Economics

Economics (from the Gr. οἰκονομική, sc. τέχνη, from οἶκος, a house, and νόμος, rule,—the “art of household management”), the general term, with its synonym “political economy,” for the science or study of wealth (welfare) and its production, applicable either to the individual, the family, the State, or in the widest sense, the world. How far the same considerations apply to all these spheres is one of the problems of economic thought in its widest sense. The term “economy” (q.v.) by itself, which should strictly mean the art of applying money (or wealth) wisely, has commonly come to mean the art of saving money, or spending as little as possible. In practice the study of “political” economy is mainly devoted to the sphere of the State; the welfare of the individual as a member of the State, and of the State in its relation to the world, being internal aspects of the prosperity of the State itself. Economics thus includes the discussion of all the numerous factors which make life profitable, whether to the nation or to the business, or to the individual man. It may be conceived either as an historical science (What principles have in fact paid?), or as an abstract science (What are the true principles which must pay, presupposing an ideal?). Economists at different times have studied both aspects, according to their lights, and influenced by historical conditions of philosophic thought. A text-book on economics necessarily deals, therefore, with the whole subject in a manner which need not here be followed, since separate articles are devoted in this work to the biographies of writers on economics, and also to the principal economic questions involved, under their own headings. In this article we propose therefore to confine ourselves to discussing the character and subject-matter of the science, indicating its relation to other sciences, and explaining the methods by which economists reach their conclusions.

We understand by economics the science which investigates the manner in which nations or other larger or smaller communities, and their individual members, obtain food, clothing, shelter and whatever else is considered desirable or necessary for the maintenance and improvement of the conditions of life. It is thus the study of the life of communities with special reference to one side of their activity. It necessarily involves the scientific examination of the structure and organization of the community or communities in question; their history, their customs, laws and institutions; and the relations between their members, in so far as they affect or are affected by this department of their activity.

At the root of all economic investigation lies the conception of the standard of life of the community. By this expression we do not mean an ideal mode of living, but the habits and requirements of life generally current in a community or grade of society at a given period. The standard of life of the ordinary well-to-do middle class in England, for example, includes not only food, clothing and shelter of a kind different in many respects from that of a similar class in other countries and of other classes in England, but a highly complicated mechanism, both public and private, for ministering to these primary needs, habits of social intercourse, educational and sanitary organization, recreative arrangements and many other elements. Many influences operating for a long period of time on the character and the environment of a class go to determine its standard of life. In a modern industrial community it is possible to express this standard fairly accurately for the purposes of economic investigation in terms of money (q.v.). But it is doubtful whether the most complete investigation would ever enable us to include all the elements of the standard of life in a money estimate. The character, tastes and capacity for management of different individuals and groups differ so widely that equal incomes do not necessarily imply identity of standard. In the investigation of past times, the incommensurate elements of well-being are so numerous that merely money estimates are frequently misleading. The conception of the standard of life involves also some estimate of the efforts and sacrifices people are prepared to make to obtain it; of their ideals and character; of the relative strength of the different motives which usually determine their conduct. But no carefully devised calculus can take the place of insight, observation and experience. The economist should be a man of wide sympathies and practical sagacity, in close touch with men of different grades, and, if possible, experienced in affairs.

It is evident that no permanent classification is possible of what is or is not of economic significance. No general rules, applicable to all times, can be laid down as to what phenomena must be examined or what may be neglected Character of subject-matter. in economic inquiry. The different departments of human activity are organically connected, and all facts relating to the life of a community have a near or remote economic significance. For short historical periods, indeed, many phenomena are so remotely connected with the ordinary business of life that we may ignore them. But at any moment special causes may bring into the field of economic inquiry whole departments of life which have hitherto been legitimately ignored. In times past, biblical exegesis, religious ideals, and ecclesiastical organization, the purely political aims of statesmen, chance combinations of party politics and the intrigues of diplomatists, class prejudice, social conventions, apparently sudden changes of economic policy, capricious changes of fashion—all these causes and many others have exerted a direct and immediate influence on the economic life of the community. In our own day we have had many illustrations of the manner in which special circumstances may at once bring an almost unnoticed series of scientific investigations into direct and vital relation with the business world. The economist must, therefore, not only be prepared to take account of the physical features of the world, the general structure and organization of the industry and commerce of different states, the character of their administration and other important causes of economic change. He must be in touch with the actual life of the community he is studying, and cultivate “that openness and alertness of the mind, that sensitiveness of the judgment, which can rapidly grasp the significance of at first sight unrelated discoveries or events.”

Some people are of opinion that the factors to be taken account of in economic investigation are so numerous that progress on these lines is impossible. It would certainly be impossible if we had to begin de novo to construct the whole fabric of economic science. But, as we shall see, it is no more necessary to do this in the world of science than it is in the world of business or politics. There is in existence a vast store of accumulated knowledge, and few, if any, departments of economics have been left quite unilluminated by the researches of former generations. Progress is the result of adaptation rather than reconstruction. It must be remembered also that economic work in modern times is carried on by consciously or unconsciously associated effort, and although it must always require high qualities of judgment, capacity and energy, many of the difficulties which at first sight appear so insuperable give way when they are attacked. In some ways also the study of highly developed organizations like the modern industrial state is simpler than that of earlier forms of society.

In the earliest times for which we have abundant material the economic life of England had already reached in certain directions a high degree of complexity. Even in the rural districts, manorial records reveal the existence of a great variety of classes and groups of persons engaged in the performance of economic functions. The lord of the manor with his officials and retainers, the peasantry bound to him by ties of personal dependence and mutual rights and obligations, constituted a little world, in which we can watch the play of motives and passions not so dissimilar as we are sometimes led to believe Ancient and modern conditions in England. from those of the great modern world. In many a country district the gradations of social rank were more continuous, the opportunities of intercourse more frequent, and the capacity for organization greater than in modern times. The manorial accounts were kept with precision and detail, and we are told that a skilled official could estimate to the utmost farthing the value of the services due from the villein to his lord. The manor was indeed self-sufficient and independent in the sense that it could furnish everything required by the majority of the inhabitants, and that over the greater part of rural England production was not carried on with a view to a distant market. But in the earliest times the manor was subjected to external influences of great importance. Vast areas of the country were in fact under the single control of a territorial lord or an ecclesiastical foundation. Every manor composing these great fiefs was likely to be affected by the policy or the character of the administration of the feudal lord, and he, again, by the policy or the difficulties, the strength or the weakness, of the central government. Foreign trade and foreign intercourse were undeveloped, but their influence was in historical times never entirely absent, while the influence of Roman law and the Christian Church constantly tended to modify the manorial organization. In the towns the division of labour had proceeded much further than in the rural districts, and there were in existence organized bodies, such as the Gild Merchant and the crafts, whose functions were primarily economic. But one of the most striking characteristics of town life in the middle ages was the manner in which municipal and industrial privileges and responsibilities were interwoven. In modern times the artisan, however well trained, efficient and painstaking he may be, does not, in virtue of these qualities, enjoy any municipal or political privileges. By means of his trade union, co-operative society or club he may gain some experience in the management of men and business, and in so far as the want of a sufficient income does not constitute an insuperable difficulty, he may share in the public life of the country. But in his character as artisan he enjoys no municipal or political privileges. In the middle ages this differentiation of the industrial, municipal and political life had not taken place, and in order to understand the working of at first sight purely economic regulations it is necessary to make a close study of the functions of local government. But this, after all, does not carry us very far. From the very nature of the records in which we study the town life of the middle ages, it follows that we obtain from them only a one-sided view. No one knows what proportion of the industrial population was included in the organized gilds, or how complete was the control exercised by these bodies over their members. Elaborate regulations were in force, but no one knows how elastic they were in practice. Medieval Englishmen were particularly apt to put their aspirations into a legal form, and then rest satisfied with their achievement. The number of regulations is scarcely to be regarded as a test of their administrative success. Further, as the country became more consolidated and the central government extended its authority over economic affairs, new regulations came into force, new organs of government appeared, which were sometimes in conflict, sometimes in harmony, with the existing system, and it becomes for a time far more difficult to obtain a clear view of the actual working of economic institutions. Thus the study of the economic life of the middle ages is one of the most complicated subjects which can engage the attention of man. It is impossible to carry the process of isolation very far. The different threads of social activity are so closely interwoven that we cannot follow any one for very long without forming wrong impressions, and it becomes necessary to turn back and study others which seemed at first sight unrelated to the subject of our investigations. Under an apparently uniform and stable system of social regulation there was much variation and movement, the significance of which it is impossible to estimate. Materials for forming such an estimate no doubt exist, but before doing so we have to study in infinite detail a vast number of separate manors, municipalities or other separate economic areas. This involves great industry on the part of many scientific workers. Meanwhile we can illustrate the economic life of the middle ages, describe its main features, indicate the more important measures of public policy and draw attention to some of the main lines of development.

