Author: Irwin Collier

In the November 1884 issue of The Princeton Review Simon Newcomb polemicized  against the brochure by Richard T. Ely, issued by the Johns Hopkins University. Today’s posting provides the transcription of a September 1883 essay by Ely that was to be revised and expanded into that brochure published by Johns Hopkins University.

This Methodenstreit among American economists has received notice in William J. Barber’s “Should the American Economic Association Have Toasted Simon Newcomb at Its 100th Birthday Party?” The Journal of Economic Perspectives 1, no. 1 (1987): 179-83.

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THE PAST AND THE PRESENT OF POLITICAL ECONOMY.
Richard T. Ely
[1883]

“THE Wealth of Nations” was published in 1776. Its centennial was celebrated in 1876 with more or less formality in various countries. In England prominent politicians and economists held a symposium to do homage to the memory of Adam Smith, its author. The occasion was remarkable on more than one account. At that time it was the only book to which had ever been awarded the honor of a centenary commemoration; though since then, in 1881, the centennial of Kant’s “Critique of Pure Reason” has been celebrated both at Concord and Königsberg. But the chief significance of the event, taken in connection with the discussion thereby evoked, consisted in the fact that, while it brought to light dissatisfaction on the part of political economists themselves with previous economic methods and conclusions, it was at the same time the herald of a new era in political economy. It announced to the world that a revolution in political, social, and economical sciences had already begun, and in various countries had met with no inconsiderable success.

Nevertheless, in 1876, as at present, there were not lacking ardent defenders of past learning. Upon the occasion to which we have referred, a distinguished speaker claimed for Adam Smith “the power of having raised political economy to the dignity of a true science; the merit, the unique merit among all men who ever lived in the world, of having founded a deductive and demonstrative science of human actions and conduct; the merit, in which no man can approach him, that he was able to treat subjects of this kind with which political economists deal, by the deductive method.” In the same year, Mr. Bagehot, an equally faithful follower of the older English school of political economy, wrote as follows: “The position of political economy is not altogether satisfactory. It lies rather dead in the public mind. Not only does it not excite the same interest, as formerly, but there is not exactly the same confidence in it.” And at the Adam Smith banquet itself, Emile de Laveleye, the distinguished Belgian professor, described a younger, rising school of political economists investigating economic problems with another spirit and different methods. Thus were brought together representatives of two schools: the older school proud of the age and respectability of their doctrines, but disheartened at the loss of public confidence; the younger school hopeful because convinced that the future belonged to them.

What, then, has political economy been in the past? and what is it to-day as represented by the teachings of the most advanced investigators in England, Germany, Italy, and America?

The English political economy of Malthus, Ricardo, and James Mill reigned almost supreme in England and in literary circles in all Christendom until within twenty or thirty years. It acquired the reputation of orthodoxy; and to be a heretic in political economy became worse than to be an apostate in religion. The teachings of these men and their adherents were comparatively simple. They were deductive, and flowed naturally from a few à priori hypotheses. Universal selfishness was the leading assumption of this English or Manchester school of political economy. “The Wealth of Nations,” says Buckle, one of the Manchester men, “is entirely deductive, since in it Smith generalizes the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness.” While it is possible to maintain with considerable show of plausibility that this is far from being a correct interpretation of Adam Smith, it most undoubtedly represents truly the teachings of followers who pushed their tendencies in method and doctrine to an extreme. Smith, indeed, made use of history and statistics, but Ricardo, his most distinguished disciple, did not. The latter opens his work on “Political Economy and Taxation” with a discussion of “value.” In all that he says concerning it—and that means twenty-five large octavo pages—he does not adduce one single illustration from actual life. Not even one historical or statistical fact is brought forward to support his conclusions. No mention is made of a single event which ever occurred. It is really astounding when one thinks of it. The whole discourse is hypothetical. Inside of two pages he introduces no fewer than thirteen distinct suppositions, all of them purely imaginary. A second leading hypothesis of this older school was that a love of ease and aversion to exertion was a universal characteristic of mankind. This antagonized the desire of wealth, which was one of the manifestations of self-interest. Then it was further assumed that the beneficent powers of nature, or the “free play of natural forces,” arranged things so that the best good of all was attained by the unrestrained action of these two fundamental principles. Equality of wages and equality of profits flowed naturally from these same original assumptions. A further deduction, perfectly logical, was that government should abstain from all interference in industrial life. Laissez faire, laissez passer—let things alone, let them take care of themselves—was the oft-repeated maxim of à priori economists.

The attractions of these doctrines were numerous and evident. For the perplexing, the bewildering complexity of the economic phenomena surrounding us, they substituted an enticing unity and an alluring simplicity. They appealed irresistibly to the vanity of the average man, as they provided him with a few easily managed formulas, which enabled him to solve all social problems at a moment’s notice, and at any time to point out the only true and correct policy for all governments, whether in the present or the past, whether in Europe or Asia, Africa or America. It required, indeed, but a few hours’ study to make of the village schoolmaster both a statesman and a political economist. Neither high attainments nor previous study and investigation were required even in a professor of the science. “Although desirable that the instructor should be familiar with the subject himself,” writes Mr. Amasa Walker in the preface to his “Science of Wealth,” “it is by no means indispensable. With a well-arranged text-book in the hands of both teacher and pupil, with suitable effort on the part of the former and attention on the part of the latter, the study may be profitably pursued. We have known many instances where this has been done in colleges and other institutions, highly to the satisfaction and advantage of all parties concerned.”

Another attractive feature of this economic system was the favor it gained for its adherents with existing powers in state and society. No exertion, no sacrifice, was required on their part to alleviate the sufferings of the lower classes. They were simply to let them alone and go their way, convinced that they were most truly benefiting others in pursuing their own egotistic designs. The capital of the country was divided according to fixed and unalterable laws into two parts: the one designed for laborers, and called the wage-fund; the other destined for the capitalists, and called profits. So far, nothing was to be done, because nothing could be done. It was impossible to contend against nature. If you should thrust her out with a pitchfork, she would return. Moreover, competition distributed the two portions of capital justly among the members of the classes for whom they were destined: the wage-fund equally and equitably among the laborers, the profits equally and equitably among the capitalists. Such bright, rose-colored views so influenced some that they began to talk about the “so-called poor man,” and at times appeared to think an economic millennium about to dawn upon us. It is only necessary to pull down a few more barriers and allow still freer play to natural forces.

