Principles of Economics
THE SCOPE AND METHOD OF ECONOMICS.
§ 1. There are some who hold, with Comte, that the scope of any profitable study of man's action in society must be coextensive with the whole of social science. They argue that all the aspects of social life are so closely connected, that a special study of any one of them must be futile; and they urge on economists to abandon their distinctive rôle and to devote themselves to the general advancement of a unified and all embracing social science. But the whole range of man's actions in society is too wide and too various to be analysed and explained by a single intellectual effort. Comte himself and Herbert Spencer have brought to the task unsurpassed knowledge and great genius; they have made epochs in thought by their broad surveys and their suggestive hints; but they can hardly be said even to have made a commencement with the construction of a unified social science.
The physical sciences made slow progress so long as the brilliant but impatient Greek genius insisted on searching after a single basis for the explanation of all physical phenomena; and their rapid progress in the modern age is due to a breaking up of broad problems into their component parts. Doubtless there is a unity underlying all the forces of nature; but whatever progress has been made towards discovering it, has depended on knowledge obtained by persistent specialized study, no less than on occasional broad surveys of the field of nature as a whole. And similar patient detailed work is required to supply the materials which may enable future ages to understand better than we can the forces that govern the development of the social organism.
But on the other hand it must be fully conceded to Comte that, even in the physical sciences, it is the duty of those who are giving their chief work to a limited field, to keep up close and constant correspondence with those who are engaged in neighbouring fields. Specialists who never look beyond their own domain are apt to see things out of true proportion; much of the knowledge they get together is of comparatively little use; they work away at the details of old problems which have lost most of their significance and have been supplanted by new questions rising out of new points of view; and they fail to gain that large illumination which the progress of every science throws by comparison and analogy on those around it. Comte did good service therefore by insisting that the solidarity of social phenomena must render the work of exclusive specialists even more futile in social than in physical science. Mill conceding this continues:—"A person is not likely to be a good economist who is nothing else. Social phenomena acting and reacting on one another, they cannot rightly be understood apart; but this by no means proves that the material and industrial phenomena of society are not themselves susceptible of useful generalizations, but only that these generalizations must necessarily be relative to a given form of civilization and a given stage of social advancement*52."
§ 2. It is true that the forces with which economics deals have one advantage for deductive treatment in the fact that their method of combination is, as Mill observed, that of mechanics rather than of chemistry. That is to say, when we know the action of two economic forces separately—as for instance the influences which an increase in the rate of wages and a diminution in the difficulty of the work in a trade will severally exert on the supply of labour in it—we can predict fairly well their conjoint action, without waiting for specific experience of it*53.
But even in mechanics long chains of deductive reasoning are directly applicable only to the occurrences of the laboratory. By themselves they are seldom a sufficient guide for dealing with the heterogeneous materials and the complex and uncertain combination of the forces of the real world. For that purpose they need to be supplemented by specific experience, and applied in harmony with, and often in subordination to, a ceaseless study of new facts, a ceaseless search for new inductions. For instance, the engineer can calculate with fair precision the angle at which an ironclad will lose her stability in still water; but before he predicts how she would behave in a storm, he will avail himself of the observations of experienced sailors who have watched her movements in an ordinary sea; and the forces of which economics has to take account are more numerous, less definite, less well known, and more diverse in character than those of mechanics; while the material on which they act is more uncertain and less homogeneous. Again the cases in which economic forces combine with more of the apparent arbitrariness of chemistry than of the simple regularity of pure mechanics, are neither rare nor unimportant. For instance a small addition to a man's income will generally increase his purchases a little in every direction: but a large addition may alter his habits, perhaps increase his self-respect and make him cease to care for some things altogether. The spread of a fashion from a higher social grade to a lower may destroy the fashion among the higher grade. And again increased earnestness in our care for the poor may make charity more lavish, or may destroy the need for some of its forms altogether.
