THE
SCOPE AND METHOD
OF
POLITICAL ECONOMY
THE
JOPE AND METHOD
of
OLITIOAL ECONOMY
by
JOHN NEVILLE KEYNES, M.A., D.Sc,
UNIVEESITY LECTUEEE IN MOEAL SCIENCE AND FOEMEELY FELLOW OF
PEMBEOKE COLLEGE IN THE UNIVEESITY OF CAMBEIDGE
SECOND EDITION, REVISED
Honöon
MACMILLAN AND CO., Limited
new yoek : the macmillan company
1897
[The Right of Translation and Reproduction is reserved]
First Edition, 1890.
Second Edition, 1897.
PREFACE TO THE FIRST EDITION.
The nature of the topics discussed in the follow¬
ing pages is sufficiently indicated in the introductory
chapter, and a lengthy preface is therefore unnecessary.
The abstract discussion of methods may appear to some
to have mainly an academic interest, since it does not
directly extend our knowledge of economic phenomena.
Whilst, however, we ought to be upon our guard against
allowing any such discussion to obscure the greater
importance of actual economic investigations, the
subject is one to which all students of economics
must necessarily give some attention in the course of
their reading, and its indirect bearing on the solution
of practical economic questions is very far indeed
from being without importance. Unfortunately almost
every problem connected with the scope and method of
political economy has given rise to conflict of opinion ;
and the resulting controversies have sometimes been
vi
PREFACE.
very bitter. Those readers, therefore, who already
have any acquaintance with the literature of economic
method, will be prepared to find that several of the
chapters are more or less controversial in character.
At the same time, I have endeavoured to avoid the
tone of a partisan, and have sought, in the treatment
of disputed questions, to represent both sides without
prejudice. Whilst making no attempt to bring about a
complete reconciliation between opposing views, I have
been able to shew that the nature of the opposition
between them has sometimes been misunderstood, and
its extent consequently exaggerated.
Since the scope and method of a science can never
be satisfactorily discussed at the commencement of
its study, some knowledge of political economy in its
general outlines is presupposed. As far as possible,
however, illustrations of a fairly simple and familiar
kind have been chosen. A good many illustrations
that were included in the first draft of the book have
been omitted, partly because they would have occupied
too much space if given with any completeness, and
partly in order to avoid points of controversy not
essentially connected wdth the subject immediately
under discussion. A certain amount of repetition has
resulted from the frequent necessity of treating the
same problem from more than one point of view, and
from the fact that the different questions to which the
PREFACE.
consideration of economic method gives rise are in so
many ways connected one with another. I have not
hesitated to repeat the same thing several times in
different connexions, if clearness seemed to be gained
thereby.
By means of quotations and references I have
endeavoured to make clear my indebtedness to other
writers ; and it is, therefore, for the most part un¬
necessary to specify here the various sources from
which I have derived assistance. To the works both
of Professor Marshall and Professor Sidgwick, however,
I am indebted in ways that it is impossible to identify
and separately indicate. I am further under obligation
to Professor Marshall, and also to Mrs Marshall, Mr
W. E. Johnson, and Professor Nicholson, for their
great kindness in reading the proof-sheets of the book
while it has been passing through the press. Their
criticisms and suggestions have been most valuable,
and have enabled me in many ways to improve my
treatment of the subject.
J. N. KEYNES.
6, Harvey Road, Cambridge,
12 Decemher 1890.
CONTENTS.
CHAPTER I.
Introductoky.
PAGE
§ 1. Nature and importance of the enquiry into the scope
and method of political economy .... 1
§ 2. The conception of political economy as a positive,
abstract, and deductive science .... 9
§ 3. The conception of political economy as an ethical,
realistic, and inductive science .... 20
§ 4. The method of political economy cannot adequately
be described by any single phrase .... 29
CHAPTER II.
On the Relation of Political Economy to
Morality and Practice.
§ 1. Distinction between economic uniformities, economic
ideals, and economic precepts . . . .31
x
contents.
page
§ 2. The possibility of studying economic laws or uni¬
formities without passing ethical judgments or
formulating economic precepts .... 37
§ 3. Grounds for recognising a distinct positive science of
political economy, the sole province of which is to
establish economic uniformities .... 46
§ 4. Applied economics 55
§ 5. Political economy and ethics 60
§ 6. Methodological importance of the distinctions indi¬
cated in this chapter 63
NOTES TO CHAPTEK II.
A. On Political Economy and Laisser Faire . . 67
B. On the Scope of Political Economy considered
as an Art 74
CHAPTER III.
On the Character and Definition of Political
Economy regarded as a Positive Science.
§ 1. Political economy and physical science ... 83
§ 2. Political economy and psychology .... 86
§ 3. Political economy a social as distinguished from a
political science 91
§ 4. Definitions of Wealth and Economic Activity . . 92
§ 5. Definition of Political Economy .... 99
NOTE TO CHAPTER III.
On the Interdependence of Economic Phenomena . 101
contents.
xi
CHAPTER IV.
On the Relation of Political Economy to
General Sociology.
page
§ 1. Conflicting views of the relation between economic
science and the general science of society . . Ill
§ 2. The place of abstraction in economic reasoning . . 114
§ 3. Examples of economic problems requiring for their
complete solution a realistic treatment. . .127
§ 4. Distinction between political economy and other social
enquiries 134
NOTES TO CHAPTER IV.
A. On the Distinction between Abstract and Con¬
crete Political Economy 140
B. On the Distinction between the Statics and
the Dynamics of Political Economy . . 143
C. On Political Economy and Common Sense . 146
CHAPTER V.
On Definition in Political Economy.
§ I. The problem of definition in political economy . .150
§ 2. Conditions to be satisfied in framing economic defini¬
tions ......... 156
§ 3. Relativity of economic definitions . . . .163
Xll
contents.
CHAPTER VI.
On the Method of Specific Experience in
Political Economy.
PAGE
§ 1. Preliminary functions of observation in economic
enquiries 168
§ 2. Limited scope for experiment in political economy . 175
§ 3. The employment of the method of diiïërence inde¬
pendently of deliberate experiment . . .185
§ 4. The method of inductive generalization from a multi¬
plication of instances 198
§ 5. Limitations of the empirical method . . . 205
CHAPTER VII.
On the Deductive Method in Political Economy.
§ I. Nature of the deductive method . . . .212
§ 2. The application of the term "hypothetical" to eco¬
nomic science 213
§ 3. Functions of observation in the employment of the
deductive method 223
§ 4. Ricardo's use of the deductive method . . . 232
§ 5. The premisses of deductive political economy . . 236
§ 6. Special modifications of the deductive method . . 240
CHAPTER VIII.
On Symbolical and Diagrammatic Methods in
Political Economy.
§ 1. Mathematical character of political economy . . 248
contents.
xiii
page
§ 2. The employment of arithmetical examples . . 250
§ 3. Exact numerical premisses not essential to the em¬
ployment of mathematical methods . . . 252
§ 4. Advantages resulting from the use of symbolical and
diagrammatic methods in political economy . . 256
CHAPTER IX.
On Political Economy and Economic History.
§ 1. Functions of economic history in theoretical investi¬
gations ........ 264
§ 2. Economic theories illustrated by history . . . 267
§ 3. Economic theories criticized by history . . . 273
§ 4. Economic theories established by history . . .275
§ 5. Functions of economic theory in historical investi¬
gations 281
§ 6. Economic history and the history of economic
theories 285
NOTES TO CHAPTER IX.
A. On the Limits op the Validity op Economic Doctrines.
§ 1. The relativity of concrete economic doctrines . . 293
§ 2. Undesirability of limiting political economy to the
theory of modern commerce 3Ó0
§ 3. In what sense universality may be claimed for the
principles of abstract economics .... 304
B. On the Conception op Political Economy as a
distinctively Historical Science . . . 308
xiv
contents.
CHAPTER X.
On Political Economy and Statistics.
PAaE
§ I. The claims of statistics to be regarded as a distinct
science 322
§ 2. Statistics regarded as a method .... 332
§ 3. The functions of statistics in economic enquiries . 336
NOTE TO CHAPTER X.
On some of the Precautions requisite in the Use of
Statistics in Economic Reasonings.
§ I. Conditions of the reliability of statistical data . . 344
§ 2. The interpretation of simple statistics . . . 348
§ 3. The range of statistics 355
§ 4. The grouping of statistics 357
Index
. 363
THE SCOPE AND METHOD OF
POLITICAL ECONOMY.
CHAPTER I.
Introductoey.
§ 1. Nature and importance of the enquiry into
the scope and method of political economy.—In the terms
economy and economic there is an ambiguity that
underlies much of the current confusion as to the
nature of political economy. Any line of action is
commonly termed economic when it attains its end
with the least possible expenditure of money, time, and
effort; and by economy is meant the employment of
our resources with prudence and discretion, so that we
may derive from them the maximum net return of
utility.
But the words are also used in a sense not implying
any specially reasonable adaptation of means to ends ;
K. 1
2
introductory.
[chap.
and in works on political economy the term economic is
generally employed simply as an adjective correspond¬
ing to the substantive wealth. By an economic fact,
accordingly, is understood any fact relating to the
phenomena of wealth. By economic activities are
meant those human activities that direct themselves
towards the creation, appropriation, and accumulation
of wealth ; and by economic customs and institutions,
the customs and institutions of human society in re¬
gard to wealth.
Political economy or economics is a body of doctrine
relating to economic phenomena in the above sense ;
and the purpose of the following pages is to discuss the
character and scope of this doctrine, and -the logical
method appropriate to its development. In seeking to
define the scope of any department of study, the object
in view is primarily to determine the distinguish¬
ing features of the phenomena with which it deals,
and the kind of knowledge that it seeks concerning
these phenomena. The enquiry also involves an ex¬
amination of the relations between the study in
question and cognate branches of study. In passing
to the consideration of method, we are dealing with
a branch of applied logic, the object being to deter¬
mine the nature of the logical processes specially
appropriate to the study—that is, the methods of
investigation and proof of which it can avail itself—
I.] LOGIC OF POLITICAL ECONOMY. 3
and the logical character of its conclusions as affected
thereby.
The discussion that follows belongs, then, to what
may be called the philosophy or logic of political
economy, and does not directly advance our knowledge
of economic phenomena themselves. For this reason,
a certain impatience is sometimes felt when any such
discussion is proposed. What we want, it is said, is
not any more talk about method, but rather useful
applications of the right method; let us increase our
actual stock of economic truths, instead of indulging
in barren disputes about the way in which economic
truths are to be attained. To this objection the logi¬
cian might reply that the enquiry has at any rate a
logical, even if it has not an economic, significance.
But it has also an economic significance. A moment's
consideration will shew that from the point of view of
political economy itself, it is of material importance
that its scope and method should be rightly under¬
stood.
There is, to begin with, a widely current confusion
as to the nature of economic laws ;. and for this reason,
amongst others, it is imperative that the economist
should seek to define as accurately as possible the
nature and limits of his sphere of enquiry. There
should be no vagueness on the question whether
political economy is concerned with the actual or the
1—2
4
introductory.
[chap.
ideal, whether it treats merely of what is, or asks
further what ought to be, laying down rules for the
attainment of those ends that it pronounces desirable.
Even if theoretical and practical enquiries are both
to be included within its scope, still the distinction be¬
tween the two, and their mutual relations, need to be
clearly and unambiguously set forth. Misunderstanding
on these points has led to a misunderstanding of econo¬
mic truths themselves, and has consequently impaired
the influence and authority of economic science.
Next as to method, it is said that instead of arguing
about what method of investigation is the right one,
it is better to exemplify the right method by employ¬
ing it in the actual attainment of new economic truths.
But are we then to beg the question of its rightness ?
In the long run, time cannot but be saved by making
a preliminary study of the instruments of investigation
to be used, the proper way of using them, and the
kind of results that they are capable of yielding.
For in so far as methods of reasoning are employed
without due regard to the conditions of their validity,
the results gained must likewise be of uncertain va¬
lidity, and the progress of economic knowledge, instead
of being advanced, will be retarded.
The process, moreover, whereby a conclusion is
reached affects its character and value, and the quali¬
fications and limitations subject to which it is to be
LOGIC OF POLITICAL ECONOMY.
5
accepted. If it is purely empirical, then it will be
established only with a more or less high degree of
probability, and it cannot be extended far beyond
the range of space or time over which the instances
on which it is based were collected. If, on the other
hand, it is obtained deductively, then it is hypo¬
thetical until it has been determined how far, and
under what conditions, the assumptions on which
it rests are realised in fact. It has been plausibly
argued that Eicardo's chief weakness was that he
did not clearly appreciate the true nature of his
own method. At any rate he did not, in interpret¬
ing his results, take the precautions necessary to pro¬
vide against misconception on the part of many of his
readers.
It is true that it is one thing to establish the
right method for building up a science, and quite
another thing to succeed in building it up. It is
also true, as the Austrian economist Monger has
remarked, that sciences have been created and re¬
volutionized by those who have not stopped to
analyse their own -tnethod of enquiry. Still their
success must be attributed to their having employed
the right method, even if they have employed it
unconsciously or without going out of their way to
characterize it. Their method must, moreover, be
subjected to careful analysis before the value of
6
introductory.
[chap.
their contributions to the science can be properly
estimated.
Economics is not in any way peculiar in re¬
quiring that its method should be discussed. The
logic of other sciences is, however, for the most part
sufficiently dealt with in general works on logic or
methodology. There are special reasons, partly to be
found in the nature of the subject itself, and partly
due to extrinsic causes, why the logic of political
economy needs a more detailed consideration.
In the first place, economic science deals with
phenomena that are more complex and less uniform
than those with which the natural sciences are con¬
cerned ; and its conclusions, except in their most
abstract form, lack both the certainty and the uni¬
versality that pertain to physical laws. There is a cor¬
responding difficulty in regard to the proper method
of economic study; and the problem of defining the
conditions and limits of the validity of economic rea¬
sonings becomes one of exceptional complexity. It is,
moreover, impossible to establish the right of any one
method to hold the field to the exclusion of others.
Different methods are appropriate, according to the
materials available, the stage of investigation reached,
and the object in view ; and hence arises the special
task of assigning to each its legitimate place and rela¬
tive importance,
I.] LOGIC OF POLITICAL ECONOMY. 7
Another reason for discussing the true principles
of economic method in some detail is that fallacious
reasonings are more common in political economy
than in most other studies. This is due only in
part to the difficulty and complexity of the subject-
matter with which the science is concerned. It
deals with phenomena which, while encompassed with
difficulties, are matters of every-day observation ; and
it has few technical terms that are not also terms of
every-day discourse. A not unnatural consequence is
that people think themselves competent to reason
about economic problems, however complex, without
any such preparatory scientific training as would be
universally considered essential in other departments
of enquiry. This temptation to discuss economic
questions without adequate scientific preparation is
all the greater, because economic conditions exert so
powerful an influence upon men's material interests.
''Few men," says General Walker, "are presumptuous
enough to dispute with the chemist or mechanician
upon points connected with the studies and labours of
his life ; but almost any man who can read and write
feels himself at liberty to form and maintain opinions
of his own upon trade and money. The economic
literature of every succeeding year embraces works
conceived in the true scientific spirit, and works ex¬
hibiting the most vulgar ignorance of economic history.
8
introductory.
[chap.
and the most flagrant contempt for the conditions of
economic investigation. It" is mnch as if astrology
were being pursued side by side with astronomy,
or alchemy with chemistry." Broadly speaking, the
general tendency of popular economics is towards rash
generalizations and fallacious arguments post hoc ergo
propter hoe. This is frequently combined with an
imperfect analysis of fundamental conceptions, leading
to confusion of thought and the selection of false
propositions as self-evident postulates ; and where
deductive reasoning is employed, its results are often
applied without regard to the conditions requisite for
their valid application.
To this it must be added that the sharp distinctions
drawn by opposing schools, and their narrow dogmatism,
have unnecessarily complicated the whole problem. The
subject has become involved in heated controversies,
that have not only made it wearisome to unprejudiced
persons, but have also done injury to the credit of
political economy itself. Outsiders are naturally
suspicious of a science, in the treatment of which a
new departure is so often and so loudly proclaimed
essential. So far, it may be inferred, from economists
having made progress in their science, they cannot
even agree how to set about their work.
The besetting fallacy of writers on economic method
has been justly said to be one of exclusiveness. A single
I.] FALLACY OF EXCLUSIVENESS. 9
aspect or department of economic study is alone kept in
view, and the method appropriate thereto aggrandized,
while other methods, of equal importance in their proper
place, are neglected or even explicitly rejected. Hence
the disputants on both sides, while right positively,
are wrong negatively. Their criticisms on rejected
methods are, moreover, too often based on misappre¬
hension or misrepresentation. Methods are attacked
for not doing what those who advocate their use have
never imagined they could do; and the qualifications
and limitations, with which each side expounds its
own method, are overlooked by the other side. Thus
combined with the fallacy of exclusiveness, or rather
in consequence of it, there is in these controversies
a remarkable prevalence of ignoratio elenchi. In the
following pages an attempt will be made to do
justice to all the different instruments of investigation
of which the economist can avail himself, while
attention will also be drawn to the limitations to
which each in turn is subject.
§ 2. The conception of political economy as a
positive, abstract, and deductive science.—The main
points involved in controversies about economic métKod
may be indicated in outline by briefly contrasting
two broadly distinguished schools, one of which de¬
scribes political economy as positive, abstract, and
deductive, while the other describes it as ethical.
10
introductory.
[chap.
realistic, and inductive. It should be distinctly un¬
derstood that this sharp contrast is not to be found
in the actual economic writings of the best economists
of either school. In the methods that they employ—
when they are really discussing the same problems—
there is to a great extent substantial agreement.
They differ, however, in the relative importance that
they attach to different aspects of their work; and
in their formal statements about method these differ¬
ences become exaggerated.
The question of the right method of economic
enquiry was not as such discussed by Adam Smith ;
and his views on the subject have, therefore, to be
gathered from his way of dealing with actual economic
problems. As a matter of fact, the support of his
authority has been claimed on behalf of both the schools
above referred to. It has been said of him that he first
raised political economy to the dignity of a deductive
science. But he has also been regarded as the founder
of the historical method in political economy.
The reason for this apparent contradiction is not
far to seek. It is to be found in Adam Smith's freedom
from excess on the side either of à priori or à posteriori
reasoning. He rejected no method of enquiry that
could in any way assist him in investigating the
phenomena of wealth. For argument or illustration
he had recoursé, as the occasion might arise, either
I.] ADAM SMITH, MALTHUS, AND RICARDO. 11
to elementary facts of human nature, or to complex
facts of industrial life. He believed in a "natural"
order of events, which might be deduced à priori from
general considerations ; but he constantly checked his
results by appeals to the actual course of history. He
worked up from abstractions to the complex realities
of the economic world in which he lived. Thus, if
on deductive grounds he lays down a doctrine of the
tendency of wages to equality, he combines it with an
inductive enquiry into the causes that check or restrict
the operation of this tendency. If he sets forth the
" natural " progress of opulence, he enters also upon an
historical investigation of what the actual progress of
opulence has been. If he condemns the doctrine of
protection to native industry mainly on abstract
grounds, he enforces his views with concrete illustra¬
tions and arguments in the greatest variety.
As regards the inductive tendencies noticeable in
Adam Smith, his successor is to be found in Malthus ;
for the continuation and development of the abstract
deductive tendencies we turn to Ricardo. Subsequent
economists of the English school assimilated what was
most characteristic in both these writers; but it was
Ricardo, rather than Malthus, who gave to their work
a distinctive tone, particularly in their specific analysis
of the method to be pursued.
Senior and J. S. Mill were the earliest English
12
introductory.
[chap.
economists who definitely formulated principles of
economic ip.ethod. Senior's views are contained in his
introductory lectures before the University of Oxford,
and in his treatise on Political Economy ; Mill's
views are to be found in his Essays on some Unsettled
Questions of Political Economy^ and in the sixth book
of his Logic, The problem is discussed in more detail
Cairnes in his Character and Logical Method of
Political Economy, a work of admirable lucidity, which
has long been considered the authoritative text-book of
English political economy, so far as concerns its logic.
/
Bagehot's essays on the postulates of English political
economy and on the preliminaries of political economy,
published in his Economic Studies, have also in some
respects a representative character.
There are minor differences in the principles laid
down by these four writers respectively, but funda¬
mentally they are in agreement in regarding political
economy as a science that is in its scope positive as
distinguished from ethical or practical^ and in its
method abstract and deductive. The following is a
very brief summary of their characteristic doctrines.
In the first place, a sharp line of distinction is
drawn between political economy itself and its appli¬
cations to practice. The function of political economy
is to investigate facts and discover truths about
them, not to prescribe rules of life. Economic laws
I.] DOCTEINES OF MILL AND CAIRNES. 13
are theorems of fact, not practical precepts. Political
economy is, in other words, a science, not an art or a
department of ethical enquiry. It is described as
standing neutral between competing social schemes.
It furnishes information as to the probable con¬
sequences of given lines of action, but does not itself
pass moral judgments, or pronounce what ought or
what ought not to be. At the same time, the greatest
value is attached to the practical applications of
economic science ; and it is agreed that the economist
ought himself to turn his attention to them—not,
however, in his character as a pure economist, but
rather as a social philosopher, who, because he is an
economist, is in possession of the necessary theoretical
knowledge. It is held that if this distinction is drawn,
the social and ethical aspects of practical problems—
which may be of vital importance—are less likely to
be overlooked or subordinated.
»
As to its position amongst the sciences, political
economy is not regarded as inseparably bound up with
social philosophy in general. Economic facts are, it is
allowed, influenced by social facts of very various kinds,
and in their turn influence them ; but it is neverthe¬
less held to be possible up to a certain point to isolate
the study of the phenomena of wealth from the study
of other phenomena of society. Such isolation is,
indeed, said to be necessitated by the requirements of
14
introductory.
[chap.
science, which always proceeds by analysing concrete
phenomena, so as to deal separately with their differ¬
ent aspects and the different elements of which they
are composed. Economic science constitutes, therefore,
a distinct, though not entirely independent, depart¬
ment of sociological speculation.
Passing to the means whereby the truths of the
science are to be reached, it is held that on account
of thé variety and complexity of the influences to
which economic phenomena are subject, the method of
specific experience or direct induction is inadequate to
yield more than empirical generalizations of uncertain
validity. Experiment is, moreover, a resource from
which the economist is debarred. It follows that
we ought not to take as our starting point the
analysis of concrete industrial facts. The right method
of procedure is, on the contrary, deductive, or, as Mill
puts it, à priori'. ' The ultimate premisses upon which
the deductive science is based are, moreover, limited in
number, so that the more important of them admit of
precise enunciation at the outset. For while the cir¬
cumstances helping in some degree to mould economic
phenomena are indefinitely numerous, there are a few
whose influence is predominant, far outweighing that of
all the rest. These predominating circumstances con¬
sist of a few simple and indisputable facts of human
nature—as, for example, that in their economic dealings
DOCTRINES OF MILL AND OAIRNES.
15
men are influenced by the desire for wealth—taken
in connexion with the physical properties of the soil,
and man's physiological constitution\
Political economy is accordingly spoken of as, in the
main, an abstract science. For in basing its conclusions
on a limited nuniber of fundamental assumptions, it
has to leave out of account many circumstances, which
are of importance in individual cases, but are never¬
theless unimportant when instances are taken in the
mass. That other motives besides the desire for wealth
do operate on various occasions in determining men s
economic activities is recognised. They are, however,
to be neglected—at any rate in the first instance
—since their influence is irregular, uncertain, and
1 There is, however, some difference of view as to the extent to
which the application of the resulting doctrines needs limitation.
Bagehot regards the doctrines of English political economy as not
applicable to all states of society, but only to those in which com¬
merce has largely developed, and in particular taken the form of
development which we find in England at the present time. The
relativity of economic investigations is also indicated incidentally by
Cairnes. Senior, on the other hand, remarks that those conclusions
which relate to the nature and the production of wealth are universally
true ; and although those which rélate to the distribution of wealth
are liable to be affected by the particular institutions of particular
countries, still the natural state of things can be laid down as the
general rule, and the anomalies produced by particular disturbing
causes afterwards accounted for. In other words, while Bagehot
regards the premisses of political economy as relating only to the
economic habits and institutions of a particular age and country,
Senior regards them as "natural," and, with slight qualifications, as
independent of age and country.
16
introductory.
[chap.
capricious. On these grounds, it is argued that the
abstraction, whereby the science takes as its principal
subject-matter an " economic man," whose activities
are determined solely by the desire for wealth, is both
legitimate and necessary ; and, in further justification
thereof, an analogy is drawn from mathematics and
physics, which are said to be based upon corresponding
abstractions ^
On similar grounds, the science is spoken of by
Mill and Oairnes as hypothetical. For inasmuch as its
premisses do not exhaust all the causes affecting the
result, its laws are only true hypothetically, that is,
in the absence of counteracting agencies. The same
point is expressed by saying that political economy is
a science of tendencies only, not of matters of fact, its
object being to work out and ascertain the result of
certain great forces, as if these alone operated, and
nothing else exerted any modifying influence^.
Senior sums up his views in the dictum that poli¬
tical economy " depends more on reasoning than on
1 Mill and Bagehot specially insist upon the high degree of ab¬
straction involved in economic reasonings. Bagehot more than once
repeats that "English political economists are not speaking of real
men, but of imaginary ones ; not of men as we see them, but of men
as it is convenient to us to suppose they are" {Economic Studies, p. 5).
2 Senior, while affirming that the conclusions of political economy
are true only in the absence of disturbing causes, still calls it a posi¬
tive, as distinguished from a hypothetical, science. By this he means
that its premisses are not arbitrarily assumed.
I.] DOCTRINES OF MILL AND CAIRNES. 17
observation/' Mill, Cairnes, and Bagehot, however, all
insist that the appeal to observation and experience
must come in, before the hypothetical laws of the
science can be applied to the interpretation and explan¬
ation of concrete industrial facts. For it then has to
be ascertained how far, as regards the particular cases
under consideration, allowance needs to be made for
the operation of disturbing causes—that is, for the
peculiar modifications introduced by the minor in-
fiuences affecting economic phenomena. Comparison
with observed facts provides a test for conclusions
deductively obtained, and enables the limits of their
application to be determined. Accordingly, while the
method of specific experience is regarded as altogether
inefficacious for the discovery of economic laws, and
as incapable of affording independent proof of their
validity, it is nevertheless considered to form an indis¬
pensable supplement to the deductive reasoning that
constitutes the framework of the science.
The above doctrines of economic method, which are
those explicitly formulated by the writers referred to,
need to be interpreted and in some respects qualified
by reference to their actual economic writings. For
if, from an examination of the latter, we seek to
deduce their views on method, we find that their prac¬
tice does/ not precisely correspond with their theory;
and we sJre led to the conclusion that, judged by their
K. 2
18
introductoey.
[chap.
own writings, they state their doctrines on method in
^00 absolute a manner, in particular exaggerating the
àbstractness of political economy taken as a whole.
They also speak as if the science had reached the
deductive stage in a more definitive manner than is
apparent from their own way of dealing with economic
problems.
In treating of the production of wealth, for ex¬
ample, as is pointed out by Professor Sidgwick, Mill
and other economists of his school have always em¬
ployed an inductive and analytical method, the deduc¬
tive element in their reasonings being in this part of
their subject essentially subordinate. Mill is oven
more distinctly an inductive economist in his elaborate
discussion of peasant proprietorship in its economic
aspects. There is no doubt a deductive element, based
on psychological data, in his argument as to the effect
of ownership on the cultivator's industry and energy.
But even on this point he brings a considerable amount
of à posteriori evidence to bear ; and his general ar¬
gument depends mainly on an inductive and compara¬
tive investigation of the actual working of peasant pro¬
prietorship in France, Switzerland, and other countries,
in which the operation of the system can be observed
on a considerable scale. Oairnes, again, in his work on
the Slave Power, where he analyses the general eco¬
nomic characteristics of slave labour, establishes some
I.] J. s. MILL. 19
important economic doctrines by a careful inductive
study of facts, comparatively little use being made of
deductive reasoning.
It is true that the general theory of distribution and
exchange, expounded by the school of Mill, is based
on reasoning of an abstract character; but even here
the writers, to whom reference has been made, tend to
exaggerate the characteristics of their own method.
They do not hold themselves aloof from the concrete
realities of the actual economic world to anything like
the extent that their description of the science would
\
lead their readers to anticipate ; and it is very far
from the truth to say that their doctrines are wholly
constructed out of a few elementary laws of human
nature. At all events, in order to establish their
consistency, a large portion of their best economic
work must be regarded as concerned with the practical
modifications of the truths of political economy, rather
than with those truths themselves.
The contrast is specially marked between Mill's
theory of method as contained in the Essays, and his
practice as manifested in the Principles, In the former,
the conception of the "economic man" occupies a
position of central and all-pervading importance ; in
the latter, it plays a much humbler part. Moreover,
in his Principles of Political Economy, Mill avowedly
treats, not merely of these principles themselves, but
2—2
20
introductoey.
[chap
also of "some of their applications to social philosophy."
He states in his preface that while he desires to give
an exposition of the abstract doctrines of political
economy, he also desires to give something more than
this; his object is to include "a much wider range of
ideas and of topics, than are included in political
economy, considered as a branch of abstract specula¬
tion." Moral and social considerations, in the widest
sense, receive accordingly their due share of attention ;
and it would be difficult to find a better instance of an
ethical treatment of economic problems than is con¬
tained in the chapter on "the probable future of the
labouring classes."
§ 3. The conception of political economy as an
ethical, realistic^ and inductive science.—The emphasis
with which the earlier systematic writers on economic
method, especially in England, dwelt upon the abstract
side of political economy led to a reaction, which took
its rise in Germany, and is especially connected with
the names of Koscher, Hildebrand, and Knies. The
two schools, thus broadly distinguished, are sometimes
\
spoken of as the English and the German respectively.
These designations have the merit of brevity; and,
taking into account what was actually written about
method by English and German economists respectively
during the middle part of this century, they are not
without justification. They must not, however, be
I.] ENGLISH AND GERMAN SCHOOLS. 21
interpreted too literally. The doctrine of method set
forth in the preceding section does not fairly represent
the many-sidedness of English work in economics.
In particular, it fails to assign a sufficiently important
place to the mass of historical and statistical material
that the labour of English economists has provided.
The doctrine would, moreover, be accepted only in a
modified and broadened form by those contemporary
economists who avowedly carr}^ on the traditions
of the English school. Again, the so-called German
doctrines, whatever may have been their origin, are
no longer the peculiar possession of any one country.
They are, for example, represented by a rising school
of economists in the United States, who expressly
repudiate the assertion that the new movement
is exclusively a German movement. Even in England
the spirit of the reaction was manifested long ago
by Richard Jones, and in recent years very forcible
expression has been given to it by Cliffe Leslie and
others. On the other hand, amongst distinguished
economists who have employed a highly abstract
method of treating economic problems, several Germans,
e.g.y von Thünen, are to be included ; and recently there
has sprung up in Austria a new school, which insists
very emphatically on the necessity of an abstract treat¬
ment of the science h
1 Professor Carl Monger of Vienna is one of the principal leaders
22
inthodüctoky.
[chap
Subject to the foregoing explanation, it is conve¬
nient to speak of the school of Roscher and Knies as
the German school. The explicit teaching of this
school in regard to the scope and method of economics
is briefly indicated in the following paragraphs\
In the flrst place, a more extended scope is given
in this later development of German opinion. Compare his Unter¬
suchungen über die Methode der SociaUoissenschaften und der Politischen
Oekonomie insbesondere. He specially insists on the necessity of dis¬
tinguishing theoretical political economy from economic history and
statistics on the one hand, and from the practical sciences of political
economy on the other ; and he accuses the dominant German school
both of misunderstanding the point of view of the abstract method,
and of attributing an exaggerated importance to the historical. He
further charges them with error in attempting to give an ethical
direction to theoretical political economy. He speaks still more
strongly in a very controversial series of letters specially directed
against Schmoller, and published under the title Die Irrthiimer des
Historismus in der Deutschen Nationalökonomie. Professor Emil Sax
of Prague is in agreement with Menger on fundamental points, but
presents his views in a less controversial form. He insists strongly
on the importance of pure theory. Compare his Wesen und Aufgaben
der Nationalökonomie.
1 On the points that follow compare Eoscher, Geschichte der
National-Oekonomik in Deutschland, especially pp. 1032—1086;
Knies, Die Politische Oekonomie vom Standpunkte der geschichtlichen
Methode', Schönberg's article on Die Volksioirthschaft (in his Hand¬
buch), §§ 1—13; and Wagner, Systematische Nationalökonomie in the
Jahrbücher fur Nationalökonomie und Statistik, March, 1886 (trans¬
lated in the Quarterly Journal of Economics, vol. i., p. 113). A good
historical account of the new German political economy of which
tha foundations were laid in the years 1842—53, principally by
Eoscher, Hildebrand, and Knies, is given in Cohn's System der Na¬
tionalökonomie, Grundlegung, §§ 108—122. See also Professor Ashley's
article on the Historical School of Economists in Mr Palgrave's Dic¬
tionary of Political Economy.
I.] THE GERMAN HISTORICAL SCHOOL. 23
to the science than is usual with English economists ;
for it is avowedly made to treat of what ought to be
as well as of what is. The possibility of drawing
any clear line of separation between these enquiries is,
indeed, practically denied. It is held that there, can
be no purely positive science of political economy, such
as was contemplated by Cairnes.
The school explicitly calls itself ethical ; it regards
political economy as having a high ethical task, and as
concerned with the most important problems of human
life. The science is not merely to classify the motives
that prompt to economic activity ; it must also weigh
and compare their moral merit. It must determine a
standard of the right production and distribution of
wealth, such that the demands of justice and morality
may be satisfied. It must set forth an ideal of eco¬
nomic development, having in view the intellectual
and moral, as well as the merely material, life; and
it must discuss the ways and means—such as the
strengthening of right motives, and the spread of
sound customs and habits in industrial life, as well
as the direct intervention of the State—by which that
ideal is to be sought after\
1 It should be observed that diiBPerences in regard to the scope of
a science may be to a considerable extent merely verbal. One writer
may include within the science itself enquiries which another writer
regards as belonging only to its applications ; but it does not follow
that the latter neglects these enquiries, or even in the slightest degree
attaches less importance to them.
24
introductory.
[chap.
Another characteristic of the German historical
school is the manner in which its adherents insist
upon the social side of political economy, and the in¬
terdependence of economic and other social phenomena.
It is held that because of this interdependence, political
economy cannot be adequately treated except in close
connexion with other branches of social science. The
treatment adopted ought, accordingly, to be realistic.
It is maintained that the economist should only very
sparingly, if at all, abstract from the complex realities
of actual economic life; and should consequently in
most of his reasonings deal, not with an abstract eco¬
nomic man,'' subject only to a single motive, the desire
for wealth, but directly with men as they really are,
moved by diverse motives, and influenced by the actual
conditions of the age and society in which they live.
Closely connected with this characteristic is the insist¬
ence upon the relativity of economic doctrines. The
economic conditions of life are subject to variation;
and subject to like variation are the laws by which
men's economic activities are regulated.
As to the method of reasoning by which economic
knowledge is to be extended, great stress is laid on the
necessity of appealing constantly to specific observation
of the actual economic world, and generalizing there¬
from. Hence the school is spoken of as inductive and
statistical. It is still more distinctively designated
1.] THE GERMAN HISTORICAL SCHOOL. 25
historical, from its special insistence on the importance
of historical material in building up the science. Only
by reference to the past, it is held, can the present be
properly understood ; and only by a comparison of the
economic conditions of different periods and different
countries can the limitations of economic doctrines be
adequately realised, and economists saved from one¬
sided and narrow dogmatism. The importance of
studying the course of economic evolution is, accord¬
ingly, emphasized.
It should be added that, independently of differences
in regard to the scope and method of political economy,
the dominant German school is distinguished from
the older English economists by a difference of attitude
towards laisser faire and government interference.
This is, however, a point of contrast with which we are
not directly concerned in the present treatise.
«
It will be observed that the above-mentioned cha¬
racteristics are by no means independent of one another.
In some cases, the connexion is very close indeed. The
more realistic our standpoint, for example, the more
obvious becomes the necessity of direct appeals to
history and statistics ; the historical method leads per¬
force to the recognition of the relativity of economic
doctrines;'and the realistic and the social standpoints
are also closely connected. In its turn, the ethical con¬
ception of the science emphasizes all the other points ;
26
INTRODUCTORY.
[CHAF.
and in fact, if it be granted that political economy is
directly concerned with what ought to be, then most
of the rest may be said logically to follow^ It results
from this dependence of characteristics that in discuss¬
ing the various questions at issue a certain repetition
is unavoidable. Accordingly, in the following pages,
even when we are treating apparently distinct prob¬
lems, there will not unfrequently be found a recurrence
of the same fundamental points, viewed in different
aspects.
Within the new school itself marked differences
of tone and attitude are to be observed. The more
advanced members of the school are not content with
emphasizing the importance of the historical method,
but go so far as to reject the aid of any other method
except in extreme subordination to it. They are not
simple reformers, but revolutionaries ; for they advocate
a complete reconstruction and transformation of politi¬
cal economy. In their view, the science in the past has
been barren of valuable results; only by a radical
change of method can it hope to be fruitful in the
future. The old doctrines, and the old ways of reaching
them, are to be put on one side and seen no more.
Professor Schmoller and Dr Ingram may be taken as
^ It will be shewn, however, that the converse does not hold good ;
that it is, in other words, possible to adopt a realistic treatment of
economic problems without passing ethical judgments.
I.] DOCTRINES OF ROSCHER AND WAGNER. 27
examples of this advanced wing of the new school.
The former would practically identify political economy
and economic history, or at any rate resolve political
economy into the philosophy of economic history. The
latter, whose aim is somewhat different, though he is
equally revolutionary in his tendency, would absorb
political econoiñy into general sociology.
The position taken by the more moderate adherents
of the German school, including Eoscher himself, is in
marked contrast to the above. They adopt a tone of
moderation and an attitude of compromise. While in¬
sisting on the importance of historical investigation in
political economy, they admit the necessity of em¬
ploying other methods in conjunction therewith; and
while taking a realistic view of the science as a whole,
they recognise the value of abstraction, at any rate in
certain preparatory stages. They accept many of the
most characteristic of the old conclusions, and on the
old grounds. According to Professor Adolph Wagner,
who may be taken as a leading representative of the
more moderate section of the new school, the inductive
and deductive methods both have their place in econo¬
mics. " These, then," he says, are the two methods :
on the one hand, deduction from psychological mo¬
tives—first and foremost, deduction from the motive
of individual advantage, then from other motives ; on
the other hand, induction from history, from statistics.
28
INTEODUCTORY.
[chap.
and from the less exact and less certain, yet indis¬
pensable, process of common observation and expe¬
rience. With both methods we are to approach the
various problems of political economy, and to solve
them so far as we can. Which method is most to be
used depends on the nature of the particular problems ;
but it depends also on the turn of mind, very likely on
the accident of training and education, of the individual
investigator.''^
^ Quarterly Journal of Economics^ vol. i., p. 124. In his Lehr- und
Handbuch der'politischen Oehonomie, vol.i., p. 17, Wagner writes further
in the same strain. ''It is not," he says, "a question of completely
changing the method of deduction, nor of entirely replacing it by the
method of induction. It would not be possible to attain the latter
aim; and, if it were possible, it would be neither right nor desirable.
The problem is to obtain an improvement in deductive procedure a
more refined and deeper psychological foundation and development
of it, and a more careful application, particularly in concrete practi¬
cal questions. To this must be added constant attention to the
hypotheses from which deductions are being made, and a keener
discernment of the necessary limits of the applicability of the method.
In short, the true solution of the contest about method is not to be
found in the selection of deduction or induction, but in the accept¬
ance of deduction and induction. Each must be employed in the
cases where it is specially adapted to the particular nature of the
problem to be solved, and as far as possible—for it is not always
possible—there must be a combination of both, although in concrete
cases one or the other will take precedence." Dr von Scheel ex¬
presses himself similarly. Different methods, he says, are service¬
able for the solution of economic problems. "We must use both
inductive and deductive methods. The most suitable method will
continually vary with the particular nature of the problem to be
solved" (Schönberg's Handbuch, Die politische Oehonomie als Wissen¬
schaft, § 3). Professor Gustav Cohn may he quoted to the same
I.] DIFFEKENT METHODS SERVICEABLE. 29
§ 4. The method of political economy cannot ade¬
quately be described by any single phrase,—^e must
not then exaggerate the opposition between what may
be called the classical English school and the new
school. The former realise more vividly the abstract
problems of the science, and in writing on method
keep these problems mainly in view. The latter realise
more vividly the concrete problems, and hence lay
stress on all the points which the English school have
tended to overlook. But the difference is strictly
speaking one of degree only ; and we find the oppo¬
sition reduced to a minimum, when we compare the
actual procedure in the solution of given problems
adopted by the best contemporary economists, whether
they profess to belong to the new school or are content
to be classed with the old\
As to the doctrine to be expounded in the following
effect. The idea, he says, that mere collections of historical or
statistical material can be made available for science, without de¬
ductive aids, is just as much an extravagance, as the opposite idea that
out of deductions from elementary hypotheses the whole science can
be constructed (Grundlegung der Nationalökonomie y p. 35). Dr E. R.
A. Seligman, again, writing on behalf of the American supporters of
the new movement, remarks that the more extreme of the Germans
"have themselves overshot the mark, have unduly undervalued the
work of the English school, and have in their zeal too dogmatically
denied the possibility of formulating any general laws" (Science
Economic Discussion^ p. 21).
1 On this point, compare Professor Dunbar's very interesting and
valuable essay on the Reaction in Political Economy y in the Quarterly
Journal of Economics^ October, 1886.
80
introductory.
[chap. i.
pages, it will suflfice here to say that while great im¬
portance will be attached to the place of the deductive
method in economic enquiry, and while a protest will
be entered against the unhistorical spirit evinced by
those adherents of the new movement who proclaim
the necessity for a complete reorganization of the
science, still no attempt will be made to justify the
doctrines of the older school in the precise form in
which they were laid down by Mill and Cairnes. The
method of political economy cannot adequately be de¬
scribed by any single phrase ; and accordingly no one
method will be advocated to the entire exclusion of
other methods. It will, on the contrary, be shewn
that, according to the special department or aspect
of the science under investigation, the appropriate
method may be either abstract or realistic, deductive
or inductive, mathematical or statistical, hypothetical
or historical.
CHAPTER II.
On the Relation of Political Economy to
Morality and Practice.
§ 1. Distinction between economic uniformities^
economic ideals, and economic precepts.—As regards
the scope of political economy, no question is more
important, or in a way more difficult, than its true
relation to practical problems. Does it treat of the
actual or of the ideal ? Is it a positive science con¬
cerned exclusively with the investigation of uni¬
formities, or is it an art having for its object the
determination of practical rules of action ? What,
for example, is the true problem of political economy
in regard to the influence of competition on wages ?
Is it to investigate the precise nature of that influence,
and to enquire how far and in what ways the operation
of competition is or may be modified by other agencies ?
Or is it rather to determine how far the effects of
competition can be morally approved, and to what
extent it is desirable that its operation should be
supplemented or superseded by combination or direct
governmental interference ?
32 POLITICAL ECONOMY AND PRACTICE. [CHAP.
The distinction here indicated is indeed threefold
rather than twofold as is usually implied. For when
we leave the enquiry into the veritable order of eco¬
nomic phenomena, their coexistences and sequences,
under existing or assumed conditions, we still have to
take account of a further subdivision of some signifi¬
cance. There is, on the one hand, the investigation
of economic ideals and the determination of a standard
by reference to which the social worth of economic
activities and conditions may be judged ; and there is
also the investigation of economic rules, ¿e., the de¬
termination of maxims or precepts by obedience to
which given ends may best be attained h Thus, in
1 There is still another distinction, which need not, however, be
dwelt upon—namely, the distinction between economic maxims as
formulated by the student, and their practical outcome in the actual
legislation of different countries. Even this distinction is not always
clearly recognised. It seems, for instance, to be obscured in the
following passage in Lord Bramwell's address as President of Section
F of the British Association: "What will be the best way to add
to the wealth of a society must be a subject of study by that
society, which will lay down rules—that is to say, make laws—for
the purpose; and this is political economy. Adam Smith was not
the first political economist, though well called the father of those
rules which now prevail. But rules for the purpose existed before
him, the great objection to them being that most of them were wrong.
There was a law that the dead should be buried in woollen. Laws
were made for fixing wages ; laws were made against regrating and
forestalling. Then think of the usury laws. You cannot deny that
these were economical laws because you think them wrong." The laws
here referred to cannot in any proper sense be called laws of political
economy. Even if political economy is regarded as an art, the
precepts of that art must be distinguished from the actual practice
II.] UNIFORMITIES, IDEALS, AND PRECEPTS. 33
regard to the payment of interest, we have, first, the
positive enquiries why, under certain conditions of in¬
dustry, interest is paid at all, and what determines the
rate paid. We have, secondly, the enquiries whether
interest ought to be paid, and, if it ought, what
constitutes a fair rate of interest. We have, thirdly,
the enquiries whether any interference in regard to
the payment of interest is desirable, and, if so, what
are the best means whereby such payment may either
be abolished or at least approximated to a fair
standard.
Another illustration may be taken from the depart¬
ment of taxation. The investigation of the incidence
of taxation is in itself a positive enquiry; so is the
problem of the influence of different forms of taxation
on relative values. These are, in other words, enquiries
as to matters of fact. Passing to problems that
belong to a different category, we may distinguish the
determination of the ideal of taxation from that of
rules of taxation in the narrower and stricter sense.
It is one thing to ask in what sense, if any, and why,
equality of taxation should be our aim ; it is another
thing to enquire by what rules, e.g.^ the adoption of
a system of progressive taxation or the judicious
combination of direct and indirect taxation, such
of politicians and finance ministers, however much their acts may be
the direct legislative embodiment of the precepts.
K. 3
34 POLITICAL ECONOMY AND PEACTICE. [CHAP.
equality can with the nearest possible approximation
be attained.
Intimate as are the connexions between the above
kinds of enquiry, they are in themselves distinct in
character, and belong to different departments in a
classification of knowledge. The first belongs to positive
science, the second to normative or regulative science
(along with ethics, if indeed it be not a branch of
ethics or of what may be called applied ethics), and
the third not to science at all in the more modern use
of the term, but to art as distinguished therefrom.
As the terms are here used, a positive science may
be defined as a body of systematized knowledge con¬
cerning what is^; a normative or regulative science as a
body of systematized knowledge relating to criteria of
what ought to be, and concerned therefore with the ideal
1 The use of the term positive to mark this kind of enquiry is not
altogether satisfactory; for the same term is used by Cairnes and
others in contrast to hypothetical, which is not the antithesis here
intended. It is difficult, however, to find any word that is quite free
from ambiguity. Theoretical is in some respects a good term and may
sometimes be conveniently used. In certain connexions, however, it is
to be avoided, inasmuch as it may be understood to imply an antithesis
with actual, as when theory and fact are contrasted; it may also
suggest that the enquiries referred to have little or no bearing on
practical questions, which is of course far from being the case. Pro¬
fessor Sidgwick in his Methods of Ethics employs the term speculative ;
but this term, even more than the term theoretical, suggests some¬
thing very much in the air, something remote from the common
events of every-day life. It seems best, therefore, not to use it in the
present connexion.
il] uniformities, ideals, and precepts. 85
as distinguished from the actuaP; an art as a system of
rules for the attainment of a given end^. The object of
a positive science is the investigation of uniformities^
of a normative science the determination of ideals^ of
an art the formulation of precepts.
The problem whether political economy is to be
regarded as a positive science, or as a normative
science, or as an art, or as a combination of these,
, >
is to a certain extent a question merely of nomen¬
clature and classification. It is, nevertheless, important
to distinguish economic enquiries according as they
belong to the three departments respectively; and it
is also important to make clear their mutual relations.
Confusion between them is common and has been the
source of many mischievous errors.
An endeavour will be made in the following pages
1 It should be particularly observed that a department of know¬
ledge does not necessarily belong to the category of art, as distinguished
from science, simply because it is concerned with what ought to be.
Logic and ethics are both of them sciences, although they are con¬
cerned with right reasoning and right conduct respectively. In the
following pages, however, whenever science is contrasted with art
without further qualification, positive science, and not normative
science, is had in view.
'2 To avoid misunderstanding, it should be added that Adam Smith
and his contemporaries, as well as some modern economists, use the
term science without any reference to the distinction between science
and art as above indicated. They mean by a science any systematic
body of knowledge, whether consisting of theoretical propositions, or.
of practical rules of action. The best recent authorities, however, at
any rate in this country, use the term in the narrower sense.
3—2
36
POLITICAL ECONOMY AND PRACTICE. [CHAP.
to shew that it is both possible and desirable to discuss
economic uniformities independently of economic ideals,
and without formulating economic precepts, although
the converse proposition cannot be affirmed; and it
follows that, if this view be correct, we ought at least
to recognise as fundamental a positive science of
political economy which is concerned purely with what
is, and which seeks to determine economic laws'^. It is
a further question whether or not we should also
recognise, as included under political economy in the
widest sense—but distinct from the positive science—
(a) a branch of ethics which may be called the ethics
of political economy, and which seeks to determine
economic ideals ; and (h) an art of political economy,
which seeks to formulate economic precepts.
^ We here use the term law, as it will consistently he used in the
following pages, in its scientific, and not in its jurisprudential, sense.
We mean by a laio a theorem, the statement of a uniformity, not
a command enforced by sanctions. The law of supply and demand,
the Ricardian law of rent, Gresham's law, and the like, may be given
as examples of economic laws in the above sense. The validity of
such laws is a purely theoretical question, and our attitude towards
them is not, or at any rate should not be, affected by oqr ethical or
pohtical views. It is otherwise as soon as we begin to lay down rules
for the guidance of statesmen and legislators. When we argue for
fair trade or for free trade, when we advocate the legislative re¬
striction of hours of labour or the nationalisation of the land, or
when we contend for a general policy of laisser faire, we have
advanced a stage further. Considerations based on political economy,
conceived as a positive science, may still form the foundation of
our argument, but such data have to be controlled by ethical and
political considerations.
II.] THE SCOPE OF POLITICAL ECONOMY. 37
§ 2. The possibility of studying economic laws or
uniformities without passing ethical judgments or
formulating economic precepts,—It has been pointed
out in the preceding chapter that the prevailing
tendency amongst a certain school of economists is
to widen the scope of political economy by giving it
a distinctly ethical character and making little attempt
to separate its treatment as a practical science from
its treatment as a theoretical science. It is even
maintained that such a separation is impossible. Thus
Professor Wagner, while clearly distinguishing the
positive and the ethical problems, denies that either
of them admits of being treated apart from the other,
although taken together their treatment may be
separated from that of the dependent art. He gives
the five following problems (of which the first two
belong to positive science as above defined, the third
and fourth to normative or ethical science, and the
fifth to art) as between them constituting the great
general problem of political economy: (1) the description
of economic phenomena; (2) the explanation of the
causes upon which they depend ; (3) the determination
of a standard by which their social merit may be
measured; (4) the setting up of an aim for economic
progress; (5) the examination of the ways and means
for attaining this aim. Of these problems -he regards
the first four as too closely connected to permit a
88 POLITICAL ECONOMY AND PRACTICE. [CHAP.
separation. Only the fifth, he considers, where we
have to deal with the practical questions of an art, can
be clearly distinguished from the rest\ Others would
not even admit the degree of separation that Wagner
allows. Dr von Scheel, for instance, remarks that the
history, theory, and art of political economy form one
indivisible whole
Yet on reflection it seems clear that there can be
no inherent reason why we should not both describe
and explain economic phenomena without either passing
a judgment on their moral worth or setting up an aim
for economic progress ; although of course the converse
does not hold good. It is clear, for example, that
we cannot determine how nearly the results of free
competition approximate to our economic ideal until
we know what those results are. Nor can we say
how far it is desirable that the effects which would be
1 Quarterly Journal of Economics, vol. i., pp. 124—128. In the
latest edition (1892) of his Grundlegung der politische Oehonomie, §§ 57
—64, Wagner interpolates between (1) and (2) as given above a third
theoretical problem, namely, the discovery of types. This yields a
symmetrical and interesting scheme in which we have three theoretical
and three practical problems. It is to be observed that in the edition
of the Grundlegung to which reference is here made, Wagner seems
more willing to admit the possibility of a separate discussion of the
three theoretical problems, although he regards all six problems as
involved in a complete treatment of any economic question, This
must be granted ; but we may at the same time clearly distinguish
between economic science in the strict sense, the ethics of political
economy, and applied economics.
^ Schönberg's Handbuch, vol. i., pp. 71, 72,
II.] THE CONNEXION BETWEEN SCIENCE AND ART. 89
brought about by unimpeded competition should be
modified by governmental interference or voluntary
combination, until we have also ascertained what kind
of modification would ensue, and what would be the
collateral effects of such interfering agencies. We
can, however, successfully investigate the nature of
economic phenomena under the régime of competition,
without comparing them with any ideal standard ; and
we can also correctly ascertain the effects exerted, or
capable of being exerted, by agencies other than com¬
petitive—such as law, public opinion, voluntary com¬
bination, and the like—without expressing an opinion
on the practical question how far it is desirable that
the operation of agencies such as these should be
specially encouraged^.
1 In discussing the connexion between science and art, it is
necessary to distinguish the logical order from what may be called
the historical order. It has often been pointed out that while in the
logical order science precedes art, the historical order is the reverse of
this. In other words, the demand for guidance arising from men's
practical needs is recognised, and attempts are made to satisfy it,
before bodies of speculative truth are systematically formulated.
Thus an empirical art of medicine exists before there is any distinct
science of physiology. Indeed, as is remarked by Sir George
Cornewall Lewis, "the purely scientific treatment of any subject,
without an attempt to lay down precepts or rules of practice, is in
general one of the latest stages in the journey of „knowledge"
(Methods of Observation and Reasoning in Politics, Chapter 19, § 5).
But, as we have said, in the logical order science precedes art, that
is, we cannot satisfactorily lay down rules for practical guidance
except on the basis of knowledge of facts. When, therefore, this
knowledge is not to be found elsewhere, the art must seek it as best
40 POLITICAL ECONOMY AND PRACTICE. [CHAP.
The proposition that it is possible to study economic
uniformities without passing ethical judgments or for¬
mulating economic precepts seems in fact so little to
need proof, when the point at issue is clearly grasped,
that it is difficult to say anything in support of it that
shall go beyond mere truism. We may, however, seek
to explain away certain difficulties, based on misap¬
prehension, that have tended to prevent its truth from
being universally recognised. The idea probably is that
any attempt to treat economic laws, without passing
ethical judgments, and without reference to an ideal to
be aimed at, is certain to result in a practical denial
that moral considerations have any bearing on economic
it can for itself, thus becoming at the same time both a science and
an art, the two enquiries, however, not being definitely distinguished.
Strictly speaking, instead of saying that historically art precedes
science, it would for the above reason be more accurate to say that at
the outset there is no clearly marked line of distinction between them.
Accordingly in early treatises on any art we expect to find, and we do
find, theorems of science more or less explicitly set forth, justifying
the rules which it is the authors' main purpose to expound. Herein
is the explanation of the fact that, while Adam Smith conceives
political economy as an art, the Wealth of Nations assumes for the
most part the form of a science. The system of political economy
there advocated, being "the obvious and simple system of natural
liberty," does not in itself consist of any elaborate code of rules.
Adam Smith is chiefly concerned to confute on scientific grounds
other systems, and to establish the scientific basis of his own. His
first three books, to a large extent his fourth, and to some extent
his fifth, are thus taken up with discussions in which the actual
relations of phenomena are discussed and expounded. On this point,
compare Sidgwick, Principles of Political Economy^ Introduction,
Chapter 2.
il] economic activities subject to moral laws. 41
phenomena at all. It has indeed been made a specific
charge against English economics of the middle part of
the century that, seeking to be purely theoretical, it
became in the worst sense unmoral, its tendency being
to claim for economic action a sphere altogether inde¬
pendent of moral laws.
Whilst it would be difficult to substantiate this
charge from the actual writings of English economists
of the first rank at any period, a certain justification
for it may be found in the tone and attitude of some
popular interpreters of economic science at the time
referred to; and it will be useful to seek to discover
the source of the error into which they fell. That
it was an error hardly needs to be insisted upon.
Nothing can be more deplorable than that the econo¬
mist should be understood to imply that, in his
industrial dealings, a man is freed from the ordinary
obligations of justice and humanity. To refer an
injustice in the economic world to demand and supply
may possibly account for it ; but it cannot seriously be
maintained that from the point of view of the moralist
or the social reformer this settles the matter. It needs
no proof that neither economic activities nor any other
class of human activities can rightly be made inde¬
pendent of moral laws.
But it is far fi^om being the case that the falla¬
cious attitude of mind here combated is a necessary
42
POLITICAL ECONOMY AND PRACTICE. [CHAP.
consequence of the attempt to construct a purely posi¬
tive science of economics. On the other hand, it is
rather the failure to recognise the fundamentally distinct
character of enquiries into what is, and enquiries into
what ought to be, that is really responsible for attempts
to solve practical economic questions without reference
to their ethical aspects. And this danger will certainly
not be diminished by endeavouring systematically to
fuse the two classes of problems. There is, however,
a further source of confusion, to which it is necessary
at this point specially to call attention, due to the
non-recognition of the fact that from the purely
positive standpoint the operation of moral forces may
need to be taken into account. It has too often been
implied, though it may not often have been expressly
stated, that—at any rate in regard to what can actually
happen, as distinguished from what one might desire
to see happen—the last word has been said when the
effects of competition have been correctly ascertained
and set forth \ As a matter of fact, although the
1 In Kingsley's Alton Loche we are told how a member of Parlia¬
ment—one that was reputed a philosopher, and a political economist,
and a Liberal—replied to a deputation of working men that however
glad he would be to help them, it was impossible—he could not alter
the laws of nature—wages were regulated by the amount of com¬
petition among the men themselves, that is, by the laws of political
economy, which it would be madness and suicide to oppose (ch. 10).
No doctrine so crude as this is, however, taught by leading English
exponents of the science. The distribution of wealth," says J. S. Mill
IL]
OPERATION OF MORAL FORCES.
43
forces of competition may usually exert a prepon¬
derating influence in the economic world, they have
not the universality and necessity which is here as¬
cribed to them, nor are they incapable of being, as we
may say, moralized. Economic phenomena depend
upon the activity of free agents, whose customary
behaviour may be modified not merely by legislative
interference, but also by changes in their own moral
standard, or in the social pressure brought to bear upon
them by public opinion; and it follows that, in general,
we are not justified in assuming finality in regard to
concrete industrial facts, or in affirming that, in the
economic world, what is must be. It is true that
emphatically, "depends on the laws and customs of society. The
rules by which it is determined are what the opinions and feelings
of the ruling portion of the community make them, and are very
different in different ages and countries; and might be still more
different, if mankind so chose" (Political Economy^ ii. 1, § 1). By
"the ruling portion of the community" we ought here to understand
not merely those who have a voice in framing a country's laws, but
also those who mould public opinion and exert an influence on the
moral tone of a people. Compare further Mill's Autobiography, p. 246,
where he speaks of the modes of the distribution of wealth as de¬
pendent on human will, and capable therefore of being modifled by
human effort. At the same time a caution should be added against
going too far in ascribing an optional or arbitrary character to the
laws of the distribution of wealth. It must not, for instance, be
supposed that the sovereign power, whether democratic or otherwise,
can arbitrarily impose upon a people any principles of distribution it
pleases, regardless of the operation of ordinary economic motives and
of the economic habits and customs which have naturally grown up
and established themselves in the community.
44 POLITICAL ECONOMY AND PRACTICE. [CHAP.
extra-regarding motives are not in economic affairs as
powerful or as constant in their operation as motives of
a self-regarding character. Still they none the less do
exercise an appreciable influence, and as the sense of
social responsibility grows stronger and becomes more
diffused their importance is likely to be increased \
It involves confusion of thought, however, to sup¬
pose that economic phenomena are for the above reason
incapable of being studied positively, or that in our
investigation of them we are necessarily bound to pass
a judgment upon their moral worth. To recognise the
influence, actual or potential, exerted by the economic
ideals that men may frame for themselves is not the
same thing as to discuss the objective validity of those
^ When people talk about supply and demand, they sometimes
forget that these are themselves phenomena depending upon human
will, and that among the changes which may lead to modifications
in supply or demand are changes in nioral conditions. This may
be the case, for instance, if, because the public conscience has been
touched, people will not purchase commodities which they believe
to have been produced under what they regard as immoral con¬
ditions; or if they will not deal with shops where the employers
have the reputation of treating their employees meanly or harshly.