Whatever views we may entertain of the correctness of the doctrines described, we should not fail to recognize the merits of the orthodox English school of political economy—the classical political economy, as it is called. It separated the phenomena of wealth from other social phenomena for special and separate study. It called attention to their importance in national life. It convinced people that it was folly to attempt to understand society without examining and investigating the conditions, the processes, and the consequences of the production and distribution of economic goods. Even if it was an error to attempt to study these economic phenomena by themselves, entirely apart from law and other social institutions, the effort was of importance as bringing out this very impossibility. If it was an error to assume simplicity of economic phenomena, the error itself led to an investigation of them, from which people might have been deterred, if their complexity and difficulty had been sufficiently realized.

The services rendered by economists of this school in practical life were not less important. They were instrumental in tearing down institutions which, having outlived their day and usefulness, were simply obstructions to the development of national economic life. This happened in many lands, but it is necessary to enumerate only a few examples. The Baron von Stein was the man of all others who ushered in the era of modern political institutions in Prussia. He began his career as minister by demolition. As Seeley, in his “Life and Times of Stein,” admits with more good sense than usually characterizes English writers on free trade and protection, international free trade could not be contemplated in the countries of continental Europe. It is only to be thought of in countries like England— “shielded comparatively from war, and depending upon foreign countries for its wealth.” But internal free trade, i.e., free trade within the nation itself, was both practicable and advisable. Stein accordingly abolished, early in the century, the internal customs which had proved a great hindrance to trade and industry, while yielding the state the insignificant sum of some $140,000 per annum (Part I. Chap. V. p. 100¹). Restrictions on the transfer of land and serfdom were institutions which stood in the way of a desirable national development, and both were abolished by Stein’s celebrated Emancipating Edict of 1807 (Part III. Chap. IV.). While he was influenced considerably by Turgot’s writings and practical activity as governor of a province and Minister of Finance, he expressly acknowledges that he studied Adam Smith’s “Wealth of Nations,” and was guided by it in his policy (Part I. Chap. V. p. 99). I have mentioned only three cases where English political economy influenced German national life. These would be important enough to attract attention if they were the only instances, whereas its influence has not ceased at the present time. There still exists in Germany a society of men called the Economic Congress, and founded in 1858. They represent the extreme economic views of the old school, and endeavor to bring legislation into harmony with their ideas; and their efforts in the past have been by no means altogether fruitless.

It is less necessary to describe the practical effects of the orthodox political economy in England. It began by influencing the younger Pitt, and reached its culmination, perhaps, in the introduction of international free trade under Cobden and Bright.

But it must be noticed that its whole spirit and activity were negative. It was powerful to tear down, but it did not even make an attempt to build up. In this respect it resembled the French Revolution, and was hailed with joy for the same reason. They both represented the negative side of a great reform, and as such answered the needs of the latter part of the eighteenth and the earlier part of the nineteenth centuries. The ground had to be cleared away to make room for new formations; and the system of political economy described could not endure permanently because it was only negative. It was obliged to give way to a school which should attempt the positive work of reconstruction.

But apart from not presenting the whole truth, like all purely negative teachers, they taught much that was positively false in its one-sided aspect. Indeed, their leading assumptions tally so little with the realities of the world, that it is strange they can be believed by any one whose knowledge of life is not bounded by the four walls of his study. Is man entirely selfish? entirely desirous of his own welfare? Our every-day experience teaches us that he is not. All men may be more or less selfish, but he who is thoroughly so, even in business transactions, is so rare as to be despised by the vast majority of mankind. During the late “hard times,” hundreds of manufacturers continued business chiefly for the sake of their employees. Even great corporations, with their proverbial lack of feeling, are far from utterly disregarding the welfare of those in their employ, as is evinced by numerous institutions for the benefit of their laborers; as reading-rooms, schools, insurance societies, and the like. It is not to be denied that policy on the part of employers is a co-operating factor in establishing such concerns, but it is unfair to attribute deeds of this character to self-interest alone.

As to wages, it is idle to ignore that competition has a powerful influence in regulating them. Experience teaches that it has. But it teaches us at the same time that it does not reduce wages to the lowest possible point in a great number—possibly the majority—of cases, and that it does not equalize them in the same employment. While carpenters are receiving $2.50 in one place, they receive $3 a day in another locality not a day’s journey distant. Farm laborers in England, in 1873, received wages which varied from an average of 12s. a week, in the southern counties, to an average of 18s. a week, in the northern—a difference of fifty per cent;² and this difference was no temporary phenomenon, but appears to have lasted for years.

The difference in special localities in the north (Yorkshire) and south (Dorsetshire) of England was still greater, amounting to between two and three hundred per cent. Look hap-hazard where one will, one finds that unequal wages for similar services are not only paid in places not remote from one another, but even in the same city or town. Appleton’s Annual Cyclopaedia for 1877, for example, gives the following table of wages paid to engineers and firemen at the time of the celebrated strike in 1877:

Employers could reduce wages, if they would, in cases not by any means rare. All sorts of motives come into play in employing laborers and servants—generosity, love of mankind, a desire to see those about one happy, pride, sentiment, etc. When a gentleman hires a boy to carry a parcel, he does not haggle with him for five cents; pride restrains him if nothing else. A gentleman in New York pays his coachman $50 a month for no better reason than the purely sentimental one that his deceased father, to whom this servant had been kind, had paid him the same amount.

The wealthy proprietor of a widely circulated journal is said to have refused to reduce the wages of his compositors, although the Typographical Union had approved a reduction. He said: “My business is prosperous; why should not my men share in my prosperity?”

