The Preconceptions of Economic Science Part 2 by Thorstein Veblen

Thorstein VeblenThe Preconceptions of Economic ScienceThe Quarterly Journal of Economics, 13 (1899)
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ADAM SMITH'S animistic bent asserts itself more plainly and moreeffectually in the general trend and aim of his discussion thanin the details of theory. "Adam Smith's Wealth of Nations is, infact, so far as it has one single purpose, a vindication of theunconscious law present in the separate actions of men when theseactions are directed by a certain strong personal motive."(1*)Both in the Theory of the Moral Sentiments and in the Wealth ofNations there are many passages that testify to his abidingconviction that there is a wholesome trend in the natural courseof things, and the characteristically optimistic tone in which hespeaks for natural liberty is but an expression of thisconviction. An extreme resort to this animistic ground occurs inhis plea for freedom of investment.(2*) In the proposition that men are "led by an invisible hand,"Smith does not fall back on a meddling Providence who is to sethuman affairs straight when they are in danger of going askew. Heconceives the Creator to be very continent in the matter ofinterference with the natural course of things. The Creator hasestablished the natural order to serve the ends of human welfare;and he has very nicely adjusted the efficient causes comprised inthe natural order, including human aims and motives, to this workthat they are to accomplish. The guidance of interposition, theinvisible hand takes place not by way of interposition, butthrough a comprehensive scheme of contrivances established fromthe beginning. For the purpose of economic theory, man isconceived to be consistently self-seeking; but this economic manis a part of the mechanism of nature, and his self-seekingtraffic is but a means whereby, in the natural course of things,the general welfare is worked out. The scheme as a whole isguided by the end to be reached, but the sequence of eventsthrough which the end is reached is a causal sequence which isnot broken into episodically. The benevolent work of guidance wasperformed in first establishing an ingenious mechanism of forcesand motives capable of accomplishing an ordained result, andnothing beyond the enduring constraint of an established trendremains to enforce the divine purpose in the resulting naturalcourse of things. The sequence of events, including human motives and humanconduct, is a causal sequence; but it is also something more, or,rather, there is also another element of continuity besides thatof brute cause and effect, present even in the step-by-stepprocess whereby the natural course of things reaches its finalterm. The presence of such a quasi-spiritual or non-causalelement is evident from two (alleged) facts. (1) The course ofthings may be deflected from the direct line of approach to thatconsummate human welfare which is its legitimate end. The naturaltrend of things may be overborne by an untoward conjuncture ofcauses. There is a distinction, often distressingly actual andpersistent, between the legitimate and the observed course ofthings. If "natural," in Adam Smith's use, meant necessary, inthe sense of causally determined, no divergence of events fromthe natural or legitimate course of things would be possible. Ifthe mechanism of nature, including man, were a mechanicallycompetent contrivance for achieving the great artificer's design,there could be no such episodes of blundering and perversedeparture from the direct path as Adam Smith finds in nearly allexisting arrangements. Institutional facts would then be"natural."(3*) (2) When things have gone wrong, they will rightthemselves if interference with the natural course ceases;whereas, in the case of a causal sequence simply, the merecessation of interference will not leave the outcome the same asif no interference had taken place. This recuperative power ofnature is of an extra-mechanical character. The continuity ofsequence by force of which the natural course of things prevailsis, therefore, not of the nature of cause and effect, since itbridges intervals and interruptions in the causal sequence.(4*)Adam Smith's use of the term "real " in statements of theory --as, for example, "real value," "real price"(5*) -- is evidence tothis effect. "Natural" commonly has the same meaning as "real" inthis connection.(6*) Both "natural" and "real" are placed incontrast with the actual; and, in Adam Smith's apprehension, bothhave a substantiality different from and superior to facts. Theview involves a distinction between reality and fact, whichsurvives in a weakened form in the theories of "normal" prices,wages, profits, costs, in Adam Smith's successors. This animistic prepossession seems to pervade the earlier ofhis two monumental works in a greater degree than the later. Inthe Moral Sentiments recourse is had to the teleological groundof the natural order more freely and with perceptibly greaterinsistence. There seems to be reason for holding that theanimistic preconception weakened or, at any rate, fell more intothe background as his later work of speculation and investigationproceeded. The change shows itself also in some details of hiseconomic theory, as first set forth in the Lectures, andafterwards more fully developed in the Wealth of Nations. So, forinstance, in the earlier presentation of the matter," thedivision of labor is the immediate cause of opulence"; and thisdivision of labor, which is the chief condition of economicwell-being, "flows from a direct propensity in human nature forone man to barter with another."(7*) The "propensity" in questionis here appealed to as a natural endowment immediately given toman with a view to the welfare of human society, and without anyattempt at further explanation of how man has come by it. Nocausal explanation of its presence or character is offered. Butthe corresponding passage of the Wealth of Nations handles thequestion more cautiously.(8*) Other parallel passages might becompared, with much the same effect. The guiding hand haswithdrawn farther from the range of human vision. However, these and other like filial expressions of a devoutoptimism need, perhaps, not be taken as integral features of AdamSmith's economic theory, or as seriously affecting the characterof his work as an economist. They are the expression of hisgeneral philosophical and theological views, and are significantfor the present purpose chiefly as evidences of an animistic andoptimistic bent. They go to show what is Adam Smith's acceptedground of finality, -- the ground to which all his speculationson human affairs converge; but they do not in any great degreeshow the teleological bias guiding his formulation of economictheory in detail. The effective working of the teleological bias is best seenin Smith's more detailed handling of economic phenomena -- in hisdiscussion of what may loosely be called economic institutions --and in the criteria and principles of procedure by which he isguided in incorporating these features of economic life into thegeneral structure of his theory. A fair instance, though perhapsnot the most telling one, is the discussion of the "real andnominal price," and of the "natural and market price" ofcommodities, already referred to above.