The Economic Point of View
4. Economics, the Market, and Society
The definition to which economic writers have yielded a more general assent than to any other . . . is “the science of exchanges.”
A. S. Bolles (1878)
. . . that definition of Political Economy which calls it the science of exchanges, is absurd.
Franklin H. Giddings (1887)
The present chapter groups together definitions that see economic affairs as in one way or another necessarily connected with the act of exchange as a social phenomenon. Two groups of these definitions may be distinguished. The one explicitly raises exchange to the first place in economics, regarding the very notion of a distinct economic sphere as revolving around a more or less carefully defined concept of exchange. The other definitions do not stress the phenomenon of exchange itself, but focus attention on such ideas as the market, the economic system, and the “economy” as an aspect of the larger concept of society. These ideas, too, depend in the last analysis on a fusion of individual activities into a social “system” through some form of the exchange relationship. Both groups of definitions provide a fresh and distinctive outlook on economic phenomena, which at the same time reveals a number of points of contact with many of the alternative conceptions.
Economics and Catallactics
But during the early classical period there was no attempt to take this phenomenon of exchange and make it the very core of economics. Political economy was the science of wealth. The fact that wealth is exchanged may have been recognized as of the first importance for a science of wealth, but this recognition did not of itself convert political economy into the science of exchanges.
The substitution, in definitions of political economy, of a verbal noun (“exchange”) instead of the classical noun (“wealth”) was, of course, of considerable significance. The subject matter of the science was now uniquely characterized, not by the objective nature of the goods-phenomena that it investigates, but by the character of the operations involved in the appearance of these phenomena. Nevertheless, the break from the classical conception of economics as a science of wealth that was involved in Whately’s proposal was not so complete as might at first glance be imagined. That which is exchanged in Whately’s Catallactics is still the same “wealth” with which the political economy of a McCulloch is concerned. The views of those who held that economics is a science of exchanges, in fact, provide another interesting example of definitions that, while themselves closely related to the older wealth-bound formulations, point to a complete emancipation from these bonds. An arresting illustration of this is furnished in the writings of Lawson.
The separation of acts of exchange and their identification with a distinct human urge made the division between economic and other human affairs a far less painful operation for Lawson than it had been for Mill. The consequences of the propensity to truck may be isolated simply by considering only the results of acts of exchange. There is no need to call upon controversial operations of “abstraction” and “hypothesis” as is necessary when one attempts to segregate the consequences of human pecuniary self-interest. Clearly the catallactic view could facilitate the conversion of political economy from a science of wealth into a science of man.
Exchange and the Propensity to Truck
The first aspect of the exchange phenomenon that deserves attention is the status of the act of exchange as an element in the activity of an individual. Adam Smith saw exchange as the result of a human propensity to barter. Whately defined man as an animal that exchanges. Now, human beings engage in barter because they hope to improve their positions by exchanging. The act of exchange is thus no different in this respect from all human actions that are undertaken in the hope of improving one’s position. Of course, the act of exchange involves the cooperation of another person, but some further property is needed to distinguish exchange from other forms of cooperation or from the act of bestowing a gift upon one’s fellow man. It is here that the concept of exchange becomes entangled with ideas of sacrifice, of the mutual coincidence of interests, and the like.
In a number of the definitions of the economic that are couched in terms of exchange, the aspect that is stressed is the fact that exchange involves a quid pro quo. In an atmosphere in which economics and self-interest were linked together, the most characteristic feature of exchange is that it provides a new means of getting something for oneself. It is this aspect of commercial behavior that aroused the ire and moral indignation of Ruskin against the “cash-payment relation” between man and man. Exchange suggests the habit of helping one’s neighbor only on the condition that one will be more than repaid in return.
Exchange and the Division of Labor
However, the significance of an economics defined as a science of exchanges may be seen, not in the nature of the act of exchange itself, but in its wide consequences. The market may be viewed, not as an institution facilitating the indirect fulfilment of individual desires (in Wicksteed’s sense of disregarding the competitive interests of other people), but on the contrary, as an institution through which individuals may cooperate to satisfy their wants at higher general levels of satisfaction. As Smith pointed out, each individual, by indulging his propensity to truck, unconsciously helps society as a whole to benefit through the increased division of labor. The “general opulence” associated with specialization is a consequence of this propensity to truck and may arise without any knowledge on the part of the barterers of the “extensive utility” that they promote.
