The New International Encyclopædia/Political Economy

by Richard T. Ely

POLITICAL ECONOMY. The term economics, derived from the Greek words οἶκος (household) and νóμος (law or regulation), was used by Xenophon and in the spurious treatise attributed to Aristotle, to signify the art of prudent and systematic household management, with particular reference to family income and expenditures, and to the labor and satisfaction of the wants of the members of the household. Political economics, or political economy, as the words imply, originally signified the art of directing the industry, the consumption, the incomes and expenditures of the State and its subjects with frugality and care; and in this sense was first used in the Traité de l'Economie Politique, published by Monchrétien de Vatteville in 1615. The use of the word in this significance soon became general. It was not until the nineteenth century that political economy came to be commonly conceived as a neutral science, divorced from the art of statesmanship. Economics then became the science of wealth, the study of those things which possess exchange value. This view became dominant about 1825, the abstract and theoretical treatment then in favor being divided into three or four topics: the production, consumption, and distribution of wealth (J. B. Say), or the production, distribution, and exchange of wealth (J. S. Mill), most subsequent writers including exchange and a minority following Mill in excluding consumption. Some writers (e.g. Senior, J. S. Mill) proposed to limit the term political economy to this comparatively narrow science of wealth; while others proposed to substitute for the term the titles Chrematistics (Sismondi), Catallactics (Whately), meaning the science of exchanges. A sharp reaction set in about 1850 against the attempt to increase the precision of the science by narrowing its scope. The Historical School (see below) maintained that the subject of the study was not wealth, but man's relation to wealth; that it was part of a general social science, and could not profitably be divorced from ethics and politics. The first contention, well expressed in Roscher's aphorism that political economy begins and ends in man, has met with practically universal acceptance. The other contentions of the Historical School are still in dispute, but they have served effectually to prevent any uniform acceptation of the term political economy. Economics, wrested from its old meaning of household management, is used or defended by Jevons, Marshall, Macleod, Ely, and other leading economists, but it is the brevity and not the clearness of the word which preserves it, since as now used it is affected with all the ambiguity of the longer title.

Content or Scope. The investigation of the social relations and activities connected with wealth may be divided into four stages. In the first stage we describe, classify, define, and enumerate economic phenomena. In the second we analyze and interpret these phenomena for the purpose of revealing cause and effect, of discovering uniformities and sequences or economic laws. In investigating economic uniformities we are practically forced to certain conclusions about economic progress, and the theory of economic progress determines largely our interpretation of approximate aims and ideals: the determination of these ideals constitutes the third stage. In the fourth stage we discuss means to attain these aims and ideals. We may easily distinguish the stages in which one of these processes far outweighs in importance all the rest. Corresponding to the first stage we have Economic History, Economic Methodology, and Economic Statistics; corresponding to the second stage is Economic Theory; to the third stage, the Ethics of Political Economy; and to the fourth stage Applied Political Economy, often but infelicitously called the Art of Political Economy. It should be added that Economic Theory, also called Economics, Social Economics, Theory of Political Economy, etc., is usually subdivided further into the inductive theory and the deductive theory, and the latter is frequently called hypothetical, abstract, speculative, Pure Economics or the Pure Theory. Briefly stated, the debate over the proper scope of political economy hinges about the question whether the term political economy shall be applied to all or only to a part of these divisions. Some writers (e.g. H. von Scheel. Laveleye, and most German writers) would use the term political economy to cover all of them. The leading English economists of the present time would use the term so as to include all except ethics and applied political economy; while the fast disappearing group of which Senior is the best example attempted to confine the science of political economy to abstract or hypothetical theory. This question will be considered below, where the discussion of scope is continued in connection with that of method. In anticipation of that discussion, and following the usage of Adam Smith and the popular interpretation of the term, we may define political economy as the ordered knowledge of the social phenomena arising out of man's activity in the acquisition and use of wealth.

By wealth we mean things possessing value. We mean goods and services which usually and regularly cost labor, and which are exchangeable for labor. We mean useful things of a material nature, and personal services which satisfy human wants, which exist in quantities below the amounts desired, so that each unit of them possesses distinct importance for us.