Lastly, the matter with which the chemist deals is the same always: but economics, like biology, deals with a matter, of which the inner nature and constitution, as well as the outer form, are constantly changing. The chemist's predictions all rest on the latent hypothesis that the specimen operated upon is what it is supposed to be, or at least that the impurities in it are only such as may be neglected. But even he, when dealing with living beings, can seldom sail safely any considerable way out of sight of the firm land of specific experience: he must rely mainly on that to tell him how a new drug will affect a person in health, and again how it will affect a person with a certain disease; and even after some general experience he may find unexpected results in its action on persons of different constitutions or in a new combination with other drugs.
If however we look at the history of such strictly economic relations as those of business credit and banking, of trade-unionism or cooperation, we see that modes of working, that have been generally successful at some times and places, have uniformly failed at others. The difference may sometimes be explained simply as the result of variations in general enlightenment, or of moral strength of character and habits of mutual trust. But often the explanation is more difficult. At one time or place men will go far in trust of one another and in sacrifice of themselves for the common wellbeing, but only in certain directions; and at another time or place there will be a similar limitation, but the directions will be different; and every variation of this kind limits the range of deduction in economics.
For our present purpose the pliability of the race is more important than the pliability of the individual. It is true that individual character changes, partly in an apparently arbitrary way, and partly according to well-known rules. It is true for instance that the average age of the workmen engaged in a labour dispute is an important element in any forecast of the lines on which it will run. But as, generally speaking, young and old, people of a sanguine and a despondent temperament are found in about like proportions at one place as at another, and at one time as at another, individual peculiarities of character and changes of character are a less hindrance to the general application of the deductive method, than at first sight appears. Thus by patient interrogation of nature and the progress of analysis, the reign of law is being made to invade new fields in both therapeutics and economics: and some sort of prediction, independent of specific experience, is becoming possible as to the separate and combined action of an ever-increasing variety of agencies.
§ 3. The function then of analysis and deduction in economics is not to forge a few long chains of reasoning, but to forge rightly many short chains and single connecting links. This however is no trivial task. If the economist reasons rapidly and with a light heart, he is apt to make bad connections at every turn of his work. He needs to make careful use of analysis and deduction, because only by their aid can he select the right facts, group them rightly, and make them serviceable for suggestions in thought and guidance in practice; and because, as surely as every deduction must rest on the basis of inductions, so surely does every inductive process involve and include analysis and deduction. Or to put the same thing in another way the explanation of the past and the prediction of the future are not different operations, but the same worked in opposite directions, the one from effect to cause, the other from cause to effect. As Schmoller well says, to obtain "a knowledge of individual causes" we need "induction; the final conclusion of which is indeed nothing but the inversion of the syllogism which is employed in deduction.... Induction and deduction rest on the same tendencies, the same beliefs, the same needs of our reason."
We can explain an event completely only by first discovering all the events which can have affected it, and the ways in which they can severally have done so. In so far as our analysis of any of these facts or relations is imperfect, in so far is our explanation liable to error; and the inference latent in it is already on its way to build up an induction which, though probably plausible, is false. While in so far as our knowledge and analysis are complete, we are able by merely inverting our mental process to deduce and predict the future almost as certainly as we could have explained the past on a similar basis of knowledge. It is only when we go beyond a first step that a great difference arises between the certainty of prediction and the certainty of explanation: for any error made in the first step of prediction, will be accumulated and intensified in the second; while in interpreting the past, error is not so likely to be accumulated; for observation or recorded history will probably bring a fresh check at each step. The same processes, both inductive and deductive, are used in nearly the same way in the explanation of a known fact in the history of the tides, and in the prediction of an unknown fact*54.