The “Purely Formal” Concept of Exchange
The catallactic view of economic affairs may be interpreted to refer to yet another aspect of exchange. Like that discussed in the preceeding paragraphs, this view ignores exchange as a peculiarly motivated human act and focuses attention on the consequences of the act. But instead of gaining its significance from the advantages arising from the social cooperation involved in exchange, the idea of exchange is now to be assigned importance as the means whereby “economic quantities” are changed. An exchange of goods alters the configuration of goods in the economy. An exchange of productive resources alters the arrangement of those factors of production. If the exclusive object of interest is the transfer of the goods themselves, then exchange is significant merely as involving the simultaneous variation of several sets of “economic quantities.” A purchase of a consumer good has resulted in a reduction both in the inventory of the seller and the cash holdings of the purchaser. The act of exchange is the event that has altered these economic quantities and has generated the ratio of their variations, viz., the phenomenon of price.
Exchange and the Economic System
The final aspect of exchange that may make it of significance for defining the scope of economics is its importance in the visualization of an economic system. It is primarily this aspect that is concerned in the second group of definitions mentioned at the beginning of the chapter, which use the idea of an economic system or organization as their criterion. The recognition that, expressed in the anarchy of numberless, seemingly haphazard transactions of economic life, there is a system that relates apparently disconnected actions and organizes them to achieve social “ends” is an achievement of economic science. But the discovery of the existence of such a system clears the way for a fresh conception of the nature of economic science itself. The existence of a system offers a new object for investigation, viz., the system itself. The system may concern wealth, the selfish behavior, or the propensity to truck, of a variety of economic men; but it does provide an independently unique phenomenon in its organization, its structure, and its operation.
When the success of the system in achieving generally prized results is not considered, then a description of the system reduces to a positive statement of the functional relationships among the sets of variables within it. And the totality of these relationships may have no special interest independently of the various sets of relationships themselves. This is the standpoint of Schumpeter’s definition in terms of exchange and the other “mechanical” formulations discussed in this and the previous chapter. But if the whole body of interrelationships is considered in its unity, and the existence of such a unity is considered significant in itself, then the idea of a system may assume a prominent place in economics.
Clearly, then, Bastiat felt some justification for assuming beforehand that the system to be studied by political economy was one that worked. After all, it was this successful operation of the system—a success that Bastiat felt to be grounded on observation—that was the object of the study. For Cairnes, who considered economics a dispassionate study of the phenomena of wealth, any predilections towards one system in particular must be unscientific. For Bastiat, what invited explanation was precisely the large degree of efficiency empirically evinced by the system, a phenomenon of which the recognition hardly deserves the suspect position of a “foregone conclusion.”
Be this as it may, Bastiat is typical of a fairly numerous group of writers stressing the organization of the economy as the focus of economic attention and seeing the significance of exchange primarily in this connection. Two eminent twentieth-century economists may be cited as examples of the popularity of this view. Hawtrey writes:
And Hayek writes:
Economics, the Economy, and the “Volkswirtschaft”
Economy and Society
Many of the ideas mentioned in the preceding sections of this chapter have a bearing on the relationships that have at various times been held to exist between economics and the social sciences generally. The structures of interpersonal patterns of contact that the economist studies in his analysis of the market may, of course, be of interest to the sociologist or the social psychologist from a totally different aspect. And writers who identified the specifically economic aspect of phenomena with the social quality inherent in exchange, the market, and the like, found themselves influenced more or less deeply by their ideas on the nature and methodology of the social sciences as a group.
Carried to the extreme position held by Comte, these ideas meant, not that the social character of economic affairs made possible a fresh means of definition, but that the awareness of this social character led to the denial that there are any specifically economic affairs whatsoever. Phenomena of wealth might indeed be distinguished. But once it is insisted that the derivation of the laws of wealth requires analysis of intellectual, moral, and political factors, then it is at once contended that no specifically economic point of view can be scientifically illuminating at all.
This view of the matter places the economic point of view even more firmly in a position subordinate to general sociological theory. Economic theory becomes a special case of sociological theory and is conceived, indeed, as providing a mirror that reflects, mutatis mutandis, the propositions of such a theory. The more interesting and important implications of this approach for economics reach beyond the scope of this enquiry. For us it is sufficient to have noticed yet another conception of the economic point of view, one that shares with those noticed in this section the characteristic of leaning heavily on the social aspect of economic affairs, and thus indirectly on the ideas of exchange discussed at length at the beginning of this chapter.
