Specific Changes Of Economic Doctrines

Specific Changes Of Economic Doctrines

From all these general comments, however, on the achievements and the limitations of the "mathematical" and the "psychological" aspects of all that was "new" in neo-classical as compared with Ricardian-classi-cal economic theory, I turn now, finally, to a different, over-all com­parison of the old and new systems of economic "doctrines."

The Psychological Aspect

The Psychological Aspect

In a sense the "neo-classical" phase of the history or development of economic theory involved not only the beginning of the still continuing, progressive "mathematicization" of much economic theory, but also the beginning of the trend, which I have just been deploring, toward general prevalence of the mistaken view or supposition that all eco­nomic theory

The Mathematical Aspect

The Mathematical Aspect

On its formal side then, all "neo-classical" economics represented an early stage of the long, slow development, which still is going on today, of "mathematical economics" or what may be called a gradual "mathematicization" of economic theory. Yet in a sense the real origins or "roots" of this development are very old;

Neoclassical Economic Theory

Neo-Classical Economic Theory, Marginal Analysis,
Or The Revolution In Value and Dıstribution Theory

As I have said, this era (1870 to 1914) witnessed, along with renewed prevalence of the liberal ideology, a great renaissance, and array of new, further advances of economic theory of the main-traditional, liberal-and-scientific, general kind. There had been, as regards the progress of such theory, a relatively sterile interlude of about two decades after the first appearance of Mill's Principles. The Ricardian-classical theoretical system as expounded and improved by Mill had become, for all con­cerned with it, substantially a finished, static body of doctrine, repeated in the textbooks but no longer undergoing much further progressive growth and improvement. Outside the circle of its "orthodox" expo­nents, a good many other economists were dissatisfied with it, and vari­ous minor, scattered, and isolated theorists did produce, within that otherwise sterile interval of time, little-noticed studies which in various degrees and ways anticipated or resembled the new developments that were to conquer and dominate the field after 1870. In fact, the list of forerunners of those later developments runs much farther back, into the quite early nineteenth century. Diverse scattered writers in various countries, unconnected with the early classical school and unknown, until much later, to most economists, had done bits of work on the "mathematical" and "psychological" lines (see below) and had al­ready made some of the same "discoveries," which were later independ­ently renewed and more fully developed in the big theoretical "revolu­tion" of the era that I speak of. Probably Von Thünen Gossen, and Coumot were the most important of those earlier forerunners; but therevolution," i.e., its impact on the whole profession began when, in 1870-1871, W. S. Jevons in England, Karl Menger at the University of Vienna, Leon Walras in Switzerland (University of Lausanne), and (though he did not publish any of his work until much later) Alfred Marshall at Cambridge, England, all about simul­taneously, and independently of one another and of those forerunners, struck out on their differing individual variants of the new lines of economic-theoretical research involving, centrally, what came to be known as "the marginal utility theory of value."

As it appears now in retrospect, the totaTimovement which thus be­gan exhibits as a whole a striking unity-in-variety. In all it produced or included a large "family" of similar-and-different systems of economic theory, created in different countries and centers by different economists and "schools" or groups of them, as schemes of analysis differing among themselves in many important detailed respects, but all involving, in a broad sense, the same general theoretical vision. Although in the fol­lowing classification which in part is rather arbitrary, some of the groupings make less sense—have more internal diversity and less dis­tinctive characters as entire groups—than others, one may perhaps speak of the Jevonian, Austrian, Walrasian, Scandinavian, American, and Marshallian "schools," or varieties or variants of the "new" kind of economic theory, of this era.

W. S. Jevons led the way in England, and the later English theorists whose styles and views most nearly resembled his and who may perhaps be grouped with him or called "Jevonian"—even though these two were in many ways unlike each other and unlike Jevons, and though all three were equally brilliant, original, and independent—were Philip Wicksteed and F. Y. Edgeworth. Meanwhile, in Austria, at the Univer­sity of Vienna, there came on the scene at the same time with Jevons, but of course independently—these men and Jevons at first knew noth­ing of each other's work or ideas—the trio of first-generation leaders of the famous, still continuing, "Austrian school" of economists, Karl Menger, Eugene von Bohm-Bawerk, a.nd Frederick von Wieser. Mean­while again, at Lausanne, Walras—at the Same time with Jevons and with Menger et a]., but again in complete independence and isolation from them all—was producing his unique and impressive system of economic theory which, however, was to gain any wide vogue or in­fluence only in a later time and slowly, because it was fully "mathe­matical" in substance and expression, and intricate and difficult, and hence was at first and long remained beyond the reach or ready com­prehension of most economists. "Walrasian" theory did fairly soon be­gin to spread among Continental European economists of diverse na­tionalities, and find here and there among them various able adherents and exponents who went on improving it and adding to it or develop­ing it further on their own lines; and the ablest of all these later Wal-rasians was the great Italian figure, Vilfredo Pareto. In the English-speaking world, Walrasian (and Paretian) economics have only quite recently begun to be really widely studied and appreciated. But we are only halfway through my list of six general "groupings" of the great economic theorists of the last decades of the nineteenth century.

In the Scandinavian countries, two Swedish leaders became most widely known and influential, beyond as well as within those countries: the earlier and greater of these two was Knut Wicksell, and the later and less original, Gustav Cassell; but there have been many others in that able group. In the United States, the important theorists in the era that I speak of were fairly numerous and diverse and do not all belong in any single "school." J. B. Clark, F. W. Fetter, T. N. Carver, H. J. Davenport, and others developed systems considerably resembling that of "the Austrian school" and somewhat indebted to it, though each had much originality. F. W. Taussig remained, as a theorist, closer than others to the old, classical, Ricardo-Mill tradition, and only half absorbed or accepted the "new" ideas of his generation; but he had great wisdom, produced much good work, and taught and formed a great many younger American economists of outstanding merit. Irving Fisher stood out as the one great American mathematical economist—on his own, not Walrasian, lines. And now having glanced at all these groups I circle back to England and speak last of Alfred Marshall (of Cambridge University) and his pupils, admirers, and followers, the "Marshallian" school. This makes sense because Marshall, though he started to form his own system back in the time of the first appearance and impact of the work of Jevons, and included in it ideas similar to those of Jevons though arrived at independently, did not publish any of his main work or make his system as such known beyond the small circle of his Cam­bridge pupils until much later—1890—so that all the other "schools" I have mentioned were already flourishing before his emerged, so to speak, onto the world's stage. As we shall see hereafter, the Marshallian system was in some ways a broad "synthesis," combining elements or features of several of the other "new" ones of this era and of the old Ricardian classical tradition generally, more fully discarded in the other new schools.

Now I shail adopt here a doubtless arbitrary and criticizable, but fairly common and convenient, usage of the terms classical and neo-classical for designating general tvpes of economic theory, and use these terms as follows. By the "classical" theory of economics I mean the old, early-nineteenth-century theoretical structure which was created mainly by Ricardo and given on the whole its best full formulation or elabora­tion, with his own (Mills) revisions and additions, in J. S. Mill's Prin­ciples.And I use the term "neo-classical" in two different senses: in a very broad sense all the diverse, late-nineteenth-century theoretical structures that I have referred to, can, I think, be called "neo-classical"; whereas the Marshallian system, alone or uniquely, was "neo-classical" also m a narrower, special, strict, and emphatic sense.

The Jevonians, Austrians, Walrasians, and Americans (with the ex­ception or Taussig), and generally the Scandinavians (partially ex-ceptmg Wicksel) were prone to lay exclusive stress on their disagree­ments with and departures from the Ricardian-classical tradition, and regard their innovations or new concepts and analyses as making up a complete intellectual "revolution" or "new economics," having very little in common with the old Ricardian-classical economics. But this I trunk resulted in all these cases from a too narrow or exclusive con­centration of attention on the (indeed important) issues, questions, or matters of relatively detailed and technical, conceptual and logical significance, involved in all the innovations or new advances; and from a tendency to take for granted" and not fully realize the large amount of continuity that was there at the same time, as regards the broad, basic, underlying general outlook that was—with some changes even here indeed, but largely-carried on. All (in the broad sense) "neo-classical-economic theory had in common with the old Ricardian-classical type or theory, in the first place, the economic-liberal outlook and hence the same general conception of the province or field and over-all task of economic theory as such, i.e., to develop a full understanding or ex­planation of the abstract general "laws" or "principles" of the operation, functioning or processes of the liberal economy, or system of "free," private, producing enterprises and consuming households and competi­tive markets. And this carried with it, also, continuing work on much the same rangeof theoretical problems, concerning the "determinants" and modes of determination," in the working of that system, lof the exchange values or relative prices of the different products, the chang­ing allocation of all productive efforts and resources into different em-pJovments and resulting outputs or supplies of the different products, and the distribution" or division of all income, or the value of all out­put, into the "shares" going as wages, profits, interest, rent, etc., to the contributors of the different kinds of "factors of production" or pro­ductive services. In all the varieties of "neo-classical" theory, new and different and generally superior analyses of these problems were de­veloped, with the aid of new "conceptual tools" and reasonings, which led to largely or partly new and more "correct" and fuller "solutions" of the old problems. But there was to a great extent retention or con­tinuation of the early "classical" vision of the general character, struc­ture, and mode of operation of the liberal economy, and of the array and the interrelations of the main problems which should be investi­gated. Among all the "neo-classical" systems in that sense, the Marshall-ian system was "neo-classical" also in the special sense that it retained or carried on, and combined with (Marshall's version of) the "new" ideas, important elements of the old Ricardian-classical, distinctive analytical scheme, which the other "new schools" either wholly or more largely discarded.