(9*) The "real" price ofcommodities is their value in terms of human life. At this pointSmith differs from the Physiocrats, with whom the ultimate termsof value are afforded by human sustenance taken as a product ofthe functioning of brute nature; the cause of the differencebeing that the Physiocrats conceived the natural order whichworks towards the material well-being of man to comprise thenonhuman environment only, whereas Adam Smith includes man inthis concept of the natural order, and, indeed, makes him thecentral figure in the process of production. With thePhysiocrats, production is the work of nature: with Adam Smith,it is the work of man and nature, with man in the foreground. InAdam Smith, therefore, labor the final term in valuation. This"real" value of commodities is the value imputed to them by theeconomist under the stress of his teleological preconception. Ithas little, if any, place in the course of economic events, andno bearing on human affairs, apart from the sentimental influencewhich such a preconception in favor of a "real value " in thingsmay exert upon men's notions of what is the good and equitablecourse to pursue in their transactions. It is impossible to gaugethis real value of goods; it cannot be measured or expressed inconcrete terms. Still, if labor exchanges for a varying qualityof goods, "it is their value which varies, not that of the laborwhich purchases them."(10*) The values which practically attachto goods in men's handling of them are conceived to be determinedwithout regard to the real value which Adam Smith imputes to thegoods; but, for all that, the substantial fact with respect tothese market values is their presumed approximation to the realvalues teleologically imputed to the goods under the guidance ofinviolate natural laws. The real, or natural, value of articleshas no causal relation to the value at which they exchange. Thediscussion of how values are determined in practice runs on themotives of the buyers and sellers, and the relative advantageenjoyed by the parties to the transaction.(11*) It is adiscussion of a process of valuation, quite unrelated to the"real," or "natural," price of things, and quite unrelated to thegrounds on which things are held to come by their real, ornatural, price; and yet, when the complex process of valuationhas been traced out in terms of human motives and the exigenciesof the market, Adam Smith feels that he has only cleared theground. He then turns to the serious business of accounting forvalue and price theoretically, and making the ascertained factsarticulate with his teleological theory of economic life.(12*) The occurrence of the words "ordinary" and "average" in thisconnection need not be taken too seriously. The context makes itplain that the equality which commonly subsists between theordinary or average rates, and the natural rates, is a matter ofcoincidence, not of identity. Not only are there temporarydeviations, but there may be a permanent divergence between theordinary and the natural price of a commodity; as in case of amonopoly or of produce grown under peculiar circumstances of soilor climate.(13*) The natural price coincides with the price fixed bycompetition, because competition means the unimpeded play ofthose efficient forces through which the nicely adjustedmechanism of nature works out the design to accomplish which itwas contrived. The natural price is reached through the freeinterplay of the factors of production, and it is itself anoutcome of production. Nature, including the human factor, worksto turn out the goods; and the natural value of the goods istheir appraisement from the standpoint of this productive processof nature. Natural value is a category of production: whereas,notoriously exchange value or market price is a category ofdistribution. And Adam Smith's theoretical handling of marketprice aims to show how the factors of human predilection andhuman wants at work in the higgling of the market bring about aresult in passable consonance with the natural laws that areconceived to govern production. The natural price is a composite result of the blending ofthe three "component parts of the price of commodities," -- thenatural wages of laborer, the natural profits of stock, and thenatural rent of land; and each of these three components is inits turn the measure of the productive effect of the factor towhich it pertains. The further discussion of these shares indistribution aims to account for the facts of distribution on theground of the productivity of the factors which are held to sharethe product between them. That is to say, Adam Smith'spreconception of a productive natural process as the basis of hiseconomic theory dominates his aims and procedure, when he comesto deal with phenomena that cannot be stated in terms ofproduction. The causal sequence in the process of distributionis, by Adam Smith's own showing, unrelated to the causal sequencein the process of production; but, since the latter is thesubstantial fact, as viewed from the standpoint of a teleologicalnatural order, the former must be stated in terms of the latterbefore Adam Smith's sense of substantiality, or "reality," issatisfied. Something of the same kind is, of course, visible inthe Physiocrats and in Cantillon. It amounts to an extension ofthe natural-rights preconception to economic theory. Adam Smith'sdiscussion of distribution as a function of productivity might betraced in detail through his handling of Wages, Profits, andRent; but, since the aim here is a brief characterisation only,and not an exposition, no farther pursuit of this point seemsfeasible. It may, however, be worth while to point out another line ofinfluence along which the dominance of the teleologicalpreconception shows itself in Adam Smith. This is thenormalisation of data, in order to bring them into consonancewith an orderly course of approach to the putative natural end ofeconomic life and development. The result of this normalisationof data is, on the one and, the use of what James Steuart calls"conjectural history" in dealing with past phases of economiclife, and, on the other hand, a statement of present-dayphenomena in terms of what legitimately ought to be according tothe God-given end of life rather than in terms of unconstruedobservation. Account is taken of the facts (supposed or observed)ostensibly in terms of causal sequence, but the imputed causalsequence is construed to run on lines of teleological legitimacy. A familiar instance of this "conjectural history," in ahighly and effectively normalized form, is the account of "thatearly and rude state of society which precedes both theaccumulation of stock and the appropriation of land." (14*) It isneedless at this day to point out that this "early and rudestate," in which "the whole produce of labor belongs to thelaborer," is altogether a figment. The whole narrative, from theputative origin down, is not only supposititious, but it ismerely a schematic presentation of what should have been thecourse of past development, in order to lead up to that idealeconomic situation which would satisfy Adam Smith'spreconception.