CHAPTER 3

Economic Objectives

It was pointed out in the preceding chapters that economics, as now constituted, has both factual, purely economic, aspects, and non-factual, mainly sociological, aspects. As a consequence of this dual nature of the subject, present-day economists have both economic objectives, applying to matters specifically related to the organization and operation of the economic system, and social, or sociological, objectives, which apply to matters specifically related to human welfare.

As indicated by the quotation from Samuelson in Chapter 1, it is the social goals that are the economists’ main concern. The question as to how goods should be produced is primarily technological, while the questions as to what goods should be produced, and for whom they should be produced are mainly social, or we may say, socio-economic. But the true purpose of the economic organization is to get the goods that the consumers want into their hands in return for their labor. Any measure having a different purpose is aiming at a non-economic, or at least not purely economic, objective. For instance, a measure designed to increase the income of a particular group—the “poor” perhaps—is directed at a social objective, not an economic objective, because from the standpoint of economics all consumers are alike. A measure designed to protect the public from the harmful effects of a certain product is likewise aimed at a social objective. All goods are alike from the economic standpoint.

These comments about the nature of the objectives of the economists do not imply that there is anything wrong with social objectives, or that they are in any way inferior to purely economic objectives. The point that is here being emphasized is that the factual objectives, the real economic objectives, are now being pushed aside while the economists pursue their social goals. The answers to their “fundamental problems,” when and if obtained, will not tell us how the economic system operates or how we can manipulate it to serve our purposes. They are merely advice as to what our purposes ought to be.

This advice is something that we no doubt need, just as we need advice from other branches of sociology, based on the results of studies and investigations, and in undertaking to fill this need the economists are aiming at a worthwhile objective. But the human race is not so constituted that an individual can envision sociological objectives, and dedicate himself to the task of promoting the economic “reform” measures that he believes will accomplish those objectives, and at the same time maintain the emotional detachment necessary for carrying out a factual analysis of the subject. The inevitable result is that the socio-economist fixes his attention on what he thinks ought to be, rather than on the scientific objective of ascertaining what is.

Since the factual aspects thus recede into the background, they come to be regarded as items to be manipulated in support of the “reform” proposals, rather than  items to which these proposals must conform if they are to be successful. “The tendency is strong, unfortunately,” says F.N. Harbison, “to marshal facts which best support deep-seated convictions rather than to use them to question where the truth may lie.”²⁸ Galbraith gives us a similar explanation for the failure of certain economic studies to produce any significant results: “A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of reality.”²⁹

Such results must be expected. A person cannot commit himself emotionally to a view of how the economy should operate, and at the same time maintain an unbiased position toward the question as to how it does operate. When he enlists under the banner of “reform” it is no longer psychologically possible for him to give impartial consideration to the factual aspects of his subject. Samuelson’s list of “fundamental economic problems” demonstrates this point. None of these problems has a factual answer. We must conclude that questions as to how the economy operates and what can be done to achieve our economic objectives are not “fundamental problems” to the present-day economist. But they must be fundamental problems for someone. As painful experience has so often demonstrated, the making of decisions is futile unless we known how to carry those decisions into effect. The economists’ concentration on defining objectives has therefore left a vacuum.

What we are proposing is not that economic science should take over the functions that the economists are now performing, but that it should address itself to the tasks that the economists are leaving undone; that is, fill the vacuum that they have left by becoming sociologists—or, as they prefer to say, social scientists—and losing sight of the factual aspects of economics. Economic science, as defined in this work, does not attempt to make decisions on Samuelson’s fundamental problems, or other matters of public policy, nor does it even attempt to influence such decisions. Its task is to supply the information that will enable an intelligent choice of objectives and will enable formulation of effective measures for attaining those objectives. Before the decision as to the objective is made, economic science can provide information about the working of the economy, which will identify the possible alternatives and will enable evaluating and comparing them. After the basic decisions are made, it can determine the various practical means by which the selected objectives can be reached, and the advantages and disadvantages of each, thus facilitating the second type of public policy decision: the decision as to what specific steps should be taken to attain the objectives.