History of Economic Thought. Greece. Greek economic thought is characterized by an exaggerated confidence in the power of the State to mold human nature, control industry, and direct the growth of society. In political thought this resulted in a striking subordination of the individual to the State; in the study of society it led to the subordination of economics to politics and ethics. Slavery was generally indorsed — indeed it was probably regarded as indispensable by the majority. The Greek philosophers fully understood the advantages of the division of labor, and Aristotle is generally credited with having entertained correct views upon money and advanced ideas concerning value. The Greek philosophers generally condemned interest-taking and entertained the traditional prejudices against trade and commerce. This brief summary may be accepted as representing the opinions predominating among those Greek writers whose works have come down to us. To be sure, there are certain qualifications to be made to this view of Greek thought, but on the whole it is probably true that the Greeks had little or no conception of the sacred regard for the individual which characterizes the theory of modern individualism.

The Romans took their philosophy from the Greeks, and though they made important studies of particular economic problems, laborious studies have utterly failed to reveal the existence of anything approaching a dominant system of economic thought. Interest-taking, avarice, and trade were generally condemned by the philosophers. Slavery was occasionally condemned — by Varro and Columella as an expensive and demoralizing industrial system, by Seneca on the general principles of the Stoic philosophy. In the Roman jurists we find evidence of systematic thought upon the nature of money, wealth, and capital; the encouragement of population, the regulation of private property and sumptuary control of various kinds, etc. But the general line of historical development is from Aristotle to the Christian Fathers, and more particularly to the mediæval Canonists.

Christianity. The immediate effect of Christianity was to strengthen in general the prevalent Aristotelian system of economic philosophy, its condemnation of usury and the pursuit of wealth in trade, its assertion of the superiority of agriculture, and its support of the social system of status. Christianity thus strengthened the subjection of economics to ethics, but it weakened the subjection of economics to politics. Within the Church there was taught the equality of men before God, and the essential dignity of labor. The clergy were permitted to earn their own livelihood by manual labor, and the laity were exhorted to free their slaves as soon as they became Christians.

The Middle Ages (A.D. 400-1500). Inasmuch as the teachings and doctrines of the early mediæval writers are well summed up in the Corpus Juris Canonici (see Canon Law), it will be convenient to discuss them under the general heading of the Canonists — the schoolmen and theologians who after the compilation of ecclesiastical laws by Gratian in the twelfth century analyzed and expounded, among other things, the relation to economic affairs of the Scriptures, the writings of the Christian Fathers, decisions of Church councils, and Papal decrees. The doctrines of the canonists were largely derived from the Scriptural injunctions against the excessive pursuit of wealth and the payment or acceptance of interest on loans. The early Fathers in their condemnation of avarice and their exaltation of fraternal love, sometimes used expressions which taken by themselves imply an utter condemnation of private property and an advocacy of communism among the faithful, but this was only an ideal, and private property was early recognized as a necessity resulting from the fall of man. The effect of this ideal, however, appears in the accepted doctrine that the maintenance of the poor was not a matter of philanthropy, but an obligation. The Scriptural attitude toward wealth led to an emphatic statement of the moral superiority of agriculture and handiwork over trade and commerce as a means of earning a livelihood, and the early writers seemed almost unanimous in the belief that what the seller made by trade the buyer necessarily lost. With the increasing temporal power of the Church and the great development of commerce which marked the eleventh century, came the necessity of harmonizing the doctrines of the Church with the obvious requirements of commerce, and many concessions were made by the later canonists. Thomas Aquinas (c.l226-74), the most authoritative of the later mediæval canonists, concedes that it is lawful to trade for a simple livelihood, or in order to supply a country with necessary articles which it does not produce within its own borders, or when the profits of the trade are devoted to some honorable purpose such as the assistance of the poor, but that, save in exceptional circumstances, a seller is bound to reveal a fault in an article, and that it is not permissible to sell an article for more than its worth. The fundamental axiom, in accordance with which all these conclusions are reached, is that every commodity has a fixed and objective value, which can be readily ascertained, and which determines its just price. To ask more for an article than its just price was extortion, and to pay less was equally unjustifiable. The distinctively ethical viewpoint of the canonists is shown in the prohibition of usury (q.v.). This was based upon the Scriptural injunctions against usury, and upon the Aristotelian argument that, money being barren it would be extortion to charge for its use. Another favorite argument was that interest was pay for time, but time is barren, and hence to demand interest was to demand something for nothing. It is needless to add that, as the growing commerce of the Middle Ages made the need of borrowing capital more and more imperative, the canonical theory was stretched so as to accommodate many ingenious forms of contract for what was practically, though not nominally, usury. In the latter half of the fifteenth century the Franciscans themselves instituted the monts de piété (q.v.), or charitable banks for loaning money to the poor, and a small interest rate was imposed in order to defray the expenses of management. By the middle of the sixteenth century the Church had practically abandoned its effort forcibly to suppress avarice and the pursuit of wealth.