Nor is selfishness always the force which moves great masses. It is often national honor, devotion to a principle, an unselfish desire to better one’s kind. Twice have we Americans disappointed in marked manner those who hoped that our national conduct would be governed by our desire of wealth, or the almighty dollar. Early in the struggle between America and England, the British Parliament passed the act for changing the government of Massachusetts, and for closing the port of Boston, which took effect June 1, 1774. This gave the other seaports, and especially Salem, a rare opportunity to take possession of Boston’s trade. Did they improve it? We will let Webster reply. “Nothing sheds more honor on our early history,” says he, in his speech at the laying of the corner-stone of the Bunker Hill Monument, “and nothing better shows how little the feelings and sentiments of the colonies were known or regarded in England, than the impression which these measures everywhere produced in America. It had been anticipated that while the other colonies would be terrified by the severity of the punishment inflicted on Massachusetts, the other seaports would be governed by a mere spirit of gain; and that as Boston was now cut off from all commerce, the unexpected advantage which this blow on her was calculated to confer on other towns would be greedily enjoyed. How little they knew of the depth and the strength and the intenseness of that feeling of resistance to illegal acts of power which possessed the whole American people! …. The temptation to profit by the punishment of Boston was strongest to our neighbors of Salem. Yet Salem was precisely the place where this miserable proffer was spurned in a tone of the most lofty self-respect and the most indignant patriotism.”

When our civil war broke out, our enemies declared that it would be ruinous to our prosperity; if it were continued, grass would grow in the streets of New York; and the Yankees, ever greedy of wealth, would lay down their arms rather than suffer such material losses as this would involve. But the American people again showed their detractors that there was that which they valued more highly than commercial gain.

These instances might be multiplied ad libitum. Any scientific method must strive to take into account all of men’s motives and all the conditions of time and place in framing economic laws concerning men’s actions. The nearer it comes to this “all,” the more precise it is, the nearer it attains to its ideal. To neglect other motives, and consider self-interest alone, is as absurd as in mechanics to “abstract” from the force which propels the cannon ball, because it is finally overcome by the attraction of gravitation.

Nor is the love of ease, the aversion to labor, more than one economic motive among a multitude of others. The love of labor, of activity, is also an economic motive. In his correspondence, Frederick the Great describes how he felt about work. “You are quite right,” he writes to a friend, “in believing that I work hard. I do so to enable me to live, for nothing so nearly approaches the likeness of death as the half-slumbering, listless state of idleness.” At another time he writes: “I still feel, as formerly, the same anxiety for action; as then, I now still long to work and be busy. …. It is no longer requisite that I should live, unless I can live and work.”³

Other assumptions of the English school stand no better the test of experience. Every business man knows that profits are not equal—are not nearly equal—in different branches of business. It is not ordinarily possible for men to change their business because it may happen to be less profitable than some other. A man usually takes up with a business as with a wife—“for better or for worse.” He understands one business or profession, and when fairly started in that, is too old to learn another. The transfers of capital made through bankers, and the changes in pursuit actually effected by some, are not sufficient to equalize natural inequalities. In his “Study of Sociology,” Herbert Spencer has finely illustrated the difficulty of estimating probable profits of an undertaking directly in one’s own line, by enumerating the many factors “which determine one single phenomenon, the price of a commodity”—as cotton.

And then the doctrine of identity of interest of laborer and labor-giver! If it only held in real life, the solution of the Social Problem would indeed be an easy task. Business men know, however, that the share of the produce of labor and capital received by labor diminishes by so much the profits of capital, and that the larger the proportion of profits received by capital, the smaller the proportion received by labor. That there is a harmony of interests between the different classes of society, “is at best a dream of human happiness as it presents itself to a millionaire.”⁴ It is possible to reconcile the different classes of society only by a higher moral development. The element of self-sacrifice must yet play a more important role in business transactions, or peace and good-will can never reign on earth.

Still another favorite notion of the older economists, and one which leads to great hardship in real life, is that taxes are shifted so as to be divided fairly between different employments. However convinced any one might be theoretically of his ability to shift his own tax upon his neighbor, he would undoubtedly prefer practically to have it laid in the first place upon the neighbor. “Possession is nine points of the law.” This also applies, in a negative sense, to the possession of an exemption. If landlords are taxed directly, they must first pay the money out of their pockets; at first, the tenants are free, and the whole burden of transferring the tax to them rests on the landlords. But as the tax is imposed in all cases at the same time, there is a united effort to resist all along the line, and it is almost certain that the landlords will be obliged to bear at least a part of it. Besides this, in the case of long leases they bear the entire burden for years, while the lessees become accustomed to the exemption, and expect it. It is problematical whether a person ever gets a tax back after he has once paid it. Taxes ought never to be imposed on the poorer classes with the idea that they will eventually free themselves from them. To speak of taxation finally righting itself, or of population in the end accommodating itself to the demand for it, and to follow this out practically, would be like the conduct of a general who should choose a busy street in a great capital as a place for his soldiers to practice shooting, and set them to work at once. Some one remonstrates: “But, General, your soldiers will kill people riding and walking in the street.” “Very likely,” replies he; “at first, some may be killed and some wounded, but in the course of time these matters regulate themselves. People will finally learn to avoid this street. Shoot away, boys!” No, taxes are not paid out of the “hypotheses or abstractions” of the economist.

No doctrine—to take up one more point in our criticism of the classical political economy—ever made a more complete fiasco than the maxim, Laissez faire, laissez passer, when the attempt was seriously made to apply it in the state. The truth is, the stern necessities of political life compelled statesmen to violate it in England itself, even when proclaiming it with their lips. This was at first done apologetically, and each interference was regarded by the “school” as an exception to the rule; but it finally began to look as if it were all exception and no rule. Interference was found necessary in every time of distress, as during our late civil war, when government borrowed money for public works to give employment to the Lancashire operatives, at the time of the cotton famine. Every reform in the social and economic institutions of Great Britain has been accomplished only by the direct, active interference of government in economic affairs. When Gladstone began his work of conciliating Ireland in 1869, he found it expedient to grant loans of public money to occupiers who wished to improve their holdings, and to proprietors to reclaim waste lands or to make roads and erect buildings, enabling them thereby to employ labor. In 188o the government of Ireland again decided to alleviate the sufferings of the Irish, by making an advance of £250,000 out of the surplus of the church funds, for public works of various kinds, in order to provide employment for those needing it. The recent Irish acts interfering between tenant and landlord in the matter of rent, and offering the assistance of the state to tenants in arrears, violate all the principles of laissez faire economists, and are nevertheless applauded by the wisest and best men of all lands. Laissez faire was tried in the early part of this century in English factories, with results ruinous to the morality of women and destructive of the health of children. Robert Owen, himself a large and successful manufacturer, declared that he had seen American slavery, and though he considered it bad and unwise, he regarded the white slavery in the manufactories of England as far worse. Children were then—that is, about 1820–employed in cotton, wool, silk, and flax establishments at six and even five years of age. The time of labor was not limited by law, and was generally fourteen, sometimes fifteen, and in the case of the most avaricious employers even sixteen, hours a day; and this in mills sometimes heated to such a degree as to be injurious to health. I know of no sadder reading and no more heart-rending tales than appear in the government reports on the condition of the laboring classes previous to state interference in their behalf in England. The moral and physical degradation of large classes was shown, by undisputed testimony, to be such as to put to shame any country calling itself civilized and Christian. It could scarcely be surpassed, even if paralleled, by the records of savage and heathen nations.

