The Development of Economics

CHAPTER XXIII

SOME APPLICATIONS AND RESTATEMENTS OF AUSTRIAN DOCTRINE

No substantial addition to the body of doctrine expounded in the preceding chapters has been made, but certain applications and restatements of these theories, not heretofore discussed, are noteworthy.

A. Public Finance and Public Administration

In 1887 Emil Sax published his Grundlegung der theoretische Staatswirthschaft, in which he made application of the new doctrine of value to collective economies, and in particular to the economy of the state; and in Book VI of his Natürliche Wert Von Wieser discussed the same topic.

Hitherto, said Sax, the economy of the state, at any rate those phases of it comprehended under the terms public finance and public administration, had been treated, not as a part of the science of political economy, but as one of its applications. It had, therefore, lacked a theoretical foundation. This defect, he said, was or might be corrected by the Austrian doctrine.

Both individual and collective needs are satisfied by goods and labor and through the mechanism of the markets.

Sax analyzed minutely the different branches of state activity and showed how the principles of economical management, which constitute the center of the Austrian economics, apply in each case and constitute the theoretical bases for the solution of the problems that arise.

B. Wicksteed’s “Common Sense of Political Economy”

One of the most interesting applications of the doctrine of Jevons and the Austrian School was made by Mr. Philip Wicksteed in his book entitled The Common Sense of Political Economy, published in 1910. As this title implies, Mr. Wicksteed attempted to demonstrate the common sense and the wide applicability and usefulness of these doctrines.

As means to this end he abandoned the traditional arrangement of subject-matter and much of traditional terminology and emphasized the identity of the principles of economics with those operative in other spheres of life. Instead of using the old headings—production, exchange, distribution and consumption—he used the following: “Administration of Resources and Choice between Alternatives”; “Price and the Relative Scale”; “Margin, Diminishing Psychic Returns”; “Economical Administration and Its Difficulties”; “Money and Exchange”; “Business and the Economic Nexus”; “Markets”; “Interest, Tools, Land”; “Earnings”; “Distribution”; and “Cost of Production.”

The principles to which he refers are those of “diminishing psychic returns,” “margins,” valuation, etc., understood and expounded in substantially the same manner that Jevons and the Austrians understood and expounded them. His contribution consists in pointing out the “common sense” of these principles and the manner of their operation in domestic, business, and state economy.

The administration of pecuniary resources and of the objects upon which they are expended is, however, but one of the branches of domestic administration, and no exception to the others so far as guiding principles are concerned. “It is possible to pay too dear in money for the saving of money, or too dear in thought and energy for the saving in bread, potatoes or cream. Whatever the nature of the alternatives before us, the question of the terms on which they are offered is always relevant. If we secure this, how much of that must we pay for it, or what shall we sacrifice to it? And is it worth it? What alternatives shall we forego? And what would be their value to us?” (Pp. 20 and 21.)

In the market this problem presents itself in terms of money prices. “The price of a thing is an indication of the range of alternatives open to the purchaser, and is a special case of terms on which alternatives are offered to us. We are constantly weighing apparently heterogeneous objects of desire against each other, and selecting between them. All these things that we balance against and compare with each other, whether they can be had for money or not, may ideally be arranged on a scale of relative significance in our minds.” (P. 13.)

In making the decisions involved in the administration of resources of every kind, he shows that the familiar doctrines of “margins” and “diminishing psychic returns” are illustrated. “From end to end of life,” he says, “the principle runs unchallenged that marginal significance decreases as the volume of satisfaction swells; and that that volume should be largest when marginal values are adjusted to the terms on which alternatives are offered.” (Pp. 159 and 160.)

In an interesting chapter entitled “Economical Administration and Its Difficulties,” he points out various ways in which the ideal coincidence between marginal significances and market prices is impeded. One is indicated by “the difficulty of keeping all departments of expenditure in connection with each other”; another “by the fact that we cannot always get things in the exact quantities we want them”; a third, by the difficulty of keeping “the balance between expenditure on things we pay for as we use them, like food, and things that we pay for at once and use over a long period, like furniture.” He shows that the various systems of hire are means which have been devised for overcoming the latter difficulty and also that of “enjoying the fraction we want of commodities that cannot be divided” and that “the premium we pay for these advantages is one of the sources of interest.” (P. 95.)