The fact that, at any rate in the estimation of traders themselves,
causes of this kind may operate to a very appreciable extent is shewn
by the anxious indignation with which some large London firms re¬
pudiated certain statements made before the Select Committee of the
House of Lords on the Sweating System (1888) in regard to their
manner of paying their workpeople. More than one firm specially
called the attention of the Committee to the fact that they ''were
being damnified and injured in their business by reason of the state¬
ments which were being made before their lordships."
il] influence of economic ideals. 45
ideals ; and our treatment of economic science may
remain strictly positive (in the sense in which we are
now using that term), while at the same time we enquire
in detail in what ways economic phenomena are or
may be affected by the pressure of public opinion, or
by motives of justice, and kindliness, and concern for
the general well-being.
It has been argued that the science cannot be
separated from the art of economics, because of the
influence exerted by the latter upon the actual course
of economic developments There is an element of
truth in this argument, which has perhaps been
sometimes overlooked; but it does not establish the
desired conclusion. Men are influenced in what they
actually do by what they think they ought to do;
and economic precepts, when enforced by the agency
of the law or public opinion, lead to modifications
of economic facts. But all this may be taken into
account without leaving the positive for the practical
standpoint. Consider, for example, the influence exerted
upon mediaeval trade by doctrines of the illegitimacy
of usury and of what constitutes a reasonable price.
It is one thing to study the nature and extent of this
influence. It is another thing to enquire into the
validity of the doctrines themselves. And although
^ Compare Professor H. C. Adams in Science Economic Discussion^
p. 102.
46 POLITICAL ECONOMY AND PRACTICE. [CHAP.
the historian may more or less combine the two dis¬
cussions, they clearly admit of logical separation.
We may conclude the argument contained in this
section by the remark that, just as the science of
psychology recognises the existence and operation of
moral motives, yet does not pass ethical judgments,
so political economy may recognise the operation of
moral motives in the economic world, and yet not
become an ethical science.
I 3. Grounds for recognising a distinct positive
science of political economy, the sole province of which
is to establish economic uniformities,—Granting that it
is logically possible to separate the positive from the
ethical and practical study of economic phenomena,
there is still no absolute inconsistency in holding that
such a separation is undesirable. It may be pointed
out how enormous is the influence exerted upon the
well-being of mankind by the modes in which wealth is
produced and distributed ; and stress may be laid upon
the fact that those human activities, which constitute
the subject-matter of the economist's investigations,
have an ethical significance, which is at least as worthy
of Goilsideration as their economic significance. It is
indeed not strange that the idea of an essentially
ethical treatment of political economy should have
a strong fascination for earnest minds. Nor is it
strange that as our social sympathies grow broader
II.] POLITICAL ECONOMY AS A POSITIVE SCIENCE. 47
and stronger, the notion of stopping short at the purely
positive enquiry should be viewed with an increasing
degree of impatience.
But in all this the point really at issue is obscured.
No one desires to stop short at the purely theoretical
enquiry. It is universally agreed that in economics the
positive investigation of facts is not an end in itself,
but is to be used as the basis of a practical enquiry,
in which ethical considerations are allowed their due
weight. The question is not whether the positive
enquiry shall complete as well as form the foundation
of all economic discussion, but whether it shall be syste¬
matically combined with ethical and practical enquiries,
or pursued in the first instance independently.
The latter of these alternatives is to be preferred
on grounds of scientific expediency. Our work will
be done more thoroughly, and both our theoretical and
our practical conclusions will be the more trustworthy,
if we are content to do one thing at a time. The
following are, in rather more detail, the reasons that
may be given for explicitly recognising the indepen¬
dence of the positive enquiry^.
1 The question of combining positive and ethical enquiries is a
somewhat different one from that of combining enquiries that belong
respectively to the departments of science and art. The two questions
have, however, a good deal in common, and we shall, therefore, in
order to avoid unnecessary repetition, treat them together. The
reader-will observe that in the arguments that follow the un de sir ability
48 POLITICAL ECONOMY AND PRACTICE. [CHAP.
(1) The attempt to fuse together the enquiries
into what is, and what ought to he, is likely to stand
in the way of our giving a clear and unbiassed answer
to either question. Our investigation, for instance, of
the laws that determine competitive wages cannot but
be seriously hampered, if the very same discussion is
to serve for a solution of the problem whether wages
so determined are fair wages. The value of economic
theories is, indeed, rightly measured by their ultimate
bearing on practical questions ; and the economist
should always seek to direct his theoretical investi¬
gations into the channels that will eventually prove
most useful from the practical standpoint. But while
the ultimate aim may be to guide human conduct,
the immediate object to be kept in view is knowledge
of positive facts. Such knowledge is not likely to
be accurate and thorough, if, instead of pursuing
his theoretical enquiries systematically, the economist
works them out piecemeal, as they happen to rise into
importance in connexion with particular practical issues.
It may require an effort to keep the practical problems
in the background even temporarily, but in the long
run the guidance afforded will be the more trustworthy,
if its scientific foundations are first made secured
sometimes of the former, and sometimes of the latter, combination is
chiefly had in view.
1 Bacon, in an often quoted; passage, comments on the hasty and
untimely eagerness with which men are apt to turn aside from pure
il] political economy as a positive science. 49
It may be added that since purely economic data
rarely by themselves suffice for the complete solution
of practical problems, either our solution of the latter
will be incomplete, or else the discussion that belongs
to the positive science of economics will not improbably
be overlaid by the introduction of considerations which,
so far as it is concerned, are extraneous L
/
science to its practical applications. "Whence it comes that, like
Atalanta, they go aside to take up the golden apple, so meanwhile
interrupting their course and letting victory slip out of their hands.
But in the true course of experiment, and the carrying it on to new
effects, the Divine Wisdom and Order are entirely to be taken as our
examples. Now God on the first day of Creation created only Light,
and gave a whole day for that work, and on that day created no
material object. Similarly, in experience of every kind, first the
discovery of causes and true Axioms is to be made ; and light-bringing
not fruit-bringing experiments to be sought for. But Axioms rightly
discovered and established supply practical uses not scantily but in
crowds; and draw after themselves bands and troops of effects"
{Novum Organum, Book i., Aph. 70).
^ The importance of maintaining the strictly scientific standpoint
in the academic study of political economy is insisted upon by
Professor Dunbar as follows: "The investigation of economic law is
a strictly scientific enquiry, as much as the investigation of the law of
gravitation, and the determination of economic law falls within the
competence of the university. Indeed, one of the great objects for
which the university exists is to train minds for such enquiry and to
further the advance of knowledge in precisely such obscure depart¬
ments. But on the mixed questions of legislative policy and expe¬
diency, it is not the province of the university to pronounce. They
indeed involve questions of science, as they involve much else ; but
their solution is not an act of the scientific judgment. It is, on the
contrary, an act of the political judgment, enlightened by the aid of
economic science, of jurisprudence, of the study of human nature
itself, or whatever else may serve to clear up the matter in hand.
The historical narratives in which the great questions of the past lie
K. 4
50 POLITICAL ECONOMY AND PEACTICE. [CHAP.
(2) The attempt to combine theoretical and prac¬
tical enquiries tends to confirm the popular confusion
as to the nature of many economic truths. What are
laid down as theorems of pure science are constantly
interpreted as if they were maxims for practical guid¬
ance. In spite of repeated protests from economists
themselves, there is an inveterate disposition on the
part of the public to regard the principles of political
economy as essentially rules of conduct, even when the
sole intention of those who formulate them is to de¬
termine what is, and not to prescribe what ought to be.
Thus, because in economic theory men s action in buy¬
ing and selling is commonly assumed to be governed
by self-interest, political economy is supposed to in-
embedded are no doubt objects of university study, and the unravel¬
ling of their tangled threads affords a valuable training, by means of
a subject-matter of unfailing interest ; but it is no part of the business
of the university to pronounce ex cathedrâ upon the policies which
may find in such narratives some illustration, but which must after
all rest upon indeterminate and probably transitory conditions. So,
too, the great financial and industrial questions of the day supply the
best of material for practice in the analysis of complicated problems
and in the collecting and weighing of evidence ; but in all this it is
the acquisition of power in the dealing with problems, and not the
solution of any practical question, that is the real matter in hand.
The university may, and if successful in its true functions will,
supply scientific data for the use of all who are concerned in the
settlement of legislative and administrative questions; but when to
these data are added the many others which form a part of the basis
for all practical decisions, the further declaration of opinion from the
university chair becomes an obiter dictum, not necessary in the strict
performance of duty, and raising some difficult questions of expe¬
diency" {Quarterly Journal of Economics, July 1891, p. 411).
II.] CONFUSION BETWEEN LAWS AND PKECEPTS. 51
culcate selfishness ; because many economic truths are
based on the postulate of competition, trades-unions
are spoken of as violating economic laws ; and because
it is laid down that, in a perfect market, price is de¬
termined by supply and demand, the science is repre¬
sented as teaching that price ought so to be determined.
This kind of confusion is perhaps particularly common
' in England where, for reasons that are to be found in
the historical development of the science, political
economy has to a large extent become identified in
the public mind with the policy of laisser faire^.
In order to remove this prejudice, it is most desir¬
able that care should be taken to distinguish economic
precepts from the theorems of the positive science upon
which they are based. But if theoretical and practical
enquiries are systematically merged together, the dis¬
tinction can never be made thoroughly clear. More¬
over, if we profess that our treatment of the subject is
throughout ethical, then where we do not blame we shall
naturally be understood to approve, or at least to ex¬
cuse. Actually to express on every occasion an ethical
judgment, and in so doing to strike always the true
note, is an impossibility. It may be added that the
moral character of economic phenomena varies even
when their scientific character is the same.
1 The connexion between political economy and the doctrine of
laisser faire is touched upon further in a note at the conclusion of
this chapter.
4—2
52 POLITICAL ECONOMY AND PRACTICE. [CHAP.
(3) There is a further reason why a positive science
of political economy should receive distinct and in¬
dependent recognition. With the advance of knowledge,
it may be possible to come to a general agreement in
regard to what is or what may be in the economic
world, sooner than any similar agreement is attainable
in regard to the rules by which the economic activities
of individuals and communities should be guided. The
former requires only that there shall be unanimity
as to facts ; the latter may be prevented by conflicting
ideals, as well as by divergent views as to the actual
or the possible. Take, for instance, the problem of
socialism versus individualism. Even if philosophers
are agreed as to facts, they may still arrive at contrary
solutions of this problem, because they differ as to the
true ideal of human society, and as to the comparative
importance to be assigned, say, to the realisation of
individual freedom.
If political economy regarded from the theoretical
standpoint is to make good progress, it is essential that
all extrinsic or premature sources of controversy should
be eliminated ; and we may be sure that the more its
principles are discussed independently of ethical and
practical considerations, the sooner will the science
emerge from the controversial stage. The intrusion
of ethics into economics cannot but multiply and
perpetuate sources of disagreement. For if an ethical
II.] POLITICAL ECONOMY AS A POSITIVE SCIENCE. 53
treatment of economic problems is to be systematic
and thorough, and not merely sentimental and super¬
ficial, fundamental ethical questions that have long
been the subject of controversy cannot be excluded—
such questions, for instance, as the determination of a
standard of justice, and the relation of this standard to
the ordinary utilitarian standard. However necessary
it may be to face these questions at a later stage, there
is no reason why we should not have a positive science
of economics that is independent of them.
In the following pages, then, it is this positive
science that is meant by political economy when that
term is used without further qualification^
At the same time, it does not follow that in pursuing
his theoretical investigations, the economist need con¬
sider himself altogether precluded from indicating the
1 As a designation for the positive science, economics or economic
science may be preferred to political economy^ as being less likely to be
used ambiguously. The name political economy is, however, too firmly
established to be altogether discarded ; and we, therefore, use all three
of the names more or less indiscriminately. It is to be added that
whatever ambiguity attaches to political economy is beginning also to
attach to the other terms. Dr Cunningham, for instance, in his
Economics and Politics in the main understands by economics, and by
economic science, a system of maxims. "Economic science," he
says, "is wholly practical, it has no raison d'être except as directing
conduct towards a given end," namely, the pursuit of wealth; and
the principles of economics are accordingly described as practical
principles (such as are embodied in the mercantile system or in the
system of laisser faire) which state the means to be pursued with
reference to this end.
54
POLITICAL ECONOMY AND PRACTICE. [CHAP.
ethical or practical significance of the theorems of fact
which it is his primary object to formulate. An isola¬
tion of this kind is generally speaking impracticable.
There are, indeed, some practical questions, especially
in currency and banking, in which economic considera¬
tions are of such paramount importance, and the
connexion between theory and practice is so immediate
and obvious, that the refusal to consider at once the
practical bearing of the theoretical discussion might
seem to be unnecessarily pedantic, and to involve
needless repetition. All that is meant is that if moral
judgments are expressed, or practical applications
pointed out, they should be regarded as digressions, not
as economic dicta, constituting integral and essential
portions of economic science itself. In other words,
the theoretical and practical enquiries should not be
systematically combined, or merged in one another, as
is maintained by those who declare that political
economy is an indivisible whole of theoretical and
practical investigations ^.
1 Economists who take the stricter view of economic science have
been criticised as inconsistent because after describing political
economy as a positive science they generally go on to introduce into
their own treatises a large number of ethical and practical pronounce¬
ments (compare Professor C. S. Devas on "The Restoration of
Economics to Ethics " in the International Journal of Ethics for
January 1897). There is, however, no inconsistency, if it is made
clear that such pronouncements are merely introduced incidentally
by way of illustration and application, and if the writer never forgets
that his primary object is the investigation of facts. What we plead
II.] APPLICATIONS OF ECONOMIC THEOREMS. 55
§ 4. Applied economics.—It is unnecessary to
insist upon the enormous practical importance of the
theoretical knowledge that economic science affords.
Industrial and financial policy can be rightly directed,
only if based upon such knowledge ; and whether we
seek to construct social ideals, or to decide upon ade¬
quate steps towards their attainment, an indispensable
preliminary is a study of the economic consequences
likely to result from varying economic conditions.
The question may, therefore, be raised whether,
granting the existence of an independent economic
science, economists should not supplement their treat¬
ment of this science by constructing a definite art
of political economy, in which maxims for practical
guidance are explicitly formulated.
In support of this view, it may be argued that if
the economist is led to regard certain practical questions
as definitely within his province, he is the more likely
to direct his theoretical investigations into the most
useful channels, so that they may ultimately become
not only light-giving but also fruit-bearing.
It may further be urged that by explicitly recog¬
nising the twofold character of political economy, while
at the same time carefully distinguishing the stand¬
points from which it becomes a science and an art
for is that there shall be no systematic combination of economics and
ethics, and no ambiguity as to the nature of economic laws.
56 POLITICAL ECONOMY AND PRACTICE. [CHAP.
respectively, we shall best remedy the popular miscon¬
ception as to the true nature of economic laws\
Granting, however, the desirability of treating
systematically the practical applications of economic
science, it may be doubted whether the phrase art of
political economy does not suggest a body of doctrine,
definite in scope and at the same time complete in
itself, such as is really unattainable. The practical
applications of economic theories are many and various ;
and the precepts based upon a study of the science may
vary, according as we take the individual, or the
national, or the cosmopolitan point of view. Leaving
this point on one side, a more serious difficulty results
from the universally recognised fact that but few
practical problems admit of complete solution on
economic grounds alone. It is true that in a few
departments—such as those of currency and banking—
we may meet with cases where, having determined the
I
economic consequences of a given proposal, we practically
have before us all the data requisite for a wise decision
in regard to its adoption or rejection. But more usually
—when we pass, for instance, to problems of taxation,
or to problems that concern the relations of the State
with trade and industry, or to the general discussion
of communistic and socialistic schemes—it is far from
^ This is one of the main grounds given by Professor Sidgwick for
recognising a distinct art as well as a science of political economy
(Frinci'ples of Political Economy, 1887, p. 395).
II.] SCOPE OF POLITICAL ECONOMY AS AN ART. 57
being the case that economic considerations hold the
field exclusively. Account must also be taken of ethical,
social, and political considerations that lie outside the
sphere of political economy regarded as a science.
If, therefore, the art confines itself to the practical
applications of the science, pure and simple, its precepts
will necessarily lack finality. They cannot be more
than conditional. At the same time, there is danger
of their hypothetical character being forgotten, and
of the idea consequently gaining currency, that the
economist desires to subordinate all considerations that
are not purely economic.
If, on the other hand, the art attempts a complete
Solution of practical problems, it must of necessity
be to a large extent non-economic in its character,
dnd its scope becomes vague and ill-defined. It
may, accordingly, be objected that in attempting to
formulate an economic art, that shall lay down absolute
rules for the regulation of human conduct, economists
are claiming to occupy too wide a range, and to frame
a body of so-called economic doctrine, that is really
much more than economic, and cannot with any
advantage be separated from general political and
social philosophy h
1 The difficulty of assigning a definite scope to political economy,
considered as an art, is discussed in further detail in a note at the
conclusion of this chapter.
58 POLITICAL ECONOMY AND PKACTICE. [CHAP.
The question of recognising a definite art of political
economy is to a certain extent a verbal one ; and if all
possible misunderstanding as to the scope of such an
art and its relation to positive economic science can be
removed, the way in which this question is decided is
comparatively unimportant. On the whole, however,
it seems likely to conduce to clearness of thought to
regard the branch of enquiry under consideration as
forming the economic side of political philosophy, or of
the art of legisMion, or of social philosophy, as the
ease may be, rather than as constituting a distinct art
of political economy. In lieu of such an art, we should
then recognise special departments of political and social
philosophy, dealing with practical questions, in which
economic considerations are of material importance, for
the discussion of which, therefore, economic knowledge
is essential, and to the treatment of which economists
will naturally turn their attention. Adopting this
alternative, we may still sum up the more important
practical applications of economic science under the
name applied economics. This term has the special
merit that it does not suggest a definite body of
principles with scientifically demarcated limits h
1 It must be pointed out, however, that the name applied economics
is also not altogether free from ambiguity. For a science may be
applied in two ways: first, to the explanation of particular factsj
secondly, to afford guidance in matters of conduct. The term
applied economics or applied political economy has indeed been
IL]
APPLIED ECONOMICS.
59
We may also, if we please, speak of certain of the
practical enquiries under consideration, as the art of
industrial legislation, the art of taxation or of State
finance, and so on. To these phrases there seems to
employed in three different senses ; (a) in the sense suggested in the
text; (b) to designate the application of economic theory to the
interpretation and explanation of particular economic phenomena,
without any necessary reference, however, to the solution of practical
questions ; (c) to mark ofí the more concrete and specialized portions
of economic doctrine from those more abstract doctrines that are held
to pervade all economic reasoning. Compare the following :
(a) ''Applied political economy studies economic phenomena
with the immediate aim of providing safe rules for administration, or
of directing economic institutions so that they may conduce to the
general welfare. Its aim is therefore immediately practical, since it
does not investigate the hoio or lohy of certain facts, but seeks rules
for doing certain things well."—Cossa, Guide to the Study of Political
Economy, First English Edition, Part i, Chapter 2. Compare also
Cornewall Lewis's division of politics into pure and applied (Methods
of Observation and Reasoning in Politics, Chapter 3, § 5).
(b) ''The following essays consist in part of attempts to apply
the principles of economic science to the solution of actual problems,
of which those presented by the Californian and Australian gold
discoveries, and by the state of land tenure in Ireland, are the
most important. So much of the volume may not improperly be
described as essays in applied political economy. The remaining
essays deal mostly with topics of a theoretical kind."—Cairnes,
Essays in Political Economy theoretical and applied, Preface. Under
the name applied political economy, both kinds of applications noted
above are here had in view.
(c) " Currency, banking, the relations of labour and capital, those
of landlord and tenant, pauperism, taxation, and finance are some of
the principal portions of applied political economy, all involving the
same ultimate laws, manifested in most different circumstances."—
devons on The Future of Political Economy. Applied economics in
this last sense constitutes what may be called the concrete, as dis¬
tinguished from the abstract, portion of economic science itself.
60 POLITICAL ECONOMY AND PRACTICE. [CHAP.
be no objection. In each case we have a distinct
and fairly compact body of doctrine, and there is no
implication that our data are exclusively economic.
For the notion of one supreme art of political economy,
we should thus substitute a series of arts, in each
of which there is a limitation to some particular
sphere of economic activity.
§ 5. Political economy and ethics.—The relation
between political economy and ethics may now be
stated more explicitly, although this will involve
little more than a repetition of what has been already
indicated. We have seen that since men's economic
activities are determined partly by moral considerations,
it may be necessary in positive economic science to
take account of the operation of moral motives. It
is not, however, the function of the science to pass
ethical judgments; and political economy, regarded
as a positive science, may, therefore, be said to be
independent of ethics.
But it is a different matter when we turn to the
applications of economic science to practice, that is,
to applied economics ; for no solution of a practical
problem, relating to human conduct, can be regarded as
complete, until its ethical aspects have been considered.
It is clear, accordingly, that practical discussions of an
economic character cannot be isolated from ethics,
except in so far as the aim is merely to point out the
il]
ethics of political economy.
61
practical bearing of economic facts, without any attempt
to lay down absolute rules of conduct. It may be
added that although in the past there may have been a
tendency with a certain school of economists to attempt
the solution of practical economic questions without
adequate recognition of their ethical aspects, there is,
at the present time, no such tendency discernible
amongst economists who have any claim to speak with
authority.
Here, then, is the third of those subdivisions of
i
economic enquiry in the widest sense, which we began
t
by distinguishing from one another. In logical order,
this division stands intermediate between the two
athers—between the positive science, that is to say,
and the so-called art. It may be regarded as a branch
of applied ethics, and may perhaps be called the ethics
of political economy. In it the functions of the
economist and the moralist are combined, the general
principles of social morality being considered in their
special bearing on economic activities h
In pursuing this enquiry, our object is scientifically
to define men's duties in their economic relations
1 A distinction may be drawn between the public and the private
ethics of political economy. As an illustration of doctrines belonging
to the latter category, attention may be called to a volume of sermons
by Mr W. Bichmond entitled Christian Economics, Compare also
Dr-Cunningham on the Ethics of Money Investment in the Economic
Review for January 1891.
62 POLITICAL ECONOMY AND PRACTICE. [CHAP.
one with another, and, above all, the duties of society,
in so far as it can by its action control or modify
economic conditions. In other words, we seek to
determine standards, whereby judgment may be passed
on those economic activities, whose character and
consequences have been established by our previous
investigation of economic facts. We seek, moreover,
to determine ideals in regard to the production and
the distribution of wealth, so as best to satisfy the
demands of justice and morality. It is subsequently
the function of applied economics, or of the so-called
art of political economy, to enquire how nearly the
ideal is capable of being attained, and by what
means; and to determine how, subject to the above
condition, the greatest aggregate happiness may ,be
made to result from the least expenditure of effort.
As an illustration, it may be pointed out that
the many problems raised by mediaeval moralists, in
connexion with the question as to what constitutes a
just price, belong to the ethics of political economy.
For instance—Is it right to sell a thing for more than
it is worth ? Is it right to sell a thing which is not
of the substance or measure or quality it professes to
be ? Is the seller bound to reveal a fault in an
article ? Is it right in trade to buy cheap and sell
dear? The modern doctrine that, under a system of
thoroughgoing competition, normal value is determined
II.] ETHICS OF POLITICAL ECONOMY. 63
by cost of production is, on the other hand, a doctrine
that belongs to positive science. The true solution
of the ethical question, as to what constitutes a just
price, may of course be held to be that competitive
price will be a just price, if only it can be guaranteed
that the competition is really free and effective on
the part of all concerned. Or it may be held that,
while this is not an ideally just price, no juster price
is practically attainable. But these doctrines are in
no way implied in the ordinary doctrine of cost oi
production as the regulator of normal value.
§ 6. Methodological importance of the distinctions
indicated in this chapter.—We may conclude the piresent
chapter by briefly pointing out the methodological
importance of the distinctions that have been indicated.
The main point to notice is that the endeavour to
merge questions of what ought to be with questions
of what is tends to confuse, not only economic dis¬
cussions themselves, but also discussions about economic
method. The relative value to be attached to different
methods of investigation is very different, according as
we take the ethical and practical standpoint, or the
purely scientific standpoint. Thus it would be generally
agreed that, in dealing with practical questions, an
abstract method of treatment avails less and carries us
much less far than when we are dealing with theoretical
questions. In other words, in dealing with the former
64 POLITICAL ECONOMY AND PRACTICE. [CHAP.
class of questions, we are to a greater extent dependent
upon history and inductive generalization.
Again, while economic uniformities and economic
precepts are both, in many cases, relative to particular
states of society, the general relativity of the latter
may be affirmed with less qualification than that of the
former. " Political economy," says Sir James Steuart,
and by this he means the art of political economy,
" in each country must necessarily be different " ; and,
so far as practical questions are concerned, this is
hardly too strong a statement. On such questions
there is nearly always something to be said on both
sides, so that practical decisions can be arrived at only
by weighing counter-arguments one against another.
But the relative force of these arguments is almost
certain to vary with varying conditions. Hence, in
general, a given economic policy can be definitely
formulated only for nations having particular economic
surroundings, and having reached a certain stage of
economic development. Applied to nations not simi¬
larly situated, the policy is likely at least to require
modification. It is even possible that what is excellent
for a given nation at a given time may be actively
mischievous and injurious for another nation, or for the
same nation at a different period of its economic
history. It follows, similarly, that the value of the
economic institutions of the past cannot adequately be
II.] RELATIVITY OF ECONOMIC PRECEPTS. 65
judged by reference to existing conditions alone. We
are not here denying the relativity of economic
theorems, but merely affirming the greater relativity
of economic precepts. Unless the distinction between
theorems and precepts is carefully borne in mind, the
relativity of the former is likely to be over-stated.
It is because differences of this kind are often over¬
looked that divergences of view on questions of method
become exaggerated. In the controversies that ensue,
one set of disputants is thinking mainly of theoretical
problems, while the other set is thinking mainly of
practical problems ; and hence each in turn is liable to
commit the fallacy of ignoratio elenchi.
Again, because economics is regarded as wholly
practical, some writers have been led erroneously to
deny that any economic doctrines admit of definite or
exact expression. It is implied that the study cannot
yield anything more than a useful collection of rules,
having a restricted validity and application, and subject
to numerous limitations and exceptions. Even if it
be granted that this description is not altogether in¬
applicable to political economy conceived as an art, it
is obviously a fallacy to assume, without having made
any clear distinction between them, that what is true of
economic precepts is equally true of economic theorems.
The frequency of errors such as these must be our
excuse for treating in so much detail the distinctions
66 POLITICAL ECONOMY AND PRACTICE. [CHAP. II.
indicated in the present chapter. The chapters that
follow relate almost exclusively to the scope of political
economy conceived as a positive science, and to the
methods whereby the theorems of this science are to be
established.
NOTES TO CHAPTER II.
A. On Political Economy and Laisser Faire.
The connexion between political economy and laisser
faire may be discussed from two different points of view,
which are not always as clearly distinguished as they should
be. There is, first, the connexion between political eco¬
nomy and laisser faire considered as an assumption or
basis of reasoning; there is, secondly, the connexion be¬
tween political economy and laisser faire considered as a
maxim or rule of conduct.
(1) Abstract economic doctrines are for the most part
based upon the assumption of free competition and absence
of government interference. This assumption may indeed
be said to have occupied a central position in the develop¬
ment of economic theories during the last hundred years.
There are two reasons why this has been so. One is to be '
found in the general principle of reasoning that it is best to
take the simplest cases first. If we can accurately determine
what will ensue under conditions of economic freedom, we
shall be the better able to deal subsequently with more
complicated cases, and to estimate the influence exerted
by various interfering agencies. The second reason is
that in modern economic societies laisser faire has been
5—2
68
POLITICAL ECONOMY [CHAP. II.
as a matter of fact the general rule. Conclusions, there¬
fore, based on the assumption of non-interference have
more nearly corresponded with the actual facts of modern
industry than any conclusions obtained from other equally
simple hypotheses could have done.
Beyond this, however, there is no essentially necessary
connexion between political economy and laisser faire
regarded as a basis of reasoning. Economists recognise
that in certain states of society, actual or possible, the
conditions are so different from those of modern industry
that conclusions depending on the hypothesis of non¬
interference are not even approximately applicable. More¬
over, in relation to modern economic phenomena themselves,
it becomes necessary ultimately to deal with more complex
problems in which various interferences with thorough¬
going competition have to be taken into account. The
assumption of laisser faire represents, therefore, only a
preliminary stage, and by its aid we traverse only a portion
of the ground that has to be covered in the course of our
economic reasonings.
A little reflection will shew that it is far from being the
case that political economy always presupposes the absence
of government interference. It investigates the effects of
export and import duties, of bounties, and of state-created
monopolies—such as the opium monopoly in Bengal. It
seeks to determine the influence exerted on wages by the
existence of poor relief guaranteed by the State. In nearly
all modern currency discussions—as, for instance, those
relating to bimetallism or the regulation of convertible paper
currencies—the whole argument is so far from being based
on the assumption of laisser faire^ that everything turns on
NOTE A.]
AND LAISSER FAIRE.
69
the supposition that some control over - the currency is
exercised by governments. In short, wherever government
intervention becomes a prominent factor, the economist
recognises and discusses the influence exerted by it ; and if
in the future the part played by the State in economic
affairs is extended, account will have to be taken of the
fact in current political economy.
A contrast is sometimes drawn between a socialistic
and an economic state of society; but when the distinction
is thus expressed, the term economic is not used in the
sense given to it by economists themselves. It is true that
in a purely communistic society a good deal of ordinary
economic theory relating to distribution and exchange
would be irrelevant or inapplicable. But although in
such a society men's economic activities would be in cer¬
tain directions controlled, they would clearly not be anni¬
hilated ; and a scientific discussion of economic phenomena
would, therefore, be by no means unnecessary. The func¬
tions of capital and the manner of its co-operation with
labour would, for example, still require elucidation. Cost
of production would still admit of analysis, and we should
still have the phenomena of increasing and diminishing
returns. We should indeed still have the phenomenon ol
rent, meaning thereby the difference between cost of pro-]
duction under more favourable and under less favourable
circumstances.
Schemes of socialism, moreover, as distinguished from
pure communism, do not necessarily involve the entire
abolition of free exchange. Under such schemes, therefore,
a theory of exchange would still be required. And unless
our socialistic community were isolated from all others.
70
POLITICAL ECONOMY [CHAP. II.
there would still remain for discussion extremely complicated
questions of foreign trade and international exchanges.
We may be sure, finally, that if some of the old eco¬
nomic phenomena were to become obsolete, new ones would
arise demanding scientific treatment.
While then a contrast may be drawn between our
current political economy in so far as it is specially
designed to elucidate the existing economic order, and the
form that the science would be likely to assume in so far
as specially designed to elucidate the phenomena of a
socialistic society, it is clearly erroneous to imagine that
the triumph of socialism would mean the extinction of
political economy as a science.
(2) We may pass to a consideration of the connexion
between political economy and laisser faire regarded as a
maxim of conduct. The question is quite distinct from that
which we have just been discussing. For it is clear that
we may on the one hand work out the consequences of
laisser faire with the very object of discrediting it as a
practical principle; or that we may on the other hand
recognise the necessity of investigating the economic efiects
of government interference, while deploring the fact that
instances of such interference are ever to be met with.
Nevertheless the questions are not unfrequently con¬
fused together, and because laisser faire is a common
economic postulate it is supposed to be a necessary
economic precept. This confusion of thought has been
encouraged by the circumstance that, until comparatively
recently, the leading modern writers on the science have
in their practical teaching expressly advocated a general
policy of non-interference with trade and industry. Hence,
NOTE A.] AND LAISSER FAIRE.
Il
starting with the conception of political economy as the
general art of legislation in matters relating to wealth, the
public have come to identify it with the particular system
of reducing government interference to a minimum ; and
the maxim of natural liberty—that everyone should be
left free to use his mind, his body, and his property in
the manner he deems best for himself—^is often regarded as
the fundamental economic axiom.
Political economy being thus transformed into a dog¬
matic creed, the worth of the study itself is measured
by the degree of acceptance accorded to this creed. So
common is the identification of political economy with
the principle of non-interference that rarely do we
find any professed attack on the former that does not on
analysis resolve itself mainly into an attack on the latter.
Compare, for instance, Dr Hutchison Stirling's vigorous
diatribe in his Secret of HegeV. Similarly, when people
talk about political economy being exploded and becoming
a thing of the past, all they mean is that laisser faire is
ceasing to be an accepted maxim. On reflection it is clear
that there is an inherent absurdity in attacking "political
economy as distinct from any particular system of political
economy. For if particular systems are exploded, that
only necessitates their being replaced by some other
system.
Regarding political economy as a positive science, it
is of course clear that neither laisser fcuire nor any other
maxim of conduct can form an integral portion of its
teaching. Hence the advocacy of a policy of laisser faire
1 Volume 2, pp. 569, ff. Compare, also, Oarlyle's various attacks
upon political econorny.
72
POLITICAL ECONOMY [CHAP. 11.
by individual economists, based though it may be on their
interpretation of economic truths, belongs at any rate to
applied economies. It has been said above that the leading
English economists have in their practical writings been as
a rule in favour of laisser faire. Looking a little closer,
however, we find that their advocacy of the principle is at
any rate accompanied by numerous qualifications and excep¬
tions. They do not regard it as an axiomatic and inexorable
formula by which all particular proposals may be finally
tested, but as a practical conclusion whose validity in
every case depends on particular circumstances h
Adam Smith, for example, holds that besides maintain¬
ing such public institutions as are necessary for defence
and the administration of justice, it is the duty of govern¬
ments to maintain certain institutions for facilitating com¬
merce and promoting education. " The third and last
duty of the sovereign or commonwealth," he remarks, *^is
that of erecting and maintaining those public institutions
and those public works, which though they may be in the
highest degree advantageous to a great society, are, how¬
ever, of such a nature, that the profit could never repay
the expense to any individual, or small number of indi¬
viduals ; and which it, therefore, cannot be expected that
any individual, or small number of individuals, should
erect or maintain." He moreover admits exceptions to a
1 "Let us remember," says Cairnes, "that laisser faire is b, prac¬
tical rule, and not a doctrine of science; a rule in the main sound,
but like most other sound practical rules, liable to numerous excep¬
tions ; above all, a rule which must never for a moment be allowed
to stand in the way of the candid consideration of any promising
proposal of social or industrial reform" (Essai/s in Political Economy,
p. 251).
NOTE A.]
AND LAISSER FAIRE,
73
policy of free trade; for he explicitly recognises certain
cases in which protection to native industry is desirable,
and other cases in which it may rightly be a matter of
deliberation "how far it is proper to continue the free
importation of certain foreign goods," or "how far, or in
what manner, it may be proper to restore that free im¬
portation, after it has been for some time interrupted."
There are other instances in which he justifies interference.
" The law," he says, " which obliges the masters in several
different trades to pay their workmen in money, and not in
goods, is quite just and equitable." Again, while allowing
that any regulations affecting the note issues of a country
may be regarded as "in some respect a violation of natural
liberty," he nevertheless considers that certain regulations
of the kind may be justified on the ground that "those
exertions of the natural liberty of a few individuals, which
might endanger the security of the whole society, are, and
ought to be, restrained by the laws of all governments; of
the most free, as well as of the most despotical."^
Turning to Malthus, we find in the ranks of leading
English economists a defender of the corn laws. Ricardo
indeed touched only to a small extent on the economic
functions of the State; but M^Culloch, who is usually
1 On Adam Smith's attitude towards laisser faire^ compare Sidgwick,
Scope and Method of Economic Science, pp. 5—7. " To attribute to
Adam Smith," says Dr Sidgwick, "a dogmatic theory of the natural
right of the individual to absolute industrial independence—as some
recent German writers are disposed to do—is to construct the history
of economic doctrines from one's inner consciousness." Compare,
also, Professor Nicholson's edition of the Wealth of Nations, Intro¬
ductory Essay, pp. 14—18, and Rae, Contemporary Socialism, 1891,
pp. 353—359.
7é political economy and LAISSER FAIRE. [chap. ii.
looked upon as one of the narrowest of Ricardo's disciples,
definitely advocated government interference in certain
directions and Mill's long list of exceptions to the rule of
laisser faire is well known. Coming to quite recent writers
there is still less justification for the notion of an essential
and necessary connexion between political economy and the
principle of non-interference. One of the distinguishing
marks of a powerful school of economists at the present
time is the definite repudiation of this principle \ and even
those, who find in the study of economics most weighty
arguments against protective and against socialist legisla¬
tion, would still never think of setting up the acceptance
of a policy of unrestricted freedom of trade and industry as
a test of economic orthodoxy.
B. On the Scope of Political Economy
considered as an ArT.
Some of the difficulties, which arise in the endeavour to
determine the scope of political economy considered as an
art, have been briefly indicated in the preceding chapter.
In this note they will be discussed in somewhat further
detail. Questions may be raised in regard to, first, the
range of well-being contemplated by the art; and, secondly,
the precise nature of the ideal at which it aims.
(1) Under the first of the above heads it may be asked
whether the aim of the economic art is individual or social ;
and whether it is national or cosmopolitan.
1 For an enumeration of instances in which M®Culloch regarded
State intervention favourably, see Rae, op. cit., pp. 360—372.
NOTE B.] SCOPE OF POLITICAL ECONOMY AS AN ART. 7 5
{a) It is clear that individuals as well as societies may
in their own interests turn to account their study of
economic science. The monopolist may derive practical
guidance from the treatment of monopoly-value ; the
manufacturer from the discussion of over-production and
industrial depression; the banker from the enquiry into
the conditions under which crises tend to become periodic ;
the trades-unionist from the analysis of the conditions
favourable to the success of a strike. We might, accord¬
ingly, recognise a branch of the economic art, concerned
with the principles according to which private persons
should be guided in the pursuit of their own economic
interests. There are, moreover, technical arts, such as the
art of banking, which are to some extent based on economic
science, but whose aim cannot be described as social.
It is, however, generally agreed by those who advocate
the recognition of an art of political economy that it aims
at some result, that is desirable, not merely from the
point of view of any given individual, but from the point
of view of society taken as a whole. It is not regarded as
an art of getting rich, or as an art of speculation, or as an
art of investment, or as professing to indicate how producers
should organize and carry on their business, in order to
make their profits as great as possible. The art of political
economy is, in other words, not identified with the whole of
the practical applications of economic science^.
^ A minor question may here be raised, namely, whether in so far
as the aim of the economic art is social, it is concerned wholly with
legislation. M. de Laveleye defines political economy as determining
"what laws men ought to adopt in order that they may, with the least
possible exertion, procure the greatest abundance of things useful
for the satisfaction of their wants ; may distribute them Justly, and
76
SCOPE OF POLITICAL ECONOMY [CHAP. II.
(5) Assuming that the aim of the economic art is social,
not individual, the further question may be asked, whether
it aims merely at national prosperity and national greatness,
or at some result that is desirable for the whole human
race. This point is suggested by List's distinction between
'political economy and cosmopolitical economy. He regards
the former as limiting its teaching to "the enquiry how a
given nation can obtain (under the existing conditions of
the world) prosperity, civilization, and power, by means of
agriculture, industry, and commerce"; while the latter
"teaches how the entire human race may attain pros¬
perity." ^
consume them rationally" (Elements of Political Economy, § 2). The
departments of economic practice here had in view are clearly of the
utmost importance; and there may be good grounds for giving a
separate recognition to what may be called the art of State finance,
and the art of industrial legislation. The former of these would in¬
clude a discussion of the general principles of taxation and of national
debts from the practical standpoint. The latter would enquire how
far and in what manner any State regulation of trade and industry is
to be recommended. The art of political economy is, however, more
usually regarded as having a wider scope than either of these. It
may, for instance, in the matter of private almsgiving claim in the
interests of society to formulate maxims for individual guidance ; or,
with a view to the more equitable distribution of wealth, it may advo¬
cate the voluntary adoption of the co-operative principle or of profit-
sharing ; or, accepting as its function a high moral task, it may seek
in various ways to influence the economic activities of individuals so
as to bring them into harmony with sound economic morality and
secure the supremacy of right habits and customs in industrial life.
1 ihe National System of Political Economy (Sampson Lloyd's
translation), p. 119. It is recognised by other economists besides
List—including some distinctly free trade economists—that the general
problem of free trade and protection needs to be handled somewhat
differently according as the national or the cosmopolitan standpoint
is adopted.
NOTE B.]
AS AN ART.
77
It is true that cases of conflict between the precepts of
the two arts here indicated are not likely to be frequent.
But if it is maintained that no real conflict can ever occur,
attention may be called to certain problems connected with
emigration and immigration, and with export and import
duties. Mill points out cases in which it is possible for a
country to gain at the expense of other countries by the im¬
position of export duties. The opium trade between India
and China aflbrds an actual instance in which a country
raises a large revenue from foreigners by means of what is
practically a tax on exports. "It is certain, however,"
Mill adds, taking the cosmopolitan standpoint, " that what¬
ever we gain is lost by somebody else, and there is the
expense of the collection besides : if international morality,
therefore, were rightly understood and acted upon, such
taxes, as being contrary to the universal weal, would not
exist. Further, in reference to the question of restricting
the exportation of machinery, Mill observes that even if
by such means a country might individually gain, the policy
would still in his opinion be unjustifiable on the score of
international morality. "It is evidently," he says, "the
common interest oí- all nations that each of them should
abstain from every measure by which the aggregate wealth
of the commercial world would be diminished, although of
this smaller sum total it might thereby be enabled to attract
to itself a larger share."^
Since then a conflict is sometimes possible, it behoves
the exponent of the economic art to make clear his view as
to what the aim of the art really is. Perhaps the most
^ Unsettled Questions of Political Economy^ p. 25.
2 Op. cit.., p. 31.
78
SCOPE OF POLITICAL ECONOMY [CHAP. 11.
obvious solution is to recognise, as List suggests, two distinct
arts—an art of cosmopolitan economy, and an art of national
economy. The precepts of the former might often require
modification to suit the special circumstances of different
nations, but it would be cosmopolitan in the sense that it
would have regard to the well-being of the greatest number,
irrespective of nationality. The latter would deliberately
sacrifice the interests of other nations, if they happened
to be in conflict with those of the nation specially under
consideration.
(2) A more fundamental question in regard to the
scope of political economy considered as an art relates to
the nature of the ideal at which it aims, {a) Does it seek
merely to point out the laws, and institutions, and eco¬
nomic habits, that are most favourable to the production
and accumulation of wealth % (5) Or does it enquire
further by what means an ideally just distribution of
wealth may be attained % (c) Or does it widen its range
still further, and ask how all economic activities both of
the State and of individuals should be moulded, with a
view to the general well-being in the fullest and broadest
sense ? This last alternative represents the prevailing view
amongst German economists.
ipi) If the end at which the art of political economy
aims is simply the increased production of wealth, its scope
is certainly definite, and the data upon which its conclu¬
sions are based belong exclusively to economic science.
Since, however, the production of wealth is not the sole
or supreme end that a society will have in view in framing
its laws and shaping its institutions, the economic art so
conceived can lay down no absolute or final rules. It can
NOTE B.]
AS AN ABT.
79
only speak conditionally, and say that in so far as the in¬
creased production or accumulation of wealth is concerned,
such and such a line of action should be adopted. Hence,
before deciding to act upon the hypothetical precepts of
political economy (so interpreted), it is necessary to enquire
how far they are consistent with other social aims, and how
far they satisfy the claims of justice. Wherever there is
conflict, an appeal must be made to some other and higher
authority. This authority must determine to what extent
each set of considerations shall be subordinated to the others.
It seems a doubtful gain to construct a deflnite art of
political economy in this sense. For inasmuch as the
science of economics itself contains all the information that
is requisite, it will suffice to call attention to the practical
bearing of its theorems, without systematically converting
them into precepts. To frame a deflnite system of precepts,
having regard entirely to the increased production of wealth,
can indeed hardly fail to give rise to misapprehension. As
a matter of fact, political economy has not unfrequently
been subjected to startling misrepresentations, because it
has first been identifled with the art of making wealth a
maximum, and then the necessarily hypothetical character
of such an art has been forgotten. It is of little use to
protest that economic precepts are not necessarily to be
acted upon. If we have once formulated maxims of policy,
and proclaimed that economic principles are directly prac¬
tical, the impression that economists desire to subordinate
all considerations to the increase of wealth will certainly
be encouraged. If, however, it can be made clear that eco¬
nomic principles are in themselves positive, and that, whilst
economics shews, amongst other things, how laws and
80
SCOPE OF POLITICAL ECONOMY [CHAP, II.
institutions influence the production and accumulation of
wealth, still it does not itself base any rules of action upon
such knowledge, but merely places the results of its investi¬
gations at the service of the legislator and social reformer,
to be by them duly weighed and considered, then the chance
of such misapprehension will at any rate be reduced to a
minimum.
(b) According to Professor Sidgwick, ^^we may take
the subject of political economy considered as an art to in¬
clude, besides the theory of provision for governmental ex¬
penditure, (1) the art of making the proportion of produce
to population a maximum,...and (2) the art of rightly
distributing produce among members of the community,
whether on any principle of equity or justice, or on the
economic principle of making the whole produce as useful
as possible."^ This conception of the economic art is
broader than that discussed above. But it seems to go
either too far or else not quite far enough. For we pass
outside the boundary of economic considerations in the
narrowest sense, taking account also of considerations of
justice ; and yet our maxims will still be, in some cases,
only conditional. They cannot claim to be absolute, until
we have taken into account all classes of considerations
that may in any way be pertinent. In framing maxims
of taxation and State finance, for example, political and
social aims have to be borne in mind as well as equitable
and strictly economic aims. The same may be said of free
trade or protectionist maxims. Again, in seeking to deter¬
mine what is the ideal distribution of wealth, we ought to
consider not merely the relation of distribution to desert,
1 Principles of Political Economy^ 1887, p. 397.
NOTE B.]
AS AN ART.
81
but also the manner in which methods of distribution affect
the various other elements of social well-being. The indi¬
vidualistic organization of industry is by some writers con¬
demned on the ground of the anti-social spirit engendered
by the competitive struggle. On the other hand, the so¬
cialistic organization of industry is by a different set of
writers condemned on the ground that it hinders the reali¬
sation of individual freedom, and the development of indi¬
vidual character. Both these arguments are independent
of the effects of socialism and individualism on the produc¬
tion and distribution of wealth.
(c) According to the third conception of the economic
art, its aim is to direct the economic activities of the
State and of individuals, with a view to the completest
realization of social well-being. Political economy," says
Professor Schönberg, representing the view of the dominant
German school, as well as his own view, "does not ask
primarily whether the greatest possible amount of wealth is
produced, but rather how men live, how far through their
economic activity the moral aims of life are fulfilled, and
how far the demands of justice, humanity, and morality are
satisfied."^ Professor Ely, taking a similar view, and
writing on behalf of the so-called "new school" of economists
in the United States, describes the ideal of political economy
as "the most perfect development of all human faculties in
each individual, which can be attained." The aim, he goes
on to say, is "such a production, and such a distribution, of
economic goods as must in the highest practicable degree
subserve the end and purpose of human existence for all
^ Handbuch der 'politischen Oekonomie, Die Volksivirthschaft, § 9.
K. 6
82 SCOPE OF POLITICAL ECONOMY AS AN AKT. [CHAP. II.
members of society."^ The end had in view is now the
supreme end for which a society exists, and every question
that arises is to be considered from all sides, and not from
a single point of view. The rules laid down will accord¬
ingly be no longer conditional, but absolute, at any rate in
relation to the particular country or state of civilization
under discussion.
The above corresponds with the attitude that the great
majority of economists of all schools have at least desired
to take, so far as they have attempted a complete solution
of practical problems for social purposes. The conception
seems, moreover, to raise the economist to a position of
greater importance than he can occupy, so long as he limits
himself to purely theoretical investigations or merely con¬
ditional precepts. But does he not herein become a good
deal more than an economist ? He will certainly need for
his scientific basis very much more than economic science
can by itself afford, for he must be a student of political
and social science in the widest sense. He must also solve
fundamental problems of social morality. We have, in
fact, no exception to the general rule that arts, claiming to
lay down absolute rules, cannot be based exclusively on
single theoretical sciences.
We are, accordingly, led to the conclusion, indicated in
the preceding chapter, that a definitive art of political
economy, which attempts to lay down absolute rules for
the regulation of human conduct, will have vaguely defined
limits, and be largely non-economic in character.
1 Science Economic Discussion^ p. 50.
CHAPTER III.
On the Character and Definition of Political
Economy regarded as a Positive Science.
§ 1. Political economy and physical science.—
Inasmuch as the production of material wealth is
dependent largely upon physical conditions, it may
be asked whether political economy does not partake
to some extent of the nature of physical science. This
question is, however, to be answered in the negative,
on the ground that while the science has to take
account of the operation of physical laws, it is still
concerned with them only indirectly; such laws do
not constitute its subject-matter. It does not, for
instance, seek to establish or explain the physical
laws that are involved in agriculture or mining or
manufacture. This is the function of such sciences
as mechanics, chemistry, geology, and the science of
agriculture. The only concern of political economy
with these laws is that it assumes certain of them as
premisses or data, and makes them the basis of its
6—2
84 POLITICAL ECONOMY AND PHYSICAL SCIENCE. [CHAP.
own reasonings, tracing the influence which they
exert in moulding and modifying men's economic
activities. Thus even the law of diminishing return
from land, regarded as a bare physical fact, is hardly
to be considered a true economic law, although it
no doubt oôcupies a unique position amongst the
physical prolegomena of economic science. Its eco¬
nomic importance consists in its relation to the
productiveness of human labour as applied to land,
and in its consequent influence upon the distribution
and exchange of wealth. If economists are led into
giving fuller details about agriculture than they usually
give about processes of manufacture, it is because,
from this point of view, the importance of the above
law is exceptionally great.
The relation of political economy to the physical
sciences is then simply this, that it presupposes them ;
it is sometimes concerned with physical laws as pre¬
misses, but never as conclusions.
Accordingly when the production of wealth is said
to be one of the great departments of economic science,
referènce is made primarily to what may be called
the social laws of the production of wealth {i.e., to the
various influences exerted on production by division of
labour, foreign trade, methods of distribution, and so
forth), rather than to the physical processes by whose
aid production is carried on. The physical requisites
III.] DIFFEKENTIA OF ECONOMIC LAWS. 85
of the production of wealth need to be summarised
in their broadest outlines; but the science is not
directly concerned with the technique of different'
trades and occupations. Again, whilst economists
recognise the physical conditions affecting men's
economic efficiency, the immediate effects of these
conditions are accepted as facts from physiology and
other sciences; it is only in so far as they indirectly
affect or are affected by the social facts of wealth
that economic science itself investigates them.
The differentia of economic laws, as contrasted
with purely physical laws, consists in the fact that the
former imply voluntary human action\ The forces of
competition are, indeed, sometimes spoken of as if
they were themselves mechanical and automatic in
their operation. But, as we have already had occasion
to remark, this is not the case. When, for instance, we
speak of the price of a commodity as determined by
supply and demand, we mean by supply not the total
amount in existence, but the amount offered for sale
by holders of the commodity ; and it is clear that in
^ ''Various laws of nature have to be considered in connexion with
human economy, but these are not economic laws. By the latter we
understand laws of economic facts. An economic fact is not a pheno¬
menon of the natural, material world. It originates when in some
way man, as an intelligent being with free will, enters actively into
co-operation with natural phenomena, for the purpose of satisfying
human needs."—Schönberg, Handbuch der politischen Oekonomie^ Die
Volkswirthschaft, § 13.
86 POLITICAL ECONOMY AND PSYCHOLOGY. [CHAP.
this sense supply, equally with demand, is dependent
upon human judgment and will.
§ 2. Political economy and psychology.—In order to
mark off political economy from the physical sciences,
it is spoken of sometimes as a moral science, sometimes
as a social science. Of these descriptions, the latter is
to be preferred. The term moral science is, to begin
with, not free from ambiguity. This term is no doubt
sometimes used in a broad sense as including all the
separate sciences that treat of man in his subjective
capacity, that is, as a being who feels, thinks, and wills.
But more frequently it is used as a synonym for ethics ;
and hence to speak of economic science as a moral
science is likely to obscure its positive character h
But the above is not the only reason why it is
better not to describe political economy simply as
a moral science. The sciences that relate to man fall
into two subdivisions—those that are concerned with
man in his purely individual capacity, and those that
are concerned with him principally as a member of
society. Political economy belongs to the latter of
these subdivisions. It is true that some of the problems
discussed by the science—those relating, for example,
/
to the functions of capital—would arise in a more
or less rudimentary form in relation to an isolated
1 Compare what has been said in the preceding chapter as to the
relation of political economy to ethics.
III.] POLITICAL ECONOMY A SOCIAL SCIENCE. 87
individual ; and it is accordingly possible to illustrate
certain elementary economic principles by reference to
the conduct of a Robinson Crusoe. As soon, however,
as we advance beyond the threshold of the science,
it becomes necessary to regard human beings, not in
isolation, but as members of associated communities
consisting of others besides themselves. The most
prominent characteristic of actual economic life is the
relation of mutual dependence that subsists between
different individuals; and political economy may be
said to be essentially concerned with economic life as
a special aspect of social life.
Political economy should then be described as a
social, rather than as a moral or psychological, science.
It presupposes psychology just as it presupposes the
physical sciences, and the natural starting point for
the economist in his more abstract enquiries is a
consideration of the motives by which individuals are
usually influenced in their economic relations ; but the
science is not therefore a branch of psychology. The
bare facts that other things being equal men prefer a
greater to a smaller gain, that under certain conditions
they will forego present for the sake of future gratifi¬
cations, and the like, are psychological facts of great
economic importance. But they are assumed by the
economist, not established by him. He does not seek to
explain or analyse them ; nor does he investigate all the
88 POLITICAL ECONOMY AND PSYCHOLOGY. [CHAP.
consequences to which they lead. Economic laws in
the strict sense are different from the above. They are
not simple laws of human nature, but laws of complex
social facts resulting from simple laws of human
nature. An illustration may be quoted from Cairnes.
>
Rent," he observes, " is a complex phenomenon, arising
from the play of human interests when brought into
contact with the actual physical conditions of the soil
in relation to the physiological character of vegetable
productions. The political economist does not attempt
to explain the physical laws on which the qualities
of the soil depend ; and no more does he undertake to
analyse the nature of those feelings of self-interest in
the minds of the landlord and tenant which regulate
the terms of the bargain. He regards them both
as facts, not to be analysed and explained, but to be
ascertained and taken account of; not as the subject-
matter, but as the basis of his reasonings. If further
information be desired, recourse must be had to other
sciences : the physical fact he hands over to the chemist
or the physiologist; the mental to the psychological
or the ethical scholar."^
The fact that social, rather than purely psycho¬
logical, phenomena constitute the subject-matter of
political economy is clear if we take any recognised
work on the science, such as the Wealth of Nations.
^ Logical Method of Political Economy^ pp. 37, 8.
III.] CHARACTER OF ECONOMIC LAWS. 89
Adam Smith traces many of the phenomena of wealth
to man's mental constitution, but it is not man's
mental constitution that it is his purpose to analyse.
This is not always sufficiently borne in mind when
the Wealth of Nations is contrasted with the Theory
of Moral Sentiments^ and spoken of as forming its
supplement.
Mill, indeed, in speaking of political economy uses
the phrase "moral or psychological science"; and he
goes on to define political economy as " the science
relating to the moral or psychological laws of the pro¬
duction and distribution of wealth."^ Take, however,
the following laws as formulated by Mill himself in his
Principles of Political Economy : rent does not enter
into the cost of production of agricultural produce ;
the value of money depends, cœteris paribus^ on its
quantity together with the rapidity of circulation; a
tax on all commodities would fall on profits. Such laws
as these ought certainly not to be described as moral
or psychological, even if it be granted that they rest
ultimately upon a psychological basis.
Moreover, as will be shewn in the following chapter,
notwithstanding the importance of psychological pre¬
misses in certain departments of economic enquiry,
the phenomena of the industrial world cannot be ex¬
plained in their entirety simply by deductive reasoning
1 Unsettled Questions of Political Economy^ pp. 129, 133.
90 POLITICAL ECONOMY AND PSYCHOLOGY. [CHAP.
from a few elementary laws of human nature. To
what purpose, and subject to what conditions, political
economy uses its psychological data will be considered
later on ; it need only be said at this point that
reasoning from such data requires to be supplemented
in various ways by direct observation of the complex
social facts which constitute economic life\
1 It may be remarked in passing that the description of economics
adopted by devons in his Theory of Political Economy seems to give
the science too much of a psychological, and too little of a social,
character. The theory of economics is described as "the mechanics
of utility and self-interest" (p. 23); it is "entirely based on a calculus
of pleasure and pain; and the object of economics As to maximise
happiness by purchasing pleasure, as it were, at the lowest cost of
pain" (p. 25). A few pages further on the same idea is expanded.
"Pleasure and pain are undoubtedly the ultimate objects of the cal¬
culus of economics. To satisfy our wants to the utmost with the
least efíort—to procure the greatest amount of what is desirable
at the expense of the least that is undesirable—in other words, to
maximise pleasure, is the problem of economics" (p. 40). The outcome
of Jevons's conception of a calculus of pleasure and pain is a theory of
utility, whose economic importance it would be difficult to exaggerate.
Still this theory does not itself constitute the central theory of eco¬
nomics. It should indeed be regarded as an essential datum or basis
of economic reasonings, rather than as itself an integral portion of
the science at all. It seems more properly to belong to a branch of
applied psychology, to which the name hedonics may be given. At
the same time, because of its economic importance, the economist
must work out the theory for himself, if he does not find it worked
out independently. Thus accidentally as it were, it may occupy an
important place in economic writings, and yet be a premiss rather
than an ultimate conclusion of the science. Jevons himself, after
laying down his theory of utility, goes on to consider its applications
to what are economic phenomena in the strictest sense. He thus
throws so much light ' upon these phenomena that his Theory of
III.] POLITICAL ECONOMY AND POLITICS. 91
§ 3. Political economy a social as distinguished
from a political science^—From whatever point of view
we look at it, political economy is best described as
a social science ; and if a distinction is drawn between
social and political sciences, it must, notwithstanding
its name, be regarded as belonging to the former, and
not to the latter, category h For while the science
has sometimes to take account of political and legal
conditions, it is essentially concerned with man in his
social as distinguished from his political relations. It is,
in other words, only in certain departments of political
economy that we are concerned with men in their
special character as members of a State. As remarked
by Knies, "à large preliminary division of political
economy has to investigate only the social economic
life of man independently of all political influences."^
The laws of distribution and exchange under conditions
of free contract may be taken as an example. These
laws do not exhaust political economy, but at any rate
they fill a large and fundamentally important place in
the science. Again, whilst economic doctrines may be
Political Economy^ taken as a whole, may rightly be regarded as one
of the most suggestive and valuable contributions to the science that
have ever been made.
1 Hence a further reason, besides the one given in the note on
p. 53, why some recent writers prefer to speak of ' the science as
economics rather than as 'political economy.
2 Die Politische Oehonomie vom geschichtlichen Standpuncte, 1883,
p. 3.
92 POLITICAL ECONOMY AND POLITICS. [CHAP.
in some cases relative to particular political conditions,
they are more frequently relative to particular stages
of industrial organization that are to a considerable
extent, if not altogether, independent of political in¬
fluences.
The above remarks relate primarily to the positive
science of economics. Regarding political economy
in its practical aspect, the connexion with politics is
more intimate. Applied economics may indeed be said
to be mainly concerned with the economic activities of
the State in its corporate capacity, or of individuals as
controlled by the State. Still, as we have already had
occasion to shew, economic maxims—having for their
object the interests of society as a whole—may also
be formulated for the guidance of individuals acting
independently of external constraint \
§ 4. Definitions of Wealth and Economic Activity.—
The point has now been reached at which it seems de¬
sirable to give a formal definition of political economy,
regarded as a positive science ; but before doing
this, it is necessary briefly to discuss the meaning
of certain terms which we have already had occasion
frequently to make use of, namely, the terms wealth
and economic activity. Wealth is one of those words
that may without disadvantage be defined somewhat
differently from different points of view; and it must
1 Compare Chapter 2, Note B.
III.]
DEFINITION OF WEALTH.
93
be borne in mind that our present object is merely to
give a definition that shall suffice broadly to distinguish
economic enquiries from those relating to other human
interests. No attempt need, therefore, be made to
deal with the difficulties that arise in connexion with
the measurement of wealth.