To illustrate these points, let us formulate the analogous problems involved in the physical example cited earlier, the construction of a bridge. The first problem, the question as to what should be done, becomes merely a matter of whether or not the bridge should be built. The second, the how problem, involves selecting the design and choosing the materials of construction. The third problem, for whom, reduces to questions as to the location of the bridge structure and its approaches, as each alternative will be more advantageous to certain individuals and less advantageous to others.

The pure scientist is not involved in these questions at all. He supplies some basic information that will be useful in this connection, but only in exceptional cases will this information be developed for the specific job. Normally it is part of the great accumulation of scientific knowledge. The engineer will take part in the consideration of these problems, particularly the second and third, and will submit his analysis of the various alternatives together with his recommendations. But he will not take a partisan stand in favor of one alternative or another, and he will not expect to make the decisions. All of these problems are problems of the community, and the decisions will be made by the general public, or their representatives, not by the scientist or the engineer.

“Economic problems” of the kind specified by Samuelson are likewise problems of general public policy, analogous to such questions as to where a bridge should be built, whether we should construct a new post office or remodel the old one, whether we should widen a crowded highway, and so on, not to the questions for which the scientist or the engineer provides specific answers. The problems appropriate to science have answers that can be discovered, and once these answers are found and definitely verified they are final, regardless of whether or not they meet with anyone’s approval. The answers to this list of “fundamental problems,” on the other hand, cannot be discovered. They must be decided upon, and no individual or group can make a decision that will be binding on all individuals or groups, or which is not subject to future reversal. No such decision can be final. These problems and their answers are not matters of fact; they are matters of opinion, and therefore outside the scope of economic science.

In order to get the proper perspective on the economic issues we need to examine them in their economic setting, not in their social setting, their political setting, or their geographical setting. For example, there is an important distinction between capitalists, a social class, and suppliers of capital, an economic class that has already been mentioned. Similarly, such concepts as land, entrepreneur, laborer, etc., as they are used in present-day economics, are primarily social concepts, not economic concepts. This work will eliminate the purely social concepts from the discussion, and will redefine those that have both social and economic significance to bring them into line with their true economic significance.

Elimination of social distinctions avoids the confusion which results from joining dissimilar concepts. The function of “owner,” for example is economically distinct from that of “manager.” It is true that there are many combination owner-managers, and it is not at all unusual for the owner to retain some of the managerial duties even where he employs a manager. But there is no necessary connection between owning and managing, as the rise of a professional managerial class in modern times clearly demonstrates, and any definition which assigns both functions to one economic entity, such as an entrepreneur, cannot adequately cope with economic situations in which these functions are handled separately.

A combination of functions is quite characteristic of economic life, particularly in its simpler forms. The farmer, for instance, is a supplier of labor, a producer, a consumer, and usually a supplier of capital. In order to get a correct picture of the economic processes in which he participates, we have to recognize these different roles. We cannot look upon him simply as an individual performing certain functions appropriate to farming, or as a unit of the society in which he exists. Such viewpoints are appropriate from a social standpoint, but for economic purposes we must look upon him as a producer when he acts in that capacity, a supplier of labor insofar as he personally takes part in the productive work, a supplier of capital insofar as he owns the land or equipment, and so on.

The function of the producer is to utilize labor and the services of capital to produce goods. It is essential to distinguish clearly between the person or agency that performs this function and the suppliers of labor and capital. The worker who operates a lathe takes part in the production process, to be sure, and so does the supervisor who oversees his work, but neither is individually acting as a producer in the economic sense. Both of these individuals are suppliers of labor. The enterprise or individual by whom they are employed is the producer. The capital is obtained from another set of individuals: owners or shareholders who supply equity capital (risk capital) and creditors who supply debt capital.