(15*) As the narrative comes nearer the region ofknown latter-day facts, the normalisation of the data becomesmore difficult and receives more detailed attention; but thechange in method is a change of degree rather than of kind. Inthe "early and rude state" the coincidence of the "natural" andthe actual course of events is immediate and undisturbed, therebeing no refractory data at hand; but in the later stages and inthe present situation, where refractory facts abound, thecoordination is difficult, and the coincidence can be shown onlyby a free abstraction from phenomena that are irrelevant to theteleological trend and by a laborious interpretation of the rest.The facts of modern life are intricate, and lend themselves tostatement in the terms of the theory only after they have beensubjected to a "higher criticism." The chapter "Of the Origin and Use of Money"(16*) is anelegantly normalised account of the origin and nature of aneconomic institution, and Adam Smith's further discussion ofmoney runs on the same lines. The origin of money is stated interms of the purpose which money should legitimately serve insuch a community as Adam Smith considered right and good, not interms of the motives and exigencies which have resulted in theuse of money and in the gradual rise of the existing method ofpayment and accounts. Money is "the great wheel of circulation,"which effects the transfer of goods in process of production andthe distribution of the finished goods to the consumers. It is anorgan of the economic commonwealth rather than an expedient ofaccounting and a conventional repository of wealth. It is perhapssuperfluous to remark that to the "plain man," who is notconcerned with the "natural course of things" in a consummateGeldwirtschaft, the money that passes his hand is not a "greatwheel of circulation." To the Samoyed, for instance, the reindeerwhich serves him as unit of value is wealth in the most concreteand tangible form. Much the same is true of coin, or even ofbank-notes, in the apprehension of unsophisticated people amongourselves to-day. And yet it is in terms of the habits andconditions of life of these "plain people" that the developmentof money will have to be accounted for if it is to be stated interms of cause and effect. The few scattered passages already cited may serve toillustrate how Adam Smith's animistic or teleological bent shapesthe general structure of his theory and gives it consistency. Theprinciple of definitive formulation in Adam Smith's economicknowledge is afforded by a putative purpose that does not at anypoint enter causally into the economic life process which heseeks to know. This formative or normative purpose or end is notfreely conceived to enter as an efficient agent in the eventsdiscussed, or to be in any way consciously present in theprocess. It can scarcely be taken as an animistic agency engagedin the process. It sanctions the course of things, and giveslegitimacy and substance to the sequence of events, so far asthis sequence may be made to square with the requirements of theimputed end. It has therefore a ceremonial or symbolical forceonly, and lends the discussion a ceremonial competency; althoughwith economists who have been in passable agreement with AdamSmith as regards the legitimate end of economic life thisceremonial consistency, or consistency de jure, has for manypurposes been accepted as the formulation of a causal continuityin the phenomena that have been interpreted in its terms.Elucidations of what normally ought to happen, as a matter ofceremonial necessity, have in this way come to pass for anaccount of matters of fact. But, as has already been pointed out, there is much more toAdam Smith's exposition of theory than a formulation of whatought to be. Much of the advance he achieved over hispredecessors consists in a larger and more painstaking scrutinyof facts, and a more consistent tracing out of causal continuityin the facts handled. No doubt, his superiority over thePhysiocrats, that characteristic of his work by virtue of whichit superseded theirs in the farther growth of economic science,lies to some extent in his recourse to a different, more modernground of normality,-- a ground more in consonance with the bodyof preconceptions that have had the vogue in later generations.It is a shifting of the point of view from which the facts arehandled; but it comes in great part to a substitution of a newbody of preconceptions for the old, or a new adaptation of theold ground of finality, rather than an elimination of allmetaphysical or animistic norms of valuation. With Adam Smith, aswith the Physiocrats, the fundamental question, the answer towhich affords the point of departure and the norm of procedure,is a question of substantiality or economic "reality." With both,the answer to this question is given naively, as a deliverance ofcommon sense. Neither is disturbed by doubts as to thisdeliverance of common sense or by any need of scrutinising it. Tothe Physiocrats this substantial ground of economic reality isthe nutritive process of Nature. To Adam Smith it is Labor. Hisreality has the advantage of being the deliverance of the commonsense of a more modern community, and one that has maintaineditself in force more widely and in better consonance with thefacts of latter-day industry. The Physiocrats owe theirpreconception of the productiveness of nature to the habits ofthought of a community in whose economic life the dominantphenomenon was the owner of agricultural land. Adam Smith oweshis preconception in favor of labor to a community in which theobtrusive economic feature of the immediate past was handicraftand agriculture, with commerce as a scarcely secondaryphenomenon. So far as Adam Smith's economic theories are a tracing out ofthe causal sequence in economic phenomena, they are worked out interms given by these two main directions of activity, -- humaneffort directed to the shaping of the material means of life, andhuman effort and discretion directed to a pecuniary gain. Theformer is the great, substantial productive force: the latter isnot immediately, or proximately, productive.(17*) Adam Smithstill has too lively a sense of the nutritive purpose of theorder of nature freely to extend the concept of productiveness toany activity that does not yield a material increase of thecreature comforts. His instinctive appreciation of thesubstantial virtue of whatever effectually furthers nutrition,even leads him into the concession that "in agriculture naturelabors along with man," although the general tenor of hisargument is that the productive force with which the economistalways has to count is human labor. This recognisedsubstantiality of labor as productive is, as has already beenremarked, accountable for his effort to reduce to terms ofproductive labor such a category of distribution as exchangevalue. With but slight qualification, it will hold that, in thecausal sequence which Adam Smith traces out in his economictheories proper (contained in the first three books of the Wealthof Nations), the causally efficient factor is conceived to behuman nature in these two relations, -- of productive efficiencyand pecuniary gain through exchange. Pecuniary gain -- gain inthe material means of life through barter -- furnishes the motiveforce to the economic activity of the individual; althoughproductive efficiency is the legitimate, normal end of thecommunity's economic life. To such an extent does this concept ofman's seeking his ends through "truck, barter, and exchange"pervade Adam Smith's treatment of economic processes that he evenstates production in its terms, and says that,, labor was thefirst price, the original purchase-money, that was paid for allthings."