The Mercantilists (1500-1750). Mediæval economic theory had been dominated by ethical considerations; the economic thought of the early modern period was dominated by political necessities. Both the feudal system and the temporal power of the Papacy had been undermined by the growth of the great modern monarchies. The problems and needs of the national States absorbed the best thought of the age. The most pressing problem of the new national governments was how to secure greater revenue. Philosophers and publicists, who would not have stooped to the elucidation of the laws of private wealth, bent their best energies to the solution of problems arising out of the establishment and maintenance of particular States. The problem of the economic thought of the period was, however, a larger one than the mere raising of the public revenue. It was requisite that this revenue should be secured in that form — ready money — which is most easily transformed into armies, navies, and the other material embodiments of national power; and the problem included, in addition, the necessity of finding or creating some more productive source of taxation than the backward agriculture of the period. With the problem of the Mercantilists plainly before us, it is easy to understand the characteristic features of the mercantile system which are described under that title. “Mercantilism,” says Schmoller, “in its innermost kernel is nothing but State-making — not State-making in a narrow sense, but State-making in the modern sense, which creates out of the political community an economic community.” The restrictive regulations, discriminating laws, and State interference which Adam Smith and his immediate successors described as the essential features of mercantilism, we now know to have been in a sense incidental. State interference was distinctly a minor consideration, minor in the sense that it was not the problem at issue. Moreover, the mercantile system resulted not in a loss, but in a net gain of industrial freedom. Contemporaneously with the imposition of those external restrictions which mark the mercantile economy went a rapid and extensive abolition of internal restrictions which had been far more numerous, brutal, and destructive than the new external regulations which succeeded them. The economic and political unit had merely increased its size. While mercantilism is the most important phenomenon of economic thought in the sixteenth and seventeenth centuries, it constituted only a part of a widespread and eager investigation of concrete economic facts. It was these studies which gave the political economy of Adam Smith its rich content of concrete phenomena. Money, banking, the rise of prices, population, poor relief, etc., were all extensively discussed in brochures and monographs. The maintenance of the poor was a constant subject of pamphlet and tract, and in the communistic Utopia of Sir Thomas More we have striking evidence that the problem of poverty was occupying the attention of the best thinkers of the time. The study of statistics became widespread and actuarial science and the investigation of social statistics were carried really to an advanced point. Neither is it correct to refer, as many have done, to the writers of this period as empiricists. Economic study had been divorced from ethics and theology, it is true, but at the hands of Bodin, Grotius, Pufendorf, Hobbes, and Locke, economics was developed as an essential part of a general political philosophy. In the De Jure Belli et Pacis of Grotius (1625), particularly, the whole mercantile system is in reality brought to judgment before the greater doctrine of international equity, and we have a new application of the old doctrines of natural law and natural liberty, doctrines which were destined to play a greater role in modern economic science than the whole mercantile system.

