The Development of Economics

CHAPTER XIX

SOME CHARACTERISTIC FEATURES OF THE LAST HALF-CENTURY

The magnitude and number of changes during the last half-century and the complexity of the influences that produced them render its characterization very difficult. It is difficult even to segregate those characteristics that are the most important from the point of view of their influence on the development of economics. The following are certainly noteworthy, though it may not be possible in every case to point out the precise manner in which each has affected the development of the science.

A. Changes in Economic Conditions

As in preceding periods, economic conditions unquestionably demand first consideration. Some of the most important of these may be described under the following heads:

1. Technique.

No preceding period has equaled this in the number of its inventions and in the rapidity in which they have succeeded each other. The application of science to industry, commerce, agriculture, transportation, etc., which is chiefly responsible for these inventions, has never before been made on such a vast scale and with so much success. No branch of economic activity has escaped its influence. One of the results is an unprecedented increase in the productivity of human labor and in the volume of economic goods available for the satisfaction of human wants. Another is a rapid increase in the number and variety of the machines employed in manufacturing, commerce, agriculture, and even the household. Year after year machinery has invaded, one after another, fields previously exempt, until few now remain uninvaded, and there has been a constant substitution of new and improved machines for old and obsolete ones in the fields already occupied.

This rapid and steady change in the technique of industry, agriculture, and commerce has necessitated and been accompanied by a continuous and never-ending process of readjustment to new conditions by both laborers and entrepreneurs. The former have been compelled to seek new occupations as fast as the new machines have taken away their old ones, and they have had to find these either in the manufacture of these machines, or in their operation. In the degree that this new and improved technique has increased the output per man employed, new industries for the satisfaction of new wants or of wants previously unsatisfied have been necessary to prevent technological unemployment. The timing of these new industries to meet the displacement of labor by machinery is a delicate process for which we have not yet learned the secret, but the necessity for it in the interests of the steady and uninterrupted employment of labor is obvious.

In the case of entrepreneurs the necessity for constant readjustment to new conditions has intensified the competitive struggle and put a premium on good management, with the result that the least competent, the marginal ones, are being constantly crowded out, and reorganizations, mergers, etc., for the purpose of eliminating competition or mitigating its effects or for securing economies in operation have become regularly recurring, normal events.

New inventions, machinery, constant displacement of labor, etc., are not peculiar to the last half-century. What is peculiar is the rapidity, the constancy, and the magnitude of the scale of these movements. During this period change has become the normal instead of the exceptional thing.

2. The Development of the Credit System.

Doing business on credit and borrowing-and-lending are very old practices, but the scale on which both are carried on and the percentage of the total population employing them have increased at a rapid pace throughout this period and have never before attained anything like the magnitude of the present day. Buying and selling goods on time has become an almost universal practice, rendered necessary in part by the constantly growing distance in space and time between producers and consumers and in part by the need for the transfer of capital from those who possess it to those who wish to use it, and made convenient and economical by modern methods of transportation, the telegraph, and the telephone.

Borrowing and lending for non-productive purposes, especially for the prosecution of wars, never before approximated the magnitude attained during the World War. Indeed, wars have been steadily grow-mg more and more expensive, and they are always financed chiefly by means of loans. Loans for purely consumptive purposes have also steadily grown in magnitude and frequency, being extensively promoted in recent times by the growth of the practice of so-called “instalment buying.”

One of the consequences of this development of the credit system has been the multiplication of banks, stock and produce exchanges, clearing-houses, etc., the welding of them together into national systems of great efficiency, complexity, and sensitiveness, and the establishment of business relations between these systems which is rapidly creating a world system. The use of this machinery has become a practical necessity for everybody. No business can be carried on, let alone be successful, without it, and people who are not directly engaged in business are no less dependent upon it for the conduct of their everyday affairs, such as the payment of their bills, the investment of their savings, the collection of their incomes, the provision of the necessary financial facilities for travel, etc., etc. Governments of all grades are also dependent upon this machinery in the management of their finances.

Viewed in its broadest aspect, the development of our credit system reveals the creation not only of a constantly increasing degree of interdependence between financial institutions and between these and individuals, corporations, and governments, but also of a network of debtor-and-creditor relationships, between individuals, different branches of business, citizens and their governments, geographical sections, and nations, of almost incomprehensible complexity.

3. Business Economy.

The production of goods for sale upon the markets, side by side with production for the consumption of the producer and his family, and the sale of services for wages side by side with their employment in the direct satisfaction of the wants of the laborer and of those immediately dependent upon him have been contemporaneous and associated phenomena in the economy of most families since the beginnings of commerce. The proportion between these two categories of activities, however, has varied greatly in different periods, the tendency being a steady increase in that of the market category over the other. The pace at which the change in this proportion has taken place has apparently quickened quite steadily, and during the last half-century, in those countries at any rate in which economic development has been most rapid and has reached the most advanced stage, market activities have so greatly predominated that they have become the determining factors in the prosperity of everybody. Nowadays few people can live, let alone be prosperous, unless they can sell at remunerative prices their services or the goods they are able to produce.