It must then always be remembered that though observation or history may tell us that one event happened at the same time as another, or after it, they cannot tell us whether the first was the cause of the second. That can be done only by reason acting on the facts. When it is said that a certain event in history teaches this or that, formal reckoning is never made for all the conditions which were present when the event happened; some are tacitly, if not unconsciously, assumed to be irrelevant. This assumption may be justifiable in any particular case; but it may not. Wider experience, more careful inquiry, may show that the causes to which the event is attributed could not have produced it unaided; perhaps even that they hindered the event, which was brought about in spite of them by other causes that have escaped notice.
This difficulty has been made prominent by recent controversies as to contemporary events in our own country. Whenever a conclusion is drawn from them that meets with opposition, it has to stand a sort of trial; rival explanations are offered; new facts are brought to light; the old facts are tested and rearranged, and in some cases shown to support the opposite conclusion from that on behalf of which they were at first invoked.
Both the difficulty of analysis and the need for it are increased by the fact that no two economic events are exactly alike in all respects. Of course there may be a close resemblance between two simple incidents: the terms of the leases of two farms may be governed by nearly the same causes: two references of wages questions to Boards of Arbitration may raise substantially the same question. But there is no exact repetition even on a small scale. However nearly two cases correspond, we have to decide whether the difference between the two may be neglected as practically unimportant; and this may not be very easy, even if the two cases refer to the same place and time.
And if we are dealing with the facts of remote times we must allow for the changes that have meanwhile come over the whole character of economic life: however closely a problem of to-day may resemble in its outward incidents another recorded in history, it is probable that a closer examination will detect a fundamental difference between their real characters. Till this has been made, no valid argument can be drawn from one case to the other.
§ 4. This brings us to consider the relation in which economics stands to the facts of distant times.
The study of economic history may have various aims, and correspondingly various methods. Regarded as a branch of general history it may aim at helping us to understand "what has been the institutional framework of society at the several periods, what has been the constitution of the various social classes and their relation to one another": it may "ask what has been the material basis of social existence; how have the necessities and conveniences of life been produced; by what organization has labour been provided and directed; how have the commodities thus produced been distributed; what have been the institutions resting on this direction and distribution"; and so on*55.
And for this work, interesting and important as it is on its own account, not very much analysis is essential; and most of what is needed may be supplied for himself by a man of active and inquiring mind. Saturated with a knowledge of the religious and moral, the intellectual and æsthetic, the political and social environment, the economic historian may extend the boundaries of our knowledge and may suggest new and valuable ideas, even though he may have contended himself with observing those affinities and those causal relations which lie near the surface.
But even in spite of himself, his aims will surely run beyond these limits; and will include some attempt to discover the inner meaning of economic history, to unveil the mysteries of the growth and decay of custom, and other phenomena which we are not any longer contented to take as ultimate and insoluble facts given by nature: nor is he likely altogether to withhold himself from suggesting inferences from the events of the past for guidance in the present. And indeed the human mind abhors a vacuum in its notions of the causal relations between the events that are presented vividly to it. By merely placing things together in a certain order, and consciously or unconsciously suggesting post hoc ergo propter hoc, the historian takes on himself some responsibility as a guide.
For example:—the introduction of long leases at fixed money rents in North Britain was followed by a great improvement in agriculture, and in the general condition of the people there; but before inferring that it was the sole, or even the chief cause of the improvement, we must inquire what other changes were taking place at the same time, and how much of the improvement is to be referred to each of them. We must, for instance, allow for the effects of changes in the prices of agricultural produce, and of the establishment of civil order in the border provinces. To do this requires care and scientific method; and till it has been done, no trustworthy inference can be drawn as to the general tendency of the system of long leases. And even when it has been done, we cannot argue from this experience to a proposal for a system of long leases in, say, Ireland now, without allowing for differences in the character of local and world markets for various kinds of agricultural produce, for probable changes in the production and consumption of gold and silver, and so on. The history of Land Tenures is full of antiquarian interest; but until carefully analysed and interpreted by the aid of economic theory it throws no trustworthy light on the question what is the best form of land tenure to be adopted now in any country. Thus some argue that since primitive societies usually held their land in common, private property in land must be an unnatural and transitional institution. Others with equal confidence contend that, since private property in land has extended its range with the progress of civilization, it is a necessary condition for further progress. But to wrest from history her true teaching on the subject requires the effects of the common holding of land in the past to be analysed so as to discover how far each of them is likely to act always in the same way, how far to be modified by changes in the habits, the knowledge, the wealth, and the social organization of mankind.
