Front Page Titles (by Subject) 4: Economics, the Market, and Society - The Economic Point of View
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4: Economics, the Market, and Society - Israel M. Kirzner, The Economic Point of View 
The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).
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Economics, the Market, and Society
The definition to which economic writers have yielded a more general assent than to any other...is “the science of exchanges.”
A. S. Bolles (1878)
...that definition of Political Economy which calls it the science of exchanges, is absurd.
Franklin H. Giddings (1887)
The present chapter groups together definitions that see economic affairs as in one way or another necessarily connected with the act of exchange as a social phenomenon. Two groups of these definitions may be distinguished. The one explicitly raises exchange to the first place in economics, regarding the very notion of a distinct economic sphere as revolving around a more or less carefully defined concept of exchange. The other definitions do not stress the phenomenon of exchange itself, but focus attention on such ideas as the market, the economic system, and the “economy” as an aspect of the larger concept of society. These ideas, too, depend in the last analysis on a fusion of individual activities into a social “system” through some form of the exchange relationship. Both groups of definitions provide a fresh and distinctive outlook on economic phenomena, which at the same time reveals a number of points of contact with many of the alternative conceptions.
Economics and Catallactics
The importance of exchange to economics was recognized very early in the development of the science. In France the physiocrats had stressed exchange and had required ability to be exchanged as a condition for the wealth with which political economy is concerned. Among the classical economists there was some debate as to whether the possibility of exchange was either a sufficient or a necessary condition for wealth. James Mill and McCulloch were among those requiring exchangeability as a condition. But Malthus pointed out that many things outside the scope of political economy may be the objects of exchange. “It has been said...that the liberties of England were chiefly obtained by successive purchases from the crown.”1 A number of the classical defination of economics in term of wealth included the exchange of wealth as a department of the subject together with its production, distribution, and consumption. One French writer had even written: “Society is purely and solely a continual series of exchanges...commerce is the whole of society.“2
But during the early classical period there was no attempt to take this phenomenon of exchange and make it the very core of economics. Political economy was the science of wealth. The fact that wealth is exchanged may have been recognized as of the first importance for a science of wealth, but this recognition did not of itself convert political economy into the science of exchanges.
The first attempt to reconsider the scope of political economy in favor of the exchange criterion was the basis for Archbishop Whately’s suggestion in 1831 to rename the entire subject. “The name I should have preferred as the most descriptive...is that of CATALLACTICS, or the ‘Science of Exchanges.’” Whatley’s outlook is perhaps best seen in his definition of man as “an animal that makes exchanges.”3 Whately joined Senior in denying the applicability of political economy to the activities of isolated man. “Robinson Crusoe is in a position of which Political Economy takes no cognizance.”4 It was no longer sufficient to characterize political economy as concerned with the phenomena of wealth or even with the wealth that is involved in exchanges. The catallactic view of economic affairs saw their unity solely in the act of exchange and conceived of political economy as expounding the principles governing these interpersonal exchanges.
Whately’s opinions on the scope of the subject seem to have aroused some interest at the time. At Dublin Whately had endowed a chair in political economy.5 At least two of the holders of the Whately professorship followed the catallactic view of their subject. But besides the enthusiasm of these followers and acceptance by several minor writers,6 Whately’s proposal, where noticed, was rejected as unjustifiably narrowing the scope of the subject.7 It was not until several decades after the publication of Whately’s book that Macleod seized on the view of economics as the science of exchanges and enthusiastically launched the idea in his crusade to revolutionize the entire subject.8 However, Macleod’s unfortunate propensity for expressing his often good ideas in an apparently bombastic fashion prevented his work from making any appreciable impression on the general economic thought of his time.
The substitution, in definitions of political economy, of a verbal noun (“exchange”) instead of the classical noun (“wealth”) was, of course, of considerable significance. The subject matter of the science was now uniquely characterized, not by the objective nature of the goods-phenomena that it investigates, but by the character of the operations involved in the appearance of these phenomena. Nevertheless, the break from the classical conception of economics as a science of wealth that was involved in Whately’s proposal was not so complete as might at first glance be imagined. That which is exchanged in Whately’s Catallactics is still the same “wealth” with which the political economy of a McCulloch is concerned. The views of those who held that economics is a science of exchanges, in fact, provide another interesting example of definitions that, while themselves closely related to the older wealth-bound formulations, point to a complete emancipation from these bonds. An arresting illustration of this is furnished in the writings of Lawson.
Lawson, one of the Dublin professors, devoted his first lecture in 1844 to problems of the scope and methodology of his subject. The object of political economy is “to investigate and trace to general laws the different phenomena of the commercial or exchanging system...” This is clearly in the Whately tradition. But even more noteworthy is Lawson’s declaration that political economy is a science that has man as its subject matter and “views him in connexion with his fellow-man, having reference solely to those relations which are the consequences of a particular act, to which his nature leads him, namely, the act of making exchange.”9 What Lawson has put before us is no less than a completely original “economic man,” fully capable of bearing comparison with his more familiar cousin, the economic man created by J. S. Mill. Mill’s creature was a being bereft of all passions other than avarice. Mill’s economics was a body of principles governing the consequences of avaricious behavior. Lawson’s economic man, on the other hand, is a far less repulsive caricature. His obsession is merely to engage in the act of exchange “to which his nature leads him,” and the task of Lawson’s political economy is to investigate the consequences of this human urge—an impulse that Adam Smith had long ago made famous as the “propensity to truck, barter, and exchange one thing for another.”10
The separation of acts of exchange and their identification with a distinct human urge made the division between economic and other human affairs a far less painful operation for Lawson than it had been for Mill. The consequences of the propensity to truck may be isolated simply by considering only the results of acts of exchange. There is no need to call upon controversial operations of “abstraction” and “hypothesis” as is necessary when one attempts to segregate the consequences of human pecuniary self-interest. Clearly the catallactic view could facilitate the conversion of political economy from a science of wealth into a science of man.