The Physiocrats. Mercantilism had been marked by a narrow favoritism of commerce and manufactures; a reaction in favor of agriculture was inevitable. The mercantilist doctrine had been characterized also by an enthusiastic, though not less narrow, nationalism; it was natural, then, that the reaction in favor of agriculture should ally itself with the broad principles of natural law and liberty expounded in the works of Grotius, Pufendorf, and Locke. This reaction in favor of agriculture and industrial liberty found expression in the doctrines of the so-called Physiocrats (q.v.). The rise of the school may be dated from Quesnay's first economic monograph, which appeared in 1756. As is implied in their name, the fundamental doctrine of the Physiocrats is the subjection of economic and political phenomena to ‘natural law,’ which as interpreted by them gave rise to the familiar political doctrine of radical individualism, and a certain materialistic conception of wealth which explains in a way all their peculiar economic theories. As Adam Smith noted, the Physiocrats treated not only of political economy, “but of every other branch of the system of civil government,” and their political and economic theories were indissolubly fused in their general doctrine of a beneficent natural law of industrial freedom, according to which the largest production and justest distribution of wealth would be best secured by permitting each individual to ‘pursue his own interest in his own way,’ so long as he did not infringe on the like liberty of others. This theory, perpetuated and popularized by Adam Smith, has exercised probably more influence upon subsequent thought than any other economic doctrine ever formulated.

While the Physiocrats fully exposed the error of confusing wealth with the precious metals, they themselves fell into the error of confusing wealth with material objects. Identifying the production of wealth with the production of raw materials, they concluded that manufactures and commerce, which merely change the position or form of raw materials, are barren and unproductive, though useful and desirable when strictly subordinated to agriculture; that the value added to raw materials in the processes of trade and industry is equivalent merely to the cost or expenses of production, while agriculture yields a net surplus — produit net — over and above the expenses of production. To Quesnay, however, the large agricultural employer, not the agricultural laborer, was the real producer of wealth; and the physiocratic theory is especially strong and advanced in its analysis of capital. Agriculture being thus the sole ultimate source of national revenue, simplicity, economy, and justice demanded that the revenue of the State should be raised by a single direct tax — the impot unique — levied upon rent. (See Single Tax.) The Physiocrats must accordingly be credited with the first statement of the epoch-making theory of surplus value, the theory that the product of industry contains a certain fund of value, due to the coöperation of natural factors, which is in excess of the minimum remuneration required to elicit the toil and sacrifice of industry, and which constitutes on this account an exceptionally satisfactory source of taxation.

Adam Smith, whose Wealth of Nations appeared in 1776, is easily the foremost figure in the history of economic thought. Next to his influence in hastening free trade and in popularizing and dignifying the systematic study of wealth, Smith's most important service, perhaps, was in divorcing political economy from ethics, and in part from politics. This appears plainly from the outline of his lectures, which were divided into four parts: I. Natural Theology; II. Ethics — incorporated in his Theory of Moral Sentiments; III. Justice or Jurisprudence; IV. Political Economy. He has been charged with the mistake of treating man as merely a wealth-seeking animal in whom the altruistic motives are wholly absent; but this criticism neglects the fact that in his Theory of Moral Sentiments the motives of duty and sympathy are accorded full recognition, and the desire for wealth is treated as only one of the worthier objects of ambition. Even in the Wealth of Nations he opposes piece-work as calculated to incite the laborer to over-exertion, and voices the necessity for rest, diversion, and even ‘dissipation.’ His whole attitude in the Wealth of Nations is essentially this: Assuming that the object of the study is to increase the national wealth as much as possible, this object will be most effectually secured by perfect industrial liberty. He left the prior question of the desire for wealth to the Theory of Moral Sentiments. On the other hand, he did not succeed so well in separating politics from economics. He could not get without the bounds of political philosophy, because his ultimate purpose was to prove the supreme efficacy of the doctrine of laissez-faire. Yet before he could lay down maxims for the increase of wealth, it was necessary to inquire how wealth was actually produced and distributed, and in doing this disinterested work of science he ceases to be the advocate. It was this passionless analysis of production, value, and distribution which had the greatest effect upon the economists who followed him and led to the attempt to formulate a non-partisan science of political economy, which should pass no ethical or political judgments. It must never be forgotten that Adam Smith was not wholly consistent in the development of his theories. At times he seems to hold that education should be left wholly to private initiative, but again he classes it among the necessary functions of government. In places he seems to hold a brief for ‘perfect industrial liberty,’ yet he does not hesitate to recommend the State regulation of banking, and his characterization of the Navigation Act as “perhaps the wisest of all the commercial regulations of England” — purely on political grounds — is famous. This inconsistency, which was in reality owing to breadth of thought, shows itself in his method of investigation. Whether it was inductive or deductive has been the subject of wide and animated discussion. Whatever the truth in this matter, the fact remains that at the hands of the economists who immediately succeeded him the science itself became increasingly theoretical, increasingly deductive and abstract. The most potent single quality of Smith's work which contributed to these results was its so-called ‘universalism.’ His work dealt with the wealth of nations, not that of a particular nation, or a particular epoch, and his confidence in the existence of a natural law of universal applicability left an indelible impression upon subsequent thinkers, granted the existence of such a law, the conditions of time, place, race, and nationality must be matters of secondary importance. The superiority of the deductive method naturally follows.