Utility may be defined as the power of satisfying,
directly or indirectly, human needs and desires; and
the possession of utility is the one characteristic that all
writers are agreed in ascribing to wealth. It seems clear,
however, that we cannot from our present standpoint
identify wealth with all sources of utility whatsoever,
since there are many means of satisfying human needs,
such as family affection, the esteem of acquaintances,
a good conscience, a cultured taste, which have never
been included within the scope of political economy,
and the laws of whose production and distribution have
hardly anything in common with the laws that are
as a matter of fact discussed by economists. Some
characteristic besides the possession of utility must
therefore be added, whereby such sources of utility as
consist in a man's own nature, or in the subjective
attitude of others towards him, may be excluded
from the wealth category. This further characteristic
may be found in the quality of being potentially
exchangeable. It is not meant that nothing is wealth
unless it is actually bought and sold. For a thing may
94
DEFINITION OF WEALTH.
[chap.
be potentially exchangeable without being actually
made the subject of exchange. Even in a communistic
society the criterion would be applicable. It is true
that with special reference to such a society, it might
more naturally be expressed in another form, the
essential characteristic of wealth being described as the
capability of being distributed by fiat of government.
The sources of utility capable of being thus distributed
would, however, be identical with those that could in
a state of economic freedom be acquired by purchase.
In either case personal qualities, and such objects of
desire as affection and esteem, would be excluded.
Wealth may then be defined as consisting of all
potentially exchangeable means of satisfying human
needs
^ Professor Marshall defines wealth as including " all those things,
external to a man, which (i) belong to him, and do not belong equally
to his neighbours, and therefore are distinctly his ; and (ii) which are
directly capable of a money measure,—a measure that represents on
the one side the efforts and sacrifices by which they have been called
into existence, and, on the other, the wants which they satisfy"
{Principles of Economics^ vol. i., 1895, p. 127). This definition corre¬
sponds broadly with that given in the text. For, on the one hand,
things must be capable of appropriation, in order that they may be
potentially exchangeable ; and, on the other hand, potential exchange¬
ability is a necessary and sufficient condition, in order that things
may be directly capable of a money measure. It should be added
that whilst emphasis may conveniently be laid on exchangeability for
purposes of definition, other of the characteristics of wealth become
more prominent in certain departments of economic science. For
instance, in the department of production, the primary notion is that
wealth is the result of labour and sacrifice. Again, in the department
111.]
KINDS OF WEALTH.
95
This definition brings within the category of wealth,
in the first place, desirable material commodities that
are capable of appropriation, such as food, books,
buildings, machines; in the second place, rights and
opportunities to use or receive or in any way derive
benefit from material commodities, such as mortgages
and other debts, shares in public and private companies,
patents and copyrights, access to libraries and picture-
galleries, and the like; in the third place, personal
services not resulting in any material product, as, for
example, those rendered by actors, soldiers, domestic
servants, lawyers, physicians; and, lastly, the right to
command or control the services of any person over
a given period.
In regard to services it is to be observed that
although the benefits they confer may be more or less
permanent, they are in themselves merely transient
phenomena. They are, however, the produce of labour ;
they admit of being made the subject of exchange ;
and they may possess exchange-valueh They give
of distribution, the right of appropriation needs more explicit recog¬
nition. Compare Professor Nicholson's article on Wealth in the ninth
edition of the Encyclopœdia Britannica.
1 When a material commodity is sold or given away, its ownership
is transferred from one person to another. When, however, a service
is rendered, nothirig passes into the possession of one person that
was previously in the possession of another ; and hence it has been
denied that services can possibly be exchanged. But it is a mistake
to suppose that change of ownership either constitutes exchange or
is essential to it. On the one hand, material commodities may
96
definition of wealth.
[chap.
rise, therefore, to problems analogous to those which
present themselves in connexion with material wealth ;
and they are accordingly rightly included under wealth
from our present stand-point^.
change ownership gratuitously ; and on the other hand, we have all
that is really essential to exchange, when A confers a benefit upon B
on the understanding that B confers some other specified benefit upon
him, and vice versa. Either benefit thus conferred may consist in
the possession of some material commodity; but it may also consist
in a service rendered, that is, in an expenditure of effort on the one
side accompanied by the satisfaction of some actual or supposed need
on the other. It is, therefore, quite correct to say that a service may
be rendered in exchange for another service, or in exchange for a
material commodity; and it is quite correct to speak of services as
having exchange-value.
^ It is sometimes considered essential to the idea of wealth that
it shall be susceptible of accumulation; and in speaking of services
as wealth there is no doubt some departure from the ordinary usage of
language. It is also true that, in certain connexions, whatever is not
susceptible of accumulation may be left out of account in the estima¬
tion of wealth. But, on the other hand, as Dr Sidgwick observes, "in
ordinary estimates of the aggregate income of the inhabitants of a
country, directly useful—or, as we might say, ' consumable '—services
are commonly included ; for as such services are reckoned as paid out
of income, if we add the nominal incomes, estimated in money, of
those who render such services as well as those who receive them, the
result will only represent the aggregate real income of the country, if
this latter notion is extended so as to include services " (Principles of
Political Economy^ 1887, p. 78). The following passage, from a
journal of high standing specially devoted to economic questions,
may serve as an example of the kind of inaccuracy to which the
omission of services from the category of consumable wealth may
give rise. "What comes out most strongly upon a review of the
distribution of wealth is the smallness of the portion which is even
theoretically available for redressing apparent inequality. It is only a
small part of a wealthy man's riches which can actually be taken from
himself, because it is after all but a small part which he actually con¬
sumes himself. The greater part is only his in so far as he directs the
III.]
PERSONAL ATTAINMENTS.
97
It will be noticed that the above definition excludes
from the category of wealth personal abilities and
attainments of all kinds. For abilities and attainments
are not in themselves capable of being made the subject
of exchange. We sometimes indeed speak of paying
for the use of a man s skill; but in reality the payment
is for services rendered by aid of the skill. The right
to command the services of any one over a given period
is included under wealth, as pointed out above.
The exclusion of human qualities and capacities
from the wealth category is on the whole in accordance
with scientific convenience, as well as with popular
thought and speech, which—as Professor J. B. Clark
observes—broadly distinguishes between the able man
and the wealthy man, between what a man is and
what he has\ At the same time, it is important to
recognise that labour expended in the acquirement
of skill is indirectly productive of wealth, in so far
mode of spending or employing it. He directly maintains a number
of persons who might conceivably be more usefully employed than in
lounging in his hall, attending to his horses, or cultivating his flowers,
but who are maintained, nevertheless, out of his wealth. Nearly the
whole of his income goes in paying directly or indirectly for labour,
and to take it from him means a general dislocation of the whole
apparatus." This passage, if not actually erroneous, is at least very
misleading. In addition to the material wealth that the rich man
consumes, he enjoys a multiplicity of services which, under other
conditions, might be distributed more equally through the com¬
munity.
1 Philosophy of Wealth, pp. 5, 6.
K. 7
98 DEFINITION OF ECONOMIC ACTIVITY. [CHAP.
as it ultimately results either in the production of
material commodities or in the performance of useful
services. Thus, labour expended in acquiring the skill
of the actor or the doctor is productive, as well as
that expended in acquiring the skill of the carpenter
or the shoemaker. Moreover, in any correct estimate
of the productive resources of a country, the natural
and acquired abilities of its inhabitants may occupy
a position of the greatest importance.
It may be added that the scope of political economy
I
is practically not affected by the question whether
wealth is limited to exchangeable sources of utility, as
in the above definition, or is used in a broader sense so
*
as to include under the title oí personal wealth all those
capacities that enable men to be efficient producers of
exchangeable wealth. For although so-called personal
wealth does not, under the former alternative, directly
constitute part of the subject-matter of the science, it
still comes in for discussion as a source of wealth, and
as such has still to be recognised as an economic factor
of vital consequence.
Wealth being defined as above, economic activity
may be correspondingly defined as human activity which
directs itself towards the production and appropriation
of such means of satisfying human needs as are capable
of being made the subject of exchange. The economic
life of a community is constituted by the economic
III.] DEFINITION OF POLITICAL ECONOMY. 99
activities of the members of which it is composed,
acting either in their individual or in their corporate
capacity. The term economy is sometimes used as
equivalent to economic life, and by national economy is
meant accordingly the economic life of a nation. It
is to be observed that as civilisation advances, each
individual becomes more and more dependent on others
for the satisfaction of his needs; and hence economic
life increases in complexity. In other words, with the
progress of society, the organization of industry and
the distribution of industrial functions grow increasingly
complicated, and the phenomena resulting from men's
economic activities become more and more varied in
character.
§ 5. Definition of Political Economy,—Political
economy, regarded as a positive science, is often briefly
defined as the science of the phenomena of wealth ;
and this definition has the merit of directness and
simplicity. There seems, however, some advantage
in attempting so to define the study as explicitly to
indicate that it is not primarily concerned with either
physical or psychological or political phenomena as
such, but with phenomena that originate in the
activity of human beings in their social relations one
with another.
With the object of making this clear, political
economy may be defined as the science which treats
7—2
100 DEFINITION OF POLITICAL ECONOMY. [CHAP. III.
of the phenomena arising out of the economic activities
of mankind in society.
It is not pretended that this or any other definition
can by itself suffice unambiguously to express the nature
of economics. The proposed formula must, therefore,
be taken subject to the various explanations that have
been already given, or that may subsequently be given,
in regard to the province of the science, and its
relations to other branches of enquiry. It may be
said of the definition of political economy, as of most
other definitions, that the discussion leading up to
it is of more importance than the particular formula
ultimately selected.
NOTE TO CHAPTER III.
On the Interdependence of Economic Phenomena.
The phenomena with which political economy is con¬
cerned are usually classified under the heads of the pro¬
duction, distribution, exchange, and consumption of wealth.
This separation of the science into distinct departments
should not, however, be regarded as absolute or essential.
The object of the classification is convenience of exposition;
but such is the action and reaction between the phenomena
in question, that it is impossible satisfactorily and com¬
pletely to discuss any one of the departments without
having regard to the others also.
Taking, for instance, production and consumption, it is
obvious that men's habitual consumption determines what
kinds of wealth shall be produced ; and, as indicated in
the distinction between productive and unproductive con¬
sumption, the form in which wealth is consumed materially
affects the amount produced. It is not quite so obvious,
but it is equally true, that the production of wealth, both
in kind and amount, is influenced by its distribution. The
very rich consume luxuries, which, if wealth were more
equally distributed, would in all probability not be produced
at all or at any rate not to the same extent. Again, if
102
PRODUCTION OF WEALTH. [CHAP. HI.
wealth were more equally distributed, there would in all
probability be an increase in the average efficiency of the
previously worst paid classes of the community, either in
consequence of their being better fed, housed, and clothed,
or in consequence of a better education and training
having been provided for them by their parents; on the
other hand, the number of hours during which they would
be willing to work might be diminished. That the amount
of wealth produced would in some such ways as these be
affected by changes in distribution seems pretty certain ;
although it is of course impossible to say à priori in what
direction the effect would predominate.
Turning to the connexion between production and
exchange, it is to be observed that, as soon as division of
labour is carried at all far, the former involves in some form
or other the latter. Those whose function may primâ facie
appear to be simply and entirely to facilitate the exchange
of wealth—for example, bankers and bill-brokers, whole¬
sale merchants and retail dealers—all play their part, and
sometimes an important part, in assisting in the production
of wealth. For without exchange in some form or other it
is obvious that production could be carried but a very little
way ; and, strictly speaking, the work of production ought
not to be considered complete, until commodities have
found their way into the possession of those persons whose
intention it is to consume them^ In the case of exchange
^ J. S. Mill in his treatment of production introduces, under the
head of capital, questions of distribution that might perhaps have
been avoided. In his fundamental propositions respecting capital,
and especially in the much criticized proposition that demand for
commodities is not demand for labour, the truth of his conclusions
NOTE.] DISTKIBCJTION AND EXCHANGE. 103
and consumption, there is a still more intimate connexion ;
for rates of exchange depend mainly upon laws of demand,
and these in their turn depend directly upon laws of con¬
sumption.
The connexion between distribution and exchange may
be discussed from more than one point of view. If it is
asked how the distribution of wealth is effected under
modern industrial conditions, the answer clearly is by
means of exchange. As it has been well expressed,
" the adjustment of rates of exchange constitutes, in the
aggregate, the process of distribution."^ We may go even
further, and say that in an individualistic society the
theory of distribution resolves itself immediately into a
theory of exchange-value. Each share into which the net
produce of a community is divided represents the price
paid for a certain service or utility afforded by the recipient
of that share. Wages may thus be regarded as the ex¬
change-value of labour, interest as the exchange-value of
the use of capital, rent as the exchange-value of the use of
land^.
From another point of view, the theory of the exchange-
value of material commodities depends upon the theory of
distribution. At any rate, as Cliffe Leslie insists, the
theory of cost of production involves the whole theory of
depends partly upon the assumption of the perfect mobility of capital
and labour. But that is a subject that comes in for explicit discussion
only in connexion with distribution, and much later in Mill's work.
Here is perhaps one reason why Mill's chapters on capital are by
some readers found so difficult, and, it may be added, unsatisfactory.
1 J. B* Clark, Philosophy of Wealth, p. 64.
2 Compare Sidgwick, Principles of Political Economy, 1887,
p. 168.
104
CONSUMPTION OF WEALTH. [CHAP. III.
wages and profits ; for unless we have already determined
a law of normal wages and a law of normal profits, the
doctrine of cost of production is meaningless.
It is, therefore, clear that theories of distribution and
exchange cannot be divorced from one another, or discussed
to any purpose in isolation.
In connexion with the interdependence of economic
phenomena, we may touch briefly upon a controversy that
has been raised as to whether the consumption of wealth
should or should not be regarded as constituting a distinct
department of political economy \ The question is to a
large extent one of convenience of arrangement, rather
than of actual divergence of view in regard to the scope of
the science.
The following are among the topics, in addition to an
analysis of the nature of economic consumption, that have
been treated by different economists under the head of the
consumption of wealth : the theory of utility, and the
relation between utility and value the distinction between
1 It may be observed that the consumption of wealth, in the sense
in which the term is used by the economist, does not of necessity in¬
volve its destruction. We may say that by the consumption of wealth
in political economy we mean its utilization, to which its destruction
may or may not be incidental. Thus, in the economic sense, jewels
are in process of consumption when they are being worn as ornaments ;
so are the houses in which we live, and the pictures that hang on our
walls. A house in which no one lives, or a picture that is stowed
away in a lumber room, lasts at any rate no longer than one that
is being rationally "consumed." Compare Senior, Political Economy,
p. 54 ; and Walker, Political Economy, § 328. Senior remarks that
" it would be an improvement in the language of political economy if
the expression * to use ' could be substituted for that ' to consume.' "
2 Compare levons. Theory of Political Economy, General Walker
is of opinion that what has led to the practical excision of the whole
NOTE.]
CONSUMPTION OF WEALTH.
105
different kinds of consumption, and in particular the
distinction between productive and unproductive con¬
sumption^ ; the effects of different kinds of consumption,
and in particular the effects of luxury^; the policy of
department of consumption from so many recent works is ''the
fascination of the mathematical treatment of economical questions,
and the ambition to make political economy an exact science " (Foli-
tical Economy, p. 298). We can hardly regard this view as correct ;
for, if we take Jevons, who has insisted more strongly than any other
English economist on the mathematical nature of the science, we
find his most characteristic doctrines distinctly based on a theory of
utility, which theory of utility he himself rightly regards as a theory
of consumption. Indeed he lays it down explicitly that " the theory
of economics must begin with a correct theory of consumption "
[Theory of Folitical Economy, 1879, p. 43). Elsewhere he declares
that the doctrine of consumption is the most important branch of the
science, and he regards it as unaccountable and quite paradoxical
that English economists should, with few exceptions, have ignored
that doctrine. See Fortnightly Revieio, vol. 26, p. 625. Professor
Walras of Lausanne, who is another representative mathematical
economist, takes up practically the same position as Jevons. A con¬
sideration of the satisfaction of needs, which must involve a theory of
consumption, is the basis of his doctrine of exchange-value. See his
Éléments TÉconomie Folitique Fure.
^ Compare J.-B. Say, Traité FEconomie Folitique; James Mill,
Elements of Folitical Economy ; M^Culloch, Frinciples of Folitical
Economy; Eoscher, Grundlagen der Nationalökonomie; E. de Lave-
leye, Éléments de VEconomie Folitique ; Leroy-Beaulieu, Frécis
d^Economie Folitique ; Lexis, Die volksioirthschaftliche Gonsiimtion,
in Schönberg's Handbuch der ^politischen Oekonomie.
2 Compare Say, M^'Culloch, Eoscher, de Laveleye, Leroy-Beaulieu,
Lexis. M®Culloch, in his treatment of the consumption of wealth,
brings out incidentally, but clearly, a point often supposed to be over¬
looked by economists, namely, that a taste for luxuries tends to in¬
crease, not to diminish, the amount of wealth produced. " The mere
necessaries of life may, in favourable situations, be obtained with
but little labour; and the uncivilised tribes that have no desire to
possess its comforts are proverbially indolent and poor, and are
106
CONSUMPTION OF WEALTH. [CHAP. Ill
sumptuary laws, and of other laws attempting to regulate
consumption'; the causes of commercial depression, and
the impossibility of general over-production^; insurance
exposed in bad years to the greatest privations. To make men
industrious—to make them shake off that lethargy which benumbs
their faculties when in a rude or degraded condition, they must
be inspired with a taste for comforts, luxuries, and enjoyments"
{Principles of Political Economy, p. 493). Cliffe Leslie goes a little
too far in the same direction, when he remarks that unproductive
expenditure and consumption " are the ultimate incentives to all
production, and without habits of considerable superfluous expendi¬
ture a nation would be reduced to destitution" {Essays, 1888, p. 170).
Men produce in the first place in order that they may live, and con¬
sumption which sustains a worker in efficient working condition is
not usually spoken of as unproductive. Cournot {Principes de la
Théorie des Richesses, § 31) points out that we can conceive a state
of society in which there would be no such thing as strictly unpro¬
ductive consumption ; for every satisfaction given to animal appe¬
tites might tend either to the preservation of health, the increase
of strength, the prolongation of existence, or the propagation of the
species. General Walker under the head of consumption exposes
the fallacy that the mere destruction of wealth in some way increases
production. This fallacy may be regarded as in a way the comple¬
mentary error of the true theory that a taste for luxuries and a high
standard of comfort do, under certain conditions, tend to increase
productive efficiency.
^ Compare M^Culloch, Eoscher, and Lexis. Professor Lexis dis¬
cusses the danger of the supply of certain commodities becoming
exhausted {e.g., coal, petroleum, quicksilver), and touches on the
policy of restraining in some way their consumption with the object
of protecting the interests of future generations. He touches also
upon interferences with consumption based on climatic, sanitary,
and moral considerations ; e.g., restrictions upon the destruction of
forests, regulations in regard to house accommodation for the labour¬
ing classes, restrictions upon the consumption of alcohol.
2 Compare James Mill, Eoscher, Lexis, and Walker. This topic
is treated under the head of consumption, because it relates to the
equilibrium between production and consumption. Professor Lexis
NOTE.] CONSUMPTION OF WEALTH.
107
and its economic advantages'; government expenditure and
the theory of taxation^; the doctrine of population, and in
particular the existence of economic wants and a standard
of comfort as affecting the increase of population^.
It is e^sy to shew that most of the above topics may
quite naturally be dealt with in other departments of the
science, as in fact they are by those economists who do not
profess to treat explicitly of the consumption of wealth.
The distinction, for instance, between productive and unpro¬
ductive consumption, and the effects generally of different
forms of consumption on production, are not inappropriately
discussed under the head of production itself; while the
phenomena of (actual or apparent) over-production may be
taken in connexion with the theory of exchange, since only
goes on to touch upon possible remedies or palliatives for trade crises,
such as State undertakings of which the main object is to provide
work for the unemployed, and emigration.
1 Compare Boscher, and de Laveleye.
2 This topic is brought under the head of the consumption of
wealth by Say, James Mill, de Laveleye, and others, on the ground
that taxation is the means whereby the consumption of government
is provided for.
3 Compare Part v. of General Walker's Political Economy ; also
Part iv. Chapter 3, of Leroy-Beaulieu's Précis d^Économie Politique.
It will be observed that even among those economists who recognise
a distinct doctrine of consumption, there is far from being complete
agreement as to what problems should be included within this depart¬
ment. The theory of population, for example, which General Walker
introduces in this connexion, is treated by James Mill under distribu¬
tion, and by M®Culloch under production, while Boscher makes it a
fifth department of political economy, distinct from production, cir¬
culation, distribution, and consumption. There is, again, a divergence
of view in regard to the place of commercial depression, and the theory
of taxation ; and the theory of consumption of Jevons and Walras is
quite different from that of any of the other writers above referred to.
108
CONSUMPTION OF WEALTH. [CHAP. HI.
under a system of exchange can these phenomena arise.
Again, the incidence of taxation is directly connected with
the phenomena and laws of the distribution of wealth;
and the remainder of the theory of taxation, except in so
far as it relates to the effect of different forms of taxation
on production, belongs to applied economics, rather than to
the positive science of economics, with which alone we are
here concerned. This last remark applies also to the dis¬
cussion of sumptuary laws, and to all enquiries how far and
in what directions the increase of consumption should be
encouraged or discouraged. Insurance may fairly be re¬
garded as a question of distribution. As to the theory of
population, since labour is one of the requisites of produc¬
tion, the law of its increase may be discussed in connexion
with production ; or it may be included in the theory of
distribution, in connexion with the laws regulating, through
the supply of labour, the normal rate of wages. The theory
of utility occupies, as we go on to shew, a unique position.
It is, however, intimately connected with the determination
of laws of exchange-value.
The truth is that the phenomena of production, dis¬
tribution, exchange, and consumption, respectively, all so
act and react upon one another, that if any one of these
classes of facts is given no independent treatment, it must
nevertheless come in for a large share of discussion in con¬
nexion with the others. Whether all propositions relating to
consumption should be arranged by themselves or discussed
as they arise in relation to other topics is, therefore, to a cer¬
tain extent a mere question of convenience of exposition \
1 Thus, Dr Sidgwick, while explicitly admitting the fundamental
importance of certain propositions relating to consumption, thinks
NOTE.]
CONSUMPTION OF WEALTH.
109
On the whole, it appears that the distinction between
productive and unproductive consumption, the phenomena
of over-production, the principles of taxation, &c., discussed
under the head of consumption by James Mill and others,
fall quite naturally and conveniently into other departments
of economic science. The theory of utility, as discussed by
Jevons, stands on a different footing. For unlike theories
of taxation, population, and so on, it relates in itself purely
to the consumption of wealth, and hence has a much
stronger claim to be considered a distinct theory of consump¬
tion. At the same time, for reasons that have been already
briefly indicated in connexion with Jevons's description
of economics, this theory may be regarded as constituting
part of the necessary prolegomena of economic science,
rather than one division of completed economic doctrine.
The consumption of wealth is not so much an economic
that in such a treatise as his own, it is more convenient to introduce
these propositions in dealing with the questions of production, distri¬
bution, and exchange, which they help to elucidate, rather than to
bring them together under a separate head (Prmciples of Political
Economy^ 1887, p. 27). J. S. Mill (Unsettled Questions^ p. 132, note)
and Cherbuliez (Precis de la Science Économique^ p. 5) are somewhat
less guarded in their rejection of consumption as a special topic for
discussion. "Political economy," says Mill, " has nothing to do with
the consumption of wealth, further than as the consideration of it is
inseparable from that of production, or from that of distribution.
We know not of any laws of the consumption of wealth as the subject
of a distinct science : they can be no other than the laws of human
enjoyment." "The consumption of wealth," says Cherbuliez, "is
in its only important form a phenomenon which cannot be separated
from the production of wealth. Unproductive consumption is the
application of wealth to the needs for which it was produced. It
requires no further discussion. When wealth gets into the hands of
the unproductive consumer, economic activity is at an end."
110 CONSUMPTION OF WEALTH. [CHAP. III. NOTE.
activity in the sense in which that term has been above
defined, as itself the end and aim of all economic activity.
Wealth is produced, distributed, exchanged, in order that
it may be consumed. The satisfaction of human needs is
the motive power throughout. Thus, a true theory of con¬
sumption is the keystone of political economy ; but it may,'
nevertheless, be regarded as occupying the position of a
fundamental datum or premiss of the science, rather than
as constituting in itself an economic law or laws on a par
with the laws of production, distribution, and exchange.
CHAPTER IV.
On the Relation of Political Economy to
General Sociology.
§ 1. Conflicting views of the relation between
economic science and the general science of society.—
Before proceeding further, it is necessary to enquire
explicitly whether political economy is really entitled
to rank as a distinct department of study at all. It
is maintained by Comte and his followers that on
account of the extremely intimate connexion between
the phenomena of wealth and other aspects of social
life, any attempt to separate economic science from
social philosophy in general must necessarily end in
failure. The phenomena of society, it is said, being
the most complicated of all phenomena, and the various
general aspects of the subject being scientifically one
and inseparable, it is irrational to attempt the economic
or industrial analysis of society, apart from its intel¬
lectual, moral, and political analysis, past and present.
It is admitted that certain of the facts of wealth may
by a scientific artifice be studied separately, but it is
112 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
denied that their investigation can constitute a distinct
science \
In striking contrast to the above is the view
of those economists who regard political economy as
an independent abstract science, dealing with the
phenomena of wealth in isolation, and having no
concern whatever with other social phenomena. While
on the former view the relation of economics to socio¬
logy is properly one of entire subordination or rather
inclusion, on this view it is one of absolute indepen¬
dence ; the facts of wealth are to be studied in and
by themselves ; they are to be treated as having
no relation to other social facts; man is to be con¬
sidered as a being who is occupied solely in acquiring
and consuming wealth.
The truth lies between these two extreme views.
What may be called the extreme separatist doctrine
1 Compare Miss Martineau's Positive Philosophy of Auguste Gomte^
vol. 2, pp. 51—54 ; also Mr Frederic Harrison's essay entitled Pro¬
fessor Gairnes on M. Gomte and Political Economy in the Fortnightly
Review for July, 1870. Comte's views have more recently been given
fresh prominence in this country by Dr Ingram's article on Political
Economy in the ninth edition of the Encyclopœdia Britannica
(republished as a History of Political Economy). Dr Ingram
combines his history with an elaborate attack on the manner in
which the science has been for the most part studied in England,
and arrives at the conclusion that political economy cannot any
longer command attention as a fruitful branch of speculation unless
it is subsumed under and absorbed into general sociology. The one
thing needful," he says, "is not merely a reform of political economy,
but its fusion in a complete science of society."
IV.] POLITICAL ECONOMY AND SOCIOLOGY.
113
affirms of political economy as a whole what is true
only of a certain portion or aspect of it, and hence
would leave the science incomplete. Comtess view/
on the other hand, overlooks the fact that only by
specialization within proper limits can scientific
thoroughness and exactness be attained in any depart¬
ment of knowledge. Students of economics may,
moreover, naturally and fairly ask to have the province
of sociology itself more explicitly defined, and to see
its own fundamental doctrines more clearly formulated,
before they can be expected to shew a willingness to
have political economy subsumed under and absorbed
into it.
It will be our endeavour to shew that whilst the
study of economic phenomena cannot be completed
without taking account of the influence exerted on the
industrial world by social facts of very various kinds,
it is nevertheless both practicable and desirable to
recognise a distinct systematized body of knowledge,
which is primarily and directly concerned with economic
phenomena alone. On this view, economics is regarded
as constituting one division of the general philosophy
of society, of which other divisions are jurisprudence,
the science of political organization, and the philosophy
of religious, moral, and intellectual development; but
it is allowed its own set of specialists, and the
necessity of systematically combining the study of
K. 8
114 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
economic phenomena with that of other aspects of
human existence is denied. It is, in other words, held
to be possible for the economist to steer a- middle
course, neither assuming throughout the whole range
of his investigations an entirely unreal simplicity, nor,
through the neglect of that specialization which has
been found indispensable in the physical sciences,
allowing himself to be hopelessly baíñed by the com¬
plexity of the actual phenomena.
It should be carefully borne in mind that throughout
this chapter, as in the chapters that follow, political
economy is regarded as a positive science. Similarly
by sociology is understood a body of theoretical truth,
not a system of practical maxims. The separate
existence of economic theory is not imperilled, when it
is admitted that practical arguments based on economic
grounds alone are rarely in themselves decisive. The
two questions are often not clearly distinguished from
one another. It is, however, important to recognise
that those who stand out most strongly for the
recognition of a separate economic science may hold
equally strongly that no true guidance in matters of
conduct is to be obtained by appealing simply to
economic considerations, all social consequences of a
non-economic character being disregarded.
§ 2. The place of abstraction in economic reasoning.—
According to what has been above called the extreme
IV.] ECONOMICS REGARDED AS AN ABSTRACT SCIENCE. 115
separatist view, political economy takes one aspect of
human society and action, and considers it absolutely
alone and apart, the science being concerned with man
solely as a being who desires to possess wealth. Just
as the geometer considers the dimensions of bodies
apart from their physical properties, and the physicist
their physical properties apart from their chemical
constitution, so the economist is said to regard man
simply as a being who, in all his economic relations, is
actuated by an enlightened self-interest, and who is also
free to act accordingly, so far as he does not interfere
with a like freedom on the part of others.
This view of political economy is taken by Mill in
his Essays, although, as we have previously had occasion
to remark, his constructive treatise on the science is
worked out on different and much broader lines^ He
describes economics as treating of the laws of the pro-
1 Professor Marshall puts the contrast very clearly and forcibly.
In 1830," he says, John Mill wrote an essay on economic method,
in which he proposed to give increased sharpness of outline to the
abstractions of the science. He faced Ricardo's tacit assumption
that no motive of action except the desire for wealth need he much
. considered by the economist ; he held that it was dangerous so long
as it was not distinctly stated, hut no longer ; and he half promised
a treatise, which should he deliberately and openly based on it. But
he did not redeem the promise. A change had come over his tone of
thought and of feeling before he published in 1848 his great economic
work. He called it Principles of Political Economy with some of their
Applications to Social Philosophy ; and he made in it no attempt to
mark off by a rigid line those reasonings which assume that man's
sole motive is the pursuit of wealth from those which do not."
8—2
116 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
duction and distribution of wealth, not so far as these
laws depend upon all the phenomena of human nature,
but only so far as they depend upon the pursuit of
wealth, or upon the perpetually antagonizing principles
to this pursuit, namely, aversion to labour, and desire
of the present enjoyment of costly indulgences. Entire
abstraction is to be made from every other human
passion or motive. In other words, the economist
is supposed to take as his subject of study, not the
entire real man, as we know him in all the complexity
of actual life, but an abstraction—usually spoken of as
the economic man—a being, who> in the pursuit of
wealth, moves along the lines of least resistance, and
does not turn aside towards other ends.
In accordance with this view, political economy is
defined as " 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 phenomena are not modified by the
pursuit of any other object."^ It is admitted that the
1 Unsettled Questions of Political Economy, p. 140. Bagehot, in-
his Economic Studies, expresses himself similarly. " Political eco¬
nomy in its complete form, and as we now have it, is an abstract
science, just as statics and dynamics are deductive sciences. And, in
consequence, it deals with an unreal and imaginary subject" (p. 73).
It " deals not with the entire real man as we know him in fact, but
with a simpler, imaginary man—a man answering to a pure defini¬
tion from which all impairing and conflicting elements have been
fined away. The abstract man of this science is engrossed with one
IV.] ECONOMICS REGARDED AS AN ABSTRACT SCIENCE. 117
economist must allow for the interference of other
impulses in applying his results, and that he ought,
even in the formal exposition of his doctrines, to
introduce many practical modifications ; but the
recognition of these other impulses is excluded from
the science itself.
The single error involved in the above view is
that of mistaking a part for the whole, and imagining
political economy to end as well as begin with mere
abstractions. The practical modifications, of which
Mill speaks, themselves demand a scientific treatment,
and should, therefore, have a place accorded to them
within the science itself. For in many cases they are
not mere isolated modifications, admitting of application
to individual instances only. It is often possible to
generalize on other foundations than that of the
economic man; and, at any rate, the various inter-
desire only—the desire of possessing wealth" (p. 74). This view
of political economy is justified by Bagehot on the ground that " the
maxim of science is simply that of common sense—simple cases first;
begin with seeing how the main force acts when there is as little as
possible to impede it, and when you thoroughly comprehend that,
add to it in succession the separate effects of each of the encumbering
and interfering agencies" (p. 74). The maxim here cited may be
accepted without hesitation ; but it seems hardly consistent with the
previous statement that political economy in its complete form is an
abstract science, &c. Our contention is that while economics rightly
begins with abstractions, in its complete form it has as good a
claim to be called a realistic as to be called an abstract science.
What appears to be the correct doctrine is clearly laid down by
Cairnes in his Logical Method of Political Economy^ pp. 42—45.
118 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
ferences with free competition admit of scientific
enumeration and classification.
The abstraction by which men are supposed to act
solely with a view to their own material advantage and
the advantage of those immediately dependent upon
them^ has, nevertheless, its place in political economy.
For while it is true that our economic activities are
subject to the influence of a variety of motives, which
sometimes strengthen and sometimes counteract one
another, it is also true that in economic affairs the
desire for wealth exerts a more uniform and an
indefinitely stronger influence amongst men taken in
the mass than any other single motive. Hence, in
order to introduce the simplicity that is requisite in a
scientifically exact treatment of the subject, it is
legitimate and even indispensable to begin by tracing
the results of this motive under the supposition that
it operates without check. By thus ignoring at the
outset all other motives and circumstances, except
those implied in the notion of free and thoroughgoing
competition, we may, at any rate in certain depart¬
ments of enquiry, determine the more constant and
permanent tendencies in operation, and hence reach a
first approximation towards the truth.
1 The "economic man" ought not to be described as a pure egoist.
In making a choice of occupations for his children, for example, he
has always been regarded as acting for them as he would for himself,
and as desiring wealth on their account.
IV.]
THE DESIRE FOR WEALTH.
119
As a matter of fact, this approximation is in some
cases a very near approximation indeed. In dealing,
for instance, with prices on the Stock Exchange,
or in the great wholesale markets, under modern
industrial conditions, we are for the most part con¬
cerned with the economic activities of persons who
practically realise in actual life the notion of the
economic man. This by no means implies that the
persons referred to are what we should ordinarily call
selfish. For men of the most unselfish character are, in
many of their commercial dealings, influenced mainly
by what are sometimes termed strictly commercial
motives—subject only to the restraints of law and of
ordinary commercial custom and morality. They may
desire wealth in order to educate and bring up their
children with a view to their children's best interests,
or in order that they may devote their wealth to par¬
ticular philanthropic objects, or to the general well-being
of the community to which they belong. Still the
desire for wealth is in its immediate economic effects
the same, whatever its ulterior object may be\
1 Cliffe Leslie criticizes the conception of the desire of wealth as a
barren abstraction, in which are confounded together many different
desires whose actual consequences are indefinitely various. "No
other branch of philosophy," he remarks, "is still so deeply tinctured
with the realism of the schools as economic science. A host of
different things resemble each other in a single aspect, and a common
name is given to them in reference to the single feature which they
have in common. It is, properly speaking, only an indication of this
120 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
There are cases, then, where motives other than
pecuniary exert so little active influence that they
common feature, but it puts their essential differences out of mind,
and they come to be thought of in the lump as one sort of thing. The
desire of wealth is a general name for a great variety of wants, desires,
and sentiments, widely differing in their economical character and
effect, undergoing fundamental changes in some respects, while
preserving an historical continuity in others. Moralists have fallen
into a' similar error, though from an opposite point of view, and, in
their horror of an abstraction, have denounced, under the common
name of love of wealth, the love of life, health, cleanliness, decency,
knowledge, and art, along with sensuality, avarice, and vanity. So
all the needs, appetites, passions, tastes, aims, and ideas, which the
various things comprehended in the word ' wealth ' satisfy, are lumped
together in political economy as a principle of human nature, which
is the source of industry and the moving principle of the economic
world...The division of labour, the process of exchange, and the
intervention of money, have made abstract wealth or money appear
to be the motive to production, and veiled the truth that the real
motives are the wants and desires of consumers ; the demands of
consumers determining the commodities supplied by producers.
After all the reproach cast on the Mercantile School, modern
economists have themselves lapsed into the error they have imputed
to it. If every man produced for himself what he desires to use or
possess, it would be patent and palpable how diverse are the motives
summed up in the phrase ' desire for wealth '—motives which vary in
different individuals, different classes, different nations, different
sexes, and different states of society...The desire for wealth is by no
means necessarily an incentive to industry, and still less to abstinence.
War, conquest, plunder, piracy, theft, fraud, are all modes of acquisi¬
tion to which it leads. The robber baron in the reign of Stephen,
and the merchant and the Jew whom he tortured, may have been
influenced by the same motives. The prodigal son who wastes his
substance in riotous living is influenced by the same motives—the
love of sport, sensual pleasure, luxury, and ostentatious display—
which impel many other men to strenuous exertion in business"
{Essays, pp. 166—170). The whole of the above argument is very
persuasively put, but it does not establish the conclusion that Cliffe
IV.]
THE DESIRE FOR WEALTH.
121
may, without serious risk of error, be neglected even
in the concrete applications of economic doctrines.
More usually, however, this abstraction from other
influences yields only an approximation towards the
actual truth, which approximation needs subsequently
to be developed and corrected.
Leslie desires to establish. By the desire of wealth is meant the
desire of general chasing power, that is, the desire to increase one's
command over the necessaries and conveniences of life in general ;
and nothing that Cliffe Leslie says proves it to be either an illegiti¬
mate or a barren assumption that in their ordinary economic dealings
men are in the main influenced by this desire, and that, in consequence,
a greater gain is preferred to a smaller. That there are enormous
variations in men's ideas, as to the particular things that constitute
the necessaries and conveniences of life, is nothing to the point.
For, as observed in the text, the immediate effects of the desire of
wealth may be the same, although the ulterior objects had in view
are very different. A man may desire general purchasing power in
order that he may be assisted towards the attainment of the noblest
and most unselflsh ends, but it does not follow that he will therefore
sell his services or his goods at less than their market value. Granting
that the objects of men's desires are very various, still, as Dr Sidgwick
puts it, so far as they are exchangeable and commensurable in value,
they "admit of being regarded as deflnite quantities of one thing—
wealth; and it is just because the 'desire of wealth' may, for this
reason, be made to include ' all the needs, appetites, passions, tastes,
aims, and ideas, which the various things comprehended under the
word wealth satisfy', that we are able to assume, to the extent
required in deductive political economy, its practical universality and
unlimitedness" (Political Economy, 1887, p. 36). We may add that it
is also not to the point that, under different conditions, the desire of
wealth may lead to very different lines of conduct. The assumption
that men are actuated by this desire is, in economic reasonings, com¬
bined with other assumptions—as, for example, the absence of force
and fraud—which circumscribe within certain limits the modes in
which the motive can operate.
122 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
Even the above degree of validity is denied to
the postulate in question by some economists. They
hold that if the abstraction whereby we suppose men
to act solely with a view to their own advantage is
not condemned as leading to positive error, it should
at least be rejected as practically useless. It is in
manifest contradiction, they say, to the facts of life.
Knies, for example, rejects it on the ground that a
society of men actuated solely and continuously by
self-interest, and allowed absolute freedom of action,
has never actually existed. He admits the possibility
of hypothetically working out the laws of price, &c.,
that would arise in such a society were it to exist,
but he denies that such a hypothetical enquiry has
any utility or practical justification. One might just
as well, he says, base an enquiry on the hypothesis
that all men are inspired by altruism, or that they
all have an equally strong impulse towards chaiity ;
and he implies that such enquiries as these would be
in all respects equally serviceable—or unserviceable—
in enabling the economist to understand and explain
the phenomena of the actual economic world\
The first point in the above argument—that no
society of pure egoists has ever actually existed—
is, strictly speaking, irrelevant. For the economists,
^ Die Politische Oekonomie vom geschichtlichen Standpuncte, 1883,
p. 504,
IV.] DEFENCE OF THE METHOD OF ABSTRACTION. 123
whom Knies is criticizing, have always insisted that
they are dealing with abstractions, with imaginary
beings of a simpler type than are to be met with in
real life. They have never posited the actual existence
of a society of men, guided in all their actions by pure
self-interest. The gist of their argument is not even
that, in the one sphere of life with which they as
economists are concerned, the desire for wealth operates
by itself and subject to no interference from the
operation of other motives. All they affirm is that,
taking a broad survey of the economic sphere, the
desire of each man to promote the material interests
of himself and his family is far more powerful, and
far more uniform in its operation, than the other
motives, which sometimes act as a drag upon it.
They hence infer that by calculating the consequences
of this desire, they will be materially assisted towards
determining what will happen on the average or in
the long run\
The latter part of Knies s criticism cannot be
ruled out as irrelevant, but it breaks down on the
score of invalidity. It amounts to this—that a
doctrine, based on the hypothesis of pure altruism,
1 Menger specially insists that the use of the so-called dogma of
self-interest is misunderstood by the historical school of German
economists, when they regard it as forming such a disturbing contrast
to " full empirical actuality." See his Methode der Socialioissen-
schaften, p. 79.
124 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
would be just as near the concrete reality, as one
based on the hypothesis of pure egoism; in other
words, that, in their economic dealings with one
another, men are as uniformly and as powerfully
influenced by an immediate desire to augment their
neighbours wealth as by a desire to augment their
own\ But this argument is certainly contradicted by
all the facts of actual economic life. Look where we
will in the industrial world, do we not flnd self-interest
—controlled though it may be by moral, legal, and
social considerations—the main force determining men's
actions ? Is it not a patent fact that in buying and
selling, in agreeing to pay or to accept a certain rate
of wages, in letting and hiring, in lending and borrow¬
ing, the average man aims at making as good a bargain
for himself as he can ? He may be restrained within
certain limits by law, morality, and public opinion ; and
the influence exerted by restraining forces such as these
must be ultimately taken into account. Still the de¬
sire for wealth is, under normal conditions, the active
^ Theoretically an attempt might be made to work out deductively
the consequences of the sole operation of altruistic motives, all inter¬
ferences due to the operation of other motives being ignored. The
contention in the text is, however, that this would not in any case
have any practical value. Sir Henry Maine rightly urges that " the
practical value of all sciences founded on abstractions depends on the
relative importance of the elements rejected and the elements retained
in the process of abstraction" (Early History of Institutions, p. 361).
The question at issue turns therefore on the relative importance of
egoistic and altruistic motives in economic affairs.
IV.] DEFENCE OF THE METHOD OF ABSTRACTION. 125
impelling force ; and the immediate economic conse¬
quences of this desire are the same, however unselfishly
the wealth gained may ultimately be expended. It is
this fact of common experience that justifies economists
in starting from the conception of the economic man, as
approximately typical of actual men considered in their
economic relations. Conclusions based on this con¬
ception contain a hypothetical element ; but they are
nevertheless, at any rate in certain departments of the
science, within measurable distance of the concrete
realities of the actual economic worlds
1 The above is freely allowed by some writers who on other grounds
criticize the English school of political economy. "No economist,"
says Professor R. M. Smith, "would venture on the solution of an
economic problem without taking into consideration the fact that men
are ordinarily moved by self-interest " {Science Economic Discussion,
p. 113). " Hypothetically, " says Wagner, "the use of the theory of
self-interest is always proper ; and, for the isolation of causes, it has
proved the best of methodological tools. For we have here an element
common to all men. We have an element founded on a law which is
in truth a ' natural ' and universal law. , It is based on the physical
nature of man, on his mental nature (which depends primarily on his
physical nature), and on his relations to the external world. As it
affects the individual, so, also, it represents the interest of the species,
since the species exists and is continued only through the individual.
The objections of historical economists are obscure, and are carried
too far, when, instead of admitting the hypothetical value of de¬
duction from self-interest, they deny that it Jras any value what¬
ever. They make a mistake which is the reverse of the mistake
of the advocates of pure deduction ; and their mistake is the greater.
In considering the modifications of industrial self-interest in dif¬
ferent individuals, different peoples, at different times, and its various
combinations with other motives, they forget that there is, after
126
POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
At the same time, in so far as it can be shewn that
in certain spheres of economic action men are normally
moved by altruistic motives, this can be more or less re¬
cognised in the abstractions upon which the economist's
more general reasonings are based. It is, however,
doubtful whether it would be possible, in any case, to
base upon the hypothesis of general altruism an exact
science corresponding to English political economy.
For the desire for the general welfare is not a motive
capable of being measured in the same way as the desire
for wealth can be measured \
But it is time now to turn to the other side of the
picture. Whilst the process of abstraction from the
full empirical actuality is an instrument of the greatest
all, a universal element of humanity in this selfishness" (Jahr¬
bücher für Nationalökonomie und Statistik, March, 1886, p. 231 ;
Quarterly Journal of Economics, October, 1886, p. 118). Wagner goes
on to point out, what we have already insisted upon, that " self-
interest, when spoken of as the motive of industrial action, often does
not mean one's individual interest alone, but includes the interest of
others; to be sure, of others in whose welfare the person who acts
takes an interest. Consider the family, the acquisition of property
for transmission to descendants. Here the egoistic action passes
over into altruistic action. But it may nevertheless be said that,
although there is a widening of the egoistic motive beyond the
individual, it still remains egoistic." There may seem contradiction
here ; but there is no real contradiction. An individual action may
form one link in a series of actions which, considered in their totality,
are altruistic; and yet considered by itself, and in relation to its
immediate consequences, it may be undistinguishable from an action
that is purely egoistic.
1 Compare Marshall, Present Position of Economics, §§ 8—11.
IV.] LIMITS OF THE METHOD OF ABSTHACTlON. 127
possible utility in economic investigations, the econo¬
mist cannot by this means alone explain all industrial
facts. Neither the conception of the economic man
nor any «other abstraction can suffice as an adequate
basis upon which to construct the whole science of
economics. In completing our investigations we have
generally speaking to deal with something far more
complex. As Roscher puts it, we must in our finished
theory "turn to the infinite variety of real life."^
§ 8. Examples of economic problems requiring for
their complete solution a realistic treatment.—It is in
attempting the final solution of problems, relating to
the distribution of wealth, that it is most obviously
insufficient to regard mankind as simply and entirely
concerned in the pursuit of gain, irrespective of social
1 The abstraction according to which all men are by nature the
same, different only in consequence of a difference of education,
position in life, Ac., all equally well equipped, skilful, and free in the
matter of economic production and consumption, is one which, as
Eicardo and von Thiinen have shewn, must pass as an indispens¬
able stage in the preparatory labours of political economists. It
would be especially well, when an economic fact is produced by the
co-operation of many different factors, for the investigator to mentally
isolate the factor of which, for the time being, he wishes to examine
the peculiar nature. All other factors should, for a time, be con¬
sidered as not operating, and as unchangeable, and then the question
asked. What would be the effect of a change in the factor to be
examined, whether the change be occasioned by enlarging or dimi¬
nishing it? But it never should be lost sight of, that such a one is
only an abstraction after all, from which, not only in the transition
to practice, but even in finished theory, we must turn to the infinite
variety of real life" {Principles of Political Economy^ § 22).
128 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
surroundings, and the operation of other than pecuniary
motives\ The love of a certain country or a certain
locality^, inertia, habit, the desire for personal esteem,
^ If by an economic motive is meant any motive that influences
men's economic activities, it is clear that the desire of wealth is not
the only economic motive. Wagner gives a five-fold classification of
economic motives in the above sense : four egoistic, and one non-
egoistic. (1) The wish for gain, and the fear of want. (2) The hope
of reward of a non-economic kind {e.g.^ approval), and the fear of
disadvantages of a non-economic kind [e.g., punishment). The
operation of such motives as these is important in connexion with
slave labour. (3) The sense of honour, and the fear of disgrace. The
gild system under ideal conditions is an example of the operation of
these motives. Another example is to be found in the pride which
every good workman takes in the quality of his work. (4) The
impulse to activity and to the exercise of power, and the fear of
the results of inactivity. " Sometimes, in the restless activity of
men who carry on industry on a great scale, the wish to accumulate
property is the immediate aim—but not so much for the sake of
material advantage, as for the sake of the power which a fortune
confers." The motive of rivalry, which may also under certain
conditions exert an appreciable influence, is closely akin to the
love of power. (5) The non-egoistic motive is the sense of duty
and the fear of conscience. "Because of it, competition is not
pressed to the utmost, prices do not reach the highest or lowest
limits which the pursuit of individual advantage would fix, and would
fix without encountering an effective check in the mere sense of
honour and propriety. Under this head, we are to class not only all
charitable action, but the cases where an industrial or social superior
purposely refrains from making his own interest the exclusive ground
of his economic conduct." See Wagner's Grundlegung der politischen
Oekonomie, §§ 38—46 ; and Quarterly Journal of Economics, vol. 1,
pp. 118—121.
2/'Political economists," said Mr Chamberlain in a speech at
Inverness in September, 1885, "find it difficult, perhaps, to under¬
stand how such unpractical considerations as the traditions and
the history of a race, the love of home and of country, religious
enthusiasm, and political sentiments, should absolutely prevent a
IV.]
ECONOMIC MOTIVES.
129
the love of independence or power, a preference for
country life, class prejudice, obstinacy and feelings of
personal ill-wiiP, public spirit, sympathy, public opinion,
the feeling of duty with regard to accepted obligations,
•
current notions as to what is just and fair, are amongst
the forces exerting an influence upon the distribution
of wealth, which the economist may find it necessary
to recognise, though the precise weight to be attached
to them varies enormously under different conditions.
The special influence that may be exerted by ethical
motives has been referred to in rather more detail in
Highlander from accepting with complacency a proposal to exile him¬
self from the land, which his forefathers have possessed and cultivated,
for which they have shed their blood, and in which they lie buried.
But human nature is a greater force even than the laws of political
economy, and the Almighty Himself has implanted in the human
breast that passionate love of country, which rivets with irresistible
attraction the Esquimaux to his eternal snows, the Arab to his sandy
desert, and the Highlander to his rugged mountains." None of our
leading economists are really open to this reproach. In the appli¬
cations of political economy, if not as an integral portion of the
science itself, they recognise the necessity of investigating inductively
the operation of all the forces that affect the movement of labour
from country to country, and from place to place within the same
country; and amongst such forces they do not overlook those here
referred to by Mr Chamberlain. The above quotation may serve to
illustrate how narrow and one-sided is the political economist in the
general estimation ; and how common it is to substitute for the views
of economists themselves, the opinions of superficial readers who
have separated fragments of economic doctrine from their proper
context. Because of misunderstandings of this sort it becomes the
more necessary to insist that the abstract theory does not exhaust
the whole of the science.
^ These forces may exert an important influence in trade disputes.
K. 9
130 POLITICAL ECONOMY AND SOCIOLOGY, [CHAP.
an earlier chapter. It is to be remarked that even in
the abstract theory the economist assumes that the
rules of conventional morality in matters of business
are generally accepted and obeyed. The standard of
such conventional morality is, however, subject to
variations, as also the extent to which departures from
it are common ; and variations of this kind should not
be overlooked by the economist in his more concrete
investigations. As a special case, attention may be
called to the extent to which the conventional morality
of the market pushes the rule of caveat emptor. Even
in the same society at the same time this varies in
different classes of transactions.
Amongst important circumstances affecting wages
are qualities of co-operativeness and habits of combi¬
nation amongst the labouring classes, as well as the
social forces and legal regulations which determine how
far these qualities and habits shall have free play.
Again, in discussing the labour question, it is obvious
that differences of enterprise and knowledge as affecting
a man's willingness or ability to change his condition
must not be overlooked. Regard must also be had to
legislation of every kind in so far as it directly or in¬
directly affects the mobility of labour. To take a special
case—the economist has to discuss the circumstances
determining the wages of women, and to enquire whether
these are in any way different from those determining
IV.]
SUPPLY OF LABOÜK.
131
the wages of men ; but only by investigating the opera¬
tion of various social influences can he obtain anything
like an adequate solution^
Turning to the more general problem of the causes
of variations in the supply of labour, we find it to be
one that depends materially on the social, intellectual,
and moral circumstances that determine men's standard
of comfort, as well as on such conditions as the price of
food and other necessaries. This point may be illus¬
trated by reference to Mill's treatment of the argument
that under socialism, " the prudential restraint on the
multiplication of mankind would be at an end, and
population would start forward at a rate which would
reduce the community, through successive stages of
increasing discomfort, to actual starvation."^ He says
that " there would certainly be much ground for this
apprehension," if socialism provided no motives to re¬
straint, equivalent to those which it would take away";
but he then goes on to speak of the force of public
opinion as possibly supplying a new motive, to which,
in accordance with the general teneur of his remarks,
might be added that of public spirit and care for the
general well-being. It is easy to exaggerate the prob¬
able efficacy of these forces ; but the illustration will
1 Compare the treatment of this problem in Walker's Wages
Question, pp. 372—884 ; and in Professor and Mrs Marshall's
Economics of Industry, pp. 175—177.
^ Principles of Political Economy, ii. 1, § 8.
9—2
132 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
at least serve to shew how, in arguing from one state
of society to another, there is need to investigate and
allow for the effects which different surroundings may
have on human action.
When we pass to the production and accumulation
of wealth, we find again that the motives in operation
vary in different instan ces \ Work, for instance, that
is inspired by mere love of routine, and saving that has
become a mere habit, are not so uncommon as à priori
we might be inclined to imagine. One consequence
of the latter fact is that we cannot discover the laws
determining the accumulation of capital, or the precise
way in which a fall in the rate of interest will affect
saving, by considering exclusively the effect of the desire
of wealth.
Even in the case of a purely monetary question,
such as the circumstances determining the amount of
^ "In vast permanent societies, in long ages of history, populations
such as the Egyptian and the Indian, under a strict caste system,
have shewn an astonishing degree of industry, directly stimulated by
habit, social feeling, and religious duty, and, in a very slight degree,
by personal desire of gain. In religious societies under very different
kinds of faith, very active industry, on a scale quite decisive as an
experiment, has been stimulated by purely religious motives. Some
of the most splendid results of industry ever recorded—the clearing
of wildernesses ; vast public works, such as bridges, monuments, and
temples ; the training of whole races of savages into habits of toil—
have been accomplished by purely religious bodies on purely religious
motives, by monks, missionaries, and priests."—Frederic Harrison on
the Limits of Political Economy in the Fortnightly Review^ June 15,
1865.
IV.] MONETARY AND FINANCIAL QUESTIONS. 133
the depreciation of an inconvertible currency, an im¬
portant consideration may be the extent to which a
people's distrust is aroused, and this in its turn may
depend partly on their political sympathies, or on their
knowledge and intelligence, or on the extent to which
their power of moral restraint prevents them from giving
way to unreasoning panic. This last point is still more
clearly important in connexion with the phenomena that
constitute a financial crisis. The theory, for example,
of the recurrence of such crises at regular intervals, so
far as it does not involve the operation of physical
causes (as in Jevonss sun-spot theory), may require
to be modified according to the stage of a nation's in¬
tellectual and moral development.
Further illustrations might be added, bringing out
in particular the infiuence exerted on industrial pheno¬
mena by legal conditions ^ and by political and social
institutions; but enough has been said to shew that,
while the pursuit of wealth may be the main force of
which account has to be taken, still—if economic science
is to succeed in affording an adequate explanation and
elucidation of the facts of economic life—it is necessary
also to have regard to social surroundings, and the
operation of diverse other motives.
^ It is pointed out by Schönberg that the legal factor is one that
must always operate, however much the maxim of laisser faire is
allowed to exert an influence. There must be laws relating to
property, &c.
134 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
§ 4. Distinction between political economy and other
social enquiries.—Since a realistic treatment of eco-
noroic problems is usually essential to" their complete
solution, it is necessary that economists should keep
in view all the various aspects of social life; and it
is clearly mischievous to aim at an entire isolation
of economics from other social sciences. But political
economy does not, therefore, lose its individuality. For
the recognition that the various forms of social activity
are in many ways interdependent does not destroy the
significance of the differences between them ; and to do
away with the boundaries, that now separate the differ¬
ent social sciences, would be to sacrifice all the gain
resulting from scientific division of labour. Political
economy has necessarily to take account of facts that
belong primarily to other subdivisions of social enquiry ;
but its study of them is confined to one particular point
of view ; it is concerned with them only in so far as
they have a direct economic bearing. Hence the eco¬
nomist rightly neglects, or passes over very lightly,
many phenomena, and relations between phenomena,
that are of central importance from the standpoint of
other social philosophers, e.g.y the jurist, the moralist,
or the student of political science. " The tendency of
scientific progress," as Cherbuliez has well remarked,
"has always been to separate the sciences, not to
confuse them ; to divide and subdivide the domain
IV.] SCIENTIFIC DIVISION OF LABOUK. 185
of their investigations, not to make of them a single
field, cultivated by the same hands, following the same
methods."^
It may be observed in passing that physical, as well
as social, conditions have to be taken into account in
political economy. If, for instance, a rise in wages
takes place, the possibility of its being maintained
may depend on the effect of better food upon the
efficiency of the workers. The law of diminishing
return, again, has a direct physical basis; and it is
impossible properly to investigate the effects of free
trade apart from the assumption of physical differences
between different countries. But no one therefore
regards political economy as having no existence in¬
dependently of the physical sciences. We may argue
further from the analogy of the physical sciences them¬
selves. For it is also true that phenomena in the
physical world are in various ways interdependent.
Geological phenomena, for instance, are dependent
upon physical and chemical phenomena. But no one
therefore denies the right of geology to be recognised
as a distinct science. It has been truly said that in a
sense everything includes everything else, and no doubt
on the problem of the rent of land it might be possible
to build up an encyclopaedia of the sciences. Never¬
theless, subdivision and specialization are necessary, if
we are to advance in accurate knowledge.
^ Freds de la Science Économique, vol. i. p. 9.
136
POLITICAL ECONOMY AND SOCIOLOGY. [CHAP.
Granting, then, that political economy is not~ a
wholly independent and isolated science, it is still to
be regarded as a distinct division of speculative truth ;
and it may rightly take rank as a social science marked
off by special characteristics from other social sciences.
It is, in other words, a science in which a form of social
activity of a distinctive character is singled out for
distinctive treatments
1 It is to be observed that Dr Schönberg—who may be taken as
representing the prevailing view of German economists—whilst fully
recognising, and indeed insisting upon, the interdependence of economic
and other social phenomena, still speaks of political economy as a
special independent science eine eigene selbständige Wissenschaft^^).
He gives the following as the great fundamental life spheres of every
people, constituting, in their totality, national life : justice, art,
science and education, family life, social life and morality, religious
life, political life, and economic life. The last of these spheres,
he remarks, stands in the closest causal connexion with the others ;
it influences them, and is influenced by them. In studying it, there¬
fore, we must recognise these causal relations. But at the same time
economic life is a distinct sphere of national life ; in it men pursue
peculiar ends ; in it peculiar forces are developed ; it depends
on special institutions ; into it enter peculiar problems ; and it is
consequently the subject of an independent science. See Schönberg's
Handbuch, vol. i. pp. 3, 16, 17. Compare, also, Dr von Scheel in the
same volume of the Handbuch, p. 69. ''It has been proposed,"
he says, " that political economy should be enlarged into the science
of society, while it ought only to be said of it that it should be
enlarged into one of the social sciences—in opposition to the too
narrow conceptions which were held formerly." Knies expresses
himself similarly—" One may take into consideration a science which,
under the name of sociology or any other name, would have to set
forth the underlying universal theory for all state and social sciences.
But with all that, the just claim and unavoidable requirement of a
special care for political and social economy, in the sense in which it
is known to us, is still not in the least affected. If this branch of
XV.] POSITION OF SOCIOLOGY. 187
Even if we recognise in the most unreserved way
that political economy is only one division or depart¬
ment of social science, there is a special reason why,
in the present state of sociological knowledge, we
should not seek to give economic doctrine an entirely
new form with a view to its absorption into general
sociology. Comte charged political economy with being
radically sterile as regards results. But what results
has sociology, conceived as a master-science dealing
with man's social life as a whole, yet to shew ? It has
been well said by Lord Sherbrooke that sociology, as
distinct from the special social sciences, has yet its
spurs to win. The time may come when in the domain
of social science wide generalizations are established,
from which each special science that deals with man in
society may learn. There may thus be constituted a
body of general sociological doctrine, to which political
économy is subordinated. But economics cannot wait
for sociology in this sense to be built up. " It is
vain," says Professor Marshall, " to speak of the higher
authority of a unified social science. No doubt if that
existed, economics would gladly find shelter under its
wing. But it does not exist; it shews no signs of
science, wLicli has grown up with the development of the scientific
division of labour for the special investigation of a very large and
important sphere of human social life, were not there already, then it
would have to be immediately invented " {Die Politische Oekonomie
vom geschichtlichen Standj^uncte, 1883, p. 9).