It is only as we approach more modern times that the conditions of economic study are realized and economic science, as we understand it, becomes possible. Those conditions are: (i.) the life of the state or other community Conditions of economic science. or communities we are studying must be so differentiated that we can isolate those functions which are wholly or predominantly economic. The “separation of employments” is not only a condition of economic efficiency; it was necessary before we could have an economic science. (ii.) We must be in a position so far to understand and estimate the character and motives of different classes and groups in these communities that we can rightly interpret their action. This condition cannot be realized without great difficulty, for “economic motives” are very different in different periods, nations and classes, and even for short periods of time in the same country are modified by the influence of other motives of an entirely different order. In studying the economic history of the 18th century, for example, it is not enough to assume with Defoe that “gain is the design of merchandise.” We have to be saturated, as it were, with 18th-century influences, so that we can realize the conditions in which industry and trade were carried on, before we can rightly explain the course of development. In our own day labour disputes, to take another example, can scarcely ever be resolved into a question of merely pecuniary gain or loss. The significance of the amount of money involved varies greatly for different trades, and can only be understood by reference to the character and habits of the people concerned. But questions of sentiment, shop-feeling and trade customs invariably play an important part. (iii.) Economics can never lead to anything but hypothetical results unless we not only realize that we must “take account of” other than the purely economic factors, but also give due weight and significance to these factors. No explanation of the industrial situation in Germany, for example, would be intelligible or satisfactory even from the economic point of view which ignored the significance of the political conditions which Germans have to deal with. So, again, it is impossible to make a useful comparative estimate of the advantages and disadvantages of the transport systems of England, the United States and Germany, unless we keep constantly in view the very different geographical, military and political conditions which these systems have to satisfy. (iv.) Sufficient information must be available to enable us to test the validity of our hypotheses and conclusions. Whatever “method” of economic investigation we employ, we must at every stage see how far our reasoning is borne out by the actual experience of life. This obvious condition of scientific inquiry is very far from being completely realized even at the present time. It implies the existence of a well-trained class engaged in the work of collecting information, and much organization both by the state and private bodies. These four conditions can be reduced to two. The community we are studying must have reached such a stage of development that its economic functions and those immediately cognate to them form a well-defined group, and adequate means must be available so that we can, as it were, watch the performance of these functions and test our hypotheses and conclusions by observation and experience.

It is easy to understand, therefore, why we trace the beginnings of economics, so far as England is concerned, in the 16th century, and why the application of strict scientific tests in this subject of human study has become possible only in comparatively recent times. Medieval economics was little more than a casuistical system of elaborate and somewhat artificial rules of conduct. From the close of the middle ages until the middle of the 18th century thousands of pamphlets and other works on economic questions were published, but the vast majority of the writers have little or no scientific importance. Their works frequently contain information given nowhere else, and throw much light on the state of opinion in the age in which they wrote. It is also possible to find in them many anticipations of the views of the economists of later times; but such statements were as a rule generated merely by the heat of controversy on some measure or event of practical importance, and when the controversy died down were seldom regarded or incorporated in a scientific system. Trade bias, personal impressions and guesswork took the place of scientific method. This was inevitable in the absence of trustworthy information on an adequate scale, and from the immediately practical aims of the writers. But from the end of the 17th century economics has been definitely recognized as a subject of scientific study.

In modern times the conditions which have made economic science possible have also made it necessary. While it is impossible to give a strictly economic interpretation of the earlier history of nations, economic interests Necessity of economic science. so govern the life and determine the policy of modern states that other forces, like those of religion and politics, seem to play only a subsidiary part, modifying here and there the view which is taken of particular questions, but not changing in any important degree the general course of their development. This may be, in the historical sense, merely a passing phase of human progress, due to the rapid extension of the industrial revolution to all the civilized and many of the uncivilized nations of the world, bringing in its train the consolidation of large areas, a similarity of conditions within them, and amongst peoples and governments a great increase in the strength of economic motives. When the world has settled down to the new conditions, if it ever does so, we may be confronted with problems similar to those which our forefathers had to solve. But, for the time, if we know the economic interests of nations, classes and individuals, we can tell with more accuracy than ever before how in the long run they will act. Public policy therefore requires the closest possible study of the economic forces which are moulding the destinies of the great nations of the world. In most civilized countries except England this is recognized, and adequate provision is made for the study of economic science. But the subject is not only of immediate concern to the state in its corporate and public capacity. The neglect of it in the domain of private business can now only lead to disastrous results. To quote from a useful work (National Education: a Symposium, 1901), “the commercial supremacy of England was due to a variety of causes, of which superior intelligence, in the ordinary business sense, was not the most important. Her insular position, continuity of political development and freedom from domestic broils played an important part in bringing about a steady and continuous growth of industry and manufactures for several generations before the modern era. The great wars of the 18th and the beginning of the 19th century, which arrested the growth of continental nations, gave England the control of the markets of the world. When peace was restored, England enjoyed something in the nature of a monopoly. The competition of France ceased for a time to be an important factor. What is now the German empire was a mere congeries of small states, waging perpetual tariff wars upon each other. In the old Prussian provinces alone there were fifty-three different customs frontiers, and German manufactures could not develop until the growth of the Zollverein brought with it commercial consolidation, internal freedom and greater homogeneity of economic conditions. The industries of the United States were in their infancy. Thus the productive power of England was unrivalled, and her manufactures and business men, under a régime rapidly approximating to complete freedom of trade, could reap the full advantages to be derived from the possession of great national resources and production by machinery. Commercial supremacy required not so much highly trained intelligence amongst manufacturers and merchants as keen business instinct and a certain rude energy. In the last generation all that has changed, and the change is of a permanent character. The struggle of the future must inevitably be between a number of great nations, more or less equally well equipped, carrying on production by the same general methods, each one trying to strengthen its industrial and commercial position by the adoption of the most highly developed machinery, and all the methods suggested by scientific research, policy or experience. Under these conditions, it is no longer possible for the individual merchant, or for small groups of merchants, to acquaint themselves, by personal experience alone, with more than a fractional part of the causes which affect the business in which they are engaged. The spread of the modern industrial system has brought with it the modern state, with its millions of consumers, its vast area, its innumerable activities, its complicated code of industrial and commercial law. At the same time, the revolution in the means of transport and communication has destroyed, or is tending to destroy, local markets, and closely interwoven all the business of the world. Events in the most distant countries, industrial and commercial movements at first sight unrelated to the concerns of the individual merchant, now exert a direct and immediate influence upon his interests. The technical training of the factory or the office, the experience of business, the discharge of practical duties, necessary as they are, do not infallibly open the mind to the large issues of the modern business world, and can never confer the detailed acquaintance with facts and principles which lie outside the daily routine of the individual, but are none the less of vital importance.” Economics, therefore, under modern conditions, is not only a subject which may usefully occupy the attention of a leisured class of scientific men. It should form part of the training of educated men of all classes, on grounds of public policy and administrative and business efficiency.