The consequences of this relatively new condition are many and far-reaching. Among them is the constantly increasing importance of price relations. Well-being or misery, prosperity or hard times nowadays chiefly depend upon the relation between the prices of the goods and services sold and of those bought. All net incomes in the last analysis depend upon the difference between these two aggregates. Maladjustments in prices have, therefore, become increasingly serious, since they affect larger and larger numbers of people and to a greater and greater degree condition the well-being of each person affected.

Another consequence is the increasing importance of the smooth and uninterrupted operation of the machinery of commerce, i.e., of the agencies for the transportation of people and goods, for the dissemination of information and for communication between people throughout the territory in which commerce is carried on, for the conduct of banking and the supply and regulation of hand-to-hand money, etc., etc. Any breakdown or long-continued interruption or even slowing-down in the operation of this machinery affects everybody in some degree and may become calamitous.

A third consequence is the increasing importance of the proper correlation and the intelligent cooperation of the different parts of the social organism, such, for example, as the economic, the political, and the religious. Government must and does play a constantly increasing role in our economic life, and the power to aid and to obstruct, to promote the harmonious operation of the economic mechanism or to prevent it, has steadily increased throughout the period here under review and was never so great as now. Religious ideas, prejudices, and institutions may also be obstructive or cooperative, helpful or harmful.

4. Difficulty of Readjustments to Changed Conditions.

The classical economists clearly revealed the processes of the readjustment of the different parts of the economic mechanism when changes take place and the conditions under which these processes become automatic. To this latter end they invented hypothetical cases in which they assumed absolute mobility of labor and capital, perfect competition, perfect coordination between the fluctuations of the volume of population and the difficulty of obtaining food supplies, etc., etc. They were well aware that these and other essential conditions were never perfectly realized, and they pointed out some of the obstacles in the way of such realization. Whatever imperfections have been or may be discovered in their analyses of the forces at work, it is certain that obstacles to readjustment to changing conditions have always existed.

During the period here under consideration, some of the most resistant and unmanageable of these have been created by more or less successful attempts at “price-fixing” in one form or another. At various points in the operation of the economic mechanism it has been possible partially or totally to stifle competition and thus to enable individuals and groups artificially to regulate prices, and this kind of regulation has rarely, if ever, had for its object the kind of adjustment to changing conditions here under consideration. Rather it has rendered rigid and more or less inflexible factors in the situation which would otherwise have been flexible and has thus aggravated the problem of readjustment by slowing up the process and forcing the flexible factors that remain to bear too large a part of the burden.

Among the influences that are responsible for this situation are the development of monopolies; the policy adopted by trades-unions always to force wages up and to resist to the bitter end any downward movement; war, especially the World War, which forced on a large scale substitution of artificial for automatic control of economic forces; and the constant increase in taxes levied practically without reference to the adjustment problem.

For another group of obstacles to readjustment to changing conditions the erection of barriers to trade between nations is responsible. The number of these has been greatly increased during the last halfcentury, especially in the period since the World War. For the relatively large free-trade areas within the boundaries of the German, Austro-Hungarian, and Russian Empires has been substituted a large number of very much smaller areas, separated from each other by tariff and other barriers, and the barriers that previously existed between the older nations have been raised higher and new ones created. Since the World War there has been a reversal of the tendency to enlarge national boundaries and to create larger free-trade areas which characterized the period immediately preceding.

During the period under consideration an important factor in the creation of obstacles to automatic readjustment is the entry of governments into the business field on a constantly increasing scale both as entrepreneurs and as regulators of private enterprise. In this case, as in that mentioned in the preceding paragraph, there has been a reversal of policy during the last half-century. For laissez-faire as a controlling principle in the determination of the relation of government to industry has been gradually substituted government control, and this control has not as a rule facilitated readjustment processes. Government monopolies have been just as rigid and inflexible as private, and probably more so, and control has tended to make the processes of readjustment slower and more cumbersome. Administrative regulations of government are notoriously inelastic, and changes in them and in the laws that authorize them generally lag far behind the conditions that make them desirable and necessary.

Offsetting to some extent these tendencies to create obstacles to readjustment, the last half-century has also witnessed the development of agencies that tend to facilitate readjustment processes. Prominent among these are greatly improved facilities for communication. Travel has become increasingly easy and relatively inexpensive. People of different localities meet each other more frequently and mix more freely than ever before, and news travels with a speed and facility that a half-century ago would have been thought impossible. Knowledge of changed and changing conditions thus reaches speedily the people who need it. Means of forecasting change have also greatly multiplied, and the reliability of these forecasts is constantly increasing, though they are still far from adequate.

