Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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First Pub. Date
1881
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New York: Maynard, Merrill, and Co.
Pub. Date
1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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DEFINITIONS IN POLITICAL ECONOMY

I.356.1

DEFINITIONS IN POLITICAL ECONOMY. The last of the essays in J. S. Mill's volume on "Unsettled Questions in Political Economy" is appropriately entitled, "The Definition and Method of Political Economy." The problem of definition in a science is one closely connected with the method of investigation pursued in it. One of the ablest advocates of the deductive method in political economy, N. W. Senior, opposing, at the beginning of his treatise on the science, the view that the main business of the economist is the investigation of facts, urges that the prime object should be the proper choice, definition and employment of words. "If," he says, "economists had been aware that the science depends more on reasoning than on observation, and that its principal difficulty consists, not in the ascertainment of its facts, but in the use of its terms, we can not doubt that their principal efforts would have been directed to the selection and consistent use of an accurate nomenclature." The advocate of the inductive method may reply that, without the observation and ascertainment of facts, an accurate use of terms in political economy, a proper exposition or definition of their meaning, and consequently, a scientific nomenclature, are impossible. To define light, heat, electricity, correctly, or to use these terms of physical science with an understanding of their true meaning, we must study the phenomena which they denote; and it is no otherwise with the terms of economic science. Production, distribution, wealth, capital, money, currency, credit, wages, profit, rent, are terms which can not be properly explained or employed without careful investigation of the facts which they are designed to represent. So with the term political economy itself. J. S. Mill, in the essay above referred to, on "The Definition and Method of Political Economy," has, contrary to the main object of the essay, afforded a signal demonstration of the failure of the deductive method to furnish an adequate and accurate definition of the science. The definition there put forward as complete is, "the science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those operations are not modified by the pursuit of any other object." Yet, immediately afterward, we find Mr. Mill admitting other and counteracting motives. "Political economy," he says, "makes abstraction of every other human motive, except those which may be regarded as perpetually antagonistic principles to the desire of wealth, namely, aversion to labor, and desire of present enjoyment." Presently, too, he adds another principle, excluded by his own definition. After repeating that the economist inquires, "What are the actions which would be produced by the desire of wealth, if unimpeded by any other?" he continues: "Only in a few of the most striking cases (such as the important one of the principle of population) are corrections interpolated into the expositions of political economy itself." Had Mr. Mill's attention been directed to the facts which observation led Adam Smith to take cognizance of in his exposition of the diversity of the rates of pecuniary wages and profit in different employments, he must have perceived that reasoning from the desire of wealth alone would inevitably lead the economist astray at the very threshold of the science. Moreover, if certain other principles are legitimately admitted within the pale of the economist's province, on what logical ground can any be excluded, whose operation is revealed by the investigation of facts? "The definition of a science," says Mr. Mill himself, in his great work on Logic, "must necessarily be progressive and provisional. Any extension of knowledge, or alteration in the current opinions respecting the subject matters, may lead to a change more or less extensive in the particulars included in the science." And in his treatise on the "Principles of Political Economy," written at a maturer age than the essay on the definition and method of the science, Mr. Mill describes the economist's province as embracing the investigation of all the causes by which the condition of mankind is made prosperous or the reverse in respect of wealth. These causes can not, indeed, he adds, be all even enumerated in a treatise on the science; but it should aim at setting forth all that is or can be known about them and the laws of their operation. In other words, political economy should be regarded as a progressive science, and must owe its progress to the constant observation of facts and ascertainment of the laws on which they depend; and no definition which confines the student to deduction from any single principle or set of principles can be otherwise than defective, and founded on a wrong conception of the method of investigation.

I.356.2

—What is true of the science as a whole, is true, likewise, of the terms which denote the chief classes of phenomena to which it relates, and the laws discoverable in them. The question of definition in respect of these terms is one of method of investigation; and no definitions should be put forward which have not been derived from the study of phenomena, nor should they, however well considered, be regarded as absolutely final and adequate.