The relations between economics and other sciences cannot be stated in a very general form. They vary for different periods, and are not the same for all branches of economics. There is no subject of human study which Relations between economics and other sciences. may not be at some time or other of economic significance, and anything which affects the character, the ideals or the environment of man may make it necessary to modify our assumptions and our reasoning with regard to his conduct in economic affairs. But if the economist, while studying one side of man’s activities, must also cultivate all other branches of human learning, it is obvious that no substantial progress can be made. The economist frankly assumes the reality of the existing world and takes men as they are, or as they have been if he is studying past times. His assumptions are based upon ordinary observation and experience, and are usually accurate in proportion to his practical shrewdness and sagacity, so that he is not interested in the speculative flights of philosophy, except in so far as they influence or have influenced conduct. In times past, and to a less extent in our own day, philosophical conceptions have formed the basis of great systems of politics and economics. The historical relations between philosophy and economics are of great importance in tracing the development of the latter, and have done much to determine its present form. But the modern conception of society or the state owes more to biology than philosophy, and actual research has destroyed more frequently than it has justified the assumptions of the older philosophical school. Experimental psychology may in course of time have an important bearing on economics, but the older science cannot be said to be of much significance except in its historical aspects. Ethics is in much the same position. That is, it is possible to conceive of an ethical science which would extend considerably our knowledge of economic affairs, but no important new principle or original discovery, relevant to economic investigation, has come from that quarter in recent years, and at present ethics has more to learn from economics than the latter has from ethics. It is in the adaptation of biological conceptions and methods, in the positive contributions of jurisprudence, law and history, in the rigorous application, where possible, of quantitative tests, that the explanation of the present position of economics is to be found. Mathematics has influenced the form and the terminology of the science, and has sometimes been useful in analysis; but mathematical methods of reasoning, in their application to economics, while possessing a certain fascination, are of very doubtful utility.

There is no method of investigation which is peculiarly economic or of which economics has the monopoly. In every age economists have applied the methods ordinarily in use amongst scientific men. There would probably Method of economic investigation. have been no controversy at all on this subject but for the fact that economics was elaborated into systematic form, and made the basis of practical measures of the greatest importance, long before the remarkable development in the 19th century of historical research, experimental science and biology. The application of the a priori method in economics was an accident, due to its association with other subjects and the general backwardness of other sciences rather than any exceptional and peculiar character in the subject-matter of the science itself. The methods applied to economics in the 18th and the early part of the 19th century were no more invented with a special view to that subject than the principles of early railway legislation, in the domain of practical policy, were devised with a special view to what was then a new means of transport. As a matter of fact, discussions of method and the criticism of hypotheses and assumptions are very rarely found in early economic works. It is only by reference to the prevailing ideas in philosophy and politics that we can discover what was in the minds of their authors. The growth of a science is much like the growth of a constitution. It proceeds by adaptation and precedent. The scientific and historical movement of the 19th century was revolutionary in character. When it began to affect economics, many people were afraid that the whole fabric of science would be destroyed and the practical gains it had achieved, jeopardized. These fears were justified, in so far as those who entertained them shut their eyes to everything new and assumed an attitude of no compromise. Where the newer methods were assimilated, the position of economics was strengthened and its practical utility increased. General discussion of method, however, is rarely profitable. In all branches of economics, even in what is called the pure theory, there is an implied reference to certain historical or existing conditions of a more or less definite character; to the established order of an organized state or other community, at a stage of development which in its main features can be recognized. In all economic investigation assumptions must be made, but we must see that they are legitimate in view of the actual life and character of the community or communities which are the subject of investigation. In common with other sciences, economics makes use of “abstractions”; but if for some problems we employ symbolic processes of reasoning, we must keep clearly in view the limits of their significance, and neither endow the symbols with attributes they can never possess, nor lose sight of the realities behind them. Every hypothesis must be tested by an appeal to the facts of life, and modified or abandoned if it will not bear examination, unless we are convinced on genuine evidence that it may for a time be employed as a useful approximation, without prejudice to the later stages of the investigation we are conducting.

We shall best illustrate the character and method of economic reasoning by examples, and for that purpose let us take first of all a purely historical problem, namely, the effect on the wage-earners of the wages clauses of the Statute of An illustration of economic method. Apprenticeship (1563). It is at once obvious that we are dealing not with an abstract scheme of regulation in a hypothetical world, but with an act of parliament nominally in force for two hundred and fifty years, and applicable to a great variety of trades whose organization and history can be ascertained. The conclusions we reach may or may not modify any opinions we have formed as to the manner in which wages are determined under modern conditions. For the time being such opinions are irrelevant to the question we are investigating, and the less they are in our minds the better. There is no reason why we should apply to this particular act a different method of inquiry from that we should apply to any other of the numerous acts, of more or less economic importance, passed in the same session of parliament. The first step is to see whether there is a prima facie case for inquiry, for many acts of parliament have been passed which have never come into operation at all, or have been administered only for a short time on too limited a scale to have important or lasting results. The justices were authorized to fix wages at the Easter quarter sessions. Did they exercise their powers? To answer this question we must collect the wages assessments sanctioned by the magistrates. This is a perfectly simple and straightforward operation, involving nothing more than familiarity with records and industry in going through them. Without having recourse to any elaborate process of economic reasoning, by confining our attention to one simple question, namely, what happened, we can establish conclusions of the greatest interest to economic historians and, further, define the problem we have to investigate. We can show, for example: (1) that the Statute of Apprenticeship did not stand alone; it was one of a long series of similar measures, beginning more than two centuries before, which in their turn join on to the municipal and gild regulations of the middle ages; one of an important group of statutes, more or less closely interwoven throughout their history, administered by local authorities whose functions had grown largely in connexion with this legislation and the gradual differentiation of the trades and callings to which it related. (2) That wages were regulated with much greater frequency during the reigns of Elizabeth, James I. and Charles I. than at any later period. (3) That they were regulated in some counties and not in others. (4) That in the counties and towns where they were regulated the action of the magistrates was in general spasmodic, and rarely continuous for a long series of years. (5) That the magistrates used their powers sometimes to raise wages, sometimes to force them down. (6) That the local variations of wages and prices were what we should call excessive, so that the standard of comfort in one district was very different from that of others. (7) That the wages assessments group themselves round certain short periods, coincident in many instances with high prices, increase of poverty, and other causes of exceptional action. (8) That what we may call, with the above limitations, the effective period of the act terminates with the outbreak of the Civil War. (9) That subsequent to that period organic changes in the industries affected, coupled with the incompetence of parliament to adapt the old legislation to new conditions, and the growing acceptance of the doctrine of laissez faire, brought about a general disuse of the statute, though isolated attempts to enforce it were made and new acts applicable to certain trades were passed in the 18th century. (10) For more than one hundred years before the repeal of the act, trade unions and other forms of voluntary association amongst wage-earners, combinations amongst employers, collective agreements, customary regulations, were established in many of the important trades of the country. But these conclusions, after all, suggest more difficulties than they remove, for they show that our inquiry, instead of presenting certain well-marked features which can be readily dealt with, has to be split up into a number of highly specialized studies: the investigation of rates of wages, prices and the standard of comfort in different localities, bye-industries, regularity of employment, the organization of particular trades, the economic functions of local authorities, apprenticeship and a host of other subjects. Moreover, all these subjects hang together, so that it seems impossible to come to a decision about one of them without knowing all about the others.