In making the transition from “domestic” to “political” economy he explains the nature and functions of money and exchange and the meaning of such phrases as economic life, economic relations, economic conditions, the economic motive and economic forces. He says:

“Advantageous exchanges can take place whenever the relative significance of any two exchangeable things is marginally different on the scales of any two men in the community, and the exchange itself tends to reduce this difference. Therefore when there is equilibrium the exchangeable things on every man’s scale must occupy the same relative positions.”

“Exchange may arise incidentally, to correct errors in administration of energies; but complex systems of industry, that avail themselves of the economies of division of labor, contemplate exchange from the first, as an essential part of the machinery of adaptation of means to ends.”

“In a society so organized media of exchange and standards of value arise spontaneously, and are regulated by law. The use of gold as a medium and a standard is dependent upon its use as a commodity. The gold prices of commodities, being an expression of their position on the communal scale in relation to gold, may become the expression of their positions relatively to each other, and of the identity of those relative positions on all the individual scales of persons who possess them. But this identity does not extend to things that cannot be exchanged. These may occupy positions differing to any degree both amongst themselves and amongst the items of exchangeable things on the different individual scales. And so may exchangeable things of which a man possesses no stock.”

“As the ultimate objects of desire are never amongst the things that enter into the circle of exchange (though never realisable without), the identity of scale is always objective and external, and never vital. Possessions, actual or virtual, are indeed necessary to life, but, as they increase, their marginal significance to life declines, and the danger arises of sacrificing life to them instead of supporting it on them.” (Pp. 126, 127.)

According to Wicksteed, the phenomena of exchange constitute the special field of political economy, the function of which is to study the application to those phenomena of the laws of economics, which have a much wider scope. The problems of this science center in the market.

Before taking up the special study of the market, however, he makes some interesting observations on the ideas that lie behind such phrases as economic life, economic relations, economic conditions, the economic motive, and economic forces. “Economic life,” he says, “consists of all that complex of relations into which we enter with other people, and lend ourselves or our resources to the furtherance of their purposes, as an indirect means of furthering our own” (p. 158). Such relations may be properly described as economic (p. 166). The phrase economic conditions connotes “the general command of exchangeable things” enjoyed by the people of a community (p. 162) and “the considerations which determine a change of flow in the economic activities” (p. 169). Economic forces means “anything and everything which tends to bring men into economic relations” (p. 168).

An extended discussion of these concepts resulted in the following conclusions.

“(a) That the economic relation is entered into at the prompting of the whole range of human purposes and impulses, and rests in no exclusive or specific way on an egoistic or self-regarding basis.

“(b) That the economic forces and relations have no inherent tendency to redress social wrongs or ally themselves with any ideal system of distributive justice.

“(c) That the hypothesis that the economic relations can be isolated, even if taken only as a first approximation, is too remote from the fact to be admissible, and would be useless and superfluous in any case; and that the economic relation, as well as being naturally allied to other relations in every degree of closeness, has itself a tendency to beget these other relations.

“(d) That it is nevertheless both legitimate and desirable to make an isolated study of the economic relation and the economic forces, though not on the hypothesis that they actually exist or act in isolation.” (Pp. 169 and 170.)

The significance of these observations and propositions is indicated by the fact that they involve an abandonment of “all attempts to rule out this or that ‘motive’ from the consideration of the economist, or indeed to attempt to establish any distinction whatsoever between the ultimate motives by which a man is actuated in business and those by which he is actuated in his domestic or public life” and an abandonment of the “hypothetically simplified psychology of the Economic Man, which figured so largely in the writings of the classical economists and which recent writers take so much trouble to evade or qualify.” According to Mr. Wicksteed, “the economic relations constitute a machinery by which men devote their energies to the immediate accomplishment of each other’s purposes in order to secure the ultimate accomplishment of their own, irrespective of what these purposes of their own may be, and therefore irrespective of the egoistic or altruistic nature of the motives which dictate them and which stimulate efforts to accomplish them.” (Pp. 4 and 5.)