188 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP
coming into existence. There is no use in waiting
idly for it ; we must do what we can with our present
resources."^
It may be added, partly by way of qualification, that
there is one particular department of economic enquiry,
in which the connexion with the general philosophy of
society is closer than in other departments. It seems
clear that in seeking a theory of economic progress, the
method of specialization can be carried less far than
when we are discussing laws that presuppose given
conditions of industry. It is indeed possible to trace
historically the actual course of progress from the
specifically economic standpoint ; and generalizations
relating to points of detail in economic development
^ Present Position of Economics^ p. 35. Dr Sidgwick in his Scope
and Method of Economic Science expresses himself to a similar effect.
He discusses in some detail the claims of sociology to be regarded as
a positive or established science, taking Comte's own tests of (1) con¬
sensus or continuity, and (2) prevision (p. 46) ; and on both grounds
he decides the question in the negative. " There is no reason," he
says in conclusion, ''to despair of the progress of general sociology;
but I do not think that its development can be really promoted
by shutting our eyes to its present very rudimentary condition.
When the general science of society has solved the problems which it
has as yet only managed to define more or less clearly—when for
positive knowledge it can ofier us something better than a mixture
of vague and variously applied physiological analogies, imperfectly
verified historical generalisations, and unwarranted political pre¬
dictions—when it has succeeded in establishing on the basis of
a really scientific induction its forecasts of social evolution—its
existence will be irresistibly felt throughout the range of the more
special enquiries into different departments of social fact " (pp. 55,
56).
IV.] THEORY OF ECONOMIC PROGRESS. 139
are attainable apart from any general theory of social
progress. But since it is admitted that the economic
conditions of any given stage in the progress of society
are determined not merely by the economic conditions,
but by the general social characteristics, of the pre¬
ceding stage, no theory of the tendencies of economic
evolution as a whole seems likely to be reached in¬
dependently of some theory of the general tendencies
of social development.
It is from the department of economic progress
that those who attack the old political economy draw
their most forcible illustrations; and it is further to
be observed that as general sociology is frequently
conceived, its one fundamental problem is " to find the
laws according to which any state of society produces
the state which succeeds it and takes its place." ^ When
sociology, as thus interpreted, can lay down propositions
that are definitely formulated and clearly established,
then the theory of economic progress may with advant¬
age be specially subordinated to it.
^ J. S. Mill, Logic, vol. 2, p. 510.
NOTES TO CHAPTER IV.
A. On the Distinction between Absteact and
CoNCEETE Political Economy.
The discussion in the preceding chapter naturally leads
to the recognition of two stages in economic doctrine, which
may be called the abstract and the concrete stage respecr
tively\ In the abstract or pure theory of political economy
we concern ourselves, entirely with certain broad general
" principles irrespective of particular economic conditions ;
or, as devons puts it, with 'Hhose general laws which are
so simple in nature, and so deeply grounded in the con¬
stitution öf man and the outer world, that they remain
the same throughout all those ages which are within our
consideration." The method of the abstract theory is al¬
most wholly deductive and hypothetical ; for though based
ultimately on observation, it works from artificially simplified
data. The results obtained are in one sense of universal
application, since they are ready to be modified to suit
particular circumstances as the occasion may arise; but
they are in themselves always incomplete, since we cannot
/
by their aid alone adequately understand the economic
phenomena of actual life.
1 Compare Jevons on the Future of Political Economy in the
Fortnightly Eeview for November, 1876, p. 625.
NOTE A.] ABSTEACT AND CONCEETE ECONOMICS. 141
Concrete economics comes in to supplement the pure
theory, and is not content with merely hypothetical results.
Its laws are obtained either by direct generalization from
experience, or by the aid of the deductive method. In
the latter case, however, the premisses are adapted to suit
special circumstances, and both premisses and conclusions
are constantly tested by direct appeals to experience. In
formulating concrete economic doctrines we seek to lay
down laws that are operative over a given period or in a
given state of society. Such laws are for the most part
relative, not universal, in their application \
We have the pure theory far excellence^ when we
concern ourselves with economic men, supposed to deal
exclusively with one another in a state of economic free¬
dom. On this basis the laws of competitive values, wages,
rent, interest, &c. are worked out in their most general
and abstract forms. Jevons's Theory of Political Economy
may be given as a typical example of an abstract treat¬
ment of the subject, as contrasted with such a work as
Walker's Wages Question, where the treatnient is in the
main concrete.
The line between abstract and concrete pplitical economy
hardly admits, however, of being rigidly determined; for
the extent to which we have in view special circumstances
and conditions of society may sometimes be a matter of
degree. Even the same doctrine (e.g., the doctrine of cost
of production as the regulator of value) may be regarded
1 What is here spoken .of as concrete economics has sometimes
been caUed applied economics. As already pointed out, however, the
latter designation is ambiguous ; and on the whole it seems best to
keep it for what is also called the art of political economy.
142 ABSTRACT AND CONCRETE ECONOMICS. [CHAP. IV.
as having an abstract or a concrete character according to
the mode in which it is treated; and in some cases the
concrete doctrines are just the abstract doctrines 'pl%is some¬
thing more, namely, an enquiry into the special conditions
under which alone the latter can be applied to existing
facts, and an investigation of the modifications of doctrine
needed in consequence thereof. Instead, therefore, of at¬
tempting to draw any hard and fast line between the two
sets of doctrines, it may be better to say simply that political
economy is abstract in so far as it neglects special conditions
of time, place, and circumstance; while it becomes more
and more concrete as it takes such conditions into account.
This relativity does not detract from the importance of the
distinction, which is of special utility in relation to problems
of method.
It should be added that the manner in which the dis¬
tinction is here expressed, and even the distinction itself,
would not be universally accepted. For, as we have seen,
some economists practically deny the possibility, or at any
rate the utility, of any abstract or hypothetical treatment
of economics at all, while others seem to regard the pure
theory as exhausting economic science. An endeavour has
been made in the preceding chapter to controvert both
these views. The pure theory may rightly be regarded as
of great and even indispensable value as the general basis
of economic reasoning, while it is at the same time held to
be only part of a larger whole.
It may, indeed, sometimes be possible to pass im¬
mediately from the pure theory to the interpretation of
individual phenomena of the actual economic world; but
more usually there is required the intervention of a body
note a.] abstract and concrete economics. 143
of doctrine, which, while possessing a certain generality of
form, is still not purely abstract in character, or capable
of being worked out merely by the aid of those simple and
general data, which alone are recognised by the abstract
theory. It is this body of doctrine that constitutes concrete
political economy, as broadly distinguished from the pure
theory of the science.
The reasoning of the abstract theory has a logical
precision which concrete economics for the most part lacks.
Being hypothetical it can be made demonstrative and
necessary, so that among properly trained persons there
should be no room for differences of opinion in regard to
its conclusions. Concrete economic doctrines are in com¬
parison contingent and indeterminate. But it does not
follow that they therefore form no part of the science, or
that they are essentially unscientific and untheoretical. It
ought frankly to be recognised that not all science is of
the demonstrative type; and it would be a great mistake
to narrow our conception of political economy to the pure
theory alone, simply in order to attain perfection of logical
form.
B. On the Distinction between the Statics
and the Dynamics of Political Economy.
In speaking in the preceding chapter of the laws of
economic progress, another subdivision of political economy
has been indicated, about which a few more words may
here be added. Economic doctrines may treat {a) of the
phenomena of wealth as they present themselves under
Ié4 ECONOMIC STATICS AND DYNAMICS. [CHAP. IV.
given economic conditions ; or (h) of the manner in which
these conditions themselves vary over long periods of
time, together with the economic changes that ensue there¬
upon.
The former of these branches of enquiry constitutes the
main body of economic science. To it belongs, for example,
the investigation of the laws which in any given society
regulate the division of what is produced into the shares of
rent, interest, and earnings. The latter branch of enquiry
may be distinguished as the study of economic progress ; and
the resulting doctrines constitute in their totality a general
theory of economic development or evolution. The laws of
the movement from status to contract, and of the transition
from collective to individual property, may be given as
examples of special doctrines belonging to this division of
the subject.
Using terms which Comte introduced into the nomen¬
clature of social science. Mill and some other economists
speak of these two branches as the statics and dynamics
of political economy respectively. These terms are not,
as a matter of fact, specially appropriate ; they may even
be misleading. In so-called economic statics we are fre¬
quently engaged in examining the effects of particular
changes, e.g.^ changes in demand, in cost of production, in
the amount of currency in circulation, and the like. The
economic world, even in a given state of society, is in
perpetual movement ; prices, wages, profits, systems of cur¬
rency, tariffs, &c. are continually changing ; and it is the
business of political economy, independently of any theory
of economic progress, to investigate the mutual relations of
these changes.
NOTE B.] ECONOMIC STATICS AND DYNAMICS.
145
Apart, however, from the use of these particular terms,
there can be no doubt of the importance of the distinction
itself, especially in the discussion of economic method. The
theory of economic progress is exceptional in its almost
entire dependence upon an historical method of treatment ;
and, as pointed out in the preceding chapter, it is more
distinctly subordinate than are other portions of economic
doctrine to general sociology. Some members of the histo¬
rical school consciously or unconsciously identify the study
of economic development with political economy as a whole,
or at any rate regard it as the only portion of political
economy worthy of scientific treatment. The relative value
that they attach to the historical method in economic in¬
vestigations is consequently very great, and the nature of
their disagreement with other economists is somewhat apt
to be misunderstood.
It should be added that the expressions statics and
dynamics of political economy are also used to indicate a
distinction of a somewhat less thoroughgoing character
than that described above. An economic theory is termed
static if it is based on the assumption of what has been
called a stationary state, that is to say, a state in which
the same things are done in the same way and to the same
extenfc for many generations. In other words, in a static
enquiry, the effects of changes of a certain specific kind are
considered, but the general social and economic conditions
are supposed fixed ; it is assumed that no fundamental
changes take place in the general character of social wants,
that no inventions lead to the introduction on a large scale
of new methods of production, that no sudden diminution
of population is caused by war or famine, that there is no
K. 10
146 economic statics and dynamics. [chap. iv.
progressive exhaustion of sources of supply, and so forth.
At a later stage it becomes necessary to consider the effects
of such changes as these, and we then pass on to the
dynamics of the subject. It will be observed that what is
here meant by the dynamics of political economy amounts to
something less than a general theory of economic evolution.
The distinction between statical and dynamical theories
in this latter sense is a relative rather than an absolute one.
Still what lies at the root of the distinction is of consider¬
able importance, especially from the methodological point
of view; and it is also important to recognise the true
nature of the relation between the two kinds of enquiry.
The static, as distinguished from the dynamic, treatment
of any problem involves a higher degree of abstraction;
and the justification for such a treatment is to be found
in the gain in clearness and precision that results from
commencing our study of the operation of economic forces
by considering them as far as possible in isolation and not
in combination. Our problems are thus simplified and we
take them first of all in a form in which they admit of a
definite and precise solution. As in other cases, however,
where we make use of abstraction, the statical treatment
is only a commencement. It has to be supplemented by a
dynamical treatment before anything like completeness or
finality can be attained.
0. On Political Economy and Common Sense.
The point of view of Comte and his school is not the
only one from which the claims of political economy to be
regarded as a science have been denied. For the paradox is
sometimes maintained that economic problems can best be
NOTE C.] POLITICAL ECONOMY AND COMMON SENSE. 147
solved by common sense, that is, by the natural untrained
intelligence and sagacity of the plain unscientific man ; and
it is accordingly considered a mistake even to attempt to
give economic reasonings a scientific form\
The question at issue resolves itself to a certain extent
into what is meant by science and scientific. Even those,
who deny that political economy is a science, admit that it
proceeds by systematic observation and analysis, and that
it results in a body of ascertained and reasoned truth. But
this is little different from what others mean by calling it
a science. A science may be defined as a connected and
systematized body of truths possessing generality of form.
Truths lacking generality cannot constitute a science j nor
can even general laws so long as they remain detached and
disconnected. In maintaining, then, the possibility of a
science of political economy, nothing more is meant than
that it is possible to discover general laws of economic
phenomena, to co-ordinate these laws, and to explain
K
particular economic facts by means of them.
In so far as the possibility of an economic science in
this sense is not denied, the question resolves itself into one
of ways and means of attaining the desired end ; and we
may here consider very briefly one or two of the arguments
put forward in favour of having recourse to what is called
a practical as opposed to a scientific method.
A scientific treatment of political economy is deprecated,
because political economy addresses an unscientific audience
^ See Professor Bonamy Price's Practical Political Economy^
Chapter i. ; also his, address as President of the Department of
Economy and Trade, Social Science Congress, 1878, published in the
Journal of the Statistical Society^ December, 1878.
10—2
148 POLITICAL ECONOMY AND COMMON SENSE. [CHAP. IV.
and is bound to make itself easy to be understood. " Its
aim is to make common sense the supreme ruler of industry
and trade. The test of a true political economy is that its
teaching, its principles, its arguments, and above all its
language, shall be intelligible to all." It is, in other words,
maintained that the economist must not be scientific, be¬
cause if he is he will be over the heads of his audience. Of
course abstruse reasoning is out of place if simpler reasoning
will serve the purpose equally well ; and technicalities, that
can without loss of precision be avoided, condemn them¬
selves. But to make intelligibility to the ordinary untrained
understanding the actual test of truth is simply to pave the
way to error.
It is needless to say that in dealing with economic
problems there is ample scope within legitimate limits for
the exercise of sound common sense. Common sense, or
at any rate common experience, supplies the economist
with many of his ultimate premisses; and, in regard to
practical questions where there is much to be said on both
sides, common sense is often in the last resort the supreme
arbiter to be appealed to h In dealing with subject-matter
so complex as that of political economy, however, it shews
the reverse of true common sense to reject any of the aids
that systematic methods of observation and reasoning can
afford ; and, all things considered, it is not an unqualified
disadvantage that the use and proper appreciation of such
methods should necessitate some preliminary training of
^ It may be said that common sense of the kind here had in view
belongs to a somewhat rare type ; still it is entitled to the name of
common sense, in so far as it is hardly amenable to scientific rule,
and is not to be acquired by scientific training.
NOTE G.] POLITICAL ECONOMY AND COMMON SENSE. 149
a scientific sort. The concrete facts of economic life are
so familiar, that men are only too ready to imagine them¬
selves competent to form sound judgments in regard to
them. It is, therefore, the more important that the need
of scientific training in methods of economic analysis and
reasoning should receive general recognition. It has been
said that political economy is losing its influence because
it is becoming too scientific. It should rather be said that
its scientific pretensions have sometimes been misunder¬
stood and exaggerated, because the limitations to which it
is subject, when treated as an exact science, have been
overlooked. But however much the credit of political
economy may have suffered from this cause, it has certainly
*
suffered a good deal more from the crude dogmatism of
those who have professed to speak in its name, although they
have received no adequate scientific training in its study.
A further reason assigned for holding that political
economy should not arrogate to itself the name of science
is that "the truths proclaimed by it are ultimately truisms,
which have always been known to all the world." In so
far as this statement is true, it is a statement that does
not apply to political economy alone. Most scientific laws
include facts that have been known all through the ages ;
but they are far from being a bare restatement of these
facts. The relation of science to everyday truths is that
it examines their logical foundations and gives them a
precise form, corrects and supplements them, explains them
by means of higher generalizations, and so systematizes and
co-ordinates them. To do all this for such economic truths
as are already the common property of mankind is one of
the aims of political economy.
CHAPTER V.
On Definition in Political Economy.
11. The problem of definition in political economy.—
All writers on the method of science, from Bacon down¬
wards, have in some form or other called attention to
the importance of the part played by the explication
of conceptions in the building up of any science ; and
it is certainly not less essential in economics than in
other sciences that our fundamental notions should be
made clear. This end is effected chiefly by discussions
concerning definitions.
There are some writers who decry all attempts to
frame accurate definitions of economic terms. Such
attempts are viewed with suspicion ; they are regarded
as throwing dust in the eyes of the student, and as
diverting his attention from more important points.
Political economy is said to have strangled itself with
definitions. Richard Jones, for example, who is known
chiefly as one of the earliest critics of the Ricardian
school, and who was also one of the first to emphasize
the relativity of economic doctrines, speaks with much
CHAP, v.] THE DISCUSSION OF DEFINITIONS. 151
scorn of those who would spend time in discussing
definitions. I have been reproached," he says, " with
giving no regular definition of rent. The omission
was not accidental. To begin, or indeed to end, an
enquiry into the nature of any subject, a circumstance
existing before us, by a definition, is to shew how little
we know how to set about our task—how little of the
inductive spirit is within us."^ Comte writes in a
similar strain, and so do some members of the modern
historical school. They regard disquisitions on the
meaning of terms as pedantic and useless, even if not
positively misleading I In all this, there is an element
of truth. Mere definition carries us a very little way ;
and to bind ourselves by rigid definitions, or even to
attempt perfect consistency in the use of terms, may
sometimes—for reasons that will presently be stated—
hinder rather than advance scientific knowledge. Still,
while excessive wrangling as to the meaning of words
is to be avoided, the fundamental importance of dis¬
cussing definitions in a really scientific way remains.
It may be observed, in the first place, that if some
economists waste time by treating problems of definition
1 Literary Bemains of Richard Jones, edited by Whewell, p. 598.
2 u "WTord-splitting and definition-extending," says Professor Thorold
Eogers, "is a most agreeable occupation. It does not require know¬
ledge. It is sufficient to be acute. Persons can spin out their
definitions from their inner consciousness by the dozen, aye, and
catch the unwary in the web" (Economic Interpretation of History,
p. viii).
152 DEFINITION IN POLITICAL ECONOMY. [CHAP.
in too great detail, others waste more time in verbal
disputes unrecognised as such. Failing to give pre¬
cision to their own use of terms, and failing also to
appreciate the sense in which the same terms are used
by other writers, they fall easily a prey to the fallacy of
ignoratio elemJii. Much controversy in economics might
be avoided by a clear understanding of the different
senses in which terms are used, and the relation of the
different meanings one to another.
But it should always be remembered that the pro¬
blem of definition, properly understood, is something
more than a mere question of language. " Definitions,''
says Mill, "though of names only, must be grounded
on knowledge of the corresponding things." In the
discussion of a definition, insight is often gained into
matters of fact; and, as Dr Sidgwick has insisted
in a highly philosophic passage in his Principles of
Political Economy, the discussion itself may be of
much greater importance than the particular definition
finally selected. Economists, Dr Sidgwick observes,
have been apt to " underrate the importance of seeking
for the best definition of each cardinal term, and to
overrate the importance of fnding it. The truth is—
as most readers of Plato know, only it is a truth difficult
to retain and apply—that what we gain by discussing
a definition is often but slightly represented in the
superior fitness of the formula that we ultimately
v.] NOT A MERE QUESTION OF LANGUAGE. 153
adopt ; it consists chiefly in the greater clearness and
fulness in which the characteristics of the matter to
which the formula refers have been brought before the
mind in the process of seeking for it."^ In choosing one
definition of a term rather than another, there is not
unfrequently something arbitrary; and so long as all
sources of ambiguity and vagueness are cleared away, it
may not, within certain limits, be of essential importance
which of two or more alternatives is adopted. But
there is nothing arbitrary or unessential in analysing
the precise content of a notion in the various con¬
nexions in which it is involved. In such an analysis,
it is generally assumed either that the extension of
the notion is more or less agreed upon, or else that
some proposition into which the notion enters is true.
In analysing, for instance, the conception of capital it
is usually taken as granted that capital is one of the
co-operating factors in the production of wealth. Our
economic notions are thus no mere fictions of the
imagination, but are drawn from the facts of industry
and commerce that have come under our notice; and
their analysis fixes our attention on distinctions and
relations of fact.
It is unnecessary to insist on the impossibility of
gaining, without clear notions, an accurate knowledge
of the things themselves to which the notions relate.
^ Principles of Political Economy, 1887, p. 49.
154
DEFINITION IN POLITICAL ECONOMY. [CHAP.
In economics, numerous errors have been the result of
vague and ill-defined notions ; and in consequence of
the complexity of economic phenomena, the attainment
of clear ideas in this department of knowledge is
undoubtedly attended with peculiar difficulty h This
is one reason why the problem of definition assumes
a greater relative importance in economics than in
some other studies. It is, as we have said, by dis¬
cussing definitions that we are aided in making our
ideas clear; and our success in framing satisfactory
definitions may also be taken as a test of their
clearness ^
The assistance afforded by the discussion of defini¬
tions towards the explication of fundamental conceptions
1 Fallacious theories of wages-r-to take but one example—may be
at least partly ascribed to the difficulty that has always been found
in precisely analysing the conception of capital, and keeping clearly
before the mind the result of that analysis.
2 Whewell remarks that "though definition may be subservient to
a right explication of our conceptions, it is not essential to that pro¬
cess. It is absolutely necessary to every advance in our knowledge,
that those by whom such advances are made should possess clearly
the conceptions which they employ : but it is by no means necessary
that they should unfold these conceptions in the words of a formal
definition" {Novum Organen Renova,tum^ p. 38). It is quite true
that it is possible to have clear notions without definitions clothed
in definite language. We have, for example, a clear conception of
capital, if we can analyse with precision and accuracy the functions
of capital in industry ; and it is not absolutely essential to this, that
an exact definition of capital should be constructed. At the same
time, the ultimate test of the clearness of any conception would seem
to be the ability to express in clear and definite language the corre¬
sponding definition.
v.] DEFINITION INVOLVES CLASSIFICATION. 155
is not, however, the only reason why the problem of
definition is important. All definition involves classi¬
fication. By giving a name to phenomena of a certain
description we thereby constitute them a class by
themselves; and it is of great scientific moment that
we should bring together into the same category those
things which have from the economic standpoint the
closest affinity one to another, and that we should not
class together those things whose resemblance is only
superficial and unimportant. For this reasön, it is
after all only within certain limits that it can be said
to matter little what precise definitions of economic
terms are ultimately selected. Our aim should always
be to render our terms significant of those distinctions
that are from the economic point of view of principal
importance. Only by the aid of an appropriate no¬
menclature will it be possible without circumlocution
to formulate exact general statements concerning the
phenomena of wealth.
From this point of view the problem of definition
resolves itself into one of classification ; and it is again
made clear that definition is not a mere question of
words, but a question of things. The truth is that
the discussion of definitions in political economy—so
far from requiring, as Professor Thorold Eogers says,
no knowledge, but only acuteness—requires, if it is to
be carried on to any useful purpose, wide experience
156 DEFINITION IN POLITICAL ECONOMY. [CHAP.
and a thorough knowledge of economic phenomena
and their mutual relations. In the order of exposition,
some consideration of definitions naturally finds an
early place. But in the order of knowledge, finality
of definition is attained only in a late stage of develop¬
ment. ^'The writers on logic in the niiddle ages,'*
says Whewell, "made definition the last stage in the
progress of knowledge; and in this arrangement at
least, the history of science, and the philosophy derived
from the history, confirm their speculative views." ^
From this standpoint, Adam Smith has been praised
for the very sparing way in which he introduces de¬
finitions in the Wealth of Nations.
§ 2. Conditions to he satisfied in framing economic
definitions.—It follows from what has been said in the
preceding section that the main objects to be kept in
view in discussing and framing definitions in political
economy are—(1) to make as distinct and precise
as possible the conceptions that are fundamental in
the science, (2) to mark those distinctions between
phenomena that are of chief economic importance.
In other words, our aim should be to make our ideas
at once clear and appropriate. It is hardly necessary
to add that we should seek to express our definitions
in a simple and intelligible form. There remain to
be considered some special difficulties that present
1 Novum Org anon Benovatum, p. 40,
v.] USE OF NON-TECHNICAL TERMS. 157
themselves in the attempt to frame satisfactory eco¬
nomic definitions.
Because economics is concerned with familiar phe¬
nomena of everyday life, and because of the precedent
set by the great economic writers of the past, econo¬
mists have for the most part to content themselves
with terms that are already in current use in ordinary
discourse. There is some gain in this. Words borrowed
from common language are, as Whewell points out,
^'understood after a very short explanation, and re¬
tained in the memory without effort." But, at the
same time, the problem of definition is made more
difficult. For if we use the terms of common language,
we must also endeavour to keep tolerably near to the
sense in which they are customarily employed. In so
far as this condition is not fulfilled, there is not only
danger of our being misunderstood by others, but, as
Dr Sidgwick remarks, we may also fall into inconsistency
ourselves through the force of old associations and the
effect of habit on our own minds. Unfortunately,
the terms of ordinary language have not, as a rule,
any precisely determined connotation ; they are used
vaguely and inconsistently. The distinctions indicated
by them, moreover, are by no means always those which
from the economic standpoint are of chief importance.
Hence arises a frequent conflict between the condition
that we are so to define our terms that tlie ideas
158 DEFINITION IN POLITICAL ECONOMY. [CHAP.
corresponding to them may be both clear and appro¬
priate, and the further condition that we are to seek,
as Malthas puts it, " to agree with the sense in which
they are understood in the ordinary use of them in
the common conversation of educated persons."^ What
then is the relative importance of these conditions ?
Some writers regard agreement with common usage as
the ultimate and supreme test. So far, they consider,
as we depart from the sense in which a term is used
in common life, we necessarily fail in solving the
problem of its best définition. In other words, the
enquiry as to what a term ought to mean in political
economy is practically identified with the enquiry as
to its actual meaning in ordinary discourse.
In opposition to the above, the true solution seems
to be as follows. In defining our terms, we should begin
with a kind of Socratic induction, and enquire what
is the main idea running through their ordinary use
both in everyday discourse and in economic writings.
Besides enabling us to minimise the divergence be¬
tween our definitions and the current meaning of
the terms defined, a study of the traditional use of
language is likely to suggest both similarities and
distinctions that might otherwise have escaped our
notice. From this point of view, even the ambiguity
of a term may not be without a certain compensating
^ Definitions in Political Economy, p. 4.
v.] USE OF OLD TERMS IN A NEW SENSE. 159
advantage ; for by enquiring into the source of the
ambiguity we may gain light on the connexion between
the phenomena denoted by the term in its two senses
respectively^ Still, however important the enquiry
into the current use of language may be, it ought
not to be regarded as identical with the problem of
determining what is the best definition to select for
scientific purposes ; and while agreement with ordinary
usage is to be sought for, this aim must always be sub¬
ordinated to the attainment of clear and appropriate
conceptions. Hence, some deviation from the colloquial
use of terms may ultimately be found inevitable. It
need hardly be said that whenever we thus find our¬
selves compelled to employ an old term in a new and
technical sense, we should spare no pains in empha¬
sizing our divergence from previous usage.
A word or two may be added with regard to the
frequent diversity in the use of terms amongst eco¬
nomists themselves. This diversity leads sometimes
to misunderstanding, and probably tends to retard
the progress of the science; it is, therefore, to be
regretted ; but we should not attach undue importance
to it. Divergence in regard to questions of definition
1 Thus—to take a simple illustration—the ambiguity of the term
value leads up to a discussion of the relation between exchange-value
and utility. Again, the ambiguity of the expression value of money
suggests the enquiry how changes in the general purchasing power of
money are related to changes in the rate of discount.
160 DEFINITION IN POLITICAL ECONOMY. [CHAP.
does not necessarily preclude substantial agreement
either in the ultimate analysis of fundamental con¬
ceptions or in completed doctrine ; and the conclusions
of any given economist may have intrinsic value,
although he is paradoxical in his phraseology. More¬
over, where there is a want of agreement in definition,
valuable lessons may sometimes be learnt from a study
of its causes. Two different definitions of the same
term may be complementary to one another, in the
sense that each lays stress on some distinction that
the other tends to slur over. And thus the criticism
of definitions that are ultimately rejected may be by
no means barren of result.
It will be gathered from what has been already said
that in advocating one definition of a term rather than
another, dogmatism is generally speaking out of place.
Advocates of particular definitions are, however, far too
apt to dismiss rival definitions as simply erroneous, not
recognising that the question is usually one of degree
of appropriateness, rather than of absolute right or
wrong. It may for this reason be useful very briefly
to consider the various grounds on which any proposed
definition may be criticized and rejected. (1) That it is
based on an erroneous analysis of facts. The real ground
of a criticism of this kind is an underlying assumption,
on the part of the framer of the definition, either that
the denotation of the term is more or less fixed, or
CRITICISM OF DEFINITIONS.
161
else that some given proposition in which the term
occurs is true. We have already pointed out that such
assumptions as these do frequently underlie proposed
definitions ; and it is clear that any resulting con¬
troversy must turn on matters of fact, and not merely
on questions of propriety of language or classification h
Whenever, therefore, such criticism can be shewn to
be valid, the critic may rightly claim to be allowed to
express dissent dogmatically. (2) TJnintelligihility or
ohsGurity. This again is a ground of criticism which, if
it can be made good, justifies an unqualified rejection.
(8) JJnsuitability. Here the basis of the criticism is that
the classification implied by the definition is not one
that is suitable or convenient for economic purposes.
The unsuitability or inconvenience may of course be
of an extreme and patent character; but frequently
it is merely a question of degree, or of a balance of
advantage and disadvantage, in regard to which a
writer may have his own opinion, but should also be
content to let others have theirs, without adopting a
violently controversial tone. For so long as econom¬
ists agree in their fundamental analyses, a difference
^ If, for instance, it is assumed that the normal value of freely
produced commodities is determined by their cost of production, then
the definition of cost of production involves questions of fact. Simi¬
larly, if in defining wealth, it is assumed that whatever can be bought
and sold is wealth ; or if in defining a market, it is assumed that the
Money Market is properly so-called.
K. 11
162 DEFINITION IN POLITICAL ECONOMY. [CHAP.
between them as to the precise point at which classes
should be separated from one another may be a matter of
comparative indifference. (4) Departure from popular
or previous economic usage. There are here three cases
which may be distinguished, (a) Where the writer
intends to define the term in the popular or the usual
economic sense, but fails to do so correctly. This is
a valid ground for speaking of a definition as incorrect.
(b) Where the writer is aware that he is departing from
ordinary usage, but in his own subsequent use of the
term unconsciously drops back into the, old meaning.
The charge here is one of internal inconsistency; and if
it can really be shewn that the force of old associations
is such that the very framer of the new definition is
misled by them, it is a fair ground for rejecting the
definition summarily, (c) Where the writer is aware
that he is departing from ordinary usage, and is not
open to the charge of inconsistency. Under these
conditions, novelty of definition may be perfectly
justifiable ; and in no case does it afford ground for
any accusation of positive error or incorrectness. The
disadvantages of using terms in a novel sense are,
however, obvious and indisputable ; and the proposed
innovation may be paradoxical in so high a degree
that it stands for practical purposes self-condemned.
Even short of this, a valid and sufficient ground for
rejecting a proposed definition will be afforded if it can
v.] RELATIVITY OF ECONOMIC DEFINITIONS. 163
be shewn that the definition involves a paradoxical
use of language that is unwarranted by the necessities
of the case.
§ 3. Relativity of economic definitions.—A serious
difficulty in the definition and use of economic terms
results from the fact that, in different departments of
economic enquiry, it may be convenient to vary the
point at which distinctions are drawn. In other words,
a conception, which is appropriate from a given stand¬
point, may need to be modified, if it is to continue
appropriate as the standpoint is changed. This has
been held to be the case, for instance, in regard to
such conceptions as wealth and capital. How then are
conflicting requirements to be satisfied ? One possible
solution would be the introduction of fresh technical
terms. A great multiplication of technical terms is,
however, in itself an evil, since it tends to restrict
the study of the science. Moreover, to have entirely
distinct names for conceptions that are closely related
to one another might lead to the disregard of important
relations and resemblances. The original terms might,
again, be rigidly defined, careful qualifications being
introduced to fit them for use in different connexions ;
but this would give rise to the necessity of very
cumbrous and involved statements. A third alterna¬
tive is frankly to allow the use of the same term in
slightly different senses, according to the department
11—2
164 DEFINITION TN POLITICAL ECONOMY. [CHAP.
of the science under discussion; and to vary the de¬
finition accordingly.
This last alternative has a great weight of authority
in its favour; and, where the differences of meaning
are really inconsiderable, it seems an admissible course
to adopt, on the ground that the context will generally
speaking suffice to mark the precise sense in which
the term is being used in any given instance. It is
an essential condition, however, that the fact of varia¬
tion in the use of the term should be very carefully
emphasized. In some cases, it may be possible to
combine the first and third alternatives by forming a
series of compound words, in which the term conveying
the central conception remains unchanged. Thus, if
it is thought desirable to define capital differently from
the point of view of the individual and that of the
community, the terms revenue-capital and production-
capital may be used accordingly. By this plan all
danger of ambiguity will be avoided, while at the
same time the common element running through the
different uses of the term will not be concealed from
view. It will probably not be necessary to use the
full compound word on all occasions.
It is to be added that definitions may be relative
not only to different standpoints, or different depart¬
ments of economic enquiry, but also to different periods
of economic development; for at each new stage of
v.] RELATIVITY OF ECONOMIC DEFINITIONS. 165
economic progress, fresh characteristics of phenomena
denoted by the same name may rise into prominence.
In order, for example, to meet the circumstances of
modern trade and financial organization, money requires
a different definition from that which is appropriate to
it in relation to earlier periods of industrial evolution.
As reflecting the characteristics of different periods,
and as illustrating the different stages through which
phenomena have passed, the actual history of the use
of terms is worthy of special study \
Attention may further be called to a difficulty,
which political economy—in common with many other
sciences—frequently finds in applying its definitions.
Limiting cases are met with, which it is far from
easy to assign to their proper category. This re¬
mark applies pre-eminently to such distinctions as
those between specialized and non-specialized capital,
skilled and unskilled labour, productive and unproduc¬
tive consumption, &c., where the two classes almost
necessarily shade into one another by insensible
1 Compare Cnnningliam, Groioth of English Industry and Com¬
merce during the Early and Middle Ages, p. 17. ''In the sixteenth
century," says Dr Cunningham, "the change in the use of certain
terms is very remarkable ; and if we attend to it, we are enabled to
realise the extraordinary transformation which was then taking place.
A social change may be said to have been completed when it found
expression in a new term, or fixed a new connotation on an old one."
The use of an historical method of definition is advocated by Pro¬
fessor Nicholson in his address on Political Economy as a Branch of
Education,
166 DEFINITION IN POLITICAL ECONOMY. [CHAP.
degrees. But even in dealing with such conceptions
as wealth, capital, money, direct and indirect taxation,
protection to native industry, and so on, there is
often the greatest difficulty in so formulating their
definitions as to leave no doubt in any case as to
whether given phenomena come under them or not.
For instance—Is skill to be included under wealth,
or is the goodwill of a business, or a merchant's
credit ? Where precisely shall we draw the dividing
lines between capital and land on the one hand,
and labour on the other? Are bills of exchange
to be included under money ? Is a tax on wages
indirect because by checking the supply of labour
it may lower profits ? Is an import duty on tea
in England protective because it may cause some
persons to consume more beer or other home-made
drinks ?
It is desirable that in the construction of defi¬
nitions, difficulties of the above kind should not be
overlooked ; but it is nevertheless no fundamental
objection to a definition that it does not enable them
to be solved offhand. If in the definition itself it is
sought to meet all limiting cases that may arise, the
resulting formula is likely to prove very cumbrous,
or more probably the attempt to obtain a definite
formula at all will finally be given up as hopeless.
But to conclude a discussion concerning the definition
v.] DIFFICULTIES IN APPLYING DEFINITIONS. 167
of a term without providing a definition cannot be
regarded as satisfactory, however valuable in itself
the discussion may be. If, therefore, an economist
brings into prominence the many difficulties in the
way of an unexceptionable definition, it should also
be his aim to make it clear what formula affords
in his opinion the best available solution of the
difficulties.
The truth is that in drawing hard and fast lines—
as definitions compel us to do—there is necessarily
something artificial ; for such lines are not drawn by
nature. Here, as elsewhere in economic matters, a
principle of continuity is in operation, and different
classes imperceptibly merge into one another. Hence
arises the necessity of being content, in some cases,
with definitions that are not absolutely unequivocal
and determinate. Where this is so, the characteristics
of the limiting cases that may arise will form a valuable
subject of consideration, and attention should be called
to them. But they may then be neglected, except
where, in special connexions, they rise into exceptional
importance.
CHAPTER VI.
On the Method of Specific Experience in
Political Economy.
§ 1. Preliminary functions of observation in economic
enquiries.—An endeavour will be made in the present
chapter to shew that, except within a somewhat limited
sphere, the method of specific experience cannot by
itself afford a sure and adequate foundation for the
attainment of economic truth, and that political
economy is accordingly not to be considered—as some
maintain—a purely empirical or inductive science.
At the same time, it may be well to say explicitly
at the oxitset that herein one side only of the truth
is presented. If pure induction is inadequate, pure
deduction is equally inadequate. The mistake of
setting up these methods in mutual opposition, as if
the employment of either of them excluded the em¬
ployment of the other, is unfortunately very common.
As a matter of fact, however, it is only by the
unprejudiced combination of the two methods that
any complete development of economic science is
CHAP. VI.] OBSERVATION OF A PRELIMINARY KIND. 169
possible. For, as Professor Cohn remarks, all induction
is blind, so long as the deduction of causal connexions
is left out of account; and all deduction is barren,
so long as it does not start from observationb
At an early stage of economic enquiry, observation
has functions to perform, which, though very important,
are somewhat liable to be overlooked. In the first
place, it is from observation that even deductive
economics obtains its ultimate premisses. From this
point of view, an introspective survey of the operation
of those motives by which men are mainly influenced
in their economic activities is of fundamental import¬
ance ; and this introspective survey must be combined
with observation of the conduct of other men in the
economic sphere. Observation is also needed in order to
determine how far and in what way economic motives
may be compared and measured. The fact, learnt by
observation, that as a rule they are measurable, is one
of the principal reasons why political economy is able
to resolve itself to a considerable extent into the form
of a deductive science.
There is further necessary an investigation of the
principal physical and other circumstances by which
economic activities are conditioned. In particular, the
legal structure of society in its general economic bear¬
ing must be examined. Of this kind of preliminary
^ System der Nationalökonomie, vol. i. p. 28.
170 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
observation, and more generally of the part played by
observation in connexion with the deductive method,
a farther consideration will follow in a later chapter.
In the meantime, there is a certain distinction to
which attention may be drawn. The observation that
precedes deductive reasoning is in the main not obser¬
vation of complex economic facts, but of elementary
economic forces and the conditions under which they
operate. It is by the agency of these forces that
complex economic facts are built up\
In all economic investigations, however, it is also
requisite that there should be some preliminary obser¬
vation of the complex phenomena themselves, with a
view to their description and provisional classification.
The phenomena which really constitute the subject-
matter of economic science are thus passed under
review in their concrete manifestations ; the problems
to be solved are indicated ; and means are afforded for
guiding and controlling our subsequent reasonings.
The department of political economy which deals
with economic phenomena from the descriptive stand¬
point may be spoken of as descriptive economics^ as
distinguished from constructive economics which aims at
establishing laws or uniformities. Descriptive economics
has itself been further subdivided into a formal and a
^ Compare Wagner, Grundlegung der politischen Oekonomie, 1892,
§92.
VI.]
DESCRIPTIVE ECONOMICS.
171
narrative branch\ The former of these analyses and
classifies the conceptions such as wealth, capital, value,
money, &c., which are needed for understanding the
nature of economic phenomena, and it involves the
logical processes of definition and division. The latter
investigates historically and comparatively, and with
the aid of statistics, the particular economic pheno¬
mena which are met with in different communities
and at different epochs ; it is essentially concrete and
circumstantial.
Within the province of descriptive and classificatory
economics, there is unlimited scope for valuable economic
work. In a broad sense, descriptive economics includes
the whole of economic history and economic statistics.
But at the same time, the knowledge of particular facts,
^ See Mr W. E. Johnson's article on the Method of Political
Economy in Mr Palgrave's Dictionary of Political Economy. Mr
Johnson gives the following scheme "of the chief departments of
economic science from the methodological standpoint :
Positive Economics
I ' !
Descriptive ' Constructive
I ' 1 . I ' 1
Formal Narrative Inductive Deductive
_j , , I
I I r
Definitions Divisions Chronological Comparative
Pure Mixed
Pure Mixed
It will be observed that the divisions given under the head of
constructive economics relate to the method of reasoning adopted,
which may he predominantly inductive or predominantly deductive,
whilst in each case a mixed method is recognised in which induction
is modified by deduction, or deduction by induction,
172 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
which is thus afforded, does not in itself constitute the
end and aim of economic science, the central problems
of which are constructive and not merely descriptive.
It would not be necessary at all to dwell upon this,
were not the view sometimes put forward that political
economy is nothing more than an empirical science in
its descriptive or classificatory stage. It is held by
some writers that under existing conditions it is im¬
possible for the economist to accomplish more than the
provision of a nomenclature, and the description and
classification of what is directly observed ; and it is said
accordingly that economics must " be content to observe
and classify and describe and name." ^
Political economy does not, however, deserve the
name of a science at all, if the economist is not com¬
petent to reason about the phenomena of wealth, and
discover law^s of causal connexion. Mere description
cannot constitute a science ; and political economy has
no purely classificatory stage, such as will enable it to
be compared with sciences of the type of zoology and
botany, which deal with material objects falling into
a natural system of classification. The doctrine in
question seems practically to overlook the fact that
economics is of necessity a science of cause and effect.
^ Compare Dr Cunningham's pamphlet on Political Economy
trea.ted as an Empirical Science. The somewhat similar doctrines
held by the more extreme members of the German historical school
will be discussed in greater detail subsequently.
VI.]
DESCRIPTIVE ECONOMICS.
173
The economist cannot help endeavouring to trace
effects to their causes, and to assign to causes their
effects. But the detection of causal connexion needs
the assistance of some apparatus of reasoning, induc¬
tive or deductive or a combination of these. Mere
reflective observation cannot possibly give the requisite
insight h
It is to be added that while some preliminary
description and classification of concrete economic
phenomena rightly precedes the treatment of economic
theory, still such description and classification must
be regarded as in the first instance only provisional.
Relations of cause and effect are often implied in what
!
appears to be simple description. Hence without some
examination of underlying principles, the description of
1 It has been already mentioned that Wagner recognises three
theoretical problems in political economy, namely, the description
of economic phenomena, their arrangement under types, and the
explanation of the causes upon which they depend (see p. 37 and
note 1 on p. 38). He adds, however, that the three problems really
constitute three stages of a single problem, and that they must not
only be all of them as far as possible solved, but also in the order in
which they are given. Political economy, he goes on to say, would
be, if still a science, at least no independent science, but only a part of
historical science and descriptive statistics, if—in accordance with
certain tendencies of the historical school—it were to limit itself to
the first of the three problems. The second and third really constir
tute the special and chief problems of political economy, for the
solution of which the firát was merely preparatory ; and it is only
when the second and third problems are reached that political
economy becomes a really independent and theoretical science
{Grundlegung der politische Oekonomie, 1892, § 58).
174 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
economic facts, to say nothing of their classification, is
apt to be unconsciously deceptive, an element depend¬
ing upon the individual writer s personal bias being
imported into what professes to be the mere holding
up of a mirror to nature. The more complete our
knowledge of the laws by which economic phenomena
are regulated, the more accurate will our description
and classification of them become.
Whatever importance then may be attached to
.purely descriptive economics, it is necessary to pass
on from observation to processes of inference that will
satisfy logical canons ; and the first question to be
considered is how far specific observation of industrial
phenomena can lead directly to the establishment of
economic laws. By the method of specific experience
is here meant the method that passes slowly from
particulars to axiomata media, and thence to the highest
generalizations of the science, without ever reversing
the order.
Two forms of the purely inductive method may be
distinguished. In the first place, some single set of
economic facts may be examined under special con¬
ditions, with a view to the application of the logical
method of difference. In the second place, an elaborate
collection of some particular class of economic facts
may be made with a view to generalization from a
large number of instances. In the former case, re-
VI.] OBSERVATION AND EXPERIMENT. 175
course is had to experiment or to some substitute for
experiment. In the latter case, the sources from which
our material is gathered are history and statistics.
§ 2. Limited scope for experiment in political
economy.—Observation and experiment are sometimes
contrasted with each other as if they were distinct
methods of obtaining knowledge. But this is of course
not the case. Experiment is nothing more than the
process of deliberately producing phenomena for our¬
selves, so that we may be enabled to observe them
under the most advantageous circumstances h In
experiment we have a control over the phenomena
under investigation, and generally a far more precise
knowledge of the conditions under which they occur,
than is possible in cases where they are brought about
independently of our own action. Where there is
free scope for experiment, we can also multiply our
instances under varying conditions, and thus isolate
phenomena successively from those circumstances that
might obscure their true character. It is accordingly
to experiment that recourse is usually had for the
application of the method of difference, which is the
^ We sometimes hear of " unintentional experiments," such as a
railway accident or a famine. Experiment, however, in the logical
sense implies something that is brought about deliberately and of set
purpose : it is not merely any striking event from the investigation of
which special insight may be gained. The conditions under which
such phenomena as the above may serve as substitutes for logical
experiment will be considered later on.
176 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
only completely adequate method of reasoning from
specific experience.
The essence of the method of difference is the
comparison of two instances, which resemble one
another in all material respects, except that in one a
certain cause is present, while in the other it is absent.
The effects of that cause are thus made manifest.
The requirements of the method can best be
satisfied if the cause, whose effects are under investi¬
gation, comes singly into operation in a state of things
with which we are so well acquainted that no material
change can pass unobserved. It is also generally
speaking essential that there should not be a long
interval between the occurrence of the cause and the
production of the effect; otherwise it is practically
impossible to exclude the interference of extraneous
and unknown causes. Under these conditions, the
instances compared are the state of things before, and
the state of things after, the given cause has come into
operation ; and this is the form of the method usually
adopted when recourse is had to experiment.
We have a different form of the method, when one
of the instances is the state of things brought about
by the given cause operating in conjunction with other
causes, while the second instance is the state of things
brought about by causes similar to the latter operating
alone. It is not essential here that the nature of the
VI.]
EXPEKIMENT.
177
"other causes" should be completely known ; the sole
requirement is that they should occur equally in both
instances. It is very difficult, however, to be sure that
this requirement is really fulfilled ; and hence the
first way of applying the method is usually the more
satisfactory \
It may now be asked how far effective experiment
is possible in political economy, or how far without
experiment the conditions requisite for the employ¬
ment of the method of difference are capable of being
satisfied.
It cannot be said that experiment is a resource
from which we are absolutely debarred in economic
enquiries. Experiment may assist in establishing the
simpler laws of the production of wealth—as, for in¬
stance, those relating to the circumstances upon which
the efficiency of labour depends, and the means whereby
such efficiency may be increased. Thus, by the aid of
experiment the economist may directly investigate the
effect of the specialization of skill upon the dexterity
of the workman, and hence be the better able to
1 Illustrations of both the above varieties of the method of
difference will be found later on. There is a third variety, in which
the given cause operates in conjunction with other causes, whose
nature and individual effects are accurately known both in kind and
amount. In this case, the effect of the given cause may be de¬
termined by subtracting from the total effect the sum of the effects
of the other causes. This form of the method of difference is
technically known as the method of residues.
K. 12
178 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
estimate the economic consequences of the division of
labour. The law of diminishing returns can also be
tested by experiment.
But these are problems that lie only on the threshold
of economics. Indeed, some of .the laws thus deter¬
mined by experiment may be regarded as the con¬
tributions of other sciences to economics, rather than
as conclusions obtained by it. In regard to problems
of distribution and exchange, and the economic in¬
fluence exerted by social institutions and governmental
policy, the possibility of effective experiment is far
more questionable. The phenomena are for the most
part not such as can be manipulated at will ; and even
when some kind of experiment is possible, our power of
controlling and varying the concomitant circumstances
is very limited; nor can the experiment be freely
repeated \
^ Cairnes, after stating that the economist is precluded from the
use of experiment in the ordinary sense, suggests as an inferior
substitute what he speaks of as "experiment conducted mentally."
Hypothetical conditions are first formulated ; then some new agency
is supposed to come into operation under these conditions ; and
finally the effects of this new agency are deduced. In this way,
Cairnes adds, Ricardo employed as far as the nature of his problem
and the circumstances of the case permitted, that experimental
method which those who would disparage his great achievements
afiect to extol, but the real nature of which, as their criticisms shew,
they so little understand" {Logical Method^ p. 81). The process
referred to is a form of the deductive method, and is of the greatest
utility. But to speak of it as in any sense ' ' experimental " can hardly
be considered a legitimate use of language.
VI.]
EXPERIMENT.
179
It is sometimes said that every new law is an
experiment; and, in the popular sense in which the
term experiment is used, this is true. In all legisla¬
tion, new phenomena are produced by human agency ;
the precise character of these phenomena either in
kind or amount, it is generally impossible to foretell ;
and, although a return to the exact status quo ante
may be out of the question, some further modification
by subsequent legislation is always possible. But it
is not the case that the primary object of every new
law is to afford means of studying the effects which
a change of conditions or the introduction of a new
agency is capable of producing ; nor is any effort made
to arrange or modify the attendant circumstances so
as to facilitate the attainment of this object. Legis¬
lation cannot, therefore, be generally speaking regarded
as equivalent to experiment in physical science^.
^ Bacon distinguishes between experimenta lucífera and experi¬
menta fructífera. " Experiments, which are in themselves of no use,
but avail only for the discovery of causes and axioms, we are wont
to call light-bringing experiments, to distinguish them from fruit-
hearing ones. They have in them a wonderful virtue and condition ;
namely, ^ that they never deceive or disappoint. For since they are
employed not to effect any result, but to reveal the natural cause in
something, however they fall out, they equally satisfy our purpose,
inasmuch as they settle the question " (Novum Organen, Book i,
Aphorism 99). In modern works on logic, the term experiment is
usually limited to experimentum luciferum ; in other words, we mean
by an experiment in the logical sense, some course of action whose
immediate object is increase of knowledge, rather than material
12—2
180 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
The statesman may, however, rightly be said to ex¬
periment when he adopts avowedly tentative measures,
with the express object of gaining insight into their social
and economic effects. Such a course may be adopted in
a modification of tariffs, the duties on a few articles only
being in the first instance altered ; or in a reform of
the Poor Laws, the change affecting in the first instance
only one or two counties. Legislation of a permissive
character may, again, be specially intended to resolve
itself into local experimentation. Action of a novel
kind may be taken by local authorities in certain parts
of the country, and the results watched by those in other
parts of the country. Thus the area of operation may
gradually be extended, and perhaps with each extension
fresh lessons may be learnt. It should be observed
that in this case we are able to compare the condition
of the locality where the experiment has been made,
not only with the antecedent condition of the same
locality, but also with the condition of other localities
where there has been no such experiment. By the
latter comparison we may be enabled to eliminate the
effects of concurrent social and industrial changes that
are affecting the country as a whole. There is here
a combination of the two forms of the method of
difference to which reference has been already made h
advantage. It is only in special cases that exjperimenta fructífera are
also to any marked extent lucífera.
1 Tentative legislation is strongly advocated by Jevons in one of
VI.]
EXPERIMENT.
181
It should be added that in special cases economic
experiments may be made by private bodies of indi¬
viduals; as, for instance, those of Robert Owen and
his followers in communism. Another interesting
example of a somewhat different kind is afforded by
the year's trial of the " forty-eight hours' week " made
in 1893 at the Salford Iron works of Messrs Mather
and Piatt.
Still, at the best, experiments, such as the above,
are made under very different conditions from those
that are conducted in the laboratory of the chemist or
the physicist. It by no means follows that whenever
experiment of some sort is possible, the requirements
of the method of difference can be adequately fulfilled.
So far, for instance, as experiments involve tentative
his essays on Methods of Social Reform (pp. 253 ff.). He points out
that by this means it is possible to make " direct experiments upon
the living social organism," and to conduct social experimentation with
a view to social progress. It may be observed that in the Middle Ages
laws were frequently passed for a limited period of years. This
remark applies, for example, to early legislation affording protection
to native industries. Thus in 1455 the silk workers and spinners
complained that their industry was being ruined by the Lombards
and others, and a law was passed prohibiting for five years the im¬
portation of manufactured silk goods. In 1463—after an interval,
during which the law was inoperative—a similar measure, but of a
more general character, was passed ; and again, after another in¬
terval, in 1482. There were several subsequent renewals, and it was
not till the beginning of the following century that the prohibition was
made perpetual. By experimental legislation of this kind, whatever
its other drawbacks, fresh experience was continually gained.
182 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
legislation, it is at any rate not possible to make them
at will ; and, therefore, the process of investigation for
ordinary enquirers differs little from simple observation.
Nor are the experiments actually made likely to be of
the kind that the theoretical economist would naturally
select. It is to be added that even statesmen cannot
indefinitely multiply the instances under varying cir¬
cumstances ; and thus one of the special advantages of
experiment is lost.
It is further to be observed that in the economic
world those effects, that are of the most consequence,
are apt to be produced very gradually. There is,
therefore, the greater opportunity for the independent
occurrence of material changes over which we cannot
possibly have control, and of whose occurrence we
may even have no suspicion. It is, in other words,
specially difficult to isolate any single cause from
other causes whose effects may be mistaken for its
own.
Experiments that involve the voluntary action of
individuals are also under a peculiar disadvantage,
inasmuch as the persons who are made the subjects of
the experiment are likely to be themselves interested
in the result. Thus, in experiments intended to throw
light upon the economic effects of community of goods,
it is impossible to exclude the interference caused by
the fact that the majority of the members of the self-
VI.] EXPERIMENTS IN COMMUNISM. 183
constituted societies, seeking to realise socialistic ideas,
are probably—at any rate at the outset—specially
selected persons, by no means typical or representative
of mankind in general. They are likely to be persons,
who are individually disinterested and unselfish, while
they are at the same time peculiarly anxious that the
results should be of a nature favourable to the scheme
they have at heart. In some cases, the members of
voluntary communistic societies have further been held
together by special bonds of a religious nature. So
far, then, as these considerations go, communistic
experiments would appear to be unduly favourable
to communism. It is true that such experiments as
have actually been tried have more often met with
failure than success. But in order to account for this,
advocates of communism may call attention to another
source of weakness in the experiments, that tells in the
opposite direction. For it may be maintained that
because of the small scale on which alone it is possible
to experiment, and the uncongenial environment,
and the fact that exceptional and sustained sacrifice of
a purely voluntary kind is required on the part of the
strongest and ablest of those concerned, the principle
under trial is not allowed a fair chance. It cannot
be said that no useful lessons are to be learnt from
experiments of the kind referred to ; but it seems
clear that they cannot be regarded as by themselves
184 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
providing conclusive evidence either one way or the
other^
^ Some of the above observations apply to the interesting ex¬
periment, already referred to, which was made by Messrs Mather and
Piatt in 1893 in order to test the working of an eight hours' day ; and
a very brief account of that experiment (taken from the Economist for
81 March, 1894) may here be given. The firm, who employed about
1200 men in the engineering and machinery tirades, were anxious to
reduce the hours of labour, and they took their workmen into counsel
with them on the subject. As a result, it was arranged that from
February 1893 to February 1894 the works should run 48 instead of
53 hours per week, the rate of wages remaining unaltered. The
details of the scheme were discussed with the officials of the Amalga¬
mated Society of Engineers, and the Society undertook that during
the year in which the experiment was to be tried no demand for a
reduction of hours should be made upon other employers. It was
moreover pointed out to the workmen that if the new system was to be
a success, they must themselves contribute their share towards making
it so by greater punctuality and by increased energy and interest
during the shorter hours. An earnest appeal was also made to the
foremen in the various departments to exercise foresight and vigilance
throughout the year in forwarding the work from process to process,
in furnishing materials well in advance, and in providing such simple
facilities and workshop conveniences, other than new tools, as might
from time to time be suggested by the men, especially the piece-work
men. A special feature in the experiment was that no overtime
wh9,tever was worked, except for breakdowns and repairs, extra men
being employed, on the double shift plan, to meet extra pressure of
work. It was arranged with the men and with the trade-unions that
should the experiment prove a failure, the firm should be allowed to
modify the programme or revert to the old system.
The results of the experiment were worked out very fully by
Mr William Mather, the indirect, as well as the direct, advantages
and disadvantages of the new system being carefully calculated
and balanced one against another. It is unnecessary to go into
details here ; it will suffice to say that the results were found to be
very satisfactory from the point of view of the employers as well as
from that of the workmen. The gross earnings of pieceworkers were
VI.]
EXPERIMENT.
185
I 3. The employment of the method of difference
independently of deliberate experiment,—On the whole —
leaving on one side the more elementary phenomena of
the production of wealth—the help to be derived from
deliberate experiment in political economy is but slight.
somewhat reduced, but this reduction was slight in comparison with
the reduction in their hours of labour ; and the very slight increase in
the wages cost of production was counterbalanced by the saving in gas
and electric lighting, and in wear and tear of machinery, &c.
It cannot be doubted that the experiment was a valuable contri¬
bution to the determination of the economic effects of a shortening of
the hours of labour. At the same time it is possible to exaggerate its
cogency, even if it be assumed that, in making his calculations, Mi-
Mather was able to eliminate interferences due to external changes in
the state of the trade in which the firm was engaged.
As was pointed out by critics at the time, the conditions under
which the reduction of hours of labour took place were in several
respects exceptional in character, so that doubt may be felt as to
whether the satisfactory results should not in large measure be
credited to these collateral conditions rather than to the mere reduc¬
tion of working hours. Thus some part of the gain might not un¬
reasonably be attributed to the better organisation enjoined upon the
foremen in the various departments, and to the additional facilities
afforded to the pieceworkers to enable them to increase their output.
It was moreover natural that throughout the trial year all concerned
should do their utmost to make the trial a success. The men would
naturally strain every nerve at the beginning in order to secure a
permanent future advantage ; and the employers would be not less
anxious that the experiment which they had initiated should not
result in failure.
Under a general eight hours' system these special incentives to
increased production would be wanting. Hence any generalisation
from a particular case of this kind must be made with caution ; and
the experiment ought to be considered along with much other evidence
bearing on the point at issue rather than as by itself affording a
decisive solution of the question.
186 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
It will for the most part be found that the exceptional
cases, in which the method of difference can with some
success be employed in complex economic enquiries,
are not the result of experiment at all, but are due
either to the sudden but fortuitous introduction of
influences, abnormal in their character or in the scale
of their operation, or else to the rare chance of two
communities existing side by side, in both of which all
the agencies affecting their economic condition, save
one, are similar in kind.
An example, to which the former of the above
descriptions will apply, is afforded by the sudden
diminution in the supply of labour on an altogether
abnormal scale caused by the Black Death in the
fourteenth century. By a comparison of the conditions
of the labour market before and after this plague, some
of the effects of a scarcity of labour on wages are
distinctly indicated even by the aid of the imperfect
data that alone are now obtainable \ Again, in the
issue of assignats at the time of the French Revolution,
in the suspension of the Bank Charter Act during a
period of crisis, in a sudden burst of activity such as
manifested itself in the American railroad construction
of 1881, we have further examples of agencies coming
1 An example of a somewhat similar character—the Irish potato-
famine of the years 1845 to 1849—is adduced by Sir G. C. Lewis, On
the Methods of Observation and Reasoning in Politics, Chapter 6, § 8.
VI.] EXAMPLES OF THE METHOD OF DIFFERENCE. 187
suddenly into operation and producing effects that
seem unmistakeable.
An example belonging to the second type is to
be found in the first two chapters of the second
book of Malthus s Essay on Population. Malthus
cites Norway and Sweden as two countries closely
resembling one another in their general economic
conditions, except that Sweden had some advantage
in a more favourable soil and climate. Nevertheless,
the average mortality in Sweden in proportion to its
population was considerably higher than in Norway,
the lower classes of the people were in a less flourishing
condition, and the increase of mortality in barren
seasons was peculiarly striking. Malthus accordingly
applies the method of difference in order to determine
the cause of this diversity ; and he finds it to consist
in the superior force in Norway of preventive checks
to the increase of population. Thus, till within a few
years of the time when he wrote, every man in Norway
was subject to ten years' military service; and during
this period he "could not marry without producing a
certificate, signed by the minister of the parish, that
he had substance enough to support a wife and
family; and even then it was further necessary for
him to obtain the permission of the officer." The
general sentiment of the country was also opposed
to early marriages. Labour was little migratory, and
188 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
the division of labour was not carried far ; every man
could, therefore, judge of the openings that existed
for his own employment and that of his children ;
and thus the danger of a redundant population was
more clearly brought home to each individual. In
Sweden, on the other hand, the variety of employment
was greater ; and the danger of redundancy, therefore,
not so apparent. The average proportion of yearly
marriages to the whole population was larger than
in Norway, and this proportion increased at every
temporary and occasional increase of food. At the
same time, the continual cry of the government was
for an increase of subjects, and practical evidence of
this desire was given in the establishment of lying-in
and foundling hospitals. The contrast was, therefore,
very marked ; and, taking it in connexion with the
general similarity between the two countries in other
respects, the conclusion drawn by Malthus seems
difficult to gainsay ^
Mill indicates in his Logic the conditions that he
regards as alone adequate for the application of the
method of difference in the protectionist controversy.