(18*) The human nature engaged in this pecuniary trafficis conceived in somewhat hedonistic terms, and the motives andmovements of men are normalised to fit the requirements of ahedonistically conceived order of nature. Men are very much alikein their native aptitudes and propensities;(19*) and, so far aseconomic theory need take account of these aptitudes andpropensities, they are aptitudes for the production of the"necessaries and conveniences of life," and propensities tosecure as great a share of these creature comforts as may be. Adam Smith's conception of normal human nature -- that is tosay, the human factor which enters causally in the process whicheconomic theory discusses -- comes, on the whole, to this: Menexert their force and skill in a mechanical process ofproduction, and their pecuniary sagacity in a competitive processof distribution, with a view to individual gain in the materialmeans of life. These material means are sought in order to thesatisfaction of men's natural wants through their consumption. Itis true, much else enters into men's endeavors in the strugglefor wealth, as Adam Smith points out; but this consumptioncomprises the legitimate range of incentives, and a theory whichconcerns itself with the natural course of things need take butincidental account of what does not come legitimately in thenatural course. In point of fact, there are appreciable "actual,"though scarcely "real," departures from this rule. They arespurious and insubstantial departures, and do not properly comewithin the purview of the stricter theory. And, since humannature is strikingly uniform, in Adam Smith's apprehension, boththe efforts put forth and the consumptive effect accomplished maybe put in quantitative terms and treated algebraically, with theresult that the entire range of phenomena comprised under thehead of consumption need be but incidentally considered; and thetheory of production and distribution is complete when the goodsor the values have been traced to their disappearance in thehands of their ultimate owners. The reflex effect of consumptionupon production and distribution is, on the whole, quantitativeonly. Adam Smith's preconception of a normal teleological order ofprocedure in the natural course, therefore, affects not onlythose features of theory where he is avowedly concerned withbuilding up a normal scheme of the economic process. Through hisnormalising the chief causal factor engaged in the process, itaffects also his arguments from cause to effect.(20*) What makesthis latter feature worth particular attention is the fact thathis successors carried this normalisation farther, and employedit with less frequent reference to the mitigating exceptionswhich Adam Smith notices by the way. The reason for that farther and more consistent normalisationof human nature which gives us the "economic man" at the hands ofAdam Smith's successors lies, in great part, in the utilitarianphilosophy that entered in force and in consummate form at aboutthe turning of the century. Some credit in the work ofnormalisation is due also to the farther supersession ofhandicraft by the "capitalistic" industry that came in at thesame time and in pretty close relation with the utilitarianviews. After Adam Smith's day, economics fell into profane hands.Apart from Malthus, who, of all the greater economists, standsnearest to Adam Smith on such metaphysical heads as have animmediate bearing upon the premises of economic science, the nextgeneration do not approach their subject from the point of viewof a divinely instituted, order; nor do they discuss humaninterests with that gently optimistic spirit of submission thatbelongs to the economist who goes to his work with the fear ofGod before his eyes. Even with Malthus the recourse to thedivinely sanctioned order of nature is somewhat sparing andtemperate. But it is significant for the later course of economictheory that, while Malthus may well be accounted the truestcontinuer of Adam Smith, it was the undevout utilitarians thatbecame the spokesmen of the science after Adam Smith's time. There is no wide breach between Adam Smith and theutilitarians, either in details of doctrine or in the concreteconclusions arrived at as regards questions of policy. On theseheads Adam Smith might well be classed as a moderate utilitarian,particularly so far as regards his economic work. Malthus hasstill more of a utilitarian air, -- so much so, indeed, that heis not infrequently spoken of as a utilitarian. This view,convincingly set forth by Mr. Bonar,(21*) is no doubt well borneout by a detailed scrutiny of Malthus's economic doctrines. Hishumanitarian bias is evident throughout, and his weakness forconsiderations of expediency is the great blemish of hisscientific work. But, for all that, in order to an appreciationof the change that came over classical economics with the rise ofBenthamism, it is necessary to note that the agreement in thismatter between Adam Smith and the disciples of Bentham, and lessdecidedly that between Malthus and the latter, is a coincidenceof conclusions rather than an identity of preconceptions.(22*) With Adam Smith the ultimate ground of economic reality isthe design of God, the teleological order; and his utilitariangeneralisations, as well as the hedonistic character of hiseconomic man, are but methods of the working out of this naturalorder, not the substantial and self-legitimating ground. Shiftyas Malthus's metaphysics are, much the same is to be said forhim.(23*) Of the utilitarians proper the converse is true,although here, again, there is by no means utter consistency Thesubstantial economic ground is pleasure and pain: theteleological order (even the design of God, where that isadmitted) is the method of its working-out. It may be unnecessary here to go into the fartherimplications, psychological and ethical, which this preconceptionof the utilitarians involves. And even this much may seem ataking of excessive pains with a distinction that marks notangible difference. But a reading of the classical doctrines,with something of this metaphysics of political economy in mind,will show how, and in great part why, the later economists of theclassical line diverged from Adam Smith's tenets in the earlyyears of the century, until it has been necessary to interpretAdam Smith somewhat shrewdly in order to save him from heresy. The post-Bentham economics is substantially a theory ofvalue. This is altogether the dominant feature of the body ofdoctrines; the rest follows from, or is adapted to, this centraldiscipline. The doctrine of value is of very great importancealso in Adam Smith; but Adam Smith's economics is a theory of theproduction and apportionment of the material, means of life.(24*)With Adam Smith, value is discussed from the point of view ofproduction. With the utilitarians, production is discussed fromthe point of view of value. The former makes value an outcome ofthe process of production: the latter make production the outcomeof a valuation process. The point of departure with Adam Smith is the "productivepower of labor." (25*) With Ricardo it is a pecuniary problemconcerned in the distribution of ownership;(26*) but theclassical writers are followers of Adam Smith, and improve uponand correct the results arrived at by him, and the difference ofpoint of view, therefore, becomes evident in their divergencefrom him, and the different distribution of emphasis, rather thanin a new and antagonistic departure. The reason for this shifting of the center of gravity fromproduction to valuation lies, proximately, in Bentham's revisionof the "principles " of morals. Bentham's philosophical positionis, of course, not a self-explanatory phenomenon, nor does theeffect of Benthamism extend only to those who are avowedfollowers of Bentham; for Bentham is the exponent of a culturalchange that affects the habits of thought of the entirecommunity. The immediate point of Bentham's work, as affectingthe habits of thought of the educated community, is thesubstitution of hedonism (utility) in place of achievement ofpurpose, as a ground of legitimacy and a guide in thenormalisation of knowledge. Its effect is most patent inspeculations on morals, where it inculcates determinism. Itsclose connection with determinism in ethics points the way towhat may be expected of its working in economics. In both casesthe result is that human action is construed in terms of thecausal forces of the environment, the human agent being, at thebest, taken as a mechanism of commutation, through the workingsof which the sensuous effects wrought by the impinging forces ofthe environment are, by an enforced process of valuation,transmuted without quantitative discrepancy into moral oreconomic conduct, as the case may be. In ethics and economicsalike the subject-matter of the theory is this valuation processthat expresses itself in conduct, resulting, in the case