THE PROSPECTS OF ECONOMICS

I

FOREWORD

Whether economics is to us a subject of thrilling interests or a dismal pseudo-science depends upon ourselves. If we come to it with literal minds, seeing only what has been definitely accomplished, we find the discussions dull and the conclusions dubious. But if we come thinking of man's long struggle to master his own fate, then the effort to solve economic problems seems a vital episode in human history, a hopeful portent for the future. Seen in this perspective, economic speculation represents a stage in the growth of mind at which man's effort to understand and control nature becomes an effort to understand and control himself and his society. The beginnings of that effort may be crude, yet they stand for a high endeavor. And the future of economics, the question whether men will ever succeed in establishing a serviceable science of economic behavior, becomes one of the crucial issues on which hangs the doubtful fate of human kind.

At present the prospect of making progress in economics is bright. We seem to be entering upon a period of rapid theoretical development and of constructive application. To justify this faith is my chief task in the following pages. But to do so I must sketch the various types of theory developed since the Napoleonic Wars impoverished Europe, showing what manner of thing economics has meant to successive generations, what varying outlooks it has opened before them, what hopes they have cherished for its future development, and how they have striven to apply its teachings. Against this background I can make clear where economics stands today, what it promises to become, and what uses it may serve in the years before

us.

II

THE PAST

1. RECONSTRUCTION AFTER THE NAPOLEONIC WARS AND THE RISE OF CLASSICAL POLITICAL ECONOMY

Orthodox economic theory as we have it today inherits its problems and its methods from classical political economy. Classical political economy in turn got its problems from English politics in the period of reconstruction that followed Waterloo, and its methods from the conception of human nature then current among philosophers and men on the street.

The Napoleonic Wars had forced England to suspend specie payments and brought on an extraordinary rise of prices. They had imposed upon the nation heavy taxes and added four billion dollars to the domestic debt. But during the long struggle England had been sustained by the rapid development of her manufactures. The Industrial Revolution which had begun in the eighteenth century was accelerated during the wars, and the high profits of manufacturers and merchants bore the brunt of war loans and taxes. At the same time these newly rich manufacturers and merchants gained in political cohesion and power much as the English Labor Party gained in the war against Germany. But the growth of manufactures brought with it a new difficulty. The diversion of labor from fields. to factories together with the rapid increase of population made England dependent upon foreign countries for a part of her food. supply, despite an extension of cultivation and a marked improvement in agricultural methods. Finally fear that the revolutionary spirit in France might spread had produced a violent reaction in English politics, not unlike the reaction which fear of the Russian revolutionary spirit produced in 1918. The Tories remained in power during the wars and for fifteen years longer; they stubbornly resisted reform and thereby stimulated the very agitation they dreaded.

On the return of peace in 1815, England faced a series of problems much like the problems she faces today. What should she do about the depreciated currency and the high cost of living, about the heavy taxes and the war debt? How could she obtain cheap foreign grain without injuring her farmers and landlords? How should she meet the demands of the new manufacturing towns for political representation and allay the unrest among the laboring classes? It was

with these problems of reconstruction that Ricardo, the chief architect of classical political economy, was concerned as an economist and a member of Parliament.

Nowadays the newspapers would call Ricardo "a millionaire radical." He was a staunch champion of free speech in days when free speech was even more unpopular than it has been among us of late. He advocated the resumption of specie payments, the reorganization of the banking system, and the systematization of the taxes. Though very rich, he demanded a levy on capital to pay the war debt. Though he had entered Parliament "through his breeches pocket," he advocated Parliamentary reform. Though a great landlord, he labored for the repeal of the import duties on grain. It was out of his analysis of this last problem that he developed the main lines of his economic theory.

When Napoleon was sent to Elba and trade was reopened across the Channel the English landed interest feared they would be ruined by a flood of cheap continental wheat. As a safeguard they proposed to raise the import duties on grain. This project roused a storm of opposition. Parliament was besieged with anti-corn-law petitions from the towns and industrial districts, "the greatest number of petitions that has ever perhaps been known" said Lord Grey. Sir Robert Peel warned the Commons that "if the measure passed the manufactures of the towns would be destroyed." For it was believed that dear grain meant high wages, and that high wages meant ruinously low profits. The debate in Parliament grew into a selfconscious class struggle between the landlords and the capitalist employers. The working classes, and this touch is especially characteristic of the times, were not a party to this struggle; they had no spokesmen of their own in Parliament, they were not even supposed to have anything at stake. To talk of the laborer being interested in the bill, said Alexander Baring, was "altogether ridiculous; whether wheat was 120s. or 80s., the labourer could only expect dry bread in the one case and dry bread in the other."1

This struggle over the corn laws made the distribution of income the chief issue in English economic policy. Ricardo, as a man of his day, made distribution the chief problem in economic theory. The practical problem was whether the power of the state should be used to maintain the high incomes of the farmers and landlords, or whether the import duties should be reduced to safeguard the in

1 See the account of the corn-law debates in William Smart, Economic Annals of the Nineteenth Century, I, 450-457.

comes of manufacturers and merchants. The theoretical problem was: what determines the proportions in which the national dividend is shared between landlords, capitalists, and laborers?

Ricardo solved this problem by propounding three separate laws of rent, profits and wages. The poorest land in cultivation, he held, yields crops sufficient merely to pay the ordinary rate of profit to the farmer who works it and ordinary wages to the laborers he employs. "The natural price of labour," Ricardo goes on, "is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or dimunition." Of course the market price of labor, "the price which is really paid, . . . may, in an improving society, for an indefinite period, be constantly above" the natural rate. Further the natural price itself is not "absolutely fixed and constant," for it "essentially depends on the habits and customs of the people." A rise in this standard of living is much to be desired, but not to be counted on. For Ricardo was a firm believer in the theory of population propounded by his friend Malthus. Practically, he held, we must face the hard fact that if wages rise perceptibly above the established standard of living, the numbers of working people will soon increase and the larger supply of laborers will again reduce wages to the old level. So in economic theorizing we may, indeed we must, take wages as a constant, fixed by the standard of living. Such is Ricardo's version of Alexander Baring's remark that the laborer had no interest in the corn-law bill, "whether wheat was 120s. or 80s., the labourer could only expect dry bread in the one case and dry bread in the other."

With wages a fixed quantity, the law of profits presented no difficulty. The farmer cultivating no-rent land pays his workmen. what is needed to enable them to maintain the established standard of living. For himself he has whatever is left after meeting his payroll. Hence, the share of the produce that goes to profits varies inversely as the share that goes to wages. In Ricardo's language "profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food." The poorer the land cultivated, the less will the agricultural laborer produce over and above what is required by his fixed standard of living, and the less produce will be left to his employer for profit.

Now this sharing of the produce on the poorest land in cultivation "regulates" the sharing between laborers and capitalists in all other enterprises thruout the country. For under a régime of free competition farmers of one class of lands cannot long make profits either