about business transactions without implying that men have certain standard ways of feeling, thinking, and acting in their market dealings with each other. It is therefore naïve to talk of divorcing psychology from economics. If Davenport's "science that treats phenomena from the standpoint of price" helps to explain the behavior of men, that theory is itself a piece of psychologizing, good or bad. It is equally naïve to talk as if the economist borrowed or could borrow all his psychological notions from the psychologists. For if economics deals with economic behavior, then it must go beyond the contributions which the professed psychologists make to the general science of behavior. The economist will learn more in his own field of course if he begins tilling it with sound psychological conceptions to help him; but the soundest general conceptions of "the original nature of man" and its modifications in the course of experience will be merely a starting point for his own researches into human behavior.

If ideas of this sort are beginning to dawn upon economists, it is partly because the younger men are reading psychological literature, but mainly because certain among the older men have been cultivating an unorthodox type of economic theory-a type of theory that deals with a range of problems undreamt of in the philosophy of value and distribution. This type is perhaps best called institutional economics.

6. INSTITUTIONAL ECONOMICS

Among Ricardo's contemporaries was Richard Jones, a clergyman of the Church of England, who knew enough of economic history and of contemporary conditions outside of England to appreciate that Ricardo's whole system applied to an institutional situation recent in its development and limited in its scope. Accordingly Jones set himself to broaden the basis of economic theory by studying the distribution of wealth in other times and other lands. The result was a book which dealt with rents under the feudal system, with metayer rents in antiquity and in modern Italy and France, with ryot rents in India, cottier rents, and finally with contract rents such as Ricardo had discussed.1

Jones was by no means the sole worker who studied economic institutions. For example, Sismondi, the historian of medieval Italy, investigated the development and cultural consequences of the industrial revolution in England; John Rae, who lived long in Canada

1 An Essay on the Distribution of Wealth, 1831.

and saw something of economic life among the Indians, showed how different institutions affect invention and the accumulation of capital; Robert Owen and William Thompson, Saint Simon and Fourier, sought to devise a new set of institutions which would insure a juster distribution of labor and income. Nor were the orthodox economists wholly hostile to this kind of work; for we have seen that John Stuart Mill emphasized the influence of institutions upon distribution, and placed his hopes for the future upon institutional changes. But such excursions into institutional economics were not considered to be really a part of economic theory-they were "applications of social philosophy" in the language of Mill's sub-title.

This mistake of differentiating economic theory from the study of economic institutions was confirmed by the rise of the German historical school in the eighteen forties. For the German critics of English political economy gradually worked themselves up to the point where they felt it necessary to throw away the whole structure of abstract theory, devote a generation or more to the collecting of historical materials, and after that make a fresh start at generalizing. That uncompromising attitude provoked the great controversy over method. Should economics be a deductive or an inductive science? While many of the accredited representatives of economics were wasting their time in this futile debate, a most unorthodox theorist was demonstrating how study of the evolution of institutions might be indissolubly joined with analysis of their workings. Karl Marx's Kapital, published in 1867, seems nowadays a curious mixture of Hegelian metaphysics, Ricardian economics, historical learning, and political propaganda. Doubtless Marx's alleged science was warped by his passionate desires, his theory shaped to suit a program, quite as much as was the case with his bitterest opponents. But Marx saw the central problem of economics in the cumulative change of economic institutions; he knew how to use contemporary documents as an effective supplement of economic theory if not as its basis; and he showed how vital economic theory becomes when it is attacked from this side, especially if the current processes of change are projected into the future.

Contemporaries were too much scandalized by Marx's conclusions to profit by his methods. Indeed they were so intent on refuting his errors that they could learn nothing in the process. It remained for younger men to whom his conclusions were an old story before they opened Das Kapital, to see the scientific possibilities in his way. of working. But by the eighteen nineties, Sidney Webb in England, Werner Sombart in Germany, and Thorstein Veblen in Amer

ica were studying the evolution of economic institutions in a scientific, as opposed to an historical or a propagandist, spirit. Further they were claiming that work of this kind is economic theory.

This sketch of the way in which economics has grown by dif ferentiation into several types has been too brief to develop the full complexity of the present situation. There are types of theory of which I have said nothing and there are varieties within each type I have not noticed. But even on the present showing we have several kinds of economists-neo-classicists like Marshall, the American psychological school represented by Fetter, those who cultivate pecuniary logic like Davenport, and the champions of institutional theory like Veblen.

Which of these several types of theory shows most vitality today! Must we choose some one type to cultivate and discard the others, or is there some rational way of combining the contributions of all? What prospect has economic theory of progressing in the near future? Such are the questions I shall try to answer under a different set of captions in the last part of this paper.