ofeconomic conduct, in the pursuit of the greatest gain or leastsacrifice. Metaphysically or cosmologically considered, the human natureinto the motions of which hedonistic ethics and economics inquireis an intermediate term in a causal sequence, of which theinitial and the terminal members are sensuous impressions and thedetails of conduct. This intermediate term conveys the sensuousimpulse without loss of force to its eventuation in conduct. Forthe purpose of the valuation process through which the impulse isso conveyed, human nature may, therefore, be accepted as uniform;and the theory of the valuation process may be formulatedquantitatively, in terms of the material forces affecting thehuman sensory and of their equivalents in the resulting activity.In the language of economics, the theory of value may be statedin terms of the consumable goods that afford the incentive toeffort and the expenditure undergone in order to procure them.Between these two there subsists a necessary equality; but themagnitudes between which the equality subsists are hedonisticmagnitudes, not magnitudes of kinetic energy nor of vital force,for the terms handled are sensuous terms. It is true, since humannature is substantially uniform, passive, and unalterable inrespect of men's capacity for sensuous affection, there may alsobe presumed to subsist a substantial equality between thepsychological effect to be wrought by the consumption of goods,on the one side, and the resulting expenditure of kinetic orvital force, on the other side; but such an equality is, afterall, of the nature of a coincidence, although there should be astrong presumption in favor of its prevailing on an average andin the common run of cases. Hedonism, however, does not postulateuniformity between men except in the respect of sensuous causeand effect. The theory of value which hedonism gives is, therefore, atheory of cost in terms of discomfort. By virtue of thehedonistic equilibrium reached through the valuation process, thesacrifice or expenditure of sensuous reality involved inacquisition is the equivalent of the sensuous gain secured. Analternative statement might perhaps be made, to the effect thatthe measure of the value of goods is not the sacrifice ordiscomfort undergone, but the sensuous gain that accrues from theacquisition of the goods; but this is plainly only an alternativestatement, and there are special reasons in the economic life ofthe time why the statement in terms of cost, rather than in termsof "utility," should commend itself to the earlier classicaleconomists. On comparing the utilitarian doctrine of value with earliertheories, then, the case stands somewhat as follows. ThePhysiocrats and Adam Smith contemplate value as a measure of theproductive force that realises itself in the valuable article.With the Physiocrats this productive force is the "anabolism " ofNature (to resort to a physiological term): with Adam Smith it ischiefly human labor directed to heightening the serviceability ofthe materials with which it is occupied. Production causes valuein either case. The post-Bentham economics contemplates value asa measure of, or as measured by the irksomeness of the effortinvolved in procuring the valuable goods. As Mr. E. C. K. Gonnerhas admirably pointed out,(27*) Ricardo -- and the like holdstrue of classical economics generally -- makes cost thefoundation of value, not its cause. This resting of value on costtakes place through a valuation. Any one who will read AdamSmith's theoretical exposition to as good purpose as Mr. Gonnerhas read Ricardo will scarcely fail to find that the converse istrue in Adam Smith's case. But the causal relation of cost tovalue holds only as regards "natural" or "real" value in AdamSmith's doctrine. As regards market price, Adam Smith's theorydoes not differ greatly from that of Ricardo on this head. Hedoes not overlook the valuation process by which market price isadjusted and the course of investment is guided, and hisdiscussion of this process runs in terms that should beacceptable to any hedonist. The shifting of the point of view that comes into economicswith the acceptance of utilitarian ethics and its correlate, theassociationist psychology, is in great part a shifting to theground of causal sequence as contrasted with that ofserviceability to a preconceived end. This is indicated even bythe main fact already cited, -- that the utilitarian economistsmake exchange value the central feature of their theories, ratherthan the conduciveness of industry to the community's materialwelfare. Hedonistic exchange value is the outcome of a valuationprocess enforced by the apprehended pleasure-giving capacities ofthe items valued. And in the utilitarian theories of production,arrived at from the standpoint so given by exchange value, theconduciveness to welfare is not the objective point of theargument. This objective point is rather the bearing ofproductive enterprise upon the individual fortunes of the agentsengaged, or upon the fortunes of the several distinguishableclasses of beneficiaries comprised in the industrial community;for the great immediate bearing of exchange values upon the lifeof the collectivity is their bearing upon the distribution ofwealth. Value is a category of distribution. The result is that,as is well shown by Mr. Cannan's discussion,(28*) the theories ofproduction offered by the classical economists have been sensiblyscant, and have been carried out with a constant view to thedoctrines on distribution. An incidental but tellingdemonstration of the same facts is given by ProfessorBucher;(29*) and in illustration may be cited Torrens's Essay Onthe Production of Wealth, which is to a good extent occupied withdiscussions of value and distribution. The classical theories ofproduction have been theories of the production of "wealth"; and"wealth," in classical usage, consists of material things havingexchange value. During the vogue of the classical economics theaccepted characteristic by which "wealth" has been defined hasbeen its amenability to ownership. Neither in Adam Smith nor inthe Physiocrats is this amenability to ownership made so much of,nor is it in a similar degree accepted as a definite mark of thesubject-matter of the science. As their hedonistic preconception would require, then, it isto the pecuniary side of life that the classical economists givetheir most serious attention, and it is the pecuniary bearing ofany given phenomenon or of any institution that commonly shapesthe issue of the argument. The causal sequence about which thediscussion centers is a process of pecuniary valuation. It runson distribution, ownership, acquisition, gain, investment,exchange.(30*) In this way the doctrines on production come totake a pecuniary coloring; as is seen in a less degree also inAdam Smith, and even in the Physiocrats, although these earliereconomists very rarely, if ever, lose touch with the concept ofgeneric serviceability as the characteristic feature ofproduction. The tradition derived from Adam Smith, which madeproductivity and serviceability the substantial features ofeconomic life, was not abruptly put aside by his successors,though the emphasis was differently distributed by them infollowing out the line of investigation to which the traditionpointed the way. In the classical economics the ideas ofproduction and of acquisition are not commonly held apart, andvery much of what passes for a theory of production is occupiedwith phenomena of investment and acquisition. Torrens's Essay isa case in point, though by no means an extreme case. This is as it should be; for to the consistent hedonist thesole motive force concerned in the industrial process is theself-regarding motive of pecuniary gain, and industrial activityis but an intermediate term between the expenditure or discomfortundergone and the pecuniary gain sought. Whether the end andoutcome is an invidious gain for the individual (in contrast withor at the cost of his neighbors), or an enhancement of thefacility of human life on the whole, is altogether a by-questionin any discussion of the range of incentives by which men areprompted to their work or the direction which their efforts take.The serviceability of the given line of activity, for the lifepurposes of the community or for one's neighbors, "is not of theessence of this contract." These features of serviceability comeinto the account chiefly as affecting the vendibility of what thegiven individual has to offer in seeking gain through abargain.