Wesley Clair Mitchell Biography and Theory

In 1896 Wesley Clair Mitchell (1874-1948) entered the University of Chicago to study classics. After taking courses from John Dewey and Thorstein Veblen, he became more interested in philosophy and economics and finally decided to pursue economics. Mitchell went on to become a leading American economist of the twentieth century: an authority on business cycles, a pioneer in establishing a research agency for studying the economy, and an astute observer of the development of economic theory. Although Mitchell did not fully accept many of Veblen's ideas, his economics was not orthodox, so he is usually identified with the so-called institutionalist school. He accepted and amplified some of Veblen's criticisms of orthodox economic theory, but he made no attempt to build a complete theoretical structure to explain the evolution of the industrial economy. Mitchell attempted to follow what Veblen recommended in his essays on methodology, researching carefully and grounding all his theoretical work in empirical information. His example as a scholar and researcher and his work in setting up the National Bureau of Economic Research to collect and analyze macroeconomic data have been more important than his contributions to pure theory.

Mitchell's views about orthodox economic theory are expressed in a number of his essays and in his Lecture Notes on Types of Economic Theory. In an unusually candid letter to J. M. Clark, he revealed the turn of mind that deflected him from the mainstream of economic theory.16 Mitchell said that at a young age he began to prefer concrete problems and methods to abstract ones. He recalled a great aunt who "was the best of Baptists, and knew exactly how the Lord had planned the world."17 Mitchell remembered how he developed "an impish delight in dressing up logical difficulties which my great aunt could not dispose of. She always slipped back into the logical scheme, and blinked the facts in which I came to take proprietary interest."

Mitchell accounted for his particular approach to economics by citing the fact that when he went to Chicago he studied both philosophy and economics. He found economics easier than philosophy and thought the economic theories from Quesnay to Marshall "were rather crude affairs compared to the subtleties of the metaphysicians.... The technical part of the theory was easy. Give me premises and I would spin speculations by the yard. Also I knew that my 'deductions' were futile."19 Mitchell was impressed with Veblen and felt "that few could match him in spinning out theories." Yet Mitchell recognized that Veblen's system had the same methodological weakness as did orthodox theory; both failed to test either their assumptions or their conclusions satisfactorily. "But if anything were to convince me that the standard procedure of orthodox economics could meet no scientific tests, it was that Veblen got nothing more certain by his dazzling performances with another set of premises."

This particular attitude is manifested in two of Mitchell's lifelong efforts. In his study of the history of economic ideas, he was interested not in what particular theorists said, but in why they attacked certain problems and not others, why they accepted certain premises without question, and why their contemporaries accepted their conclusions and thought them significant. Mitchell's work in the history of economic theory possibly represents the best of the relativist position. He concluded that economic theory can be largely explained as an intellectual reaction to problems of the times. This attitude is also manifested in his work on business cycles. He left behind no theory of cycles founded upon abstract premises from which conclusions could be deduced. His approach was a careful construction and explanation of time series as a preliminary step to checking the tentative theories he offered. At times his work on business cycles appears almost atheoretical, yet there is a theoretical structure underlying the entire analysis.

Mitchell criticized the abstract models of orthodox theory. "Economic theory of the speculative kind is as cheap and easy to produce as higher mathematics or poetry—provided one has the gift. And it has the same problematical relation to reality as do those products of imagination." He also objected to the hedonistic psychological assumptions of orthodox theory but did not accept Veblen's instinct theories. He claimed that the social sciences could develop a better explanation of the activities of humans by basing their explanation upon empirically grounded behaviorist psychology, and he advocated a more general­ized approach to studying human behavior than could be achieved by letting the various branches go their own ways. Orthodox theory had incorrectly focused on normality and equilibrium in the system instead of examining its dynamic interrelationships.

Mitchell particularly emphasized the evolutionary cumulative causation ap­proach in his study of the business cycle. Implicit in Mitchell's writings is an ethical dissent as well as a scientific dissent from orthodox theory. Mitchell, who hoped to use economic knowledge to improve welfare, maintained that a study of the economy revealed a need for national planning in order to achieve better integration of the activities of firms and better control of fluctuations in economic activity.
Mitchell took Veblen's distinction between pecuniary and industrial employ­ments as a broad guide in his approach to the study of business cycles. Fluctua­tions in economic activity can be accounted for largely by the reactions of businesses to changing rates of profit. Because business decisions are made in a setting of expectations and uncertainty, the businessperson's investment deci­sions always reflect either an optimistic or a pessimistic outlook on the future. Fluctuations in economic activity are to be expected in economies with devel­oped monetary systems; therefore, orthodox theory, with its conceptual frame­work of normal, static, and equilibrium, is not appropriate. Mitchell did not attempt to build another abstract model of the business cycle. He tried instead to explain what happens during the business cycle, giving what he called a descriptive analysis of the cycle. Because each cycle is unique, the possibility of developing a general theory is restricted; yet all cycles have certain similarities, because all reveal the interactions of economic forces during the various phases of depression, revival, prosperity, and crises.

Although others before Mitchell had seen the cycle as a self-generating process, he was the first to give this conception explicit form and to support it with extensive empirical data. His explanation of the cycle is based on business reactions to changing levels of profits. A depression carries the seeds of the subsequent revival as interest rates fall, inefficient firms are eliminated, both fixed and variable costs decline, inventories decrease, and so on. Prosperity also carries the seeds of crisis and subsequent depression as costs rise, with a consequent squeeze on profits.

Mitchell's descriptive analysis, reflecting as it does a scholar's judicious blend of theory, description, and history devoid of mathematical encumbrances, is somewhat like Marshall's. Yet the hard theoretical core that underlay Marshall's microeconomic analysis was missing, to such an extent that some call Mitchell's work measurement without theory. Others, with post-Keynesian hindsight, find in it the multiplier process, the accelerator principle, and a counterpart to Keynes's marginal efficiency of capital and liquidity preference. Mitchell be­lieved that business cycles cannot be considered apart from the rest of the economy; they are part and= parcel of the system and are, in fact, generated by the system. As each phase*of the cycle evolves into the next phase, the institu­tional structure of society changes so that "economists of each generation will see reason to recast the theory of business cycles which they learned in their youth."

In 1920, at the age of forty-five, Mitchell founded the National Bureau of Economic Research. This private, nonprofit organization has been tremendously important in financing economic research in the United States. Although its most important efforts have involved the measurement of national income and business-cycle research, it has sponsored research in nearly all areas of the economy. If we were studying the development of economic research in the United States, Mitchell's role would require at least one long chapter. In Chapter 16 we will see some direct influences of Mitchell in the work of some of his students—Simon Kuznets, for example—and some indirect influences in the work of economists who were more interested in measuring economic activity than in producing abstract deductive models.