I.356.3

—We are not, however, justified in giving, in the definition or use of economic terms, a wider meaning to one that has a special signification, merely in order to embrace under it a larger group of phenomena which is already denoted by a more general term. When a distinct agency or principle, or set of facts, has once been designated by a distinct name, it is contrary to the objects of scientific nomenclature to generalize unnecessarily the meaning of this name or term, for the mere purpose of covering additional ground already provided with a denomination. The term money, for example, was formerly employed by the best economists only to denote the common medium of exchange and common standard of value. "Money," said Mr. Huskisson, in his famous tract "On the Depreciation of the Currency," "is not only the common measure and common representative of all other commodities, but also the common and universal equivalent." No instrument of exchange can fulfill these functions, or answer to this definition, unless it be legal tender in payment of debt. It must be the common medium of exchange and the universal equivalent, and not merely a medium accepted or used in particular localities, at particular times, and by particular persons. A check, a bill of exchange, an ordinary promissory note, a bank note which is not legal tender, may, at certain places and times, and among some of the inhabitants of a country, perform the functions of money. But such instruments may become valueless, or be rejected as payment, in a crisis, or beyond a particular district, and they have at all times only a limited circulation, so that they do not come up to the mark of money, and are not definable as the common medium of exchange or universal equivalent. It is true that prices are not determined simply by the amount of money, in the strict and accurate sense, but by the whole mass of instruments of exchange. This whole mass is, however, adequately denoted by the term circulating medium; and it is a wanton sacrifice of the means of precision of language and thought, to expand the meaning and definition of the special term money so as to cover the entire volume of circulation.

I.356.4

—On the other hand, there are cases in which the extension of the meaning of a term from a special to a more general sense, and the enlargement of its definition, may be not only justifiable but necessary. Further observation of phenomena, or the advance of scientific knowledge, may prove that a wider field of inquiry than was originally contemplated and denoted by a particular term, lies before the student. No other term, nevertheless, may be equally serviceable or apposite; or it may be difficult to supersede it, and accordingly a more extensive signification must be given to it. An instance of the highest importance presents itself in the case of the term distribution. Political economy is commonly defined as the science which investigates the natural laws governing the production and distribution of wealth. But by distribution some of the early French economists meant only what is now indicated where the business of the distribution of goods is spoken of, by contradistinction to their production. And in the first book of the "Wealth of Nations," Adam Smith applies the term distribution simply to the process of exchange whereby wages, profit and rent, and the value of each man's products or services, are obtained. It has, however, become clear that the causes governing the partition of wealth include also customs, social arrangements and positive laws. The different distribution of property in England and France has not been the result simply of the process of exchange, or of dealings in the market. The advance of knowledge of the natural laws of society, moreover, reveals the fact that they control even human positive laws, and that the latter have their antecedents as well as their consequences, and follow an ascertainable order. The natural history of Roman law, from a period earlier than the twelve tables down to its codification under Justinian, has been recovered, and shown to follow a regular and natural development or evolution. When political economy, therefore, is defined as investigating the natural laws governing the distribution as well as the production of wealth, the term distribution should be understood as covering a much larger field than that of exchange, and extending over positive institutions and social usages and arrangements. The case affords an illustration of the connection between definition and method of investigation. Economists could not have persisted in limiting the field of inquiry to exchange, had they kept actual phenomena in view. Nor can the science they profess obtain an accurate nomenclature, or be equipped with proper definitions, otherwise than by close and unflagging attention to those phenomena. The question whether a special or a more general signification should be given to a term, is always one turning mainly on facts. If the narrower meaning excludes the consideration of essential facts, a wider definition should be adopted. Where, however, the whole extent of the field of inquiry is adequately indicated by another term, it is inconvenient and misleading to give that comprehension to one which hitherto had denoted only a particular section of the field.

I.356.5

—The opposite error ought equally to be avoided, of giving needlessly and arbitrarily a more restricted meaning to phrases than had been attached to them in the current nomenclature of a science. A change in the actual economy of society may indeed call for a limitation of the meaning of a word, and the question whether there really be such a change in actual phenomena, is sometimes one of complexity and difficulty. A case of considerable practical importance arises in relation to the definition of profit. Adam Smith, and his successors down to J. S. Mill, included under profit the two elements of interest on the capital engaged in business, and remuneration for its direction and management. Some recent writers, however, separate, under the name of profit, the second element from interest, on the ground that the capital employed in modern enterprises is rarely managed by the capitalists themselves, who obtain only interest, while the direction is in the hands of paid directors and managers, whose earnings measure the gain, over and above interest, on the undertakings, and who are regarded by the writers in question as a higher class of skilled laborers. There are, however, facts, in addition to long usage, in favor of including under profit both interest and remuneration of superintendence. In the first place, if we take into consideration not only undertakings requiring large capitals, and carried on by companies or great firms, but all the various employments, wholesale and retail, large and small, to be found in a country, it will be seen that a vast number of capitalists still manage their own capitals, and earn more than interest; so that the term profit, in its old meaning, is still useful to designate the double earnings of capital. Secondly, even where a large business is carried on by a paid manager and a staff of directors, the owners of the capital engaged, if the management be good, ordinarily obtain more than bare interest, and a term is needed to comprehend their entire gains. But whether we confine the term profit to the earnings of management, or include interest also under it, ought we to define the surplus above interest, which is the fruit and remuneration of superintendence, simply as a species of wages; the wages, that is to say, of a special description of industrial or commercial skill? In support of an affirmative answer, it is argued that a flourishing business may be conducted by a skilled manager, who receives a fixed salary determined by the causes that regulate the wages of skilled labor in general. The counter-argument is, that the surplus above interest, derived from the employment of capital in business, follows a principle entirely different from that which governs wages, varying, not in proportion to labor and skill, but to the amount of the capital. If either a capitalist conducting a business himself, or a manager conducting one on behalf of a company, sees that by some skillful stroke he can raise the returns, the gain will be in proportion, not to his trouble or sagacity, but to the capital employed. If, again, the managers of two different companies, see that they can make 5 per cent. more than usual by the sale of goods in a new market, the amount of gain in each case will depend on the quantity sold, not on the skill or trouble involved, which may be nearly the same in both cases; although twice the amount sold on behalf of the poorer company is disposed of, at twice the profit, by the other. There seems thus to be an element, over and above interest, in the income derived from the active employment of capital, which can not properly be defined as wages, because following a different law.