" If two nations," he says, " can be found which are
alike in all natural advantages and disadvantages ;
whose people resemble each other in every quality,
physical and moral, spontaneous and acquired; whose
^ Compare Bonar, Malthus and his Work, p. 132.
VI.] CONDITIONS OF THE METHOD OF DIFFERENCE. 189
habits, usages, opinions, laws, and institutions, are the
same in all respects, except that one of them has a
more protective tariff, or in other respects interferes
more with the freedom of industry; if one of these
nations is found to be rich, and the other poor, or one
richer than the other, this will be an experimentum
crucis: a real proof by experience, which of the two
systems is môst favourable to national riches.''^
The implication is that these conditions are
necessarily incapable of being satisfied. It has
been maintained, however, that a comparison of the
economic progress of Victoria and New South Wales
during the period succeeding the year 1870 actually
provides an instantia crucis of the kind asked for.
Both colonies gained ground after 1870, but the
progress of New South Wales is said to have put
that of Victoria into the shade, whether we take as
our criterion population, or revenue, or exports and
imports, or the value of rateable property. The
method of difference has accordingly been applied to
find the cause of this. The territories of the two
colonies are contiguous; they closely resemble one
another in natural advantages and disadvantages ;
their inhabitants belong to the same stock, and are
similar in character and habits; they are governed
on the same principles; their institutions have been
1 Logic, vol. ii. p. 472.
190 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
for the most part the same. But in this respect
there is one striking exception. In Victoria a policy
of protection has been in the ascendant, in New
South Wales a policy of free trade. Here then, it is
argued, is to be found the difference required to
account for the diversity in the progress of the two
colonies k
It cannot be denied that in such cases as the above
some degree of cogency attaches to the employment
of the method of difference even in complex economic
enquiries; in other words, a connexion of cause and
effect can be established by this method with a more
or • less high degree of probability. The cases of
which this can be said are, however, exceptional ; and
even in the most favourable instances, confirmation
by some independent line of reasoning is indispensable.
For, in consequence of the complexity of the surrounding
circumstances, and the length of time generally required
for effects fully to manifest themselves, it is impossible
that the conditions requisite for the valid employment
of the method should be more than approximately ful¬
filled. Such conditions as are often satisfied in physical
science are quite unattainable.
If we are sometimes inclined to accept without
1 Compare Lord Farrer, Free Trade and Fair Trade, Chapter 29 ;
and Sir G. Baden-Powell on the Results of Protection in Young Com¬
munities in the Fortnightly Revieio for March 1882.
VI.] COMBINATION OF INDUCTION AND DEDUCTION. 191
question economic arguments based on the method of
difference, it is to a large extent because the way
has been prepared by previous reasoning tending
towards the same conclusion. How far we rely on
the previous reasoning, and how far on the à posteriori
evidence pure and simple, it is often difBcult to
determine. The latter evidence may, as Cairnes points
out, strongly arrest attention, because it deals with
new and perhaps striking facts. But when the basis
on which we really rest our conclusion is subjected to
logical analysis, it will probably be found to combine
induction and deduction, which mutually support and
strengthen one another; and not to be—as at first it
seemed—purely inductive.
It may be worth while to turn back to one or two
of the instances given above, in order to examiné their
cogency in a little more detail. In the comparison
drawn by Malthus between Norway and Sweden, it
seems impossible to make quite sure that some vital
difference between the two countries may not have
been overlooked. Hence the argument has not the
cogency that an ordinary argument based on the
method of difference would have in physics or chemistry ;
nor does Malthus for a moment imagine that it has.
He gives it as one item only in a mass of concurrent
evidence ; and as such its force is unquestionable. This
exemplifies the true place of the method of difference
192 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
in complex economic enquiries. Any given application
of the method taken by itself has not the independent
validity that belongs to the method under ideal con¬
ditions ; for such conditions cannot be fulfilled. But
it may usefully serve to strengthen or confirm evidence
afforded by other methods.
Similar remarks apply to the free trade argument
based on the comparison between New South Wales
and Victoria. It is clear that in this comparison
account ought to be taken of the circumstances of the
two colonies before as well as after 1870. The gold
discoveries dating from 1851 caused Victoria to
develope with extreme rapidity, her gold fields being
about six times as productive as those of New South
Wales. More recently, however, there has been a
falling off in the Victorian production of gold from
about ten millions annually to about three millions.
May not the protectionist find here an obvious cause
for the comparatively slow progress of Victoria after
1870 ? Again in 1870, in consequence of the previous
rapid development of Victoria, the two colonies started
from a different level. While Victoria is not much
more than a quarter of the size of New South Wales,
her population was in 1870 very considerably the
larger, and so was her external trade. But it is a
well recognised fact that ceteris paribus the higher
the stage a country has reached, the more difficult is
VI.] NEW SOUTH WALES AND VICTORIA.
193
it likely to be for her to maintain a high rate of
progress. It may farther be argued, rightly or wrongly,
that by her policy of protection Victoria has laid the
foundation of future greatness, whatever the imme¬
diate effects on her prosperity may have been. It is
impossible, therefore, to base a perfectly conclusive
argument upon a bare comparison of the circum'stances
of the two countries.
The truth is that between any two countries there
are sure to exist to an almost indefinite extent differ¬
ences that may conceivably affect their economic con¬
dition. These differences may be small in themselves
and not apparent on the surface, and yet in the
aggregate their economic influence may be consider¬
able. "No two communities,'' says Sir Robert Giffen,
"are sufiiciently alike to be comparable in strict logic.
The slightest differences in the race or moral con¬
dition of the two communities, who are to outward
appearance much the same, might make a great
deal of difference in their material progress. If the
two are subjected to different economic régimes, how
are we to tell whether the inferior progress of the
one materially—even when we are sure about the
inferiority—is due to the régime, and not to other
differences in the character of the communities, which
we cannot so well appreciate ? External economic
circumstances are, besides, incessantly changing, and
K. 13
194 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
may affect two communities apparently of much the
same character and position quite differently. If it
were possible to institute many pairs of comparisons
and exhibit a uniform result in all, it might be safe
to infer that it was the régime which did make the
difference, no other uniform cause of difference being
assignable ; but this condition of course it is impossible
to fulfil.''^
^ Essays in Finance^ Second Series, p. 200. Mill argues on a
'priori grounds that it is impossible for two countries to agree in
everything affecting their economic condition with the one exception
of their policy as regards free trade or protection. After the passage
quoted on pages 188, 9 he continues: " But the supposition that two
such instances can be met with is manifestly absurd. Nor is such a
concurrence even abstractedly possible. Two nations which agreed in
everything except their commercial policy would agree also in that.
Differences of legislation are not inherent and ultimate diversities;
are not properties of Kinds. They are effects of pre-existing causes.
If the two nations differ in this portion of their institutions, it is
from some difference in their position, and thence in their apparent
interests, or in some portion or other of their opinions, habits, and
tendencies ; which opens a view of further differences without any
assignable limit, capable of operating on their industrial prosperity,
as well as on every other feature of their condition, in more ways
than can be enumerated or imagined. There is thus a demonstrated
impossibility of obtaining, in the investigations of the social science,
the conditions required for the most conclusive form of inquiry by
specific experience." This à priori argument has some degree of
validity; but it is pushed a little too far. The adoption of a free
trade policy instead of a protectionist or vice versa might conceivably
be due to fortuitous circumstances. It might be due, for instance,
to the ascendancy of an individual statesman or statesmen, whose
infiuence was exerted on the particular side in question- It might,
therefore, possibly be unconnected with any other differences of
economic importance, At the same time, while such an occurrence
VI.] FALLACIOUS ARGUMENTS FROM CAUSE TO EFFECT. 195
So great is the danger of exaggerating the probative
force of the method of difference in economic enquiries,
that there is probably in popular economic reasoning
no more common fallacy than a false argument from
cause to effect based on an illegitimate application of
this methods
Typical examples are to be found in the ordinary
à posteriori arguments in favour either of protection
or of free trade. The protectionist points to the
prosperity of the United States, and the free trader
to the prosperity of England. But economic prosperity
or the reverse is of course the outcome of a variety
of causes acting together, some of which tell in the
same direction, while others more or less counteract
one another. Granting that free trade tends towards
prosperity, there may also be other powerful causes
as this is ''abstractedly possible," it is without doubt improbable in
the highest degree.
^ It may be observed in passing that we commit the fallacy of post
hoc ergo propter hoc not only when we assign an effect to an ante¬
cedent that is really unconnected with it, but also when we assign
it exclusively to an antecedent that only partially accounts for it.
For example, Professor Marshall enters a caution " against treating
the new forces of competition as exclusively responsible for those
sufferings of the English working classes at the end of the last
century and the beginning of this, which were partly due to war, bad
harvests, and last, but not least, a bad Poor Law. That law was
itself antagonistic to free competition, which it set aside in favour
of a crude form of socialism, that exercised a degrading influence
on character" (Principles of Economics, vol. i, 1st edition, p. 717
note).
13—2
196 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
tending in the same direction ; and these may operate
with greater force in the countries that happen to be
protectionist than in those that happen to levy no
protective duties. Hence it is quite compatible with
the free trader's position that a given protectionist
country should be more prosperous than a given free
trade country. For it is not maintained that, how¬
ever much other circumstances may vary, prosperity
is always proportional to freedom of commerce ; but
simply that under given economic conditions the
prosperity of a country is increased by free trade.
On the other hand, if it be allowed that on the
whole England has very greatly prospered since the
repeal of the Corn Laws, the beneficial effects of
free trade are not by this single fact alone rendered
unquestionable; for the conditions demanded by the
method of difference fail altogether to be satisfied.
Many other causes have been in operation during the
last forty years to which our prosperity might on
similar grounds be rightly or wrongly attributed; for
example, the progress of invention, the vast improve¬
ment in means of communication and the diminished
cost of transport, the spread of education, the Australian
and Californian gold discoveries, the extension of the
field for emigration and the further opening up of new
countries. It must, moreover, be remembered that,
even before the repeal of the Corn Laws, England
VI.]
THE METHOD OF DIFFERENCE.
197
occupied a unique position in the commercial world.
Friedrich List, applying the à posteriori method, is
led to attribute the commercial supremacy of Great
Britain largely, if not mainly, to the restrictive policy
pursued by her up to the early part of the present
century ^
All things considered, it must be said that the
method of difference has no very important part to
play in economics ; and that even when it is employed
under exceptionally favourable conditions, the argument
is still not completely satisfactory, unless supported and
strengthened by some independent line of reasoning.
The function of the method of difference in political
economy is to suggest or to confirm, rather than to afford
complete and adequate proof. It should be added that
the method needs to be employed with the greatest
caution, even when it is used only for purposes of
verification. So many counteracting causes may be
1 It would have seemed almost unnecessary to call attention to
the above considerations were it not that the à posteriori argument in
favour of free trade has recently been cited as a typical example of
the value of the inductive method in economic enquiry. The
inductive method, says Professor R. M. Smith, is comparative—it
compares economic institutions performing the same function among
different nations of the same degree of civilisation, in order to
discover which is the best " {Science Economic Discussion, p. 107) ;
and he afterwards adds, as a special illustration of a general conclusion
gained by induction, that we can reason "from the prosperity of
England to the principle of free trade, at least for industrially
developed nations " (ib. p. 114).
198 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
in operation that the influence of a given cause,
although undoubtedly exerted in a known direction,
may be extremely difficult to detect in the complex
facts, which alone are open to direct observation. More
will be said upon this point in the following chapter.
§ 4. The method of inductive generalization from
a multiplication of instances.—It has been shewn in
the preceding section that the economist cannot to
any considerable extent rely upon inferences based
on the examination and comparison of single pairs
of instances. It remains to be considered how far he
can substitute quantity for quality, and can generalize
from the direct observation of a number of cases
in which the same cause is in operation under
varying conditions. Generalizations, thus based upon
an accumulation of instances, will fall for the most
part under Mill's method of agreement, or his method
of concomitant variations, and will be in the strictest
sense empirical.
The essence of the method of agreement consists
in finding two phenomena constantly conjoined, while
the remaining circumstances by which they are
accompanied are none of them present in all the
instances. Where this condition is fulfilled, it is
inferred that there must be some causal connexion
between the two phenomena in question.
The peculiarity of the method of concomitant
VI.] HISTORY AND STATISTICS. 199
variations is that it requires quantitative data.
Causal connexion is inferred to exist between two
phenomena, because variations in the one correspond
in some manner with variations in the other.
In the endeavour to employ the above methods,
the special sources from which material may be
gathered are the history of the past and the sys¬
tematic observation of the present. The account of
existing economic phenomena need not necessarily
take a statistical or quantitative form. But since
economics is essentially concerned with quantities,
there is a tendency for contemporary economic records
to become more and more statistical in tone. The
same would be the case with the history of past times, if
statistical data relating to the past could be multiplied
at will. The further we go back, however, the fewer
and the more untrustworthy are the figures at our
disposal.
The functions of history and statistics in economic
enquiries are very important and very various. For the
present, however, their distinguishing characteristics
will not be dwelt upon; and they will be considered
in respect of one of their functions only, namely, as
constituting—along with the observation of everyday
economic facts—the basis of inductive generalization
from a multiplication of instances \
1 It is to be observed that some writers who insist upon the
200 THE METHOD OF SPECIFIC EXPERIENCE [CHAP.
The first and most obvious point to notice is that
the importance of the place to be assigned to such
generalization in economics varies according to the
importance of the purely inductive method in economics use the term
inductive in a rather wider sense than is usual in works on logic.
"Finally, we may ask," says Professor R. M. Smith, "what can
the inductive method do when it faces some great economic problem
which affects the whole community and civilisation itself? Such a
problem is the labour problem. What is the condition of the labour¬
ing class? Has that condition deteriorated or improved? The
inductive method has not shrunk from attempting to find an answer
to even such questions as these. Thorold Rogers has laboriously
traced the condition of the English labourer during the last six
centuries, for the purpose of answering this question historically.
Giffen has attempted, by statistics, to shew that the condition of the
labouring class has materially improved during the last fifty years"
{Science Economic Discussion^ p. 111). What writers on logic,
however, usually mean by induction and the inductive method is a
process of reasoning, whereby on the strength of particular instances
a general law is established. In the above examples there is no
establishment of any general law at all, and the enquiries are
obviously of a kind that must proceed by a study of concrete facts.
Not even the most extreme of anti-inductive economists has ever
maintained that we can à 'priori^ or by any other method than that
of specific experience, determine the condition of the labouring classes
at any given time, or compare their condition at different times.
It should then be clearly understood that in expressing doubts as to
the efficacy of pure induction in political economy, we are referring
to the establishment of general laws on purely empirical data ; we do
not mean to deny—it would indeed be absurd to deny—the essential
and paramount importance of direct appeals to experience in en¬
quiries which are not concerned with the ascertainment of general
laws at all, but merely with the investigation of economic phenomena
at a particular time or place, or with their comparison at different
times or places. In other words, we make no attempt to establish de¬
scriptive economics on any other basis than that of direct observation.
The only question at issue is the place of induction in constructive
economics.
VI.] IN RELATION TO THE PRODUCTION OF WEALTH. 201.
nature of the problems under discussion. As a rule, it
is less and less to be trusted, as we work up from the
more simple to the more complex phenomena with which
the science is concerned. This is in accordance with
the ordinary logical canon, that the greater the number
of causes in operation, and the more complicated the
mode of their interaction, the less possible it becomes
to fulfil the conditions required for valid inductive
reasoning.
It is in regard to the circumstances affecting the
production of wealth that the relative importance of
direct generalization from specific experience is thé
greatest. It has, indeed, been already pointed out
that, in this department of the science, all economists
agree in adopting as their principal resource an
inductive method. No doubt, even within this sphere,
they seek deductively to connect their conclusions
with general principles of human nature. In other
words, deduction and induction, here as elsewhere,
supplement one another. Still, the inductive element
is more prominent than the deductive. This is the
case, for instance, in the investigation of the circum¬
stances upon which the degree of productiveness of
productive agents depends, and in the comparison of
production on a large and on a small scale.
Again, in investigating the laws of the increase
of capital, while the deductive argument from a
202 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
psychological analysis of motives is important, the
effects of extërnal circumstances upon the operation
of such motives can be ascertained only by fresh
observation and direct generalization. It is experience
that teaches what states of society most encourage
saving, though no doubt the facts that experience
brings to light can afterwards be psychologically
accounted for.
Similar remarks apply to theories of population.
In the suggestion and development of such theories,
the history of population, and statistical records of
the manner in which the rate of increase of human
beings has in fact varied with varying conditions, are
of the first importance. This is exemplified in the
second and later editions of Malthus's Essay on
Population, Malthus pursues an inductive method of
enquiry. His reasoning is directly based on historical
and statistical data. He collects and compares recorded
facts which throw light on the forces controlling the
growth of population in a number of different countries,
civilised and uncivilised, in past times and in modern
Europe.
As further examples of a valid treatment of
economic problems, in which induction is placed in
the foreground, reference may again be made to
Cairnes's analysis of the economic characteristics of
slave labour, and to Mill's discussion of peasant
VI.] EMPIRICAL GENERALIZATIONS. 203
proprietorship in its economic aspects. It is worth
specially pointing out that Mill's argument is based
on the method of agreement, not on the method of
difference. He is not able, satisfactorily or on any
considerable scale, to compare different systems of land
tenure under conditions identical in all other material
respects—identical, that is to say, in climate, fertility
of soil, national character, methods of cultivation, and
so forth.
Some additional illustrations of the appropriate use
of the empirical method in political economy will be
found in the chapters that follow on economic history
and statistics. To give here one more example of a
typical character, it may be pointed out that in regard
to the possibilities of co-operative production in its
various forms we are in a marked degree dependent
upon direct generalization from experience.
When recourse is had to the empirical method it
must always be remembered that the mere number of
the instances is not so important, as that they should
be diverse in character, and collected over a wide and
varied range. The object is to eliminate the effects
of adventitious circumstances ; and it is, therefore,
important that the instances, upon which the argument
is based, should have as little as possible in common,
except those circumstances which constitute the special
subject of investigation. A dozen well-selected instances
204 THE METHOD OP SPECIFIC EXPERIENCE. [CHAP.
fulfilling this condition are worth more than a hundred
all of a similar character.
It should be added that, taking empirical gene¬
ralizations at their best, great caution is necessary in
extending them beyond the limits of actual experience.
For, however wide and varied the range of economic
•conditions that has been examined, there may still
be other conditions, in relation to which the inferred
law needs considerable modification. Je von s truly
remarks—"However useful may be empirical know¬
ledge, it is yet of slight importance compared with
the well-connected and perfectly explained body of
knowledge, which constitutes an advanced and de¬
ductive science. It is, in fact, in proportion as a
science becomes deductive, and enables us to grasp
more and more apparently unconnected facts under
the same law, that it becomes perfect. He who
knows why a thing happens, will also know exactly
in what cases it will happen, and what difference
in the circumstances will prevent the event from
happening. Though observation and induction must
ever be the ground of all certain knowledge of nature,
their unaided employment could never have led to
the results of modern science."
It follows that even when we rely primarily on
induction, it is of great importance that our con¬
clusions should be confirmed and interpreted by
VI.] LIMITATIONS OF THE EMPIRICAL METHOD. 205
deductive reasoning. Hence, in saying that in certain
departments of economic enquiry induction is funda¬
mentally important, it is not meant that the need
of deduction from more general principles is super¬
seded ; but merely that the induction may usefully
precede the deduction.
§ 5. Limitations of the empirical method,—There
remain to be briefly considered those very important
departments of economic enquiry, in which direct
generalization from complex economic facts, without
a prior appeal to underlying principles, is generally
speaking in a high degree untrustworthy, and in
which, if we depend upon inductive reasoning alone,
our conclusions are more likely to be erroneous than
not. In this category are included the central problems
of the exchange and distribution of wealth. It is of
these problems that Cairnes is thinking when he
speaks of the "utter inadequacy" of the inductive
method in political economy. Bagehot is also referring
to them, when he remarks : " The facts of commerce,
especially of the great commerce, are very complex.
Some of the most important are not on the surface ;
some of those most likely to confuse are on the
surface. If you attempt to solve such problems
without some apparatus of method, you are as sure
to fail as if you try to take a modern military fortress
—a Metz or a Belfort—by common assault : you must
206 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
have guns to attack the one, and method to attack
the other." By this reference to an "apparatus of
method," Bagehot means that we are to proceed, not
by the unaided analysis of complex economic facts,
but by a synthesis, based on a previous examination
of the nature and action of the elementary forces,
through whose operation the complex facts are pro¬
duced. The need of an à posteriori investigation of
the concrete phenomena themselves, at a certain stage
of the reasoning, remains ; but no trust is to be put in
an à posteriori method pure and simple.
The argument, on which the above view is based,
turns on the enormous complexity of the phenomena of
the distribution and exchange of wealth. In the technical
language of logic, the method of direct generalization
is inapplicable, because of plurality of causes and
intermixture of effects. There is plurality of causes,
ix,, the same phenomenon may on different occasions
be traced to wholly different agencies ; and there is
intermixture of effects, ix,y the same cause is continually
operating in conjunction with other causes, whose effects
coalesce and combine with its own. In consequence
of the latter circumstance, the effect proper to a given
cause is, in one place, counteracted by some other
influence operating simultaneously; in another place,
it is intensified ; in another, it is modified and led
to change its character. Mill shews clearly in the
VI.] NEED OF DEDUCTIVE EEASONING. 207
third book of his Logic (without any special reference
to political economy) that where effects result from
the union of many causes, the method of simple
observation is in general inappropriate. The difficulty
is increased by the length of time that is in the
majority of cases required if the full effects of economic
/
causes are to be allowed to manifest themselves. In
these cases, even if the purely à posteriori method
enables us to detect the immediate but transient
effects of given economic changes, the ultimate and
more permanent effects are likely to elude our grasp
unless we are assisted by some " apparatus of method.''
Many of the problems of political economy are further
complicated by the relation of mutuality that so often
exists between the phenomena with which the science
is concerned. Instead of one phenomenon determining
a second, and the second determining a third, without
any influence being in either case exerted in the
opposite direction, the three phenomena may mutually
determine one another. This is the case, for example,
with supply, demand, exchange-value, and with other
economic phenomena that are of equally fundamental
importance. To deal with relations of this kind by
the method of direct generalization is out of the
question. We must, as Professor Marshall puts it,
"work with the aid of a special organon.'
1 Present Position of Economics, p. 31.
208 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
For these reasons, it is impossible to frame any
general theories of value, interest, wages, rent, &c. by
purely à posteriori methods of reasoning. Recourse
must needs be had to a method, in which deduction
from elementary principles of human nature occupies
a position of central, though not exclusive, importance.
Upon this point there is practical unanimity amongst
economists, with the exception of the extreme wing of
the historical school ; and they do not so much aflSrm
that general theories can be obtained by the method
of specific experience, as that it is useless attempting
to obtain general theories at all. They turn aside,
therefore, upon the track of a quite different class
of problems.
Leaving general theories, a typical instance may
be added of an economic problem of a more special
character, towards whose solution the purely à posteriori
method avails little or nothing. Suppose that it is
desired to determine the relation, if any, between the
general commodity-purchasing power of money and the
price of securities yielding a fixed rate of interest.
Can the method of concomitant variations suffice for
a solution ? Statistics are available in abundance. The
average price of Consols—which may be taken as
representative of securities yielding a fixed rate of
interest—is known for every year in the century;
and numerous tables have been compiled, shewing
VI.] NEED OF DEDUCTIVE KEÁSONING. 209
how, during a number of years, the average aggregate
price of certain selected wholesale commodities has
varied. In the construction of these tables certain
difficulties present themselves, but however perfect they
might be made, we could never, by simply comparing
them with the price of Consols or any other kind of
security, obtain even approximately a solution of the
given problem. For whatever may be the effect of the
general purchasing power of money on the price of
securities, it is at any rate likely to be insignificant by
the side of other influences, such as the condition of
the money market or the political outlook. It is true
that the investigation, if it is to be complete, requires
knowledge of the general characteristics of periods of
rising and falling prices, such as can be gained only by
experience. But it also of necessity involves deductive
reasoning of some degree of complexity.
In some cases it is possible approximately to satisfy
the conditions of valid induction, and yet the conclusion
so obtained cannot be regarded as more than suggestive
and provisional, until deductive explanation and
verification are forthcoming. Theories of periodic
movements in the money market may be cited as an
instance in point.
It is remarkable that some writers on economic
method should imply that while the deductive method
might be applicable to a simple and stationary condition
K. 14
210 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP.
of industry, it becomes valueless in face of the in¬
creasing complexity of the modern economic world ;
and that under such conditions, at any rate, it must
give way to the method of specific experience^. We
have already indicated reasons why the reverse is
nearer the truth. It is needless to say that as the
forces in operation become more numerous and their
modes of interaction more intricate, and as changes in
the general conditions of industry succeed one another
more rapidly, the problems of economics become more
difficult whatever method may be employed for their
solution. The deductive method needs to be applied
with the greater caution, and the apparatus of facts
with which ^ it has to be supplemented increases in
importance. But on the other hand, facts by them¬
selves leave us the more helpless, and mere empiricism
is the more misleading. Compare, for example, the
investigation of the connexion between changes in
gold supply and prices, or between changes in gold
supply and the rate of discount, under simple and
comparatively stationary industrial conditions, with the
same investigation under complex industrial conditions,
where credit and banking are fully developed, and
where prices, and the condition of the loan market,
are liable to alterations from an indefinite number of
^ Compare Cliffe Leslie's essay on The Known and the Unknown in
the Economic World,
VI.] WEAKNESS OF PURE INDUCTION. 211
causes. If a mere à posteriori examination of statistics,
without any appeal to deductive argument, might in
the former case be of some value, it would certainly in
the latter case be almost worse than useless ^
There is a special reason why no attempt should be
made to ignore or disguise the weakness of pure induc¬
tion in complex economic enquiries. The prevalence
of a low type of inductive reasoning in the treatment
of economic questions is one of the most fertile sources
of economic fallacy; and, however legitimate the em¬
ployment of the inductive method may be under
certain conditions, there can be no doubt that this
method is liable to serious abuse.
1 Compare Sir Kobert Giiïen's admirable investigations on the
above-mentioned subjects in the Second Series of his Essays in
Finance, In these essays the necessity of having recourse to a
deductive method of investigation is clearly shewn, whilst it is at the
same time pointed out that the deductive argument must not ignore
the actual working of modern commerce and modern banking. The
use of the deductive method has been so constantly misrepresented,
that it is well to lose no opportunity of repeating that to fall back
upon a deductive line of reasoning by no means involves our going
on our way regardless of actual facts.
14—2
CHAPTEE VII.
On the Deductive Method in Political
Economy.
§ 1. Nature of the deductive method,—In so far as
the method of specific experience fails to afford reliable
knowledge of economic laws, recourse mnst be had to
a method, whose essence consists in the preliminary
determination of ,the principal forces in operation, and
the deduction of their consequences under various
conditions. For an à posteriori argument depending
entirely upon the examination of concrete facts in all
the complexity of their actual presentation, is substi¬
tuted an à priori argument depending upon knowledge
' of the general characteristics displayed by men in their
economic dealings one with another. " The problem of
the deductive method,'' says Mill, "is to find the law
of an effect from the laws of the different tendencies
of which it is the joint result." The method in its
complete form consists of three steps. It is necessary,
first, to determine what are the principal forces in
operation, and the laws in accordance with which they
CHAP. VII.] THE DEDUCTIVE METHOD.
213
operate. Next comes the purely deductive stage, in
which are inferred the consequences that will ensue
from the operation of these forces under given con¬
ditions. Lastly, by a comparison of what has been
inferred with what can be directly observed to occur,
an opportunity is afforded for testing the correctness
and practical adequacy of the two preceding steps, and
for the suggestion of necessary qualifications. It will
be observed that only one of these three steps—namely,
the middle one—is strictly speaking deductive. The
so-called deductive method in its complete form is
thus seen to be not an exclusively deductive method.
It may more accurately be described as a method
which, whilst predominantly deductive, is still aided
and controlled by induction. This point will be further
brought out in what follows, but it seems desirable to
call attention to it at the outset.
§ 2. The application of the term " hypothetical " to
economic science.—Political economy, in having recourse
to the deductive method, is usually described as essen¬
tially hypothetical in character. This description of
the science needs, however, to be carefully explained
and guarded, as there is some danger of confusion of
thought in regard to the implications contained in it.
All laws of causation may be said to be hypothetical,
in so far as they merely assert that given causes will
in the absence of counteracting causes produce certain
214
THE DEDUCTIVE METHOD. [CHAP.
effects. As a matter of fact^ in the instances that
actually occur of the operation of a given cause,
counteracting causes sometimes will and sometimes
will not be present; and, therefore, laws of causation
are to be regarded as statements of tendencies only. It
follows that all sciences of causation, and pre-eminently
sciences employing the deductive method—including
political economy and astronomy—contain a hypotheti¬
cal element.
The above may be expressed somewhat differently
by saying that the use of the deductive method in
economics involves, at a certain stage, a process of
abstraction, necessitating a frequent recurrence of the
qualification ceteris paribus. The abstraction is carried
furthest in reasonings where the motive of self-interest
is supposed to operate unchecked in a state of economic
freedom ; that is, in reasonings which involve the con¬
ception of the " economic man." But in all cases where
the deductive method is used, it is present more or less.
For in the deductive investigation of the economic
consequences of any particular circumstance or any
particular change, the absence of interfering agencies
and of concurrent but independent changes is of neces¬
sity assumed. So far as other changes themselves
result from the one change or the one circumstance
specially under consideration, account must of course
be taken of them ; but the distinguishing characteristic
VII.]
LAWS OF CAUSATION.
215
of the deductive method consists in seeking, in the first
instance, to effect a mental isolation from the operation
of all modifying forces that are not in some way con¬
nected causally with the particular subject of enquiry.
The distinction between dependent and independent
changes, here indicated, is of fundamental importance,
and is in itself simple enough. At the same time, a
difficulty is often found in keeping it clearly in view
throughout the course of a complicated argument ; the
faculty of succeeding in this is essential to sound
economic reasoning, and needs special cultivation.
It does not, however, follow that because a law
is hypothetical in the above sense, it is therefore
unreal or out of relation to the actual course of
events. Although laws of causation may from a
certain point of view be regarded as hypothetical,
they are from another point of view categorical.
For they affirm categorically the mode in which
given causes operate. Moreover, even though a cause
may be in a manner counteracted in consequence of
the operation of more powerful causes acting in the
opposite direction, it will still continue to exert its
own characteristic influence, and will modify the
ultimate result accordingly. No one supposes that
the law of gravitation ceases to operate when a
balloon rises in the air or water rises in a pump ; and
this may serve as a simple illustration of what is of
216
THE DEDUCTIVE METHOD. [CHAP.
constant recurrence in regard to economic phenomena.
An intensification, for instance, in the demand for
a commodity may take place concurrently with an
increase in supply; and hence the absolute effect of the
change in demand may not be apparent in any actual
change of price. It may even be that the price falls,
whereas the change in demand operating alone would
have caused it to rise. Were it not for the latter
change, however, the price would, under the supposed
circumstances, have fallen still more. It remains true,
absolutely and without qualification, that every change
in demand tends to cause price to be different from
what it would otherwise have been.
Take, again, the theory that an increase (or dimi¬
nution) in the quantity of money in circulation tends
ceteris paribus to be followed by a general rise (or fall)
in prices. This is, in a sense, a hypothetical law: it
does not enable us to say that whenever there is an
actual increase in the quantity of money in circulation
there will actually be a rise in prices; nor does it
even enable us to say that if we find an increase
in the amount of money in circulation taking place
concurrently with a general rise in prices, the latter
phenomenon must of necessity be wholly due to the
former. For the cause in question is not the only one
capable of affecting general prices. Its effects may,
therefore, be counteracted by the concurrent operation
vil] " hypothetical " character of economics. 217
of more powerful causes acting in the opposite direction,
or exaggerated by the concurrent operation of causes
acting in the same direction. But while this is true,
it is also true that wherever the cause in question is
present, it does exert its due influence in accordance
with the law laid down, and plays its part in helping
to determine (positively or negatively) the actual effect
produced. The given law, therefore, notwithstanding
the hypothetical element that it contains, still has
reference to the actual course of events; it is an
assertion respecting the actual relations of economic
phenomena one to another.
But the question may be raised whether deductive
political economy is not hypothetical in a more funda¬
mental sense than has yet been indicated. It is clear
that whenever conclusions are reached by deductive
reasoning, their applicability to actual phenomena
must remain hypothetical, until it has been determined
how far the premisses which form the basis of the
reasoning are realised in fact. May it not accord¬
ingly be said that some at least of the conclusions of
deductive political economy are hypothetical in the
sense that they require, not merely the absence of
counteracting causes, but the realisation of certain
positive conditions, which are not as a matter of fact
always realised? If this question is answered in the
affirmative, it must not be understood to carry with
218
THE DEDUCTIVE METHOD. [CHAP.
it the implication that political economy employs
arbitrary or fictitious premisses, or premisses whose
relation to the actual phenomena of economic life is
doubtful. This, however, appears to be what is meant
by those who speak of the deductive method disparag¬
ingly, on the ground that it yields only hypothetical
conclusions—conclusions which are affirmed to be use¬
less for all practical purposes, however much their
hypothetical validity may be beyond question.
It is certain that in their use of the deductive
method, economists do very frequently work from
positive assumptions not universally realised. Indeed
their premisses need to be varied in order to meet
different cases ; and this being so, it is clear that the
applicability of their conclusions must depend upon
circumstances. For instance, in dealing with problems
that relate to rent, certain conditions of land tenure
are assumed; and in treating monetary questions,
certain regulations as to coinage, legal tender, instru¬
ments of credit, and so on, are supposed to be in force.
Again, in working out theories of wages, it is a not
unusual assumption that each grade of labour, or even
the working class as a whole, has its own definite
standard of comfort. Even those assumptions that may
be summed up under the general head of absence
of disturbing causes have a positive side. For the
relevancy of the argument, so far as the explanation of
vil] " hypothetical " character of economics. 219
actual phenomena is concerned, requires that, as a
matter of fact, the causes, whose influence is neglected,
shall be strictly "disturbing'' causes, and shall not
exert an influence so powerful as to reduce that of
other agencies to insignificance.
It must, however, always be borne in mind that
the deductive method does not consist of the deductive
step alone. This appears to be forgotten by those
who speak scornfully of the hypothetical character of
deductive political economy. Mere deductive reasoning
may indeed be symbolized by a hypothetical statement
of the form. If P and Q are true, R is true. But the
deductive method is not concerned merely with
establishing the connexion between the truth of P and
Q and the truth of P. In its complete form, it includes
a preliminary investigation of the forces actually in
operation, and the various conditions under which
they operate ; and it also tests the applicability of its
results to actual phenomena by appeals to the concrete
realities that are open to direct observation. There is
sometimes a convenience in taking the deductive stage
of economic work more or less by itself; and in the
pure theory of economics special prominence is given to
it. But still the premisses are not chosen arbitrarily.
For while the pure theory assumes the operation of
forces under artificially simplified conditions, it still
claims that the forces whose effects it investigates are
220
THE DEDUCTIVE METHOD. [CHAP.
verœ causae in the sense that they do operate, and
indeed operate in a predominating way, in the actual
economic worlds
brief reference may here be made to laws of
normal value, normal wages, &c. In arriving at these
laws, account is professedly taken only of the com¬
paratively universal and permanent forces in operation,
leaving on one side the varying influence exerted by
the local and temporary causes that may happen also
to act at any given moment. The laws are, therefore,
arrived at by a very deliberate process of abstraction,
and they may appear to have an exceptionally hypo¬
thetical character. If, however, the forces whose
influence is calculated can be shewn to be really the
predominant and more permanent ones operating in any
given economic society, then it may be a legitimate
postulate that the modifying forces act in different
directions on different occasions, so that in the long run
they tend to balance and neutralise one another.
Under these circumstances, although the conclusions of
the deductive reasoning may fail to correspond with the
observed facts in any individual instance, they will
nevertheless be realised, if instances are taken in the
mass and if the general conditions of economic life
1 It is this point that Senior is anxious to insist upon, when,
although holding that political economy " depends more on reasoning
than on observation," he yet refuses to speak of it as a hypothetical
science.
VIL] " HYPOTHETICAL " CHARACTER OP ECONOMICS. 221
I
remain unchanged for a suiSciently long period of
v
time\ - Laws of normal value &c. are, therefore, not
necessarily hypothetical in any sense that implies
unreality. They are nearly always not merely of greater
scientific importance, but also of greater practical im¬
portance, than the ever-varying phenomena observable
in individual instances. It is indeed essential that the
operation of local and transient influences should not
be ultimately overlooked or disregarded. But until
knowledge has been gained of general and permanent
tendencies, that which is local or transient will in all
probability be itself misinterpreted.
The conclusions reached in this section may be
briefly summed up by saying that deductive political
economy is rightly described as hypothetical, if by this
nothing more is meant than that, in the first place, its
laws are statements of tendencies only, and are there-
^ It has to be recognised that the predominant and more perma¬
nent forces in operation are themselves liable to variation over long
periods, and this undoubtedly, as Professor Marshall points out
{Principles of Economics, vol. i. 1895, p. 426), increases the difficulties
that are met with in applying economic doctrines to practical
problems. The question at issue may be made more clear if we
explicitly distinguish two points that are involved in the determina¬
tion of laws of normal value, normal wages, &c. In the first place,
we abstract from the operation of local and transient causes ; in the
second place, we assume that the general conditions of economic life
are stationary, so that the predominant forces in operation are
themselves constant. It is only within the limits up to which this
second assumption is realised that normal value can be identified
with average value, normal wages with average wages, &c.
222
THE DEDUCTIVE METHOD. [CHAP.
fore usually subject to the qualifying condition that
other things are equal ; and that, in the second place,
many of its conclusions depend upon the realisation
of certain positive conditions, which are not as a matter
of fact always realised. Given the conditions, however,
the laws may be stated categorically. The conditions
are, moreover, not arbitrarily assumed, but are chosen
so as to correspond broadly with the actual facts in the
different forms in which economic phenomena manifest
themselves. In saying, therefore, that political economy,
in so far as it has recourse to the deductive method,
is a hypothetical science, it is necessary to guard
against the idea that this implies unreality or want
of correspondence with the actual order of economic
phenomena^.
1 Much of what Cairnes says in his Logical Method of Political
Economy about the hypothetical character of the science is perfectly
sound, and expressed with his usual lucidity and efíectiveness. But a
few of his statements—as, for instance, when he remarks that an eco¬
nomic law is not an assertion respecting the actual order of economic
phenomenaqp. 99), and again that an economic law can be established
or refuted only by an appeal to some mental or physical principle (p.
107)—are likely to give rise to misunderstanding, even if they admit
of justification when carefully explained. Consider, for example, in
reference to the above statements, the attempt to refute the doctrine
of cost of production as the regulator of value by an appeal to certain
social facts, summed up in the phrase—" immobility of labour and
capital." If the doctrine is considered purely hypothetical, this ob¬
jection might be dismissed as simply irrelevant. But we cannot think
that Cairnes would have been content so to dismiss it. In his hands,
and in those of his school generally, the doctrine means that under
existing economic conditions cost of production does actually exert a
vil]
necessity of observation.
223
I 8. Functions of observation in the employment of
the deductive method,—The part played by specific
experience in guiding and giving reality to deductive
economic reasoning is of the utmost importance. It
may be said without qualification that political
economy, whether having recourse to the deductive
method or not, must both begin with observation and
end with observation. As already pointed out, there
is a tendency to forget that the deductive method in
its complete form consists of three stages, only one of
which is actually deductive, the two others being the
inductive determination of premisses, and the inductive
verification of conclusions. The true character of
the deductive method is in particular misapprehended
by those of its critics, who reject its aid in political
economy on the ground that its employment means
closing one's eyes to facts, and trying to think out the
laws of the economic world in entire neglect of what is
actually taking placed
Very material influence upon the price of the great majority of com¬
modities. Consider further the doctrine of the existence of grades of
labour between which competition is sluggish and ineflective. This
doctrine is indicated by Mill, but is given greater prominence by Cairnes,
who bases upon it a modification of the received theory of value. By
appeal to what mental or physical principle, however, can it be said
to be established? It is rather to be regarded as a modification of
premisses, suggested by observation and having for its object to bring
economic theories into closer relation with actual facts.
^ Speaking of induction as supplementary to deduction, Wagner
observes that according to our past experience and probably also in
224
the deductive method.
[chap.
It is true that in working out the pure theory of
economics, the part played by specific observation may
be subordinated and kept temporarily in the back¬
ground. It is true also that the intellectual bias of
some investigators naturally inclines them to cultivate
specially this side of the subject. Again, for purposes
of illustration, and with the object of familiarising
ourselves with the kind of reasoning requisite in dealing
with economic problems, it may sometimes be useful to
frame hypotheses that have little relation to actual
facts \ Still it is only partially and temporarily that
the economist can thus remain independent of specific
experience. The special functions of observation as
supplementary to deductive reasoning are at once
suggested by the analysis of the deductive method
already given.
In the first place, observation guides the economist
in his original choice of premisses. Even in the most
abstract treatment of political economy, it is necessary
to begin by considering what are the general character¬
istics actually displayed by men in their economic
dealings with one another, and by investigating the
the future, we must expect more from induction as a means of control
than as an independent method. We shall probably owe to induction
not so much new results as corrections, refinements, and enlargements
of propositions obtained in the first instance deductively" {Grundle¬
gung der ;politischen Gehonomie, 1892, § 95).
1 On the subject of illustrative hypotheses, compare Venn, Em-
pirical Logic, pp. 388,1Ï.
VII.] FUNCTIONS OF OBSERVATION.
225
physical and social environment in which their economic
activities are exercised. As already implied, however,
it is not necessary that the propositions assumed in
regard to men's motives or their material and social
surroundings should be true universally or without
qualification. To attempt any exact correspondence
with what has been called the " full empirical actuality "
would be to sacrifice generality, and to involve ourselves
afresh in those complexities of actual economic life
from which it is the special object of the deductive
method temporarily to escape. The requirements are,
first, that the motives taken into account shall be
exceptionally powerful in the economic sphere, and so
far uniform in their operation that the kind of conduct
deduced from them shall correspond broadly with what
actually happens ; and, secondly, that the circumstances
under which the motives are supposed to operate shall
be of a representative character, either as regards
economic life in general, or, at any rate, as regards a
special aspect of it over a given range.
The observation requisite for the selection of
premisses may sometimes involve little more than the
reflective contemplation of certain of the most familiar
of every-day facts. But it is to be remembered that
the economist does not always work from one and the
same set of assumptions ; and in some cases knowledge
of a much more extended character is required in order
K. 15
226
THE DEDUCTIVE METHOD. [CHAP.
to determine what the premisses shall be. This remark
applies to the working out of the theory of the foreign
exchanges, of movements in general prices, of the effects
of trade-unions or of machinery on wages, and the like.
In dealing with problems of this kind the necessity
for a somewhat intimate acquaintance with concrete
economic phenomena arises at the very commencement
of our enquiries. The general principles that should
guide the economist in his selection of premisses will
be indicated in rather more detail subsequently\
In the second place, observation enables the
economist to determine how nearly his assumptions
approximate to the actual facts under given economic
conditions. He thus learns how far his premisses
require to be modified ; or to what extent, where no
actual modification of premisses is necessary or feasible,
allowance must be made for ..the effects of so-called
disturbing causes. The use of observation for the above
1 Cairn es observes that " the economist starts with a knowledge of
ultimate causes" (Logical Method, p. 75); but this statement should
at any rate be limited to the pure theory of economics. As remarked
by Professor Dunbar in his essay on the Reaction in Political
Economy, the method to be employed in carrying economic science
into regions never penetrated by Eicardo is simple ; it is only neces¬
sary to draw from the actual observation of affairs fresh premisses
relating to forces of the secondary order (Quarterly Journal of Econo¬
mics, October, 1886, p. 10). Professor Marshall's Prmciples of
Economics affords numerous striking examples of the fresh develop¬
ments of which deductive political economy guided by observation is
capable.
VII.] FUNCTIONS OF OBSERVATION.
227
purpose is one of the principal respects in which the
more concrete is distinguished from the more abstract
treatment of political economy. Its importance for the
adequate understanding of the economic phenomena of
any given period is very great. ''Nothing but unreality/'
as Bagehot puts it, " can come of political economy till
we know when and how far its first assertions are true
in matter of fact and when and how far they are
not."^
Considering this function of observation from a
somewhat different standpoint, it will be seen that
observation determines the limits of the positive
validity of laws deductively obtained. The economic
world is subject to continual changes. Certain as¬
sumptions may be realised at one stage of economic
progress, and nevertheless be in violent opposition to
facts at another stage. Hence without the aid of an
extensive knowledge of facts, there is danger of ascribing
to economic doctrines a much wider range of application
than really belongs to them. This point will be further
considered in treating of the relation between economic
theory and economic history.
^ Economic Studies, p. 71. Bagehot himself illustrates this state¬
ment by an inductive investigation of the effect of differences in the
real wages of labour upon movements of population. An important
postulate in regard to the nature of this effect is involved in the
ordinary deductive determination of laws of normal wages. See also
Mr L. L. Price's Industrial Peace, pp. 108, ff.
15—2
228
the deductive method.
[chap.
In the third place, the economist has recourse to
observation in order to illustrate, test, and confirm his
deductive inferences. It is important here to observe
that the verification may, and in fact v^ill generally,
consist in the satisfactory explanation of actual pheno¬
mena, not necessarily in the discovery of phenomena
that would justify as direct generalizations the con¬
clusions that have been deductively obtained^.
Of course in some cases, instead of any confirmation
of theory, there will be revealed a clear discrepancy
between the actual course of events and the results of
the deductive reasoning, shewing that the latter, if not
positively erroneous, are at any rate insufficient to
account for the facts. The problem then is to de¬
termine the source of the error or incompleteness. It
is possible that empirical enquiry may indicate the
operation of agencies, exerting an important influence
upon the phenomena in question, but of which no
^ Amongst recent economic treatises, Professor Nicholson's Moiiey
may be mentioned as affording numerous effective examples of the
way in which actual occurrences may serve to illustrate and confirm
deductive arguments. If we want examples, however, we cannot do
better than go back to the Wealth of Nations. As Professor Marshall
observes—"Adam Smith seldom attempted to prove anything by
detailed induction or history. The data of his proofs were chiefly
facts that were within everyone's knowledge, facts physical, mental,
and moral. But he illustrated his proofs by curious and instructive
facts; he thus gave them life and force, and made his readers feel
that they were dealing with problems of the real world, and not with
abstractions."
vil] the pkocess of verification. 229
account has been taken ^ ; or it may be that whilst the
right forces have been taken into account, their relative
strength has been wrongly estimated, or the mode of
their individual operation miscalculated ; or there may
have been error in the deductive reasoning itself.
The serious difficulties which sometimes attend the
process of verification must not be overlooked. Mill
goes so far as to say that " the ground of confidence in
any concrete deductive science is not the à priori
reasoning itself, but the accordance between its results
and those of observation à posteriori!'^ This state¬
ment needs to be slightly qualified. For we may have
independent grounds for believing that our premisses
correspond with the facfcs, and that the process of
deduction is correct; and we may accordingly have
confidence in our conclusions, in spite of the fact that
there is difficulty in obtaining explicit verification.
There must not of course be a manifest discrepancy
between our theoretical conclusions and the actual facts.
But we should not hastily draw negative conclusions,
or suppose theories overthrown, because instances of
their operation are not patent to observation. For
the complexity of the actual economic world, which in
the first place makes it necessary to have recourse to
^ The operation of these agencies having once been suggested by
observation, it is not improbable that we may be again aided by
deduction in determining the precise nature of their influence.
2 LogiCf vi. 9, § 1.
230
the deductive method.
[chap.
the deductive method, may also render it difficult to
determine whether or not the actual effects of any
given agency really correspond with the results of our
deductive calculations \
Again, laws of normal value, wages, &c. are, as we
have already pointed out, verifiable only by instances
taken in the mass and not by instances taken in¬
dividually. It follows that, as in framing empirical
generalizations, so in verifying from observation the
results of deductive reasoning, it is in general necessary
to extend our investigations over a wide range of facts,
and especially to allow sufficient time for effects fairly
to manifest themselves. If these precautions are not
taken, misunderstanding may easily ensue and economic
theory be unjustly discredited.
The doctrine that taxes on commodities are, under
ordinary conditions, paid by consumers may serve as
a simple example ; for this doctrine is in no way
inconsistent with the fact that a new tax may in the
^ The problem of the effect exerted on general prices by the
quantity of money in circulation is first worked out deductively, and
then illustrated and tested by the examination of instances in which
changes in the amount in circulation have occurred on a considerable
scale. In some cases the confirmation may be very clear and deci¬
sive ; but sometimes there may be the greatest difficulty in allowing
properly for the effects of an increase or diminution in the general
volume of trade, for the effects of an expansion or contraction of
credit, and so forth, the tendency of which is to counteract or exagge¬
rate the effects proper to the cause specially under investigation.
VII.] THE PROCESS OF VERIFICATION. 231
first instance bear very heavily upon the industry that
is taxed. The whole reasoning by which the doctrine
is established shews that it relates solely to what will
happen in the long run. In other words, it relates only
to taxes of old standing or to such as have been long
anticipated \
As another simple instance, it may be pointed out
that in accordance with the principles of deductive
political economy, the repeal of the Corn Laws must
have tended to bring about a permanent fall in the
price of wheat in England. Yet no such fall occurred
immediately. The explanation of the apparent dis¬
crepancy is to be found in the interference of such
circumstances as the failure of the potato crop, the
Crimean War, and especially the depreciation of gold,
1 The deductive theory of the incidence of taxes on commodities
has been a frequent source of perverse misunderstanding. " The
deductive economist's theory of profits and prices," writes Cliffe
Leslie, "will be found to claim to be true, under all circumstances,
in the case of every individual in trade and of every particular
article, and to foretell the exact rates at which goods will be sold.
His theory of taxation is an application of his theory of profits and
prices; and it proceeds on the assumption that prices will actually
conform to the cost of production, so nicely in every particular case,
that every special tax on any commodity will be recovered by the
producer from the consumer, with a profit on the advance" (Essays,
1888, p. 229; compare also p. 64). In so far as isolated passages
from the writings of deductive economists may appear to justify such
statements as the above, it is only because they have not always been
sufficiently careful to emphasize the distinction between the imme¬
diate and the ultimate incidence of taxation.
232
THE DEDUCTIVE METHOD. [CHAP.
which contributed to maintain the price down to 1862,
notwithstanding free trade. Time, moreover, was re¬
quired in order to allow the area of cultivation in new
countries to be increased, and means of communication
to be developed, so as to meet the new demands
I 4. Ricardo's use of the deductive method,—The
above considerations indicate certain requirements that
need to be satisfied in the right use of the deductive
method, and also certain limitations to which the
method is subject. One essential point is that there
shall be a clear and definite enunciation of the assump¬
tions upon which any given piece of reasoning is based.
Sometimes, in addition to giving a careful explanation
of the conditions under which the inferred results hold
good, it will be advantageous to indicate the directions
in which these results are likely to be modified by
alterations in the conditions. In discussing the effects
of economic changes it is further requisite to specify in
general terms the period of time taken into consideration,
distinguishing clearly between immediate and ultimate
effects. It must always be remembered that assumptions
need to be varied in order to meet varying economic
circumstances; and à priori dogmatism must be avoided
in regard to the application of conclusions to any given
state of society. Before such applications can be justi-
1 Further illustrations of the part played by observation in con¬
nexion with the deductive method will be found in chapters 9 and 10.
vil]
ricardo.
233
fied, empirical tests must be applied—tests, which in
some cases lie ready enough to hand, but which not in¬
frequently involve systematic observation and statistical
research of greater difficulty than the deductive reason¬
ing itself.
Ricardo's writings, and in particular his Principles
of Political Economy and Taxation^ are frequently
quoted as affording typical and representative examples
of the use of the deductive method in economics ; and
any objections, to which either his methods or results
are open, are accordingly regarded as in all respects
equivalent to objections to the deductive method as
such. It must be said, however, that while Ricardo's
writings contain some of the most brilliant and in¬
structive examples of close deductive reasoning to be
found in economic literature, and while a thorough
study and mastery of his works may rightly be re¬
garded as a part of the necessary equipment of the
economic student, still his manner of employing the
deductive method is not free from grave faults. For
instance, the explanations and qualifications, which are
continually necessary in the interpretation of his results,
have usually to be supplied by the reader himself.
Neither the subsidiary postulates, nor those that under¬
lie the greater part of the reasoning, are explicitly
indicated; and there is sometimes an unexplained
change from one hypothesis to another that is specially
234
THE DEDUCTIVE METHOD. [CHAP.
perplexing. Again, the necessity of attending to the
element of time is insufficiently emphasized, and far
too little importance seems to be attached to the
characteristics of the periods of transition, during which
the ultimate effects of economic causes are working
themselves out. The tone adopted by Ricardo suggests
further an undue confidence in the absolute and uni¬
versal validity of the conclusions reached ; and in his
illustrations there is a remoteness from the facts of
actual life that is not really essential to the employment
of the deductive method.
There is still another respect in which Ricardo's
chief work fails to satisfy the requirements of a perfect
deductive system. As a science grows more deductive,
the logical arrangement of its different parts, and the
due subordination of some parts to others, become
considerations of increasing importance. Ricardo, how¬
ever, never makes sufficiently clear the exact relation
between his different theorems, and the manner of
their dependence one upon another. In some respects,
the different chapters of the P7'inciples of Political
Economy and Taxation read more like independent
essays than consecutive chapters of a connected and
logically complete system.
An explanation of much of the above is to be found
in the special circumstances and conditions under which
Ricardo wrote. While his premisses were suggested
VII.]
RICARDO.
235
by the actual economic world in which he lived, his
observation was partial, and confined to a narrow range.
He was consequently led to interpret his results with¬
out adequate limitation. It is, moreover, very doubtful
whether it was his deliberate intention to produce
a complete systematic exposition of economic science.
It has been suggested on very plausible grounds that
his chief work was originally written not for publication,
but with the object of formulating his own ideas on
various economic questions, and for private circulation
amongst an inner circle of acquaintances. If this view
is correct, the not unfrequent incompleteness of the
argument from the strictly logical standpoint is to
a considerable extent accounted for. Nothing can be
more natural than that anyone writing for those whom
he knows to be already familiar with his general
attitude should omit an explicit statement of postu¬
lates and qualifications, that are certain in any case
to be present to the minds of his readers ^
1 Compare a very suggestive note on Ricardo's Use of Facts in the
Quarterly Journal of Economics, July, 1887, p. 474. Compare, also,
Letters of Ricardo to Maltlius, edited by Dr Bonar. "It is not diffi¬
cult," says the editor, " for men living two generations after Ricardo,
and having (as he himself expressed it) ' all the wisdom of their
ancestors and a little more into the bargain,' to point out many
unjustified assumptions, many ambiguous terms, and even many
wavering utterances in Ricardo's Principles, in spite of their appear¬
ance of severe logic. The author's detached practical pamphlets were
in those respects far more powerful than this volume of imperfectly
connected essays on general theory. The fiattering importunities of
236
the deductive method.
[chap.
Whatever may be the explanation, however, of
Ricardo's shortcomings, it is certain that the deductive
method is not exemplified in anything approaching an
ideal form in his pages.
§ 5. The premisses of deductive political economy,—
In those abstract reasonings, which constitute the most
prominent part of economic theory, the principles by
which the economist is guided in his choice of premisses
are generality and simplicity: the former, in order to
widen as far as possible the range over which the theory
may be applicable as an instrument for the solution of
concrete problems ; the latter, in order that the process
of deductive reasoning may not be too difficult \ The
principle that men desire to increase their sum of satis¬
factions with the smallest possible sacrifice to them¬
selves, the law of decreasing final utility as amount of
commodity increases, the law of diminishing return
from land, and the like, are premisses which possess
the requisite degree of universality. The hypothesis
of free competition, again, affords a fairly simple basis
friends had induced an unsystematic writer to attempt a systematic
treatise " (p. xvii).
1 "The function of a pure theory," says Professor Marshall, "is
to deduce definite conclusions from definite hypothetical premisses.
The premisses should approximate as closely as possible to the facts
with which the corresponding applied theory has to deal. But the
terms used in the pure theory must be capable of exact interpretation,
and the hypotheses on which it is based must be simple and easily
handled."
VII.]
CHOICE OF PREMISSES.
237
for deductive reasoning, and, so far at any rate as
modern trade is concerned, is approximately valid in
relation to a large number of economic phenomena.
The alternative hypothesis of pure monopoly is in
certain respects even simpler, but the cases in which
it is approximately realised cover a much narrower
area^.
Passing to the consideration of more concrete
problems, the above statement requires to be slightly
modified. The first requirement now is that the pre¬
misses shall ultimately include all the circumstances
which exert any very important influence upon the
phenomena in question at the period and place to
which the investigation has primary reference. The
second requirement is again one of simplicity. The
hypotheses adopted should be capable of being made
the basis of deductive inference ; they should therefore
take a definite and precise form, and should be as few
and as simple as is consistent with keeping fairly
close to the facts I
1 Cournot in his Recherches sur les Principes Mathématiques de la
Théorie des Richesses takes the hypothesis of pure monopoly on the
part of sellers as his starting-point.
2 Wagner, without attempting a complete enumeration of postu¬
lates, gives as the first important hypothesis of deductive economics
(il) the assumption that everyone acts from economic self-interest
{Grundlegung der politischen Oekonomie, § 67). To this he adds
two other fundamental hypotheses, namely, (b) that all concerned
know and understand their own interests, and (c) that they are not
238
THE DEDUCTIVE METHOD. [CHAP.
Bagehot in his unfinished Postulates of Political
Economy proposed to enumerate the principal assump¬
tions of economic science, and to examine the validity
or the limits of the validity of each in turn. Such
an enumeration and examination may under certain
conditions be highly instructive; but unless the object
in view is carefully explained, it may also prove
»
misleading. In the use of the deductive method in
political economy, and especially in the pure theory,
hindered by law from pursuing their interests. We thus postulate as
the general basis of our argument {a) the desire, (h) the ability,
(c) the permission, to act in accordance with the dictates of self-
interest. Wagner goes on, however, to point out (§ 70) that each of
these three assumptions is capable of being modified as circumstances
may require. Such modifications will of course not be introduced
arbitrarily, but with the object of making our hypotheses correspond
more and more nearly with the facts ; and the facts will themselves
vary according to the particular nation, period, place, or class of
economic phenomena, under investigation. Thus, the first assumption
may be varied by taking into consideration the operation of other
motives as co-operating factors along with self-interest; the second
assumption may be varied by the recognition of inequalities in the
knowledge and ability required in order to pursue one's own interests
to the best advantage, the extent of the modification depending upon
the particular class of persons under consideration; the third
assumption may be varied by considering various ways in which
individual freedom in economic affairs may be interfered with.
In these ways Wagner thinks that we may approach more and more
nearly to complete coincidence between our assumptions and the full
reality, although it is allowed that the altered hypotheses may not
always be easy to work with, and that the ideal of mathematical
procedure may not be attainable. It might be added that as our
general command over the processes of deductive reasoning in
economics increases, the greater will be our success in working from
these modified assumptions.
VII.] PKELIMINAEY ENUMERATION OF PREMISSES. 239
there are some half dozen premisses that are more
fundamental and of more constant recurrence than
others. But unless great care is taken to emphasize the
distinction between abstract and concrete economics, the
recognition of a limited number of definite assumptions
as fundamental and sufficient tends to- give to the
science a formal and unreal aspect that is not properly
characteristic of it considered in its totality\
The validity, moreover, of economic postulates
varies not only from time to time, and place to place,
but also in different connexions at the same time and
place. Hence even if a preliminary enumeration of
premisses, supposed to underlie the whole science of
economics, were really feasible, it would not be possible
to examine once for all the validity of such premisses ;
and on the whole it seems best to regard any pre¬
liminary enumeration and examination of economic
postulates, not as definitive or exhaustive, but simply
as illustrative of the general character of economic
theory I
1 The notion that the whole of the science is built up from just
one or two premisses has always been seized upon for comment by
adverse critics. Compare, for instance, Mr Frederic Harrison's
criticism that "political economy has two postulates—production as
the sole end, competition as the sole motive—postulates of which the
human race and its history can shew no actual example."
