CHAPTER 1

Introduction

Modern man, homo sapiens, as he calls his species with a characteristic lack of modesty, has left evidence of his presence in various locations on earth for fifty thousand years or more. During this long interval his fortunes have fluctuated widely, periods of relative prosperity have alternated with grim struggles for survival, but there has been an unmistakable general trend towards a better understanding of the problems of existence, and human life is far different today from what it was in the Old Stone Age. When we stop to analyze this progress, however, it is apparent that the forward movement has been far from uniform. In most fields of activity the gains have been meager and painfully slow. Indeed, in some of these fields it is questionable whether we have advanced much beyond the point where our ancestors stood at the dawn of recorded history. Politically, war and the threat of war are still the same psychological and material burden on the nations of today as they were on the rival tribes of the prehistoric era. Economically, the great majority of the human race still live under one version or another of the same primitive communal economic organization that developed from man’s first awkward efforts at group living, and where more advanced systems have evolved they are imperfectly understood and ineptly handled. Ethically, the conduct of the populace in general is still far below the standards of even the earliest of the great moral and religious teachers.

In striking contrast, progress toward understanding and control of the physical environment has been outstanding, and during the last few centuries knowledge in this field, the province of physical science and its applied branches, has been expanding at a rate that might well be termed explosive. Recent spectacular achievements in certain special areas have merely dramatized this rapidly accelerating forward movement, which is taking place all along the physical front. This situation wherein one branch of knowledge is continually reaching out for new worlds to conquer while its fellows still grapple unsuccessfully with the problems of the Cave Dwellers is a strange anomaly in our present-day society, and the reasons for the extraordinary disparity deserve much more serious consideration than they are commonly given.

A comparison like this is usually shrugged off with the assertion that the problems in these other fields are more difficult than physical problems, and that the slower rate of progress is due to this factor. We are entitled, however, to take this kind of a contention with a grain of salt. It is one of those statements that can neither be proved nor disproved, the kind of an explanation that is made to order for those who wish to rationalize failure to reach their goals. From a purely detached point of view it is hard to understand why the maintenance of full productive employment, for instance, should warrant being classified as a more difficult task than the design and manufacture of an airplane. If exactly the same methods had been applied to the solution of both problems we might perhaps be justified in concluding that the problem which resisted these methods was the more difficult, but where totally different methods have been utilized we are certainly not out of order in suspecting that failure in one case and success in the other is a reflection of the relative adequacy of the methods used, rather than of the relative difficulty of the problems.

One of the most significant discussions now in progress turns on how far the methods by which the astonishing results in pure and applied science have been achieved may be transferred to other human activities.²

—James B. Conant

Of course, many economists contend that scientific methods are not applicable in their field. Frank H. Knight, a prominent economist of the post-World War I era, wrote extensively on the subject, and expressed the opposing view clearly. He characterized “the notion that social problems can be solved by applying the methods by which man has achieved mastery over nature” as “false, and illusory.” In support of this conclusion, however, he makes this statement: “But obviously, the basic problems are value problems, to which natural science has little relevance… It [science] shows how to do things, how to achieve a concretely defined objective, not what objectives to pursue.”³

The implication of this statement is that the identification of “what objectives to pursue” is the primary task of economics, and that the issue of “how to reach a concretely defined objective” is irrelevant. Paul Samuelson makes the same point by defining the objective of economics as obtaining the answers to three questions, all of which are addressed to the issue of “what objectives to pursue.” He lists the following:

1. What commodities shall be produced and in what quantities?
2. How shall goods be produced?
3. For whom shall goods be produced?⁴

We need look no further to see why progress in economics has been so slow compared to the rate of advance in the scientific fields. The inevitable result of the policy of concentrating attention on identifying the objectives is that economics is now long on commendable objectives and short on methods by which to reach those objectives. Clearly there is a wide gap here that needs to be filled by systematic study of the factual side of economics, which we may define as obtaining the answers to two very different questions, as follows:

1. How does the economic system operate?
2. How can we manipulate it to attain our defined objectives?

The economists challenge the assertion that there are factual answers to these questions, and even deny that there are factual data that can be applied to a resolution of the issues. From Heilbroner and Thurow we get this assessment of the situation:

One of the most important attributes of modern history is lodged in a striking difference between two kinds of knowledge: the knowledge we acquire in physics, chemistry, engineering, and other sciences, and that which we gain in the sphere of social or political or moral activity. The difference is that knowledge in some sciences is cumulative and builds on itself, whereas knowledge in the social sphere does not.⁵