And yet Lawson himself in his second lecture gave a definition of his subject almost identical with the earlier formulations in terms of wealth.11 The contradiction between the first and the second lectures seems capable of resolution only on the assumption that Lawson himself was willing enough to follow Whately in terminology but was not prepared to admit that this difference meant any substantive alteration in outlook.
Several decades later the American Perry warmly endorsed the catallactic view of Whately and Macleod precisely because it offered an escape from the idea of wealth. In order to avoid the difficulty involved in giving an adequate definition of the concept of wealth as the core of political economy, Perry turned to the conception of that discipline as a science of exchanges.12 We have already noticed a trend in economic thought, towards the latter part of the nineteenth century, that favored the abandonment of wealth as the focus of economics and its replacement by such ideas as welfare and the maximization-pattern of behavior. This trend was now reinforced by Perry’s proposal to reject the concept of wealth altogether in favor of the idea of exchange, thus taking the catallactic idea a step beyond Lawson. It may be remarked that Perry’s suggestion was not generally accepted by American economists of his time. Walker pointed out that until one knows precisely what is being exchanged, little meaning is conveyed by defining economics as the science of exchanges. If, on the other hand, one admits that it is wealth that is being exchanged, then, of course, one immediately renounces any claim to the excision of that troublesome concept.13 The definition of economics in terms of exchange has not gotten rid of the notion of wealth; it has simply swept it under the rug. Henry George wrote of Perry’s discarding the noun wealth: “Without the clog of an object-noun political economy...has plunged out of existence...” It is true that one American writer asserted that economists yielded the definition of economics as the science of exchanges “a more general assent than to any other.”14 But more typical of general opinion was probably the blunt declaration made to the American Economic Association in 1887 that “that definition of Political Economy which calls it the science of exchanges, is absurd.”15
Despite the alleged absurdity of this definition, it has always retained some measure of popularity. Several twentieth-century economists who devoted careful attention to the problem of defin- ing their subject and weighed the merits of several more sophisticated formulations still preferred the exchange criterion.16 But the selection of exchange to serve as the core of economics may yet reflect any one of a number of points of view. This is so because the exchange concept itself reflects several related, but distinct, aspects of economic activity, each of which deserves to be kept in clear focus.
Exchange and the Propensity to Truck
The first aspect of the exchange phenomenon that deserves attention is the status of the act of exchange as an element in the activity of an individual. Adam Smith saw exchange as the result of a human propensity to barter. Whately defined man as an animal that exchanges. Now, human beings engage in barter because they hope to improve their positions by exchanging. The act of exchange is thus no different in this respect from all human actions that are undertaken in the hope of improving one’s position. Of course, the act of exchange involves the cooperation of another person, but some further property is needed to distinguish exchange from other forms of cooperation or from the act of bestowing a gift upon one’s fellow man. It is here that the concept of exchange becomes entangled with ideas of sacrifice, of the mutual coincidence of interests, and the like.
In a number of the definitions of the economic that are couched in terms of exchange, the aspect that is stressed is the fact that exchange involves a quid pro quo. In an atmosphere in which economics and self-interest were linked together, the most characteristic feature of exchange is that it provides a new means of getting something for oneself. It is this aspect of commercial behavior that aroused the ire and moral indignation of Ruskin against the “cash-payment relation” between man and man. Exchange suggests the habit of helping one’s neighbor only on the condition that one will be more than repaid in return.
If this aspect of exchange is implicit in the notion of a science of exchanges, then there appears good reason to reject Walker’s contention that in the absence of a clear conception of what is being exchanged a science of exchanges has no meaning. Perry, against whom Walker was arguing, did, in fact, in one connection define economics as concerned with actions done by one person to another for the sake of receiving something in return.17 Clearly this points to the real meaning behind Perry’s exchange formulation. There is no urgent need to introduce any concept of wealth to make precise the definition of economic activity as that which is directed to another person for the sake of obtaining something in return.
In this form, the conception of economic activity as exchange is closely parallel to the “non-tuism” that was noticed in the previous chapter. Wicksteed’s definition of the economic relationship in terms of a lack of regard for the interests of the person with whom one is dealing was given alternative expression as the “relationship into which men spontaneously enter, when they find that they can best further their own purposes by approaching them indirectly”; and as involving man in the search for “some one else to whose purposes he can directly devote his powers or lend his resources...” “The industrial world is a spontaneous organization for transmuting what every man has into what he desires...”18 Exchange in this context is the device whereby a man can get the things he wants by giving up to another the things he has. The entire realm of economic affairs, in this form of the catallactic view, is a vast net of relationships in which this device is being put to work. Several other American writers at the turn of the century seem to have in mind this aspect of exchange as a means of enticing one’s fellow man to provide one with the goods one desires.19 The “propensity to truck” must be understood as the faculty that men possess of recognizing situations in which the device of exchange, understood in this sense, would prove profitable.