Even more interesting and instructive is the history of the professions, made by Gilds and other Corporations and Combinations in industry and in domestic and foreign trade, that they used their privileges on the whole for the benefit of the public. But to bring in a complete verdict on the question, and still more to deduce from it sound guidance for our own time, needs not only the wide general knowledge and subtle instincts of the practised historian, but also a grasp of many of the most difficult analyses and reasonings relating to monopolies, to foreign trade, to the incidence of taxation, etc.
If then the economic historian aims at discovering the hidden springs of the economic order of the world, and at obtaining light from the past for guidance in the present, he should avail himself of every resource that may help him to detect real differences that are disguised by a similarity of name or outward appearance, and real similarities that are obscured by a superficial difference. He should strive to select the true causes of each event and assign to each its proper weight; and above all to detect the remoter causes of change.
An analogy may be borrowed from naval affairs. The details of a battle with appliances that have passed away may be of great interest to the student of the general history of those times; but they may afford little useful guidance for the naval commander of to-day, who has to deal with a wholly different material of war. And therefore, as Captain Mahan has admirably shown, the naval commander of to-day will give more attention to the strategy than to the tactics of past times. He will concern himself not so much with the incidents of particular combats, as with practical illustrations of those leading principles of action which will enable him to hold his whole force in hand, and yet give to each part of it adequate initiative; to keep up wide communication, and yet be able to concentrate quickly, and select a point of attack at which he can bring an overwhelming force.
Similarly a man saturated with the general history of a period may give a vivid picture of the tactics of a battle, which will be true in its main outlines, and almost harmless even if occasionally wrong: for no one is likely to copy tactics, the appliances of which have passed away. But to comprehend the strategy of a campaign, to separate the real from the apparent motives of a great general of past times, a man must be a strategist himself. And if he is to make himself responsible for suggesting, however unobtrusively, the lessons which the strategists of to-day have to learn from the story which he records; then he is bound to have analysed thoroughly the naval conditions of to-day, as well as those of the time about which he is writing; and he must neglect no aid for this end that is to be had from the work of many minds in many countries studying the difficult problem of strategy. As it is with naval history, so it is with economic.
It is only recently, and to a great extent through the wholesome influence of the criticisms of the historical school, that prominence has been given to that distinction in economics which corresponds to the distinction between strategy and tactics in warfare. Corresponding to tactics are those outward forms and accidents of economic organization which depend on temporary or local aptitudes, customs and relations of classes; on the influence of individuals; or on the changing appliances and needs of production. While to strategy corresponds that more fundamental substance of economic organization, which depends mainly on such wants and activities, such preferences and aversions as are found in man everywhere: they are not indeed always the same in form, nor even quite the same in substance; but yet they have a sufficient element of permanence and universality to enable them to be brought in some measure under general statements, whereby the experiences of one time and one age may throw light on the difficulties of another.
This distinction is akin to the distinction between the uses of mechanical and of biological analogies in economics. It was not sufficiently recognized by economists at the beginning of last century. It is markedly absent from Ricardo's writings: and when attention is paid, not to the principles which are embodied in his method of working, but to particular conclusions which he reaches; when these are converted into dogmas and applied crudely to the conditions of times or places other than his own, then no doubt they are almost unmixed evils. His thoughts are like sharp chisels with which it is specially easy to cut one's fingers, because they have such awkward handles.