B. The World War

War is the greatest of all the disturbers of economic equilibrium both within national boundaries and between nations, and the World War outranks all others in this particular. Its preeminence as a disturbing force is chiefly due to the number and economic importance of the nations involved, to the scope and complexity of the economic relations between them, to the relatively advanced stage of their economic development, to the number of soldiers and sailors engaged and the magnitude and expensiveness of their equipment, and to its destructiveness of men and materials.

From the time that it became involved in the war to the date of the establishment of peace, each nation was obliged to make the prosecution of the war the chief concern of the government and of a large percentage of the people. This meant a speedy transformation of large numbers of manufacturing plants and the construction of new ones for the production of war supplies and equipment; the use of old, and in many cases the creation of new, transportation agencies for the moving of these goods from place to place and across seas; the utilization of farms and farmers, mines and miners in the production of food and raw materials for war instead of peace needs; the construction of barracks and hospitals for the housing and care of men in training, the sick, and the wounded and of warehouses for war supplies; the withdrawal of millions of men and women from peace-time occupations, not only for direct service in the field of war operations but also for the operation of these war-time agencies at home; the utilization of financial institutions for the sale of government bonds and short-time securities, for the supplying of people with the means of purchasing them, and for the receipt, disbursement, and transfer of government funds; and the employment of government officials in the devising, levy, and collection of a large number of new taxes and of a greatly increased volume of old ones, etc., etc.

In this process of transformation of peace-time to war-time economies government functions and activities were enormously increased. Economic operations previously performed by private agencies, in the fields especially of manufacturing and transportation, were taken over by governments, those left in private hands were to a larger extent than ever before directed and supervised by governmental authority, and a number of new activities were created and performed by governmental agencies. Even the consumption of the population, not directly or indirectly engaged in war activities, was interfered with by rationing and other measures.

The duration of the war, four years, was long enough to bring this transformation process to a state approximating completion. Then followed a period characterized by the occupation of conquered territory, the reconstruction of the political map of Europe, the repatriation of the war personnel and its absorption into the home economies, the restoration of devastated territory, the gradual return to private agencies of the operation and control of the economic machinery which governments had taken over during the war period, and the partial restoration of stable monetary conditions which had been upset by the widespread suspension of specie payments and the circulation of large volumes of inconvertible government securities and banknotes.

The restoration of the economic world to its ante-war status has not yet been and probably never will be, completed. The new tariff barriers erected by the newly created states still remain. Every nation is carrying an enormously increased burden of taxation and a crushing load of indebtedness. The United States has passed from the status of a debtor to that of a creditor nation. Russia has assumed an entirely new role in the family of nations and is engaged in the conduct of an economic experiment of the first magnitude. The status of Germany has been radically changed. The payment of her war indemnity and the settlement of the debt relations between the different nations are still perplexing the world’s statesmen. Within each nation the establishment of the price, plant, and other relations between the different branches and subdivisions of the economic mechanism that are essential to permanent and normal prosperity has not yet been accomplished. International trade relations are still in an unstable and more or less chaotic state.

The growth of democracy on the one hand and of dictatorship on the other has also had grave economic consequences, among them the use of taxation and public credit on a large scale for social purposes, such as radical changes in the distribution of wealth, unemployment insurance and doles, old-age and other pensions, etc., etc.

C. Changes in the Field of Thought

During the last half-century changes in the field of thought have been quite as striking as those in the field of action. All the sciences have been involved, and in many respects our outlook upon, and our interpretation of, the physical and social world have changed. Criticism of old theories and points of view and constructive thinking have gone hand in hand, but the former has perhaps been more characteristic of the period than the latter.

Especially noteworthy from the point of view of the social sciences have been the development and spread of the doctrine of evolution and the so-called “new psychology.” The publication of Darwin’s Origin of Species was an event of the first magnitude in the history of the former and started a trend of thought which has continued to the present time and influenced all the social sciences. The new psychology, with its conflicting theories and viewpoints, has raised doubts regarding the validity of the older theories of human behavior without achieving any authoritative consensus of opinion regarding what is the correct explanation. Anthropology, archæology, and sociology have also thrown light upon the problems with which the social sciences are concerned and added greatly to the data needed for their correct solution.

D. The Development of Economics

To point out the most significant trends in economics during the last half-century is difficult, perhaps impossible. A longer perspective than the present time makes possible may be necessary. Doubtless equally competent observers and students would differ regarding this matter. All would agree, however, that this science has been influenced and to a degree modified by the changes in economic conditions and in the thought movements described in the preceding paragraphs.

The purpose of this book can best be served by discussing first some significant attempts to reconstruct the science in the light of the criticisms described in Book III and of the changes outlined in the present chapter; second, some important additions to and modifications of certain doctrines that cannot properly be described as attempts to reconstruct the science; and third, some significant reactions against what may be called orthodox economics. Under the first head we shall trace the development of the so-called Austrian School, including the criticisms that have been passed upon it, and describe the most significant phases of the work of John B. Clark and Alfred Marshall. Under the second we shall describe some recent additions to theories of value and distribution, and under the third we shall give an account of the New Historical School and of the so-called institutional and statistical economists.