(31*) In hedonistic theory the substantial end of economic life isindividual, gain, and for this purpose production and acquisitionmay be taken as fairly coincident, if not identical. Moreover,society, in the utilitarian philosophy, is the algebraic sum ofthe individuals; and the interest of the society is the sum ofthe interests of the individuals. It follows by easy consequence,whether strictly true or not, that the sum of individual gains isthe gain of the society, and that, in serving his own interest inthe way of acquisition, the individual serves the collectiveinterest of the community. Productivity or serviceability is,therefore, to be presumed of any occupation or enterprise thatlooks to a pecuniary gain; and so, by a roundabout path, we getback to the ancient conclusion of Adam Smith, that theremuneration of classes or persons engaged in industry coincideswith their productive contribution to the output of services andconsumable goods. A felicitous illustration of the working of this hedonisticnorm in classical economic doctrine is afforded by the theory ofthe wages of superintendence, -- an element in distribution whichis not much more than suggested in Adam Smith, but which receivesampler and more painstaking attention as the classical body ofdoctrines reaches a fuller development. The "wages ofsuperintendence" are the gains due to pecuniary management. Theyare the gains that come to the director of the,, business," --not those that go to the director of the mechanical process or tothe foreman of the shop. The latter are wages simply. Thisdistinction is not altogether clear in the earlier writers, butit is clearly enough contained in the fuller development of thetheory. The undertaker's work is the management of investment. It isaltogether of a pecuniary character, and its proximate aim is"the main chance." If it leads, indirectly, to an enhancement ofserviceability or a heightened aggregate output of consumablegoods, that is a fortuitous circumstance incident to thatheightened vendibility on which the investor's gain depends. Yetthe classical doctrine says frankly that the wages ofsuperintendence are the remuneration of superiorproductivity,(32*) and the classical theory of production is ingood part a doctrine of investment in which the identity ofproduction and pecuniary gain is taken for granted. The substitution of investment in the place of industry asthe central and substantial fact in the process of production isdue not to the acceptance of hedonism simply, but rather to theconjunction of hedonism with an economic situation of which theinvestment of capital and its management for gain was the mostobvious feature. The situation which shaped the common-senseapprehension of economic facts at the time was what has sincebeen called a capitalistic system, in which pecuniary enterpriseand the phenomena of the market were the dominant and tone-givingfacts. But this economic situation was also the chief ground forthe vogue of hedonism in economics; so that hedonistic economicsmay be taken as an interpretation of human nature in terms of themarket-place. The market and the "business world," to which thebusiness man in his pursuit of gain was required to adapt hismotives, had by this time grown so large that the course ofbusiness events was beyond the control of any one person; and atthe same time those far-reaching organisations of invested wealthwhich have latterly come to prevail and to coerce the market werenot then in the foreground. The course of market events took itspassionless way without traceable relation or deference to anyman's convenience and without traceable guidance towards anulterior end. Man's part in this pecuniary world was to respondwith alacrity to the situation, and so adapt his vendible effectsto the shifting demand as to realise something in the outcome.What he gained in his traffic was gained without loss to thosewith whom he dealt, for they paid no more than the goods wereworth to them. One man's gain need not be another's loss; and, ifit is not, then it is net gain to the community. Among the striking remoter effects of the hedonisticpreconception, and its working out in terms of pecuniary gain, isthe classical failure to discriminate between capital asinvestment and capital as industrial appliances. This is, ofcourse, closely related to the point already spoken of. Theappliances of industry further the production of goods, thereforecapital (invested wealth) is productive; and the rate of itsaverage remuneration marks the degree of its productiveness.(33*)The most obvious fact limiting the pecuniary gain secured bymeans of invested wealth is the sum invested. Therefore, capitallimits the productiveness of industry; and the chief andindispensable condition to an advance in material well-being isthe accumulation of invested wealth. In discussing the conditionsof industrial improvement, it is usual to assume that "the stateof the arts remains unchanged," which is, for all purposes butthat of a doctrine of profits per cent., an exclusion of the mainfact. Investments may, further, be transferred from oneenterprise to another. Therefore, and in that degree, the meansof production are "mobile." Under the hands of the great utilitarian writers, therefore,political economy is developed into a science of wealth, takingthat term in the pecuniary sense, as things amenable toownership. The course of things in economic life is treated as asequence of pecuniary events, and economic theory becomes atheory of what should happen in that consummate situation wherethe permutation of pecuniary magnitudes takes place withoutdisturbance and without retardation. In this consummate situationthe pecuniary motive has its perfect work, and guides all theacts of economic man in a guileless, colorless, unswerving questof the greatest gain at the least sacrifice. Of course, thisperfect competitive system, with its untainted "economic man,"isa feat of scientific imagination, and is not intended as acompetent expression of fact. It is an expedient of abstractreasoning; and its avowed competency extends only to the abstractprinciples, the fundamental laws of the science, which hold onlyso far as the abstraction holds. But, as happens in such cases,having once been accepted and assimilated as real, though perhapsnot as actual, it becomes an effective constituent in theinquirer's habits of thought, and goes to shape his knowledge offacts. It comes to serve as a norm of substantiality orlegitimacy; and facts in some degree fall under its constraint,as is exemplified by many allegations regarding the "tendency" ofthings. To this consummation, which Senior speaks of as "the naturalstate of man,"(34*) human development tends by force of thehedonistic character of human nature; and in terms of itsapproximation to this natural state, therefore, the immatureactual situation had best be stated. The pure theory, the"hypothetical science" of Cairnes, "traces the phenomena of theproduction and distribution of wealth up to their causes, in theprinciples of human nature and the laws and events -- physical,political, and social -- of the external world."