Exchange and the Division of Labor
However, the significance of an economics defined as a science of exchanges may be seen, not in the nature of the act of exchange itself, but in its wide consequences. The market may be viewed, not as an institution facilitating the indirect fulfilment of individual desires (in Wicksteed’s sense of disregarding the competitive interests of other people), but on the contrary, as an institution through which individuals may cooperate to satisfy their wants at higher general levels of satisfaction. As Smith pointed out, each individual, by indulging his propensity to truck, unconsciously helps society as a whole to benefit through the increased division of labor. The “general opulence” associated with specialization is a consequence of this propensity to truck and may arise without any knowledge on the part of the barterers of the “extensive utility” that they promote.
This idea is, of course, related to Smith’s “invisible hand,” which directs each member of the economic community to produce that which is most urgently required by the consumers. Looking at the market, the observer recognizes that the benefits of the division of labor in increasing the nation’s output would, at least in principle, be obtained if the producers and consumers could be induced to specialize by any means whatsoever. A system in which productive effort was inspired by the hope of being accorded public honor, such as Marshall has imagined,20 or by the communistic ideal, in which the sole incentive is the desire to promote social welfare, or by a system of police compulsion, can be imagined as directing individual effort into channels sufficiently specialized to increase the total product far beyond what could be achieved by a primitive autarky. The exchange system embodied in the market is only one of several conceivably efficient mechanisms to attain this end; and its distinctive feature in Smith’s view is that this “end” need never be consciously aimed at by any participant in the market.
This remarkable property of the exchange system may thus well be seen as the central thread uniting all economic endeavor. Since of all the possible devices capable of attaining economic specialization only the market system can evolve spontaneously, and it alone is compatible with conventional notions regarding private property rights, the act of exchange emerges as the key to all social cooperation. There seem grounds for suggesting that the early proponents of catallactics did, in fact, have this aspect of exchange in mind. Whately was not thinking of the act of exchange as merely an expression of a more sophisticated avarice. The unwillingness to accord Crusoe the edification of being made the subject of economic analysis was simply the expression of the belief that political economy was primarily interested in the exciting new vistas of social cooperation made possible by the division of labor that was being encouraged by the rise of modern capitalism. Whately’s interest in man as an exchanging animal arises from the tendency of individuals to become associated through acts of exchange and thus to pool their human and acquired resources for the ultimate benefit of all. It is of some interest to note that two eminent sociologists, Gabriel Tarde and Max Weber, saw this aspect of exchange as the central feature of economic life.21 The charge raised against the catallactic definitions that they have failed to eliminate the concept of wealth from their subject undoubtedly has some validity on such an interpretation. The recognition, in the existence of a system of exchange, of a factor favorable to the expansion of total production does presuppose concepts of measurements that, again, imply some form of the idea of wealth.
The “Purely Formal” Concept of Exchange
The catallactic view of economic affairs may be interpreted to refer to yet another aspect of exchange. Like that discussed in the preceeding paragraphs, this view ignores exchange as a peculiarly motivated human act and focuses attention on the consequences of the act. But instead of gaining its significance from the advantages arising from the social cooperation involved in exchange, the idea of exchange is now to be assigned importance as the means whereby “economic quantities” are changed. An exchange of goods alters the configuration of goods in the economy. An exchange of productive resources alters the arrangement of those factors of production. If the exclusive object of interest is the transfer of the goods themselves, then exchange is significant merely as involving the simultaneous variation of several sets of “economic quantities.” A purchase of a consumer good has re- sulted in a reduction both in the inventory of the seller and the cash holdings of the purchaser. The act of exchange is the event that has altered these economic quantities and has generated the ratio of their variations, viz., the phenomenon of price.
The most ambitious attempt to expound this conception of exchange is contained in Schumpeter’s 1908 definition of the scope of economics in terms of the exchange relationship.22 His concept of economy is coincident with this concept of exchange. Perhaps the most arresting and widely discussed implication of Schumpeter’s concept of exchange is its application to the Crusoe economy. If an act of exchange is significant only as the simultaneous alteration in stocks of goods, then the idea of exchange may easily be extended to the activity of a single individual. When Crusoe shoots game, in Schumpeter’s example, he is merely exchanging shot and energy for food. This use of the idea of exchange has been considered by critics as an arbitrary and unfruitful piece of mental gymnastics, but has, at the same time, earned grudging respect as “never to be forgotten subtlety.”23
Schumpeter’s outlook is, of course, consistent with his wish to ignore human behavior as a factor in economics. Leaving human behavior to the psychologists, the economist is merely to examine the results of behavior in terms of related variations in the quantities of goods and prices. From a less positivistic point of view, Schumpeter’s extension of exchange to the isolated economy may, in fact, be seen, not as an extension, but as a restriction, of the interpersonal concept of exchange. With the recognition of the purposive element in human action, exchange is simply the sacrifice of the satisfaction of lesser, for the sake of satisfying more urgent, needs. Interpersonal exchange is significant as reflecting the possibility of simultaneous actions on the part of two purposeful human beings, each intent on attaining that position which he prefers among all the alternatives open to him. And, of course, this element of exchange can be pointed out in the isolated economy as well. It requires neither special subtlety nor mental gymnastics to see that Crusoe is exchanging one satisfaction for another whenever he forgoes the first in order to secure the second. In the words of Seligman, “Crusoe exchanges in his mind apples and nuts in estimating their value to him.”24 But when Schumpeter considers Crusoe to exchange, not by forgoing one pleasure for the sake of another, but because the quantities of the various resources at his command undergo simultaneous variation, then he has effectively robbed the concept of exchange of all but its barest externals. There is little real difference, on this view, between the case where A exchanges his horse for B’s cow and the case where A’s horse and B’s cow have exchanged places and refuse to budge. Nothing is added to the exposition of related variations of economic quantities by explaining that these variations constitute Tausch. Something of this seems to have been felt by Schumpeter himself in writing that his conception of all activity as exchange is “purely formal.”25 The Schumpeterian exchange relationship is best understood when it is denoted by the alternative term that Schumpeter uses for it, “price.”26 Price to Schumpeter meant simply a parameter governing the simultaneous variations in the quantities of goods. The Tausch-relation meant nothing more. The definition of economics in terms of Schumpeter’s exchange relationship merely conveyed in different terms his “mechanical” definition of the subject noticed in an earlier chapter, centering around changes in “economic quantities.”
