The Common Sense of Political Economy

The Common Sense of Political Economy

Ein jeder lebt’s, nicht vielen ist’s bekannt.

We are all doing it; very few of us understand what we are doing.

Introduction

In the ordinary course of our lives we constantly consider how our time, our energy, or our money shall be spent. That is to say, we decide between alternative applications of our resources of every kind, and endeavour to administer them to the best advantage in securing the accomplishment of our purposes or the humouring of our inclinations. It is the purpose of this book to evolve a consistent system of Political Economy from a careful study and analysis of the principles on which we actually conduct this current administration of resources.

I assume no previous acquaintance on the part of the reader with works on Political Economy, and rely on no hypotheses except such as the common experience of life suggests and explains. But since the system evolved from them will differ in some important particulars from traditional doctrine it will be suitable at the outset to render some account of the relation in which it stands to current or recent economic theory.

On the 1st of June 1860, William Stanley Jevons wrote to his brother, Herbert:

In the last few months I have fortunately struck out what I have no doubt is
the true Theory of Economy, so thorough-going and consistent, that I cannot now read other books on the subject without indignation.

Some eight weeks later he spoke of his theory as destined to “re-establish the science on a sensible basis”; and at last, in 1871, he embodied it in his
Theory of Political Economy. Now Jevons’s great discovery, like so many others, was nothing but a discovery of the obvious; for it was the discovery that whereas human wants are sometimes capable of complete satisfaction, and sometimes of gradual assuagement, in any case the relative urgency with which they demand further gratification is affected by the extent to which they have already been satisfied. So that a slice of bread and butter is not of the same significance in comparison with other things—the pleasure of smoking a pipe of tobacco, or of going out to look at a sunset, for example—if one has had nothing to eat for several hours, and if he has just enjoyed a hearty meal.

Walras in Switzerland, Menger in Austria, and Jevons in England, were all of them, without knowledge of each other’s work, erecting a theory of value upon this obvious but strangely neglected principle, which bases economic thought on the broad experiences of daily life and the psychology of choice between alternatives. All the most noteworthy advances in the theory of Political Economy that have since been made are the inevitable developments of this single principle.

This principle furnishes the clue to all the most intricate problems of the abstract theory of Political Economy; and I believe that the reconstruction contemplated by Jevons has been carried to a far more advanced point than is generally realised even by those who are themselves accomplishing it. Adhesion to the traditional terminology, methods of arrangement, and classification, has disguised the revolution that has taken place. The new temple, so to speak, has been built up behind the old walls, and the old shell has been so piously preserved and respected that the very builders have often supposed themselves to be merely repairing and strengthening the ancient works and are hardly aware of the extent to which they have raised an independent edifice. I shall try to shew in this book that the time has come for a frank recognition of these facts.

My book therefore has two distinct but connected aims. It attempts to start with the reader from the very beginning, and to place a clue in his hands which will lead him, directly and inevitably, from the facts and observations of his own daily experience to an intimate comprehension of the machinery of the commercial and industrial world. And secondly, it attempts (implicitly in the First Book, more explicitly in the Second) to convince professed students of Political Economy that any special or unusual features in the system thus constructed are not to be regarded as daring innovations or as heresies, but are already strictly involved, and often explicitly recognised, in the best economic thought and teaching of recent years.

It may be convenient here to indicate in advance the main features of the construction thus attempted.

It will easily be shown that the principle laid down by Jevons is not exclusively applicable to industrial or commercial affairs, but runs as a universal and vital force through the administration of all our resources. It follows that the general principles which regulate our conduct in business are identical with those which regulate our deliberations, our selections between alternatives, and our decisions, in all other branches of life. And this is why we not only may, but must, take our ordinary experiences as the starting point for approaching economic problems. We must regard industrial and commercial life, not as a separate and detached region of activity, but as an organic part of our whole personal and social life; and we shall find the clue to the conduct of men in their commercial relations, not in the first instance amongst those characteristics wherein our pursuit of industrial objects differs from our pursuit of pleasure or of learning, or our efforts for some political and social ideal, but rather amongst those underlying principles of conduct and selection wherein they all resemble each other; for only so can we find the organic place of industry in our conception of life as a whole.