The Classical School. The economic thought of the early part of the nineteenth century was dominated by a group of writers including Bentham, Malthus, J. B. Say, Ricardo, McCulloch, James Mill, and others, who have been variously designated as the Classical, Orthodox, Ricardian, or English School. The leaders of this school differed upon points of economic doctrine, but the general system of thought developed by them is strikingly harmonious: deductive in method, pessimistic in tone, utilitarian and materialistic in its assumptions, and cosmopolitan in the sense that its ultimate scientific ideal was the discovery of universal economic laws applicable to all nations at all times.

Jeremy Bentham (1748-1832) gave the classical economy its ethical framework through his formulation and tireless propagation of the utilitarian philosophy. Utilitarianism in its early form was largely an application to ethics of the individualistic doctrine of self-interest which Smith and the Physiocrats had applied so skillfully in the field of political philosophy. “To obtain the greatest portion of happiness for himself is the object of every rational being,” says Bentham. — All that was materialistic, pessimistic, and mechanical in the classical system of political economy seems to have been magnified and intensified by the famous Essay on the Principle of Population by Malthus (q.v.). who in his fondness for the historical method of research was in marked contradistinction to the men about him. But his favorite method had little or no effect upon the classical political economy, while his famous doctrine that population tends to increase faster than food became the very backbone of the classical economy and modified almost every department of human thought. It may, indeed, be said that while Adam Smith investigated the causes of the wealth of nations, Malthus gave an exposition of the causes of poverty, and the contrast is not unfair. The one was essentially an optimist, the other, if not himself pessimistic, certainly gave a more pronounced impetus to pessimistic tendencies than any other economist in the history of the science. From the scientific standpoint, the most important use made of the Malthusian proposition was in the Ricardian theory of distribution.

David Ricardo (1772-1823) held that as a country grew and population increased society would be forced to resort to poorer and poorer soils to obtain its supply of food, the law of diminishing returns would set in, and as the margin of cultivation was forced down an increasing share of the product of industry would go to the landlord in the shape of economic rent — the difference between the natural productivity of the better land and the worst land in cultivation. Excluding rent, the division of the remainder of the product between the laborer and the capitalist was determined by a corollary of the Malthusian principle — the ‘iron law of wages.’ In the long run, Ricardo held, wages would tend to equal the cost or price of the food, necessaries, and conveniences required for the support of the laborer and his family in their accustomed style of living. Profits, naturally, consisted of the product minus rent and wages; they were ‘the leavings of wages.’ Ricardo's theory of ‘progress,’ then, is clear. With the passage of time and the settlement of the country, rent would absorb a larger share of the produce, increasing both absolutely and relatively; wages would absorb a larger share, increasing relatively, but remaining constant in amount (with a tendency, however, to decrease as rents rose higher and higher); while profits would necessarily decrease both absolutely and relatively. This theory of distribution was developed as an integral part of his famous cost of production theory of value, i.e. that commodities will tend to exchange in quantities proportional to the respective expenses of producing them. In stating this theory Ricardo at times spoke as if all the expenses of production could be resolved into the toil and sacrifice of labor — commodities, he was fond of saying, tend to exchange for each other according to the respective amounts of labor embodied or realized in each. He thus supplied the socialists with their celebrated labor theory of value, according to which labor is the sole cause of value, and in consequence is entitled to the whole produce of industry. To a great extent Ricardo molded the economic thought of the day, and has greatly influenced the later economists. The socialists took from it, illogically perhaps, the iron law of wages and the labor theory of value. Henry George took from it, but logically in this case, the doctrine that progress itself means poverty so long as private property in land is permitted. Finally, Ricardo's theory shifted the centre of economic interest from the land-owning classes to the capitalist class.