2 The enumeration of postulates proposed by Bagehot was unfor¬
tunately never completed. Enumerations of the kind referred to will,
however, be found in Senior, Political Economy^ p. 26; Cairnes,
240
the deductive method.
[chap.
§ 6. Special modifications of the deductive method,—
There are certain modifications of the deductive method
Logical Method^ Lecture 2, § 2, and Lecture 3, § 1 ; Cossa, Introduc¬
tion to the Study of Political Economy^ Theoretical Part, Chapter 6,
§ 2; Sidgwick, Political Economy, Introduction, Chapter 3, § 3.
Compare also the postulates formulated by Wagner, as given in
the note on page 237. It may be useful to quote from Senior and
Cairnes. Senior says, "We have already stated that the general
facts on which the science of political economy rests, are comprised
in a few general propositions, the result of observation or conscious¬
ness. The propositions to which we then alluded are these:—
1. That every man desires to obtain additional wealth with as little
sacrifice as possible. 2. That the population of the world, or, in
other words, the number of persons inhabiting it, is limited only by
moral or physical evil, or by fear of a deficiency of those articles of
wealth which the habits of the individuals of each class of its inhabit¬
ants lead them to require. 3. That the powers of labour, and of the
other instruments which produce wealth, may be indefinitely increased
by using their products as the means of further production. 4. That,
agricultural skill remaining the same, additional labour employed on
the land within a given district produces in general a less propor¬
tionate return, or, in other words, that though, with every increase of
the labour bestowed, the aggregate return is increased, the increase of
the return is not in proportion to the increase of the labour." Cairnes
indicates the following as the ultimate premisses of economic science
—first, " the general desire for physical well-being, and for wealth as
the means of obtaining it next, " the intellectual power of judging
of the efficacy of means to an end, along with the inclination to reach
our ends by the easiest and shortest means" ; thirdly, " those propen¬
sities which, in conjunction with the physiological conditions of the
human frame, determine the laws of population"; and lastly, "the
physical qualities of the soil and of those other natural agents on
which the labour and ingenuity of man are employed." It is clear
that such enumerations as these cannot lay claim to completeness.
Some postulate is, for example, essential in regard to the nature of
the social customs and legal institutions relating to property. Some
postulate is also requisite in regard to the variation of utility with
amount of commodity ; for it would not be possible from Senior's or
VII.]
THE DEDUCTIVE METHOD.
241
which render it comparatively easy to deal effectively
with problems of considerable intricacy. It is particu-
Cairnes's premisses alone to deduce laws of demand. Even the
principle of free competition is not clearly enunciated. This principle
is indeed so complex, and involves so many different subsidiary
assumptions in different connexions, that it would be difficult to
analyse once for all its full content in the various economic reason¬
ings in which it plays a part.
A well-arranged enumeration of postulates is given by Mr W. E.
Johnson in his article on the Method of Political Economy in
Mr Palgrave's Dictionary of Political Economy. Mr Johnson does
not profess that any complete enumeration of premisses is possible.
Agreeing, however, with the view taken in the text, he considers that
there are some half dozen premisses which may be regarded as typical
and which are almost universally applied. " Of these six data, two
belong to each of the divisions, physical, psychological, and social.
(1) The two physical or natural laws presupposed are the law of
Diminishing Eeturns, which arises from the necessity of having
recourse to inferior agents of production, or to their use under less
advantageous circumstances; and the law of Increasing Beturns,
which results from the increased possibilities of industrial organisation
under extension of supply. Both these laws represent tendencies
ascertained by ordinary observation, which work in opposite direc¬
tions. Hence more exact knowledge as to the magnitude of the
forces in particular circumstances has to be supplied by further
detailed observation. (2) The two psychological data are general
expressions of the nature of Demand and of Supply, so far as these
depend on the characters of individuals. The law of demand is to the
effect that the utility afforded by any increment of any kind of desired
object diminishes with increase of the amount possessed : the law of
supply is to the effect that every one tries to procure material well-
being with the least possible sacrifice. These assumptions are common
to almost all economic reasonings of a deductive type, though they
are not always explicitly formulated. Here, as in the case of the
physical presuppositions, further detailed observation is required to
determine the precise degree in which these psychological forces act
under any circumstances. In particular, the law of supply requires
to be made more definite by an estimate of the influences of habit.
242
THE DEDUCTIVE METHOD. [CHAP.
larly helpful to work up gradually from simple to more
and more complex hypotheses. The conditions assumed
at the outset may fail to represent even approximately
the actual facts. But the problem having first been
treated in the simplest conceivable form, it may be
possible to grapple with it under somewhat less simple
conditions. And so we may go on, until at last the
assumptions do fairly correspond with the facts. As
remarked by Bagehot, " the maxim of science is simply
that of common sense—simple cases first ; begin with
seeing how the main force acts when there is as little
as possible to impede it, and when you thoroughly
comprehend that, add to it in succession the separate
effects of each of the encumbering and interfering
agencies." ^
Milks working out of the theory of international
values affords a familiar example of the above method
of procedure. He begins by supposing that inter¬
national dealings are carried on between two countries
inertia, ignorance, or custom, which materially affect its application.
(3) The two sociological data relate to the conditions of freedom and
restraint under which the economic activities of a community take
pláce. Speaking generally, it is assumed on the one hand that
individual action is controlled by certain legalised institutions with
regard to property, and, on the other hand, that individuals are free
to act according to their own will within certain limits. A similar
remark applies here, as before, namely, that the precise degree of
freedom or of restraint, operative under any circumstances, has to be
determined by specific observation."
1 Economic Studies^ p. 74.
vii.] mill's theory of international values. 243
only, and in two commodities only, which commodities
are directly exchanged the one for the other, without
the intervention of money in any form. The countries
are supposed contiguous, so that cost of carriage may
be left out of account ; neither country has any inter¬
national liabilities except in payment for imports ; and
complete free trade exists, neither export nor import
duties being imposed on either side. The problem
having in this simplified form been solved, the various
limitations are one by one removed until an hypothesis'
is at last reached that includes all the essential con¬
ditions of actual trade between different communities.
Similarly, in seeking to determine the circumstances
that regulate the range of general prices, the most
serviceable method is to begin with a very simple
artificial hypothesis, and thence pass gradually to the
complex realities of modern traded
1 Compare Professor Nicholson's treatment of this problem in his
book on Money. He begins as follows—"Now, under the present
conditions of industry and exchange, the causes which lead to general
movements of prices are exceedingly complex and various, and In
order to understand them it is necessary to begin with the simplest
case, and then gradually to introduce the less obvious, though equally
effective, causes of movement. I would then beg the reader to get
rid, as far as possible, of all the notions he may have formed of the
causes of the actual movements in prices in recent years in the com¬
plex industrial world of to-day, and, in order to isolate and examine
the most important cause of all, to take up an attitude of observation
in what, for fault of a better term, may be called a 'hypothetical
market.' The phrase is suggestive of unreality, but no more so than
16—2
244
THE DEDUCTIVE METHOD. [CHAP.
Another interesting and useful variety of the
deductive method is where a number of alternative
conditions are taken, which between them cover all
cases that are practically possible, and an enquiry is
instituted as to what Avill happen under each in turn.
In this way the limits within which the truth will lie
may be determined ; and in so far as it is possible in
any concrete instance to discover the relation of the
actual to the hypothetical conditions, the deductive
solution may be turned to practical account. Unless
the different alternatives are formal contradictories, a
preliminary investigation of facts will of course be
the suppositions or hypotheses constantly made in physics and
mathematics, of bodies perfectly rigid, smooth, or without weight, or
of lines without breadth, or of points without parts or magnitude.
Let the following, then, be assumed as the laws and conditions of our
market: (1) No exchanges are to be made unless money (which, to be
quite unreal and simple, we may suppose to consist of counters of a
certain size made of the bones of the dodo) actually passes from hand
to hand at every transaction. If, for example, one merchant has two
pipes but no tobacco, and another two ounces of tobacco but no pipe,
we cannot allow an exchange of a pipe for an ounce of tobacco unless
money is used. Credit and barter are alike unknown. (2) The
money is to be regarded as of no use whatever except to effect
exchanges, so that it will not be withheld for hoarding ; in other
words, it will be actually in circulation. (3) Let it be assumed that
there are ten traders, each with one commodity and no money, and
one trader with all the money (100 pieces) and no commodities.
Further, let this moneyed man place an equal estimation on all the
commodities" (p. 56). All this sounds artificial enough; but it is
only the starting point. Before the discussion is finished, the reader
finds himself dealing with actual concrete problems of to-day.
vil]
ALTERNATIVE HYPOTHESES.
245
necessary in order to determine what alternatives
should be chosen.
Let the problem be to determine the ultimate
consequences of a strike of workmen, its immediate
success being assumed. Enquiry may be made as to
what will happen under three different suppositions:
first, in so far as the rise in wages leads to an increase
of efficiency on the part of the workmen, and is therefore
not at the expense of other members of the community ;
secondly, in so far as it raises prices, and is therefore
at the expense of consumers; thirdly, in so far as it
lowers profits, and is therefore at the expense either
of earnings of management or interest. In the first
of these cases, there is, ceteris paribus, no reason why
the success of the strike should not be permanent.
In the second case, it is necessary to consider the
possibility of a reaction in so far as higher prices lead
ultimately to the use of substitutes or stimulate
foreign competition k Besides this, there is a further
subdivision of alternatives according as, before the
strike, wages in the given trade were or were not below
the general level of wages (of course taking into account
the net advantages of different occupations). If they
were, then, except for the reasons suggested above,
there need be no reaction, and the strike may merely
^ And under these circumstances the effects on wages in allied
trades have also to be considered.
246
THE DEDUCTIVE METHOD. [CHAP.
have expedited a rise that would inevitably have
occurred sooner or later. If, however, wages were
already at the normal level, then after the rise there
is likely to be a reaction in consequence of an influx of
labour from other trades, the extent to which this
happens and its rapidity depending on the effectiveness
of competition. Under the third original hypothesis,
there is again a subdivision of alternatives according as
before the strike profits were or were not abnormally
high in the trade in question. If they were, the rise
in wages is likely to be maintained, although if com¬
petition is effective it may have to be shared with other
trades. If profits were not abnormally high, then
capital and business power may move to other trades ;
and ultimately the question arises how far either
earnings of management or interest generally will
bear reduction without reacting seriously on the
demand for labour.
The above is of course not intended as an actual
solution of the given problem, but only as an illustration
in bare outline of the manner in which it may be dealt
with by the deductive method. We see how by the
aid of the deductive method an analysis can be given
which will enable us to understand our whereabouts,
so that if we wish to investigate any actual case we
may know what are the special facts for which it is
most important to look.
VII.]
MATHEMATICAL METHODS.
247
There are other modifications of the deductive
method in which use is made of mathematical symbols
and diagrams. The nature of the aid that can thus
be afforded is discussed in the following chapter.
CHAPTER VIII.
On Symbolical and Diagrammatic Methods in
Political Economy.
§ 1. Mathematical character of political economy.—
Political economy is declared by devons to be essentially
mathematical in character; and if the term mathematical
is used in a broad sense so as to include all enquiries
that deal with quantitative relations, the propriety of
thus describing the science admits of easy demon¬
stration. For political economy is not concerned simply
with questions as to whether events will or will not
happen. It deals with phenomena whose quantitative
aspect is of fundamental importance, and one of its
main objects is to determine the laws regulating the
rise and fall of these phenomena. Its principal theorems
relate accordingly to the manner in which variations of
one quantity depend on variations of another quantity.
The quantitative, and therefore in a broad sense
mathematical, character of economic reasonings might
be illustrated by opening almost at random any eco¬
nomic work that fairly covers the ground of the science.
CHAP. VIII.] MATHEMATICAL CONCEPTIONS. 249
Thus Mill in his treatment of supply and demand as
regulators of value introduces conceptions that are
strictly mathematical. He insists, for example, that
the idea of a ratio between supply and demand is out
of place, what is really involved being an equation.
Other instances are afforded by his general treatment
of the value of money, and his theory of international
values. In the latter case he employs undisguised
mathematical formulae^ If further illustrations are
wanted, it may be pointed out that all discussions
concerning a measure of value, involving as they do
the conception of a unity are intrinsically mathematical
in character. Methods of measuring changes in the
purchasing power of money must also of necessity be
based upon mathematical considerations.
The fact that political economy is essentially con¬
cerned with quantitative relations, and therefore
involves mathematical notions, needs to be insisted
upon, because to some economists the very idea of a
mathematical treatment of economic problems is not
only repugnant, but seems even absurd; and further
because the importance of seeking to make our
economic conceptions quantitatively precise has not
always received due recognition. Something more
than the above, however, is needed iii order to establish
the position that economic knowledge can be advanced
^ Pnnciples of Political Economy, Book iii, Chapter 18, § 7,
250
mathematical methods.
[chap.
by the explicit use of geometrical diagrams or mathe¬
matical formulae. Simple quantitative relations can
after all be clearly expressed in the forms of ordinary
speech ; and the need of careful quantitative analysis
may accordingly be admitted, whilst there remains
an unwillingness to have recourse to mathematical
symbolism. We are thus still left with a question of
method demanding discussion ; and the object of the
present chapter is briefly to enquire what is the
nature of the advantage, if any, to be derived from
the use of mathematical formulae and diagrams in
economic reasonings^
§ 2. The employment of arithmetical examples.—•
Up to comparatively recent years, the mathematics
introduced into ordinary economic treatises has for the
most part taken the form of arithmetical examples;
and a word or two may be said at this point in regard to
1 It may here be pointed out that mathematical methods in
economics fall into two subdivisions, the algebraic and the diagram¬
matic. The application of the former requires knowledge of various
technical processes, and as employed by Cournot and Jevons involves
the infinitesimal calculus. The diagrammatic or graphic method, on
the other hand, requires no more than an elementary knowledge of
the first principles of geometry. The two methods are frequently
combined. It is to be observed that diagrams lend themselves
naturally to the registering of statistics, while to express statistics
equationally is not possible until their laws have been determined.
The employment of diagrammatic methods by the theorist is ac¬
cordingly more likely than that of algebraic methods to be indirectly
of assistance to the statistician.
VIII.]
ARITHMETICAL EXAMPLES.
251
the part capable of being played by such examples in
political economy. By taking particular numerical
premisses and working out results, we may illustrate
conclusions that have been obtained by means of
ordinary reasoning processes; and hypothetical illus¬
trations of this kind are certainly not without value.
By their help students are likely to be materi¬
ally assisted towards understanding the operation of
such laws as that of supply and demand. Numerical
examples have, moreover, a probative force in certain
cases where it is not desired to do more than disprove
a universal proposition, or—what comes to the same
thing^—establish a particular one; as, for instance, if
we merely wish to shew that it may he profitable for
a country to import commodities that it could itself
have produced with a less expenditure of effort than
is required in the country from which it obtains
them.
The citation of examples is not, however, a method
whereby general conclusions can be obtained ; and the
use of arithmetical illustrations may involve the danger
of our forgetting that after all they are nothing more
than illustrations. It is difficult or even impossible to
guarantee the typical or representative character of the
particular numerical data that have been selected, or
to be certain that if they were varied the same general
conclusion would always result. The consequence may
252
mathematical methods.
[chap.
be a failure to discriminate between that which is
essential and that which is merely accidentals
§ 8. Exact numerical premisses not essential to the
employment of mathematical methods,—If the use of
mathematical symbols and diagrams is rightly to be
called a method, it must do more than yield merely
isolated examples, and must be free from imperfections
such as those just pointed out. The economist must by
the aid of his symbols and diagrams be enabled to deduce
conclusions having general validity under conditions
that can be precisely determined. It is, however,
necessary here to guard against a misapprehension
that has led some economists to reject mathematical
methods far too summarily. Professor Cairnes, for
instance, seems to imply that the employment of such
methods is necessarily barren unless we can obtain
premisses capable of being stated with numerical
accuracy^. He is here indeed only following in the
footsteps of Mill, who remarks that mathematical
principles are " manifestly inapplicable, where the
causes on which any class of phenomena depend are
so imperfectly accessible to our observation, that we
1 A noteworthy instance in which the employment of a numerical
example leads to error of the above-mentioned kind is to be found in
Mill's Political Economy, Book iv, Chapter 3, § 4. This is pointed
out by Professor and Mrs Marshall in their Economics of Industry,
p. 85, note,
2 Logical Method, 1875, p. vii.
VITI.] NUMERICAL DATA UNATTAINABLE. 253
cannot ascertain, by a proper induction, their numerical
laws,"^ Professor Cliffe Leslie argues similarly against
the application of mathematics to political economy on
the ground that economic premisses are not capable of
exact quantitative determination ^ And Dr Ingram
says bluntly—"The great objection to the use of
mathematics in economic reasoning is that it is neces¬
sarily sterile. If we examine the attempts which
have been made to employ it, we shall find that the
fundamental conceptions on which the deductions are
made to rest are vague, indeed metaphysical, in their
character. Quantitative conclusions imply quantitative
premisses, and these are wanting. There is then no
future for this kind of study, and it is only waste of
intellectual power to pursue it." ^
The impossibility of obtaining exact numerical
premisses in political economy is fully recognised by
Cournot and other mathematical economists. But at
the same time they shew clearly that such premisses
are not always essential to the employment of mathe¬
matical methods. Cournot, for instance, remarks that
while the law of demand for any commodity might
conceivably be expressed by an empirical formula or
curve, we cannot as a matter of fact hope to obtain
^ LogiCy Book iii, Chapter 24, § 9.
2 Essays in Political and Moral Philosophy, 1888, pp. 69, 70.
® History of Political Economy, pp. 181, 2.
254
MATHEMATICAL METHODS. [CHAP.
observations sufficiently numerous or exact for this
purpose. But he adds that it by no means follows
that the unknown law of demand cannot by means
of symbols be usefully introduced into analytic com¬
binations. For one of the most important functions
of mathematical analysis is to discover determinate
relations between quantities whose numerical values are
unassignable. Functions, while remaining numerically
unknown, may possess known properties; and on the
assumption that certain general relations between
quantities hold good, it may be possible mathematically
to deduce further relations that could otherwise hardly
have been determined ^
^ Principes Mathématiques de la Théorie des Richesses, § 21.
Again, in his preface, Cournot remarks that some economists seem to
have a false notion of the nature of the applications of mathematical
analysis to political economy. On s'est figuré que l'emploi des
signes et des formules ne pouvait avoir d'autre but que celui de
conduire à des calculs numériques ; et comme on sentait bien que le
sujet répugne à cette détermination numérique des valeurs d'après
la seule théorie, on en a conclu que l'appareil des formules était,
sinon susceptible d'induire en erreur, au moins oiseux et pédantesque.
Mais les personnes versées dans l'analyse mathématique savent
qu'elle n'a pas seulement pour objet de calculer des nombres ; qu'elle
est aussi employée à trouver des relations entre des grandeurs que l'on
ne peut évaluer numériquement, entre des fonctions dont la loi n'est
pas susceptible de s'exprimer par des symboles algébriques " (pp. vii,
viii). The possibility of mathematical reasoning without numerical
data is discussed and illustrated in considerable detail by Professor
Edgeworth in his Mathematical Psychics^ pp. 1—9, and 83—93. "It
is necessary," he says, "to realise that mathematical reasoning is not,
as commonly supposed, limited to subjects where numerical data are
attainable. Where there are data which though not numerical are
VIII.]
COURNOT.
255
Cournot himself exemplifies the process which he
thus describes. He starts with simple formulae to
express relations between demand and price, cost of
production and price, and the like, and assuming that
these relations will conform to certain specified con¬
ditions, deduces by mathematical manipulation some
of the consequences resulting therefrom. He deduces,
for example, with the greatest clearness and precision
the general laws determining what price will yield to a
monopolist a maximum profit ; and he then proceeds to
deal with the difficult problem of the incidence, under
different suppositions, of taxes on monopolies. Other
problems are treated in a similar manner with more or
less success; and at no point in the reasoning is it
essential that numerical values should be assigned to
the symbols.
What is true of algebraical formulae is true of
diagrams also. Representing, for example, by a curve
the manner in which the demand for a commodity varies
with its price, general laws to which this curve will
conform may be determined, and results deduced. But
quantitative—ÍOX example, that a quantity is greater or less than
another, increases or decreases^ is positive or negative, a maximum or
minimum—there mathematical reasoning is possible and may be
indispensable. To take a trivial instance; a is greater than h, and
h is greater than c, therefore, a is greater than c. Here is mathe¬
matical reasoning applicable to quantities which may not be sus¬
ceptible of numerical evaluation."
256
MATHEMATICAL METHODS. [CHAP,
this does not necessitate that curves of demand for
different commodities should be capable of being drawn
with numerical accuracy.
§ 4. Advantages resulting from the use of symbolical
and diagrammatic methods in political economy,—The
employment of symbolical and graphic methods in¬
dependently of specific numerical data is of course
confined mainly, if not wholly, to the pure or abstract
theory. Those, therefore, who deny the utility of
abstract political economy in any form, and maintain
that the only fruitful method of economic enquiry is
inductive and empirical, will naturally reject mathe¬
matics as an instrument. This general question has,
however, been sufficiently discussed already ; and,
therefore, in briefly enquiring what kind of advantages
may result from the employment of mathematical
methods, it will be taken for granted that the eco¬
nomist ought sometimes to have recourse to abstract
and deductive reasoning. The advantages are partly
direct, and partly indirect ; and a brief reference may
in the first place be made to the latter.
When mathematical processes are employed in the
solution of a problem, attention can hardly fail to be
called to the conditions assumed as the basis of the
argument, and due importance is likely to be attached
to the exact enunciation of these conditions; a more
thoroughgoing quantitative analysis of fundamental
VIII.]
PRECISION OF REASONING.
257
conceptions is also necessary ; it becomes less easy to
slur over steps in the reasoning; and difficulties are
brought to light that might otherwise have remained
hidden. Hence there arises a higher standard of precision
in abstract economic reasonings, even in cases where
non-mathematical methods are still employed. As a
further consequence, a check is put upon the tendency
to overlook the limitations to which purely abstract
and deductive methods of reasoning are subject.
Professor Foxwell has well remarked that " there is no
greater safeguard against the misapplication of theory
than the precise expression of it"; and he rightly
indicates that precise expression is necessitated when
use is made of mathematical analysis\ It is now
generally recognised that the introduction of mathe¬
matical methods and habits of thought into economics
has exerted a wide-reaching and important educational
influence in stimulating precision both of thought and
expression, and hence eliminating errors due to slovenly
and inaccurate reasoning ^
^ Quarterly Journal of Economics^ October, 1887, p. 90.
2 Mr L. L. Price points out in an effective passage that the
mathematical and historical methods have, in spite of their
apparent antagonism, co-operated with one another in helping
to make economic theory more accurate and more comprehensive.
"By emphasising its limiting conditions, the historical treatment
has checked the misapplication of theory; and the mathematical
treatment, proceeding from a different starting-point by a different
road, has reached the same goal, and tended to induce greater
precision of statement" {Economic Science and Practice, p. 309).
258
mathematical methods.
[chap.
Amongst the characteristic direct advantages of
mathematical analysis and diagrammatic representation
is the fact that the significance of continuity in the
variations of phenomena is brought into prominence.
This remark applies pre-eminently to the diagrammatic
treatment of the law of supply and demand. Such a
treatment affords, for example, the simplest means of
dealing with the ingenious criticisms to which Mr
Thornton has subjected this law. He adduces cases
which at first sight look like exceptions overturning
the law altogether; but the method of diagrams at
once shews them to be extreme or limiting cases due
to a break in the continuity either of demand or of
supply. They are thus accounted for, and their true
signification easily apprehended \
Another characteristic advantage of mathematical
methods is increased power of treating variables {e.g.,
demand, cost of production) in their true character,
and not as constants. Professor Edge worth observes
that " to treat variables as constants is the characteristic
vice of the unmathematical economist." ^ So to treat
them may indeed be necessary for purposes of simplifi¬
cation, if we are limited to the comparatively clumsy
instrument afforded by ordinary language and ordinary
1 Compare Thornton, On Labour, Book ii, Chapter 1 ; and Pro¬
fessor Eleeming Jenkin's essay on 'Hhe Graphic Eepresentation of the
Laws of Supply and Demand, and their Application to Labour. "
Mathematical Psychics, p. 127, note.
VIII.] VARIABLES AND CONSTANTS. 259
propositional forms. It is^ however, clear that under
such conditions the solution obtained cannot be re¬
garded as more than a first approximation. Many of
Ricardo's and Mill's reasonings are in this way rendered
incomplete; for example, in discussing the incidence
of tithes, and the effects of agricultural improvements,
they assume that demand is unaffected by a rise or fall
in price. A more striking and important instance is
to be found in the treatment of cost of production as a
constant, and the consequent failure to recognise the
part played by demand in the determination of normal,
as well as market, value. It is true that in the earlier
editions of his Economics of Industry Professor Marshall
expounded the correct theory without any explicit
reference to symbols or diagrams. But it is no secret
that his important contributions to the theory of value
are mainly to be attributed to insight gained through
working at economics mathematically on the lines first
indicated by Cournot. It may be added that the full
force and signification of Professor Marshall's theories
are best apprehended by the aid of diagrams, even
where their use is not absolutely necessary ; and that
in certain of the more complex developments of the
theories, some assistance of a symbolical kind remains
essential.
A point closely connected with the one just con¬
sidered is the assistance which mathematical methods
17—2
260
mathematical methods.
[chap.
afford towards understanding the relation of mutual
dependence which may subsist between different
phenomena, e.g.y supply, demand, and price. This
conception is of central importance in economics.
For, as Professor Marshall has observed, ''just as the
motion of every body in the solar system affects and
is affected by the motion of every other, so it is with
the elements of the problem of political economy."
The conception is, however, one that is found to be
specially difficult of realisation by those who are with¬
out mathematical training. Arguments involving this
conception are, moreover, apt to be lengthy, as well
as difficult to follow, if expressed wholly in ordinary
language\
It may, indeed, be added as amongst the special
advantages of mathematical methods that they lead
not only to accuracy and precision, but also to concise¬
ness and the avoidance of circumlocution. In some
cases it is possible by means of a single diagram to
make intelligible at a glance what would otherwise
require a more or less elaborate explanation. This re¬
mark applies to the ambiguity of the phrase increase of
demand^ pointed out by Professor Sidgwick^ The real
import of the distinction between a mere extension
^ Compare Professor Edgeworth's British Association Address on
the Application of Mathematics to Political Economy, Statistical
Journalf December, 1889, p. 541.
2 Political Economy i 1887, p. 179.
VIII.] EXPLANATIONS FACILITATED BY DIAGBAMS. 261
of demand due to a fall in price, and an intensification
of demand at a given price, can be made more clear by
the aid of a diagram than by a long verbal explanation.
The effects of an intensification of demand can also be
more quickly and easily realised by diagrammatic aid
than in any other way^.
Much of the above is well expressed by Cournot
in his remark that "even when the employment of
mathematical signs is not absolutely necessary, it can
facilitate the exposition, make it more concise, put it
on the way towards more extended developments, and
prevent digressions of vague argumentation.''^
It can, however, hardly be affirmed that there are
economic truths of fundamental importance which are
incapable of being expounded except in a mathematical
form. Jevons's theory of utility and its applications
are in many respects the most striking outcome of
1 Other illustrations are given by Professor Edgeworth in his
British Association Address. " In the case of international trade,"
he remarks, " the various effects of a tax or other impediment,
which most students find.it so difficult to trace in Mill's labori¬
ous chapters, are visible almost at a glance by the aid of the ma¬
thematical instrument. It takes Professor Sidgwick a good many
words to convey by way of a particular instance that it is possible for
a nation by a judiciously regulated tariff to benefit itself at the
expense of the foreigner. The truth in its generality is more clearly
contemplated by the aid of diagrams such as those employed by the
eminent mathematical economists Messrs Auspitz and Lieben "
{Statistical Journal^ December, 1889, p. 540).
2 Príncipes Mathématiques^ p, viii.
262
MATHEMATICAL METHODS.
[chap.
mathematical economics; and it is difficult to do full
justice to this theory unassisted by mathematical
methods. Nevertheless, without the explicit use of
diagrams or algebraical formulae, what is essentially
the same theory has been independently worked out
by Monger and the Austrian schools
^ Menger's Grundsätze der Volhswirtlischaftslehre was published
in 1871, the same year as that in which Jevons's Theory of Political
Economy appeared. It may be said that the work of Monger and his
followers is mathematical in tone, though not in language. Professor
Walras of Lausanne, another independent worker in the same field,
is like devons an ardent champion of mathematical methods. So is
Mr Wicksteed, who in his Alphabet of Economic Science retains the
mathematical form, and expounds Jevons's doctrines with admirable
clearness. Professor Marshall is a mathematical economist of a
different type inasmuch as—unlike devons and Walras, and also
unlike Cournot, with whom he has in many respects more affinity—he
subordinates his mathematics. He employs diagrams for the illustra¬
tion and further development of his theories, but shews that his main
doctrines are capable of being expressed without mathematical aids.
He here proceeds on the principle that even in cases where mathema¬
tical symbolism is specially appropriate, and even where truths have
actually been reached wholly or partially through the instrumentality
of mathematical analysis, still some effort may rightly be made to
avoid the use of mathematics in writing for the general economic
public. The reason for this, like most other points connected with
the subject under discussion, is very happily expressed by Professor
Edgeworth. "Mathematics," he says, "is as it were the universal
language of the physical sciences. It is for physicists what Latin
used to be for scholars; but it is unfortunately Greek to many
economists. Hence the writer who wishes to be widely read—who
does not say, with the French author, Pimprime pour moi—will do
well not to multiply mathematical technicalities beyond the indis¬
pensable minimum, which we have seen reason to suppose is not very
large. The parsimony of symbols, which is often an elegance in the
physicist, is a necessity for the economist,"
VIII.]
SUMMARY.
263
On the whole, we arrive at the conclusions,
first, that political economy involves conceptions of a
mathematical nature requiring to be analysed in a
mathematical spirit ; and secondly, that there are
certain departments of the science in which valuable
aid may be derived from the actual employment of
symbolical or diagrammatic methods. Mathematics
may not up to the present time have proved an
absolutely indispensable instrument of economic in¬
vestigation and exposition; but it would be difficult"
to exaggerate the gain that has resulted from the
application of mathematical ideas to the central
problems of economic theory.
CHAPTER IX.
On Political Economy and Economic History.
I 1. Functions of economic history in theoretical
investigations.—The nature of the distinction between
economic history and economic theory, though some¬
times apparently overlooked, needs no detailed discus¬
sion. The former describes the economic phenomena
[existing at any given period in the past, and traces
the actual progress of such phenomena over successive
periods ; the latter seeks to determine the uniformities of
coexistence and sequence to which economic phenomena
are subject. The propositions of economic history are
accordingly statements of particular concrete facts ;
economic theory, on the other hand, is concerned with
the establishment of general laws.
Neither of the two can take the place of the other.
For, on the one hand, mere historical research cannot by
itself suffice for the solution of theoretical problems; and,
on the other hand, the actual evolution of economic
habits and conditions cannot be constructed à priori.
CHAP. IX.] STUDY OF ECONOMIC DEVELOPMENT. 265
At the same time, economic history and economic
theory in various ways assist and control one another ;
and their mutual relations become specially important
as the history approaches the period with which the
theory is more particularly concerned.
Reference may first of all be made to the desirability
of a general historical study of the gradual development
of those phenomena which are made the subject of
theoretical enquiry. This applies to any treatment of
economics that is not of the most abstract character.
Thus, independently of any assistance that may be
derived from actual historical generalizations, we shall
gain a clearer insight into the general principles now
regulating the distribution of wealth in England, if we
can follow the process of development through which
our system of distribution has passed. The really
characteristic and significant features of the existing
system will in this way be more distinctly perceived,
and their economic consequences more exactly traced.
^s an instance of a more special character, it
may be observed that certain of the problems to
which trade-unionism gives rise are more likely to
be effectively dealt with, if attention is paid to the
circumstances under which trade-unions originated.
Another simple instance is to be found in the theory
of the London Money Market, and the influence exerted
therein by the Bank of England. The present position
266 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
and functions of the Bank in the Money Market cannot
be properly understood, as Mr Bagehot shews in Lombard
Street, unless account is taken of its origin and history.
It may be added that in working out the general theory
of modern banking, it is helpful to study the different
ways in which modern banks had their beginning, and
the various purposes which it was their original object
to fulfil.
In a similar way, most theoretical enquiries, unless
they are of a particularly abstract and general character,
may with advantage commence with a brief historical
introduction, tracing the mode of development of the
I
phenomena under discussiou.
The kind of aid, however, which the theorist thus
gains from studying the evolution of economic phe¬
nomena, though very real, is indirect and perhaps
somewhat indefinite. The more specific functions of
economic history in connexion with the theoretical
problems of political economy may be roughly classified
as follows: first, to illustrate and test conclusions not
themselves resting on historical evidence ; secondly, to
teach the limits of the actual applicability of economic
doctrines ; thirdly, to afford a basis for the direct
attainment of economic truths of a theoretical character.
It is to the last named function that reference is more
particularly made when the application of the historical
method to political economy is spoken of.
IX.]
HISTORICAL ILLUSTRATIONS.
267
§ 2. Economic theories illustrated hy history.—
Even when the general line of argument adopted
by the economist is of a deductive character, it is
desirable that concrete historical illustrations should if
possible be found. The kind of qualifications requisite
in applying theoretical conclusions to problems of real
life will thus be made prominent ; and the student will
at the same time be reminded that hypothesis and
abstraction are employed but as means to an end, the
ultimate aim of the science being the explanation
and interpretation of the phenomena of the actual
industrial world. Historical digressions may also assist
the student in grasping the true import of a piece
of reasoning that is in itself severely abstract. For
example, the effect exerted on the general level of
prices in a country by the quantity of money in
circulation may be illustrated from the debasement of
the currency under Henry VIII. and Edward VI. and
the great discoveries of the precious metals in America
during the Tudor period, from the history of the
\
assignats of the French Revolution, from the period of
the Bank Restriction in England, and from the gold
discoveries in Australia and California in the present
century \
1 Compare Nicholson, Money and Monetary Problems^ pp. 58 £f.
Cairnes shews in his Leading Principales of Political Economy^
pp. 377 fí., how the occurrences following the gold discoveries in
268 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
It is to the economic history of the last hundred
years that we most naturally turn for illustrations of
current economic theories. Earlier economic history is,
however, for some purposes available. Thus records of
prices in the Middle Ages afford opportunities for
illustrating the economist's general theory of values.
For example, the movements in the price of grain
resulting from the dearth of the years 1315, 1316,
illustrate very forcibly the effect exerted on price by
changes in supply. The price of wheat rose to more
than three times what it was in ordinary years ; and the
fact that the rise was proportionately greater than any
that has been experienced in recent times verifies the
theoretical conclusion that the more limited the range
from which supplies are drawn, the greater will be the
influence exerted on the market by variations in the
seasons. A comparison between medieval and modern
prices illustrates, further, the influence of extended
markets, and increased facilities of communication, in
diminishing fluctuations and unifying prices throughout
the country in ordinary years.
An objection may perhaps be raised to drawing
illustrations of modern economic theories from prices
in the Middle Ages, on th§ ground that the influence
of custom, and the operation of legal restrictions,
Australia also serve to illustrate in a striking way the abstract theory
of foreign trade.
IX.]
HISTORICAL ILLUSTRATIONS.
269
must necessarily have obscured or even nullifíed the
effects of supply and demand. It is true that very
great caution is requisite in applying to earlier times
theories that presuppose thoroughgoing competition ;
but even in the medieval industrial world competition
was always at work in some form or other. Each case
requires special investigation, and it is at any rate clear
that law and custom did not exert an absolute and
decisive influence on the price of grain at the period
above referred to\ In so far as they were in some
degree operative, the figures become in one respect
still more striking, since they shew how changes in
supply are capable of overriding both custom and legal
enactments.
As regards wages, one of the most obvious of
early historical illustrations relates to the revolution
in the history of labour in this country caused by the
ravages of the Black Death in 1348, 1361, and 1369.
Notwithstanding the differences of opinion'as to the
probable population of England at the beginning of
the fourteenth century, it is generally agreed that not
much less than half the people must have been swept
off by the plague. An opportunity is thus afforded of
studying on a large scale the effect on wages of a
sudden diminution in the supply of labour, and also
1 Compare Rogers, History of Agriculture and Prices in England^
vol. i. Preface; and vol. iv. p. 427.
270 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
the conditions under which a rise in wages, once
obtained, is likely to be permanent. At first the whole
industrial machine was thrown out of gear ; wages were
doubled and, in some cases, even trebled. Even when
things had somewhat settled down, nominal wages ^
appear to have risen on the average about fifty per
cent. The whole of this rise was not maintained ; but
still wages during the next hundred years remained
from twenty-five to forty per cent, higher than they
were before the plague.
All this is in accordance with the general economic
theory of wages. Especially it should be noticed that
theory leads to the conclusion that if a general rise in
wages is to be rendered permanent, it must be able to
exert an influence upon the labourer s standard of com¬
fort before an increase in the population has had time
to bring about a reaction. This conclusion is borne
out by the permanent improvement in the position
of the labouring classes that was effected in the case
before us. It is true that after the plague had spent
1 The plague was accompanied by a dearth, and this, together
with the general dislocation of industry and the check given to the
proper cultivation of the land, resulted in a considerable rise in the
price of corn. Moreover a general slight rise in prices was in opera¬
tion, in consequence of successive depreciations of the coinage in 1346
and 1351. The rise in real wages was, therefore, not quite so great as
the rise in nominal wages would seem to indicate ; but no very great
deduction need be made on this score, since the general increase in
the money value of commodities was slight as compared with the
increase in wages.
IX.]
HISTORICAL ILLUSTRATIONS.
271
its force, population increased rapidly—a fact which
may be noted as illustrating the Malthusian doctrine
of population—but the diminution in the supply of
labour was so great that the filling in of the gaps could
not take place fast enough to prevent the rise in wages
from permanently establishing itself.
Continual efforts were made by the legislature to
restore wages to their old level; but though the
statutes passed with this object may have been
partially successful in certain localities, they were
in the main inoperative\ This failure of legislative
enactments to over-ride the ordinary action of supply
and demand is very significant. It has been suggested
that where economic conditions are changing very
^ Professor Rogers suggests that even in those cases where the
Statute of Labourers was nominally operative, it was in reality
evaded. " The Statute of Labourers may indeed have produced some
effect on farm labour. I seem to detect its operation from a fact
which I have frequently noticed in the accounts after the Black
Death. Entries of payments on certain rates are cancelled, and lower
sums are substituted for them. Of course in the tables which I have
constructed I have not taken the figures which have been cancelled,
but those which are substituted. But I cannot help thinking that
these changes point to evasions of the statute, and that perhaps the
labourer was compensated to the full extent of the previous entry,
but in some covert way, or by some means which would not come
within the penalties of the statute. Thus there might be larger
allowances at harvest-time, or the permission to make fuller use of
common rights, or, as I have seen in the case of a shepherd, a licence
to turn his sheep into his lord's pasture, or some analogous equivalent
to a necessary but illegal money payment " {History of Agriculture
and Prices in England^ vol. i. p. 300).
272 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
slowly, wages and prices may appear to be regulated
by laws or customs entirely irrespective of competition,
whereas in fact the laws or customs are being them¬
selves gradually modified from generation to generation,
so that at any given time the rates which they sanction
are not materially different from the normal rates that
the free operation of supply and demand would itself
have brought abouti If there is any truth in this
theory, it will explain how it was that although law
and custom sometimes exerted considerable influence
in medieval industrial economy, they failed to do so
in the particular period succeeding the ravages of the
Black Death. Here was a crisis in which economic
conditions changed not gradually, but suddenly ;
customary and legal rates of wages were unable to
adapt themselves quietly and by degrees, but became
strikingly divergent from competition wages ; and they
had to give way accordingly.
Whilst attention is called to the value of historical
illustrations such as the above, attention may also be
called to the weakness of historical records as com¬
pared with contemporary observations. It is almost
impossible to be equally sure of the accuracy and
adequacy of the available data; and it is very easy
to misinterpret them, particularly if they are of a
statistical character. Many unrecorded and unsus-
1 Compare Marshall, Present Position of Economics, pp. 48 to 50.
IX.]
HISTORICAL ILLUSTRATIONS.
273
pected influences may also have been in operation,
and undue importance may consequently be attached
to those of which a record remains. This danger be¬
comes the greater, if we set out with the object of
illustrating a foregone conclusion.
There is a further difflculty sometimes involved in
the use of historical illustrations. In order that they
may not be cumbrous, there is danger of their becoming
either inadequate as illustrations, or else inaccurate
from the historical standpoint. Separated from their
context, they are apt to lose a good deal of their force,
while there is at the same time a certain liability
to exaggeration. A theory may be satisfactorily tested
and confirmed by an historical record taken in its
entirety, and yet it may be difflcult to point to any
separate portion of the record as constituting by itself
an adequate illustration or exemplification. Illus¬
trations avowedly fictitious are preferable to historical
illustrations that require to be doctored in order to
serve their purpose; and on the whole, while it is
desirable to have recourse to historical illustrations
wherever suitable ones present themselves, it is
chimerical to expect that such illustrations can wholly
supersede and replace illustrations of a hypothetical
character.
§ 3. Economic theories criticized by history.—It has
been said that the true function of economic history in
K. 18
274 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
relation to theoretical investigations is criticism ; and
this is undoubtedly one of its most important functions.
For history does not merely illustrate and confirm ; it
also brings mistakes to light, and shews where doctrines
have been laid down without due qualification or limit¬
ation. The history of wages, for example, shews the
error of the assumption that the standard of comfort of
the labouring classes automatically determines the rate
of wages, whilst it is itself unaffected by changes in
that rate.
In particular, economic history teaches the limits
of the actual applicability of economic doctrines. It
calls attention to the shifting character of economic
conditions,' and shews how, as these conditions vary,
some at least of the principles by which economic
phenomena are regulated vary also. The relativity of
economic doctrines is discussed in some detail in a note
at the conclusion of the present chapter ; and hence no
more than a passing reference to the subject need be.
made at this stage. It will suffice to remark that the
almost universal recognition of such relativity by recent
economists, so far at any rate as concrete economic
doctrines are concerned, may be regarded as one of the
most striking and legitimate triumphs of the historical
school. The question how far there remain economic
principles for which universality may still be claimed
will be considered later on.
IX.]
THE HISTOKICAL METHOD.
275
§ 4. Eoonomic theories established by history.—The
question next arises how far historical material may be
of service for the discovery of economic uniformities,
and not merely for the confirmation or criticism of
theories arrived at in some other way. There are,
without doubt, many problems which require for their
solution a combination of deductive reasoning and
historical investigation so to speak on equal terms;
and there are other cases in which our main reliance
has to be placed upon historical generalizations.
The effects of machinery on wages, the occurrence
of credit cycles, the extent of the evils resulting from
bad currency regulations, the effects of gold discoveries
i
or of a scarcity of gold on trade and industry, the work¬
ing of a system of progressive taxation, the economic
consequences of different systems of poor relief, and
of State interference of various kinds, may be given as
instances where the economist is more or less directly
- dependent upon historical material. It is true that
deduction from elementary principles of human nature
also finds some place in the argument. Deduction at
some stage or other of the reasoning is, indeed, in most
cases essential to its cogency ; for the fallibility of purely
empirical laws must constantly be borne in mind. Still
instances of the above kind serve at once to invalidate
the view that economic history never provides premisses
for the economist or forms the basis of his doctrines.
18—2
276 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
For purposes of illustration the problem of the
effects of machinery on wages may be considered in
rather fuller detail. This problem really involves two
questions, as is pointed out by Professor Nicholson in
his essay on the Effects of Machinery on Wages : first,
the immediate or closely proximate effects of the
extended use of machinery—the characteristics, that
is to say, of the state of transition ; and secondly, the
general characteristics—as affecting wage-receivers—
of a system of industry in which much machinery is
used, compared with one in which little machinery is
used.
In dealing with the first of these questions we may
to a considerable extent employ deductive reasoning
based on the general theory of distribution. We have
to consider the increased efficiency of production due
to the use of machinery, yielding a larger dividend for
distribution ; the greater aid which capital is able to
afford to labour, tending to raise the capitalist s share
at the expense of the wage-receiver's^; the impetus
1 This is a more satisfactory method of treatment than to argue
from the increase of fixed at the expense of circulating capital. Con¬
sidering that the amount of capital at the disposal of an employer is
not a definite sum, but may within certain limits be increased by the
aid of credit, without diminishing the resources of other employers, it
does not follow that an extended employment of machinery will neces¬
sarily diminish circulating capital. Assuming that the substitution
of machine for hand labour lowers prices, demand will be stimulated ;
and it is possible that this may be the case to such an extent that in
IX.]
EFFECTS OF MACHINERY ON WAGES.
277
given to the accumulation of capital ; the change in
the kind of labour required, skilled labour of a given
kind being superseded by unskilled labour or by skilled
labour of another kind. These are the main factors to
be taken into account, and we can argue from them
deductively to the kind of effects that will be pro¬
duced. Of course the actual effects will vary with
varying conditions ; but still arguing for the most
part deductively, we can determine what are the most
influential of these conditions : e.g.^ the continuity or
want of continuity in the changes, and the time over
which a given alteration is spread^; also, the adapt¬
ability of the labourers, depending mainly on their
general intelligence and technical education.
the production of the given commodity all the labour that was for¬
merly employed may still be employed in addition to the machinery—
the employers by means of credit discounting the future, so that al¬
though they have to purchase the machinery they can still advance as
much in wages as before. This is the more likely to hold good if the
machinery is introduced gradually, so as to allow demand to increase
pari passu. So far as a different kind of labour is required, the old
skilled workmen suffer because their particular skill is superseded,
and not because there is less circulating capital with which to main¬
tain them. It is always true, however, that, ceteris paribus, the
extended use of machinery increases the relative importance of
capital in the work of production.
^ Professor Nicholson, in the essay to which reference has been
made above, formulates the following Law of Continuity : "A radical
change made in the methods of invention will be gradually and con¬
tinuously adopted; and these radical changes, these discontinuous
leaps, tend to give place to advances by small increments of inven¬
tion.^^ A proposition of this kind can of course be established only
by direct historical evidence.
278 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
In all the above we may, in the manner indicated
in the two preceding sections, appeal to the experience
of the last hundred years to illustrate, confirm, or
correct our conclusions ; still, so far, the use of history
is mainly supplementary. We need more definitely to
look to the past, when we turn to the second of the
questions involved in the given problem, and seek to
determine how wage-receivers are affected by the
general characteristics of an age of machinery as
compared with one of hand labour. In order to solve
this problem, it is necessary, not only to consider the
effects of cheapened production, but also to ask such
questions as the following—how far, and under what
conditions, the use of machinery leads to the increased
employment of women and children, to the concentra¬
tion of industry in large towns, to a widening of the
gulf between employers and employed, and to longer
hours of labour; how far it increases the monotony of
t
work and dispenses with technical skill or the reverse^;
how far it increases or diminishes the specialization of
skill ; how far it increases or diminishes fluctuations
in wages. Only to a limited extent do these questions
admit of abstract treatment. At any rate so far as
deductive reasoning is employed, it does but follow
the suggestions of history, and starts from premisses
^ Experience seems to shew that on the whole the use of machinery
increases rather than diminishes the demand for skilled labour.
IX.] EFFECTS OF MACHINERY ON WAGES. 279
that are established historically. It is clear that the
problem as a whole cannot be adequately dealt with
except on an historical basis.
At the same time, and in consequence of the
method employed, great care is necessary if we are
to avoid attributing in too high a degree to the use
of machinery effects that are partly or wholly due
to some other cause. There is need also to guard
against the danger of unduly extending the range of
our generalizations, in consequence of overlooking the
way in which the problem is affected by the special
conditions of particular trades. Inductions that may
seem to be justified by the facts should as far as possible
be deductively checked ; and it should in particular be
remembered that the characteristics of machine-using
epochs may vary at different stages, and that the use
of very much machinery may not be related to that
of much, as the use of much is to that of little, or
the use of little to that of none.
In more general problems relating to economic
growth and progress the part played by abstract reason¬
ing is reduced to a minimum, and the economist's
dependence upon historical generalizations is at a
maximum. Theories of economic growth and progress
may, indeed, be said to constitute the philosophy of
economic history. For only by the direct comparison
of successive stages of society can we reasonably
280 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
hope to discover the laws, in accordance with which
economic states tend to succeed one another or to
become changed in character^
There are in fact few departments of political or
social science in which the à priori method avails less
than in the study of economic development. Mill in
his Political Economy y Book iv., discusses the influence
of the progress of society on production and distribu¬
tion; and his method is to begin by assuming certain
factors unchanged, and then to deduce the consequences
of changes in others. Some additional light is thrown
on the general laws of rent, profit, and wages, under
the hypothesis of effective competition ; but the dis¬
cussion yields very little in the way of a true theory
of economic progress. It has been already pointed out
that in studying the mode of development of economic
conditions, the economist is more than ordinarily de¬
pendent upon general sociological knowledge ; and it
may almost be regarded as a cdfollary that he is
also more than ordinarily dependent upon historical
investigation. The realistic and historical conceptions
of political economy go hand in hand, and the spheres
1 The historical comparison may, however, in some cases be use¬
fully supplemented by a contemporary study of oriental and savage
countries, in the manner exemplified by the investigations of Sir
Henry Maine. The study, for example, of village life in India and
Ceylon gives insight into the nature and development of the agricul¬
tural communities of earlier times in Europe.
IX.] IMPORTANCE OF THEORY TO THE HISTORIAN. 281
within which they are specially appropriate may for
the most part be identified.
§ 5. Functions of economic theory in historical
investigations,—Turning to the other aspect of the
relation between economic history and economic
theory, we may pass on to enquire how far theoretical;
knowledge is of service in historical investigational
The first point to notice is that a knowledge of
theory, i.e., of previously established general pro¬
positions relating to economic phenomena, teaches the
historian what kinds of facts are likely to have an
important economic bearing. Even when engaged in
the mere collection and registration of events, it is
often advantageous, as Jevons has pointed out in the
case of the physical observer, that our attention should
be guided by theoretical anticipations. Industrial
phenomena are exceedingly complex, and unless we
know what special facts to look for, it is quite possible
that some of the most vital circumstances may fail
to attract our notice. Knowledge of cause and effect
in the economic world is, accordingly, of assistance for
discriminating between the facts to be specially noted
and those that may without risk of error be disregarded.
But while theoretical anticipations may serve a
very useful purpose, they may also be a serious source
of danger. It has often been pointed out how the
mere narration of events is influenced by the narrator s
282 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
theoretical views. He is apt so to arrange and co¬
ordinate his facts—emphasizing some and slurring over
others—that they cannot but suggest the conclusions
he himself is inclined to draw from them. The history,
for example, with which List commences his National
System of Political Economy, though in many respects
both sound and interesting, is more or less open to
this criticism ; that is to say, it is history read in the
light of a particular theory, which theory is afterwards
to a considerable extent based on the history.
If then a writer s theoretical views are likely to
exert an influence upon his narration of facts, it is
clearly of material importance that his preliminary
study of theory should be careful and exact. It is also
of importance that the theoretical position taken by
the historian should not be disguised. As remarked by
Professor Marshall, " the most reckless and treacherous
of all theorists is he who professes to let facts and
figures speak for themselves, who keeps in the back¬
ground the part he has played, perhaps unconsciously,
in selecting and grouping them, and in suggesting the
argument post hoc ergo propter äoc."^
If the historian is properly to fulfil his function, he
must avowedly attempt to establish relations between
phenomena, and trace causes and effects. But it is an
error to suppose that this is possible without the appli-
^ Present Position of Economics^ § 16.
IX.] IMPORTANCE OF THEORY TO THE HISTORIAN. 283
cation of general propositions previously established.
Causes in history are not, as has been affirmed, "given
to us in each case by direct evidence,'' if by this is
meant that each set of events can be studied separately,
and causal connexions assigned without the assistance
either of deductive reasoning or comparison with other
instances. All that is really given to us in each case
by direct evidence is a complex sequence of events,
in which the true bonds of causal connexion may be
disguised in a thousand different ways, so that, far from
being patent to every observer, they can be detected
only by the trained student thoroughly equipped with
scientific knowledge. It follows that some familiarity
with economic theory is needed for the interpretation
of industrial phenomena, such as it falls within the
province of the historian to give.
The above remarks apply with special force to
the economic history of the last hundred years, both
because the interactions between economic phenomena
become more and more complicated as we approach
recent times, and the interpretations of economic
science are therefore the more indispensable ; and also
because modern economic analysis has a more direct
and immediate bearing on this period than on earlier
periods. Still the application of what has just been
said need not be limited to recent economic history,
although it is true that as regards earlier times no
284 POLITICAL ËGONOMY ÁÑD ECONOMIC HÍSTORY. [öHAP.
elaborate apparatus of theory is required. It may be
added that the economic historian will be benefited
by having received a scientific training in economic
reasoning, even where there is little scope for the
application of particular economic dogmas. Just as it
is a function of history to criticize theory, so it may
be regarded as a function of theory to criticize history.
Theory often cannot tell definitely what actual results
will follow from any given change ; but it can deter¬
mine the kind of effects that are probable or possible,
and it can often particularise the conditions under
which each will occur. It can, therefore, usefully
criticize and test any given account of what actually
took place. It is often competent to declare that
a given effect cannot have been due to the assigned
cause, or at least that this cannot have been the case
under the stated conditions.
There has been some dispute as to whether the
study of economic history should precede that of
economic theory, or vice versa ; it may also be argued,
as a third alternative, that since their dependence upon
one another is mutual, the study of the one and the
other should be carried on more or less pari passu.
It is difficult to lay down a general rule applicable
to all circumstances. But, on the whole, so far as
elementary study is concerned, it seems best that some
treatment of general economic science in its simplest
IX.] INTERACTION OF FACTS AND IDEAS. 285
and broadest outlines should come first. For unless the
history is limited to an early period—say to that pre¬
ceding the seventeenth century—the history essential
to the illustration and due limitation of the general
principles of economic reasoning can more easily and
more safely be supplied incidentally, than can the
theory essential to the right understanding of the
history.
§ 6. Economic history and the history of economic
theories.—Distinct from the history of economic facts,
but closely related thereto, is the history of ideas and
theories concerning the facts. In the industrial sphere,
as in other departments of human action, facts and ideas
act and react upon one another, so that there results a
complex bond of connexion between the historical
succession of phenomena and the historical succession
of theories. Economic theories may accordingly be
considered, not merely in relation to their absolute
truth or falsity, but also in relation to the economic
facts that helped to produce them, and those that they
themselves helped to produce.
The theories of industry and commerce current at
any period often throw light on the actual industrial
facts of that period. From the study of the theories
new points of view from which to regard the facts may
be obtained, and fres^ clues may be suggested leading
to a more thorough knowledge of the actual course of
286 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
events. For this reason alone the economic historian
would be led to examine the drift of economic opinion
over the period of his investigations h
Another reason why the historian of economic facts
concerns himself with the history of economic theories
is to be found in the direct influence which the opinions
current at any period exert on subsequent events.
The course of economic development is controlled and
modified not only by actual legislation, but also by social
institutions and current habits of thought; and it is
clear that all these are under the influence of theories
and ideas. In early times, indeed, it is principally by
their influence on actual phenomena that it becomes
possible to trace the progress of ideas; and up to a
certain stage, the history of thought on economic
1 "Among the facts with which we are concerned," says Dr Cun¬
ningham in his Groiüth of English Industry and Commerce during the
Early and Middle Ages, ''none are of greater importance than those
which shew that certain ideas were prevalent at a certain time, or
were beginning to spread at a particular date. It is only as we under¬
stand the way in which men viewed the dealing and enterprise of
their own time, and can thus enter into their schemes of advancement
or their aims at progress, that the whole story may come to possess a
living interest for us " (p. 17). Dr Cunningham adds that from the
preambles of statutes and other documents and the economic litera¬
ture of each century, " we can generally learn what men thought and
what they wished, so that we can better apprehend the meaning of
what they did " (p. 21). It ought no doubt to be borne in mind that
the preambles of statutes taken by themselves may sometimes be
misleading. Their primary object being to provide justification for
the statutes that follow, they cannot in all cases be regarded as
unbiassed expressions of opinion.
IX.] INTERACTION OF FACTS AND IDEAS. 287
questions is almost necessarily merged in the history
of the facts themselves. As we approach modern
times, the theories begin to find more articulate and
definite expression in literature, and we are able more
and more clearly to distinguish between economic
history and the history of political economy h But
it remains none the less true that the development
of economic institutions and the course of economic
legislation are always the outcome of the progress of
thought concerning the phenomena of wealth. Even
individual theorists may exert a striking influence on
subsequent economic legislation. Adam Smith pre¬
pared the way for the triumphs of laisser faire which
culminated in the repeal of the Corn Laws; and the
reform of the English Poor Law in 1834 was largely
due to the direct and indirect influence exerted by the
writings of Malthus.
The reciprocal influence exerted by facts upon
theories constitutes a further fundamental reason why
the history of economic doctrines cannot be divorced
I
from that of actual economic phenomena. The theories
of any period are almost always based at least partly
1 Blanqui fails to make the distinction sufficiently clear when he
describes the history of political economy as " a summary of the ex¬
periments which have been made amongst civilised nations to improve
the lot of mankind." Political economy, even if regarded as funda¬
mentally an art, is not properly to be identified, with economic
legislation.
288 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP.
upon assumptions that have a special application to
the actual circumstances of that period. With every
change in economic conditions fresh problems arise for
solution, and the solutions offered cannot but be to
some extent affected by the contemporary current of
events. No v^riter can altogether free himself from
the characteristic influences of his age and country;
nor is it desirable that he should do so. It follows that
the theories of the past cannot be properly understood,
or their validity fairly estimated, unless they are taken
in connexion with the actual phenomena that were at
the time attracting attention, and helping to mould
and colour men's views.
As a simple example of the interaction of facts and
ideas, the contempt expressed by Xenophon and other
ancient writers towards the manual arts, with the
one exception of agriculture, may be connected with
the circumstance that in ancient communities manual
labour was to a very great extent performed by slaves.
At the same time, this contempt would naturally tend
to perpetuate the state of things which up to a certain
point accounted for it.
Another example is to be found in the strong moral
feeling that existed in the Middle Ages against the
taking of interest. Under modern economic conditions
individuals, as distinguished from nations, borrow
mainly in order that they may make a profit. But in
IX.] INTERACTION OF FACTS AND IDEAS. 289
the eleventh and twelfth centuries the field for the
investment of capital was limited, and for the most
part recourse was had to the money lender only in
circumstances of misfortune or special need. Hence
the taking of interest naturally presented itself in a
different aspect from that in which we are now wont
to regard it. It should, however, be added that while
the theory of the immorality of interest was relatively
justified, many of the arguments adduced in support
of the theory were as fallacious in reference to the
economic conditions of the Middle Ages or any other
period, as they would be in reference to existing
economic conditions. The actual prohibitions of the
Church against usurious practices were also in some
cases apparently pushed beyond the point which the
circumstances of the time are likely to have rendered
expedient ; as, for instance, when wholesale merchants
were forbidden to make a difference between cash
prices and credit prices in their dealings with retail
traders ; for it seems clear that in this case credit
would usually be taken with the object of making a
trade profit. As a matter of fact, however, the pro¬
hibitions were constantly evaded by means of ingenious
legal fictions ; and it is probable that they were seldom
really operative except in cases where they had some
practical utility.
The Mercantile System and the doctrines of the
K. 19
290 POLITICAL ECONOMY AND ECONOMIC HISTOKY. [CHAP.
Physiocrats have been clearly shewn by recent historians
to have been the natural products of the times and
circumstances in which they respectively arose. The
need of reading particular economic works in the light
of contemporary phenomena has also been copiously
illustrated by reference to our three great English
economists, Adam Smith, Malthus, and Ricardo. A
word or two may be said here in regard to the last of
the three only, whose doctrines, sometimes spoken of as
pure abstractions, had in reality a special relation to
the facts that came under his observation.