A clear distinction between factual and social issues will enable evaluation of objectives from the standpoint of whether or not they can be obtained by the means it is proposed to use. It is important to recognize that non-economic objectives, such as the purely social objectives that are the primary concern of the present-day socio-economist, cannot be attained by economic means; that is, by manipulating the mechanisms of production and exchange. Lack of recognition of this point is the reason for the failure of many economic programs aimed at what most persons would consider desirable objectives.

As pointed out earlier, none of the items listed by Samuelson as the “fundamental economic problems” has a scientific solution. These are social, political, and technological problems. They may have answers, but they are not factual answers that can be obtained by scientific methods; they are matters of opinion and judgment. For example, consumers constitute an economic class. The questions as to whether the income of consumers can be increased, and if so, how, are therefore economic (and technological) questions that have factual answers. On the other hand, the poor and the rich are social classes. Thus the questions as to how, and whether, to raise the income of the poor at the expense of the rich (a favorite objective of the economists) are social issues that have no factual answers.

The economists’ failure to draw this distinction between the factual and the nonfactual, and to adapt economic thinking to the difference is primarily responsible for their persistent advocacy of “something for nothing” schemes of one sort or another, and their inability to deal with the factual problems of the present-day economy such as inflation and unemployment, a failure that is leading many in the profession to question whether solutions to these problems even exist. Samuelson, for instance, says:

 

Particularly during the last decade, poor economic performance and the rise of contending schools of economic thought have led many to doubt whether the fiscal and monetary authorities can do anything to improve economic performance.³⁰

The chapters that follow, which do make the distinction between the factual and the non-factual, will cover only one part of the field that is included in present-day “economics,” but by dealing only with factual matters, and using factual methods, they will arrive at those factual answers that have eluded the economists.

The minimum wage issue is a good example. The minimum wage laws now in effect in the United States attempt to accomplish a social objective, assuring an adequate income to all workers, by economic means; that is by modifying the normal operation of the price system, and paying sub-standard workers more than they would normally receive. But the economic mechanism responds to that interference in its own way, not in the manner anticipated by the lawmakers. The usual result is to deny employment to the workers the law was intended to benefit. This point is recognized by the great majority of economists, but the public does not have enough confidence in the conclusions reached by the economists to accept them if, as in this case, they are unwelcome.

The same kind of a reaction of the mechanism takes place in response to the attempts that are continually being made in nearly all countries in the world to improve the living standards of the workers by raising money wages. Here again the economic system responds in its own way. It reacts with inflation, not with higher real wages.

The stumbling block for all such measures is cost. The individual enterprise economic system operates on a minimum cost basis, and whenever an additional cost is imposed on any portion of the mechanism, the system responds in such a way as to restore the minimum cost condition. In the minimum wage case this is accomplished by excluding the sub-standard workers from employment. In the case of money wage increases, it is accomplished by absorbing the increase in the relation between money wages and real wages. The same fate awaits all such schemes, however ingenious they may be. The economic mechanism cannot be outwitted.

Sooner or later the nation, and the world at large, will have to accept the fact that attainment of any social objective, other than those automatically accomplished by processes such as technological progress that work in harmony with the economic mechanism, involves a cost, and provision should be made for meeting that cost from public funds. Otherwise, the attempt to reach the objective will fail, unless it is possible to shift the cost burden to the public through the price mechanism. As will be brought out in the subsequent discussion, attempts to impose the cost on the producers (employers) are futile. The hope that it will be lost in the intricacies of some ingenious scheme for creating synthetic purchasing power out of nothing is likewise doomed to expire in the light of cold reality.