All of the "new schools" together achieved a very considerable ad­vancement or improvement of the science on its abstract and "techni­cal," conceptual and logical or theoretical side; an advance beyond the primitive or rudimentary, Ricardian-classical theoretical analysis of economics, which had achieved little more than a relatively clear and systematic formulation of "common-sense" ideas about the subject matter, to a much more truly or fully "scientific" kind of analysis. The latter, in other words, was more fully precise and rigorous, thorough, penetrating, and logically unified, and could yield many insights not readily evident or available to the "common sense" of generally in­formed and intelligent but not specially trained or mentally equipped observers of and reasoners about economic affairs. There was still not very much truly scientific empirical research in economics, or effective work toward making the inquiry an empirical as well as a logical science; but the advances made in this era in theoretical research were also required and useful steps toward making more scientific empirical re­search possible later on. Yet along with all the real and important gains or advances that were achieved, there was I think a partly offsetting loss of some of the somewhat greater or relative "realism" in a meaning­ful sense, which Ricardian-classical theory, with all its crudity and de­ficiencies, had possessed. Although the latter had not spelled out so well, with full precision and logical rigor," all the implications of its basic insights; it had embodied on the whole a better intuitive grasp of the most important factors and connections in the real processes of the operation and development of the real economy. The "neo-classical" systems, in the process of improving theory as such, made it more ab­stract; and the new preoccupation with the work of perfecting the con­ceptual and logical details of the analysis, and working out all the exact implications of various possible sets of assumptions, or conceptual-visions of imaginable situations, entailed a partial withdrawal of attention from the effort to form and adhere to a realistic vision of the real world. Moreover, there was also, in neo-classical as compared with the old classical theory, an increased and excessive concentration on just "value and distribution" theory, or analysis of the competitive market system's way of determining the relative prices of the economy's different prod­ucts, and productive services and resources, and allocating the latter among different industries. There was no adequate continuing develop­ment of "aggregative" theory, of the whole economy's total output or income and the places and relations within that of total consumption, saving, investment, etc.; and theory of economic growth or develop­ment. Perhaps, however, all these limitations of "neo-classical" eco-nomic theory were or made up only the unavoidable and not excessive "price" of all its new, real, and great achievements, which on the whole outweighed them. And it would be futile to deplore the fact that the new advances made economic theory, as it had not been in earlier times, too intricate, "technical," and esoteric to be readily intelligible to a very wide public; although this change probably reduced its in­fluence on public opinion and actual governmental economic policies. Wot of course the "science" still did not gain enough prestige to make the public willing to accept the recommendations of economists without understanding the analyses behind them. Economics had to go through this phase of its development, which was of more value for its still later, further progress than for its current usefulness within this era.

Now I turn to consideration of the two main aspects of the innova­tions or novel elements in neo-classical as compared with Ricardian-classical economic theory. In a sense all these innovations were mathematical in form, i.e., in their conceptual and logical nature—even "hen expressed in ordinary language, not in the special "language" of athematics. And in substance the most important substantive innova-ions were in a sense "psychological," i.e., were comprised in the new analysis of "utility" or all the human wants and satisfactions, subjective eelings, and comparative estimates of the amounts of "utility" of differ-nt goods or goals or gains, or in short "motives," thought of as under-ying, producing, and directing human economic behavior. In other words, on its formal side, all the "new" economic theory systematically carried out—although often entirely or mainly in ordinary verbal lan-guage—applications of the concepts and logic of integral and differ­ential calculus to the task of analyzing the relations among the changes of variable economic quantities—"inputs" of work and of other re-"purces in production and "outputs" of products, and market supplies, emands, prices, costs, incomes, spendings, savings, investments, etc. and with the help of this new conceptual and logical apparatus, as applied in this particular field, the attempt was made to analyze fully—as Ricardian-classical theory had not tried to analyze—the psycho­logical or subjective backgrounds of consumers' demands, and evalua­tions of products, and the backgrounds in the same sense of all economic choices or decisions and actions; as well as greatly to improve on the older "classical" analysis of the other, not human-psychological, but physical or material part of the economic subject matter—the relations among the changes of the "tangible, objective" economic quantities or variables.
The Political And Policy Ideas Of The Liberal Economists Versus Those Of The Businessman

Here the difficulty is that as a rule the social philosophies of the lib­eral economists were not made at all fully explicit in their writings. "Political economy" was already beginning to change—become con­tracted or narrowed down—into "economics"; economists were becom­ing more strictly specialized, or concentrating their efforts, with a new intensity, on just working out a full, precise, and rigorous development of their own body of abstract theory of the potential working, or proces­ses, of the "free" and competitive business economy. Many of them in­deed also made contributions to the kinds of empirical research con­nected with that, which were beginning to advance beyond the early rudimentary stages to more modern scientific forms or methods and achievements. But the main emphasis was still on theoretical research in economics; and the social-institutional ideals and assumptions or presuppositions of liberal-and-scientific economic theory tended as a rule, in the new development and expositions of the latter, to be more latent than explicit. But a glance at what generally were their explicit views on some particular issues about proper governmental economic policies will serve to bring out the rather wide distance separating their (more consistent) liberal ideals from those which were then domi­nant in the business community and generally in the ruling climate of opinion of that era.

The business community's and general public's form or version or .understanding of economic (laissez-faire) liberalism was naturally not really self-consistent or fully in line with the authentic tradition of thought of the liberal political economists. For of course "practical" men have always tended to demand, simultaneously, ample freedoms for themselves, from public control of or interference with their acquisi­tive activities, and restrictions, for their protection or benefit, of the freedoms of others to invade their markets or fields of opportunity as new competitors on even terms. Hence the spread among the Western world's businessmen, after the age of mercantilism ended, of inclina­tions to support laissez faire in general never made them all supporters, e.g., of international free trade—or made this part of the consistent pro­gram generally popular among them, outside of mid-nineteenth-century England, where the special, local, and temporary situation of the Eng­lish manufacturers of that time did lead them to support this also, in their own self-interests. But in other countries and very generally in this slightly later time of which I am speaking, tariff protectionism was, inconsistently, a part of the program of public policies strongly supported among businessmen devoted in (some) other respects to lais­sez faire. Nor was there in the business world ever a prevailing, full, consistent awareness of the fact, and the implications for public policy of the fact, that within each national economy there could be a real harmony of all private business interests with the common or public economic interest of that whole community only if the economy in question had in it no monopolies, and no impediments limiting the mobility of labor, capital, and resources of all kinds out of the less and into the more productive and demanded and rewarding fields of employ­ment for them. Public policies designed to foster and maintain full prevalence of real, complete "free competition" in that sense, throughout each national economy, have always been included in the policy programs of the liberal economists, but were not generally sup­ported by businessmen in this era. On the contrary, the latter generally wanted the governments of their countries and localities to not only tolerate but actively assist their efforts to achieve and maintain more or less monopolistic power positions for their enterprises, and put ob­stacles in the way of their would-be competitors. In short, they really wanted the state to be active in all the ways seen as helpful to their own business interests; and laissez faire to them meant only a ban against all the kinds of reform legislation or state intervention that were beginning to be demanded by spokesmen for labor, social service workers and re­formers, discontented agrarian groups, etc.

Now the views of the leading "orthodox" economists of this same era, as to what public policies should be, were in almost complete opposi­tion, on all these points, to the views prevailing in the dominant busi­ness and political circles. The economists continued, with virtually complete unanimity, to argue for complete freedom of international trade, or free development, and full use of the benefits, of the interna­tional division of labor. Also, they all realized and stressed the need for either nonexistence or public control of monopolies, and full mobility and "free competition," as the precondition of realization of "the eco­nomic harmonies." Hence, all at least opposed public policies or meas­ures seen as aiding growth or maintenance of private monopolies; while many, especially in the United States, where governmental "antitrust" or antimonopoly legislation began to develop in this era, saw its con­sistency with the spirit of true economic liberalism, and strongly sup­ported it. Nor did the economists only thus, in these two areas, of for­eign-trade policy and policy with respect to domestic competition and monopolies, uphold the full, consistent, laissez-faire tradition and op­pose the tendencies of business-community sentiment that were in­consistent with its applications in these areas. The economists or many of them also, in varying degrees, themselves departed from adherence to strict laissez faire in some of the other fields or directions in which the businessmen most strongly insisted on it, and supported many of the reforms most vigorously opposed in the business world. Among these were inspections of factories and mines and enforcement of laws to safe­guard the health and safety of the workers; restrictive regulations of fe­male labor and child labor, and compulsory education; workmen's com­pensation for industrial accidents and diseases; and legalization of previ­ously illegal labor-union activities. Also they generally favored public regulation of the services and charges for the services of such both pub­licly essential and naturally monopolistic enterprises as the railroads and (later) light and power companies; and monetary policies that would allow adequate expansion of the supplies of money and credit along with the growth of production and trade, and be just to debtor as well as to creditor classes. All these and many other such issues found the leading economists, more often than not, aligned with the demo­cratic, popular, and progressive reformist elements, and against the con­servative businessmen. Thus, all in all, there was already in that time a tendency among the latter to regard the academic economists generally as "subversive radicals."