It is a comparatively simple thing to state the question to which we want an answer, but extremely difficult to define the exact nature of the evidence which will constitute a good answer; easy enough to say we must try hypothesis after hypothesis, and test each one by an appeal to the facts, but a man may easily spend his life in this sort of thing and still leave to his descendants nothing more than a legacy of rejected hypotheses. Every volume of records we look through contains a mass of detailed information on the economic life of England in the period we are studying. How much of it is relevant to the subject of inquiry? What is to be the principle of selection? How shall we determine the relative weight and importance of different kinds of relevant evidence? As in modern problems, so in those of past times, a man requires for success qualities quite distinct from those conferred by merely academic training and the use of scientific methods. A correct sense of proportion and the faculty of seizing upon the dominant factors in an historical problem are the result partly of the possession of certain natural gifts in which many individuals and some nations are conspicuously wanting, partly of general knowledge of the working of the economic and political institutions of the period we are studying, partly of what takes the place of practical experience in relation to modern problems, namely, detailed acquaintance with different kinds of original sources and the historical imagination by which we can realize the life and the ideals of past generations. These qualities are required all the more because, in order to make any further progress with such an inquiry as we have suggested, we have deliberately to make use of abstraction as an instrument of investigation.

Let us see how this will work out. Suppose we have selected one of the numerous subsidiary problems suggested by the general inquiry, and obtained such full and complete information about one particular industry that we The plan of a general theory. can tabulate the wages of the workers for a long series of years. We may do the same for other industries, some of them coming under the Statute of Apprenticeship, others not. If all the industries belong to one economic area over which, so far as we can tell from general statistics of wages and prices, and other information, fairly homogeneous conditions prevailed, we may be able to reach some useful conclusions as to the operation of the act. But it would be absurd to suppose that we could reach those conclusions by simple reference to the trades themselves. We cannot assume that the fluctuations in wages were due to the action or inaction of magistrates without the most careful examination of the other influences affecting the trades. In economic affairs the argument post hoc propter hoc never leads to the whole truth, and is frequently quite misleading. We cannot suppose that the policy of the Merchant Adventurers’ Company had nothing to do with the woollen industry; that the export trade in woollen cloth was quite independent of the foreign exchanges and international trade relations in those times; that the effect on wages of the state of the currency, the influx of new silver, the character of the harvests, and many other influences can be conveniently ignored. In studying, therefore, such an apparently simple question as the effect of an act of parliament on wages in a small group of trades we want a general theory which we can use as a kind of index of the factors we have to consider.

Assuming that we have in our minds this safeguard against loose thinking and neglect of important factors, the investigation of the special problems arising out of the general inquiry resolves itself into a careful definition of each Difficulties due to want of evidence. problem we wish to deal with, and the collection, tabulation and interpretation of the evidence. In most cases the interpretation of the facts is far from obvious, and we have to try several hypotheses before we reach one which will bear the strain of a critical examination in the light of further evidence. But at this stage in historical investigation it is generally the want of evidence of a sufficiently complete and continuous character, rather than difficulties of method, which forces us to leave the problem unsolved. It is, for instance, practically impossible to obtain reliable evidence as to the regularity of employment in any industry in the 17th century, and the best approximations and devices we can invent are very poor substitutes for what we really want. For this reason guesswork must continue to play an important part in economic history. But every genuine attempt to overcome its difficulties brings us into closer touch with the period we are examining; and though we may not be able to throw our conclusions into the form of large generalizations, we shall get to know something of the operation of the forces which determined the economic future of England; understand more clearly than our forefathers did, for we have more information than they could command, and a fuller appreciation of the issues, the broad features of English development, and be in a position to judge fairly well of the measures they adopted in their time. By comparing England with other countries we may be able in the distant future to reach conclusions of some generality as to the laws of growth, maturity and decay of industrial nations. But like the early statisticians of the 17th century, economic historians are the “beginners of an art not yet polished, which time may bring to more perfection.”

When we come to exclusively modern questions, there is no reason or necessity for a fundamental change of method. We cannot suppose that there occurred, at or about the commencement of the 19th century, a breach of The investigation of modern questions. historical continuity of such a character that institutions, customs, laws and social conventions were suddenly swept away, the bonds of society loosened, and the state and people of England dissolved into an aggregate of competing individuals. The adoption of machinery gradually revolutionized the methods of production; but in the first instance only certain industries were affected, and those not at the same time or in the same degree; old laws grown obsolete were repealed, but other laws affecting wage-earners and employers took their place, more complicated and elaborate than the Elizabethan code. Trade unions, so far from disappearing, were legalized, gathered strength from the changes in industrial organization, and nowhere became so powerful as in the most progressive industries; while other forms of combination appeared, incomparably stronger, for good or evil, than those of earlier times. But while we recognize these facts, we must not suppose that we have to study the action of men as though they were all enrolled in organized associations, or covered by stringent laws which were always obeyed. There has never been in the history of English industry such licence as we find in certain directions in the earlier part of the 19th century.

It is not in the decay of combination and monopoly or in the growth of competition that we must look for the distinctive characteristics of modern problems. A 17th-century monopoly was a very weak and ineffective instrument compared The distinctive features of modern problems. with a modern syndicate; the Statute of Apprenticeship was certainly not so widely enforced as the “common rules” of trade unions; and many of the regulations of past times, which look so complicated to modern eyes, were conditions of free enterprise rather than restraints upon it. It is due to the influence of the laisser faire doctrine that we regard law and regulation as a restraint on liberty. As a maxim for guidance in public affairs, laisser faire was genuinely relevant at the end of the 18th and the beginning of the 19th century, when the Statute Book was cumbered with vexatious and obsolete laws. As an explanation of what has taken place in later years, or of the actual economic life of the present day, it is ludicrously inadequate. Competition, in the sense in which the word is still used in many economic works, is merely a special case of the struggle for survival, and, from its limitation, does not go far towards explaining the actual working of modern institutions. To buy in the cheapest market and sell in the dearest; to secure cheapness by lowering the expenses of production; to adopt the less expensive rather than the more expensive method of obtaining a given result—these and other maxims are as old as human society. Competition, in the Darwinian sense, is characteristic not only of modern industrial states, but of all living organisms; and in the narrower sense of the “higgling of the market” is found on the Stock Exchange, in the markets of old towns, in medieval fairs and Oriental bazaars. In modern countries it takes myriads of forms, from the sweating of parasitic trades to the organization of scientific research. Economic motives, again, are as varied as the forms of competition, and their development is coeval with that of human society. They have to be interpreted in every age in relation to the state of society, the other motives or ideals with which they are associated, the kind of action they inspire, and the means through which they operate. Apparently the same economic motives have led in the same age and in the same nation to monopoly and individual enterprise, protection and free trade, law and anarchy. In our own time they have inspired both the formation of trade combinations and attempts to break them up, hostility to all forms of state interference and a belief in collectivism.

