Principles of Economics. Illustrated (eBook)

Economic conditions are constantly changing, and each generation looks at its own problems in its own way. In England, as well as on the Continent and in America, Economic studies are being more vigorously pursued now than ever before; but all this activity has only shown the more clearly that Economic science is, and must be, one of slow and continuous growth. Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them.

The present treatise is an attempt to present a modern version of old doctrines with the aid of the new work, and with reference to the new problems, of our own age. Its general scope and purpose are indicated in Book I.; at the end of which a short account is given of what are taken to be the chief subjects of economic inquiry, and the chief practical issues on which that inquiry has a bearing. In accordance with English traditions, it is held that the function of the science is to collect, arrange and analyze economic facts, and to apply the knowledge, gained by observation and experience, in determining what are likely to be the immediate and ultimate effects of various groups of causes; and it is held that the Laws of Economics are statements of tendencies expressed in the indicative mood, and not ethical precepts in the imperative. Economic laws and reasonings in fact are merely a part of the material which Conscience and Common-sense have to turn to account in solving practical problems, and in laying down rules which may be a guide in life.

But ethical forces are among those of which the economist has to take account. Attempts have indeed been made to construct an abstract science with regard to the actions of an "economic man," who is under no ethical influences and who pursues pecuniary gain warily and energetically, but mechanically and selfishly. But they have not been successful, nor even thoroughly carried out. For they have never really treated the economic man as perfectly selfish: no one could be relied on better to endure toil and sacrifice with the unselfish desire to make provision for his family; and his normal motives have always been tacitly assumed to include the family affections. But if they include these, why should they not include all other altruistic motives the action of which is so far uniform in any class at any time and place, that it can be reduced to general rule? There seems to be no reason; and in the present book normal action is taken to be that which may be expected, under certain conditions, from the members of an industrial group; and no attempt is made to exclude the influence of any motives, the action of which is regular, merely because they are altruistic. If the book has any special character of its own, that may perhaps be said to lie in the prominence which it gives to this and other applications of the Principle of Continuity.

This principle is applied not only to the ethical quality of the motives by which a man may be influenced in choosing his ends, but also to the sagacity, the energy and the enterprise with which he pursues those ends. Thus stress is laid on the fact that there is a continuous gradation from the actions of "city men," which are based on deliberate and far-reaching calculations, and are executed with vigor and ability, to those of ordinary people who have neither the power nor the will to conduct their affairs in a business-like way. The normal willingness to save, the normal willingness to undergo a certain exertion for a certain pecuniary reward, or the normal alertness to seek the best markets in which to buy and sell, or to search out the most advantageous occupation for oneself or for one's children—all these and similar phrases must be relative to the members of a particular class at a given place and time: but, when that is once understood, the theory of normal value is applicable to the actions of the unbusiness-like classes in the same way, though not with the same precision of detail, as to those of the merchant or banker.

And as there is no sharp line of division between conduct which is normal, and that which has to be provisionally neglected as abnormal, so there is none between normal values and "current" or "market" or "occasional" values. The latter are those values in which the accidents of the moment exert a preponderating influence; while normal values are those which would be ultimately attained, if the economic conditions under view had time to work out undisturbed their full effect. But there is no impassable gulf between these two; they shade into one another by continuous gradations. The values which we may regard as normal if we are thinking of the changes from hour to hour on a Produce Exchange, do but indicate current variations with regard to the year's history: and the normal values with reference to the year's history are but current values with reference to the history of the century. For the element of Time, which is the centre of the chief difficulty of almost every economic problem, is itself absolutely continuous: Nature knows no absolute partition of time into long periods and short; but the two shade into one another by imperceptible gradations, and what is a short period for one problem, is a long period for another.

Thus for instance the greater part, though not the whole, of the distinction between Rent and Interest on capital turns on the length of the period which we have in view. That which is rightly regarded as interest on "free" or "floating" capital, or on new investments of capital, is more properly treated as a sort of rent—a Quasi-rent it is called below—on old investments of capital. And there is no sharp line of division between floating capital and that which has been "sunk" for a special branch of production, nor between new and old investments of capital; each group shades into the other gradually. And thus even the rent of land is seen, not as a thing by itself, but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice.

Again, though there is a sharp line of division between man himself and the appliances which he uses; and though the supply of, and the demand for, human efforts and sacrifices have peculiarities of their own, which do not attach to the supply of, and the demand for, material goods; yet, after all, these material goods are themselves generally the result of human efforts and sacrifices. The theories of the values of labor, and of the things made by it, cannot be separated: they are parts of one great whole; and what differences there are between them even in matters of detail, turn out on inquiry to be, for the most part, differences of degree rather than of kind. As, in spite of the great differences in form between birds and quadrupeds, there is one Fundamental Idea running through all their frames, so the general theory of the equilibrium of demand and supply is a Fundamental Idea running through the frames of all the various parts of the central problem of Distribution and Exchange*1.

Another application of the Principle of Continuity is to the use of terms. There has always been a temptation to classify economic goods in clearly defined groups, about which a number of short and sharp propositions could be made, to gratify at once the student's desire for logical precision, and the popular liking for dogmas that have the air of being profound and are yet easily handled. But great mischief seems to have been done by yielding to this temptation, and drawing broad artificial lines of division where Nature has made none. The more simple and absolute an economic doctrine is, the greater will be the confusion which it brings into attempts to apply economic doctrines to practice, if the dividing lines to which it refers cannot be found in real life. There is not in real life a clear line of division between things that are and are not Capital, or that are and are not Necessaries, or again between labor that is and is not Productive.

The notion of continuity with regard to development is common to all modern schools of economic thought, whether the chief influences acting on them are those of biology, as represented by the writings of Herbert Spencer; or of history and philosophy, as represented by Hegel's Philosophy of History, and by more recent ethico-historical studies on the Continent and elsewhere. These two kinds of influences have affected, more than any other, the substance of the views expressed in the present book; but their form has been most affected by mathematical conceptions of continuity, as represented in Cournot's Principes Mathématiques de la Théorie des Richesses. He taught that it is necessary to face the difficulty of regarding the various elements of an economic problem,—not as determining one another in a chain of causation, A determining B, B determining C, and so on—but as all mutually determining one another. Nature's action is complex: and nothing is gained in the long run by pretending that it is simple, and trying to describe it in a series of elementary propositions.