English Political Economy Since Ricardo. The narrow scope, the deductive method, and theoretical nature of the classical economy were all intensified and formally indorsed by N. W. Senior (1790-1804), the most influential English economist between Ricardo and the younger Mill. Within the limits of classical economics Senior did notable work; he cleared up many of the latent obscurities in the Ricardian theory of distribution, propounded the abstinence theory of interest, and formulated the famous doctrine of the wages fund, (latent in the work of Smith, Ricardo, and others) that the average rate of wages is the quotient secured by dividing the number of workmen into the fund of capital set aside by the capitalists for the employment of labor. With the exception of the Malthusian principle, this doctrine probably contributed more than anything else to make political economy the ‘dismal science.’ Senior is remarkable also for his exposition of the extent to which the monopoly element enters into ordinary economic life. Under perfect competition, he declares, prices of commodities would accurately measure “the aggregate amount of the labor and abstinence necessary to continue their production.” But he points out repeatedly that differential advantage of any kind in production gives rise to a monopolistic rent, which includes all income obtained without a proportionate sacrifice of labor or abstinence. In his abstinence theory Senior deprived the socialists of much of the comfort offered them in the classical economy, but in his analysis of monopoly he clearly defines the element in distribution which supplies them with a real grievance.

John Stuart Mill (1806-73) typifies the transition in England from the classical to the modern system of economic thought. He began his career as a Ricardian of the Ricardians, but in the later years of his life he came under the influence of Auguste Comte and the socialistic thought of his time, and in 1848 his principal economic treatise appeared under the title Principles of Political Economy with Some of Their Applications to Social Philosophy — a queer compromise between the Ricardian economies, which he had learned in his youth, and the warm desire to find some means to improve the condition of the masses, which had come to him from the observations of his maturer years. The compromise was not fortunate from the standpoint of logic. Most economists since Mill, and Mill himself in his later years, recognized that the book was inconsistent; but it was superbly written, alive with the desire to improve the condition of the masses, and exercised an enormous influence upon the subsequent development of English economic thought. The modifications of the old doctrine which Mill introduced exercised probably a greater influence than the old theories which he incorporated in his Principles. He preserved the old doctrines of rent and profits, and advocated laissez-faire as a general principle of political expediency, but made so many exceptions that at times they seem more important than the rule. Mill also indorsed the doctrine of the wage fund; but in his later years he abandoned his belief in this theory, and advocated “views of the taxation and regulation of inheritance and bequest which would break down large fortunes and bring about a wider diffusion of property.”

The development of English economic thought since 1850 has been profoundly affected by the reaction against the classical system described below, and only a few words can he devoted to the subject here. The logical successors of Ricardo and Senior were Cairnes, Bagehot, and Fawcett (to whom might be added Professor Marshall of Cambridge). It is impossible to characterize at length the work of these men, but all have been ardent defenders of the orthodox school, though they have recognized and ably expounded its limitations as a theoretical science. They stand as the modern defenders (Fawcett an extreme partisan) of the deductive type of economic theory. In Thorold Rogers, Cliff Leslie, Arnold Toynbee, and Professors Ashley and Cunningham we have a group of historical economists, all of whom have made important contributions from the historical standpoint and who have indorsed more or less completely the general views of the Historical School (see below). Jevons stands at the head of what might be called a psychological school of political economy, of whom perhaps the most distinguished living British exponents are Professor Edgeworth of Oxford and Professor Smart of Glasgow. Both Jevons and Edgeworth, however, have made important contributions in every branch of the science, particularly that of statistics; and the attempt to classify such men as Bagehot, Jevons, Marshall, Edgeworth, and Nicholson reminds us forcibly that the period of schools has fortunately passed. The representative English economists, like those of every other country, make the most of all schools and methods: deductive, historical, psychological, statistical, and mathematical.