Frank Knight agrees. He tells us that “The data with which the social sciences are concerned are themselves not objective in the physical meaning—are not data of sense observations… They consist of meanings, opinions, attitudes and values, not of physical facts.”⁶ This has been the opinion of the leading economists ever since the beginning of systematic study in this area. One of the early theorists, Alfred Marshall, explained, “Economics is a study of men as they live and move and think in the ordinary business of life,”⁷ and on this basis he asserted that “the actions of men are so various and uncertain, that the best statement of tendencies which we can make in a science of human conduct, must needs be inexact and faulty.”⁸ Heilbroner and Thurow say that “economists observe the human universe, just as scientists observe the physical universe, in search of orderly relationships.”⁹ Jacob Viner, a contemporary of Knight, contended that there are no relationships in economics comparable to those found in science.

We have no logical justification for belief in the existence of important economic functions that are simple, stable through time and space, and characterized by stable and fixed parameters. The social order is in these respects different in kind, or different in so high a degree as for most practical purposes to be equivalent to a difference in kind, from the physical or even the biological order of nature.¹⁰

As these statements demonstrate, the economists, by and large, look upon the subject matter of economics as a study of human behavior. They view it as an uncertain and elusive field where exact correlation of cause and effect is impossible. Business, scientific and technical people, on the other hand, find that the economic forces that they encounter in the course of their daily tasks move steadily and relentlessly forward to their inevitable consequences regardless of human desires and opinions. We have found that if we accommodate ourselves to these natural forces, they can be made to serve our purposes; if we do not, they mow us down without a trace of compassion. The very best of intentions are of no avail; the utmost of human determination is futile. Either we stay on solid economic ground or we go down to certain defeat.

Forces of this kind are no strangers to us. Throughout our everyday work we are dealing with physical forces that display exactly the same characteristics. If we wish to erect a building, we must design the structure in conformity with the physical principles that govern the various elements. If we neglect or refuse to do so, there is no argument about it. The building collapses and that is the end of the matter. We cannot protest the decision; we cannot appeal to higher authority. So far as our experience would indicate, there is no essential difference between the physical laws and the economic laws with which we come in contact. Neither can be challenged or ignored with impunity. Neither is affected in the slightest degree by our approval or disapproval.

It is apparent that we are concerned with aspects of the economic process that are quite different from what the economists see. They are focusing their attention on the objectives of economic actions, which are the results of human decisions, whereas we are primarily concerned with the effects of those actions, which are controlled by natural laws independent of human preferences and opinions. Our observation is that when an economic action is once taken, the ensuing events march inexorably forward to definite and certain consequences that are wholly independent of the hopes and desires of those who initiated the action. Here, then, is another side of economics, a field that has been overlooked or disregarded. What we now propose to do, in this work, is to apply scientific methods to an examination of this hitherto unexplored, or at least under-explored, field.

Economists, like the workers in other non-scientific fields, are what the medical profession calls general practitioners. There are different ideas as to methods, to be sure, and individuals have their own personal fields of special interest, but there is no division of labor, which is at all comparable to that in the scientific ranks. For example, J. M. Keynes, the most influential of the modern economists, made his own basic studies and constructed his own theories, thus performing functions analogous to those of the pure scientist. He then applied his findings and his theories to economic problems and arrived at methods for handling these problems, which he believed were appropriate on the basis of the theories, which he had devised, thus performing functions analogous to those of the engineer. Finally, he took over the role of advocate and worked strenuously and effectively to get his theories and recommendations adopted by governmental agencies and others concerned.

Many other less publicized members of the economic profession have covered similar ground, still others confine their activities to one or two of these three fields, but they are all recognized as “economists.” They get their training in the same college classes and from the same textbooks, they read the same journals, and they belong to the same professional societies. No distinction such as that between pure scientists and engineers is ever made, nor does the economist normally recognize that in waging a partisan battle for the adoption of his favorite economic “reform” program he is stepping outside the field of economics and into that of politics, the determination of public policy.

The final stage of economic planning, the decision-making process, requires consideration of the social and political aspects of the issues under consideration, as well as the economic aspects. These are items of a nature very different from the factual considerations that enter into a determination of how the system operates, and they call for a very different approach to the subject matter. In the absence of any definite sub-division of the field, it is practically inevitable that either one or the other of these different approaches should dominate the thinking and the activities of the economic profession.