The conditions which are peculiar to the modern world are the large numbers we have to deal with, the vast and fairly homogeneous areas in which justice is administered and property secured, and the enormously increased facilities for transport and communication. These conditions are of course not independent of each other, and they have brought in their train many consequences, some good and some bad. But they supply the bases for that general theory which, as we have seen, is indispensable in economic investigation. From the standpoint of general theory economic movements assume an impersonal character and economic forces operate like the forces of nature. Although economic motives have become more complex, they have just as much and no more to do with general economic reasoning and analysis than the causes of death with the normal expectation of life, or domestic ideals with the birth-rate. So far as we have anything to do with psychology at all, it is the psychology of crowds and not of individuals which we have to consider. If we study the economy of a village, the idiosyncrasies of every individual in it are of importance. If the village is replaced by a large area, inhabited by millions, with modern facilities of communication, it is a matter of observation and experience that for the purposes of general reasoning the idiosyncrasies of individuals may be neglected. Whether such large numbers have the character of the “economic man” of the early economists matters very little. All the assumptions we require are furnished by observation of people in the mass and the larger generalizations of statistics. Thus we can construct a kind of envelope of theory, which, by careful testing as we proceed, can be made to indicate in a general manner the reactions of one part of the activities of the economic world upon the others, and the interdependence of the several parts. From its very nature this general theory can never correspond strictly to the actual life and movement of any given state. It is useful and necessary, and plays somewhat the same part in economic investigation as ton-mile statistics do in the administration of a railway. To express in any language or to illustrate by any images, from a purely objective standpoint, the infinitely complicated movements of the actual world, is a task far beyond human capacity.

With the aid of this general theory the methods we have sketched in relation to historical problems apply with greater force to the special problems of modern times, and are rewarded with results more accurate, more fruitful, Application to modern problems. more relevant to difficulties which all civilized nations have to face, than those of historical research. To many minds the interest and usefulness of economics depend entirely on the application of these methods, for it is the actual working of economic institutions about which the statesman, the publicist, the business man and the artisan wish to know. Under the conditions we have described, many of the most interesting problems of our own time, when they are once defined, resolve themselves into statistical inquiries. But in most cases such an inquiry cannot be successfully carried out by a mere statistician. Definite economic problems can very rarely be dealt with by merely quantitative methods. In the tabulation and interpretation of statistical evidence, as in its collection, it is scarcely possible to overrate the importance of wide knowledge and experience. There is another very important instrument of investigation which can be used in our own time, but cannot be employed in historical research. Historical documents, however detailed, rarely show all the factors we have to deal with or fully explain a given situation. No sane person would suppose that the minutes of a modern legislative body explain the steps by which legislation has been passed, or the issues really involved. The ostensible cause of a modern labour dispute is frequently not the real or the most important cause. In modern problems we can watch the economic machine actually at work, cross-examine our witnesses, see that delicate interplay of passions and interests which cannot be set down or described in a document, and acquire a certain sense of touch in relation to the questions at issue which manuscripts and records cannot impart. We can therefore substitute sound diagnosis for guesswork more frequently in modern than in historical problems.

What then, it may be asked, becomes of the “old Political Economy”? Of what possible use are the works of the so-called classical writers, except in relation to the history of economics and the practical influence of theory in past times? If we take the mere popular view of what is meant by the “old Political Economy,” that is, that a generation or so ago economics was comprised in a neatly rounded set of general propositions, The “old political economy.” universally accepted, which could be set forth in a text-book and learnt like the multiplication table, it is not incumbent on the present generation to define its attitude at all. In this sense of the words, there was no faith delivered to our fathers which we are under any obligation to guard or even explain. If by the “old Political Economy” we mean the methods and conclusions of certain great writers, who stood head and shoulders above their contemporaries and determined the general character of economic science, we are still under no obligation to define the attitude of the present generation with regard to them. The fact that Adam Smith, with the meagre materials of the 18th century at his disposal, saw his way to important generalizations which later research has established on a firm basis, may enhance greatly the reputation of Adam Smith, but does not strengthen the generalizations. They stand or fall by the strength of the evidence for or against them. In the history of economics or the biography of Ricardo it is of interest to show that he anticipated later writers, or that his analysis bears the test of modern criticism; but no economist is under any obligation to defend Ricardo’s reputation, nor is the fact that a doctrine is included in his works to be taken as a demonstration of its truth. The appeal to authority cannot be permitted in economics any more than in chemistry, physics or astronomy. But the cases stated above suggest more or less false issues. There has been no revolution in economic science, and is not likely to be any. The question we have really to determine is how we can make the best use of the accumulated knowledge of past generations, and to do that we must look more closely into the economic science of the 19th century.

Any one who has taken the trouble to trace the history of one of the modern schools of economists, or of any branch of economic science, knows how difficult it is to say when it began. “Anticipations” of method and doctrine can generally be found by the diligent investigator in the economic literature of his own or a foreign country. So that cross-sections of the stream of economic thought will reveal the existence, at different times, in varying proportions and at different stages of development, of most of the modern “schools.” Again, the classification of an economic bibliography at once shows how varied has been the character of economic investigation, ranging from the most abstract speculation on the one hand to almost technical studies of particular trades on the other. Of the great army of writers who flourished in the first half of the 19th century some were closely identified with the utilitarian school, and the majority were influenced in a greater or less degree by the prevailing ideas of that school. Others, however, were hostile to it. In many works, such as those of a statistical or historical character, there are frequently to be found passages which could have been written in no other period, but are only of the nature of ejaculations and do not affect the argument. In stating the position of economics during this time we cannot ignore all writers, except these who belonged to one group, however eminent that group may have been, simply because they did not represent the dominant ideas of the period, and exercised no immediate and direct influence on the movement of economic thought. We must include the pioneers of the historical school, the economic historians, the socialists, the statisticians, and others whose contributions to economics are now appreciated, and without whose labours the science as we know it now would have been impossible. If we take this broadly historical view of the progress of economics, it is obvious that even in England there was no general agreement, during the 19th century, as to the methods most appropriate to economic investigation.

Suppose, now, we ignore the writers who were inaugurating new methods, investigating special problems or laboriously collecting facts, and concentrate attention on the dominant school, with its long series of writers from Adam Smith to John Stuart Mill. It is the work of these writers which people have in mind when they speak of the “old Political Economy.” There are several quite distinct questions we can ask with regard to them. That they must be studied closely by every one who wishes to follow the history of economics goes without saying. That they must be studied by the economic historian is equally clear, owing to their practical influence and the fact that they furnished the theoretical bases of much of the economic policy of the 19th century. This is true whether their method is good or bad, whether their conclusions are true or false. It is not so easy to determine their relevance and usefulness in relation to distinctively modern problems, or to indicate within what limits their work is of permanent value, and we can only deal with these questions in their more general aspects.

It must be clear to every observer that the economists of the classical period, with the one exception of Adam Smith, will speedily share the fate of nearly all scientific writers. They will be forgotten, and their books will not be read. Adams Smith’s Wealth of Nations, if it has ever been, has long ceased to be a scientific text-book. Whether a modern economist accepts his views or not is of no importance. There is probably not a single chapter in the Wealth of Nations which would be thoroughly endorsed by any living economist. But the reputation of the book and its author is quite independent of considerations of this kind. The Wealth of Nations is one of the great books of the world, many of the sayings of which are likely to be more frequently quoted in the future than they have been in the 19th century. Malthus is already an author whose name is probably more widely known than that of any other economist, but whose works are rarely read, and studied only by a small proportion of the few people who write books on the history of economic theory. Of economic students, many are unaware of the fact that he wrote any other book than the Essay on the Principle of Population, and what is of permanent importance in that work is contained in the generalization which it suggested to Darwin. Moreover, modern economists, while accepting in the main the general tenor of Malthus’s theory of population, would not agree with his statement of it. Like Malthus, Ricardo owes his reputation very largely to the theory associated with his name, though it has long ceased to be stated precisely in the terms he employed. But there are very few people in the world who have made a careful study of his works; and although his theory of rent has a wide and increasing application in economics, it is not comparable in general scientific importance with Malthus’s theory of population. It is already impossible to take J.S. Mill’s Principles of Political Economy as a text-book. Important as it was for thirty or forty years, it will soon be as little read as M’Culloch’s Principles. For the rest of the economists of this period, it is difficult to see how they can escape oblivion. When the generation whose economic training was based upon J.S. Mill has died out, the relevance of the “old Political Economy” is not likely to be a question of any interest to ordinary educated men and women, or even to the great mass of economic students.