Exchange and the Economic System
The final aspect of exchange that may make it of significance for defining the scope of economics is its importance in the visualization of an economic system. It is primarily this aspect that is concerned in the second group of definitions mentioned at the beginning of the chapter, which use the idea of an economic system or organization as their criterion. The recognition that, expressed in the anarchy of numberless, seemingly haphazard transactions of economic life, there is a system that relates apparently disconnected actions and organizes them to achieve social “ends” is an achievement of economic science. But the discovery of the existence of such a system clears the way for a fresh conception of the nature of economic science itself. The existence of a system offers a new object for investigation, viz., the system itself. The system may concern wealth, the selfish behavior, or the propensity to truck, of a variety of economic men; but it does provide an independently unique phenomenon in its organization, its structure, and its operation.
The system has been described variously as the exchange system, the price system, the market, and so on. These terms reflect possibly varying outlooks on the character of the system, but all of them imply the phenomenon of exchange. The description of the subject matter of economics as exchanges may thus imply the entire system of exchanges. In the words of one writer: “Economics studies the market as political science studies the state. Appreciation of this analysis seems to me to be fundamental to the catallactic point of view.”27 Undoubtedly this aspect of exchange is akin to that described in a previous section, in which exchanges secure the advantages of specialization and the division of labor, but the two are quite distinct. There the act of exchange was seen as bringing to a focus the possibilities for mutual benefit that are opened up for men by the division of labor, and the aggregate of all such acts of exchange measured the maximum of specialization and effective social cooperation attained. Here the relevant aspect is the relationship between all the acts of exchange themselves, the structural pattern of these acts, and the way in which they all together succeed in “delivering the goods.”28
When the success of the system in achieving generally prized results is not considered, then a description of the system reduces to a positive statement of the functional relationships among the sets of variables within it. And the totality of these relationships may have no special interest independently of the various sets of relationships themselves. This is the standpoint of Schumpeter’s definition in terms of exchange and the other “mechanical” formulations discussed in this and the previous chapter. But if the whole body of interrelationships is considered in its unity, and the existence of such a unity is considered significant in itself, then the idea of a system may assume a prominent place in economics.
Bastiat is an example of an economist who, stressing the exchange point of view, did see the prime interest of his subject as existing in the exposition of such a system. And it seems likely that at least part of the criticism aimed at his work arises from a misunderstanding of Bastiat’s self-assigned scope of investigation. Bastiat is often characterized as a shallow optimist content to bestow lyric praise on the laissez-faire economy. Cairnes attacked Bastiat as unscientific. Bastiat, Cairnes complained, considers it his task as an economist, not only to discuss the phenomena of wealth in a laissez-faire economy, but also to demonstrate that this system is the optimum one.29 This, Cairnes declares, is to assert that the results of political economy are a foregone conclusion, and if this is the case, then it is not a science at all, because “science has no foregone conclusions.” By attempting to justify rather than explain the facts of wealth, Bastiat is departing from the impartiality of science.
Cairnes’ insistence on the disinterested character of scientific inquiry in general, and of economics in particular, is a classic statement of a jealously guarded tenet of scientific economics. Bastiat’s enthusiasm for the innate harmonies of a free economy did produce passages in his writings that are vulnerable to the type of criticism levelled by Cairnes. Nevertheless, it seems that Bastiat’s conception of his subject was sufficiently different from that of Cairnes to exculpate him from at least part of the blame imputed to him in the latter’s reproaches. Bastiat was impressed by the comparative smoothness with which the tremendously complicated machinery of economic endeavor succeeded in fulfilling the wants of consumers. His classic passages in the opening chapter of Harmonies économiques,30 in which he describes how a humble carpenter is served, in exchange for his skilled labor, with commodities brought from the four corners of the earth and how each day the great city of Paris is provided with colossal quantities of food and other articles, have been echoed in subsequent economics textbooks again and again. One would be closing one’s eyes to the light, Bastiat observes, if one failed to recognize that all this is the product of a “prodigiously ingenious mechanism.” “This mechanism is the object of study of political economy.”
Clearly, then, Bastiat felt some justification for assuming beforehand that the system to be studied by political economy was one that worked. After all, it was this successful operation of the system—a success that Bastiat felt to be grounded on observation—that was the object of the study. For Cairnes, who considered economics a dispassionate study of the phenomena of wealth, any predilections towards one system in particular must be unscientific. For Bastiat, what invited explanation was precisely the large degree of efficiency empirically evinced by the system, a phenomenon of which the recognition hardly deserves the suspect position of a “foregone conclusion.”