A few among the economic theorists of the time, moreover, gave still more ground for that charge against them by giving favorable theoreti­cal consideration to the possibilities and possible merits of thor­oughgoing socialism as a regime or system alternative to free and com­petitive capitalism. But these were exceptional; although the range of differing political views among the economists was fairly wide, the ma­jority were firm believers in the liberal capitalist system and the program of liberal public economic policies already indicated here. Whether and how far my term "conservative liberal' applies to them is perhaps an open question; certainly they were as a rule much less "conservative" for more "progressive," perhaps even "radical" in many cases and on inany issues, than were most of the businessmen and upper- and mid­dle-class peonle of the. time.. But I think, that on the whole the greater number of the eminent theoretical economists of this era can be clas­sified as tending to be in slight degrees at least "conservative" liberals in their over-all social, moral, and political outlooks. They were adherents of the traditional liberal vision, of the good, "free" society and economy with its limited role for the state and large role for the "free play" of private interests and initiatives, competition, voluntary adjustments among individuals and groups, etc.; and adherents of that vision who thought it was on the way to progressively fuller realization in the world around them. Thus they viewed that world with considerable optimism, and argued for preservation of its essential features and against all really radical, socialist, and other programs for change away from them. There was often too little realization, by these economic theorists, of the real width of the gap between their ideals and those that were dominant in the business community and were exerting more influence than their own on the current evolution of the real, existing order. But I have said enough about all these matters; it is time to turn to the new developments, in this period, in or of economic theory itself

The Variety Of Viewpoints

The Variety Of Viewpoints, Especially Among “Intellectuals”

Yet I must now immediately "qualify" that too simple or single ac­count of the liberal outlook of this era, which rather describes the rel­atively most conservative variant, or part of the rather wide spectrum of differing "shades" that in fact coexisted in different quarters. The variant just described was indeed widely prevalent, especially among the rich and the men of business, but never universal even among them. In other quarters there were many exponents of other outlooks considerably unlike that—often much more universally and impartially humane-liberal, and progressive or reformist on various lines, and in some cases quite "radical." The very stability, security, confidence, and optimism that prevailed favored tolerance of dissent, and there were many viewpoints and much free discussion. My whole effort in the first part of this chapter, to portray the general climate of opinion of the era, is designed only as a prelude to discussion of the new developments, within it, of liberal-and-scientific economic theory, which were in­fluenced by and related to that climate. But there were important differ­ences, as I will hereafter indicate more fully, of the (varying) political views of the eminent economists who carried out those new develop­ments, from the views or sentiments predominant in the business community and already generally characterized here. Nor were the economists alone in "deviating," in various ways and degrees, from the standpoint of just that body of conservative-liberal opinion. It is, for my purpose here, an awkward fact that systematic, broadly comprehen­sive, articulate, social-philosophical thinking and writing, or political theory in that sense, was already declining in this era, which produced few important political philosophers and, among them, fewer still who had much knowledge or understanding of or interest in economic prob­lems and affairs as such. The on-going growth of intellectual specializa­tion was further separating the newer developments of economic analysis, on the one hand, from those of political reflection, on the other, in some ways to the detriment of both. Hence most of the writings, by noneconomist intellectuals, in the broader field of general social, moral, and political philosophy, that I might refer to here, did not in fact have much clear relevance to the problems of main interest to us. But it may be worthwhile to refer very briefly in passing to a few such writers and their points of view.

Herbert Spencer's extreme individualism and antistatism, and "social Darwinist" theory of all social "evolution" (identified with "prog­ress"), glorifying the unmoderated competitive struggle among men and groups and societies as "nature's" method of producing progress through innovations, conflicts, and "survival of the fittest," had a wide vogue among the successful and especially conservative, conservative-liberal businessmen and other people in this period. But Spencer went, in these matters, to an extreme position far beyond the views of most economic-liberal economists, and his outlook must not be confused with theirs. How far "liberal" thought, within this same era, could diverge or differ from Spencer's variety is well shown by the example of the Oxford political philosopher, T. H. Green, a humane-idealist re­former who wanted the state to do a great deal, to create and maintain for all men the conditions—involving many restrictions of their "free­doms" in the simplest, ordinary meaning of the word—under which all would be enabled and helped to develop in themselves the good human characters that would make them "free," in a deeper sense, from the inner compulsions of their evil passions, and from the frustrations the unwise run into. But Green's interesting philosophy, also, had little relevance to or connection with the liberalisms of the era's liberal political economists.

And the same must be said even of the different political ideas of the essayist, Walter Bagehot, despite the fact that Bagehot was himself a respectable economist in his way and on the side. His Lombard Street, a study of the workings of the London money market, deservedly be­came a classic in its field; and his short essay on The Postulates of Political Economy gave an excellent statement of the conditions and limits of the empirical validity of the traditional assumptions and re­sulting "laws" of economic theory. But Bagehot's social and political philosophy expressed a point of view and an array of insights which lay (alas!) beyond the mental horizons of this era's leading economic theo­rists. His political outlook was conservative-liberal (with the main ac­cent on "conservative"), in a way or sense which meant that he and they had little in common. He had a fine blend of two different visions, not often combined. On the one hand, he had the Burkeian and romantic-conservative vision of the socially useful and necessary, though non-rational, emotional, and imaginative foundations of social unity or co­hesion, order, and voluntary deference and loyalty from below upward, and responsible humaneness from above downward in the social hier­archy. And with that he combined the liberal-individualistic, rational and practical (economic and utilitarian) vision stressing free pursuits and fulfillments of and adjustments among the self-interests of all, in the competitive economy and in the political system of the democratic state, as they could work within the limiting, modifying, and protect­ing milieu of that other part of the spiritual, cultural, or moral, social order. Adam Smith could have understood Bagehot—indeed these two had much in common—but the fields of awareness of the liberal econ­omists of this later time did not, I think, generally extend far into this other area. It is time now to turn to what can be said about their so­cial philosophies or outlooks.

Renascent Liberalism

The Conservative Tinge In The Renascent “Liberalism”

But now, having compared the renascent liberalism of this epoch with the original, late-eighteenth-century liberalism, with regard to the optimism that was present in both but made even more pronounced in the later version by its inclusion of the fully developed liberal theory of progress, I am going to compare and (in a measure) contrast the two in a different respect, in a way which may at first confuse the reader-or seem to be in conflict with a part of what I have just said. As com­pared with the original eighteenth-century form of the classical liberal­ism, the revival-and-revision of it which was the late nineteenth cen­tury's ruling climate of opinion was, I think, in a not great but signif­icant degree, less "radical" or more "conservative"—in a sense now to be explained. The liberal vision of the good society of free individuals was now (in the later period) less a vision of a new order still to be achieved through emancipative reforms or a throwing off of stilj existing and strong, old, traditional restraints; it was more nearly or largely just a favorable, theoretical depiction and celebration of an order thought of as already largely achieved or existing, or well on the way to full realization, and an armory of arguments in its defense, against new, incipient threats to it, arising from the advance of democ­racy and expanding activities of democratic governments, the growing strength and demands of labor or the working class, and the continuing socialist movements. But to clarify, explain, and defend all that I have in mind about this, I must say more about the historic meanings and relations of "liberalism" and "conservatism."

The expression "conservative liberalism" can seem self-contradictory only if one thinks, in the far too simple but common way, of "liberal" and "conservative" as words with simply, directly opposite meanings, i.e., of the "liberal" simply as the "progressive" person, favoring re­forms or changes (of just any kind, or all kinds?), and of the "con­servative" simply as the standpatter or opponent of all changes away from whatever is the status quo in his particular time and country. But the absolute relativism to which this leads makes little sense; e.g., it im­plies that, in a Communist country, the orthodox Communist is the true "conservative." And of course it has long been abundantly clear to the reader of this book that "liberalism" in the classical sense cannot be equated with reformism or progressivism of just any or every kind. Throughout its history or development, "liberalism" in this more defi­nite sense has always been a particular vision of "the good society," mainly stressing its ideas of the proper liberties or freedoms of all in­dividuals, which for everyone must be extensive but limited for the sake of the similar freedoms of all other men, and an equitable balance of the freedoms of all; and a scheme of institutions harmonizing the free activities of all, in pursuit of their own ends, with the requirements of their common welfare. Indeed, an ideal of progress also has always been inherent in this liberalism—but progress, first (from all older, non-liberal starting points) to the fullest possible realization of that vision; and then continuing progress mainly through free, private efforts and innovations by all in all departments of life, and competitive selection of many among those for general or widespread adoption and continuance; with later, new, institutional reforms or changes only as made necessary by emerging new conditions, for continuing realizations of the old, en­during, liberal ideals. This liberalism, then, was relatively "radical" in the contemporary setting when it first appeared as a fully formed and articulate "vision," in a still very nonliberal actual world, and implied or called for a sharp break with or away from the dominant nonliberal traditions; and the same liberalism became, in the altered setting of a later time, relatively more "conservative," when its "vision" was, or was being, largely realized. All this, however, still does not fully bring out my meaning in referring to "Victorian conservative liberalism"; let us look, next, at the also not very simple historic meaning of "conserva­tism."