Having made our preliminary study of the psychology of choice, or the principles which regulate our selection between alternatives, we shall proceed to the special application of these principles to the commercial and industrial life, and to the characteristic phenomena which it manifests. It is not surprising that our definition of the area of the industrial and commercial or economic life should demand some revision when approached from this point of view. If earlier generations of investigators were chiefly intent on sharply defining Political Economy as a separate and self-contained area, and if our present tendency is to regard it as an integral part of the general life of society; if former generations were anxious to emphasise, and even hypothetically to magnify, the difference between the economic life and all that lay outside it, and if we, on the other hand, are intent on rediscovering in every branch of commercial and industrial life the identical motives and principles with which we are familiar elsewhere, it is not surprising that the old definitions of the economic life itself should prove unsatisfactory to us.

Accordingly, I shall try to shew that it is time frankly and decisively to abandon all attempts to rule out this or that “motive” from the consideration of the Economist, or indeed to attempt to establish any distinction whatever 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. Economic
relations constitute a complex machine by which we seek to accomplish our purposes, whatever they may be. They do not in any direct or conclusive sense either dictate our
purposes or supply our
motives. We shall therefore have to consider what constitutes an economic relation rather than what constitutes an economic motive. And this does away at a stroke with the hypothetically simplified psychology of the Economic Man which figured so largely in the older books of Political Economy, and which recent writers take so much trouble to evade or qualify. We are not to begin by imagining man to be actuated by only a few simple motives, but we are to take him as we find him, and are to examine the nature of those relations into which he enters, under the stress of all his complicated impulses and desires—whether selfish or unselfish, material or spiritual,—in order to accomplish indirectly through the action of others what he cannot accomplish directly through his own.

We shall find that 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 those 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. And the things and doings with which economic investigation is concerned will therefore be found to include everything which enters into the circle of exchange—that is to say, everything with which men can supply each other, or which men can do for each other, in what we may call an impersonal capacity; or, in other words, the things a man can give to or do for another independently of any personal and individualised sympathy with him or with his motives or reasons.

A full realisation of this, while bringing home to our minds the fundamental importance and the wide area of these relations, will at the same time convince us of the impossibility of permanently isolating them in practical life from the non-economic relations into which they perpetually play.

When our conception of the nature of economic facts and relations has become clear, we shall see without difficulty that the market, in the widest sense of the term, is their field of action, and that market prices are their most characteristic expression and outcome. The individual, in administering his resources, regards market prices as phenomena which confront him independently of his own action, and which impose upon him the conditions under which he must make his selections between alternatives. But when he has arrived at a thorough comprehension of the principles of his own conduct, as he stands confronted by market prices, he will find that those market prices are themselves constituted by other people’s acting precisely on the principles on which he acts; so that he is in fact himself, by his own action, contributing towards the formation of those very market prices which appear to be externally dictated to him. Because other people are doing exactly what he is doing a phenomenon arises, as the resultant of the sum of their individual actions, which presents itself to each one of them, severally, as an alien system imposed from without.

For the complete establishment of the theory of the market we shall be driven again to search for resemblances where stress has previously been laid on differences. The buyer and the seller have usually been opposed to one another, and the interplay of their rival interests has been regarded as the source of the phenomena of the market. But we shall try to go below this. The obvious and universally recognised fact that the same man may be a buyer under one set of circumstances, or a seller under another, and that even in the same market a man who would buy if prices were low may sell if prices are high, will lead us to a decisive simplification of the theory of markets, based on the consideration of buyers and sellers as a homogeneous group arranged and graduated on a single principle. But the explanation and elaboration of this conception cannot be anticipated here.

Our theory of markets once complete, all the rest is straightforward; but again it must be by attending to resemblances rather than to differences that we advance to the solution of the problems of “distribution.” Wages, rent, interest, profits, etc., will be found to resolve themselves into mere questions of special markets, so that, strictly speaking, there is no more room for a separate theory of rent or a separate theory of wages than there is for a separate theory of the price of boots or a separate theory of the fees of a classical coach. If we mean by theory a system of general truths dealing with generalised facts, as distinct from the isolated factors and influences proper to some concrete phenomenon or group, then there can be no theory of rent, interest, or wages; there can be but one theory of distribution, and that the theory of the market.