But modern economists distilling his crude expressions; extracting their essence, and adding to it; rejecting dogmas, but developing principles of analysis and reasoning, are finding the Many in the One and the One in the Many. They are learning for instance that the principle of his analysis of rent is inapplicable to much that commonly goes by the name of rent to-day; as well as to a much larger part of those things which are commonly, but incorrectly, described as rent by historians of the Middle Ages. But yet the application of the principle is being extended, and not contracted. For economists are also learning that it is applicable with proper care to a great variety of things in every stage of civilization which do not appear at first sight to be of the nature of rent at all.
But of course no student of strategy can ignore tactics. And, though no one life will reach out to a study in detail of the tactics of every fight which man has waged with his economic difficulties; yet no study of the broad problems of economic strategy is likely to be worth much unless it is combined with an intimate knowledge of the tactics as well as the strategy of man's struggles against his difficulties in some particular age and country. And further every student should make by personal observation a minute study of some particular set of details, not necessarily for publication, but for his own training; and this will help him much to interpret and weigh the evidence which he obtains in print or writing, whether with regard to present or past times. Of course every thoughtful and observant man is always obtaining, from conversation and current literature, a knowledge of the economic facts of his own time, and especially in his own neighbourhood; and the store of facts which he thus imperceptibly gets is sometimes more full and thorough in certain special regards than is to be distilled from all the records in existence as to some classes of facts in remote places and times. But independently of this, the direct and formal study of facts, perhaps mainly those of his own age, will much exceed the study of mere analysis and "theory," in its demands on the time of any serious economist; even though he may be one of those who rank most highly the importance of ideas relatively to facts, even though he may think that it is not so much the collection of new facts as the better study of those already collected, that is our most urgent need now, or that will help us most in improving the tactics as well as the strategy of man's contests with his difficulties.
§ 5. It is doubtless true that much of this work has less need of elaborate scientific methods, than of a shrewd mother-wit, of a sound sense of proportion, and of a large experience of life. But on the other hand there is much work that is not easily to be done without such machinery. Natural instinct will select rapidly, and combine justly, considerations which are relevant to the issue in hand; but it will select chiefly from those which are familiar; it will seldom lead a man far below the surface, or far beyond the limits of his personal experience.
And it happens that in economics, neither those effects of known causes, nor those causes of known effects which are most patent, are generally the most important. "That which is not seen" is often better worth studying than that "which is seen." Especially is this the case if we are not dealing with some question of merely local or temporary interest, but are seeking guidance in the construction of a far-reaching policy for the public good; or if, for any other reason, we are concerned less with immediate causes, than with causes of causes,—causæ causantes. For experience shows, as might have been anticipated, that common sense, and instinct, are inadequate for this work; that even a business training does not always lead a man to search far for those causes of causes, which lie beyond his immediate experience; and that it does not always direct that search well, even when he makes the attempt. For help in doing that, everyone must perforce rely on the powerful machinery of thought and knowledge that has been gradually built up by past generations. For indeed the part which systematic scientific reasoning plays in the production of knowledge resembles that which machinery plays in the production of goods.
When the same operation has to be performed over and over again in the same way, it generally pays to make a machine to do the work; though when there is so much changing variety of detail that it is unprofitable to use machines, the goods must be made by hand. Similarly in knowledge, when there are any processes of investigation or reasoning in which the same kind of work has to be done over and over again in the same kind of way; then it is worth while to reduce the processes to system, to organize methods of reasoning and to formulate general propositions to be used as machinery for working on the facts and as vices for holding them firmly in position for the work. And though it be true that economic causes are intermingled with others in so many different ways, that exact scientific reasoning will seldom bring us very far on the way to the conclusion for which we are seeking, yet it would be foolish to refuse to avail ourselves of its aid, so far as it will reach:—just as foolish as would be the opposite extreme of supposing that science alone can do all the work, and that nothing will remain to be done by practical instinct and trained common sense. An architect whose practical wisdom and æsthetic instincts are undeveloped will build but a poor house however thorough his knowledge of mechanics: but one, who is ignorant of mechanics, will build insecurely or wastefully. A Brindley, without academic instruction, may do some engineering work better than a man of inferior mother-wit, however well he may have been trained. A wise nurse, who reads her patients by instinctive sympathy, may give better counsel on some points than a learned physician. But yet the study of analytical mechanics should not be neglected by the engineer, nor that of physiology by the medical man.