(35*) But sincethe principles of human nature that give the outcome in men'seconomic conduct, so far as it touches the production anddistribution of wealth, are but the simple and constant sequenceof hedonistic cause and effect, the element of human nature mayfairly be eliminated from the problem, with great gain insimplicity and expedition. Human nature being eliminated, asbeing a constant intermediate term, and all institutionalfeatures of the situation being also eliminated (as being similarconstants under that natural or consummate pecuniary regime withwhich the pure theory is concerned), the laws of the phenomena ofwealth may be formulated in terms of the remaining factors. Thesefactors are the vendible items that men handle in these processesof production and distribution and economic laws come, therefore,to be expressions of the algebraic relations subsisting betweenthe various elements of wealth and investment, -- capital, labor,land, supply and demand of one and the other, profits, interest,wages. Even such items as credit and population becomedissociated from the personal factor, and figure in thecomputation as elemental factors acting and reacting though apermutation of values over the heads of the good people whosewelfare they are working out. To sum up: the classical economics, having primarily to dowith the pecuniary side of life, is a theory of a process ofvaluation. But since the human nature at whose hands and forwhose behoof the valuation takes place is simple and constant inits reaction to pecuniary stimulus, and since no other feature ofhuman nature is legitimately present in economic phenomena thanthis reaction to pecuniary stimulus, the valuer concerned in thematter is to be overlooked or eliminated; and the theory of thevaluation process then becomes a theory of the pecuniaryinteraction of the facts valued. It is a theory of valuation withthe element of valuation left out,-- a theory of life stated interms of the normal paraphernalia of life. In the preconceptions with which classical economics set outwere comprised the remnants of natural rights and of the order ofnature, infused with that peculiarly mechanical natural theologythat made its way into popular vogue on British ground during theeighteenth century and was reduced to a neutral tone by theBritish penchant for the commonplace -- stronger at this timethan at any earlier period. The reason for this growing penchantfor the commonplace, for the explanation of things in causalterms, lies partly in the growing resort to mechanical processesand mechanical prime movers in industry, partly in the(consequent) continued decline of the aristocracy and thepriesthood, and partly in the growing density of population andthe consequent greater specialisation and wider organisation oftrade and business. The spread of the discipline of the naturalsciences, largely incident to the mechanical industry, counts inthe same direction; and obscurer factors in modern culture mayhave had their share. The animistic preconception was not lost, but it lost tone;and it partly fell into abeyance, particularly so far as regardsits avowal. It is visible chiefly in the unavowed readiness ofthe classical writers to accept as imminent and definitive anypossible outcome which the writer's habit or temperament inclinedhim to accept as right and good. Hence the visible inclination ofclassical economists to a doctrine of the harmony of interests,and their somewhat uncircumspect readiness to state theirgeneralisations in terms of what ought to happen according to theideal requirements of that consummate Geldwirtschaft to which men"are impelled by the provisions of nature."(36*) By virtue oftheir hedonistic preconceptions, their habituation to the ways ofa pecuniary culture, and their unavowed animistic faith thatnature is in the right, the classical economists knew that theconsummation to which, in the nature of things, all things tend,is the frictionless and beneficent competitive system. Thiscompetitive ideal, therefore, affords the normal, and conformityto its requirements affords the test of absolute economic truth.The standpoint so gained selectively guides the attention of theclassical writers in their observation and apprehension of facts,and they come to see evidence of conformity or approach to thenormal in the most unlikely places. Their observation is, ingreat part, interpretative, as observation commonly is. What ispeculiar to the classical economists in this respect is theirparticular norm of procedure in the work of interpretation. And,by virtue of having achieved a standpoint of absolute economicnormality, they became a "deductive" school, so called, in spiteof the patent fact that they were pretty consistently employedwith an inquiry into the causal sequence of economic phenomena. The generalisation of observed facts becomes a normalisationof them, a statement of the phenomena in terms of theircoincidence with, or divergence from, that normal tendency thatmakes for the actualisation of the absolute economic reality.This absolute or definitive ground of economic legitimacy liesbeyond the causal sequence in which the observed phenomena areconceived to be interlinked. It is related to the concrete factsneither as cause nor as effect in any such way that the causalrelation may be traced in a concrete instance. It has littlecausally to do either with the "mental" or with the "physical"data with which the classical economist is avowedly employed. Itsrelation to the process under discussion is that of an extraneous-- that is to say, a ceremonial -- legitimation. The body ofknowledge gained by its help and under its guidance is,therefore, a taxonomic science. So, by way of a concluding illustration, it may be pointedout that money, for instance, is normalised in terms of thelegitimate economic tendency. It becomes a measure of value and amedium of exchange. It has become primarily an instrument ofpecuniary commutation, instead of being, as under the earliernormalisation of Adam Smith, primarily a great wheel ofcirculation for the diffusion of consumable goods. The terms inwhich the laws of money, as of the other phenomena of pecuniarylife, are formulated, are terms which connote its normal functionin the life history of objective values as they live and move andhave their being in the consummate pecuniary situation of the"natural" state. To a similar work of normalisation we owe thosecreatures of the myth-maker, the quantity theory and thewages-fund. NOTES: 1. Bonar, Philosophy and Political Economy, pp. 177, 178. 2. "Every individual is continually exerting himself to find outthe most advantageous employment for whatever capital he cancommand. It is his own advantage, and not that of the society,which he has in view. But the study of his own advantagenaturally, or rather necessarily, leads him to prefer thatemployment which is most advantageous to the society... Bydirecting that industry in such a manner as its produce may be ofthe greatest value, he intends only his own gain; and he is inthis, as in many other cases, led by an invisible hand to promotean end which was no part of his intention. Nor is it always theworse for society that it was no part of it. By pursuing his owninterest he frequently promotes that of the society moreeffectually than when he really intends to promote it." Wealth ofNations, Book IV, chap. ii. 3. The discrepancy between the actual, causally determinedsituation and the divinely intended consummation is themetaphysical ground of all that inculcation of morality andenlightened policy that makes up so large a part of Adam Smith'swork. The like, of course, holds true for all moralists andreformers who proceed on the assumption of a providential order. 