Government began to interfere actively in behalf of the laborers in 1833, and since 1848 has largely extended its protection. The time of labor has been limited, and the employment of women and children regulated by a Factory Act, which is regarded as a triumph of civilization; if the “London Times,” and Mackenzie’s work, “The Nineteenth Century,” can be trusted, investigations show that the act has proved an “unmingled good.” Sanitary legislation has improved the dwellings, health, and morality of the poorer city population. Government spent, e. g., some $7,000,000 in repairing and rebuilding three thousand tenements in Glasgow, with such good effect that the death-rate fell from fifty-four to twenty- nine per thousand, and crime diminished proportionately.

After laissez faire had been allowed centuries to test its practical effects in educating the masses and had left them in continued ignorance, government began to take the matter in hand. It appropriated £20,000 annually for the education of the poor from about 1830 to 1839, when this pittance was increased to £30,000. The work has gone on until in the present decade the final triumph of universal and compulsory education has been assured. Hon. J. M. Curry, agent of the Peabody Fund, recently made the following emphatic statement: “I am only stating a truism when I say there is not a single instance in all educational history where there has been anything approximating universal education unless that education has been furnished by government.” England has had no experience which can prove Dr. Curry’s assertion an over-Statement.

In our own country it is curious to note how the advocates of the laissez faire abandon position after position. First, tenements are exempted from what is considered the general law, because experience has shown that “nothing short of compulsion will purify our tenement districts.” Then it is discovered that the ordinary laws of supply and demand are not preserving our forests; consequently, that individual and general interests do not harmonize. The inadequate action of competition in regulating and controlling great corporations gives another excuse for governmental interference. “Corners” in necessaries of life call for a further abandonment of the laissez faire dogma, as does also the success attendant on the establishment of government fisheries. The list might be extended almost ad libitum, and every day adds to it. Thus has laissez faire, one of the strongholds of past political economy, been definitely abandoned. Justin McCarthy has described, as one of the most curious phenomena of these later times, “the reaction that has apparently taken place towards that system of paternal government which Macaulay detested, and which not long ago the Manchester School seemed in good hopes of being able to supersede by the virtue of individual action, private enterprise, and voluntary benevolence” (Chap. LIV.). Legislation is now based to greater extent on the principle of humanity. Women and children are protected, not only against the greed of employers, but even against themselves. Individual freedom is limited both for individual good and the general welfare. And as McCarthy has said in another chapter (LXVII.) of his “History of our Own Times”: “We are perhaps at the beginning of a movement of legislation which is about to try to the very utmost that right of state interference with individual action which at one time it was the object of most of our legislators to reduce to its very narrowest proportions.”

It would be easy to extend our criticism of past political economy, but it is scarcely necessary in a paper of this character. It is plain that it does not answer the needs of to-day. But there is fortunately a live, vigorous political economy which is grappling with the problems of our own time. It looks without, not within; it observes external phenomena, but concerns itself little with the movements of internal consciousness. It does not attach much importance to finely drawn metaphysical distinctions or verbal quibblings about definitions, as it finds its entire strength and energy absorbed in studying great social and financial questions. But before examining further this newer political economy, let us trace briefly its development.

Protest against the harsh doctrines of Ricardo and his followers was early entered by those who were not professional political economists. Dickens’s works are full of such protests. Nothing, for example, could be more cutting than the irony with which he describes the principles of the Gradgrind school in his “Hard Times.” Early in the story poor Sissy Jupe fills them with despair at her stupidity by returning to the question, “What is the first principle of political economy?” the absurd answer, ‘To do unto others as I would that they should do unto me.’” Farther on, when poor Gradgrind appeals to his too apt scholar, Bitzer, to admit some higher motive than self-interest, he is told that “the whole social system is a question of self-interest. What you must always appeal to is a person’s self-interest. It’s your only hold.” Then our author adds: “It was a fundamental principle of the Gradgrind philosophy that everything was to be paid for. Nobody was ever, on any account, to give anybody anything, or render anybody any help without purchase. Gratitude was to be abolished, and the virtues springing from it were not to be. Every inch of the existence of mankind, from birth to death, was to be a bargain across a counter. And if we didn’t get to heaven that way, it was not a politico-economical place, and we had no business there.” Frederick Maurice, the English Christian socialist, Ruskin, and Carlyle have all condemned in unmeasured terms the “Cobden and Bright” political economy as detestable. Such expressions, even, as “bestial idiotism” are used in speaking of free competition as a measure of wages.

Such attacks naturally formed no basis for a reconstruction of the science, nor was such a basis found in the writings of political economists like Adam Müller and Sismondi. They repudiated the Adam Smith school, and gave many good grounds for their opposition, but they failed to dig deep and lay broad, solid foundations for the future growth of political economy. This was also the case with men like Frederick List and our own Carey. The younger Mill—John Stuart—occupies a peculiar position. He adhered nominally all his life to the political economy of his father, James Mill, and his father’s friend, Ricardo. Yet he confesses in his autobiography that the criticism of the St. Simonians with other causes early opened his eyes “to the very limited and temporary value of the old political economy, which assumes private property and inheritance as indefeasible facts, and freedom of production and exchange as the dernier mot of social improvement.” The truth is, when Mill became dissatisfied with numerous deductions drawn by the leaders of his school, he obtained others, not by investigating and altering the foundation upon which he was building, but by introducing new material, i.e. new motives and considerations, into the superstructure. Mill stood between an old and a new school, having never been able to decide to leave the one or join the other once for all. In political economy he was a “trimmer.” This, of course, unfitted him to found a new school himself.