The old European conservatism that was dominant most of the time through long ages before the Enlightenment, and resurgent for a time just after it, was rooted in the nonliberal conviction that extensive free­doms for all individuals would be certain to prove incompatible with, and would destroy, any good or tolerable order in society. For this out­look stressed the inequality or diversity or unlikeness of men, i.e., the existence, in many grades, of naturally superior and inferior kinds of men—as regards all kinds of intellectual, practical, and moral ca­pabilities; and the necessity of control of inferiors by superiors, as the sine qua non for a well-ordered society. There must be firm government by an elite of the wise and good, a definite and (by all) accepted social hierarchy, fixed statuses and roles for all men, and strict subordination of all private individual desires to a common conception of "the com­mon good" and the duties of all in relation to that, imposed by the rul­ing elite; in short, in this sense, an "organic" society. From Plato to Burke, this outlook in different forms had many great exponents. There is a clear contrast between its basic assumptions and those of liberalism, which stress the near-equality or similarity or "common human nature" of all men, and attribute to (nearly) all alike innate, potential capacities for adequate rationality and decency, or wisdom and virtue. Obviously the liberal assumptions lead to the liberal belief in the possibility and desirability of achieving and maintaining all needed order and har­mony in society, through a free agreement and collaboration among all in developing and supporting the necessary institutions to make secure the freedoms of all, and justice among all, and the growth of a system of exchanges or mutual services aligning their private with their com­mon interests. At the respective foundations of the two outlooks lie, above all, liberal optimism and conservative pessimism about the native mental and moral capacities of most men—all ordinary men—or "the many."

Now by no means all eighteenth-century liberals—advocates of a great enlargement of the individual liberties or freedoms of "the many," or a general abolition of most of the old conservative restrictions upon those—were conscious "radicals" in like degrees. Many did not at all fully realize how "radically" or greatly the old order might be transformed in the long run by the results of the carrying out of their program; for they tended to suppose that when all became "free," their behavior in most respects would change but little from what it had been under the traditional controls, which they regarded as simply unneces­sary. In particular the structure or hierarchy of the social classes, and he roles and relations of and attitudes between the upper and lowet classes, were not expected by many to be greatly changed. Even under the new conditions, of absence of the old compulsions, and freedom of all individuals to follow the dictates of their own interests or desires, there would still be leadership by those best qualified to lead, and suf­ficient, voluntary deference to them by the majority; for as intelligent and decent individuals, all would see their own interests as best served by these relations. The liberals in any case were not complete, extreme, all-out, or absolute libertarians in the manner of the anarchists; nor were they (generally) egalitarians like the socialists. The most moderate among them envisioned continuing, general, "free" acceptance of a social order on the whole more like than unlike the old familiar one, or involving only a few limited departures from it.

But in the early nineteenth century, the state of things became, in fact, greatly altered. Partly in consequence of the new individual freedoms and the uses made of them by growing numbers of self-made captains of industry, and workingmen, and others, and partly in consequence of changes of conditions which would have occurred to a great extent in any case, there appeared to most observers to have been a great growth of widespread distress, disorders, and disharmonies in the work­ing of the "free" societies—new tensions and conflicts, and so on. Hence there were, in different quarters, the strong resurgence of the old conservatism, the growth of radical, Utopian socialist dreams and agitations, and the tendency of even liberal thought to become strongly tinged with unwonted pessimism. The still later improvement of con­ditions, already described above, toward the latter part of the nineteenth century, brought about the revival of very widespread acceptance of the liberal outlook, and of its confident optimism; but the trial it had gone through, and the lasting effects of the earlier, renewed preaching of the old conservatism, left a mark upon it. The body of liberal-in­dividualistic belief in the late nineteenth century, in the upper and middle strata in Western societies or among all the most influential people in them, was a liberalism that had absorbed and been modified by a little of the outlook of the old conservatism, so that it was a relatively conservative liberalism, more consciously than that of the late eighteenth century had been. The composition of the really governing class or classes had changed. The men of business and wealth, more than those of high birth, were now dominant; but they tended to imi­tate the old aristocracy or take on many of its attitudes and views, to be­lieve in the right and duty of their class to exert the main influence in society and the state, and to consider it the duty of the members of the lower classes to accept subordination to them. At the same time, the growth of political democracy was transferring potential, predominant political power to those lower classes; hence the laissez-faire maxim of economic liberalism became primarily a demand that democratic gov­ernments be not allowed to enlarge their spheres of authority and ac­tivity, and invade or restrict the spheres of the independent authority of businessmen and organizations over their affairs and employees or subordinates, and/or do things contrary to their strong desires.

Victorian Conservatie Liberalism

Victorian Conservative Liberalism and NeoClassical Economics

The Late Nineteenth Century’s Ruling Climate Of Opinion

The intellectual scenery now changes, abruptly and radically, as we turn our attention away from Marxism to the main new developments in our field of interest in the last few decades of the nineteenth century: the resurgence of the classical liberalism, which again became (with some new modifications), the ruling climate of opinion in the Western world; and the associated new advances of the main-traditional, lib-eral-and-scientific kind of economic theory. In fact the outlook that prevailed most widely in this final part of the nineteenth century— and on into the present century, down to the First World War— was not only extremely unlike the outlook of Marx. It was also, al­though less markedly, considerably unlike any of the diverse outlooks that had been widely prevalent, in different quarters, in earlier parts of the nineteenth century, and expressed or reflected in such diverse intel­lectual productions as the political economy of Malthus and Ricardo, ro­mantic-conservative political philosophies, early (pre-Marxian) social­ism, and the composite pattern of the views of J. S. Mill. And the changes, from the early and middle parts to the latter part of the cen­tury, of the background of prevailing, real economic and social condi­tions and popular attitudes undoubtedly helped to produce this change of the intellectual climate.

Until rather late in the nineteenth century, industrial capitalism, the bourgeois civilization, and democracy were all still young or incipient, immature, raw or crude, at once promising and disturbing, distress-laden, and diversely received, controversial affairs. Hence the times produced a wide range of rival philosophies and programs. At about the center of that range stood the classical liberalism—expressed as a whole most fully in Benthamism—and the liberal, classical political economy; but they were under strong and widespread, hostile, critical attacks from both sides—from romantic-conservative or reactionary critics to the "right" of them, and from the early radical prophets of socialism to the "left" of them. Moreover, even the liberal economists —Malthus, Ricardo, and their followers—presented a rather largely and deeply pessimistic view of the current operation, tendencies, and prospects of the liberal capitalist economy, and the current and pros­pective state or condition of society and the people. They thus expressed a sense of the existing and prospective evils, or widespread miseries, which was not entirely unlike the impressions that underlay and mo­tivated those other rival creeds and gospels, even though the liberal economists alone regarded those evils as resulting from unalterable "laws of nature" and not from the liberal system or institutions, which they favored as the best attainable.

But later, when time and the further evolution of the modern West­ern societies had moved on into the last few decades of the nineteenth century, industrial capitalism and the business civilization and democ­racy had become well established, mature, successful, and much more generally or widely accepted. Prosperity was unmistakably both rising and spreading to more and more of all the people everywhere. The old European-conservative kind of opposition or resistance to the liberal-in­dividualistic outlook and regime had declined or moderated to the point of making its peace with the latter and, so to speak, entering into a kind of synthesis or symbiosis with it, which modified it in a measure only. And the socialist outlook, although still flourishing and developing in its own circles, was now, for the time being, a less widely prevalent and potent, not immediately menacing, rather small minority affair. Thus the (slightly modified) classical liberalism as a general outlook or point of view not only was resurgent but attained the greatest degree of prevalence, secure predominance, and practical influence it has ever had. Moreover, the tone of most liberal thought was now again more optimistic, as it had been in the time of its origin, the late eighteenth century; the element of pessimism, which had been introduced by the views of Malthus and Ricardo, faded away. This again may be explained by the background change of real conditions. Population pressure was being relieved by the results of the opening up of great new areas of fertile land as sources of food for the European peoples, a rate of con­tinuing technological and economic progress such as Malthus and Ricardo had by no means fully foreseen, and a falling birth rate. Thus events were wot fulfilling Ricardo's gloomy forecast; the real wages of labor were rising generally, the rates of profit on new capital invest­ments were not falling seriously, and the land-rent share of the value of output was not growing relatively or at the expense of the other in­come shares; and there was no sign of the approach to "the stationary state." Most important, in this new and more comfortable (for most people) state of the Western world, the earlier prevailing sense of the pervasive presence of inevitable, grim class conflicts over income-dis­tribution tended to decline, and allow a full or nearly full renewal of the still earlier (eighteenth-century) faith in "the economic harmonies" in the "natural" operation of the liberal economy, that is, in the full conduciveness of a universal "free play" of individual self-interests (within the limits of liberal legal justice among all) to the economic and general welfare of all the people.