We turn now to the subject of the market, in which, according to Mr. Wicksteed, the chief phenomena and problems of political economy center, and note first his definition of it, namely, “the machinery by which objective equilibrium in the marginal significance of exchangeable things is secured and maintained in a catallactic society” (p. 212). “Equilibrium” in this definition means the conditions which exist when a commodity in the market “occupies the same place at the margin on the scales of all who possess it, and is higher at the margin on all their scales than on the scales of any one who does not possess it” {ibid.). The price “which if at once established would produce equilibrium without oscillations” he calls “the equilibrium price,” and this price, he says, “is determined by the quantity of the commodity at command and the composition of the collective scale” (ibid.), or “by the place on the communal scale of the lowest of the desires for a unit that, are gratified, and these will all of them be higher than any that are not gratified. Hence if there are X units of the commodity the place of the xth unit on the collective scale will determine the equilibrium price” (ibid.).

In further elaboration of these points, in connection with his account of how the prices of crops are determined, he says (pp. 216, 217): “The more I possess of any commodity the lower on my relative scale does it stand at the margin; so that if equilibrium amongst the consumers were established at any point on their scales and the growers still had stores in relative excess, and therefore found it to their interest to effect further exchanges, this continued distribution, yet further increasing the supplies of the consumers, would lower the marginal significance of the commodity on all their scales. The more of a commodity there is distributed, then, the lower will be the position on the several personal scales, and therefore on the collective scale, at which equilibrium is finally reached. Thus the amount of the crop and the scale of preferences of the community are the two ultimate considerations which determine the point on the collective scale at which equilibrium will be reached, or what we call the equilibrium price or value of the commodity.”

He shows that the collective scale “registers the estimates not only of the buyers but also of the sellers at reserve prices,” these latter being equivalent to buyers at those prices, since withholding supplies for a price above the one prevailing at the time has the same effect upon the market as offering to purchase at the reserve price the quantities withheld.

His treatment of the relations of buyers and sellers on the market is unique and especially noteworthy. The usual procedure is to treat them as opponents with rival interests, but he regards them as a homogeneous group and notes that, while to the individual buyer market prices appear to be “phenomena which confront him independently of his own action and which impose upon him the conditions under which he must make his selection between alternatives” (p. 5), as a matter of fact he is by his own action contributing toward the formation of these prices, other buyers, acting on precisely the same principles on which he acts, together with himself ultimately determining what these shall be.

The seller does not determine prices, but “reflects the collective mind of the consumers.” Speaking of the typical marketer and the seller’s relations to her, he says:

“It is mainly what the others will give that determines what the seller asks of her, and in an infinitesimal degree it is what she will give that determines what the seller asks of the others. What the purchaser meets in the market, therefore, is but a reflection of her own mind and that of her compeers thrown back from the mind of the seller. It is only in virtue of the obstinate illusion of the mirror that she believes the object she is contemplating to be actually, as it is in appearance, behind the fishmonger’s slab, or the counter, instead of, as it really is, in front of it.”

“It is the collective mind of the purchasers, then, as estimated by the sellers, that determines the price proclaimed by the latter. The sellers read the collective scale to the best of their ability, and announce their reading to the individual purchaser. If I could perfectly read your mind I should know how much tea or fruit you would buy at any price I choose to fix in my mind, and if I wanted you to buy exactly twenty-five units I should know what price to fix in order to make you do so. In like manner, if I could perfectly read the minds of all other purchasers I should know exactly how much each of them would buy at any particular price, and what particular price I must fix in order to make the sum of all their purchases reach any given amount. When they had finished their purchases, each of them having just as much as he cared to take at that price, the marginal unit of stock would occupy the same place on all their scales; and that place would be the one that equated it to the given price. There would then be equilibrium; that is to say, since the marginal increment of the commodity would occupy the same place on every relative scale, the conditions of exchange for that commodity would no longer exist.” (Pp. 218 and 219.)

The justification of the author’s title, Common Sense of Political Economy, is nowhere better shown than in his treatment of such subjects as interest, saving, accumulation, tools and machinery, and distribution. He begins his discussion of the first of these topics by calling attention to the relation between the maximum and best satisfaction of one’s wants and the flow of one’s income. The latter may be regular and the expenditures required for the proper and maximum satisfaction of wants may be and usually are irregular. Thus we need to purchase some commodities whose services to us are short and others whose services extend over considerable periods of time, in the former case expenditures needing to be repeated daily or weekly or at comparatively frequent intervals and in the latter at relatively long intervals—in some cases, perhaps, only a few times in a lifetime. To meet expenditures of the latter kind accumulation in advance must be made or future income anticipated. The income of a lifetime rarely, if ever, flows in such a manner as to correspond in time with these needs for expenditure, and the cases of no two persons in regard to this matter are exactly alike. In a community or a country or the world, every possible kind and degree of difference is likely to occur among the people who are in commercial relations with one another. As the author puts the matter in the summary of his chapter entitled “Interest, Tools, Land” (p. 266), “one man could administer his resources for a given period more economically if he could quicken their flow for the first part of the period at the expense of slackening it in the last; and the case is reversed to another. Or both may be in the same case, but to one the advantage of anticipation may be relatively greater than to the other. Between these two the conditions of exchange exist; and if, when equilibrium is reached, there is a premium on anticipation, that constitutes one source of the phenomena of interest.”