III

THE FUTURE

1. RECONSTRUCTION AFTER THE WORLD WAR AND THE PROSPECT OF RENEWED VITALITY IN ECONOMICS

The war promises to give economics once again the vitality it had in Ricardo's day. That will be a marked change; for economics had settled into an academic discipline, cultivated by professors and neglected by men of action, modest in its pretensions to practical usefulness, more conspicuous for consistency and erudition than for insight, hated by few and feared by none. Even the Marxian socialists had become respectable, professing an orthodox creed and practicing an opportunist policy. Nowhere outside of Germany did economists play an active rôle in shaping public policy, and in Germany they were intrusted merely with certain details of imperial state-craft. There is doubtless a connection between the emergence of the later types of economic theory and the development of public affairs; but that connection is not obvious like the emergence of Ricardo's theory of distribution from the corn-law struggle. As economic theory had got to be further removed from contemporary problems it had lost

much of its early intensity, and become "sicklied o'er with the pale cast of thought." For years Ricardo and Malthus had bombarded each other with long letters about their theoretical differences, for on those subtle differences they saw dependent grave issues of national policy. In June, 1914 there were probably no two men in all the world who took their quest of economic truth with such serious

ness.

When war broke out, however, the nations found that economic efficiency was a matter of life and death. The first shock forced governments and business interests to concoct immediately novel expedients to save credits from disruption. Presently all the large questions of war-financing had to be faced-how much to borrow and how much to tax, how to adjust the burden of taxation, and how to manage the currency. Then it became clear that victory required drastic economic mobilization of all available resources to maintain military efficiency and civilian morale. It was not merely a problem of getting money with which to buy goods, but a problem of organizing agriculture and industry, shipping and railways, of training labor and making inventions to procure the necessary amount of food, clothing and munitions.

Economists in every belligerent country had a share in framing the many measures for mobilizing resources. They were called in as technical advisers for the most part, but some among them became responsible officials. Both executives and advisers were plunged into a situation where they had to think constructively about economic institutions. They did a vast amount of strenuous planning, and tried to change the institutions of their several nations even more radically than they succeeded in doing.

What developments of economic theory has all this experience produced? Not much as yet on which one can put his finger beyond monographic books and articles. And there are those who expect no more than this to emerge. Economics, they say, will not change because the kind of theory we had in 1914 proved adequate to the demands made upon it. I cannot accept this view. The war-times were too full of emergencies to permit of calm reflection, still less did they permit free writing and publishing. But the next few years should harvest heavy crops from the sowing of the war. For the influence of the war on systematic thought is not over; indeed the war is just beginning to make its influence felt in the slow-moving social sciences.

The problems of reconstruction thrust upon us by the war offer as strong a stimulus to original analysis today as the reconstruction

L

problems of 1815 offered to Ricardo and his circle. Europe's need of adapting her institutions to fit the altered conditions is far more pressing, but it is clear that changes must come in the United States as well-changes that call for intelligent planning. Public finance bristles with difficulties-shall we try to collect the loans to our recent Allies, shall we seek to reduce the domestic debt rapidly, shall we maintain the heavy supertaxes on large incomes, can we make the federal budget a real scheme of control, are our public expenditures too large a fraction of our national income? The terms under which the railways passed back to private operation satisfies no one; how can we provide inducements for the new capital investments that are required, pay adequate wages and yet keep freight rates moderate? The war almost stopped immigration; after the war we imposed hasty legal restrictions upon the expected inrush of Europeans; what policy shall we adopt, now that we have time for sober second thoughts? What shall we do with the huge amount of shipping which we acquired during the war? Shall we continue to export capital on a grand scale? Can we maintain our traditional tariff policy without thwarting our commercial ambitions? This list of problems bred by the war need not be completed; it is long enough to suggest how varied and how searching are the demands that will be made upon the constructive capacity of economists.

Not only has the war left us a legacy of problems through which we must flounder or think our way; it has also left us an example of bolder action in the common interest than we had been accustomed to consider. Thousands of men who participated in the work of the War Boards learned to think in terms of the nation's needs, to collect quantitative data as a guide to their planning, and to effect a strange blending of government and private initiative in the measures they adopted. This bold spirit has not wholly vanished. Our more competent public men and our more aggressive private citizens face their problems with an imaginative vigor that would have shocked a larger portion of the community in 1914 than it shocks today. And so our economic problems that were not begotten by the war are coming in for re-consideration. There is promise that the government and private agencies in conjunction will see and attack the problem of controlling the business cycle. A more constructive attitude will animate our dealings with large-scale business enterprises. We shall become better conservators of our natural resources. We shall study economic wastes of various sorts and strive to diminish them. We shall learn more about the size and distribution of our national income, and shall evolve a more definite policy