Be this as it may, Bastiat is typical of a fairly numerous group of writers stressing the organization of the economy as the focus of economic attention and seeing the significance of exchange primarily in this connection. Two eminent twentieth-century economists may be cited as examples of the popularity of this view.Hawtrey writes:
...when the perfect cooperation which would be the ideal of reason is denied us, we turn back to...the whole apparatus of human motives, instinctive, habitual, or other. If each member of society can be induced or impelled to do his allotted task by associating it with some motive that appears to him adequate, then he need never know how he is contributing to the real end, and need not even be aware of the end at all. It is this problem of organization that we shall call the Economic Problem. It is in fact the real subject matter of political economy.31
And Hayek writes:
...the spontaneous interplay of the actions of individuals may produce...an organism in which every part performs a necessary function for the continuance of the whole, without any human mind having devised it....The recognition of the existence of this organism is the recognition that there is a subject matter for economics. It is one of the causes of the unique position of economics that the existence of a definite object of its investigation can be realized only after a prolonged study...32
Economics, the Economy, and the “Volkswirtschaft”
This line of thought leads directly to the role played in discussions of the scope of economic inquiry by the idea of the Volkswirtschaft. The word seems almost by philological accident to have given rise to features in German-language definitions that are absent in English-language discussions of the subject. Numerous disquisitions on the Wesen of the Volkswirtschaft evince conceptions ranging from the more holistic views of some of the economists of the Historical School and advocates of Sozialpolitik, in which the Volkswirtschaft is considered as an organic whole, to views that see it merely as an agglomeration of separately operating individual “economies.”33
It is significant that the existence in the German language of a single word to represent compactly so complex a conception has had considerable bearing on the direction taken by definitions of economic affairs. Many writers defined their subject directly in terms of the study of the Volkswirtschaft (hence Volkswirtschaftslehre). Thus, such a definition immediately places the accent on the social character of economic activity. The absence for a long time in English of a word corresponding to Volkswirtschaft meant that English definitions of the subject were not prone to be thus influenced.34 The current use of the term “the economy,” itself a reflection of the interest in macroeconomic “aggregates,” is too recent and too specialized to have had much influence on English definitions. When Schmoller used the term “political economy” as the equivalent of Volkswirtschaft, the grossen gesellschaftlichen Käorper, he was coining what must at that time have been a new meaning for “political economy.”35
Moreover the use of the term Volkswirtschaft seems to have had more than coincidental connection with a conception of economic phenomena in which temporal relationships, and historical significance generally, were stressed. The term carried with it, especially to the writers who stressed the organic unity of the whole, the same implications of continued identity over time as are asso- ciated with terms such as the State or the Nation (terms cited by Schmoller, for example, as analogous to the Volkswirtschaft).36 To the endowment of the economy with an only arbitrarily divisible extension along the time dimension is certainly in some degree to be ascribed the well-known description of economics by Mangoldt as the “philosophy of economic history” and the similar view of Roscher37 and other economists of the Historical School. Conceived as possessing in this way a kind of fluid unity in its extension over both space and time, the idea of the Volkswirtschaft could lay claim to a distinct entity (distinct, e.g., from the “body politic”) only by virtue of its more conspicuous and enduring function of providing for the material needs of the nation.
It was noticed in the previous chapter that German economists paid considerable attention to the maximization principle. This interest sometimes ran into sharp conflict with the notion of economics as the study of the Volkswirtschaft. One writer typically dismissed these discussions of the “economic principle” by declaring that the task of economics is not to investigate the effects of Wirtschaftlichkeit, but to understand the workings of the Volkswirtschaft.38 In the twentieth century Amonn, who stresses the social character of economic phenomena probably more than any other writer, has sharply criticized attempts to define the scope of economic science in terms of such concepts as individual acts of economizing. Attempts to build up the notion of a Volkswirtschaft from the elements of individual economic behavior are foredoomed to failure.39 It is from the social relationships involved in economic activity that such activity derives its distinctive character. This point gave rise to vigorous disagreement from those who attempted to construct the Volkswirtschaft out of the Wirtschaft.40
Also associated with the idea of the Volkswirtschaft are those definitions of economics that are couched exclusively in terms of national aggregates. To this class belong, for example, the views of economists from the time of the classical school who saw their subject as concerned with national, not individual, wealth.41 Discussion of “social goals” as something apart from individual motives, to which the economy as a whole is conceived as striving, are also related to the idea of the Volkswirtschaft. Both the writings of R. Stolzmann and Othmar Spann are relevant in this regard.42
Economy and Society
Many of the ideas mentioned in the preceding sections of this chapter have a bearing on the relationships that have at various times been held to exist between economics and the social sciences generally. The structures of interpersonal patterns of contact that the economist studies in his analysis of the market may, of course, be of interest to the sociologist or the social psychologist from a totally different aspect. And writers who identified the specifically economic aspect of phenomena with the social quality inherent in exchange, the market, and the like, found themselves influenced more or less deeply by their ideas on the nature and methodology of the social sciences as a group.
The social character of the phenomena studied by the economist was recognized early in the history of the discipline. In his definition of political economy J. S. Mill had stressed this aspect to a degree that seems to have escaped later writers.43 Nevertheless, it is true that the emergence of sociological thought in the second half of the nineteenth century brought with it a vastly increased awareness of the contribution that economics can make to the systematic study of society. This in turn made for a “sociological” attitude towards the study of economics itself, which manifested itself in a variety of forms.