These differences between individuals result in the phenomena of accumulation, saving, and advances. The former takes place not only when precious metals and the like are hoarded, but chiefly when long-service commodities, like implements, houses, clothes, etc., are produced. This fact is obscured by the habit of associating accumulation with saving, but we should remember that the person who does the accumulating may be “bought out, day by day or week by week by short-service commodities” and in that case does not do the saving which necessarily accompanies accumulation. That is done by others. In the words of Mr. Wicksteed, “what happens is in principle something like this:— . . . By such agencies as Savings Banks and the like a number of persons club together, generally unconsciously, so that the tiniest streams and dribbles of savings (that is to say, refrain-ings from drawing things out of the circle of exchange) are gathered together, and are continuously embodied in long-service commodities”; or we may put it in this way: “week by week I may abstain from short-service commodities and cede them to others as payment for embodying their efforts in long-service or slowly maturing commodities. The abstinence is mine, not theirs. They have been enjoying immediate returns to their efforts, but I, through them, have been accumulating; and, at any moment, by advancing my accumulations, I can, in virtue of the premium on anticipation which the market offers, secure the promise of a larger sum than I have saved, in a series of subsequent payments.” (P. 278.)

The source of interest indicated in the preceding quotations is the difference in the needs of people for changing the distribution or flow of a given life income between the present and the future or between different future periods. Another discussed by Mr. Wicksteed is the profit to be made by using or advancing accumulations in the form of tools, machines, and other equipment which increases the efficiency of labor and natural agents. He notes that the production of these efficiency-increasing contrivances is a process of saving quite as much as the “diverting of effort from the increase of short-service commodities to the increase of long-service commodities,” but that unlike the former it results in increasing income rather than in merely redistributing its flow. In this latter case as in the former, however, interest arises from the difference in the positions of people relative to savings and to their use in production. “It may, and certainly often will, happen that one man is in a relatively favourable position for saving, and another in a relatively favourable position for fertilising the result of saving. Thus it may involve relatively smaller distress on my part than it would do on yours to deflect a certain sum from my current expenditure, from the direct supply of my wants to the construction of tools; and you, on the contrary, may be able so to apply these tools as to make them increase the efficiency of your efforts more than any use to which I could have applied them would have increased mine. In that case it may well happen that the increased yield so secured, while it would less than compensate you for the relatively severe process of saving, will more than compensate me for the relatively light one. If, then, I transfer the tools in which my saving is embodied to you, and you assign to me anything less than the whole increase of revenue, which results to you, I may be satisfied, and you may have a clear gain.” (Pp. 283, 284.)

Wicksteed claims that the law of diminishing marginal significance holds in the case of tools and machines as well as in the case of consumption goods, the additions to productivity by increasing their volume being subject to the law of diminishing returns (p. 284). A manufacturer, for example, finds that a given addition to his capital requirement, say £10,000, may increase the efficiency of his staff and equipment £1,000 per year; and that the addition of a second £10,000 will increase it perhaps £500 but not £1,000. Consequently he will find it profitable to borrow £10,000 at 6% but not £20,000, and his equilibrium loan demand at 6 per cent will be £10,000. At 5 per cent he might find it profitable to borrow more.