Modern Reactions Against the Classical System. Socialism. It is a striking tribute to the classical system of political economy and to the intellect, power, and personal excellence of its leaders, that the development of economic thought since 1850 can best be understood and described as a series of reactions against the dominant doctrines of that school. The earliest and most passionate protest against the classical economy came from the socialists. (See Socialism.) The antagonism between socialism and the classical economy is fundamental and irreconcilable. The foundation of the latter was laissez-faire and its theories were built around the system of private capitalistic enterprise; while socialism is in essence a protest against laissez-faire and the private ownership of capital. The rise of modern socialistic doctrine may conveniently be dated from William Godwin's Inquiry Concerning Political Justice (1793), although Godwin himself was inclined toward anarchism; but the chief bond uniting the early socialists was their common hatred of the orthodox political economy. In recent times, largely under the influence of Karl Marx (q.v.), socialism has acquired a positive theory which is adopted with substantial unanimity by the great mass of people who may correctly be called socialists. Logically enough, this ‘scientific socialism’ has its roots in the Ricardian theory of value and distribution. Mutilating his theory of value and interpreting it ethically, they claim that, as labor is the sole cause of value, the laborer is entitled to the whole produce of industry. They accept a part of his gloomy law of wages, magnify the class antagonism inheresnt in his theory of distribution, and glory in the pessimism which unconsciously pervaded his analysis. On the basis of a broader historical survey than Ricardo permitted himself to make, they confidently assert that the regime of capitalism is but a temporary stage in industrial evolution, and that it must inevitably give way to a régime of collective production. Marx's theory of value has met little but criticism from the economists, but his doctrine that the underlying causes of all social phenomena, such as religion, literature, and art, are economic in character, called by him the materialistic conception of history, has profoundly influenced the science, particularly in Germany. The chief office of the socialists has been to arouse sympathy for the classes of society whose condition is such as to make socialism attractive to them.

The Sociologists. To the sociologists may be ascribed the most fundamental and inclusive protest against the methods of the Classical School. The Ricardians aimed at an abstract science of rigid precision, universal in application, raised above the limitations of particular epochs and national boundaries. They were thus led to neglect history, custom, law, and ethics; they spoke as if the existing stage of economic development was permanent, and their method of treatment was predominantly deductive. The most effective protest against these exaggerations was made by the Historical School, which will be noted hereafter; but a more fundamental protest, and one prior in point of time, was made by Auguste Comte (1798-1857), the father of modern sociology. He exercised great influence in shaping the methods of political economy and marking out its particular place among the social sciences. The influence of sociology upon modern economic thought will be discussed more fully in the article Sociology.