At the extreme was the opinion first propounded by Comte, and taken up by later writers, that it was futile to seek for laws in economics apart from the laws of society as a whole. To Comte the recognition of economic affairs as part of the phenomena of society meant that an economic analysis of society that leaves out intellectual, moral, and political factors must be a “metaphysical” subject, created by an “irrational” separation.44 Later writers, especially those of the Historical School, held essentially similar views. In England Ingram and Leslie were stressing the need for turning to the “great science of society” for any valid economic knowledge.45
Carried to the extreme position held by Comte, these ideas meant, not that the social character of economic affairs made possible a fresh means of definition, but that the awareness of this social character led to the denial that there are any specifically economic affairs whatsoever. Phenomena of wealth might indeed be distinguished. But once it is insisted that the derivation of the laws of wealth requires analysis of intellectual, moral, and political factors, then it is at once contended that no specifically economic point of view can be scientifically illuminating at all.
However, awareness of the sociological importance of economics did not, of course, always involve its submersion in a broadly understood sociology.46 Any number of writers at the turn of the century could be cited who diligently pursued the study of economics, but who were fully conscious of its status among the social sciences. Confining our attention strictly to that aspect of the sociological outlook on economics which affected the conception of the nature of the economic point of view, we notice several strands of thought that run through the literature during the present century.
At one level, we observe again Amonn’s insistence on the futility of the search for the nature of economic science in any concepts built on individual activity. There does exist a given pie that the economist studies, but its essence is the structure of the societal relationships that make up economic affairs as we know them in the world and as they have been traditionally studied by the economists from Ricardo on. To attempt to analyze economic affairs by referring them back to the individual is to abstract from their very essence.47 From the point of view of the scope of this essay, this view is primarily of importance as constituting a rejection of the formulations of the economic point of view that we take up in the final chapters. The emphasis on the social aspect has, however, been used by one or two writers to distinguish economics from technology.48
In a somewhat different context, the recognition that economic affairs refer to the actions of men, not in isolation from one another, but within a societal framework, has affected the conception of the economic point of view in respect of the goals of economic activity. Anderson, Haney, Parsons, and Macfie may be taken as examples of the many writers during the past half century who show this influence.49 The stress, at this level of discourse, is not on the social patterns of relationships that emerge during the course of economic activity. Rather, these writers tend to emphasize the fact that the values and motives that affect and inspire economic activity are overwhelmingly conditioned by society as a whole. Whatever the role of individual activity, it is pointed out that values are socially determined and are the product of forces whose explanation must be sought in sociology or social psychology. This trend of thought, too, seems to be significant to our own problem chiefly in its implied rejection of the “atomistically individualistic” conceptions of the economic point of view treated in later chapters.
Finally, in this necessarily brief and fragmentary survey of the sociologically conditioned conception of the economic point of view, we must notice the attempts to “locate” economics within the more general expanse of sociological theory. These attempts have generally been made by writers who were primarily interested in the study of society and intent on defining precisely the nature of the economic point of view, not for its own sake, but in order to have more clearly in focus the separate facets that together make up the complete sociological perspective. Thus, Pareto conceived of economics as an integral part of sociology and believed that the distinctively economic point of view is obtained by a conscious restriction of attention to certain “variables.”50 A complete sociological theory would entail consideration of all the variables that affect action in society. Economics obtains its separate status by deliberate “abstraction” from the “noneconomic” variables and thus becomes a hypothetical subdiscipline within the all-embracing theory of society. The particular criteria that are to determine the “economic” or “noneconomic” nature of any one variable are not here of chief interest. (In fact they reflect the points of view discussed in several of the chapters in this book.) What is of moment is the idea that an economic point of view is possible only as a first and crude abstraction from a more comprehensive and complex theoretical system, viz., the theory of society.
Professor Parsons, who in his earlier writings had embraced this conceptual framework for the “location” of economics, has more recently espoused a somewhat different idea.51 The new view sees the “economy” as a subsystem of society. The theory of social systems in general will apply to the economy as a special case. The basic variables operative in the economy, (as well as in all special-case subsystems of society) are the same variables as govern the theory of social systems generally. The economy is that subsystem of society which is distinguished by its adaptive function, i.e., that function of any social system which relates to its control of the environment for the purpose of attaining goals.
This view of the matter places the economic point of view even more firmly in a position subordinate to general sociological theory. Economic theory becomes a special case of sociological theory and is conceived, indeed, as providing a mirror that reflects, mutatis mutandis, the propositions of such a theory. The more interesting and important implications of this approach for economics reach beyond the scope of this enquiry. For us it is sufficient to have noticed yet another conception of the economic point of view, one that shares with those noticed in this section the characteristic of leaning heavily on the social aspect of economic affairs, and thus indirectly on the ideas of exchange discussed at length at the beginning of this chapter.
[]T. Malthus, Definitions in Political Economy, pp. 70 f. Mill's position is in his Commerce Defended (1808), p. 22; McCulloch's, in his Principles of Political Economy (1825), part I, p. 5. Parallel to the exchangeability condition required for wealth by these writers is the requirement that items of wealth be capable of appropriation and alienation. (See, e.g., S. Read, Political Economy [Edinburgh, 1929], p. 1.] Sismondi explicitly denied that exchangeability is a prerequisite for wealth (Nouveaux principesd'économie politique [Geneva, 1951], p. 71).
[]Count DeStutt de Tracy, A Treatise on Political Economy (English ed., Georgetown, 1817), “Of Action,” pp. 6, 15.
[]R. Whately, Introductory Lectures on Political Economy (4th ed.; London, 1855), p. 4.
[]Ibid., p. 5. See N. Senior, Outline of the Science of Political Economy, p. 25. Torrens, apparently, was in disagreement (ibid.), See also E. Cannan, Theories of Production and Distribution, 1776–1848, p. 7.
[]On the existence of a Dublin “school” in economics during this period, see R. D. Black, “Trinity College, Dublin, and the Theory of Value, 1832–1863,” Economica, New Series, XII (1945), 140–148.