He concludes this part of his discussion with the following statements: “We have now examined a variety of cases in which a man may be willing to promise a premium in future wealth for the possession of present wealth; and two points have come out already. Firstly: Whatever a man’s reason for this wish may be, he comes into competition with all other men, who, for the same or any other reason, are willing to make similar promises. . . . Secondly: the premiums he will actually have to pay for the whole advance that he receives is not determined by the premium he would have been willing to pay for some of it sooner than go without, but by the equilibrating value of present as measured in future wealth, which is the resultant of the collective forces that play upon the market. This resultant proclaims the position of a unit-at-any-given-time-in-the-future, relatively to that of a unit-at-the-present-time, on the communal scale. It is open to any one to bring the significance of the marginal units on his own scale into harmony with this resultant. In a state of equilibrium every individual has done so; and where there is not equilibrium every individual has something (in his own estimate) to gain by approaching it.” (Pp. 286, 287.)

The place of land and other natural agents in the market is essentially similar to that of tools and machines. The value of the latter rests not upon the fact that they were produced, that “much has been sacrificed” to secure them, but upon the fact that they have “value in the present and future as a source of efficiency.” The same is true of land. “Whether regarded as purely a gift of nature or partly as a manufactured article [it] has its marginal value, exactly as a tool has. It may be hired for its marginal annual yield or may be bought for the estimated significance of the indefinite succession of these annual yields, just as an engine or a house may be; and it will be balanced on the same principles against wheat or anything else that can directly minister to human satisfactions.” (P. 290.)

Human services, as well as commodities of all kinds, are in the circle of exchange and follow the law of the market. Their chief peculiarities come from the facts (1) that “effort cannot be stored (except in a secondary sense and in a limited degree), unless embodied in some material thing animate or inanimate” and therefore “runs to waste if not used as the capacity for it arises”; (2) that “in many cases it is impossible for the holders to maintain an effective reserve price”; and (3) “that it is impossible to detach it (unless embodied) from its source.” (P. 315.) Subject to these restrictions “the law of the market dominates the exchange of human efforts with each other and with commodities.”

Markets for human efforts, however, are frequently imperfect on account of the influence of uneconomic considerations (p. 326), such as “the need for rest and aversion to irksome effort” (p. 327), “the uncertainty that often exists as to what the service bargained for will really effect” (p. 328), and the fact that the distribution of human efforts among its various markets, as well as the production of human raw material, is not responsive to demand to anything like the degree that supply of commodities is responsive to their demand. For these and other reasons the prices of human efforts do not follow fluctuations in marginal significance so closely as do commodities, but the difference is one of degree of responsiveness to the law of the market and does not remove human efforts from the dominance of that law.

“Economic forces,” therefore, “tend to secure to every worker as much as he is worth at the margin to others” (p. 339). “Hence, if we say that any kind of service is over- or under-paid in the open market, we must be speaking in accordance with some ideal conception; for instance, the idea of what is due to a man, as such, rather than what he commands in virtue of the significance to others of what he can do” (ibid.).

“A man may be underpaid because some obstacle or obstacles have been opposed to the working-out of economic forces, but the economic forces cannot cause a man, such as he is, to receive a lower remuneration than represents the worth to others of his work”; for they “are always urging those others to purchase anything that they can get for less than it is worth to them so that if there are any persons to whom the work of an individual (or class of individuals) would be worth more than he is now receiving for it, the economic forces urge them to offer higher terms and so secure his services” (p. 340).

In his chapters on markets of various kinds, reviewed in preceding sections, Mr. Wicksteed explained interest, rent, wages, and profits, the topics usually discussed by economists under the head of distribution. What he treats under this latter head is the analogy between the problem of the administration of resources, which he explained and solved in the very first chapter of his book, and that of the administration of the factors of production, including cost of production as a side topic.

This analogy consists in the fact that they both involve “the balancing and mutual substitution at the margin of factors in the production of a desired result which cannot be substituted for each other at their ‘origin’” (p. 358), the “desired result” in the one case being the direct satisfaction of wants and in the other their indirect satisfaction through production, i.e., the increased efficiency of the factors of production.

He illustrates this analogy as follows: “Everything I want and can get out of the circle of exchange has its market price; that is to say, there are terms on which it is obtained as an alternative for other things I may desire. Given my resources, the question I have to decide is how much I am to spend on each commodity in order to bring all their marginal significances in balance with their respective prices. Now, though we cannot think of a supply of water and a supply of literature, taken as wholes, as alternatives, yet at their margins they may perfectly well be so. The water company may make an extra charge for a garden hose, and I may consider whether I will command that extra supply of water and pay the extra rate, or go without it and spend the money on . . . classics. Thus, the supplies of all the articles that I buy in relatively large quantities and in relatively small units are clearly and directly alternatives at their margins. . . .