Furthermore, the liberal outlook in this period was optimistic in an­other way, which had not been fully paralleled in the eighteenth cen­tury: the idea of ever-on-going, all-around, inevitable, automatic, hu­man-social progress, which had been "born" but not fully developed within the Enlightenment, and had been hardly able to develop freely or win general outright acceptance amid the troubled conditions preval­ent in the earlier parts of the nineteenth century, now came into its own. I speak here in particular of the simple liberal theory of progress in that sense, which was unlike the Hegel-Marx theory of a tortuous, fluctuat­ing, eventual progress through a series of alternating phases of improve­ment and deterioration, grim struggles or conflicts, wars or revolutions, new forward surges, and so on. The simpler and different liberal theory involved merely the idea of a rather steady or continuous cumulative growth and advance of all knowledge and wisdom or "enlightenment," and of application of that to all social problems, and hence progress in solving the latter or improving institutions and practices in all the ways shown by advancing knowledge to be needed to make them bring about the best results for human welfare. There was failure to realize the great limitations within which progress of that kind is confined; that it always has been clear-cut only in a restricted range of fields—the strict sciences and the techniques based on them, economic, "material" production, medicine and public health, etc.—and depends, even in these fields, on the presence of the right social and cultural conditions, thus far prevalent in human history only in the last few centuries of Western civilization, and by no means certain to become universal or endure forever. It was not realized that in the even more vital fields of aesthetic and ethical insight and achievement—prevailing discernment or appreciation, pursuit, and realization of the highest values, or wisdom in the choice of ultimate ends and thus in the use of all progressive knowledge or the knowledge that is power—that here such "progress" as there has been in history has been at best only occasionally recurrent through brief intervals, or highly fitful, and subject to frequent, long, disastrous declines or. reversals; or in short, that. the. chances of widespread and enduring achievements in this most vital sphere are always highly precarious.

Moreover, the much too simple and absolute, overoptimistic, Iate-nineteenth-century liberal theory of progress greatly exaggerated the power or ability of the best intellectual and spiritual achievements to control the actual conduct and course of practical affairs and the evolu­tions of societies. The dynamics of objective social evolution or history are extremely complex and still by no means fully understood by any­one; certainly they were not fully or correctly understood by Marx, though he had some insights absent from the liberal theory in question here. The effects of intellectual progress on social reality are subject to much counteraction and complication by developments running in the other direction, i.e., effects of changes of "material" conditions, through consequently prevailing attitudes, upon all intellectual and cultural life and achievement. The nonrational, emotional factors in all human behavior, and the power struggles among groups, classes, na­tions, etc., play important and often antiprogressive or progress-revers­ing roles which the liberal theory of progress never sufficiently allowed for. This phase of the optimism that was prevalent, to an extent now hardly conceivable, in the late nineteenth and very early twentieth cen­turies, has been rudely shattered since then by two world wars, and we live now in a world pervaded by a mood of pessimism verging on despair that I think is equally, in the opposite direction, excessive and unwarranted. In spite of all that I have said and all that needs to be said in adverse criticism of that confident, hopeful, progressive oudook, it is easy now to despise it much too completely and respect it much too little. It inspired much steady, intelligent work to help along all the progress believed in, and thus much progress was achieved.
Gustav Cassel – The Mathematical School

From Leon Walras, we jump ahead to Gustav Cassel, the Swedish engineer turned economist, who has de­veloped Walras' theory, and applied it more broadly to distribu­tion and money. It is true that Cassel aims to eliminate the old theories of value, and rejects the theory of marginal utility as a solution of the problem of value. But he really puts nothing in their place, his thought being so to limit the scope of economics as to avoid the problems of causation. If he were to go into the matter, he would doubtless be driven to some similar form of subjective marginism. He adopts an abstract mathematical procedure, assumes the existence of value and prices, and con­structs demand and supply schedules consisting of quantities which depend upon price. His theory is at bottom essentially the same as that of Walras or Jevons. He resorts to an idea of scarcity similar to Walras' rarete.

In fact, Cassel's rejection of marginal utility seems to be a frank attempt to limit economics to an empirical dealing with exchange ratios among objective quantities, merely taking util­ity and subjective value for granted. He seeks to explain eco­nomic phenomena by the single principle of "scarcity." In doing this, he assumes and takes for granted (1) limited supply and unlimited wants, (2) the necessity of exchange, and (3) the function of price in balancing supply and demand. He accepts observed movements in price in lieu of a theory of value causa­tion.

In developing his theory, Cassel adopts the device of first assuming "simple" cases, and then introducing the complica­tions. (1) He begins by assuming that supply is a fixed and known quantity of goods, and argues that, when the prices of all goods are fixed (by using a set of simultaneous equations), the demands of consumers can be known. Demand is made a function of price or prices, and is expressed in quantities of goods. (2) He next assumes that supply consists, not in a quan­tity of goods, but in a fixed quantity of the factors of production. The prices of the factors of production are then supposed to equal the prices of the goods into which they enter through production. (3) He then introduces money. The purchasing power of consumers is said to be derived from their participation in the processes of production; their incomes representing the total of prices paid for the use of the factors of production. (4) He then introduces a sort of quantitative dynamics by as­suming that fixed and constant percentages of change occur in production activity, and the equations are again set up on that basis.

Finally, Cassel states that his procedure gives us the relation among all prices, but not any single absolute price. If one such were known, all others could be absolutely determined. He proceeds, therefore, to expound the determination of the value of money, and more particularly the price of gold — presumably in an attempt to supply the missing absolute quantum.

His general theory of prices is more clearly worked out than Walras'. He develops a theory of money, and an analysis of monetary phenomena, which had much influence in the second and third decades of this century. But his system is too deficient in fundamental basis to endure. His thought is too abstract, and his logic too circular. It would be impossible to get all the data required for working out his equations; if we had the data, we could add nothing to our knowledge by solving them.

Such theory is viciously abstract in that it omits, not only institutional and social-control facts, but also the differences which exist in individual attitudes — differences between neces­sity and choice, or between impulsive and reflective action.

Like Walras, from whom he borrows, Cassel begs the whole question of economic life, value. By assuming value to start with, and thus evading the problem of its cause, he is estopped from dealing with its determination. The result is a system of business mathematics, not a social science.


In brief summary of the character and im­portance of the thought of Gossen, Jevons, and L. Walras, it may be stated that all emphasized the subjective element in \ralue causation, that all pursued a deductive, mathematical method, and that all arrived at a concept of the margin, where a final or most intense want is satisfied. Their philosophy is utilitarian and hedonistic. (With the exception of the emphasis of marginal utility, these observations apply also to Cassel.)

The mathematical approach is essential, especially in the thought of Cournot, Walras, and Cassel. (Much of Jevons' and most of Gossen's thought would stand up without mathematics. Without the equations, L. Walras does not seem to go beyond A. Walras, and Cassel not beyond L. Walras, in so far as any positive additions to value theory are concerned.) The mere mathematician needs measurable quantitative data, which are homogeneous, and are either fixed or vary in relation to one another. In dealing with values, this leads him to extremes of abstraction, and limits him to quantities exchanged. He more or less takes for granted and assumes the quality of value, and sets up "equations" which, if true, are truisms. In assuming the causation of value, he provides no basis for prediction, law, science.

Another notable point of likeness is that each of the three chief earlier economists discussed formulates more or less pre­cisely some law concerning the attainment of maximum satis­faction. Walras puts it thus: "Taking two commodities on a single market, the maximum satisfaction of wants or the maxi­mum of effective utility exists when and where the ratio of the intensities of the last wants satisfied, or the ratio of the raretes, is equal to price."

One great difference between Jevons and Walras deserves attention, and that is the fact that Jevons has a better apprecia­tion of the causation of values, and consequently goes more deeply than Walras into the real problem of determination. Walras, for example, frequently starts out by assuming his price, and his supply and his demand are price-determined quantities. Jevons seeks to build up to his price by proceeding from causal forces to determination. This difference undoubtedly proceeds from the fact that Jevons was more affected by the Classical English economics, which at bottom has a sort of social point of view, however much it may be shoved into the background. Walras is more mathematical and more inclined both to assume the existence of value and to think of it as a quality of goods, both material and immaterial; Jevons is more psychological'— though not more subjective — and endeavors carefully to guard against treating value as lying in goods.

As to Cassel, in his extreme individualistic and mathematical technique he goes beyond Walras and even spurns causal analy­sis. His subjectivism, therefore, has to be assumed — just as he assumes the existence of the value quality.

As will appear from a reading of the next chapter, the analysis of subjective elements made by these men lacks the refinement to which it has been carried by the Austrian School. And, ex­cepting Gossen, their emphasis on changes in quantity of goods and on exchange in markets tends toward the idea of value as a relation between commodities, which in the last analysis is hardly consistent with strict subjectivism.

Leon Walras - The Mathematical School

Leon Walras, The Mathematical School

Leon Walras (1834-1910) is another economist who was slow in gaining recognition, and whose fame has suf­fered from no fault of his work, but from causes exterior to it. His Elements d'economie politique pure (Elements of Pure Eco­nomics) was published in 1874, thus shortly following the works of Jevons and Menger.1 His thought was undoubtedly inde­pendent, however, and he himself recommends Jevons' book as complementary to his own. He constructed a more complete system based upon mathematical analysis than did Jevons. The establishment of the Mathematical School may be dated from Walras, for, though he was preceded by Cournot, his work was much more complete and systematic.

To some extent, like Senior, Gossen, and Jevons, Walras sought to make economics an abstract science, distinguishing pure economics from applied economics, on the one hand, and from social economics on the other. Truth, he held, rather than the useful or the good, should be the goal. In his opinion, econ­omists had given too much attention to exceptional cases, such as old masters' pictures.