[]The Whately professors who endorsed the catallactic view were J. A. Lawson, Five Lectures on Political Economy, delivered before the University of Dublin, 1843 (London and Dublin, 1844), pp. 12 f.; and W. N. Hancock, An Introductory Lecture on Political Economy (Dublin, 1849), p. 7. The writer who wrote under the pseudonym Patrick Plough (and was noticed by Seligman in his “On Some Neglected British Economists,” Economic Journal, 1903), bestowed on his book (London, 1842) the following title: Letters on the Rudiments of a Science, called formerly, improperly, Political Economy, recently more pertinently, Catallactics.
[]Among writers who condemned the narrowness of the catallactic view were F. W. Newman, Lectures on Political Economy (London, 1851), p. 19; J. Cazenove, Thoughts on a Few Subjects of Political Economy (London, 1859), p. 70. See also W. E. Hearn, Plutology (London and Melbourne, 1864), p. 6. For later criticism of the narrowness of Whately's position, see W. Roscher, Geschichte der National-Oekonomik in Deutschland (Munich, 1874), pp. 844, 1072; P. Cauwèes, Précis du coursd'économie politique (Paris, 1881), p. 7; P. Leroy-Beaulieu, Traité théorique et pratiqued'économie politique (Paris, 1896), I, 16.
[]H. D. Macleod, The Elements of Political Economy (London, 1858), p. 5. Macleod stresses his independent arrival at the catallactic position. In his notion of exchange Macleod is narrower than some of his precursors. Thus he dismisses taxation from political economy on the grounds that it is not the subject of exchange. Whately expressly considered taxation as exchange (Introductory Lectures, p. 7 n.). Senior too (Outline of the Science of Political Economy, p. 87) viewed “all that is received by the officers of Government as given in Exchange for Services. ... ” In his History of Economics, published some forty years later, Macleod carefully collected favorable references to his own work by later writers and cites the American Perry, about whom more below.
[]J. A. Lawson, Five Lectures on Political Economy, pp. 12–13.
[]A. Smith, Wealth of Nations, ed. Cannan (Modern Library edition), p. 13.
[]See J. A. Lawson, op. cit., p. 26. (A similar ambivalence seems visible also in Plough's work cited above, n. 6.)
[]A. L. Perry, Elements of Political Economy (14th ed.; New York, 1877), pp. 1, 54.
[]F. A. Walker, Political Economy (New York, 1883), p. 3. Henry George's criticism is in his The Science of Political Economy (New York, 1898), p. 130.
[]Albert S. Bolles, Political Economy (New York, 1878), p. 3.
[]Franklin H. Giddings, “The Sociological Character of Political Economy,” read at the second annual meeting of the association; published in the association's Publications, III (1889), 43. It is of some interest that Giddings, who here castigates the “absurdity” of the Perry position, has elsewhere (Essays in Honor of J. B. Clark, 1927) gratefully cited Perry's book as having been his own first textbook in economics.
[]See, e.g., A. Amonn, Objekt und Grundbegriffe der theoretische Nationalökonomie (2nd ed.), pp. 160 f., for Max Weber's position; Felix Kaufmann, “On the Subject Matter and Method of Economic Science,” Economica, November, 1933, pp. 384 f; H. Halberstaedter, Die Problematik des wirtschaftlichen Prinzips (1925), p. 76. Schumpeter's position is discussed later in this chapter.
[]A. L. Perry, An Introduction to Political Economy (New York, 1877), p. 12.
[]P. Wicksteed, “The Scope and Method of Political Economy,” Economic Journal, March, 1914, reprinted in Common Sense of Political Economy, II, 781.
[]See S. Newcomb, Principles of Political Economy (New York, 1886), p. 6; F. B. Hawley, “A Positive Theory of Economics,” Quarterly Journal of Economics, 1902, pp. 233 f.
[]A. Marshall, The Present Position of Political Economy (London, 1885), pp. 22–25.
[]See especially G. Tarde, Psychologie économique (Paris, 1902), pp. 151 f., for the use of this aspect of exchange to distinguish between economics and politics. On Weber's position, see above, n. 16; see also shils and Finch, eds., Max Weber on the Methodology of the Social Sciences (Glencoe, 1949), p. 63; M. Weber, Gesammelte Aufsätze zur Wissenschaftslehre (Tübingen, 1922), pp. 365–366.
[]Schumpeter's definition of economics in terms of exchange was set forth in his Das Wesen und der Hauptinhalt der theoretische Nationalökonomie (Leipzig, 1908); see especially pp. 55, 582. For Schumpeter's maturer view of exchange, see his History of Economic Analysis (1954), p. 911. For what seems to be a change in Schumpeter's appraisal of Whately's stress on catallactics, see Wesen und Hauptinhalt, p. 50 n., and History of Economic Analysis, p. 536 n.
[]See A. Amonn, Objekt und Grundbegriffe der theoretischen Nationalökonomie (1st ed., 1911), p. 128; L. Robbins, Nature and Significance of Economic Science (2nd ed.), p. 21 n.
[]E. R. A. Seligman, “Social Elements in the Theory of Value,” Quarterly Journal of Economics, May, 1901, p. 327. See also L. Mises, Socialism (English ed., London: Jonathan Cape, 1936), pp. 114, 117.
[]J. A. Schumpeter, Wesen und Hauptinhalt, p. 53.
[]Op. cit., p. 49.