About 1850, three young German professors of political economy, Bruno Hildebrand, Wilhelm Roscher, and Carl Knies, began to attract attention by their writings. The Germans had previously done comparatively little for economic science, having been content for the most part to follow where others led, but men soon perceived that a new creative power had arisen. These young professors rejected, not merely a few incidental conclusions of the English school, but its method and assumptions, or major premises—that is to say, its very foundation. They took the name Historical School, in order to ally themselves with the great reformers in Politics, in Jurisprudence, and in Theology. They studied the present in the light of the past. They adopted experience as a guide, and judged of what was to come by what had been. Their method may also be called experimental. It is the same which has borne such excellent fruit in physical science. They did not claim that experiments could be made in the same way as in physics or chemistry. It is not possible to separate and combine the various factors at pleasure. Experiments are both difficult and dangerous in the field of political economy, and can never be made as experiments, because they involve the welfare of nations. But these men claimed that the whole life of the world had necessarily been a series of grand economic experiments, which, having been described with more or less accuracy and completeness, it was possible to examine. The observation of the present life of the world was aided by the use of statistics, which recorded present economic experience. Here they were assisted by the greatest of living statisticians, Dr. Edward Engel [sic, should be Ernst Engel], late head of the most admirable of all statistical bureaus, the Prussian. Hence their method has also been called the Statistical Method.⁵ Economic phenomena from various lands and different parts of the same land are gathered, classified, and compared, and thus the name Comparative Method may be assigned to their manner of work. It is essentially the same as the comparative method in politics, the establishment of which Mr. Edward A. Freeman regards as one of the greatest achievements of our times. Account is taken of time and place; historical surroundings and historical development are examined. Political economy is regarded as only one branch of social science, dealing with social phenomena from one special standpoint, the economic. It is not regarded as something fixed and unalterable, but as a growth and development, changing with society. It is found that the political economy of to-day is not the political economy of yesterday; while the political economy of Germany is not identical with that of England or America. All à priori doctrines or assumptions are cast aside, or at least their acceptance is postponed, until external observation has proved them correct. The first thing is to gather facts. It has, indeed, been claimed that for an entire generation no attempt should be made to discover laws, but this is an extreme position. We must arrange and classify the facts as gathered, at least provisionally, to assist us in our observation. We must observe in order to theorize, and theorize in order to observe. But all generalizations must be continually tested by new facts gathered from new experience.

It is not, then, pretended that grand discoveries of laws have been made. It is, indeed, claimed by an adherent of this school, as one of their particular merits, that they know better than others what they do not know. But it must not, therefore, be supposed that their services have been unimportant. The very determination to accept hypotheses with caution, and to test them continually by comparing them with facts unceasingly gathered, is a weighty one, and promises good things for our future economic development. And in gathering facts, they have been unwearied. Their contributions to our positive knowledge of the economic institutions and customs of the different parts of the world have been wonderful. They have, too, infused a new spirit and purpose into our science. They have placed man as man, and not wealth, in the foreground, and subordinated everything to his true welfare. They give, moreover, special prominence to the social factor which they discover in man’s nature. In opposition to individualism, they emphasize Aristotle’s maxim, ὅτι ὁ ἄνθρωπος φύσει πολιτικὸν ζῷον, or, as Blackstone has it, “Man was formed for society.” They recognize, therefore, the divine element in the associations we call towns, cities, states, nations, and are inclined to allot to them whatever economic activity nature seems to have designed for them, as shown by careful experience. They are further animated by a fixed purpose to elevate mankind, and in particular the great masses, as far as this can be done by human contrivances of an economic nature. They lay, consequently, stress on the distribution as well as on the production of wealth.

They watch the growing power of corporations; they study the tendency of wealth to accumulate in a few hands; they observe the development of evil tendencies in certain classes of the population—in short, they follow the progress of the entire national economic life, not with any rash purposes, but with the intention of preparing themselves to sound a note of warning when necessary. If it becomes desirable for a central authority to limit the power of corporations, or to take upon itself the discharge of new functions, as the care of the telegraph, they will not hesitate to counsel it. They make no profession of an ability to solve economic problems in advance, but they endeavor to train people to an intelligent understanding of economic phenomena, so that they may be able to solve concrete problems as they arise.

The methods and principles of the Historical School have been continually gaining ground. In Germany they have carried the day. The Manchester School may be considered as practically an obsolete affair—ein überwundener Standpunkt—in that country. Emile de Laveleye, the Belgian economist, may be named as the most prominent adherent of the school among writers who use the French language, but he has followers of more or less note in France, though the older political economy is stronger there than elsewhere—stronger than in England, its home. Nearly all of the younger and more active Italian economists, as Luzzati, Cusumano, and Lampertico, are adherents of the Historical School.

T. E. Cliffe Leslie has led this school in England, and contributed largely to its growth. The most noteworthy English scholars who have openly supported it to a greater or less extent are Stanley Jevons and Prof. Thorold Rogers, whose monumental work on Agriculture and Prices, written in the spirit of that school, has excited worldwide admiration. The younger men in America are clearly abandoning the dry bones of orthodox English political economy for the live methods of the German school. We may mention the name of Francis A. Walker, the distinguished son of Amasa Walker, as an American whose economic works are fresh, vigorous, and independent. Essentially inductive and historical in method, they have attracted wide attention and favorable notice on both sides of the Atlantic.

This entire change in the spirit of political economy is an event which gives occasion for rejoicing. In the first place, the historical method of pursuing political economy can lead to no doctrinaire extremes. Experiment is the basis; and should an adherent of this school even believe in socialism as the ultimate form of society, he would advocate a slow approach to what he deemed the best organization of mankind. If experience showed him that the realization of his ideas was leading to harm, he would call for a halt. For he desires that advance should be made step by step, and opportunity given for careful observation of the effects of a given course of action. Again: this younger political economy no longer permits the science to be used as a tool in the hands of the greedy and the avaricious for keeping down and oppressing the laboring classes. It does not acknowledge laissez faire as an excuse for doing nothing while people starve, nor allow the all-sufficiency of competition as a plea for grinding the poor. It denotes a return to the grand principle of common sense and Christian precept. Love, generosity, nobility of character, self- sacrifice, and all that is best and truest in our nature have their place in economic life. For economists of the Historical School, the political economy of the present, recognize with Thomas Hughes that “we have all to learn somehow or other that the first duty of man in trade, as in other departments of human employment, is to follow the Golden Rule— “Do unto others as ye would that others should do unto you.”