His great object was to expound a mathematical theory of exchange, and it is on the second part of his book, entitled "Mathematical Theory of Exchange" that interest is to be chiefly centered. To achieve his end, he assumes a perfect com­petition such as might obtain in the Bourse, and, like Say, makes the entrepreneur, receiving and distributing payments for "pro­ductive services," the center of the scheme. He neglects the ac­tion of impulses, and, after the fashion of the hedonist, employs the general hypothesis of exchanges between parties who seek in exchanging to secure the greatest possible satisfaction of their desires.

Social wealth, as defined by him, consists of all things, mate­rial and immaterial, which have utility and are limited in quantity. The amount of the value of external things is proportional to the amount of satisfactions they bring us. There is no direct or immediate relation between supply and price; but such a rela­tion does exist between price and demand, and the demand curve depends upon this relation. The cause is intensity of utility. And where two commodities are concerned the demand curve depends upon the relation between the intensity of utility of the one commodity and that of the other. The price, then, where neither of the commodities entering the exchange is valueless, is such that the intensity of the last want satisfied is the same for each.

For Jevons' "final degree of utility" — and Gossen's Werth der lezten A tome — Walras uses the raretS, which he defines as "the intensity of the last want satisfied." 1 Exchange values are proportional to raretes. Two commodities being given, for in­stance, if the utility and the quantity of one of the two com­modities in respect to one or more exchangers varies, so that the rarete varies, the value of that commodity in relation to the other, or its price, will likewise vary.

In some respects Walras' rarete appears to be a truer concept than the common notion of marginal utility; for, in defining it as depending on supply and utility,2 he gives clear recognition to the fact that supply limitations are included and expressed in it. It would not be difficult for both cost and utility theorists to approach some agreement with Walras' formula, according to which utility and supply, working in obedience to the theory of maximum satisfaction, determine the demand curve from which, positing the law of a single price for the market, comes price.

It is to be emphasized, however, that rarete is subjective. Like his fellows of the mathematical-utility school, Walras' theory is based upon the assumption of a direct relation between demand and price and the absence of such a relation between supply and price.

In contrast with Gossen, Walras treats with notable clearness the subject of market values; and he goes beyond Jevons in for­mulating his exchange equations for dealings in any number of commodities rather than two alone.
Nevertheless one puts down the "pure political economy" with the feeling that little if anything has been added to real knowledge. What boots it that "the effective demand or supply of one good in terms of another is equal to the effective supply or demand of the other multiplied by its price in terms of the first good"? Other economists had stated that demand equals supply!

Instead of seeking causes, he sets up a number of simultaneous equations equal to the number of the "unknown" (prices), and proceeds to turn the crank. Starting from the obvious and ques­tion-begging equation, "demand for a X value of a = supply of b X value of b," Walras draws curves whose axes are (1) quan­tity of a given good demanded at a given price, and (2) prices of the given good in terms of another good: his curve "gives the quantity of a effectively demanded, as functions of the price of a." Finally comes the italicized statement: "Two goods being given, in order that there be equilibrium, or a stationary price of one in terms of the other, it is necessary and sufficient that the effective demand of each of the two goods be equal to its effective supply {offre). When that equality does not exist, in order to reach an equilibrium price there is necessary a rise in the price of the good of which the effective demand is greater than the effective supply, and a fall in the price of the one whose effective supply is greater than the effective demand." He uses a formula which is practically identical with that shown on a preceding page in the discussion of Jevons.

Jevons - The Mathematical School


Some seventeen years after the appearance of Gossen's book, yet quite independently, the English economist, Jevons, worked out similar ideas, and along similar lines. In an introduction to a collection of his essays another English econ­omist, and one whose opinion has no small weight, says: "But I do not think it too much to say that the future historian of the science . . . will trace the main sources of its advance in the writings of four men, each of marked genius — Petty, Cantillon, Ricardo, and Jevons; and of these four, the name of Jevons . . . will not, I think, rank last in order of fame." Though the words, "main sources," make the statement an exaggeration, it has its element of truth.

William Stanley Jevons was born in Liverpool, England, in. the year 1835. He was a shy and thoughtful man, much given to introspection, and possessed of a very inquiring turn of mind. He attended University College School and University College, London, and in 1854 was made assayer of the mint at Sydney in Australia. Returning, he became successively lecturer and professor at Owens College, and professor at University College (1876-1880). His untimely death in 1882 came by drowning, and men have always regarded it as a great loss to economic thought.

Jevons brought into the development of English economic thought more of the spirit and discipline of pure science than any predecessor. He was no "moral philosopher" or retired. business man or busy lawyer or social reformer. He was a social scientist who specialized in economic phenomena for the sake of ascertaining the laws which govern them. He was frankly a theorist. He sought the truth concerning fundamental principles, no matter where it might lead; and in his quest, he used the methods and technique which characterize the scientist in any field, and which are apt to be most highly de­veloped in academic life.

Though he wrote several books and numerous essays, his Theory of Political Economy, published in 1871, will be mainly considered here.

Jevons' political economy, while treating of the wealth of nations with the purpose of teaching how the poor can be made as few as possible and all be well paid for their work, inquires how wealth may be best consumed. Consumption he gives a distinct place, and puts it before production and distribution, in this departing from the practice of Mill and the Classical economists in general.

Thus wants, and their satisfaction by utilities, are empha­sized. "The most important law in the whole of political econ­omy" is the "law of variety" in human wants: each separate want is soon satisfied, yet there is no end to wants. (Note the idea of indefinite expansibility!) Banfield is quoted with ap­proval as saying: "The satisfaction of every lower want in the scale creates a desire of a higher character." A "law of suc­cession of wants" is also suggested, and is roughly illustrated by a range of utilities shading from air down through food, clothing, and lodging to amusements.

Jevons employs the word, "utility," "to denote the abstract quality whereby an object serves our purposes." He does not allow moral considerations to enter; mere pleasure and pain are the ultimate objects of the calculus of political economy.

He goes on to poit out that utility is not inherent. It is relative to wants, and too much of a good brings disutility. Utility decreases as the quantity increases. There is thus a difference between total utility and degree of utility, the degree of utility of successive units decreasing while total utility in­creases.

"There is a certain sense of esteem, of desirableness, which we may have with regard to a thing apart from any distinct consciousness of the ratio in which it would exchange for other things. I may suggest that this distinct feeling of value is prob­ably identical with the final degree of utility. While Adam Smith's often quoted value in use is the total utility of a com­modity to us, the value in exchange is defined by the terminal utility, the remaining desire which we or others have for pos­sessing more."

This final degree of utility is the degree of utility of the last or the next possible addition to a stock. It is the now famous term with which Jevons designated what we ordinarily call marginal utility. By it, exchange value is determined: "The ratio of exchange of any two commodities will be the reciprocal of the ratio of the final degree of utility of the quantities of commodity available after the exchange is completed." In fact, "The final degree of utility is that function upon which the whole Theory of Economy will be found to turn." To illus­trate, take water. Water has no value, for we have so much of it that its "final utility" is 0. But let the supply run short through drought, and we begin to feel a higher degree of util­ity, — and value comes into being.

Like Gossen, Jevons concluded that in consumption the tendency is to equalize final, or marginal, utilities.

He makes some further analyses: such as the distinction between actual, prospective, and potential utility; and the in­dication of three dimensions in utility — quantity, degree, and duration. He points out that the time element, too, must be allowed for, as an element of uncertainty. In this connection he undertakes to apply the idea of final degree of utility not only to current choices, but also to future choices — to the process of discounting the future use of goods. He emphasizes the fact that in appraising goods now, men consider not only the dura­tion of the period during which they will be consumed, but also the degree of certainty that consumption will be possible.

In developing his ideas Jevons endeavored to work out a theory of objective exchange value by applying mathematics. He argued that we do not need to employ units of measurement for quantities of feeling, because the individual makes direct comparisons in his mind. He does not assume that we can measure the utility of the last unit of a good, as a quantity of pleasure. He would deal only with relations — the ratio of final degrees of utility. His concept is of a ratio between (1) the changes in utility of a good and (2) the changes in the number of units of the good. He would thus avoid the assumption of an exact quantity of pleasure at the margin, and at the same time would provide a homogeneous basis for comparing the relative importance of all sorts of goods. This is an outstanding point in his theory.

In this way, Jevons deals with the difficulty that every mind is inscrutable to every other mind, and consequently no common denominator is to be found. This difficulty he endeavors to escape by turning to the "aggregate" of individuals, arguing that "the laws which We are about to trace out are to be con­ceived as theoretically true of the individual; they can only be practically verified as regards the aggregate transactions, pro­ductions, and consumptions of a large body of people. But the laws of the aggregate depend of course upon the laws apply­ing to individual cases."

He then works out his formula, based upon the ratio of final degrees of utility, for explaining the determination of exchange values,—with which values, regarded as mere "ratios of ex­change" Jevons was primarily concerned. It is as follows:

Jevons says that the only unknowns in this equation are x and y, i.e., the quantities of the two commodities exchanged.

Quite naturally Jevons attacked the labor-cost theory of value, and, for that matter, all cost theories. His brief runs something as follows. In the first place, many valuable things are not reproducible at any cost; hence all such goods are not subject to a cost-explained valuation, and a cost theory is at best partial. Again, the facts show that market values generally fluctuate either above or below cost, seldom equaling it. Finally, there seems to be little relation between the quantity of labor expended and the ultimate value of the product. Take the Great Eastern steamship, for example. In spite of its cost, what is its value when it is found impracticable to use it? In short, "labor once spent has no influence on the future value of any article:" its value on the contrary rises and falls according to the degree of its utility.