The explanation of this decay of interest does not lie upon the surface. It is frequently supposed that the influence of the “old Political Economy” has been gradually undermined by the attacks of the historical school. But great as the achievements of this school have been, it has not developed any scientific machinery which can take the place of theory in economic investigation. If our view is correct that, broadly speaking, the two ways of regarding economic questions are complementary rather than mutually exclusive, there does not seem to be any reason why the growth of the historical school should have been destructive of the “old Political Economy” if it had been well founded. The use of the historical method has, in fact, raised more reputations than it has destroyed, because by keeping carefully in view the conditions in which economic works have been written, it has shown that many theories hastily condemned as unsound by a priori critics had much to be said for them at the time when they were propounded. This observation is true not only of old-world writers like the Mercantilists, but also of Ricardian economics. No one is concerned to prove that the Ricardian economics applies to the manorial system, and it is generally supposed at any rate that the world has been approximating more and more nearly during the last century to the conditions assumed in most of the reasoning of that school. On the principles we have explained, therefore, the Ricardian economics should supply just that body of general theory which is required in the investigation of modern economic problems, and the reputation of at any rate the leading writers should be as great as ever. It would be of immense advantage from a scientific point of view if this could be taken for granted, if for a time the work of the classical economists could be considered final so far as it goes, and for the purposes of investigation regarded as the theoretical counterpart of the modern industrial system. This assumption, however, has been made quite impossible, not by the historical school, but by the criticism and analysis of economists in the direct line of the Ricardian succession.

Modern economic criticism and analysis has destroyed the authority of the “old Political Economy” as a scientific system. The assumptions, the definitions, the reasoning, the conclusions of the classical writers have been ruthlessly overhauled. Defects in their arguments have been exposed to view by those who are most concerned to defend their reputation. Writers with none of the prejudices of the historical school, but with the cold and remorseless regard for logic of the purely objective critic, have pointed out serious inconsistencies here, the omission of important factors there, until very little of the “old Political Economy” is left unscathed. In fact, there never was a scientific system at all. What was mistaken for it was fashioned in the heat of controversy by men whose interests were practical rather than scientific, who could not write correct English, and revealed in their reasoning the usual fallacies of the merely practical man. So the “old Political Economy” lies shattered. It is useless to suppose that this destructive criticism from within can be neutralized by generously sprinkling the pages of the classical writers with interpretation clauses. This may serve to show that the ideals of our youth were not without justification; but the younger generation, which does not care about our ideals, and looks to the future rather than the past, will not read annotated editions of old books, however eminent their authors. If the Ricardian school of economists had been merely philosophers, or even a group like the French physiocrats, this state of things might be regarded with equanimity. We might assume that criticism and analysis had separated the wheat from the chaff in their writings, that everything of permanent value had probably been preserved and incorporated in the works of later economists. But the character of much of their work makes this assumption impossible. It is, in fact, quite true that many of them were more interested in practical aims than in the Ricardo’s limitations. advancement of economic science. We may talk of the assumptions implicitly involved in Ricardo’s works. In reality we do not know what those assumptions were; we only know what assumptions we should make in order to reach the same conclusions, and they may be very different from “the mind of Ricardo.” Ricardo’s works, in fact, do not explain a theoretical system, but contain the matured reflections, more or less closely reasoned, of a man of great mental power looking out on the world as it appeared to a business man experienced in affairs. The conclusions of such a work are of wider significance than the assumptions we attribute to the author would warrant. They are not expressed in terms which satisfy our canons of scientific accuracy. Dissected sentence by sentence, the book may be shown to be a mass of inconsistencies. If it has the misfortune to be systematized by an enthusiastic but dull and incompetent disciple, it may appear even absurd. But after all the misinterpretation of contemporaries and the destructive criticism of later times, the book as a whole leaves upon us an impression of peculiar strength and charm, and imparts a sense of the relations of things truer, because less mechanical, than the laboured reasoning of smaller men. Such is the character of much of the work of Ricardo and some of his contemporaries. We think that the decay of interest in these writers involves a real loss, and that students of modern problems may do worse than read Ricardo and his school. Some of the criticism of their works, necessary and useful as it has been, will probably be corrected later on by that breadth of view and sense of proportion which has enabled us to appreciate justly the achievements of lesser men in more remote times. But rehabilitation in accordance with the canons of historical justice will not restore the lost influence of the Ricardian school. Their achievements in the 19th century will be fully acknowledged, but the relevance of their work to the problems of the 20th century will be admitted less than at the present time.

In a subject like economics it must always be very difficult to decide how far a departure from the traditional form and expression of its main doctrines is necessary or desirable. No one who is really experienced in economic Economics a conservative science. investigation cares to emphasize the originality, still less the revolutionary character of his own work. It is much more likely than not that some principle which for the moment seems new, some distinction which we may flatter ourselves has not been observed before, has been pointed out over and over again by previous writers, although, owing to special circumstances, it may not have received the notice it deserved. Economics is therefore, on the whole, an intensely conservative science, in which new truths are cautiously admitted or incorporated merely as extensions or qualifications of those enunciated by previous writers. This procedure has its advantages, but it may easily become dangerous by destroying the influence of the science it is meant to preserve. It is not unlike the procedure of the canonists and casuists of the middle ages with regard to the doctrine of usury, by which the doctrine was to all appearances preserved intact while in reality it was stripped of all its original meaning by innumerable distinctions “over-curious and precise.” In the same way the doctrines of the classical economists may be adapted by interpretation clauses and qualifications the exact force of which cannot be tested or explained, so that we do not know whether the original proposition is to be considered substantially correct or not. The result will be that while the doctrines are apparently being brought into closer correspondence with the facts of life, they will in reality be made quite useless for practical purposes or economic investigation. It is easier to point out the danger than to suggest how it should be met. The position we have described is no doubt partly due to the unsettlement of economic opinion and the hostile criticism of old-established doctrines which has characterized the last generation. Or it may be the result of economic agnosticism, combined with unwillingness to cut adrift from old moorings. Whatever the cause, the complete restatement of economic theory, which some heroic persons demand, is clearly impossible, except on conditions not likely to be realized in the immediate future. The span of life is limited; the work requires an extensive knowledge of the economic literature of several countries and the general features of all the important departments of modern economic activity. In general theory special studies by other men cannot play the same part as they do in historical and statistical work. In historical and statistical investigation, or in special studies of particular subjects, it is possible, given the pecuniary means, to organize a whole army of skilled assistants, and with ordinary care to combine the results of their separate efforts. In general theory the inverse rule seems to prevail. There the unity of conception and aim, the firm grip of all the different lines of argument and their relation to each other, which are required, can only be given by a single brain. But no one individual can do original work over the whole field. He is lucky if he can throw new light on a few old propositions. For the rest, he can only, with the utmost caution, adopt the suggestions of other minds as qualifications of old doctrines, never feeling quite sure that he is right in doing so. A complete restatement could only be undertaken by a group of men, trained in much the same conditions, accustomed to think and work together, each one engaged on a special department, but all acting under the control of one master-mind. This is largely a question of the organization of economic studies, and it is of the greatest importance that, if possible, such an effort should be made to present in a connected form the best results of modern criticism and analysis.