[]Carl E. Parry, “A Revaluation of Traditional Economic Theory,” American Economic Review (Supplement, 1921), p. 125.
[]“If economic theory is interpreted as a critique of the competitive system of organization, its first and most general problem is that of determining whether the fundamental tendencies of free contractual relations under competitive control lead to the maximum production of value as measured in price terms.” (F. H. Knight, “Fallacies in the Interpretation of Social Cost,” Quarterly Journal of Economics, 1924, reprinted in The Ethics of Competition, p. 218.)
[]J. E. Cairnes, “Bastiat,” reprinted in his Essays in Political Economy (London, 1873), pp. 312 f.
[]F. Bastiat, Harmonies économiques (8th ed.; Paris, 1881), pp. 25–28.
[]R. G. Hawtrey, The Economic Problem (London: Longmans, Green & Co., 1925), p. 3.
[]F. A. v. Hayek, “The Trend of Economic Thinking,” Economica, May, 1933, pp. 130–131. For similar passages stressing the economic organization for the purposes of definition, see R. T. Bye, “The Scope and Definition of Economics,” Journal of Political Economy, October, 1939, p. 626; K. E. Boulding, The Skills of the Economist (Cleveland, 1958), p. 8. See also F. Oppenheimer, “Alfred Amonn's ‘Objekt und Grundbegriffe,’” Weltwirtschaftliches Archiv. Bd. 27 (1928), I, Literatur, p. 170.
[]For samples of the literature on this point, see C. Menger's Untersuchungen (Appendix I, “Ueber das Wesen der Volkswirthschaft”); G. Schmoller, “Die Volkswirtschaft, die Volkswirtschaftslehre, und ihre Methode” (1893), reprinted in his Über einige Grundfragen der Sozialpolitik und der Volkswirtschaftslehre (Leipzig, 1898).
[]For one example of German influence in this regard, see Ely's approving reference to the definition of economics as the “science of national housekeeping,” an idea which he relates to that of a “Volkswirthschaft” (Introduction to Political Economy [New York, 1889], p. 95).
[]See G. Schmoller, Über einige Grundfragen, p. 217.
[]See G. Schmoller, Grundriss der allgemeinen Volkswirtschaftslehre (11th and 12th ed.; 1919), I, 1.
[]W. Roscher, System der Volkswirtschaft, I (Berlin, 1906), 42.
[]F. Kleinwachter, “Wesen, Aufgabe und System der Nationalökonemie,” Conrads Jahrbucher (1889), p. 639.
[]See especially A. Amonn, Objekt und Grundbegriffe (2nd ed.), pp. 153 f.
[]See especially the article by Oppenheimer cited above, n. 32.
[]See, e.g., D. Raymond, The Elements of Political Economy (2nd ed.; Baltimore, 1823), p. 35; Patrick Plough (pseud.), Letters on the Rudiments of ... Catallactics, p. 4; R. Whately, Introductory Lectures, pp. 16, 33 f.
[]On this see T. Suranyi-Unger, Economics in the Twentieth Century (English ed., New York, 1931), p. 78. See also the next section in this chapter.
[]For J. S. Mill's emphasis on the social character of economic affairs, see his Essays on Some Unsettled Questions of Political Economy, pp. 133, 135, 137, 140. Amonn, in his sharply critical review of Mill's position (Objekt und Grundbegriffe, 1st ed., pp. 35–36), does not seem to take notice of these passages. Gehrig (in an essay introducing his 1922 edition of Hildebrand's Die Nationalökonomie der Gegenwart und Zukunft, p. 1x), ascribes it to the credit of the “new” economists to have first recognized the social character of their discipline.
[]See Comte's Cours de philosophie positive (2nd ed., 1864), IV, 194 f.; see also the works cited above, ch. I, n. 24.
[]On this see above, ch. II, n. 48. Compare Parsons' view that Marshall's conception of economics turned it into an “encyclopedic sociology,” so that any separate identity of economic theory as a discipline is destroyed. (See, e.g., T. Parsons, The Structure of Social Action [Glencoe, 1949], p. 173.)
[]See, e.g., A. Amonn, Objekt und Grundbegriffe (1st ed.), p. 154 n.
[]It comes as not altogether a shock to discover at least one writer who advanced a view precisely opposed to that of Amonn. A. Schor (in his dissertation Die rein ökonomische Kategorie in der Wirtschaft [Königsberg, 1903]) can find the purely economic aspect of affairs only by abstracting completely from the social element.
[]R. T. Bye, “The Scope and Definition of Economics,” Journal of Political Economy, October, 1939, p. 625; J. F. Hayford, “The Relation of Engineering to Economics,” Journal of Political Economy, January, 1917, p. 59.
[]See above n. 42. See also B. M. Anderson, Social Value (Cambridge, 1911); L. H. Haney, “The Social Point of View in Economics,” Quarterly Journal of Economics, 1913; T. Parsons, “Some Reflections on ‘The Nature and Significance of Economics,’” Quarterly Journal of Economics, May, 1934, pp. 518 f.; Alec L. Macfie, Economic Efficiency and Social Welfare (London, 1943). The justification for what might seem the perfunctory treatment of the matters touched on in this paragraph must be that, important as they are in other connections, they have far less relevance—and that of a chiefly negative character—for our own discussion.
[]On this, see Talcott Parsons and Neil J. Smelser, Economy and Society (Glencoe, 1956), p. 6.
[]Ibid., Parsons and Smelser ascribe the original suggestion to Professor W. W. Rostow. See also P. A. Sorokin, Society, Culture and Personality (New York, 1947), pp. 7 f.