As observed in a previous chapter, the main con¬
dition essential to the correct understanding of Ricardo
is the precise determination of the assumptions upon
which his reasoning proceeds. What these assumptions
are, however, the reader is usually left to his own in¬
genuity to^discover. Ricardo himself never explicitly
formulated them—probably because they seemed to
him in no sense arbitrary abstractions, but patent facts
to which it was unnecessary specially to call attention.
The reason of this is to be found in his personal
circumstances, and in the general economic conditions
of his time. His fundamental assumption is the
operation of thoroughgoing uncontrolled competition ;
and this may, in the first place, be connected with his
position in the City, and on the Stock Exchange—a
market that may be taken as a type of the theoretically
IX.]
RICARDO.
291
perfect market, where competition is unceasing, and
supply and demand all powerful. Ricardo's personal
surroundings are, however, comparatively unimportant
from our present point of view. What is really of
importance is that he wrote at a moment when in
the industrial world itself, so far as internal trade was
concerned, the principle of competition was very active
and self-assertive. Old statutes that sought to regulate
industry were giving way before it. No Factory Acts
had yet been passed. Trade combinations of workmen
were still illegal. The industrial revolution of which
Adam Smith hardly saw the commencement was in
progress ; and in the general movement caused by it,
the subtle hindrances to competition which were still
in operation were the more easily overlooked.
Ricardo has frequently been represented as laying
down the " iron law " that wages cannot permanently
rise above what is sufficient to provide the bare neces¬
saries of life. He explicitly recognises, however, that
the "natural price of labour," even when estimated
in food and necessaries, is not absolutely fixed and
constant. "It varies," he says, "at different times in the
same country, and very materially differs in different
countries. It essentially depends on the habits and
customs of the people."^ At the same time, in the
course of his reasonings, e.g., in his treatment of taxes
^ Principles of Political Economy and Taxation (McCulloch's
edition), p. 52.
19—2
292 POLITICAL ECONOMY AND ECONOMIC HISTOKY. [CH. IX.
on raw produce, he constantly assumes that the working
classes have so low a standard of comfort, that an
alteration in the price of necessaries must very quickly
react upon the nominal rate of wages. This assumption
may be taken in connexion with the deterioration in
the state of the working classes at the beginning of the
present century—a deterioration due mainly to the
industrial revolution and the demoralizing conditions
under which poor relief was administered, supplemented
by the Napoleonic wars and an extraordinary series of
bad harvests.
A minor assumption involved in many of Ricardo's
reasonings is that all the agricultural produce con¬
sumed in a country is grown in the country itself.
This again was a natural assumption to make at a
time when, except in years of scarcity, the importation
of wheat was virtually prohibited. Even had free trade
seemed within the range of practical politics, Ricardo
could not have anticipated that the development of
the wheat-producing capacities of North America and
India, combined with the discovery of cheap and rapid
means of transit, would ever bring about a condition
of affairs in which England would import nearly twice
the quantity of wheat and flour that she produced for
herself. Such a state of things, even if its possibility
were contemplated, would seem so remote from facts
as to make its economic consequences not worth dis¬
cussing.
NOTES TO CHAPTER IX.
A. On the Limits of the Validity of Economic
Doctrines.
§ 1. The relativity of concrete economic doctrines.—By
some of the older economists, for example, Senior, political
economy was regarded as a system of doctrines possessing
universal validity. The science was declared to belong
to no one nation and to no one country; wages, profits, and
other economic phenomena were held to be governed by
immutable laws comparable to the law of gravitation.
De Quincey's eulogy of Ricardo may serve as an illus¬
tration. "Previous writers," he says, "had been crushed
and overlaid by the enormous weights of facts, details,
and exceptions ; Mr Ricardo had deduced, à 'priori^ from
the understanding itself, laws which first shot arrowy
light into the dark chaos of materials, and had thus con¬
structed what hitherto was but a collection of tentative
discussions into a science of regular proportions, now first
standing upon an eternal basis." ^
This claim to offer something unconditional and true
in the same way for all times, lands, and nationalities,
^ Confessions of an English Ojgium-Eater (edition of 1856), p. 255.
294 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP, IX.
is termed by Knies the absolutism of theory'^. He con¬
siders that it is countenanced as a tacit assumption by some
writers who would not perhaps defend it on principle;
and in opposition to it, he and other economists of the
historical school affirm the relativity of economic doctrines.
On the ground that the economic phenomena of each age
and each community are subject to special laws, an absolute
system possessing universal validity is regarded as neces¬
sarily an impossibility; every people and every epoch are
considered to have a political economy of their own more
or less peculiar to themselves.
It is to be added that the affirmation of the relativity
of economic doctrines is not confined to the historical
school. Mr Bagehot, who was an economist of an essen¬
tially conservative type, expressly limits the science to
a single kind of society, *'a society of grown-up com¬
petitive commerce,'' such as we have in England in the
nineteenth century.
In the discussion of the question here raised, the dis¬
tinction between abstract and concrete economics rises into
importance. The former may at any rate be regarded as an
instrument of universal application. It discusses principles
^ While sometimes using the phrase cosmopolitanism of theory in
much the same sense as absolutism, Knies í)oints out that it is not
strictly speaking sufficiently broad in its signification. This phrase
indicates the disregard of the special conditions given by territorial
differences and differences of nationality, but it fails to indicate the
disregard of distinctions brought about by differences of time^
whether in the case of one and the same people or of all peoples. To
express this second element in absolutism of theory, the term per-
petualism is suggested. Die politische Oehonomie vom geschichtlichen
Standpuncte, 1883, p. 24.
NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 295
that are universal in the sense of pervading all economic
reasoning. To this point we shall return presently. Con¬
fining our attention in the meantime to concrete economic
doctrines, it may be said that their relativity follows im¬
mediately from the realistic conception of this portion of
the science adopted in an earlier chapter. It is as true of
economic conditions, as of social conditions in general, that
they are ever subject to modification. They vary with the
legal form of society, and with national character and in¬
stitutions.
Even where the forces in operation are the same, the
relative strength that should be assigned to each may
vary indefinitely. Law, custom, competition, combination,
are agents in determining the distribution and exchange of
wealth, no one of which is probably at any time altogether
inoperative \ But the extent of their infiuence, and the
manner in which it is exerted, are constantly varying;
1 Just as in modern industrial societies, where competition is the
dominant force, some values are nevertheless regulated by law or
custom {e.g., parliamentary railway fares, lawyers' fees), so in more
primitive societies, where custom is the most powerful influence, com¬
petitive prices are not altogether unknown. Sir Henry Maine in
his Village Communities, Lecture vi, gives several instances of com¬
petitive prices existing side by side with customary prices. There are
cases, for example, where members of the same group never think
of trading together upon commercial principles, but where dealings
between members of different groups are entirely unshackled by
customary rule. There are also cases where "natives of India will
pay willingly a competition price for one article, when they would
think it unjust to be asked more than a customary price for another.
A man who will pay the price of the day for corn collected from all
parts of India, or for cotton-cloth from England, will complain if he
is asked an unaccustomed price for a shoe."
296 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX.
and such variations are always of importance as affecting
the relevancy of economic doctrines in relation to actual
economic phenomena.
Not much needs to be said in illustration of the above
statements. It has become a commonplace that many
modern economic theories have little or no direct appli¬
cation to medieval Europe. Cliffe Leslie puts the case very
forcibly in brief compass—"The structure and phenomena
of medieval society in Germany, as elsewhere, were far
from suggesting an economic theory based on individual
interest and exchange. Common property in land, common
rights over land held in severalty; scanty wealth of any
kind, and no inconsiderable part of it in mortmain, or
otherwise intransferable ; labour almost as immovable as
the soil ; production mainly for home consumption, not
for the market ; the division of labour in its infancy, and
little circulation of money; the family, the commune, the
corporation, the class, not individuals, the component
units of society: such are some of the leading features of
medieval economy."^ The Ricardian law of rent, in the
ordinary form in which it is stated, may be taken as
a special example. Every economist recognises that this
law does not apply universally, although the physical fact
of different returns to different doses of capital may
remain.
It must not, indeed, be supposed that current economic
theories are wholly inapplicable to earlier periods of
history. Instances of their applicability have been given
in the preceding chapter. Dr Cunningham draws a clear
1 Essays in Political and Moral Philosophy^ 1888, p. 84.
NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 297
distinction in this respect between market prices and rents.
"Many of the phenomena of medieval industrial life,"
he remarks, "were governed by conditions precisely similar
to those which operate now; competition was quite as real,
though there was more 'friction,' and its action was less
obvious. Market prices of all kinds, such as the price
of wool or of herrings, were determined by supply and
demand as truly as now, and none of the frequent efforts
to interpose barriers could alter the forces at work, though
they might affect the rate of their operation. But with
rents it was different ; free competition and market rates
did not control agricultural operations as they do now, and
the theory which rightly assumes them for the present day
does not serve to explain the variations of medieval rents."
The following statement may be quoted as an example
of the tendency to over-estimate rather than to under¬
estimate the relativity of economic doctrines. " The middle
ages," says Dr Seligman, "were a period of customary, not
of competitive prices ; and the idea of permitting agreements
to be decided by the individual preferences of vendor or
purchaser was absolutely foreign to the jurisprudence of
the times. The 'higgling of the market' was an impossi¬
bility simply because the laws of the market were not left
to the free arbitrament of the contracting parties. It
would have seemed preposterous for the producer to ask as
much as he could get, or, on the contrary, to demand less
than his neighbour, and thus undersell him."^ Professor
Rogers has, however, shewn that "producers were very
acute during the middle ages, and for the matter of that,
1 Science Economic Discussion, p. 6.
298 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX.
buyers, too, in doling out their supplies to the market,
or in making purchases, according, to their interpretation
of the amount in hand or available for sale. The most
critical sales of the year were those effected in early
summer, when the amount of the last year's produce was
known pretty correctly, and the prospects of the ensuing
harvest could be fairly guessed."^ This brings out a
point that is of considerable importance in the operation
of the law of supply and demand, namely, the manner in
which estimates of future supply influence the amounts
immediately demanded by purchasers and those immediately
offered for sale by vendors. Take, again, the following
reference to the price of iron in the fourteenth century,
as a simple instance of the effect of demand on price.
very dry summer caused much wear and tear of imple¬
ments, and consequently an increased demand and a higher
price; so that the bailiff's accounts frequently mention the
^dearness of iron on account of drought.'"^
Again in regard to contemporary economic phenomena
of a different type from our own, although prices may
appear to be wholly under the influence of custom, com-
^ Six Centuries of Work and Wages, p. 144.
2 Ashley, Economic History, vol. i., p. 36. Professor Ashley in a
lecture on the Study of Economic History (Quarterly Journal of
Economics, January, 1898) observes in criticism of the use here made
of this quotation, " Surely the power of tracing so obvious a connexion
between phenomena demands nothing more than plain common
sense." Granted that this is so, however, it seems in no way to affect
the appropriateness of the instance in relation to the particular point
at issue. The question raised in the text does not turn on the nature
of the proof of the law connecting changes in price with changes in
demand, but simply on the range of the application of the law.
NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 299
petition may still operate in a disguised form—a change in
the quality of the goods sold taking the place of a change
in price. Sir Henry Maine indicates that in the more
retired villages in the East, where the artificer who plies
an ancient trade still sells his wares for the customary
prices, he is prepared to change their quality under con¬
ditions which in the West would lead to a change in priced
Still, whilst it is an exaggeration to regard doctrines
based on the hypothesis of competition as wholly inap¬
plicable to the past or to oriental societies at the present
time, it is strictly true that such doctrines can never be
safely applied without special enquiry and the most careful
investigation of economic conditions.
And the progress of society does not merely afiect the
solution of old economic problems; it also gives rise to
entirely new ones. There are many doctrines relating to
complex problems of money, credit, international trade, and
the like, that can apply only to advanced economic societies.
In relation to earlier states of society these doctrines are
not so much false as irrelevant.
The above remarks relate to economic theorems. The
recognition of the relativity of economic maxims is even
more imperative; and, as suggested in an earlier chapter,
%
unless we carefully distinguish the theorems from the
maxims, we shall naturally be led to exaggerate the re¬
lativity of the former. Legislation directed against specu¬
lative dealings in any commodity may be mentioned as a
simple instance of the relativity of economic politics. The
expediency of such legislation depends largely on the
1 Village Communities^ pp. 190, 1,
300 EELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX.
extent to which the economic conditions of place or time
render it possible for individuals or combinations to succeed
by speculative purchases in gaining an effective control
over the whole supply of the commodity \ Speaking more
generally, we may say that the less favourable the con¬
ditions to the maintenance of thoroughly effective com¬
petition, the more expedient become legal interferences
with competition. Thus the justification of the Assize of
Bread and Ale, and other similar medieval laws regulating
prices, is to be found in the probable failure of competition
in the case of retail exchanges. The aim was merely to
ensure—what really effective competition would of itself
have brought about—a correspondence between retail
prices and the variations in the price of the raw material.
§ 2. Undesirahility of limiting political economy to the
theory of modern commerce.—The recognition of the re¬
lativity of economic doctrines led Mr Bagehot, not to the
adoption of the historical method in any form, but to the
limitation of political economy to " the theory of commerce,
as commerce tends more and more to be when capital
increases and competition grows." Mill is criticized for
" having widened the old political economy either too much
or not enough." ^'If it be," says Bagehot, "as T hold, a
theory proved of, and applicable to, particular societies
only, much of what is contained in Mr MilFs work should
not be there ; if it is, on the contrary, a theory holding
good for all societies, as far as they are concerned with
wealth, much more ought to be there, and much which is
there should be guarded and limited." ^
^ Compare Ashley, Economic History, vol. i. p. 187.
2 Economic Studies, pp. 19, 20.
NOTE A.] SPHERE OF POLITICAL ECONOMY. 801
A good many reasons may be urged against adopting a
definite limitation of political economy such as is here
indicated. It is true that the modern economist will
formulate principally a doctrine that applies to the
economic world in which he finds himself ; he will fre¬
quently select assumptions that hold good only in such a
world ; and wherever this is the case, it is essential that it
should be carefully borne in mind. But we need not work
with one and the same set of assumptions throughout.
We may investigate the economic phenomena of more
societies than one ; and we shall find that the application
of our doctrines has to be narrowed or may be widened
according to circumstances. While some of our conclusions
may be true only of the more advanced countries of the
world, and that only in the present stage of their de¬
velopment, others may have a far more extensive ap¬
plication, or may at any rate require to be only slightly
modified in order that this may be the case. It is
probably true that the law of supply and demand directly
applies to some classes of exchanges in almost every state
of society ; and there are many other laws to which a very
wide range of application may be given, e.g.^ Gresham's
law—that bad money drives out good money. Moreover,
the wider the range of our investigations the more com¬
plete and serviceable is likely to be our knowledge of the
present \
Mr Bagehot speaks of the periods preceding the modern
^ It has been shewn in the preceding chapter that certain theories
of prices and wages may be very well exemplified by statistics of the
fourteenth and fifteenth centuries. But the England of that period
was certainly not an example of a modern industrial society.
802
SPHERE OF POLITICAL ECONOMY. [CHAP. IX.
commercial era as fre-economic^) but this conception is
open to criticism. Granted that in ancient Greece and
Egypt, in feudal Europe, in the village communities of
India and Ceylon which still survive, the phenomena of
wealth are found to be in many vital respects different
from those of modern Europe, and to be partially at least
governed by different laws ; still they remain economic
phenomena, and—except in so far as adequate data are
unattainable—it is not beyond our power to investigate
them. We are compelled to recognise eras of varying
economic types, and the existence of primitive societies
in which industrial organization is but rudimentary; but
until we find an age or a society in which exchanges—
even in a disguised form—are unknown, and appropriated
wealth does not exist, we have not in a strict sense reached
the pre-economic.
We are told, for instance, how in the village com¬
munity of Ceylon the craftsman " exchanges the results of
his handiwork and specially acquired skill against a share
of the produce on the threshing-fioor of his neighbours."^
The exchange takes place without the intervention of any
medium of exchange, and is regulated by custom, not by
competition. Nevertheless it is an economic phenomenon
of a kind that the economist ought not to neglect. Sir
Henry Maine has pointed out, further, how the importance
of studying the economic phenomena of the East is in¬
creased by the fact that in the midst of striking diversity,
they nevertheless do resemble in many respects the eco-
1 Economic Studies, p. 65.
2 Sir J, B. Phear, The Aryan Village in India and Ceylon, p. xvi.
NOTE A.] SPHERE OF POLITICAL ECONOMY.
303
nomic phenomena of the West. "If Englishmen settled
in India," he remarks, " had found there kinds of property
such as might be attributed to Utopia or Atlantis, if they
had come upon actual community of goods, or an exact
equality of all fortunes, or on an exclusive ownership of
all things by the State, their descriptions would at most
deserve a languid curiosity. But what they found was
very like, and yet appreciably unlike, what they had left at
home. The general aspect of this part of social mechanism
was the same. There was property, great and small, in
land and moveables ; there were rent, profits, exchange,
competition ; all the familiar economical conceptions. Yet
scarcely one of them exactly corresponded to its nearest
Western counterpart. There was ownership, but joint
ownership by bodies of men was the rule, several owner¬
ships by individuals was the exception. There was the
rent of lands, but it had to be reconciled with the nearly
universal prevalence of fixity of tenure and the consequent
absence of any market standard. There was a rate of
profit, but it was most curiously under the influence of
custom. There was competition, but trade was conducted
by large bodies of kinsmen who did not compete together ;
it was one large aggregate association which competed
with another." ^
A further reason for not accepting Bagehot's conception
of political economy is that it is impossible so to limit the
science that all its concrete doctrines shall be relative to
precisely the same condition of society. It cannot be said
^ The Effects of Observation of India on Modern European Thought^
Rede Lecture, 1875.
304
SPHERE OF POLITICAL ECONOMY. [CHAP. IX.
of the modem commercial world itself that it is a fixed and
stationary state of society, subject no longer to variation
or modification. The economic condition of the United
States to-day is not the same as that of England—the
postulate, for instance, of the free mobility of labour from
place to place and from occupation to occupation is pro¬
bably more fully realised in the former country than in the
latter ; nor is the economic condition of England—in
regard, for instance, to the tenure of land—the same as
that of France. Still more striking is the contrast between
the economic England of the latter part of the nineteenth
century and the economic England of Adam Smith's time.
Even in the commercial era, therefore, it is necessary
carefully to examine the applicability of our premisses, and
to recognise still a relativity. As a matter of fact, there
is comparatively little risk of our misapplying modern
economic theories to savage or oriental states of society.
It is when we come nearer home that the danger of the
undue extension of economic doctrines is the greater ; and
that danger is at least not diminished by Bagehot's con¬
ception of a transcendently economic era, in regard to
which it may be supposed that the application of economic
theories is absolute, needing no qualification.
§ 3. In what sense universality may he claimed for the
yrinciples of abstract economics.—The relativity of concrete
economic doctrines does not establish the impossibility of
an abstract theory having a certain character of uni¬
versality ; and it remains to be indicated in what sense
universality may still be claimed for the principles of
abstract economics.
In the first place, abstract economics analyses the
NOTE A.] UNIVERSALITY OF ECONOMIC DOCTRINES. S05
fundamental conceptions of the science, such as utility,
wealth, value, measure of value, capital, and the like. It
has been pointed out in an earlier chapter that even the
definitions of political economy may sometimes be relative
or progressive. But in the analysis of such conceptions as
the above it is not too much to look forward ultimately to
a certain finality. If the conceptions take on a somewhat
different character in different connexions, we shall at least
find something that is generic and universal in each one of
them ; and a consideration of them in their general character
will be a valuable preliminary to more concrete economic
enquiries.
Abstract economics next proceeds to discuss certain
fundamental principles that are universal in the sense of
pervading all economic reasonings. One of these principles
is the law of the variation of utility, which is the key-note
of Jevons^s principal additions to the science. This prin¬
ciple applies not only to material commodities determining
the law of demand for them, but also to services ; and
hence it is of the greatest importance in the whole theory
of distribution. Thus, other things being equal, the aid
which a döse of capital of a given description can render to
the labour with which it is co-operating diminishes as the
number of doses is increased ; similarly, other things being
equal, the aid which a unit of labour of a given kind can
afford to capital, and to the other kinds of labour which it
is assisting, diminishes as the number of units is increased.
The truth of this elementary principle is quite independent
of social institutions and economic habits, though the
results which it actually brings about may vary consider¬
ably. Another principle of a similar character is that,
K. 20
806 UNIVERSALITY OF ECONOMIC DOCTRINES. [CHAP. IX.
other things being equal, a greater gain is preferred to a
smaller ; or, as we may put it, every man so far as he is free
to choose will choose the greater apparent good
On the basis of its analysis of fundamental conceptions,
assisted by principles such as the above, abstract economics
is enabled to draw certain negative or formal inferences
which possess the character of universality. As, for
instance, that a general rise in values is impossible ; that
if two kinds of commodities have the same law- of utility,
that which is the rarer will be the more valuable ; that
of different methods of production which can be used for
obtaining a given result, the one that can do the work the
most cheaply will in time supersede the others®; that
facilities of transport tend to level values in different
places, while facilities of preservation tend to level values
at different times. In the same category may be placed
such propositions as that no commodity or service can
serve as a universal measure of value between different
times and places, and that general over-production in a
literal sense is impossible.
From formal inferences of this kind we pass on to
general theories relating to economic phenomena which,
1 It is of principles such as these that levons is probably thinking
when he remarks that **the first principles of political economy are
so widely true and applicable, that they may be considered universally
true as regards human nature" (The Future of Political Economy,
Fortnightly Review, vol. xxvi., p. 624) ; and again, the theory of
the science consists of those general laws which are so simple in
nature, and so deeply grounded in the constitution of man and the
outer world, that they remain the same throughout all those ages
which are within our consideration " (p. 625).
2 This is one form of the important Law of Substitution.
NOTE A.] UNIVERSALITY OF ECONOMIC DOCTRINES. 307
with due modifications, are applicable under widely difierent
conditions. It has to be admitted that the body of doctrine
thus built up is mainly hypothetical in character ; that is,
it will not by itself enable us to lay down definitely the
laws according to which wealth is distributed and ex¬
changed in any given society. In order to determine the
latter, we have further to take into account the special
conditions under which the general principles operate ; and
such conditions are indefinitely variable. But what is
here maintained is that the abstract theory is invaluable
as a preliminary study. The principles involved and the
modes of investigation employed have a significance and
importance which it would be misleading to call merely
relative ; and the economist who would deal with the more
concrete problems of any particular age or state of society
cannot afford to neglect them. Thus, as we have already
seen, there is a good deal of abstract reasoning in re¬
gard to the laws of supply and demand that has a very
wide application indeed. These laws work themselves out
differently under different conditions, and in particular
there are differences in the rapidity with which they
operate. Their operation may, however, be detected
beneath the surface even in states of society where custom
exerts the most powerful sway. And this would in all
probability be overlooked were not our attention turned in
the right direction by the method of analysis afforded by
abstract economics.
20—2
308 historical conception of economics. [chap. ix.
B. On the Conception of Political Economy as
a distinctively historical science.
It has been shewn in the preceding chiapter that the
study of economic history plays a distinct and characteristic
part in the building up and perfecting of political economy.
There are many problems belonging to economic science
whose solution must necessarily remain incomplete, apart
from the aid afforded by historical research ; and the
historical method is, therefore, rightly included amongst
the methods to which the economist ought to have recourse.
Nevertheless economics is not to be considered, as some
maintain, an essentially historical science.
This view is opposed to the doctrines of those more
advanced members of the historical school who maintain
that their method should supersede, and not merely supple¬
ment, other methods, and who seek to bring about thereby
a complete transformation of political economy. A claim
of this kind is sometimes put forth explicitly. Thus CliflPe
Leslie treats the deductive and historical methods as neces¬
sarily antagonistic, and rejects the former on the ground
that its professed solutions of economic problems are illusory
and false. It yields, he says, "no explanation of the laws
determining either the nature, the amount, or the dis¬
tribution of wealth"; the philosophical method of political
economy must on the other hand "be historical, and must
trace the connexion between the economical and the other
phases of national history."^ From a similar point of view,
Dr Ingram blames Jevons for seeking to "preserve the
1 Essays in Political and Moral Philosophy^ 1888, 189.
NOTE B.] HISTOElCAL CONCEPTION OE ECONOMICS. 309
à priori made of proceeding alongside of, and concurrently
with, the historical." He adds that ''the two methods
will doubtless for a time coexist, but the historical will
inevitably siipplant its rival.
Other writers, while professing that they do not entirely
reject the deductive method, still set it contemptuously on
one side as having already done all it can do, and played to
the full its unimportant part in economic investigations.
The necessity for a completely new departure is no less
strenuously insisted upon. Even if the doctrines reached
by the methods of the older economists possess a relative
truth, they are, it is said, of little importance ; and
political economy can do fruitful work in the future only
by taking on a new form and becoming a distinctively
historical science. The abstract method, says Professor
Schmoller, has degenerated into intellectual consumption;
the spring of its vitality is dried up. A necessary revolution
is in progress, whereby things are viewed from a totally
different side—the historical. " In the future a new epoch
will come for political economy, but only by giving value to
the whole historical and statistical material which now
exists, not by the further distillation of the already-a-
hundred-times-distilled abstractions of the old dogmatism."'^
The extreme "historismus" of which we are now
speaking is characteristic only of the more advanced wing
of the historical school, and not of Roscher, who is usually
regarded as its chief founder, or of its more moderate
^ History of Political Economy, pp. 232, 3.
2 Zur Littei^aturgeschichte der Staats- und Sozialwissenschaf ten ^
p. 279.
310 HISTORICAL CONCEPTION OE ECONOMICS. [CHAP. IX.
representatives such as Wagner, whose treatment of the
whole subject of economic method is admirable \
Roscher, for instance, insists on the necessity of taking
into consideration the varying character of economic habits
and conditions, and attacks especially the fallacy of
criticizing economic institutions, regardless of a people's
history and the stage of social and industrial development
to which they have attained. But he neither effects nor
seeks to effect a complete transformation of political
economy. Whilst his chief treatise on the subject abounds
in historical and statistical illustrations, and is full of
information about the history of economic principles, the
doctrines taught in it follow in the main the orthodox
lines both in substance and in manner of exposition. He
even "has no doubt that the future will accord both to
1 See previous references to Wagner on pp. 27, 8, and elsewhere.
Wagner is spoken of by a recent writer in the Revue de Belgique
(15 April 1889) as un dêductif modéré, and as such is contrasted with
Schmoller, who is un historique avancé, with Menger, who is un déductif
intransigeant, and with Brentano, who is un historique modéi'é. He
explicitly includes himself, however, amongst the representatives of
the historical school of national economy in Germany ; and the fact
that he is nevertheless described as un déductif modéré may be con¬
sidered a tribute to the judiciousness with which he combines rival
methods, and holds the balance between them. A moderate writer
whose attitude is one of compromise is likely to be regarded as belong¬
ing to the one hostile camp or the other according to our own point
of view. There are in fact all shades of opinion among recent
German economists who more or less sympathise with the historical
reaction, and this makes it very difficult broadly to describe their
position without doing injustice to some. Even individual writers
take up sometimes a more and sometimes a less extreme position. In
the present note we are purposely dealing only with the more extreme
views of the more extreme writers.
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 311
ilicardo and Malthus their full meed of honour as political
economists and discoverers of the first rank."^ This very-
moderation of Roscher is, however, by some of his more
advanced followers made a subject of reproach. The
dogmatic and the historical matter in his Principles are
said to be juxtaposed rather than vitally combined ; and he
is charged with not having been sufficiently under the
influence of the method which he himself was one of the
first to characterize^.
In criticizing the conception of political economy as a
distinctively historical science the main difficulty consists
in understanding what the conception really amounts to.
It is far from being easy to gain a clear idea of the form to
be assumed by economics when its "transformation" has
been effected. Much that is said by the historical school
consists of mere negative criticism; and on the positive
side, there is often wanting an adequate discrimination
«
between what really belongs to economic science, and what
is no more than economic history pure and simple^.
^ Principles of Political Economy, Preface.
2 Knies deplores the fact that Roscher did not make stronger
steps forward after having taken up a position that promised so much.
He considers that the historical method, as exemplified by Roscher's
actual treatment, becomes historical description enlarged rather than
political economy set right. Die politische Oekonomie vom geschicht¬
lichen Standpuncte, 1883, p. 85.
3 Cliffe Leslie enumerates a number of problems which he asserts
are left entirely unsolved by the deductive method ; but most of these
problems will be found to be of a purely historical character. On the
other hand, when he comes to deal with theoretical questions, he
himself constantly implies or presupposes the use of a deductive and
à priori method of reasoning on fundamental points. For instance,
"Only high profit can permanently support high interest, and low
312 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX.
According to Knies, the historical conception of political
economy is based on the ideas of economic evolution and
the relativity of economic doctrines. Economic institutions
and economic theories are products of historical develop¬
ment. Ko given economic system can be final. It is
itself the result of special conditions of time, place, and
nationality; and as these vary, it will be subjected to
progressive modifications. Every nation, therefore, and
every age has a political economy of its own. Hence
follows the denial that there are any absolute or universal
economic laws. Every economic principle is relative to the
profit can afford only a low recompense to the lender of capital. The
rate of profit determines in general both the maximum and the
minimum of interest ; the maximum must be below it, or the borrower
would make nothing, and the minimum must not be so low as to
drive the owners of capital to employ it themselves, instead of lending
it, or to spend it" {Essays, p. 255). Again, ''A falling-ofí in the
foreign demand for British produce, such as is sometimes argued from
the small proportion of exports, would have the opposite effect of
diminishing the proportion of imports, by altering the equation of
international demand to the disadvantage of Great Britain. A
diminution of exports might result from .hostile tariffs, but imports
would fall off more. A good market abroad for our exports raises
their value measured in foreign commodities, and swells the amount
of goods given for them ; while a declining demand in foreign countries
would compel us to give more for our imports ; the ratio of exports
would increase, exporters would sell at ever-increasing disadvantage
and diminishing profits" (p. 257). The doctrine here laid down
appears to be based on Mill's theory of international values, which
represents the deductive method in a somewhat high stage of develop¬
ment. Other typical instances, in which Cliffe Leslie employs the
deductive method after the fashion of ordinary deductive economists,
are cited by Professor Sidgwick in an article on Economic Method in
the Fortnightly Bevieio for February, 1879, pp. 304, 5. Compare also
—with reference to other economists of the historical school—Sidg¬
wick, Scope and Method of Political Economy, pp. 35, 6.
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 813
particular phase of development to which a nation has at
any given time attained. And so political economy re¬
solves itself into a description of the various stages of
industrial evolution, and the principles appropriate to
each in turn\
The relativity of economic doctrines has been discussed
in the preceding note; and only two remarks need be
made at this point in regard to the bearing of such
relativity upon the question whether economics must be
regarded as a distinctively historical science®.
In the first place, the mere fact of a progressive
1 "In opposition to the absolutism of theory, the historical con¬
ception of political economy rests upon the fundamental principle
that the theory of political economy, in whatever form we find it, is—
like economic life itself—a product of historical development; that
it grows and develops—in living connexion with the whole social
organism—out of conditions of time, space, and nationality; that
it has the source of its arguments in historical life, and ought to give
to its results the character of historical solutions; that the laws of
political economy should not be set forth otherwise than as historical
explanations and progressive manifestations of the truth; that they
represent at each stage the generalizations of truths known up to a
certain point of development, and neither in substance nor* in form
can be declared unconditionally complete ; and that the absolutism of
theory—even when it gains recognition at a certain period of historical
development—itself exists only as the offspring of the time, and
marks but a stage in the historical development of political economy "
(Die politische Oehonomie vom geschichtlichen Standpuncte, 1883,
pp. 24, 5). Knies allows abstraction and the deductive method
a place in political economy, provided that they are employed with
due precautions, and that the results obtained by their aid are em¬
pirically tested before being regarded as conclusively established
(p. 499). The position granted to other methods than the historical
remains, nevertheless, a very subordinate one.
2 But see, further, the concluding paragraph of this note (p. 820),
where the argument is turned the other way.
314 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX.
evolution of industrial conditions by no means establishes
the impossibility of general economic laws. There may
be much that is common to the different stages of develop¬
ment; the same tendencies may be in operation under
varying circumstances. Nothing more, therefore, than
special modifications of the general laws may be requisite
in order to suit special cases as they arise. It has been
shewn that, notwithstanding the relativity of concrete
economic doctrines, a certain character of universality
belongs to the abstract theory of political economy.
In the second place, in so far as each epoch has a
political economy peculiar to itself, the question still
remains how that political economy is to be established.
Hence, regarded as a system dealing primarily with the
economic problems of our own age, no need is shewn for a
transformation of the existing science. At most all that
is necessary is the recognition that in regard to many of
its doctrines, as ordinarily laid down, some limitation of
their sphere of application is essential.
Professor Schmoller of Berlin goes further in the
direction indicated by Knies, and in some of his utterances
seems practically to identify economic science with the
philosophy of economic history, or even with economic
history itself in its broadest outlines. He holds that at the
stage we have now reached we had better not attempt to
formulate economic laws. We must rest content to work on
at specific historical investigations, observing and recording
actual economic phenomena, classifying them, and searching
into their causes. There is an underlying implication that
this search is likely to be successful, notwithstanding the
alleged impossibility of formulating economic laws.
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 315
The denial that it is possible to arrive at economic laws
seems, however, not intended to apply to laws of economic
development. At any rate an express exception in regard
to the latter is made by some extreme advocates of the
historical method. While the changing nature of industrial
conditions is insisted upon, it is held that the laws of these
changes may be discovered, and that such laws will be
universal in their character. Political economy is ac¬
cordingly to be transformed into "a doctrine of the laws of
the economic development of nations."^
Somewhat similarly. Professor Ashley—after remarking
that among economists who employ the historical method
there is considerable divergence of opinion as to the kind
of results to be aimed at, and the shape political economy
should assume—expresses what may be taken for his own
view as follows: "An increasing number—*the historical
school' in the strict sense of the word—hold that it is
no longer worth while framing general formulas as to
the relations between individuals in a given society, like
the old * laws' of rent, wages, profits; and that what they
must attempt to discover are the laws of social development
—that is to say, generalizations as to the stages through
which the economic life of society has actually moved.
They believe that knowledge like this will not only give
them an insight into the past, but will enable them the
better to understand the difficulties of the present."^
Political economy is here resolved into a philosophy of
1 This was Hildebrand's ultimate object. Compare also Ingram,
History of Political Economy, pp. 201 to 206; and Cliffe Leslie,
Essays in Political and Moral Philosophy, pp. 83, 190.
^ English Economic History and Theory, Preface.
316 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX.
economic history. It is held to be possible to determine
economic laws ; but such laws belong to a different sphere
from that of the laws ordinarily formulated by economists.
Two propositions have to be established in order to make
good this position : first, that any theory of economic
development must rest on an historical basis; secondly,
that an economic science worthy of the name is an impossi¬
bility except in so far as it consists of a theory of economic
development.
The first of these propositions would now meet with
almost universal acceptance. It has been laid down in the
preceding chapter that so far as any satisfactory theory of
economic development can be formulated, its foundation
must be sought principally in a direct appeal to history.
Assistance may be derived from a comparison of European,
oriental, and savage states of society at the present time ;
but the main resource must be a comparison of successive
states of society in the past. Whilst, however, the theory
of economic development affords the most appropriate
sphere for the employment of the historical and com¬
parative method, it should be added that the function of
establishing general laws of economic evolution is to be
regarded as one which the method may fulfil in the future,
rather than one which it has up to the present time gone
very far towards fulfilling.
Passing to political economy, regarded as a statical
science, the ultra-historical doctrine under discussion in¬
volves not so much its regeneration as its simple negation.
We must not ask what new theories of value, rent, money,
international trade, &c., are to replace those that it is
sought to destroy. Such theories, we are told, it is "not
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 317
worth while" to formulate; or rather, with the materials
at present available, they cannot be formulated so as to be
of any real utility or importance.
Positively to meet this attack would require a careful
statement and detailed defence of particular economic laws,
shewing not merely their hypothetical truth, but also their
effective bearing on concrete economic phenomena. Such a ,
defence of political economy cannot be attempted here.
It must suffice to refer to the best contemporary treatises
on the science. In examining, however, the claims put
forward on behalf of the purely historical method, it is
important to observe that if the impossibility of establishing
economic laws throws us back upon specific historical in¬
vestigations, still such investigations cannot in themselves
constitute a science of political economy. Instead of
economics being converted into a distinctively historical
science, it is made to stand aside in order that economic
history may take its place. The claim that the historical
method shall dominate political economy resolves itself from
this point of view into the assertion of the supreme and
paramount importance of the work of the historian as
compared with that of the theorists
1 Professor Monger complains with considerable justice that the
advocacy of the historical method in an extreme form does not arise
out of the scientific needs of economists who are investigating the
problems of their own science, but is rather forced on the science
from outside. "The historians," he says, "have stepped upon the
territory of our science like foreign conquerors, in order to force upon
us their language and their customs, their terminology and their
methods, and to fight intolerantly every branch of enquiry which does
not correspond with their special method" {Die Irrthi'mer des His¬
torismus in der Deutschen Nationalökonomie, Preface).
318 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX.
But we are told that the establishment of economic
laws is only postponed. ''It is by no means a neglect of
theory," says Professor Schmoller, "but the necessary basis
for it, if at times we proceed mainly in a descriptive
manner. Only in so far as the descriptive material is
defective are reproaches against this method justifiable."'
Theoretical economists, however, have never denied that
there is an ample field of work for economic historians,
and they welcome any assistance in their own sphere of
enquiry that historians may be able to afford. What they
protest against is the view that besides the collection of
descriptive material there is, in the present stage of
economic knowledge, no useful work to be done. They
protest also against the confusion of the descriptive
material of a science with the science itself. As observed
by Professor Sax, it cannot but be regarded as a thoroughly
wrong idea to bid our age renounce the vocation of
obtaining a satisfactory theory of political economy until
such time as an incalculable number of investigations in
the sphere of economic history shall have been completed ^
Taking our stand simply on the necessity for scientific
division of labour, it is better that those who are working
in the .field of economic tj^eory should do what they can
with the materials already available, rather than that they
should occupy their time, with researches that belong to
the province of pure historians. The more thoroughly the
historical enquiries are carried out the better; for thorough
^ Zur LitteraturgescMchte der Staats- und Soziahvissenschaften,
p. 279.
2 Das Wesen und die Aufgaben der Nationalökonomie, p. 3.
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 319
work ill any department of economic study will be an
assistance, not a hindrance, to workers in other depart¬
ments. But there is work of more than one kind to be
done.
Over and above any dispute, however, as to the most
fruitful direction of enquiry in the particular stage of
development that political economy has now reached, there
is involved in the ultra-historical view an exaggerated
idea of the sufficiency of the part that historical material
can ever play in the building up of the science, and of the
extent to which, without the aid of explicit theory, the
historian can assign to phenomena their causal connexions.
It has been already shewn that economic history itself needs
to be interpreted by theory. Moderate advocates of the
historical method, such as Arnold Toynbee, have clearly
recognised that "without the help of deduction, this method
can serve only to accumulate a mass of unconnected and
unserviceable facts. It follows that to postpone con¬
siderations of theory until an indefinite number of facts
have already been collected is, even from the historical
point of view, a mistake.
The case against the supremacy of the historical method
in economics is all the stronger, if we regard the method
as literally confining itself to the facts of past times. For
the purely historical method is obviously much narrower
than the inductive ; and it will hardly be denied that the
facts which are essential to the economist are to a very
great extent obtained from contemporary observations or
1 F. C. Montague, Arnold Toynbee (Johns Hopkins University
Studies in Historical and Political Science, Seventh Series, i. p. 33).
320 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX.
from records so recent that they have hardly yet passed
into what we understand by economic history. Moreover,
inferences based on historical research, as distinguished
from observation of the present order of events, labour
under special disadvantages. Often there is more or less
uncertainty concerning the facts themselves. "History
has suffered to drop from her pages, perhaps has never
recorded, much of the information which would now be
most precious to us"^; and an incomplete record may be
even worse than no information at all, so far as affording a
basis for theoretical conclusions is concerned. We see the
past as it were through a mist; and we cannot "cross-
examine its facts" as we often can the facts of the present
time^.
It is still more important to observe that just
because of the evolution of industrial systems, and the
shifting character of economic conditions, upon which the
historical school of economists so much insist, the study
of the past is rendered the less serviceable for the solution
of present-day problems. Upon many of these problems
extremely little light is thrown by economic history that is
more than a hundred years old. How indeed can gene¬
ralizations based upon one set of circumstances be safely
applied to quite another set of circumstances? Hot only
may the problems calling for solution be novel in their
1 Ricliard Jones, Literary Remains, p. 570.
2 Compare Marshall, Present Position of Economics, § 17. Wagner
also calls attention to the special caution that has to be exercised in
appealing to historical evidence, just because the historical method
''cannot grant a premeditated, to say nothing of an experimental,
isolation of causes" (Grundlegung der 'politischen Oekonomie, vol. i.,
p. 223).
NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 321
character; there may even arise new industrial classes.
With what classes in the fourteenth century, for example,
are we to compare the modern factory operative and the
modern capitalist employer? If, therefore, for no other
reason than that institutions and habits and conditions
change, another method of investigation than the historical
must for very much of our economic work be essential.
Political economy can never become a specifically historical
science.
K.
21
CHAPTER X.
On Political Economy and Statistics.
§ 1. The claims of statistics to he regarded as
a distinct science.—A leading German statistician has
gone so far as to say that there are almost as many
different views of the nature and province of statistics,
as there are writers who have occupied themselves
with the subject. Many different definitions of the
term statistics have also been proposed ; a list of 180,
«
more or less differing from one another, was drawn up
by Quetelet as long ago as 1869. Even the etymology
of the term, or at all events the mode of its derivation
from the Latin status, has been a matter of dispute.^
1 The correct account of the derivation of statistics seems to be
that it came through the Italian stato, which was in the fifteenth
century first used in the signification of territory, or "state" in the
political sense. See Eümelin, article Statistik in Schönberg's Hand¬
buch, § 2; and Wappäus, Einleitung in das Studium der Statistik,
p. 7. "Achenwall," says Professor Wappäus, "never in his writings
explained the origin of the name statistics, but it comes out in his
lecture-notes. His explanation is as follows. The Italians were the
first to form a science of the State, and called it Ragione di Stato.
From this—in Latin writings, and lectures given in Latin—arose
Ratio status, or Disciplina de ratione status, or Disciplina de statu.
CHAP. X.]
ACHENWALL.
323
Only two or three views, however, such as are most
broadly distinguished from one another, need be
noticed here.
Gottfried Achenwall, professor of law and politics at
Göttingen about the middle of the last century, though
not the originator of the Latin adjective statisticus,
appears to have been the first to use the German
substantive Statistik, and he is usually regarded as
the founder of statistics considered as a special branch
of knowledge \ He meant by statistics a collection of
noteworthy facts concerning States—the historical and
descriptive material upon which political science, as we
now understand it, is largely dependent. It is to be
added that as treated by the school of statisticians to
which Achenwall belonged—the so-called "descriptive"
school—statistics was not essentially numerical' or
quantitative. Verbal description took the first place,
and figures were used merely as accessory thereto.
Since the time of Achenwall the term, as ordinarily
used, has changed its meaning, and the distinguishing
There being in classical Latin no simple expression for 'state' in our
sense, the word status was used with this meaning. The Italians at
the same time gave to any one learned in the above science or art
the name statista. German scholars adopted the word statista into
Latin, and formed the adjective statisticus.^'
1 This view is not strictly correct, as Achenwall had predecessors
at the German universities (Conring, Schméitzel, and others) whose
subject-matter and method resembled his own. His treatment was,
however, more thorough than theirs, and attracted more attention.
21—2
324 POLITICAL ECONOMY AND STATISTICS. [CHAP.
mark of statistics is considered to be the employment
of numerical data\ Moreover, regarded as a science,
statistics is not content to be merely descriptive, but
claims to be theoretical and speculative. The principal
question at issue is whether statistics can legitimately
be regarded as constituting a distinct science at all.
This question is complicated by the fact that, in addition
to Achenwalhs view, two very different conceptions of
statistics as a science have been formed.
Statistical science is, according to Dr Mouat, "a
special science of methods from which, and by which
1 Statistics in this sense may be traced back to the ''Political
Arithmetick" of Sir William Petty, and other English writers of the
seventeenth and eighteenth centuries ; and the influence of Quetelet
and Knies was important about the middle of the present century in
favour of the arithmetical, as opposed to the descriptive, school. The
latter still has some, though not many, adherents. The late Pro¬
fessor Wappäus of Göttingen, for example, in his Einleitung in das
Studium der Statistik, published after his death in 1881, defends
Achenwall's conception. He recognises that quantitative data have
assumed a greater relative importance than formerly, but he ascribes
this simply to the fact that they are now more easily procurable.
"The increased facilities for obtaining numerical facts have," he
says, "necessarily affected the method of statistics. We now have
two equally important resources : description, and numerical expres¬
sion. The two methods supplement one another, and it is a mistake
to try to make two separate branches of science out of them. Mis¬
understandings have arisen about statistics, because demands have
been made upon it, which cannot be fulfilled—demands only to be
satisfied by a purely philosophical branch of study, which statistics
is not. Statistics is a positive science, an aggregate of knowledge
brought together for a practical end, namely, the knowledge of the
concrete State. This is a very simple definition, and justified by the
genesis and history of the science" (pp. 32—4).
X.] STATISTICS EEGARDED AS A SCIENCE. 825
alone, the natural laws can be deduced which govern
most of the conditions of man, and many of those of
the animal and vegetable kingdoms." " There is not,"
Dr Mouat adds, "a branch of human knowledge to
which the science of statistics is not closely allied, and
for the correct understanding of w^hich the scientific
marshalling of figures, and observation of aggregate
facts, is not more or less necessary. That the laws
deduced from them fall into the ranks of the branches
of knowledge to which they belong when they are
fairly established does not, in my humble judgment,
invalidate the scientific claim of the agency to which
they owe their existence."^
The concluding portion of the above statement
would probably meet with universal acceptance. A
method or an agency may, however, be " scientific
without thereby becoming itself a science. Statistics,
or statistical method, as understood by Dr Mouat, is
a very important means whereby human knowledge
is extended; but as such it is to be regarded as a
scientific instrument, rather than as an independent
body of doctrine constituting a distinct science.
It is, indeed, necessary to recognise a theory of
statistics, dealing with what may be called the tech¬
nique of the statistical method, that is to say, the
^ History of the Statistical Society of London (Jubilee volume of
the Statistical Journal), p. 47.
326 POLITICAL ECONOMY AND STATISTICS. [CHAP.
conditions that statistical data must fulfil, the modes
in which they are to be ascertained and collected,
the manner of their arrangement and employment for
purposes of reasoning, the criteria determining the
validity of arguments based upon them, and the logical
character of the conclusions established by their aid.
But all this US really antecedent to the actual use of
statistics, for any particular purpose. The whole discus¬
sion constitutes, not a separate science, but a special
branch or department of inductive logic or methodo¬
logy—that is, of the science or art which treats of
scientific method in general.
It is, however, in quite a different sense from the
above that the existence of an independent science
of statistics is affirmed by the majority of Conti¬
nental statisticians, and also by some English writers \
Statistical science is regarded, not as an abstract science
of methods dealing with phenomena of very various
kinds under a distinctive aspect, but as a concrete
science with a distinctive subject-matter. A distinction
is clearly drawn between statistics as a method and
1 Compare Mr Wynnard Hooper's paper on the Method of Statisti¬
cal Analysis in the Statistical Journal for March, 1881; and the same
writer's article on Statistics in the ninth edition of the Encyclopœdia
Britannica. Mr Hooper himself takes the view advocated in the text,
namely, that t];iere is no independent science of statistics. The two
views are sometimes spoken of as the English and the Continental
respectively. There is not, however, universal agreement amongst
Continental, any more than amongst English, writers on the subject.
X.] STATISTICS BEGARDED AS A SCIENCE. 327
■■ !
statistics as a science. It is recognised that the
method has a very wide application ; but the science
is described as studying exclusively man's social life.
As thus interpreted, statistical science becomes
practically equivalent to sociology, with the implication
that the sole means whereby sociological, including
economic, knowledge can be attained is the systematic
collection and inductive interpretation of social pheno¬
mena. There is the further implication that the data
are mainly, if not exclusively, numerical, '
Dr Mayr, taking this view, defines the science of
statistics as " the systematic statement and explanation
of actual events, and of the laws of man's social life
that may be deduced from these, on the basis of the
quantitative observation of aggregates."^
If it is asked why the quantitative observation of
social aggregates should constitute a distinct science,
while no similar claim is made in regard to the
observation of purely physical aggregates, the reply
given is that in the determination of the laws of social
life statistical enquiry is ''the only possible mode of
investigation," and not—as in the case of the physical
sciences—a merely secondary or supplementary method.
1 This definition is given in Dr Mayr's Die Gesetzmässigkeit im
Gesellschaftsleben, an abridged translation of which will be found in
the Statistical Journal for iSeptember, 1883. For definitions given by
English statisticians, who take a similar view, see Statistical Journal,
December, 1865, p. 492 ; and Jubilee volume, p. 8.
328 POLITICAL ECONOMY AND STATISTICS. [CHAP.
Social science and political economy are spoken of as
branches or departments of the science of statistics,
a science which studies social and economic phenomena
in the only satisfactory way, namely, by the accumula¬
tion of facts and generalization from them. It will
be observed that the doctrine here set forth is even
narrower than that which regards induction as the sole
valid method of economic enquiry. For we are now
limited to quantitative induction ; qualitative induction,
whether historical or comparative, is out of place as
well as the deductive method.
Our grounds for rejecting this view have been given
in a previous chapter, and to pursue the discussion here
would merely carry us back to a class of considerations
that have been already sufficiently insisted upon. It
may, however, be added that for the general science of
society we have at any rate another name—sociology
or social science—which does not beg the question as
to method, and which is free from the ambiguity that
at best must attach to the term statistics. For it has
to be allowed that by this term is also meant a method
of analysis having an indefinitely wide range of appli¬
cation outside the science of man in society. Thus we
speak of moral and intellectual statistics, of vital and
medical statistics, of astronomical and meteorological
statistics, of physical and physiological statistics, as well
as of economic and political statistics. It can hardly be
X.] STATISTICS REGARDED AS A SCIENCE. 329
said that there is any concrete department of enquiry,
in which statistics as a method may not find a place :
and it is upon this character of universality that the
claim of statistical research to public recognition and
encouragement is frequently based.
If a less extreme view than that above described
is taken, and statistics is considered to be a distinct
science, but nevertheless not to include the whole of
social science or of economics, then it becomes a part
which is only differentiated from the remainder by
the employment of a particular method. Professor
R. M. Smith explicitly recognises statistical science as
" a branch of social science employing a specific method,
and devoting itself to those problems of life in society
which can best be solved by that method."^ It seems,
however, both unusual and undesirable to differentiate
sciences by their method as distinguished from their
subject-matter. We might equally well identify other
scientific methods with those particular sciences in the
development of which they happen to be of special
importance. At any rate the question now becomes
little more than a verbal one. There need be no
fundamental disagreement between those who take
the view just indicated, and those who prefer to treat
^ Statistics and Economics (Publications of the American Eco¬
nomic Association, vol. 3), p. 118. Professor Smith divides social
statistics into population statistics, economic statistics, and statistics
of vice and crime.
330 POLITICAL ECONOMY AND STATISTICS. [CHAP.
statistics simply as a particular method or instrument
of scientific enquiry, which is not peculiar to the study
of social facts, although it may be of much greater
relative importance in connexion with that study than
in other departments of knowledge.
There seems, however, to be an idea that if the
claim of statistics to recognition as a science be not
admitted, then the statistician becomes a mere drudge,
who is denied the luxury of opinions, and whose sole
function is to collect materials for others to reason
about and base theories upon. Professor Smith's main
ground for calling statistics a science is that this is
the only way of rescuing the study from "the barren¬
ness which results from viewing its object as simply
the collection of masses of figures, with which the
statistician has nothing further to do." He regards
the question whether statistics is or is not a science
as not a merely verbal one, because the answer to it
determines "the position of the statistician and the
authority with which he speaks."
By another writer it is said that if statistics is not
a science, then the statistician is merely as one who
binds up sheaves of wheat for others to thresh out^
But this by no means follows. There is, indeed, special
risk of error when statistics are used by others than
those who have prepared them. For, as Mr Hooper
1 Dr Guy in the Statistical Journal^ 1865, p. 483.
X.] STATISTICS REGARDED AS A SCIENCE. 331
remarks, " there are usually ^ pitfalls ' even in the
simplest statistical statement, the position and nature
of which are known only to the persons who have
actually handled what may be called the 'raw materiak
of the statistics in question." Hence the statistician
rightly, and even necessarily, performs the function
of interpreting results. But in so doing he becomes
the economic statistician, the political statistician, the
medical statistician, the physical statistician, as the
case may be. He applies his statistics, that is to say,
within the domain of some particular science ; and it
may be added that unless he has an adequate knowledge
of that science, not only will he probably go astray in
his interpretation, but the very facts themselves are
not likely to be suitably selected or arranged.
But all this, it is clear, applies to medical and
physical and other statistics, just as much as to social
statistics; and no one would maintain that we have
a distinct science, wherever we have a branch of know¬
ledge in which statistics may be usefully employed.
Hence if we go out of our way to recognise a science
of statistics which is concerned with social phenomena
alone, we seem thereby to cast an undeserved slur upon
statistics used in other departments of enquiry. We
may, on the other hand, refuse to recognise a distinct
statistical science in any sense, without lowering the
standard of what is required from statisticians, or in
832 POLITICAL EOQNOMY AND STATISTICS. [CHAP.
the slightest degree underrating the importance of the
functions which they perform.
§ 2.1 Statistics regarded as a method,—In seeking to
define statistics regarded as a method, it is convenient
to adopt the somewhat clumsy phrase already quoted
from Dr Mayr, and say that it is a scientific method
based on the quantitative observation of aggregates. It
is, in the first pláce, a method based on observation.
It goes direct to facts, which it collects and systema¬
tically arranges. It is, in the second place, based on
an observation of quantities. Ik deals with phenomena
that are measurable, and hence capable of numerical
expression. It is, in the third place, concerned with
aggregates, as distinguished from individuals or units.
Series of isolated nuiïierical facts are popularly called
statistics, and they may be of use simply as informa¬
tion or as means of description or illustration, but they
are of little or no value as a scientific instrument. In
the scientific use of statistics the observations must
be made in the mass, they must involve a certain
degree of continuity, and the resulting figures must
be carefully and systematically grouped \
1 The term statistics, when used as a singular noun, signifies the
method above described, or—if we recognise such a science—the
science of statistics (German, die Statistik ; French, la statistique).
In English, however, the term is generally used as a plural noun,
and it then signifies the numerical data which constitute the basis of
the statistical method.
X.] THE METHOD OF STATISTICS. 333
By the aid of statistics, thus understood, we are
enabled to employ the method of concomitant varia¬
tions. In this way, quantitative inductions are estab¬
lished, and the laws of the variations of phenomena
determined.
There is a dose connexion between the statistical
method and the doctrine of chances. On the basis
of the quantitative observation of aggregates, the
influence exerted in individual cases by accidental
causes may be eliminated. For when instances are
taken in the mass, it is often a fair assumption that
accidental causes will operate so as to neutralise one
another. The effects of agencies exerting a permanent
influence on phenomena of a certain description can
in this way be calculated, even though in any given
individual case their influence may be slight and
uncertain. The manner in which aggregate regularity
is 'found to emerge out of individual irregularity,
when instances are taken in sufficient number, has
been one of the most striking results of statistical
research. It was this fact that excited the enthusiasm
of the Belgian mathematician Quetelet; and to his
influence may be ascribed the impetus given to the
study of statistics in the second quarter of the present
century.
In the use of statistics, considerable assistance may
often be derived from the employment of diagrams.
334 POLITICAL ECONOMY AND STATISTICS. [CHAP.
The graphic method is not only useful for the popular
exposition of statistics, enabling the mind more accu¬
rately to realise numerical comparisons ; but it has also
a genuine scientific value. Thus by means of graphic
representation we may employ the special method of
quantitative induction called by Whewell the method
of curves^. The relative positions of curves can be
1 The graphic method takes different forms. Straight lines of
different lengths, for example, are sometimes used, and rectangles, or
triangles, or other geometrical figures, the relative size of which can
easily be compared. Maps are also vory serviceable as a popular
method of illustration, where the statistics relate to difíerent geo¬
graphical divisions. Statistical maps are sometimes called carto-
grams, cartography being defined as "the employment of maps
for the graphic illustration of statistics." The above forms have
not, however, the scientific value that belongs to the use of curves,
so drawn as to represent the manner in which the variations of
some given quantity are related to the variations of some other
quantity. Whewell defines the method of curves as follows: "The
Method of Curves consists in drawing a curve, of which the
observed quantities are the Ordinates, the quantity on which the
change of these quantities depends being the Abscissa. The efficacy
of this Method depends upon the faculty which the eye possesses, of
readily detecting regularity and irregularity in forms. The Method
may be used to detect the Laws which the observed quantities follow ;
and also, when the Observations are inexact, it may be used to correct
these Observations, so as to obtain data more truè than the observed
facts themselves " {Novum Organon Renovatum, Aphorism xliv). On
the graphic method of statistics in general, see a paper by Professor
Marshall in the Jubilee volume of the Statistical Journals also Dr
D. ,E. Dewey's Elementary Notes on Graphic Statistics, and the article
on Graphic Method by Mr A, W. Flux in Mr Palgrave's Dictionary of
Political Economy. Practical examples of the employment of this
method will be found in Jevons's Investigations in Currency and
Finance. The use of diagrams for statistical purposes should be
X.] . GRAPHIC STATISTICS.
335
more easily compared than columns of figures ; and cor¬
respondences may thus be observed, and empirical laws
suggested, that would otherwise have escaped attention.
This is especially true when there are more than two
series of phenomena whose mutual relations are made
the subject of investigation. The mere saving of space
may be a matter of importance. Several distinct curves
can be placed in a single chart, and it thus becomes
possible to grasp at one and the same moment a greater
multiplicity of detailb
The use of curves also renders us less liable to be
distracted by movements of a partial or temporary
character. There are indeed cases, as pointed out both
by Whewell and by Jevons, where diagrams to a certain
extent supersede the taking of averages ; for we may
apprehend intuitively the general course of a curve,
neglecting individual irregularities. A similar appre¬
hension would generally speaking not be possible, or at
any rate not equally reliable, were we limited to mere
columns of figures I
clearly distinguished from their employment in economic theory as
discussed in a previous chapter.
^ Care must be taken to render it easy to follow the course of the
different curves without risk of their being confused one with another.
They may be distinguished by form as well as by colour. Thus one
curve may consist of an unbroken line, another of a broken line,
another of a succession of dots, another of dots and dashes alter¬
nately, and so on.
2 It should be added that whilst the graphic method of statistics
336 POLITICAL ECONOMY AND STATISTICS. [CHAP.
§ 3. The functions of statistics in economic en¬
quiries.—Cairnes lays it down that "the relation of
statistics to political economy is in no respect different
from that in which they stand to other sciences which
have reached the deductive stage." ^ But this summary
dismissal of the question cannot be accepted. In the
first place, notwithstanding the importance of deduction
in economics, the science cannot be regarded as having
reached the deductive stage in the same definitive
manner as those sciences with which an analogy is
here suggested—for instance, physics and astronomy.
Its premisses are less determinate than theirs, and
greater prominence needs to be assigned to empirical
confirmation and criticism. In the second place, al¬
though statistics ought not to be identified with
sociology, the quantitative observation of aggregates is
certainly of far greater relative importance in the social
sciences than it is in the great majority of the physical
sciences. In the latter—for instance, in optics or in
is—for the reasons above stated—scientifically important, certain
precautions are necessary in order to prevent the comparison of curves
from proving deceptive. This is especially the case when we represent
by curves the progress of phenomena, with a view to comparing
their proportional rates of progress. Professor Marshall indicates
the nature of the needful precautions in the paper referred to in the
note on p. 334.
1 Logical Method of Political Economy, p. 86. While the above
is given as summing up Cairnes's view of the relation between statis¬
tics and political economy, some of his incidental remarks on the
subject seem to indicate a less extreme position.
X.]
FUNCTIONS OF STATISTICS.