4. "In the political body, however, the wisdom of nature hasfortunately made ample provision for remedying many of the badeffects of the folly and injustice of man; in the same manner asit has done in the natural body, for remedying those of his slothand intemperance." Wealth of Nations, Book IV, chap. ix. 5. E.g., "the real measure of the exchangeable value of allcommodities." Wealth of Nations, Book I, chap. v, and repeatedlyin the like connection. 6. E.g., Book I, chap. vii: "When the price of any commodity isneither more nor less than what is sufficient to pay the rent ofthe land, the wages of the labor, and the profits of the stockemployed in raising, preparing, and bringing it to market,according to their natural rates, the commodity is then sold forwhat may be called its natural price." "The actual price at whichany commodity is commonly sold is called its market price. It maybe either above or below or exactly the same with its naturalprice." 7. Lectures of Adam Smith (Ed. Cannan, 1896). p. 169. 8. "This division of labor, from which so many advantages arederived, is not originally the effect of any human wisdom, whichforesees and intends that general opulence to which it givesoccasion. It is the necessary though very slow and gradualconsequence of a certain propensity in human nature which has inview no such extensive utility, -- the propensity to truck,barter, and exchange one thing for another. Whether thispropensity be one of those original principles in human nature ofwhich no further account can be given, or whether, as seems moreprobable, it be the necessary consequence of the faculties ofreason and speech, it belongs not to our present subject toinquire." Wealth of Nations, Book I, chap. ii. 9. Wealth of Nations, Book I, chaps. v.-vii. 10. Wealth of Nations, Book I, chap. v. 11. As e.g., the entire discussion of the determination of Wages,Profits and Rent, in Book I, chaps. viii.-xi. 12. "There is in every society or neighborhood an ordinary oraverage rate both of wages and profit in every differentemployment of labor and stock. The rate is naturally regulated...partly by the general circumstance of the society... There is,likewise, in every socity or neighborhood an ordinary or averagerate of rent, which is regulated, too... These ordinary oraverage rates may be called the natural rates of wages, profit,and rent, at the time and place in which they commonly prevail.When the price of any commodity is neither more nor less thanwhat is sufficient to pay the rent of the land, the wages of thelabor, and the profits of the stock employed in raising,preparing, and bringing it to market, according to their naturalrates, the commodity is then sold for what may be called itsnatural price." Wealth of Nations, Book I, chap. vii. 13. "Such commodities may continue for whole centuries togetherto be sold at this high price; and that part of it which resolvesitself into the rent of land is, in this case, the part which isgenerally paid above its natural rate." Book I, chap. vii. 14. Wealth of Nations, Book I, chap. vi; also chap. viii. 15. For an instance of how these early phases of industrialdevelopment appear, when not seen in the light of Adam Smith'spreconception, see, among others, Bucher, Entstehung derVolkswirtschagt. 16. Book I, chap. iv. 17. See Wealth of Nations, Book II, chap. v, "Of the DifferentEmployment of Capitals." 18. Wealth of Nations, Book I, chap. v. See also the plea forfree trade, Book IV, chap. ii: "But the annual revenue of everysociety is always precisely equal to the exchangeable value ofthe whole annual produce of its industry, or, rather, isprecisely the same thing with that exchangeable value." 19. "The difference of natural talents in different men is inreality much less than we are aware of." Wealth of Nations, BookI, chap. ii. 20. "Mit diesen philosophischen Ueberzeugungen tritt nun AdamSmith an die Welf der Engahrung heran, and es ergiebt sich ihmdie Richtigkeit der Principien. Der Reiz der Smiths'schenSchriften beruht zum grossen Teile darauf, dass Smith diePrincipien in so innige Verbindung mit dem Thatsachlichengebracht. Hie und da werden dann auch die Principien, was durchdiese Verbindung veranlasst wird, an ihren Spitzen etwasalgeschliffen, ihre allruscharfe Auspragung dadurch vermieden.Nichtsdestoweniger aber bleiben sie stets die leitendenGrundgedanken." Richard Zeyss, Adam Smith und der Eigennutz(Tubingen, 1889), p. 110. 21. See, e.g., Malthus and his Work, especially Book III, as alsothe chapter on Malthus in Philosophy and Political Economy, BookIII, Modern Philosophy: Utilitarian Economics, chap. i,"Malthus." 22. Ricardo is here taken as a utilitarian of the Benthamitecolor, although he cannot be classed as a disciple of Bentham.His hedonism is but the uncritically accepted metaphysicscomprised in the common sense of his time, and his substantialcoincidence with Bentham goes to show how well diffused thehedonist preconception was at the time. 23. Cf. Bonar, Malthus and his Work, pp. 323-336. 24. His work is an inquiry into "the Nature and Causes of theWealth of Nations." 25. "The annual labor of every nation is the fund whichoriginally supplies it with all the necessaries and conveniencesof life which it annually consumes, and which consist alwayseither in the immediate produce of that labor or in what ispurchases with that produce from other nations." Wealth ofNations, "Introduction and Plan," opening paragraph. 26. "The produce of the earth -- all that is derived from itssurface by the united application of labor, machinery and capital-- is divided among three classes of the community... Todetermine the laws which regulate this distribution is theprincipal problem of political economy." Political Economy,Preface. 27. In the introductory essay to his edition of Ricardo'sPolitical Economy. See, e.g., paragraphs 9 and 24. 28. Theories of Production and Distribution, 1776-1848. 29. Entstehung der Volkswirtschaft (second edition). Cf.especially chaps. ii, iii, vi, and vii. 30. "Even if we put aside all questions which involve aconsideration of the effects of industrial institutions inmodifying the habits and character of the classes of thecommunity... that enough still remains to constitute a separatescience, the mere enumeration of the chief terms of economics --wealth, value, exchange, credit, money, capital, and commodity --will suffice to show." Shirres, Analysis of the Ideas ofEconomics (London, 1893), pp. 8 and 9. 31. "If a commodity were in no way useful... it would bedestitute of exchangeable value;... (but), possessing utility,commodities derive their exchangeable value from two sources,"etc. Ricardo, Political Economy, chap. i, sect I. 32. Cf., for instance, Senior, Political Economy (London, 1872),particularly pp. 88, 89, and 130-135, where the wages ofsuperintendence are, somewhat reluctantly, classed under profits;and the work of superintendence is thereupon conceived as being,immediately or remotely, an exercise of "abstinence" and aproductive work. The illustration of the bill-broker isparticularly apt. The like view of the wages of superintendencein an article of theory with more than one of the laterdescendents of the classical line. 33. Cf. Bohm-Bawerk, Capital and Interest, Books II and IV, aswell as the Introduction and chaps. iv and v of Book I.Bohm-Bawerk's discussion bears less immediately on the presentpoint than the similarity of the terms employed would suggest. 34. Political Economy, p. 87. 35. Character and Logical Method of Political Economy (New York,1875), p. 71. Cairnes may not be altogether representative of thehigh tide of classicism, but his characterisation of the scienceis none the less to the point. 36. Senior, Political Economy,