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¹ Seeley’s Life of Stein. 1879.

² The Movements of Agricultural Wages in Europe, by Prof. Leslie, in Fortnightly Review, June 1, 1874.

³ Macaulay’s Life of Frederick the Great.

⁴ Gustav Cohn, on Political Economy in Germany. Fortnightly Review, Sept. 1, 1873.

⁵ This name has been sometimes reserved for one wing of the Historical School without sufficient reason. The difference between its various members is simply one of degree.

Source: The Overland Monthly, Vol. II. Second Series. September, 1883, pp. 225-235.

Image Source: Universities and their sons; history, influence and characteristics of American universities, with biographical sketches and  of alumni and recipients of honorary degrees, Vol. IV (1900), p. 505.

This is an interesting early lance broken in the American version of the famed Methodenstreit that was taking place contemporaneously between Carl Menger and Gustav von Schmoller in Central Europe. Simon Newcomb represented the Menger side (pro-analysis and use of deduction) versus the historical/institutional side (pro-description and use of induction) that was represented by Richard Ely. While it is a 1884 brochure written by Ely that Newcomb explicitly addresses, an earlier version of Ely’s “The Past and Present of Political Economy” had been published in September 1883 in The Overland Monthly.

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THE TWO SCHOOLS OF POLITICAL ECONOMY.
Simon Newcomb
1884

EVERY careful observer of current opinion knows that the system of Political Economy which we have imported from England, and which we generally teach in our colleges, does not command that universal assent to which its scientific character and the eminence and influence of its expounders would seem to entitle it. That these, expounders are to be counted among the great men of our time none will deny; and when we find the opinion of the masses diverging from the principles held by such men, it is natural in the first place to attribute it to defective education. But in the present case it cannot be claimed that distrust of the teachings of political economy is confined to the less educated classes. As a matter of fact, it will be found difficult to name any one class of men who mingle with the world among whom at least a large minority, possibly a majority, will not be found to share the distrust in question. Farmers, men of business, college graduates, eminent philosophers, students fresh from the seats of learning in Germany, are all imbued with the same feeling.

There are yet other considerations which give seeming weight to the dissent in question. The general rule is that when a sound body of doctrine is assailed from fallacious standpoints, the views of the assailing parties are so confused and contradictory that they can be easily disposed of by pointing out their inconsistency. But in the present case a careful examination will show that these widely different classes of men assign substantially the same reasons for their dissent. Can views which are shared by such widely separated classes be other than sound? This is the question which it is the object of the present article to consider. It will assist the reader in following us if we begin by indicating our conclusion. It is in brief that the objections raised against the economic system alluded to, which is commonly called the English Political Economy, are founded on a misapprehension of what that system professes, or ought to profess, to do and to teach. It does not follow from what we say that there is anything erroneous in the general current of the views held by the objectors themselves. They are simply men who, in applying their views to the case in question, forget the limitations which are placed upon human knowledge in every department of inquiry, and the necessary imperfections of all scientific statement. We shall prove this conclusion by showing that the very same objections which they raise against the current system of economy can be raised against almost every branch of human knowledge with equal force and conclusiveness.

We must begin with a precise statement of what the objections are. This we can do by quoting, almost verbatim, propositions which may be found in the writings of such a logician as Wundt, in a brochure by Dr. Ely, recently issued by the Johns Hopkins University, and in the daily conversation of almost every man of business. These different men and classes all agree in framing an indictment of which the substance is the following:

The political economy of the schools is a deductive science founded on a-priori hypotheses respecting human nature, which are too wide of the actual facts of the world to form a sound basis for any practical conclusion. It assumes to subject all economic phenomena to a few formal laws, and fails to consider how these laws are modified or even reversed in practice. It takes no account of the very different circumstances in which different nations and communities are placed, but assumes all to be under the same system. It assumes universal self-interest and universal selfishness as the preponderating causes of economic phenomena. Some of its great expounders attempt to establish far-reaching principles without adducing one single illustration from actual life, without bringing forward a single historical fact, and without citing any event which ever occurred. It assumes an absolute lack of friction in all economic movements. Not only do capital and labor move with perfect ease from place to place, and from employment to employment, but this, it is implicitly maintained, is accomplished without the slightest loss. The silk-manufacturer diverts his capital into another employment, like the construction of locomotives, with precisely the same facility with which he turns his family carriage-horse from an avenue into a cross street. From such assumptions equality of profits and equality of wages are readily deduced, while the fact that inequality is the universal rule is entirely ignored. The result of thus substituting ideal for actual conditions is a body of doctrine which, however logically it may be reasoned out, does not agree with the state of things which actually exists around us.

Formidable as this indictment looks, we can easily show that it applies with equal force to every branch of pure science, when we consider the science in its relation to practical applications. It is in fact a most valuable illustration of a truth which every logical student should know, but which hardly any one always bears in mind—that all scientific propositions are in their very nature hypothetical. Let us take examples of the most familiar sort.

If we begin by examining any school arithmetic, we shall hardly find an illustration adduced from the actual history of mankind, and only here and there will we find any mention of a single event which ever occurred, or a single transaction which ever took place. The problems in arithmetical operations are all made up by the author out of his own head, or borrowed from others who made them up in the same way. When a boy is set to compute interest on a note, it will be found that no such note was ever drawn, and that the parties whose names are signed to it never existed. The same remark applies to the numerous grocers, laborers, custom-house officers, and merchants who are quoted in the book. Not one is an actual man, but all are hypothetical and imaginary products of the author’s brain.

When the pupil gets into Algebra the case is intensified. He is set to work on quantities called x and y without a shadow of proof that any such quantities ever existed. It is yet worse when he reaches Geometry. He is taught that lines have no thickness, when, as a matter of fact, every line that anybody ever saw or conceived of had thickness. He is set to work on purely imaginary triangles, quadrilaterals, and circles; and throughout the whole treatise there is not one allusion to a geometrical figure which ever had a visible existence outside the book.