Economics is unlike many other sciences in the fact that its claim to recognition must be based upon its practical utility, on its relevance to the actual life of the economic world, on its ability to unravel the social and economic Some recent developments of economic theory. difficulties of each generation, and to contribute to the progress of nations. The very effectiveness of modern criticism and analysis, which has brought great gains in almost all branches of economic theory, has made the science more difficult as a subject of ordinary study. The extensions, the changes or the qualifications, of old doctrines, which at any rate in the works of responsible writers are rarely made without good if not always sufficient reason, have modified very considerably the whole science, and weakened the confidence of ordinary educated men in its conclusions. In the case of many subjects this would matter very little, but in that of economics, which touches the ordinary life of the community at so many points, it is of great importance, especially at a time like the present, when economic questions determine the policy of great nations. The “economic man” of the earlier writers, with his aversion from labour and his desire of the present enjoyment of costly indulgences, has been abandoned by their successors, with the result that in the opinion of many good people altruistic sentiment may be allowed to run wild over the whole domain of economics. The “economic man” has, on the other hand, been succeeded by another creation almost as monstrous, if his lineaments are to be supposed to be those of the ordinary individual—a man, that is, who regulates his life in accordance with Gossen’s Law of Satiety, and whose main passion is to discover a money measure of his motives. It is extremely important to consider how far the economic conceptions based upon this view of the action of men in the ordinary business of life—such, for example, as the doctrine of marginal utility—depend for their truth and relevance on the fact that in economics we are dealing with large aggregates. The earlier writers generally assumed perfect mobility of labour and capital. No economist would deliberately make that assumption now unless he were dealing with some purely theoretical problem, for the solution of which it was legitimate at some stage in the reasoning. Many of the questions of the greatest practical importance at the present time, such as the competition between old and new methods of manufacturing commodities substantially the same in kind, and equally useful to the great body of consumers, arise largely from the immobility of capital or labour, or both of them. But it is obvious that if the assumption of perfect mobility is invalid, there is scarcely any economic doctrine identified with the earlier writers which may not require modification, in what degree it is impossible to say without very careful investigation. Much suggestive work on this subject of a general character is incorporated in economic books of the present day, but there is room for a whole series of careful monographs on a question of such fundamental importance. The same may be said of another subject, too frequently neglected by earlier writers, to which due significance has been given in the best recent work, namely, time in relation to value. It would perhaps be too much to say that the full consideration of this point has revolutionized the theory of value, but it has certainly created what seems almost a new science in close contact with the actual life of the modern world.

Some doctrines of the earlier economists, such as the Wages Fund Theory, are now practically abandoned, though it may be said that they contained a certain amount of truth. Others, which were considered of fundamental importance, owe their position in modern economics and the form in which they are stated to the “tradition of the elders.” If they could, by some happy chance, have been left for discovery by modern economists, they would without doubt have received different treatment, to the great advantage of economic science. Such a doctrine is the so-called Law of Diminishing Returns, which Mill considered “the most important proposition in Political Economy.” “Unless this one matter,” he says, “be thoroughly understood, it is to no purpose proceeding any further in our inquiry.” “Were the law different, nearly all the phenomena of the production and distribution of wealth would be other than they are.” On the other hand, Thorold Rogers, not to speak of earlier objectors, described the law as a “dismal and absurd theorem.” The opinions of present-day economists appear to fluctuate between these two extremes. The law may apparently be “a general rule” or “a tendency” which is liable to be “checked,” or a particular case of the law of the conservation of energy. If we go to Mill to discover what it is, we find that “it is not pretended that the law of diminishing return was operative from the beginning of society; and though some political economists may have believed it to come into operation earlier than it does, it begins quite early enough to support the conclusions they founded on it.” “It comes into operation at a certain and not very advanced stage in the progress of agriculture.” But this very important stage in the history of a nation is not defined or clearly illustrated. We are told that we can see “the law at work underneath the more superficial agencies on which attention fixes itself”; it “undergoes temporary suspension,” which may last indefinitely; and “there is another agency, in habitual antagonism” to it, namely, “the progress of civilization,” which may include every kind of human improvement. Mill apparently is not content with the confusion between “law” and “agency” or “force,” but opposes the one to the other. He is constantly speaking in terms which imply the conquering of one law by another, a habit from which his successors have not freed themselves; and the theory of natural processes which appears to have satisfied him, was that when two forces come into operation there is a partial or complete suspension of one by the other. In modern economics “fertility” has no very definite meaning. It may mean what is ordinarily understood by the word—climate, rainfall, railway rates or anything else except “indestructible powers of the soil.” To speak of “additional labour and capital” without reference to the kind and quality of the labour and capital, and the manner in which they are employed, organized and directed, throws very little light on agriculture. Every improvement involves, from a quantitative point of view, more or less of capital or of labour, so that it is the “antagonizing” influences, which are nearly all qualitative, which appear to be really important. It is therefore extraordinarily difficult at present to know what happens, or rather what would happen if it were not prevented, when a country reaches “the stage of diminishing returns”; what precisely it is which comes into operation, for obviously the diminishing returns are the results, not the cause; or how commodities “obey” a law which is always “suspended.” Possibly the present generation of English industrial history will furnish many illustrations of the law of diminishing returns. We can only say that it requires investigation and restatement.

Closely related to the law of diminishing returns is the Theory of Rent. No economic doctrine so well illustrates the achievements and the defects of modern economic analysis. Ricardo’s statement of the theory left upon the world an impression, not wholly just, of singular clearness. He employed the theory with wonderful success in unravelling the problems of his time. Its importance has not been seriously, or at any rate successfully, called in question. Treated at first as a doctrine peculiarly applicable to land, with a certain controverted relevance to other natural agents, it has been so extended that there is scarcely any subject of economic study in which we may not expect to find adaptations or analogies, so that Ricardo seemed to have discovered the key of economic knowledge. But it was discovered that there were no “indestructible powers of the soil”; that the fertility of land in a country like England is almost entirely the result of improvement at some time or other; that “advantage of situation” includes very much more than the words in their literal sense imply; that both “fertility” and “advantage of situation” include many kinds of differential advantage; that in some circumstances rent does not enter into the price of agricultural and other produce, and that in others it does. Moreover, the study of the theory of rent has had a very great influence on all branches of economics by destroying the notion that it is possible to draw sharp lines of distinction, or deal with economic conceptions as though they were entirely independent categories. That modern economic analysis is incomparably more accurate than that of earlier times there can be no question. But the net result of the development of the doctrine of rent is that all problems in which this factor appears, and they embrace the whole range of economic theory, must apparently be treated on their merits. In its modern form the doctrine is far too general to be serviceable without the closest scrutiny of all the facts relating to the particular case to which it is applied. To deal adequately with the numerous extensions or qualifications of these and other doctrines in the hands of modern economists would involve us in an attempt to do what we have already said is impossible except on conditions not at present realized. It is clear that in the interests of general economic theory we require a vast number of special studies before an adequate restatement can be undertaken.