The obvious reply to Jevons is that this degree of utility de­pends partly upon supply, which in its turn is subject to limita­tions of cost. Indeed, Jevons himself goes on to admit that labor plays a part as a determining circumstance, reasoning that labor affects supply, supply affects degree of utility, value depends on degree of utility. This appears to be virtually an admission that the case for utility is overdrawn.

Jevons has been further criticized in two matters of impor­tance: first, he confuses demand price — what marginal pur­chasers will pay — with marginal utility, apparently assuming that the relations of the two to value are the same; and, in the second place, he is guilty at points of substituting the idea of social utility for that of individual utility, leaping the gulf which lies between the utility scales of different men.

In his theoretical writings, Jevons' method was deductive and mathematical, and, indeed, his conception of political econ­omy was not dissimilar to that held by Senior, whom he cites with approval. He believed, as Gossen had believed, that eco­nomics can and should be a science, and that the mathematical method is necessary to make it so, — a necessity inherent in the measurement of pleasures and pains.

Hermann Heinrich Gossen

Hermann Heinrich Gossen

Hermann Heinrich Gossen (1810-1858) was one of those unfortunate geniuses whose work fell upon deaf ears and unseeing eyes. Yet, although his book was all but forgotten and unknown, so clear and important was his con­tribution to economic theory that a few pages should be devoted to him.

Gossen's book, Die Entwickelung der Gesetze des menschlichen Verkehrs (Development of the Laws of Exchange among Men) was published in 1854 at Brunswick. The author states that it is the result of twenty years of meditation; that what Coper­nicus had done in founding the physical laws of the universe, that he, Gossen, had done for human society, — though some metaphysical Kepler or Newton might be needed to fill in the outline and determine the precise application of his forces. The confusion which existed in economic doctrine, he conceived to lie in the absence of mathematical treatment: to deal scientif­ically with complicated forces requires mathematics. He even suggested that while it is not now possible to measure absolute quantities of satisfaction, comparisons may be made by geomet­rical principles, and measurements of unknown quantities arrived at, just as distances are computed in astronomy. It may be said that his book is an attempt to put economics on an exact, mathematical basis.

The philosophy is essentially utilitarian and hedonistic. But the broad goal of a greater sum total of human happiness is constantly kept in view.

Gossen at once proceeds to develop a law of decrease in amount of satisfaction, using the common geometrical figures with their ordinates, abscissae, and curves. From this law he derives the following principles: —
(1) "There is a manner of enjoying each satisfaction, chiefly dependent upon the frequency, according to which the sum of the man's satisfaction reaches a maximum. If this maximum is reached, the sum of the satisfaction will be decreased by a more frequent, as well as by a less frequent, repetition."

(2) "The man who has the choice of several satisfactions, but whose time is not sufficient to procure all completely, in order to attain the maximum of satisfaction must — however the absolute amounts of the satisfactions may differ — partly enjoy all, even before he has completely enjoyed the greatest one; and this [must be] in such proportions that at the moment his consumption ceases the amount of each satisfaction is the same."

(3) The possibility of increasing the sum of the satisfactions of life, even under present conditions, exists when a new satis­faction, be it in itself ever so small, is discovered, or when one already known is extended.
According to Gossen, things have value in proportion as they yield satisfactions or enjoyments. On this basis, commodities may be divided into three classes: first, those which have all the properties for yielding satisfactions, that is, consumers' goods, or Genussmittel, as he calls them. Next come "goods of the sec­ond class," comprising those in which the union of all the prop­erties for complete enjoyment is lacking, as, for example, pipes and ovens and other complementary goods. Finally, produc­tion goods are distinguished. These embrace land, machinery, etc., and have an indirect value due to their ability to produce goods of the other classes. (He develops a theory of im­putation.)

"With increase in quantity, the value of each added unit (Atom) must undergo a continuous decrease until it sinks to nil." Thus, goods which yield only one satisfaction have their consumption limited by time, or the number of units consumed. As to a complex of goods: "If his powers are not sufficient to produce all possible means of satisfaction, man must produce each one to such an extent that the last unit of each has equal value to him."

But, meanwhile, what of costs? Gossen here states that different goods require different degrees of exertion for their production, "and the value of the things produced thereby will naturally be diminished in the same degree with the estimation of the difficulty, as such." He draws a diagram like the ac­companying figure, and concludes that "the value reaches a maxi­mum when the quan­tity ad is produced, i.e., when the production is carried on so long that the difficulty and the value are equal." It follows that in order to obtain a maximum of satisfaction, men have to divide their time and energy spent in procuring different satisfactions, so that the last unit of any one satisfaction is equal to the amount of difficulty or disutility which would be caused if that unit were produced in the last moment of exertion, i.e., at the margin of disutility.

Nor does Gossen let wants or desires go without some analysis along the line of difference in elasticity, etc. He distinguishes "needs" (Bedurfnisse) from luxury or pleasure desires, the former being those which cannot be trenched upon without bringing economy in other satisfactions; and he notes some of the results which flow from the fact that men differ in their purchasing power.

The conclusion is that this obscure German anticipated much of recent development in economic theory. The sub­jective side of value, wants, is emphasized; the marginal utility idea of value determination is formulated; and this is brought into correlation with the margin of disutility. And his classifica­tion of goods into different orders or classes is suggestive of Menger's thought. All this he did, to say nothing concerning his development of mathematical methods of presentation. Perhaps the lack of elegance and clarity in exposition may account for a part of the neglect accorded him. The chief gen­eral criticisms seem to be his lack of system in presentation, and a failure to deal adequately with market price.
Gossen, Jevons, Walras and The Mathematical School

The development of the marginal-utility analysis in value theory is commonly associated with the names of Jevons and of the members of the Austrian School. But, both in the con­cept of the margin and in the emphasis of utility and demand, these men were anticipated. As is usually the case, there were forerunners.

First Developments.

Not to dwell upon such sugges­tions as may be found in the writings of Galiani, Barbon, and others, the French writer, Condillac, must be especially men­tioned both because of his clear statement and his considerable influence. Condillac stated that value depends upon wants, being less in the thing itself than in the estimate we form of it. "A thing does not have value because of its cost, as some sup­pose; but it costs because it has a value." The true value of goods varies according to the intensity of wants and the supply of goods: assuming equal utility, it varies according to out estimates of rarete or abundance.

Jeremy Bentham, famous in English jurisprudence and political philosophy, suggested the idea when he wrote: "The greater the quantity of the matter of property a man is already in possession of, the less is the quantity of happiness he receives by the addition of another quantity of the matter of property, to a given amount."

Also noteworthy in this connection are the English writers Craig, Longfield, and Lloyd. John Craig in 1821 developed the significance of utility in value determination in an original way, analyzing the utility of a good into different strata which come into play as supply is increased.2 But Longfield (1833) had a clearer expression of the marginal idea as applied both to utility and cost: to him market price was "measured by that demand, which being of the least intensity yet leads to actual purchases." In the following year, W. F. Lloyd published a most remarkable Lecture on the Notion of Value. Value, he reasoned, may be defined as the esteem in which an object is held. Although human wants are varied and no limit can be assigned to their development, yet, for any specific object, an increase in supply will bring satiety and value will vanish (p. 10). Lloyd says: "In its ultimate sense, value undoubtedly signifies a feeling of mind which shows itself always at the margin of separation between satisfied and unsatisfied wants." The claim of this Englishman to the distinction of first clearly explaining value in terms of marginal utility seems strong.

At about the same time, a Frenchman, Auguste Walras, in studying the basis of property rights, reached the conclusion that value arises from the rarete (relative scarcity) of objects which have utility. He argued that value is the relation between the quantity of a good and the sum of the effective needs for it, in other words, its rarete. He failed, however, to develop the idea of degrees of utility and the marginal analysis. It is of interest to note that a countryman, Augustin Cournot, soon published a work which, while not developing the idea of marginal utility, did bring out clearly the relation between incremental variations in quantity of goods and those in prices. Cournot's work would thus tend to supplement that of A. Wal­ras, and in any event was pioneering in the field of mathematical economics and marginism.

The German, Thomas, has often been overlooked in this connection. In his Theorie des Verkehrs (1841), however, he very cleaily states the main idea of the modern subjective theories of value: Value depends on estimation, and for estima­tion there must be not only an object, but a subject who eval­uates. Value depends upon the strength of desire, and price upon a comparison of the estimations put by the parties to an exchange upon their goods. He expresses the idea of a scale with upper and lower limits (Grenzeri) Thomas, however, seems not to have thought it necessary to enter into the minute psychological analysis characteristic of the modern marginal-utility thinkers.

Similar ideas were soon advanced quite independently by a French engineer named Dupuit. He wrote that "goods have a utility not only for each consumer, but also for each want for the satisfaction of which they are employed"; and seems to have clearly grasped the concept of final or marginal utility.
Finally, Senior should also be mentioned as a forerunner; and Banfield and Jennings, to whom Jevons himself expressed in­debtedness, should not be forgotten.

The first writer, however, who developed the ideas now under consideration, and centered a more or less comprehensive sys­tem of economic theory in them, was Gossen.