But is not the matter improved when he gets to Physics? Is he not now confronted with the actual facts of nature? No : on the contrary, all natural phenomena are positively contradicted by the propositions he is taught. Not satisfied with talking about things which never did exist, he is introduced to things of which we cannot define the existence without a contradiction in terms—such absurdities as a material point, for example. He is told how a body acted upon by no force will move, when, as a matter of fact, no one ever saw in the universe a body which was not acted on by some force. He learns the law of falling bodies, which tells him that a body falls sixteen feet in the first second, three times that distance in the next, five times in the third, and so on, without end. As a matter of fact no body ever did or ever could fall according to this law. It rests upon two perfectly unattainable hypotheses: (1) that there is no atmosphere to resist the motion of the body, and (2) that the force of gravity is the same at all heights. The fact is that not only did no body ever fall according to this law, but no body was ever known to move in accordance with the law for any considerable period. When the mechanical powers are taught, no allowance is made for friction, altho this agent modifies the effect in all cases, and is sometimes the most potent factor in producing it. Thus all the laws of power in machines which the student learns are not applicable to any actual machine, but only to ideal conditions, which never existed on earth and could rarely be produced if men tried to. In fine, the whole of physics as taught in our schools and colleges is a purely ideal science, which is concerned with a kind of matter and a state of things which never existed in the world, and which would lead any firm of machinists into pecuniary ruin should they apply its principles unmodified in their calculations.

We have made it quite clear, we trust, that the indictment under consideration lies with as much force against all the exact sciences as it does against Political Economy as taught by the English school. As a matter of fact, every one who has studied the views of the class of so-called “practical men” who undervalue what they term “theory” knows that this class really does bring against the practical value of scientific training objections substantially identical with those under consideration. The question which now meets us is whether it is possible to construct a system of Political Economy which shall be free from such objections. Our object is to answer this question in the negative, by showing that the imperfections alluded to are inseparable from all exact knowledge. Paradoxical tho it may appear, the fact that the phenomena of nature cannot be reduced to simple formal laws does not render less necessary the consideration and study of such laws. Most of the effects which we observe either in nature or in human society are the products of a complex combination of causes, acting and interacting in such a way that it is impossible to trace their combined action by any direct process. If we expect to study their action by any rational method, only one mode of proceeding is open to us—that of analysis. We begin by isolating each separate cause, and considering what would be its action were all the others absent. But, since the causes act only in combination, the separate study of each is necessarily the study of a state of things which as a matter of fact does not exist. Thus the introduction of ideal conditions instead of the real conditions is a necessary first step in any rational system of exact knowledge.

We are now in a condition to illustrate more fully the proposition already alluded to—that all science is from its very nature founded on hypothesis. The expression of a law of nature is merely an assertion that under certain circumstances a certain result will be produced. So far as the law is concerned the circumstances may or may not exist; they may even be such as never did exist without at all impairing the validity of the law. Let us take a proposition so simple as that gunpowder explodes. It presupposes as an hypothesis the existence of gunpowder. There may be large regions of country where there is no powder, and there the law is entirely without application. Again, the powder will not explode unless it is touched by fire. Here we have again another hypothesis—fire. Thus, so familiar a proposition as that under consideration is only hypothetically true. But this is not all. We must always assume not only some positive hypothesis, but the negative hypothesis that all causes which might influence the result are absent. In other words, the enunciation of all natural laws is to be understood with some such limitations as “other conditions being equal,” or “if no other cause intervenes to modify or prevent the effect.” These same qualifications must be understood in all applications of the principles of political economy. The writer does not for a moment pretend that economists always remember this qualification. But they are perfectly excusable for not always expressing it, because they must leave something to be supplied by the reader. Gunpowder will not explode if it is wet, nor if it is treated in any one of many other ways. Is it therefore necessary in every chemical treatise where the properties of gunpowder are described, that an exhaustive statement of the conditions under which it will not explode must be made? Is chemistry a delusion and a snare because a hunter may have considered the law that gunpowder explodes true, whatever the condition of his powder-flask, and may have missed a shot in consequence? The person who expects either economic or physical phenomena to occur according to formal laws, regardless of circumstances, is justly stigmatized as a doctrinaire, and one who interprets these laws in accordance with the doctrinaire method should be relegated to the same place of perdition to which we assign the doctrinaire himself.

The great mistake made by the objectors is that of supposing that the economist considers all his hypotheses as susceptible of universal application without any restriction or modification whatever. We avoid this error by remembering that the correctness and applicability of the hypothesis are always open to challenge, but that the fact of its incorrectness or inapplicability no more invalidates the general law founded upon it than the fact that there may be no gunpowder within a thousand miles of the north pole invalidates the truth of the theorem that gunpowder explodes. A careful study of human nature would perhaps show that the power of always distinguishing between the truth of the hypothesis and the truth of the connection between the hypothesis and conclusion is rarely acquired by the large majority of men. We may define a wise man as one equipped with a large and well-selected stock of hypotheses, properly arranged for use, each with its conclusion attached. To foresee what will occur to-morrow he selects from his hypotheses such as correspond most nearly to the state of things to-day, and then forms his conclusions accordingly. If he applies an hypothesis which is not valid to-day, and thus reaches an erroneous conclusion, that is his fault, and not the fault of the law. So also if the hypothesis is itself true, but other causes come in to modify its action, we have a case of defective knowledge which may lead to a mistaken conclusion. But no science that ever existed professes to give formal rules by which conclusions can be worked out without any exercise of judgment on the part of the individual.

In the light of these considerations, let us inquire how we must proceed to establish a sound system. The causes with which the economist has to deal differ from those which appear to us to operate in nature in this important point—that final causes or the ends which men have in view come into play. This fact makes it necessary to follow quite different methods in physical and in economic investigations. But in both classes of inquiry we have this in common, that to reach a really satisfactory conclusion we must analyze the causes which act into their component elements. The first step of the economist must be to discover and define the most general and widely diffused tendencies of human nature, just as the physicist commences by teaching the most general laws of force. Now, if we study civilized men, we shall find that notwithstanding the wide diversity between the motives which actuate different men, and the conditions in which they are placed, they have this in common: that when they want to reach an end, they adopt the easiest and shortest way to it which they can find, unless they have some special reason for preferring another way. This is as sound and comprehensive a law as that a stone will fall directly downwards unless it is turned aside by some intervening force. Not an objection can be made to the one that may not also be made to the other.