It is interesting to note that there was actually a trend in the scientific direction at one time. In the early days of economics in the United States, the authors of two of the most widely used textbooks were scientists: General Francis A. Walker, one of the early presidents of the Massachusetts Institute of Technology, and Simon Newcomb, the celebrated astronomer. (Incidentally, General Walker was the first president of the American Economic Association.) However, the close relation between economics and social problems tended to draw many of those primarily interested in such problems into the economic field, with the result that economics has become a branch of sociology rather than a branch of science, a classification which both the standard library systems and the college curricula recognize.

Unfortunately, the triumph of the sociological viewpoint in economics has had the result of distorting the economist’s picture of what is taking place in the world. The individual who looks at economic activities through sociological spectacles sees people in their social settings and classifications, not in their economic environment. For instance, he sees capitalists, a social class, rather than suppliers of capital, an economic class. If he were dealing with social problems, this might be quite appropriate, but it is fatal to the validity of his conclusions regarding economic matters, as the suppliers of capital are not necessarily, or even usually, capitalists in the social sense. Indeed, there is no economic reason why they should ever be capitalists.

The picture is further distorted because the sociologically oriented economist usually has a strong bias against capitalists (the social class), which prevents him from recognizing the true place of suppliers of capital (the economic class) in economic life. In the subsequent analysis we will find many other examples of this same situation: the socio-economist sees a social picture rather than an economic picture, and when he tries to make economic sense out of what he sees, all too often there is confusion.

Following the usual sociological pattern, the literature of the economic profession is primarily partisan. The great majority of economic writers, past and present, have been special pleaders rather than unbiased searchers for the truth, exponents of a particular point of view rather than impartial judges of the facts. “Economists, in books and articles and letters to the editor, tirelessly urge this policy or that,”¹¹ says one of their own number.

If the policies that were adopted on the strength of their theories had been successful in practice, the economists would have a good case in favor of continuing to advocate measures based on these theories. But the reality is far different. The pessimistic assessment of the present situation in the economic field by Heilbroner and Thurow has already been quoted. Samuelson likewise concedes that the economic profession has failed to accomplish its principal objectives; it “cannot find the combination of policies that allows full employment, stable prices, and free markets.”¹² He admits that “what may be needed are new approaches to the problems of productivity, wages, and price formation.”¹³

J. K. Galbraith blames the economy for not conforming with the theories. As he puts it, the American economic system operates “in defiance of the rules”¹⁴ laid down by the economists, and those rule-makers cannot account for what Galbraith admits is, at least at times, a “brilliant” performance. Joan Robinson, a devout Keynesian, tells us flatly, “It is impossible to understand the economic system in which we are living if we try to interpret it as a rational scheme”.¹⁵

When those who have undertaken the task of analyzing our economy not only admit that they are unable to discover the true rules by which it is governed, but come to the conclusion that it has no rational basis at all (which means that the remarkable results that the system achieves must be accidental), then common sense warns us that it is no longer sound policy to continue relying on the methods and procedures that have brought us to this dead end.

We need to recognize that the basic elements of economics are purely factual. The underlying reason for all economic activity is the iron law that man must work or starve, a law that the human race as a whole cannot evade, no matter how distasteful it may be. Similarly, the primary economic processes are governed by fixed and immutable principles, which are beyond the reach of human powers. Any action taken in defiance of, or in ignorance of, these principles must inevitably fail in its intended purposes, no matter how commendable the objective of that action may be.

Under present conditions relatively few people recognize the existence of these matters of fact in economics. The socio-economists present their arguments for or against proposed measures which involve factual questions—price controls, public works programs, minimum wage laws, employment measures, etc.—almost entirely on the basis of the desirability of the objectives at which the measures are aimed, with little or no reference to the question as to whether such measures are capable of reaching those objectives. With very few exceptions, legislators decide whether to vote for or against legislation of this nature on exactly the same basis that they use in deciding how to vote on purely policy measures, never realizing that in the former case the hard facts of economic life may nullify, or even reverse, the effects which they are trying to produce by passing such laws. Far too many economic experiments initiated with enthusiasm and high hopes have ended in bitter disappointment because their authors ignored or disputed the existence of permanent and unchangeable laws and principles in the economic field.

We live in a period in which most of the conventional wisdom of the past [in economics] has been tried and found wanting. Economics is in a state of self-scrutiny, dissatisfied with its established premises, not yet ready to formulate new ones. Indeed, perhaps the search for a new vision of economics… is the most pressing economic task of our time.

—Heilbroner and Thurow¹