It must be clearly recognized that the functions of economic science in the present requirements of the world cannot possibly; be discharged by treatises on economic theory. The relations between general theory and special studies Relations between general economics and special studies. conducted on the lines we have indicated have completely changed. General theory never has been, and in the nature of things never can be, the actual reflex of the life and movement of the economic world. It never has been, and never can be, more than an indication of the kind of thing which might be expected in a purely hypothetical world. When the aim of the man of affairs and the hypothesis of the economist was unrestricted competition, and measures were being adopted to realize it, general theory such as the classical economists provided was perhaps a sufficiently trustworthy guide for practical statesmen and men of business. If only people can be got to believe in them, a few abstract principles are quite enough to destroy an institution which it has taken centuries to create. But a new institution cannot be made on the same terms. The modern industrial system has brought with it an immense variety of practical problems which nations must solve on pain of industrial and commercial ruin. For these problems we want, not a few old-established general principles which no one seriously calls in question, but genuine constructive and organizing capacity, aided by scientific and detailed knowledge of particular institutions, industries and classes. Just as the historical school grew up along with the greatest constructive achievement of the 19th century, namely, the consolidation of Germany, so the application to modern problems of the methods of that school has been called forth by the constructive needs of the present generation. We have already shown how these methods, in their turn, require the aid of general theory, but not of a general theory which tries to do their work. In fact, every attempt to make it do so must inevitably fail. How can such a huge mass of general propositions as are necessarily included in a system of economics ever be thoroughly tested by an appeal to facts? If they are not so tested, the general theory will remain a general theory, of no practical use in itself, until the end of time. It they are to be tested, an indefinitely large number of special studies must be made, for which the original materials must be collected and examined. That is, original investigation of special problems has to be carried out on a more gigantic scale than any economist of the historical school ever dreamt of or the world requires, with the certain knowledge that at the end of it all the general theory will not correspond with the facts of life. For there is all the difference in the world between using a body of general theory as an indication of the factors to be considered in the study of a special problem, and undertaking special studies with a view to testing the general theory. If the necessary limitations of general economic theory are recognized, most of the difficulties we have noticed disappear. Now that the “industrial revolution” has extended practically all over the world, so that we have several countries carrying on production by modern methods, it is easily possible to sketch the main features of industrial and commercial organization at the present time, to describe the banking and currency systems of the principal nations, their means of transport and communication, their systems of commercial law and finance, and their commercial policy. It is true that at present very little work of this kind has been done in England, but innumerable books, many of them about England, have been written by thoroughly competent economists, in French, German and other languages. So that no great amount of original work is required for a reliable account of those general features of the modern system which should form the introduction to economics. The general theory which we require should be sketched in firm and clear outline, leaving the detailed qualifications of broad principles to special studies, where they can be dealt with if it is necessary or desirable, and examined by statistical and other tests. For such a general theory there is ample material in the economic literature of all civilized countries. It is of the utmost importance that the economic terms, which are also, though in many cases with an entirely different meaning, the terms of business and commerce, should as far as possible be used in their common and ordinary English sense: that they should correspond in meaning with the same words when used in description, in law, accountancy and ordinary business. This is no doubt a difficult matter. But some change in this direction is necessary both in the interests of the science itself and of its practical utility. All the materials for investigation, all the facts and figures from which illustrations are drawn, all methods of keeping accounts in England, assume the ordinary English tongue. There are few if any conceptions in economics which cannot be expressed in it without depleting the ordinary vocabulary. At present the language of economics is for the ordinary Englishman like a foreign language of exceptional difficulty, because he is constantly meeting with words which suggest to his mind a whole world of associations quite different from those with which economic theory has clothed them. The refinements of economic analysis, as distinguished from its broader achievements, should be reserved for special studies, in which a technical scientific terminology, specially devised, can be used without danger of misconception. But in a subject like economics obscurity and an awkward terminology are not marks of scientific merit.

Economic studies should be as relevant to existing needs as those of engineering and other applied sciences. The scientific study of practical problems and difficulties is (generally speaking, and with honourable exceptions) far more advanced in almost every civilized country than it is in England, where the limited scale upon which such work is carried on, the indifference of statesmen, officials and business men, and the incapacity of the public to understand the close relation between scientific study and practical success, contrast very unfavourably with the state of affairs in Germany or the United States. The backwardness of economic science has been an index of the danger threatening the industrial and commercial supremacy of the United Kingdom. There are very few questions of public or commercial importance upon which the best and most recent investigations are to be found amongst English works. This would matter very little, perhaps, if Englishmen had a firm belief, established by actual experience, in the soundness of their policy, the present security of their position, and the sufficiency of their methods to strengthen or maintain it. But this is very far from being the case. If we take, for example, the corner-stone of the British commercial system in the 19th century, namely, the policy of “free trade” (q.v.), the public do not now read the economic works which supplied the theoretical basis of that policy, and, indeed, would Economic problems in Great Britain. not be convinced by them. The great men of the period, Cobden and Bright, are merely historical figures. Long before his death, Bright’s references in public speeches to the achievements of the Anti-Corn Law League were received with respectful impatience, and Peel’s famous speech on the repeal of the corn laws would not convince the German Reichstag or a modern House of Commons. The result is that free trade had become by the end of the 19th century in the main an old habit, for which the ordinary English manufacturer could give no very reasonable explanation, whatever may be its influence in commerce and public affairs. The doctrine of free trade only prevailed in so far as it could be restated in terms which had a direct relevance to the existing position of England and existing conditions of international trade. And it was directly challenged by the representatives of Mr Chamberlain’s school of Imperialist thought (see Chamberlain, Joseph). It thus became the work of economic science ruthlessly to analyse the existing situation, explain the issues involved in the commercial policy of different countries, and point out the alternative methods of dealing with present difficulties, with their probable results.

The commercial policy of a state is merely the reflex of its system of public finance (see e.g. English Finance). The absence of conviction in regard to British commercial policy naturally had its counterpart in the attitude of many men to the financial system of the country. The eulogies showered upon it in the past were no longer considered adequate. The great increase in recent years in British military and naval expenditure, made necessary by the exceptional demands of a state of war and the great development of foreign powers, was partly responsible for the new difficulties; partly it was due to the great extension of the functions of the state during the latter part of the 19th century. The former causes may be considered partly permanent, partly temporary; but those of a permanent character are likely to increase in force, and those of a temporary character will leave Commerce and finance. a deposit in the shape of an addition to the normal expenditure of the central government. The extension of government functions appeared much more likely to continue than to be checked. Normal expenditure might therefore be calculated to rise rather than fall. In spite of the vast increase in national wealth, it was found a matter of increasing difficulty to meet a comparatively slight strain without recourse to measures of a highly controversial character; and the search for new sources of revenue (as in 1909) at once raised, in an acute form, questions of national commercial policy and the relations between the United Kingdom and the colonies.

The development of the powers of the central government has been less than that of the functions of local governing authorities. This, again, is a movement much more likely to extend than to be checked. Local governing authorities now discharge economic functions of enormous importance and complexity, involving sums of money larger than sufficed to run important states a generation ago. The scientific study of the economics of local administration is, however, in its infancy, and requires to be taken up in earnest by economists. These questions of commercial policy and local government are closely bound up with the scientific study of the transport system. Although the British Empire contains within itself every known species of railway enterprise, the study of railways and other means of transport, and their relation to the business, the commerce and the social life of the country, is deplorably backward. It is obvious that no inquiry into commercial policy, or into such social questions as the housing of the poor, can be effective unless this deficiency is remedied.

The whole social and political fabric of the British Empire depends upon the efficiency of its industrial system. On this subject many monographs and larger works have been published in recent years, but dealing rather with such questions as trade unionism, co-operation and factory legislation, than the structure and organization of particular industries, or the causes and the results of the formation of the great combinations, peculiarly characteristic of the United States, but not wanting in England, which are amongst the most striking economic phenomena of modern times.

These are some of the questions which must absorb the energies of the rising generation of economists. The claim of economics for recognition as a science and as a subject of study must be based on its relevance to the actual life of the economic world, on its ability to unravel the practical difficulties of each generation, and so contribute to the progress of nations.

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