The separation of the factual aspects of economics from the sociological aspects that we are here proposing should also go a long way toward clarifying the present ambiguous position of the economist. The professional workers in the field of economics feel that they should rightfully be accorded the same kind of an authoritative status that the scientists enjoy in their field, but all too often the economists’ recommendations meet the kind of reception indicated by the quotation from Franklin Roosevelt in Chapter 2. “Economists,” says Max Black, “are sometimes treated like witches in otherwise civilized communities.”³¹

What is being overlooked here is that the scientist and the engineer maintain their authoritative standing only because they confine themselves to factual matters, and do not try to make the decisions. The role of the engineer is well understood, both by himself and by the community, and his recommendations are seldom overruled for physical reasons, although they are frequently overruled for other reasons. An engineering recommendation for a cantilever bridge, based on lower cost and equal or better serviceability under the existing circumstances, may well be rejected by a community that prefers a suspension bridge on esthetic grounds, but this does not imply any doubt as to the soundness of the engineering recommendations. It simply means that other considerations outweigh the engineering aspects in the minds of the citizens who make the ultimate choice.

The world is no more willing to let the economists make the decisions in economic matters than it is to let the engineers make the decisions in physical matters. Where the public rules, such decisions are made by the general public; where others rule, they are made by the rulers, whoever they may be. In any event, they are not made by the engineers or the economists, except to the extent that those individuals are also members of the general public or the ruling group. The difference is that the engineer recognizes the logic of this situation and accepts it as a matter of course; the economist usually, or at least frequently, does not. The sense of frustration, which the economists so often mention, and more often reveal by the way in which they express their views on matters of public policy, has its origin in their conception as to the functions of their profession, a conception that is not accepted by the community at large.

Of course, the economist suffers from the fact that he is so frequently wrong, and in some instances, as in the predictions of economic conditions that would follow the conclusion of World War ii, spectacularly wrong, and he is further handicapped by the inability of the members of his profession to agree among themselves, but the primary reason why the recommendations of the economist are not given the same weight, and the same respectful consideration, as those of the engineer is that the economists’ recommendations are not based solely, perhaps not even primarily, on economic principles. They are dictated to a large, and often controlling, degree by non-economic (mainly social) preferences and prejudices. The average citizen knows, even though he may not stop to analyze the situation very closely, that the advice which he gets from the economist on a subject such as a price control measure, for example, is not like the recommendations of the engineer, designed to aid the public in getting the results which they want; it is designed to accomplish what the economist believes should be done. The mere fact that economists can be, and commonly are, categorized by such terms as “liberal” or “conservative” is a clear indication of the difference. We do not have “liberal” engineers.

As brought out in the foregoing discussion, the ostensibly economic objectives that present-day economists identify as their principal concerns are actually social, or no more than socio-economic at most No general agreement has ever been reached as to what these purely social objectives ought to be, particularly with respect to the degree to which ethical considerations should enter into their conclusions. “Opinions range, or have ranged,” says J. M. Clark, “from the view that economics has nothing to do with ethics, to the view that it must formulate explicitly the ethical standards that furnish its setting and give its analysis meaning.”³² From one school of economic thought we get the dictum: “Economics, as a science, is neutral… it can express neither approval nor disapproval,”³³ while at the same time another tells us just as definitely, “hardly any economic theory can be considered ideologically neutral.”³⁴

We can, however, define the objectives of economic science. They are to determine the principles and relations governing economic processes and to apply this information to devising the most efficient means of attaining the economic objectives designated by the appropriate agencies of organized society. What we are undertaking in this work is to apply the time-tested methods of the physical sciences—not the methods which the economists have been calling scientific, the methods of the social sciences, but the methods which scientists actually use, and which they call scientific—to the factual aspects of economics to see whether we can duplicate some of the highly satisfactory results that have been thus obtained in the physical fields.

Subdividing according to the scientific pattern, we can say that the objective of pure economic science is to determine the nature and characteristics of the relations that exist between the various economic entities and processes, and the objective of applied economic science is to determine how the information developed by the scientific investigators can best be applied to accomplish whatever ends the individual, group, or society as a whole may choose to seek.