Again, a large majority of the intended acts of every man are executed for gaining some end which he, the man, has in view. The good he seeks is his own, and not that of anybody else, except so far as he may make the good of others an object to himself. Economically and scientifically there is no difference between the acts of the man working to get a loaf of bread for himself, and of the man working to get a loaf of bread for his neighbor, except that the former are more common. Thus the actuating motives of men in general may be called “selfish” in a scientific sense, however disinterested they may be in a popular sense.

Again, nearly all human acts with which the economist is concerned are those directed towards the acquisition of wealth. These acts have this common feature, that the man so directs his exertions as to obtain from them the maximum amount of wealth, unless his course is modified by some other cause than the desire of wealth. The objection that the latter is not the sole and universal motive among men has no more force than the objection that the tendency to fall is not the sole and universal force which acts upon bodies upon the surface of the earth.

Again, economics can concern itself only with average results as they arise in the general action of great bodies of men. It takes no account of the individual bargaining in a desert between John, who owns the only camel within reach, and William, who has the only bucket of water within reach. It is not concerned with the fact that Smith gives double wages to his coachman out of pure sentiment, except so far as this sentiment may be common to all men. Now, however capricious may be the acts of the individual, it is certain that when we consider only average results common to the whole, these results have a certainty, permanence, and freedom from caprice which individuals do not exhibit. Where the individual may be travelling or residing at any moment no man can predict. But the centre of gravitation of the whole population of the United States has during the past thirty years moved past Cincinnati and along the neighborhood of the Ohio River with a slow and regular motion, which statistics show to be as exact and definite as the change in the pointing of the magnetic needle.

It is also to be admitted that unknown causes play a very important part in Political Economy, more important, perhaps, than they do in the applications of Physical Science. The result of this partial ignorance is that economic phenomena cannot be predicted as physical phenomena can; and thus one proof of the soundness of scientific conclusions, which appeals so strongly to the human mind in the work of the astronomer, is not at the command of the economist. But this defect again is less of a drawback in Political Economy than it might appear at first sight. The unknown causes which we cannot predict are generally such as men cannot influence. When we come to those which men can influence there is not the slightest doubt that scientific prediction can be applied. In other words, the unknown quantity is the cause itself, and not the relation of the cause and its effect.

Hence confining economic science within certain necessary bounds—that is, regarding it firstly as concerned only with general averages, and secondly as concerned only with the relation of cause and effect, and not merely with known causes— its applications are not subject to any greater limitations than are those of Physical Science. Upon the widely diffused tendencies of human nature, which we have described, we can build up a system bearing the same relation to the transactions of the commercial world that theoretical physics bears to the working of machinery. Such a system is that commonly known as the “school economy,” and taught by Ricardo and Mill. The objections to the deductive features in this school can arise only from a misapprehension. Its deductions being only hypothetically true, are not to be applied in practice unless the actual case is shown to apply to the hypothesis. But it does not follow that the method is useless because it needs modification when applied to particular cases, because this is true of all science.

Deduction is an essential process in every rational explanation of human affairs. To say that we are not to apply it to any subject is equivalent to saying that we can have no rational conception of the relation of cause and effect. A subject of which this is true would be quite unworthy of the study of men. It is a familiar fact to those who have studied human nature, that the so-called “practical men” who proclaim most loudly their distrust of what they call “theories” are extremely liable to become the victim of the most unfounded theories and injurious superstitions. Any one pretending to have a system of economics must be able to say that some assigned cause will produce definite effects, which he can foresee, upon the interests of society. If he cannot foresee what effect would be produced by any cause whatever, he has nothing worth talking about in his system. Now, the prediction of any effect of this kind is in its very nature an operation of deduction, and subject to the same limitations which have to be imposed on the deduced consequences of the purely theoretical economy. The conclusion of the protectionist, that the free competition of low-priced labor will diminish the wages of high-priced labor, is reached by a purely deductive process. Even if such a conclusion could be reached by induction,—that is to say, if we actually found by the collection of statistics that wages had been lowered by such competition,—the conclusion that they would be lowered in future would be a deductive one. It would in the first place presuppose that the competition had in times past been the true cause of the lowering of wages. And the conclusion would rest on the hypothesis that no cause would come into play to modify the effect. The conclusion would therefore be subject to all the limitations imposed on deductions generally.

Let us now look at what the objectors have to offer us in exchange for our system. Some of the more intelligent and distinguished of them profess to be disciples of a new school known as the German, statistical, or historical school. The one fundamental principle of this school is, that instead of beginning with certain hypothetical principles of human nature it professes to start from the great facts of history and statistics. Starting in such a way would be as bad as commencing the study of geometry by instructing the pupil in land-surveying, or commencing physics by taking the student around to see all the machinery in a city at work. Moreover, the new school has not really put any new system into practice. When we examine its writings we find them divisible into three classes. First, we have works like those of Roscher, which, whatever merit they may possess, do not, in their mode of development, differ radically from the system to which we are accustomed, and which therefore cannot be considered as forming a separate school unless we ascribe an extraordinary importance to differences of detail, and regard the works of every different writer as forming a different school. We have, secondly, a large mass of statistical investigation and social studies affecting the well-being of nations. But this is applied, not pure, political economy, and is at best only an application of principles of political economy to be otherwise learned. Finally, we have a very large mass of mere nonsense, of no interest or value to anybody except the student of psychology, who may use it to illustrate the aberrations of the human intellect.

Our judgment of the new-school economist must therefore depend upon his position. In so far as he is one who points out that the old system, however consistent and logical it may be, cannot be safely applied without due consideration of all the modifying causes which may act in each particular case, he is a sound teacher, how little soever common-sense people may need his teaching.

When he tells us that he has found out a better way of developing the subject,—a method by which the incompleteness inherent in all scientific systems is avoided,—he takes a position which he lamentably fails in making good. There is not a stone in his foundation capable of bearing any weight at all which is not taken from the English system. He can and does make valuable additions to the superstructure, but has added nothing better than platitudes to the foundation.

When he denounces and professes to reject the commonly received propositions which lie at the base of the subject because they are not absolute and universal, he is guilty of a proceeding so irrational that only the number and strength of his following entitle him to serious refutation.

Source: The Princeton Review, v. 60, November, 1884, pp. 291-301.

Image Source:  Simon Newcomb in Leading American Men of Science, David Starr Jordan, ed. New York: Henry Holt and Company, 1910. Page 363.