“And just so a firm of manufacturers (or the ‘entrepreneur’ or ‘undertaker’ who deals on their behalf with all the persons and for all the things necessary for the enterprise) will require certain things that cannot be substituted for each other in their totality” (“a place where the industry may be conducted,” “some output of human energy,” “material on which to work,” “tools and apparatus,” “subsidiary substances, such as coal, gas or water”) “yet, within limits, the most apparently unlike of these factors of production can be substituted for each other at the margins, and so brought to a common measure of marginal serviceableness-in-production.” (Pp. 360, 361.)

This process of comparison of results and substitution at the margins of the agents producing them is constantly in progress under the guidance of entrepreneurs and independent competing producers. “We may suppose that some possess land, some tools or buildings, some material, some manual skill, some knowledge of the markets on which the produce may be placed. . . . Some may contribute several factors. . . . A marginal addition or subtraction of any of the factors, the others remaining constant, may be expected to have such and such an effect on the products, and it is thus and thus only, that they can make comparisons. The withdrawal of the whole supply of labor or the whole supply of land would annihilate the industry. The withdrawal of any one class of tools, or any one kind of intelligence or experience, would severely cripple it; but the withdrawal of a defined small amount of one factor, at the margin, would produce a definite result. How much of any other factor must be withdrawn to produce the same result? When we have answered that question we have determined the relative marginal efficiency of a unit of each of the two factors, and have arrived at the principle on which they must share in the proceeds; for we can now express the contributions made to the result by all the different factors in one and the same unit, and if we divide the proceeds by the sum of these units we shall determine the share to be claimed on account of each.” (P. 369.)

Since all satisfaction and increases in productive efficiency resulting from market activities are in the future, it is their estimated and not their actual results that determine the activities of the marketers. Mistakes are, therefore, possible and are frequently made, but the effects of these mistakes upon present value are nil. They can only affect future estimates and, therefore, future values. This principle reveals the essence of the relation between cost of production and value.

“In the sense of the historical and irrevocable fact that resources have been devoted to this or that special purpose, . . . [cost of production] has no influence on the value of the thing produced, and therefore does not affect its price. Cost of production, in the sense of alternatives still open which must now be relinquished in order to produce this specific article, influences the craftsman in determining whether he will produce it or not.” (p. 38o.)

“In no case can the cost of production have any direct influence upon the price of a commodity, if the commodity has been produced and the cost has been incurred; but in every case in which the cost of production has not yet been incurred, the manufacturer makes an estimate of the alternatives still open to him before determining whether, and in what quantities, the commodity shall be produced; and the stream of supply thus determined on fixes the marginal value and the price. The only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. Thus what has been variously termed utility, ophelemity, or desiredness is the sole and ultimate determinant of all exchange values.” (P. 391.)

Mr. Wicksteed concludes his chapter on distribution with an excellent summary of the entire book, a summary which presents in comparatively short space a “picture of the movement of the industrial and commercial world” as he has analyzed it. The opening paragraph of this summary reads as follows: “We have now reached our goal. We have traced the identity of the great laws of the psychology of choice through all our commercial and private life, have shown that the principles on which we choose between further indulgence of our literary tastes and further support of social movements in which we are interested are the same as those on which we choose between the different wares in the market, that our resources are administered on the same principles whether directly or indirectly applied to our purposes, that our conduct in the presence of market rates itself explains how those rates are constituted, and that every man’s desire to fulfill his own purposes will ceaselessly urge him to search out the means of fulfilling those of others.” (P. 391.)

Footnotes

1 “Der Collectivismus ist auch nur eine Form der Bethätigkeit individueller Wesen und kan ja nicht anderes sein. Insofern sind also alle Collectivbedürfnisse Bedürfnisse der in Collectivismus Personen.”—Dr. Emil Sax, Grundlegung der theoretische Staatswirthschaft (Wien, 1887), p. 192.

2 Von Wieser, Natural Value, pp. 222-223.

3 Ibid., pp. 223-225.

4 Ibid., p. 229.

5 Ibid., p. 255.

6 Ibid., pp. 235 and 236.

7 Philip H. Wicksteed, The Common Sense of Political Economy (London, Macmillan & Co., Ltd., 1910), p. 14.

8 Ibid., p. 20.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”