We may attempt to develop this thought a little further. A man decides that a certain book and a certain article of clothing are each worth a guinea to him, but no more. If he can get either of them for that sum, or for anything less, he will purchase it; if not, not. This man has established an equality between the book and the article of clothing, and it is on such equalities or inequalities that he bases his whole administration of resources. Equality implies that the equal things have been reduced to a common measure. They are balanced against each other, therefore, by considering them as homogeneous magnitudes. In what sense are they such, and how are we to arrive at their common measure? Obviously not by dwelling on the specific nature of the services which the one article renders in clothing the body, and the other in clothing, feeding, or otherwise gratifying the mind, but by dwelling on the fact that both alike satisfy certain wants, or minister in a defined degree to the vital necessities and impulses of the purchaser. In this sense they may be regarded as substitutes for each other. A man cannot (conveniently or adequately) clothe himself in a book, or educate himself on a coat, and therefore there is a sense in which the coat and book cannot be regarded as substitutes for each other. But he may please himself with either, and, given a certain general state of his supplies and tastes, it may well be that a set of flannels of given quality and a certain specified book would equally gratify his tastes and desires at the moment; so that, from the point of view of his general vitality, they might be regarded as equivalent. Each would be equally pleasing and would be felt equally to enrich his life. The marginal theory of the administration of resources, as developed in this book, will shew that it is by contemplating commodities and services under their aspect of equivalents or substitutes (that is to say, by concentrating our attention on that point of view from which the services they render are like, not on that from which they are unlike) that we shall be able to constitute the theory of the market.

In like manner, in dealing with the particular markets of the productive factors or agents, we shall find that it is not by considering the special services that land renders to production, and the special conditions under which it renders them, or by considering the same problem with reference to labour or capital, that we shall worm out the secrets of the process of “distribution,” but by considering that aspect under which all of these, and any other factors of production there may be, resemble each other. An addition or withdrawal of a small amount of any one factor of production, the others remaining constant, will produce a certain defined effect on the output; and, given certain supplies and conditions, this effect might often be counteracted by the addition or withdrawal of a small amount of some other factor. Thus under given conditions a small withdrawal of land might be compensated by a small addition of labour, so that the product might remain the same. When we have realised this we may reduce land, labour, and other productive agents to common terms and regard them as substitutes for each other, much as we did the book and the flannels; and thus, by fixing our attention on the identity rather than the diversities in the services rendered by the several factors of production, we may reduce them to a common measure and so solve the problem of distribution.

In all this there is nothing revolutionary or startling, but it will be found that a connected and systematic exposition of these truths will call into question much that still holds its place in text-books of Political Economy. It will be sufficient here to indicate, without any attempt to justify or elaborate, some of the main conclusions that will be reached.

We shall have to abandon the favourite diagrammatic method by which prices, whether market or normal, are indicated by the intersection of a curve of demand and a curve of supply, or a curve of demand and a curve of cost of production. We shall call for a revision of the whole theory of increasing and diminishing returns as usually expounded, and this will be seen to involve either the abandonment or the restatement of much ingenious theory that has been based on the supposed phenomena presented by industries subject to the law of diminishing returns.

In close connection with the subject just mentioned, we shall have to note that certain general truths, of universal application, which were first observed and formulated in relation to land, have been mistaken for specific characteristics of that particular factor of production. This has produced a perfect spawn of errors, misconceptions, and misnomers, which will long continue to infest economic thought. I have tried to indicate with perfect precision the specific source of these errors.

And finally, the general principles of our investigation will involve (less directly, but not less inevitably) an abandonment of the so-called Quantity Law in the study of finance, and some readjustment, at least, in the usual statement of the nature of foreign trade and the phenomena of bill-broking.

All this controversial matter has been as far as possible avoided in the First Book of this treatise, which aims at simple and direct construction, with the minimum of polemical reference to current terminology or theory. And it is my hope that, whatever may be the verdict passed by experts on the Second Book, the First may be found to have some independent value, which may be acknowledged even by those who dispute the legitimacy of the inferences subsequently drawn from the principles it expounds.

Finally, in a brief Third Book I have endeavoured to shew that the principles elaborated in the first two Books will furnish the student of political and social reform with something like an instrument of precision, by which he may be able to analyse both the familiar phenomena of public life and the various movements and suggestions which are put forward with a view to social amelioration. This last Book aims at no more than suggestion and illustration, and makes no claim to systematic completeness, even in outline.