For mental faculties, like manual dexterity, die with those who possess them: but the improvement which each generation contributes to the machinery of manufacture or to the organon of science is handed down to the next. There may be no abler sculptors now than those who worked on the Parthenon, no thinker with more mother-wit than Aristotle. But the appliances of thought develop cumulatively as do those of material production.
Ideas, whether those of art and science, or those embodied in practical appliances, are the most "real" of the gifts that each generation receives from its predecessors. The world's material wealth would quickly be replaced if it were destroyed, but the ideas by which it was made were retained. If however the ideas were lost, but not the material wealth, then that would dwindle and the world would go back to poverty. And most of our knowledge of mere facts could quickly be recovered if it were lost, but the constructive ideas of thought remained; while if the ideas perished, the world would enter again on the Dark Ages. Thus the pursuit of ideas is not less "real" work in the highest sense of the word than is the collection of facts; though the latter may in some cases properly be called in German a Realstudium, that is, a study specially appropriate to Realschulen. In the highest use of the word, that study of any field of the wide realm of economics is most "real" in which the collection of facts, and the analysis and construction of ideas connecting them are combined in those proportions which are best calculated to increase knowledge and promote progress in that particular field. And what this is, cannot be settled offhand, but only by careful study and by specific experience.
§ 6. Economics has made greater advances than any other branch of the social sciences, because it is more definite and exact than any other. But every widening of its scope involves some loss of this scientific precision; and the question whether that loss is greater or less than the gain resulting from its greater breadth of outlook, is not to be decided by any hard and fast rule.
There is a large debateable ground in which economic considerations are of considerable but not dominant importance; and each economist may reasonably decide for himself how far he will extend his labours over that ground. He will be able to speak with less and less confidence the further he gets away from his central stronghold, and the more he concerns himself with conditions of life and with motives of action which cannot be brought to some extent at least within the grasp of scientific method. Whenever he occupies himself largely with conditions and motives, the manifestations of which are not reducible to any definite standard, he must forego nearly all aid and support from the observations and the thought of others at home and abroad, in this and earlier generations; he must depend mainly on his own instincts and conjectures; he must speak with all the diffidence that belongs to an individual judgment. But if when straying far into less known and less knowable regions of social study he does his work carefully, and with a full consciousness of its limitations, he will have done excellent service*56.
Notes for this chapter
See I. II.
Mill, On Comte, p. 82. Comte's attack on Mill illustrates the general rule that in discussions on method and scope, a man is nearly sure to be right when affirming the usefulness of his own procedure, and wrong when denying that of others. The present movement towards Sociology in America, England and other countries recognizes the need for the intensive study of economics and other branches of social science. But perhaps the use of the term Sociology is premature. For it seems to claim that a unification of social sciences is already in sight: and though some excellent intensive studies have been published under the name of Sociology, it is doubtful whether those efforts at unification which have been made so far have achieved any great success beyond that of preparing the way and erecting danger posts at its pitfalls for the guidance of later generations, whose resources will be less inadequate for the giant task than our own.
Mill exaggerated the extent to which this can be done; and he was thereby led to make excessive claims for the deductive methods in economics. See the last of his Essays; Book VI. of his Logic, and especially its ninth chapter; also pp. 157-161 of his Autobiography. His practice, like that of many other writers on economic method of all shades of opinion, was less extreme than his profession.
Compare Mill, Logic, Book VI. ch. III.
Ashley, On the Study of Economic History.
As the imitators of Michael Angelo copied only his faults, so Carlyle, Ruskin and Morris find to-day ready imitators, who lack their fine inspirations and intuitions.
End of Notes
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