John Rae - Social and Individual Wealth

John Rae: Social and Individual Wealth

The American writer, John Rae, furnishes another instance of early criticism of Smith's economics which should not be forgotten. Rae was a Scotch immigrant, first to Canada and later to the United States. His book was published in 1834 at Boston, Massachusetts, and was entitled, Statement of Some New Principles on the Subject of Political Economy, Ex­posing the Fallacies of the System of Free Trade, and of Some Other Doctrines Maintained in the Wealth of Nations.l While the title perhaps unduly emphasizes the merely critical part of the work, it sufficiently suggests the reason for presenting a brief treatment of its author at this point.

The first book of the New Principles is headed, "Individual and National Interests are not Identical." Rae adopts Lauder­dale's general idea of a difference between public and individual interests, and develops a theory of government interference in harmony with it. His idea differs from Lauderdale's, however, in that he does not consider a difference in the wealth itself, but one in the "causes giving rise to individual and national wealth." His treatment is diffuse and lacks the verve and acumen of Lauderdale's thought; but it is his merit that he clearly shows how fundamental to Smith's thought is the notion of an identity between national and individual wealth, and that he connects his analysis with public policy.

Rae states Smith's case thus: "The axiom which he brings forward, that the capital of a society is the same with that of all the individuals who compose it, being granted, it follows that to increase the capitals of all the individuals in a society is to increase the general capital of the society. It seems, there­fore, also to follow that as every man is best judge of his own business and of the modes in which his own capital may be augmented, so to prevent him from adopting these modes is to obstruct him in his efforts to increase his own capital, and . . . to check the increase of . . . general capital; and hence, that, as all laws for the regulation of commerce are in fact means by which the legislator prevents individuals conducting their busi­ness as they themselves would deem best, they must operate prejudicially on the increase of individual and so of general wealth." Furthermore, Rae points out that it is assumed by Smith that as the capital of a single individual grows through saving and accumulation, so the national capital is increased in the same way.

The whole scheme Rae rejects. In the first place, even assum­ing that individual and social interests are the same, it is not true that saving from revenue is the sole means that an individ­ual uses to increase capital. He must first gain his revenue, and thus the amount he can save depends partly on his talents and capacities. Moreover, the fact that an individual by gambling and tricky bargaining may gain wealth, shows that self-interest does not always lead to increased national wealth.

But it is not true that social and individual interests are identical, nor that the causes giving rise to wealth are the same in the two cases. For, while it is generally true that an individual can find employment, and so obtain an income from which he can save, in the case of a nation the "materials on which the national industry may be employed are to be provided, and often are or may be wanting." Individuals seem generally to grow rich by grasping a portion of existing wealth; nations, by the production of new wealth. "The two processes differ in this, that the one is acquisition, the other creation."

Rae then goes on to argue that the creation of wealth de­pends upon invention, and national wealth can be increased only through the aid of the inventive faculty.6 Thus the power of invention plays a leading part in his thought.

In this connection, it may be remarked that Rae also criticizes Smith's treatment of division of labor, holding that it springs from invention rather than the reverse, and hence is effect rather than cause of increased productivity. And, of course, there is an element of truth in this, for in reality the two are interrelated, each being now cause and now effect.

In harmony with the foregoing ideas, Rae opposed a strong tendency of the Classical School by holding that there is no presumption against governmental interference. From what has already been written, it is evident that he denies the exist­ence of any presumption in favor of laisser faire. But elsewhere he approaches the question in a different way, centering his criticism largely on the distinction between natural and artificial. He says that society is natural, proceeding from the operation of natural forces, both subjective and objective. But the states­man cannot be separated from society, nor can the actions generated by him be called unnatural. Therefore, the inter­ference of the legislator is natural, and, Rae thinks, often bene­ficial: legislation may promote intelligence and invention, and prevent dissipation of the community's funds.

Though criticism of method might more logically be reserved for later discussion, Rae's is so unique and so entwined with his criticism of the philosophy that it can hardly be passed over without a word here. Smith's method, Rae says, is not truly scientific, that is, inductive. There are two sorts of philosophy, he explains: one is explanatory and systematic, the other is inductive or scientific. The former seeks merely to explain phenomena, as does Smith, fitting them into some machinery of "natural" assumptions. Furthermore, it generalizes from familiar and ill-defined notions, and the confusion in Smith's use of the terms, value, wealth, stock, capital, self-interest, desire of bettering one's condition, etc., is illustrative. The doubts and difficulties into which political economy has fallen since Smith's day are evidence of the weakness of his method. "If we, therefore, view his work as an attempt to establish a science of wealth, on the principle of the experimental or inductive philosophy, it is exposed to the censure of transgressing every rule of that philosophy."

Just what influence Rae exerted is not clear. John Stuart Mill was acquainted with his book, and it may be conjectured that some of his modifications of the Classical system were the result. An English economist, Hearn, who, as will be seen, had some influence on Jevons, also knew Rae's work. In 1856 an Italian translation was made.
Lauderdale As Individualistic Critics: Social and Individual Wealth


Early in the nineteenth century, two shrewd and eccentric Scotchmen wrote books in which they opposed Smith's economic system in a fundamental way. While accept­ing his individualistic point of view, they took the Wealth of Nations to task on the ground that it confused public and private wealth.

The first of these was Lord Lauderdale (1759-1830), who in 1804 published his Inquiry into the Nature and Origin of Public Wealth and into the Nature and Causes of Its Increase. French and German translations of this work appeared in 1808, and an enlarged English edition in 1819. Its main points concern value, wealth, and capital, in treating all of which the author showed much originality, and had a very considerable effect. More will be said of his ideas on value and capital in other chapters.

At the very outset, he emphasizes the importance of defining terms and analyzing their meaning; and he particularly stresses the distinction between "wealth" and "riches." The latter term he uses to designate private wealth. The former consists of "all that man desires, as useful or delightful to him".

Then, in his chapter on public wealth and private riches (pp. 43 ff.), Lauderdale begins by stating that all previous writers had made the mistake of confusing individual and na­tional wealth, and had accordingly made national wealth equal the sum of individual riches. With such an idea, these writers had naturally reasoned that the proper way to increase national wealth is by means of "parsimony" (saving); for that is the means by which individuals become rich.

But here Lauderdale points to the fact riches of the individual depend in part upon the scarcity of the things saved, or, as we would say, an individual's wealth is the exchange value of his property. And he asks, does not common sense revolt against the idea of increasing wealth by making things scarce? "For example," he says, "let us suppose a country possessing abundance of the necessaries and conveniences of life, and uni­versally accommodated with the purest streams of water: what opinion would be entertained of the understanding of a man, who, as the means of increasing the wealth of such a country, should propose to create a scarcity of water, the abundance of which was deservedly considered as one of the greatest blessings incident to the community? It is certain, however, that such a projection would, by this means, succeed in increasing the mass of individual riches; for to the water, which would still retain the quality of being useful and desirable, he would add the circum­stance of existing in scarcity, . . . and thus the individual riches of the country would be increased in a sum equal to the value of the fee-simple of all the wells" (pp. 44-45). Or, in the case of food, to increase the supply would act vice versa. Or, again, would the declaration of a war which decreased the capital value of the national debt, rents, and other incomes, and so re­duced private riches, decrease the lands, or waters, or any of the wealth of the nation? Surely not.

He concludes that it is very important to observe that in proportion as the riches of individuals are increased by an aug­mentation of the value of any commodity, the wealth of the nation is generally diminished (p. 50). This strongly suggests opposition between public and private interests. Indeed, he remarks: "... nothing but the impossibility of general com­bination protects the public wealth against the rapacity of private avarice" (p. 54).
In following chapters, Lauderdale treats of the source of wealth and the means of augmenting it, criticizing Smith vigor­ously on such points as non-productive labor, division of labor, and the function of capital. He concludes that wealth can be increased only by the means which produced it, namely, produetion by land, labor, and capital; parsimony, or the "baneful passion of accumulation," cannot avail.

This doctrine finds expression in the extreme conclusion that the best way to increase public wealth is to make great expendi­tures, while the quickest way to diminish it is to accumulate a sinking fund.

In his discussion of "accumulation" and consumption, he may be dubbed the father of the idea of overproduction based upon underconsumption.

Lauderdale's emphasis of consumption and demand, and his shrewd observations on the effects of varying distribution of wealth, are remarkable. He was far in advance of his contempo­raries in these matters.
It is to be noted, too, that his treatment of capital anticipates the later development of economic thought, since he regards it as a factor coordinate with land and labor, which contributes to production by saving labor or by enabling man to do things beyond the reach of personal exertion. This is in advance of Smith's conception, but the thought is warped by Lauderdale's emphasis of oversaving and the fancied evil of having a nation overequipped with capital goods.

The breadth of Lauderdale's reading is notable, as he cites Xenophon, Locke, Petty, Vauban, Gregory King, Harris, Hume, "the works of all the Economists" (Physiocrats), William Pul-teney, Hooke, Smith, Malthus, and others.

To Americans, atjeast, it is of interest to note that an early economist of the United--States, Daniel Raymond (1820), refers to Lauderdale, anor virtually follows him in contrasting social with individual wealth,3 and the French economist, Ganilh, who was influenced by Lauderdale, in turn exerted an influence upon Raymond and other Americans. Indeed, the French translation had considerable effect ia the-land of the Physiocrats. In Ger­many, one of the chief economists influenced by him was Hermann. One of the many writers of the early nineteenth cen­tury who read and were influenced by Lauderdale was John Rae, concerning whom a word must be said next.