337
electricity—so far as conclusions rest on an inductive
basis, it is usually a basis of experiment. Individual
cases can be treated as typical ; and where a repetition
of trials is necessary, it is only in order to guard
against error. The statistical method is important in
special instances, e.g., in meteorology, but generally
speaking it occupies a subordinate position. In the
social sciences, on the other hand, there is little room
for experiment, while statistics play a part for which
no substitute can be found. Political economy, in par¬
ticular—being concerned pre-eminently with quantities
—has a special tendency to become on its inductive
side statistical, just as on its deductive side it tends to
become mathematical.
To begin with, statistics are of importance in eco¬
nomic enquiries in respect of their merely descriptive
functions. For example, statistics of production and
of wages and prices are essential elements in any com¬
plete description of the social condition of a community ;
statistics of exports and imports in the description of
its foreign trade and intercourse with other nations;
statistics of taxation and of national indebtedness in
the description of its financial condition. This point is,
however, so obvious that we need not dwell upon it,
but may pass on at once to the more strictly scientific
uses of statistics.
The functions of statistics in economic theory are.
338 POLITICAL ECONOMY AND STATISTICS. [CHAP.
first, to suggest empirical laws, which may or may not
be capable of subsequent deductive explanation ; and
secondly, to supplement deductive reasoning by check¬
ing its results, and submitting them to the test of
experience. Statistics play a still more important
part in the applications of economic science to the
elucidation and interpretation of particular concrete
phenomena.
We have seen that there are certain departments
of economics in which we are compelled to content our¬
selves with empirical laws. In such cases we are usually
concerned with aggregates, and can make little or
nothing of individual phenomena taken by themselves.
Our main reliance must, therefore, be placed upon sta¬
tistics, which may be either historical or contemporary.
An illustration is once more afforded by the Malthusian
doctrine of population. Malthus himself made elaborate
statistical enquiries concerning the proportion of yearly
marriages to population ; the fruitfulness of marriages
in different countries ; the effects of epidemics on births,
deaths, and marriages ; and so forth. He hence inferred
that under favourable circumstances population tends
to double itself in twenty-five years ; and on a similar
basis he estimated the effects of the various checks to
population operating in the less civilised parts of the
world, and in past times, as well as in the different
States of modern Europe.
X.] GENERALIZATIONS BASED ON STATISTICS. ' 839,
In this connexion it is once more necessary to point
out the characteristic weakness of empirical generaliza¬
tions. They may be true of a given state of society,
but with the changes incident to the progress of time
may become false. It is necessary, therefore, to keep
as it were a watch upon them, and from time to
time bring up to date the statistics upon which they
are based. It is no exaggeration to say, as Sir Eobert
Giffen has said, that Malthus's statistical enquiries
remain as valuable as ever. At the same time, further
experience gained during the present century suggests
certain qualifications in the statement of the Malthusian
doctrine, and in some degree modifies the practical
conclusions drawn from it.
Empirical laws need not, however, always remain
such. Statistical investigations may suggest laws
which can subsequently be established on a more or
less satisfactory deductive basis. In other words, the
observed uniformities may be referred to causes which
are adequate to account for them, and which are
shewn to be in operation. Thus the tendency of
financial crises to recur at periodical intervals was
not first worked out theoretically; it was disclosed
by statistical observations, and theories to account for
the cyclical movement were afterwards propounded.
Another simple illustration is to be found in the
autumnal drain on the Money Market.
22—2
840 POLITICAL ECONOMY AND STATISTICS. [CHAP.
Besides affording absolute additions to economic
knowledge, statistics are of great value in enabling
the deductive economist on the one hand to test and
where necessarj modify his premisses, and on the other
hand to check and verify his conclusions. By means
of statistics, also, he may sometimes roughly measure
the force exerted by disturbing agencies.
Thus, Mr Bagehot appeals to statistics to test the
legitimacy of the postulate that in modern industrial
communities there tends to be a movement of labour
from the worse paid to the better paid localities. He
holds that patent statistical facts shew what may be
called "the tides" of the people, the set of labour
being steadily and rapidly from the counties where
there is only agriculture and little to be made of new
labour, towards those where there are many employ¬
ments and where much is to be made of it h Statistics
may, again, be called in to determine how far in a
given state of society this tendency does actually
result in an equality of wages, or how far there are
other strong forces in operation which succeed in more
or less counteracting it.
Another illustration is afforded by the functions of
statistics in the controversy between free traders and
protectionists. Statistics cannot by themselves decide
this controversy, but they are of assistance in supple-
1 Economic Studies, p. 22.
X.] . PROBLEMS INVOLVING STATISTICS. 341
meriting more abstract reasoning. The free trader,
whilst basing his conclusions mainly on a deductive
process, is bound to deal with all available statistics,
shewing in what respects they bear out his theory,
and in what ways any apparent inconsistencies may
be accounted for\
If from considering how general theorems are to
be established and tested we pass on to enquire how
particular concrete problems are to be solved, we find
that the aid to be derived from statistics is relatively
even greater. There are many important problems of
fact—especially where a comparison is instituted be¬
tween different times or places, though not in this
case alone—which are statistical in their very nature :
for example, the enquiry whether during the last five
and twenty years there has or has not been an apprecia¬
tion in the value of gold ; the comparison between the
position of the labouring classes now and fifty years
ago ; the analysis and explanation of the recent
^ Compare Lord Earrer, Free Trade versus Fair Trade, and Sir R.
Giffen on the Use of Import and Export Statistics {Essays in Finance,
Second Series). "Statistics," Sir Robert Giffen remarks, "though they
cannot logically prove the affirmative in the direct issue between
free trade and protection, from the difficulty of finding exactly
parallel cases and eliminating other causes, may be used to prove
negatively that there is nothing in the apparent facts to help the
protectionist " (p. 223). In other of Sir R. Giffen's essays there
are excellent instances of the mutual bearing on one another of
statistics and deductive reasoning.
342 POLITICAL ECONOMY AND STATISTICS. [CHAP.
depression of trade ; the investigation of the relative
pressure of taxation, under existing conditions, upon
different classes of the community. A sound know¬
ledge of theory is requisite for a satisfactory treatment
of problems of this kind. Theory guides us in our
selection of statistics, and teaches us how to turn them
to the best account. But the data for the solution of
the problems must necessarily be numerical.
In the majority of cases, moreover, aggregate regu¬
larity has to be evolved out of individual irregularity,
and hence a special reason why we must deal with
phenomena in the mass, and not individually. Thus—
again taking as our examples the enquiries above re¬
ferred to—if we compare prices now with prices five
and twenty years ago, some will be found to have fallen,
some to have risen ; similarly if we compare wages now
with wages fifty years ago; even in a year of depression
some trades are found to be fiourishing ; the pressure
of taxation varies in the case of different individuals
in the same class. Averages must, therefore, be taken ;
and it is clear that the essential conditions for the
right solution of the problems are reliable statistics,
and ability to use the statistics in a sound manner.
The right use of statistics is, indeed, far from being
a simple matter. Statistics, it is often said, can be
made to prove anything. And if they are used with¬
out special knowledge, or grouped simply with the
X.] IMPORTANCE OF THE STATISTICAL METHOD. 843
object of establishing a foregone conclusion^ the charge
is well founded. As against ignorant or prejudiced
statisticians, or against the casual employment of a
few figures picked up at random and regardless of
what may be called their context, it is not difficult
to defend the paradox that there is nothing more
misleading than facts—except figures. For reasoning
from statistics, in addition to the dangers which it has
in common with all empirical reasoning, is subject to
difficulties and dangers peculiar to itself h If, however,
the limitations of statistics are clearly recognised, if
they are accurately collected over an adequate range,
if they are employed without prejudice and after full
enquiry into their true significance, and if they are
fairly and properly grouped, then their value is unique,
and the statistical method easily makes good its claim
to rank as a thoroughly effective and reliable instru¬
ment of science.
^ The nature of these difficulties and dangers is briefly indicated
in the note following this chapter.
NOTE TO CHAPTER X.
On some of the Pkecautions requisite in the
Use of Statistics in Economic Reasonings.
§ 1. Conditions of the reliahility of statistical data.—
If arguments based on statistics are to be of any value,
particular attention must be paid to the following points :
{a) the sources from which the statistics are obtained,
with special reference to their reliability; (h) their true
meaning and significance ; (c) their completeness or incom¬
pleteness as covering the whole range of the phenomena to
which they relate ; (d) the manner of their grouping, with
special reference to the taking of averages. Each of these
points may be briefly considered in turnk
The initial difliculty in the use of statistics is the pos¬
sible inaccuracy of the original data. Statistics may be
obtained and published officially, or they may be collected
through private channels. Under the former of these con¬
ditions, the accuracy of the figures is sometimes practically
^ In what follows I am specially indebted to Sir R. Giffen's Essays
in Finance, First and Second Series ; to papers on Statistics by Pro¬
fessor R. M. Smith in the Political Science Quarterly, the Quarterly
Journal of Economics, and the Publications of the American Economic
Association', and to various papers in the Journal of the Statistical
Society.
NOTE.] THE RELIABILITY OF STATISTICS.
345
unquestionable ; as, for example, in the case of railway
traffic receipts. But this is by no means the universal
rule, even when official statistics are forthcoming. Thus
up to 1854 the values of imports into this country were
calculated at the prices of the early part of the eighteenth
century. From 1854 to 1870 they were officially computed
according to the best information obtainable. At the
present time both imports and exports are in this country
valued according to the declarations of the importers and
exporters. The returns are of course checked by the officers
compiling the statistics ; but still their accuracy depends to
a considerable extent upon the good faith and carefulness
of the consignees and exporting agents, who it is said are
often insufficiently instructed by their principals. The
chance of error is greater in some cases than in others. For
example, when goods are sent into the country to be sold
on commission, there is no available invoice of the same
definite character as when they are sent to order. Again,
the check exercised by the customs' officers is likely to be
more effective in the case of goods that are subject to a
duty than in the case of those that are non-dutiable.
The uncertainty attaching to the accuracy of statistics
is still greater when they are collected through private
channels. Wages statistics may be taken as a special
example. If they are obtained by the simple process of
writing to some individual in each district under investiga¬
tion, and asking him to give the best information in his
power, they can hardly be of much practical value, unless
the sources of the informant's own knowledge are fully set
forth and are themselves capable of being tested. Both
employers and workmen are in danger of being more or
846
THE RELIABILITY OF STATISTICS. [CHAP. X.
less unconsciously biassed by class prejudice or by conside¬
ration of the uses to which the information they afford
may be put. Probably the best sources of information are
the actual ledgers and pay-rolls of large establishments if
recourse can be had to them, or records kept by trade
societies primarily with a view to the enlightenment of
their own members. Where two or more sources of infor¬
mation are available, they will serve mutually to check one
another.
It is of importance that access should be had to the
ultimate data themselves, and not merely to calculations
already based upon them. For instance, knowledge of the
actual wages paid to individuals, and the number of men
employed at each rate, is of much greater value to the
statistician than ready made averages provided either by
employers or workmen. This of course applies not only to
wage-statistics, but to all statistics.
A distinction may be drawn between the absolute accu¬
racy of statistical data, and their relative accuracy. Abso¬
lute accuracy may in some cases be unattainable ; and yet
it may be possible to institute very valuable comparisons.
But in such cases relative accuracy is essential; the sta¬
tistics should be collected on the same method, and under
similar circumstances. If these conditions are fulfilled,
error within certain limits need not be seriously misleading ;
for in accordance with the doctrine of chances, it may be a
legitimate assumption that the error will exert approxi¬
mately the same proportional influence on each side of the
comparison.
It follows that in comparing statistics of any kind for
consecutive years, what is specially important is that no
NOTE.] THE RELIABILITY OF STATISTICS.
347
change shall have been made in the mode or circumstances
of their collection. For example, in comparing income
tax returns at different periods, it may be necessary to
make allowance for improvements in the means adopted
for preventing false returns. It should also be remembered
that in consequence of changes in the rate of the tax, in¬
ducements to falsify statements of income may be increased
or diminished.
In the case of official statistics, it is most desirable that
on the occurrence of any change in methods of collection,
the old method should for a few years be carried on along¬
side of the new. It can then be approximately calculated
what allowance must be made for the change in compari¬
sons involving periods before and after it.
A similar difficulty frequently arises when statistics of
different nations are compared. There is, for instance,
the greatest variety in the methods by which the values
of exports and imports are calculated in different countries.
It has already been mentioned that in England the practice
is for values to be declared by exporters and importers.
In most foreign countries, however, values are computed
according to tables of prices officially drawn up\ With a
^ Again, "as regards the basis of valuation most European
countries adopt the practice of valuing imports as they lie in the
port of arrival, i.e., including cost of freight, and exports at their
value at the port of export, Le., excluding cost of freight. The
United States, however, presents an exception to this practice as
regards imports, which are valued according to the invoice values
declared by the importers at the port of shipment, i.e., excluding the
cost of freight." Further difficulties are caused by the divergent
methods of classifying articles of import and export which are
adopted by different countries. See a paper on the Comparability
348
THE RELIABILITY OF STATISTICS. [CHAP. X.
view to international comparisons, statisticians are exerting
all the influence they can command in the direction of
bringing about uniformity in methods of collecting sta¬
tistics in different places.
Where complete accuracy is unattainable, it is impor¬
tant to be able to calculate the limits of the possible inaccu¬
racy. If we know the exact conditions under which the
data were collected, and the precautions taken to ensure
correctness, then to calculate such limits may be within
our power, and due allowance for error can be made. It
may be added that if, when statistics are being collected,
the use that is to be made of them is known and borne in
mind, then—although it may be necessary to make some
allowance for the possible effects of bias—they are more
likely to be valuable for their purpose.
§ 2. The interpretation of simple statistics. -—Apart
from any inaccuracy in the actual figures, there is a con¬
stant danger of reading into statistics what—when properly
interpreted and analysed—they cannot be shewn to imply.
For in the phenomena to which they relate there may be
differences, of which the mere figures taken by themselves
yield no indication. A few simple illustrations may be
given of the kinds of error likely to result, if heterogeneous
and incommensurable quantities are treated as though they
were homogeneous and commensurable.
In the comparison of price-lists, and in many other
enquiries, constant guard must be kept against overlooking
differences in quality. This applies even to raw materials.
The quality of corn, for example, as well as the yield of the
of Trade Statistics of various Countries by Mr A. B. Bateman in the
Statistical Journal for June 1894.
NOTE.] THE INTERPRETATION OP STATISTICS. 349
harvest, varies with the season ; so that the Gazette average
of wheat may itself be misleading. The fact of variation in
the quality of raw materials is clearly recognised by Pro¬
fessor Rogers in his History of A gricultiire and Prices. He
purposely omits all notice of inferior grain, and in calcu¬
lating the average price of cattle neglects such quotations
as evidently relate to animals much below the average
quality. Similar omissions are made in the case of wool ;
and it is pointed out that in this case the difficulty is
increased by the fact that even among the various kinds of
best wool, there is so large a difference in value as to
suggest a difference of breeds in different districts. It is
clear that under such conditions as these, the most careful
judgment in the selection and manipulation of figures is
essential. The task of comparing prices, simple as it may
at first sight appear, is found to be one that needs for its
adequate performance, not only freedom from bias, but
also wide experience, and sagacity of a high ordert
^ "As regards agricultural production, the initial difficulty of all
the statistics is the different value of the units which go by the same
name. The wheat, oats, and barley of one country, though called by
the same names, are not the same as the wheat, oats, and barley of
another country. There are the very greatest differences in quality,
as any price list of London or other market, where grain from every
part of the world is sold, would shew. Yet nothing is so common as
comparisons of the world's production of wheat, for instance, in
which this difference of quality is ignored, and fine reasonings are
indulged in where this difference of quality might seriously affect the
result. What is true of grain is as true, if not more true, of live
stock. There are sheep and sheep, cattle and cattle, horses and
horses; in truth the agricultural live stock of any two countries,
instead of being susceptible of ready comparison, can hardly be
compared directly at all. The point is notoriously of great importance
in historical investigations. In comparing England of the present
350 THE INTERPRETATION OF STATISTICS. [CHAP. X.
When we pass from raw materials to manufactured
goods, the difficulty is enormously increased. There is
room for wide divergence in quality, when only one kind
of material enters into the composition of the commodity
in question ; and when materials are mixed, the proportion
of the more valuable to the less valuable may in some cases
vary almost indefinitely. The same names may even in
course of time come to denote things that are practically
different in kind.
One or two instances may help to illustrate the point
under discussion. It might have been anticipated that
during the extraordinary infiation in the price of tin in the
early part of 1888, the exports of tin-plates would decrease.
As a matter of fact, however, they shewed a slight increase;
and the explanation of the apparent anomaly seems to be
that a large proportion of the goods classed as tin-plates in
the Board of Trade returns have little or no tin in their
composition. During the period when the price of tin was
so high, the shipment of these thin iron plates largely
predominated over those more thickly coated with tin\
Another example is afforded by an instance in which
day with the England of previous centuries the difference of the
average weight and qualities of the live stock called by the same
names has always to be considered. In nothing in recent years, as I
understand, have some continental countries such as France made
more remarkable improvement than in the quality of their live stock,
so that with no increase in numbers, or little increase, there has
been an enormous advance in real production. The point is of equal
importance in international comparisons " (Giffen on International
Statistical Comparisons in the Economic Journal for June 1892,
p. 225). Many other valuable illustrations of points mentioned in
the text will be found in this article.
1 See the Economist, June 30, 1888, p. 823.
NOTE.] THE INTERPRETATION OP STATISTICS. 351
the value given for a consignment of shirtings to New-
Zealand was challenged as being so low as to be obviously-
incorrect. Invoices were accordingly produced, and they
proved both that the figures were rightly quoted, and that
the goods were really described as shirtings. Further
enquiry, however, brought out the fact that their object
was to serve as shrouds for the carcases of sheep sent to
Europe in refrigerating chambers. It need hardly be added
that for this purpose an article much inferior in quality and
price to those ordinarily classed as shirtings was required h
In some cases the differences in quality are now in one
direction, now in the other, so that over any fairly large
area they practically cancel one another. Error may then
be avoided by simply taking averages. But no such re¬
source is available where the changes tend to be all in one
direction, as in the improvement in the quality of some
manufactured goods, and in house accommodation. In
certain cases, as already indicated, there is a progressive
change of quality even in raw materials. "An ox or a
sheep,'' Professor Marshall remarks, " weighs now more
than twice as much as it used to ; of that weight a larger
percentage is meat, of the meat a larger percentage is prime
meat, and of all the meat a larger percentage is solid food,
and a smaller percentage is water." ^
An instance of a somewhat different kind may be added,
in which mere price-lists are likely to mislead those who
have not special knowledge of the trades in which the lists
are used. Where the price of the raw material is subject
to considerable fluctuations, it is not unusual for the
1 British Association Beport for 1885, p. 870.
^ Contemporary Bevieiv, March, 1887, p. 375.
852 THE INTERPRETATION OE STATISTICS. [CHAP. X.
nominal wholesale price of finished goods to remain un¬
changed—that is to say, there is no alteration in the pub¬
lished price-lists—while there is, nevertheless, an actual
alteration in prices through a modification of discounts and
in other ways. For reasons of this kind, price-lists may
sometimes be even worse than useless, unless supplemented
by additional information.
Another obvious case in which care is necessary in the
interpretation of statistics need be touched upon only
briefly. Whenever there are changes in the prices of
commodities, it is clear that values, say of exports or im¬
ports, afibrd no adequate measure of amounts. For in¬
stance, in 1872 we exported iron and steel to the value of
¿035,996,167, and cotton yarn to the value of ¿016,697,426;
while in 1882 the figures had fallen to ,£31,598,306, and
¿012,864,711. The amounts were, however, only 3,382,762
tons and 212,327,972lbs. in the former year; while they
were 4,353,552 tons and 238,254,700 lbs. in the latter.
Here then is a further reason why all statistics involving
prices need to be interpreted with caution. It is now
generally recognised that between distant periods any bare
comparison of prices is worthless ; we are practically more
in danger of being led astray in the comparison of statistics
over a long series of consecutive years.
Passing to statistics of wages, it is to be observed that
the figures themselves usually give nothing more than
nominal time wages, and hence afford a very uncertain
criterion both of real wages and of task wages. Other
variables are involved in the determination of both of
these, and supplementary statistics are therefore required
if a comparison is to be made either of the well-being of
NOTE.] THE INTERPRETATION OF STATISTICS. 353
the working classes, or of the cost of labour, at different
periods or in different localities. Account must, for in¬
stance, be taken, not only of variations in the prices of
those commodities upon which wages are habitually spent,
but also of variations in their quality, thus again introduc¬
ing the difficulties to which reference has already been made.
We need not dwell upon the importance of also taking
into consideration variations in hours of labour, intensity
of labour, continuity of employment, and so on. The neces¬
sity of having regard to such points as these shews, how¬
ever, the difficulty attending arguments from wage-statistics
to the condition and progress of the working classes. Any
argument bearing upon this problem should if possible be
cumulative, the same result being obtained from different
points of view and from quite independent figures.
In other questions relating to wages it may be neces¬
sary to take account of the quality of the work done ; and
the neglect of this consideration may equally vitiate an
argument from statistics. Professor Oliffe Leslie, in seek¬
ing to controvert the doctrine that wages tend to an
equality, remarks that "Dorsetshire, Somersetshire, and
Devonshire labourers have for the last fifty years been
earning less than half what the same men might have
earned in Northumberland.'' Granting, however, that,
during the period referred to, agricultural wages in North¬
umberland were twice those of the south-western counties,
it does not follow that the same men, who earned ten
shillings a week in Devonshire, would have been able to
earn twenty shillings if they had migrated to the north ;
for the very fact that the northern labourers had for two
or three generations been earning higher wages would be
K. 23
354 THE INTERPRETATION OF STATISTICS. [CHAP. X.
likely to make them more efficient workers and more
valuable to their employers.
A further difficulty arises from the fact that in the
course of time the character of the work itself may change;
so that men who are called by the same name are not
necessarily doing the same work. For instance, the rates
of pay of postmen in India have increased considerably
in recent years. The work required of them is, however,
found to be of a different character, involving greater re¬
sponsibility, and demanding a better education and a
higher degree of intelligence. In 1855 they had only to
deliver letters, and many of them could not even read their
own vernacular. Now they have to pay money orders,
and some of them are expected to read English as well as
the vernacular language of the districts
From what has been said in this and the preceding
section it follows that if a collection of statistics is to be
of scientific value, it should not be a mere list of figures.
The method of collection and the principle of compilation
should be carefully explained; and, if possible, notes should
be added touching on any peculiar influences that have
affected the phenomena themselves, or the accuracy of the
returns, during the period over which the statistics extend.
There should in particular be evidence that any apparent
anomalies have been made the subject of special investi¬
gation, so as to exclude the possibility of their being simply
due to error of some kind. The more experienced the
statistician, the more scepticism he shews about all statis¬
tics which have not been compiled in accordance with the
above conditions.
1 See Barbour, Theory of Bimetallism^ p. 125.
NOTE.] THE RANGE OF STATISTICS.
855
§ 3. The range of statistics.—Another danger to be
guarded against in the use of statistics is that of basing con¬
clusions upon an incomplete survey. It need hardly be said
that if we are seeking empirically to determine the effects
of any cause, either our facts and figures should be gathered
from the whole area or period over which the operation of
that cause is felt, or we should at least have adequate
grounds for believing that those statistics to which we
confine our attention are typical and representative. A
similar precaution is necessary when by the aid of statistics
we investigate the course or progress of economic pheno¬
mena.
From this point of view it is necessary again to refer to
the importance of considering the manner in which statistics
are collected. The individual statistics may be perfectly
correct, but they may be unrepresentative. It is, for in¬
stance, unsatisfactory to obtain statistics of wages by means
of circular letters forwarded to workmen with the request
that they will fill in various details. Only a few send
answers, and these are likely to be the better off and the
more intelligent. There is, therefore, no guarantee that
the statistics so obtained are really typical.
Another point to notice in connexion with wage-
statistics is that in comparing wages in different occu¬
pations and at different times, average yearly earnings
constitute the only satisfactory unit. The regularity of
emplo3m[ient varies enormously in different trades and at
different periods ; and a mere record of the daily or weekly
wages earned by those who succeed in getting work may,
therefore, be misleading, in so far as it gives no indication
of the extent to which workmen are liable to be temporarily
23—2
356
the range of statistics.
[chap. x.
unemployed. Professor Thorold Rogers's view that the
fifteenth century and the first quarter of the sixteenth may
be regarded as "the golden age of the English labourer"
has from this standpoint been criticized by Dr Cunning¬
ham and others, on the ground that it rests not only upon
the interpretation of prices, but also upon the assumption
that the labourer's income is fairly represented by three
hundred times his daily wages.
Turning to a different department of economic enquiry,
it is unsatisfactory, in seeking to investigate the effects
of gold discoveries on prices, to attend only to statistics of
prices in a few principal markets. Cliffe Leslie adduces
evidence to shew that the gold discoveries of 1850 coincided
with the opening up of backward places through improve¬
ments in means of communication. This tended to bring
about—what there had not previously been—a level of
prices between the hitherto backward places and the great
centres of commerce and industry ; and the new gold
enabled the process to be carried out by a levelling-up
instead of a levelling-down, i.e., it was made possible for
prices to be raised in the former localities without their
being at the same time lowered in the latter. It was,
accordingly, in backward places—for example, on the new
lines of railway in the inland parts of Ireland and Scotland,
and similarly in many countries of Europe—that the effect
of the gold discoveries in raising prices was most apparent;
it could not be properly estimated by merely considering
prices in great towns such as London and Paris H
Considerations of a somewhat similar kind are pertinent
^ Essays in Political and Moral Philosophy, 1888, pp. 282, fí.
NOTE.] THE GROUPING OF STATISTICS. 357
in relation to the effects of diminished gold supplies. Pro¬
fessor Nicholson holds that a falling off in the supplies
of gold is likely to exert its primary influence in countries
on the margin of the commercial world, in which credit is
comparatively little developed ; and that we cannot, there¬
fore, properly investigate the operation of the diminished
production of bullion by simply attending to statistics of
gold reserves, and movements of the precious metals, in
the great centres of commerce.
§ 4. The grouping of statistics.—While our statistics
must not be partial, we must also seek to fulfil the more
difficult requirement of so grouping or "weighting" them,
as to bring out correctly their relative importance. In
studying the course of prices, for instance, while careful
not to overlook any markets occupying a unique position
or affected by peculiar influences, we must also be careful
not to assign the same relative weight to small as to large
markets.
A simple example will serve to indicate what is here
meant. Suppose that on two successive days the price of
corn in any market is thirty-two shillings and thirty-six
shillings a quarter; then a bare consideration of these
figures gives thirty-four shillings as the average price for
the two days. But suppose further that three times as
much corn is bought and sold on the first day as on the
second, then for most purposes it would be more correct to
say that the average is thirty-three shillings. Speaking
more generally, if amounts h, c are on different occasions
sold at prices x, z respectively, we weight our price re-
Ti iji X + y z
turns accordingly, and take as our average not ^— ,
358
THE GROUPING OF STATISTICS. [CHAP. X.
but ^ Where data for the determination of
a + 6 + c
a, 5, c are not available, it is usually impossible to ensure
that our averages are not sometimes undul}^ enhanced, and
sometimes unduly depressed, by reason of an exaggerated
importance being assigned to small transactions of an
exceptional character. In such a problem as that of
measuring changes in the general purchasing power of
money, the task of assigning varying weights to our
primary figures becomes at the same time of increasing
importance and increasing difficulty b
In taking the average of a series of averages there is
a special risk of error, somewhat analogous to that just
discussed. Thus, if there is a relative increase in the
number of workers in more highly paid occupations, the
average wages of all labour may rise much faster than
the average of representative wages in each trade, or may
even rise while the latter is stationary or falling. To quote
an illustration given by Professor Marshall—"If there are
500 men in grade A earning 125. a week, 400 in grade B
earning 25s., and 100 in grade C earning 405., the average
wages of the 1000 men are 205. If after a time 300 from
grade A have passed on to grade B, and 300 from grade
B to grade C, the wages in each grade remaining station¬
ary, then the average wages of the whole thousand men
will be 28s. 6d. And even if the rate of wages in each
grade had meanwhile fallen 10 per cent., the average
1 The need for a "weighted index-number" is, however, dimin¬
ished, if the number of commodities taken as the basis of the calcu¬
lation is made very large indeed.
NOTE.]
THE GROUPING OF STATISTICS.
359
wages of all would still be about 25s. 6d., that is, would
have risen more than 25 per cent." ^
The taking of averages is thus frequently complicated
by the fact that an equal significance ought not to be
attached to all the figures; and the difficulty of the problem
is still further increased when some kind of average less
easy of calculation than the arithmetical is appropriate.
In the great majority of economic investigations the arith¬
metical average is, indeed, the most suitable as well as the
simplest ; but there are some exceptions. For instance, if
population doubles itself in twenty-five years, it is obviously
^ Principles of Economics^ vol. i., 3rd edition, p. 772 note. Similarly
Sir Robert Giffen, in the article referred to in the note on p. 350, points
out that "it is quite conceivable that in one of two countries the
earnings may be higher than in the other in every single employment
which can be enumerated and compared, and yet the average earnings
of the average wage-earning man may be higher in the latter country
than in the former, the reason being the different distribution of the
people according to earnings." The correctness of the above statement
is shewn by a theoretical comparison as follows. Take first a com¬
munity of 1000 wage-earners distributed amongst employments A, B,
C, D, E, the annual wages in these employments being respectively
£50, £60, £70, £80, £90, and the uumbers of men employed in them
being respectively 500, 200, 100, 100, 100. Then take another
community also of 1000 wage-earners in which the corresponding
wages are £40, £50, £60, £70, £80 and the numbers employed 100,
100, 100, 200, 500. The average wages per head will be found to be
in the first case £61, and in the second case £69. " In a comparison
of rates of wages merely according to the nature of the employment,
the wages in the first community would'obviously appear higher than
in the second, and this would be strictly true in a sense; but the
inference would be untrue that the average earnings of the wage-
earning classes in the first community, striking a true average, would
be higher."
360 THE GROUPING OF STATISTICS. [CHAP. X.
incorrect to say that the average annual increase is four
per cent.^
There are some cases in which to take an average at all
may be misleading. If, for instance, we take an average
of men's wages and children's wages, or of the earnings of
professional men and manual labourers, or of house-rents
in Whitechapel and in the neighbourhood of Hyde Park,
we are averaging things that belong to different categories,
neither of which is really represented in the result. Even
if such an average can be of service for any special purpose,
it will become delusive when used in ignorance of the
diverse nature of the data on which it is based
If there is continuity in our data, so that—although the
extremes are far removed from one another—we pass be¬
tween them gradually and through all intermediate grades,
then it is a different matter. But in any case the value of
an average is enormously increased if at the same time the
range of the variations on both sides is clearly stated. The
truth is that an average from its very nature lets drop a
considerable amount of information. In itself it tells
nothing as to the manner in which the data from which it
is obtained are grouped. It may, therefore, advantageously
1 On the different kinds of averages, and on the subject of averages
in general, see Venn, Logic of Chance, 1888, Chapters 18, 19.
2 It has been said, e.g., by Mr Longe, that there is no such thing
as an average or general rate of wages. In one sense this admits of
easy disproof, since we can take the arithmetical mean of any series
of quantities whatever. What is meant, however, is that wages in
different occupations are unrelated to one another and disparate, so
that their average is a mere number and has no practical signification
or importance. This view, although it may be rejected, will serve to
illustrate the meaning of what is said above in the text.
NOTE.] THE GROUPING OF STATISTICS. 361
be accompanied by a supplementary statement on this point,
giving not only the extreme deviations from the average as
above suggested, but also the average deviation \
This leads to the remark that in treating of fluctuations
from an average, considerable importance attaches to the
particular range over which the average has been calcu¬
lated. In dealing, for instance, with the statistics of some
phenomenon over a term of years, we may seek to establish
a periodicity in the movements towards and away from the
average ; but the average, if taken for successive periods of
years, may itself be subject to progressive variations, and
unless these are correctly calculated and due allowance
made for them, our conclusions may be seriously vitiated.
Thus what has been called the "par" of trade, that is, the
level which indicates neither prosperity nor depression, is
itself ever gradually shifting its position. The exports and
imports of any given year, the railway traffic receipts, the
production of iron and the like, must not be compared
simply with the corresponding statistics of some former
period ; for they may all shew an increase, and yet—because
the normal level has itself risen in the interval—the later
date may coincide with the lowest tide of depression, whilst
the earlier coincided with the highest tide of prosperity^.
On the other hand, if we are studying the secular move¬
ments, it is equally necessary to have analysed the periodic
variations. Averages of terms of years have to be com¬
pared, and the periods over which these averages are taken
^ Compare Venn, Logic of Chance^ pp. 444, ff.
2 If we merely compare a single year at one period with a single
year at another, we are practically committing the fallacy referred to
in the preceding section, namely, of arguing from partial data.
362
THE GROUPING OF STATISTICS. [CHAP. X.
should be such as to eliminate as far as possible inter¬
ferences caused by the periodic movements^.
It is not intended to give here a systematic discussion
of the technique of the statistical method ; and enough has
now been said to indicate the nature of the difficulties to
which the treatment of statistics may give rise. The
theory of statistics, which investigates in detail both the
principles in accordance with which statistics should in the
first instance be collected and arranged, and also the right
methods of taking averages and dealing with fluctuations,
is, as we have already pointed out, a department of applied
logic or methodology. As such, it demands a distinctive
treatment, though it seems hardly appropriate to speak of
it as an independent science.
1 Compare levons, Investigations in Gui'rency and Finance, pp.
34, ff.
INDEX.
Absolutism of theory, 294.
Abstract economics, 140—143 ;
294, 5 ; 804—7.
Abstraction, method of, 118—127 ;
214, 5 ; 220, 1.
Achenwall, G., 823.
Adams, H. C., 45 n.
Agreement, method of, 198.
Algebraic methods, 250 n.
Altruistic motives, 44 ; 128—6.
Ambiguity of terms, 157—160.
Analysis of conceptions, 158.
Ä posteriori arguments for free
trade or protection, 195—7.
Applied economics, 58 ; 92 ; 141 n.
Arithmetical average, 859.
Arithmetical examples, 250,1.
Art, 85 ; 89 n.
Art of political economy, 86 ; 55
_60; 74—82.
Ashley, W. J., on the German
Historical School, 22 n. ; on the
price of iron in the fourteenth
century, 298 ; on economic
legislation, 800 w. ; on the his¬
torical conception of political
economy, 315.
Assize of Bread and Ale, 800.
' Austrian School ', the, 21 ; 262.
Average value and normal value,
221 n.
Averages, 842; 857—862.
Axiomata media, 174.
Bacon, Francis, on science and
its practical applications, 48 w.;
on the explication of concep¬
tions, 150 ; on experiments,
179 n.
Baden-Powell, Sir G., 190 n.
Bagehot, W., on the scope and
method of political economy,
12 sqq,; on the abstract cha¬
racter of political economy, 116
n.; on the à posteriori method,
205 ; on the functions of obser¬
vation, 227 ; on the assumptions
of economic science, 288,289 w.;
on the method of science, 242 ;
on the Bank of England, 266 ;
on the relativity of economic
doctrines, 294 ; his limitation
of political economy to the
theory of modern commerce,
800—804 ; his use of statistics,
840.
Bank of England, 265, 6.
Banking, art of, 75.
Barbour, B., 854 n.
Bateman, A. E., 848 n.
Black Death, 186 ; 269-—272.
Blanqui, J. A., 287 n.
364
INDEX. •
Bonar, J., on Malthus, 188 n.; on
Eicardo, 235 n.
BramweU, Lord, 32 n.
Cairnes, J. E., on the scope and
method of political economy,
12 sqq. ; on applied political
economy, 69 n.) on laisser faire^
72 n. ; on rent, 88 ; on second¬
ary influences in economics,
117 n. ; on * mental experiment ',
178??,.; on àposimor? evidence,
191 ; on slave labour, 202 ; on
the inductive method, 205 ; on
the hypothetical character of
political economy, 222 n. ; on
the ultimate premisses of eco¬
nomic science, 226 n., 239 n. ;
on mathematical methods, 252 ;
on the effects of the Australian
gold discoveries, 267 n. ; on po¬
litical economy and statistics,
336.
Capital, 153 ; 154 n. ; 164 ; 166 ;
functions of, 69 ; 86 ; increase
of, 132; 201,2.
Carlyle, Thomas, 71 n,
Cartograms, 334 n.
Causation, laws of, 21S sqq.
Causes in history, 283.
Caveat emptor, rule of, 130.
Ceylon, 280 n. ; 302.
Chamberlain, J., 128 n.
Chances, doctrine of, 333.
Cherbuliez, A. E., on the con¬
sumption of wealth, 109 n. ;
on scientific division of labour,
134.
Clark, J. B., on the definition of
wealth, 97 ; on distribution and
exchange, 103 n.
Classification, 155 ; 161 ; 171—4.
Cohn, G-., on the German His¬
torical School, 22 n. ; on in¬
duction and deduction, 28 n.,
169.
Colloquial use of terms, 157—9.
Commercial motives, 119.
Common sense, 146—9.
Communism, experiments in, 181
—183.
Comparative method, 280 n.
Competition, 31 ; 38, 9 ; 42, 3 ;
85 ; 298—300 ; in the Middle
Ages, 269; 272; 297,8.
Competition, hypothesis of, 67 ;
236, 7 ; 241 n. ; 290,1.
Competitive prices and customary
prices, 295 n.
Comte, A., on political economy
and sociology. 111 sqq. ; his
use of the terms * statics ' and
'dynamics,' 144; on definitions
in political economy, 151.
Concomitant variations, method
of, 198, 9 ; 333.
Concrete economics, 141—143 ;
295, 6.
Conring, H., 323 n.
Consols, price of, 208.
Constructive economics, 170 ; 200
n.
Consumption of wealth, 104—
110.
Continuity of economic pheno¬
mena, 167; 258.
Conventional morality, rules of,
130.
Co-operative production, 203.
INDEX.
365
Corn Laws, effects of their repeal,
196 ; 231, 2.
Cosmopolitanism of theory, 294
n.
Cosmopolitical economy, 76—8.
Cossa, L., on applied political eco¬
nomy, 59 n. ; on the premisses
of economic science, 240 n.
Cost of production, 62, 3 ; 69 ;
103,4; 141,2; 161 n.; 222 n,;
259.
Counteracting causes, 213—217.
Cournot, A., on unproductive
consumption, 106 n. ; his use
of the hypothesis of pure mo¬
nopoly, 237 n. ; his use of
algebraic methods, 250 n. ; on
the application of mathematics
to political economy, 253—5,
261.
Cunningham, W., on economic
science, 53 n. ; on the ethics
of political economy, 61 n. ; on
changes in the use of terms,
165 n. ; on political economy as
an empirical science, 172 n. ;
on the importance of economic
literature to the historian of
economic facts, 286 n» ; on
medieval prices and rents, 296,
7 ; on Thorold Eogers, 356.
Curves, method of, 334,5.
Custom, 268,9; 272; 295.
Customary prices, 295 n. ; 297—9.
Deduction and induction, 27, 8 ;
168,9 ; 190,1 ; 201 ; 204,5.
Deductive method, 212—247.
Definition, 150—167.
Dependent and independent
changes, distinction between,
215.
De Quincey, T., on Eicardo, 293.
Descriptive economics, 170—174 ;
200 n.
Descriptive school of statisticians,
323; 324 w.
Desire of wealth, 118—126.
Devas, C. S., on economics and
ethics, 54 n.
Dewey, D. E., 334 n.
Diagrammatic methods, 250 n. ;
256—263.
Diagrams, statistical, 333—5.
Difference, method of, 176,7 ; 180 ;
181; 185—198.
Diminishing Eeturn, law of, 84 ;
178; 236.
Diminishing Utility, law of, 236 ;
305.
Distribution of wealth, 42 n. ; 80,
1; 101—4; 205—8; 265.
Disturbing causes, 218,9 ; 226, 7.
Dogmatism in definition, 160.
Dunbar, C. F., on the opposition
between different schools of
economists, 29 n. ; on the aca¬
demic study of political eco¬
nomy, 49 n.; on observation
and the deductive method in
economics, 226 n.
Dynamics of political economy,
143—6.
Economic activities, subject to
moral laws, 41.
Economic activity, definition of,
98.
Economic development, 45 ; 138,
366
INDEX.
9; 143—5; 265,6; 279—281;
315, 6.
Economic history, 264: sqq.; philo¬
sophy of, 279; 314—316.
Economic ideals, 32,3 ; 36 ; 44,5 ;
55; 62,3; 78—82.
Economic laws, 3 ; 36 ; 85 ; 88,9.
Economic legislation, 32 n.
'Economic man,'the, 16; 19; 24;
114—127; 141; 214.
Economic motives, 118; 127—
132.
Economic precepts, 32,3 ; 36.
Economic theories, history of,
285—292.
Economics, 2 ; 53 ii. ; 91 n.
Economy, 1; 99.
Edgeworth, F. Y., on mathema¬
tical reasoning, 254 n.; on the
treatment of variables, 258 ; on
the application of mathematics
to political economy, 260 ?z.,
261 n., 262
Egoism and altruism, 118—126.
Eight hours' day, 181 ; 184 n.
Ely, E. T., on the ideal of political
economy, 81.
Empirical generalizations, 198—
211 ; 338, 9.
' English School,' the, 20,1 ; 29.
Ethical conception of political
economy, 23 ; 25, 6 ; 37, 8 ; 46,
7; 51; 60—63.
Ethics, 35 n.
Ethics of political economy, 36 ;
60—63.
Exchange of wealth, 69, 70; 95 n.;
102—4; 205—8.
Exclusiveness, fallacy of, 8, 9.
Experiment, 175—184.
Experimenta lueifera et fructí¬
fera, 179 n.
Experimental legislation in the
Middle Ages, 181 n.
Export and import statistics, 345 ;
347; 352.
Export duties, 77.
Extension of demand, 260,1.
Fallacies in political economy,
7, 8.
Farrer, Lord, 190 n. ; 341 n.
Financial crises, 133.
Fluctuations from an average,
361.
Flux, A. W., on graphic statistics,
334 n.
Formal economics, 170,1.
Foxwell, H. S., on the use of
mathematical analysis, 257.
Free trade and protection, 76 n,;
135; 188—190; 192—7; 340,1.
' German Historical School,' the,
20 sqq. ; 81 ; 123 n. ; 308 sqq,
Gifíen, Sir E., on the method of
difference in economic reason¬
ings, 193,4 ; on the use of the
deductive method, 211 n. ; on
Malthus, 339; on the use of
statistics, 341 n., 344 n. ; on
statistical comparisons, 350 n.,
359 n.
Gold discoveries, 196; 267; 356.
Gold supply and prices, 210 ; 216,
7 ; 356, 7.
Graphic method of statistics, 333
—335.
Gresham's law, 36 n. ; 301.
Guy, W. A., 330 n.
INDEX.
367
Harrison, F., on political economy
and sociology, 112 w. j on the
operation of religious motives,
132 n. ; on the postulates of
political economy, 239 n.
Hedonics, 90 n.
Hildebrand, B., 20; 22 n.; 315 71.
Historical conception of political
economy, 308—321.
Historical illustrations, 267—273.
Historical method, 24, 5 ; 145 ;
266; 275—281; 308—321.
Historical method of definition,
165 71.
' Historical School,' the, 20 sqq. ;
145; 274; 308
* Historismus,' 309.
History and statistics, 199.
Hooper, W., on statistics, 326 ti.,
330, 1.
'Hypothetical,' application of the
term to deductive political
economy, 213—222.
Hypothetical precepts, 57 ; 78, 9.
Illustrative hypotheses, 224.
Incidence of taxes on commo¬
dities, 230,1.
Inconvertible currency, 133.
India, 77 ; 280 n. ; 295 n. ; 302,3 ;
354.
Indirect taxation, 166.
Induction and deduction, 27,8 ;
168,9 ; 190,1 ; 201 ; 204,5.
' Inductive,' use of the term, 200 ?i.
Inductive method, its varieties,
174,5.
Industrial legislation, art of, 59 ;
76 n.
Ingram, J. K., on political econ¬
omy and sociology, 26,7,112 n. ;
on the use of mathematics
in economic reasoning, 253;
on the historical method, 308,
315 n.
Intensification of demand, 261.
Interdependence of economic phe¬
nomena, 101 sqq. ; of physical
phenomena, 135.
Interest, payment of, 33 ; 288,9.
Intermixture of effects, 206.
International values, 242,3; 249;
312 n.
Introspection, 169.
' Iron law ' of wages, 291,2.
Jenkin, F., on the law of supply
and demand, 258 n.
Jevons, W. S., on applied poli¬
tical economy, 59 n. ; his de¬
scription of economics, 90 n. ;
his theory of consumption, 104
7^., 107 71., 109 ; his theory of
commercial crises, 133; on
abstract economics, 140 ; his
' Theory of Political Economy,'
141; on tentative legislation,
180 71.; on empirical know¬
ledge, 204 ; on the mathemati¬
cal character of political eco¬
nomy, 248 ; his use of algebraic
methods, 250 7i.; his theory
of utility, 261,2; on observa¬
tion, 281 ; on the first principles
of political economy, 306 n. ;
his ' Investigations in Currency
and Finance,' 334 n. ; on the
use of diagrams, 335 ; on fluc¬
tuations from an average, 362 n.
Johnson, W. E., on the chief de-
368
INDEX.
partments of economic science,
171 n. ; on the postulates of
political economy, 241 n.
Jones, Eichard, his reaction a-
gainst the doctrines of Eicardo,
21; on definitions in political
economy, 150,1 ; on history,
320.
' Just price,' 62, 8.
Kingsley, Charles, 42 n.
Knies, K., his doctrine of eco¬
nomic method, 20 sqq.; on
political economy as a social
science, 91 ; on the postulate
of self-interest, 122 sqq.; on
political economy and socio¬
logy, 186 n. ; on absolutism of
theory, 294; on Eoscher, 811
n.; on the historical concep¬
tion of political economy, 812,8;
his view of statistics, 824 n.
Laisser Faire, 25; 86 n.; 51;
67—74 ; 188 n.
Laveleye, E. de, his definition of
political economy, 75 n.; on
the consumption of wealth,
105 n., 107 71.
Laws and precepts, confusion
between, 86 n. ; 50, 1 ; 64,5 ;
70,1.
Legislation, 179,180.
Leroy-Beaulieu, P., on the con¬
sumption of wealth, 105 n.,
107 n.
Leslie, T. E. Clifie, on the method
of economics, 21 ; on the theory
of cost of production, 108 ; on
unproductive consumption, 106
n.; on the desire for wealth,
119 n. ; on the deductive method,
210 n. ; on the deductive econ¬
omist's theory of taxation, 281
n. ; on the application of ma¬
thematics to political economy,
258 ; on medieval society in
Germany, 296 ; on the deduc¬
tive and historical methods,
808 ; his use of the deductive
method, 811 ti. ; on the histori¬
cal method, 815 n.; on agri¬
cultural wages, 358 ; on the
effects of gold discoveries, 856.
Lewis, Sir G. Cornewall, 89 n. ;
59 7%. ; 186 71.
Lexis, W., on the consumption of
wealth, 105 w., 106 w.
List, E., on political economy
and cosmopolitical economy,
76 ; on the commercial su¬
premacy of Great Britain, 197 ;
his use of history, 282.
Logic, 85 7^.
Logic of political economy, 8 sqq.
Longe, F. D., 860 7^.
McCulloch, J. E., on govern¬
mental interference, 78,4; on
the consumption of wealth,
105 71., 106 71., 107 n.
Machinery, exportation of, 77.
Machinery and wages, 276—9.
Maine, Sir H. S., on sciences
founded on abstractions, 124 w.;
his method of investigation,
280 n. ; on competitive prices
in India, 295 n. ; on customary
prices, 299 ; on the economic
phenomena of the East, 802,8.
INDEX.
869
Malthus, T. R., his relation to
Adam Smith, 11 ; his defence
of the corn laws, 73 ; on defini¬
tions in political economy, 158 ;
his comparison between Norway
and Sweden, 187,8, 191; his
use of the inductive method,
202; his infiuence on subse¬
quent legislation, 287 ; his rela¬
tion to contemporary pheno¬
mena, 290 ; his use of statistics,
889.
Marshall, A., on the definition of
wealth, 94 n.\ on J. S. Mill,
115 n.\ on measurable motives,
126 n. ; on the wages of women,
181 n. ; on political economy
and sociology, 187 ; on the con¬
dition of the working classes
at the beginning of the century,
195 n, ; on the need of deductive
reasoning, 207 ; on the varia¬
tion in economic forces over
long periods, 221 n. ; his ' Prin¬
ciples of Economics,' 226 n.;
on Adam Smith, 228 n.; on
the function of a pure theory,
286 n. ; on the use of numerical
illustrations, 252 n. ; his contri¬
butions to the theory of value,
259 ; on the mutual dependence
of economic phenomena, 260;
his use of mathematics in po¬
litical economy, 262 n.; on
competition and custom, 272
7^. ; on the historian's need of
theory, 282 ; on the records of
the economic past, 820 7i. ; on
the graphic method of statis¬
tics, 884 n. ; on changes in the
K.
quality of commodities, 851 ;
on averages, 858, 9.
Mathematical character of poli¬
tical economy, 248 sqq.
Mathematical methods, 252—268.
Mather and Piatt, Messrs., their
experiment in the working of
an eight hours' day, 181 ; 184 n.
Mayr, G., on the science of sta¬
tistics, 827.
Measurable motives, 126 ; 169.
Medieval and modern prices, 268.
Menger, C., on the discussion of
method, 5 ; his doctrine of
economic method, 21 n.; on the
German historical school and
the dogma of self-interest, 128
; his relation to mathema¬
tical economics, 262 ; on ' his-
torismus,' 817 n.
Mercantile system, 289.
Method, 2,8.
Method of political economy, 80.
Mill, James, on the consumption
of wealth, 105 n., 106 n., 107
n., 109.
Mill, J. S., on the scope and
method of political economy,
11 sqq.; on the distribution of
wealth, 42 72. ; on the rule of
laisser faire, 74; on export
duties, 77; on political econo¬
my as a psychological science,
89 ; on capital, 102 n. ; on the
consumption of wealth, 109 n. ;
on political economy as an ab¬
stract science, 115 sqq. ; on
socialism, 181 ; on the prob¬
lem of sociology, 189 ; on the
' statics ' and ' dynamics ' of
24
370
INDEX.
political economy, 144; on defi¬
nitions, 152 ; on the method
of difference, 188, 194 n. ; on
peasant proprietorship, 202,3 ;
on the method of simple obser¬
vation, 206,7 ; on the deductive
method, 212 ; on the verifica¬
tion of deductive reasoning,
229; on international values,
242,8 ; his use of mathematical
conceptions, 249; his use of
numerical illustrations, 252 n. ;
on the applicability of mathe¬
matical principles, 252 ; his
treatment of variables as con¬
stants, 259 ; on economic pro¬
gress, 280.
Mobility of labour, 130; 304; 353.
Money, definition of, 165 ; 166 ;
value of, 159 n.
Monopoly, 68 ; 237.
Montague, F. C., 319
Moral forces, operation of, 40—44.
Moral science, 86.
Mouat, F. J., on statistical sci¬
ence, 324,5.
Mutual dependence of economic
phenomena, 207 ; 260,
Narrative economics, 170,1.
National economy, 99.
National economy, art of, 78.
Natural liberty, maxim of, 71.
New South Wales and Victoria,
189, 190 ; 192—4.
Nicholson, J. S., on Adam Smith,
73 n. ; on the definition of
wealth, 95 7Z. ; on the use of an
historical method of definition,
165 n. ; his treatise on ' Money,'
22872.; on general prices, 243 n.,
267 72.; on the effects of ma¬
chinery on wages, 276, 277 n, ;
on the effects of diminished
gold supplies, 357.
Normal value, 220,1.
Normative science, 34,5.
Norway and Sweden, 187,8 ; 191.
Numerical premisses, 252—6.
Observation, 169 sqq, ; 223—232.
Official statistics, 344,5 ; 347.
Over-production, 106; 306.
Owen, R., 181.
Palgrave, R. H. I., Dictionary of
Political Economy^ 22 n. ; 171
72. ; 241 72. ; 334 n.
Peasant Proprietorship, 18 ; 202,3.
Permissive legislation, 180.
Perpetualism of theory, 294 n.
Personal wealth, 98.
Petty, Sir W., 324 n.
Phear, Sir J. B., 302 72.
Philosophy of economic history,
279; 314—316.
Physical laws, 83—5.
Physiocrats, 290.
Plurality of causes, 206.
Political and social sciences, 91.
Political economy, 2 ; 53 ; 99,100.
Population, theory of, 108 ; 202.
Positive science, 34,5.
Post hoc ergo propter hoc, 8 ; 19572.;
282.
Postmen in India, 354.
' Pre-economic' periods, 302.
Premisses of deductive politica
economy, 236—9.
Price, Bonamy, 147 n.
INDEX.
371
Price, L. L., 227 n. ; on the mathe¬
matical and historical methods,
257 n.
Prices in the Middle Ages, 268,9 ;
297,8.
Production of wealth, 84,5 ;
101,2; 132; 177,8; 201.
Productive labour, 97,8.
Protective duty, 166.
Psychology, 46 ; 87—90.
Quantitative inductions, 833.
Quetelet, A., 322; 324 n.\ 333.
Eae, J., 73n.\ 74n.
Regulative science, 34.
Relativity of economic definitions,
163—167 ; of economic pre¬
cepts, 64,5 ; 299, 300 ; of eco¬
nomic theorems, 15 n. ; 24 ; 64 ;
141 ; 227 ; 274; 293 sqq, ; 312—
314 ; 320, 1.
Residues, method of, 177 7i,
' Revue de Belgique, ' 310 n.
Ricardian law of rent, 36 n. ; 296.
Ricardo, D., 5 ; his influence on
English political economy, 11 ;
on governmental interference,
73 ; his use of the deductive
method, 232—6 ; his treatment
of variables as constants, 259 ;
relation of his assumptions to
contemporary economic pheno¬
mena, 290—292.
Richmond, W., 61 n.
Robinson Crusoe, 87.
Rogers, J. E. Thorold, on defi¬
nitions in political economy,
151 n., 155; on medieval prices,
269 n. ; on the Statute of La¬
bourers, 271 n.; on supply and
demand in the Middle Ages,
297, 8 ; his ' History of Agri¬
culture and Prices, ' 349 ; on
the English labourer in the
fifteenth century, 356.
Roscher, W., on the scope and
method of political economy,
20 s^^.; on the consumption
of wealth, 105î^., 106 107?2.;
on the limits of the method of
abstraction, 127 ; his attitude
of moderation, 309—311.
Rümelin, G. von, 322 w.
Sax, E., on the method of poli¬
tical economy, 22 n. ; on the
ultra-historical view, 318.
Say, J.-B., on the consumption
of wealth, 105 ?i., 107 n.
Scheel, H. von, on the inductive
and deductive methods, 2Sn.;
on the scope of political econo¬
my, 38 ; on political economy
and sociology, 136 n.
Schmeitzel, M., 323 n.
Schmoller, G., on the scope and
method of political economy,
26, 7 ; on the abstract method,
309 ; on the historical concep¬
tion of political economy, 314,
318.
Schönberg, G., on the scope and
method of economics, 22 n. ; on
the aim of political economy,
81 ; on the nature of economic
laws, 85 n. ; on the influence
of legal conditions, 133 n. ; on
political economy and soci¬
ology, 136 n.
872
INDEX.
Science, S5n.; 39 n.; 147.
Science of political economy, 86 ;
58.
Scientific division of labour, 184 ;
818.
Scope of a science, 2.
Self-interest, motive of, 118 sqq.
Seligman, E. E. A., on the Ger¬
man historical school, 29 n. ;
on medieval prices, 297.
Senior, N. W., on the scope and
method of political economy,
11 sqq. ; on the consumption
of wealth, 104 n. ; on the non-
hypothetical character of poli¬
tical economy, 220 n. ; on the
premisses of political economy,
289 w. ; on the universal validity
of economic doctrines, 298.
Services, 95,6.
Sherbrooke, Lord, on general so¬
ciology, 187.
Sidgwick, H., on the method of
the older economists, 18 ; on
' speculative ' science, 84 n. ;
on science and art, 40 n. ; on
the recognition of a distinct art
of political economy, 56 n. ; on
Adam Smith, 78 n.; on the
scope of political economy as
an art, 80 ; on the inclusion of
services under income, 96 n.;
on distribution and exchange,
108 71. ; on the consumption of
wealth, 108 n. ; on the desire
for wealth, 121 n. ; on general
sociology, 188 n. ; on the dis¬
cussion of definitions, 152 ; on
the use of terms, 157 ; on the
premisses of political economy.
240 n. ; on the ambiguity of
* increase of demand,' 260 ; on
Cliffe Leslie and the historical
school, 812 n.
Slave labour, 18 ; 202.
Smith, Adam, his method of rea¬
soning, 10,11 ; his use of the
term ' science,' 85 n. ; his con¬
ception of political economy,
40 n, ; his attitude towards
laisser faire^ 72, 8 ; his purpose
in the ' Wealth of Nations,' 88,
9; his sparing use of definitions,
156 ; his use of history, 228 n.;
his influence on subsequent
legislation, 287; his relation to
contemporary phenomena, 290.
Smith, E. M., on the motive of
self-interest, 125 n. ; on the
inductive method in economics,
197 n. ; his use of the term
' inductive, ' 200 n. ; on statisti¬
cal science, 829, 80 ; on the use
of statistics, 844 n.
Social character of economics,
86 sqq.
Socialism, 52 ; 56 ; 69, 70 ; 81 ;
181.
Sociology and pohtical economy,
111—14; 184—9.
Socratic induction, 158.
Specific experience, method of,
168 ; 174 sqq.
Speculative science, 84 n.
Standard of comfort, 218 ; 270 ;
274.
State finance, art of, 59 ; 76 7z.;
80.
Statics of political economy,
148—6.
INDEX.
373
stationary state, 145 ; 221 n.
' Statistical Journal,' 344 n.
Statistics, derivation of the term,
822 n, ; science of, 322—32 ;
theory of, 325, 6, 362 ; method
of, 332—5; in economics, 336
—343.
Statute of Labourers, 271, 2.
Steuart, Sir James, 64.
Stirling, Hutchison, 71.
Strike of workmen, 245, 6.
Substitution, law of, 306 n.
Supply and demand, 41; 44 n.;
85,6; 249; 258 ; 298; 301;
307.
Sweden and Norway, 187,8; 191.
Taxation, art of, 59 ; 80 ; prob¬
lems of, 33, 4 ; 56 ; 108.
Taxes on commodities, incidence
of, 230,1.
Tentative legislation, 180.
Theoretical science, 34 n.
Thornton, W. T., on the law of
supply and demand, 258.
Thünen, J. H. von, 21 ; 127 n.
Toynbee, A., on the historical
method, 319.
Uniformities, ideals, and precepts,
35; 40.
Unproductive consumption, 106 w.
Utility, definition of, 93 ; theory
of, 90 n. ; 104 ; 109,10 ; 261, 2 ;
305.
Utilization of wealth, 104 w.
Validity of economic postulates,
238,9.
Value, 159 n.
Variables and constants, 258,9.
Venn, J., on illustrative hypo¬
theses, 224 n. ; on averages,
360 w., 361 n.
Verbal disputes, 152.
Verification, 228—232.
Victoria and New South Wales,
189, 190 ; 192—4.
Wages of women, 130,1.
Wages statistics, 345, 6 ; 352—
354; 355,6; 358,9.
Wagner, A., on the scope and
method of economics, 22 n.;
on the inductive and deductive
methods, 27,8 ; on the problems
of political economy, 37, 38
173 n. ; on the motive of self-
interest, 125 n. ; on economic
motives, 128 n. ; on observation
in political economy, 170 n.; on
induction in political economy,
223 n. ; on the postulates of po¬
litical economy, 237 n., 2á0n.;
his relation to the German
historical school, 310 n. ; on
historical evidence, 320 w.
Walker, F. A., on fallacious rea¬
sonings in political economy,
7,8 ; on the consumption of
wealth, 104 n., 106 n., 107 n. ;
on the wages of women, 131 n.;
his treatise on the ' Wages Ques¬
tion,' 141.
Walras, L., 105 n.; 107 n.; 202 n.
Wappäus, J. E., on the deriva¬
tion of 'statistics,' 322 ?z.; on
the nature of statistical science,
324 n.
INDEX.
374
Wealth, definition of, 92—8.
Wealth in a communistic society,
94.
Weighted statistics, 357, 8.
Whewell, W., on definitions.
154 w., 156,157 ; on the method
of curves, 334«., 335.
Wicksteed, P. H., 262 «.
Xenophon, 288.
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