I.356.6

—A definition of wages which was not inappropriate to a past phase of industrial economy, is sometimes put forward as applicable to that of our own day. The real wages of labor, according to a definition which originated with Adam Smith, consists, not in the sum of money the laborer receives from his employer, but in the commodities he is enabled to procure. And in Adam Smith's time, this definition was true in the main of the recompense of agricultural labor over a great part of Europe. The farm laborer was paid chiefly in kind, not in money; he was fed, clothed and lodged by his master; and his wages depended almost altogether on the necessaries and comforts he directly received. But in modern times this mode of payment is nearly extinct, and the quantity and quality of the commodities obtained by the workman depend, not simply on what he gets in exchange for his labor as wages, but on another set of exchanges, in which he is buyer instead of seller. The food and clothing of the Irish harvest laborer depend, not merely on the amount of money he earns in England, but on the Irish potato crop, the American crops, the price of tea. sugar and cloth, and other conditions unconnected with the price of his labor. The commodities obtained by a laborer may properly enough be said to form his real income, but the use of the term "real wages," by modern economists, in the sense in which they define it, shows how superficially the actual economy of life has been studied under the influence of the deductive method, and how essential the observation of facts is to "the selection and consistent use of an accurate nomenclature," on which N. W. Senior laid so much stress—The term capital is so variously defined that we shall not attempt more than to support the common definition in preference to one assigning to it a wider signification, for which an eminent English economist contends. As ordinarily defined, capital denotes commodities engaged in production or commerce, excluding things which, however valuable and durable, are not so employed. W. Stanley Jevons, however, argues that the private house of a gentleman is practically productive of an income equivalent to the sum he would have to pay for a hired dwelling. Mr. Jevons puts the question, "Are articles in the consumer's hands capital?" In reply, he contends that, if we consider hotels and houses let by their owners to tenants as capital, we can not consistently refuse the same denomination to houses inhabited by the proprietors. In like manner, he would class the clothes in a private wardrobe, along with those in a tailor's shop, as capital. It is nevertheless evident, we would suggest, that the stock of dresses possessed by a lady of fashion, may represent simply extravagance and waste. A private house, again, may be altogether beyond the means of its owner; and whereas, if let it might yield him a sufficient income, it may, if inhabited by himself, involve him in ruin. We adhere, accordingly, to the definition which confines the term capital to things in the hands of producers, or things from which an income is derived by sale or other dealings in the market. The stock which a country gentleman raises on his farm for the market, thus constitutes capital; but his hunters and dogs, his guns and his pheasants, unless he sells the last, do not conform to the designation.

I.356.7

—The definitions discussed in these observations have been instanced, not on their own account only, but also for the sake of general conclusions, to which they point. The first condition of adequate and accurate definition in political economy, is the study of the actual economic structure of society, the changes that take place in it, and the fundamental social laws that govern these changes. Gratuitous and useless innovations in the use of terms are to be deprecated; but the advance of economic knowledge, and the appearance of new phenomena may call for new classifications, and new expositions of the nomenclature of the science. There have been states of society to which not a single term in that nomenclature would have been applicable in its present meaning; and the most civilized societies may yet undergo changes calling for large alterations in economic language and thought.

T. E. CLIFFE LESLIE.

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