The Historical School. The most influential reaction against the classical economy was that inaugurated by what is known as the Historical School of Germany, and is usually dated from the work of Lorenz von Stein, Der Sozialismus und Communismus des heutigen Frankreichs, written in 1842, or, more correctly, from Wilhelm Roscher's Grundriss zu Vorlesungen über die Staatswirtschaft nach geschichtlicher Methode, published in 1843. Two contemporaries of Roscher, Bruno Hildebrand and Karl Knies, must be associated with Roscher and Stein in the introduction of this method, which has transformed economic science in Germany and profoundly affected it the world over. The characteristics of the Classical School which these writers most earnestly attacked were what have been called its cosmopolitanism and its perpetualism — the belief in economic laws valid for all nations and all times. The positive doctrines of these writers, briefly summarized, maintain the propositions that economics is a social or political science which can be profitably pursued only in connection with the other sciences of social or political life, particularly administration, law, and history; and that not only are economic phenomena conditioned by general social and political institutions, but that these institutions are products of an ordered historical development, so that the economic science of any particular nation can only be studied and formulated in connection with the historical development of that nation. Thus instead of a universal political economy we have an historical national economy. The work of the Historical School must be regarded as the most important movement of economic thought in the latter half of the nineteenth century, but only a few words can be devoted to its rise and development. From the standpoint of method it was simply an application to economic investigation of a method that had been developed and popularized by Grimm, Savigny, Eichhorn, and other German investigators in philology, history, and jurisprudence, a generation before the rise of the Historical School of political economy. What may be called the nationalistic spirit of the school was the result of irresistible political forces of the day, first expressed in the economic publications of Friedrich List (1789-1846). Germany was in the process of developing into a great empire, and, as has been pointed out in connection with the mercantile system, such a period in the life of a nation is almost invariably attended with protective legislation designed to make the new State industrially, as well as politically, independent and homogeneous. The new German economics simply voiced these economic and political tendencies, to which attention had been called by List. The work of the German economists who succeeded Roscher, Knies, and Hildebrand has been marked by a predominant use of the inductive method and a close adherence to actual economic phenomena; by special study of the effect of legal institutions, custom, law, and ethics upon economic phenomena; by an intermediate attitude between extreme protectionism and extreme free-trade views; and by a discriminating sympathy with the claims of socialism. Quite generally they look to the State rather than to individual initiative to solve the problem of poverty, and they have thus become known as Katheder-Socialisten (socialists of the professorial chair), or State Socialists, as contrasted with the Social Democrats, whose radical programme they refuse to indorse.

The American reaction precedes in point of time the National Oekonomie of Germany, and, like the latter, had its source in the political problems attendant upon the rise of a new State. The first systematic protest came from an early group of publicists, among whom may be mentioned Alexander Hamilton, Daniel Raymond, Matthew Carey, Hezekiah Niles, and Friedrich List. Daniel Raymond is the author of the first treatise on political economy in which a distinctively American system was advanced. His first work, Thoughts on Political Economy, appeared in 1820, and undoubtedly attracted a good deal of attention in certain circles. The fundamental idea of Raymond's system is his conception of wealth. Wealth, he held, is not an aggregation of exchange values, such as Adam Smith had conceived it, but the capacity or opportunity to acquire the necessaries and conveniences of life by labor. The English political economy, he held, was a study of exchange values, of private economy as opposed to national economy, and the laws of wealth laid down by Adam Smith were untrue of a nation conceived as a unity. Extending his doctrine of wealth, he maintained that the interests of one class do not always coincide with the interests of the nation as a whole, and that national wealth in its true sense will be most rapidly increased by developing all the national powers to their widest possible extent. He is, thus, a warm advocate of protection as opposed to the doctrine of laissez-faire.

We come to a second period of development in American economic thought with Henry C. Carey (1793-1879), by far the most influential of the earlier American economists. Carey's work is especially noteworthy, not only for his earnest defense of protection, but for his economic optimism and his continued attacks upon the Ricardian school. Drawing his lessons from American experience, he flatly denied the Malthusian principle and the law of diminishing returns. Carey's position upon these points was undoubtedly well taken for the America of his time, and although it is questionable whether he was justified in defending the exact converse of these propositions, he did unquestionably show that the fundamental premises of the classical economy were not universally applicable. Carey defended a broad social conception of wealth similar to that held by Raymond, defining it as the measure of power which man has acquired over nature, while “the value of an object expresses the resistance of nature which labor has to overcome to produce the object.” Carey thus was led to propose the theory that the value of an object depends rather upon the cost of reproduction than the cost of production. Perhaps the central doctrine of his system is that of association. The increase of wealth, the increasing mastery of man over nature, the development of a nation's powers. Carey held to be dependent upon the increasing association resulting from a compact population following diversified pursuits with a close interrelationship between agriculture and manufactures. It was this optimistic belief in the possibilities of increased association that led him to advocate protection and to survey an increasing population with the greatest complacency. Since Carey's time, other American economists, like Henry George and Francis A. Walker, have exerted a world-wide influence upon economic thought. The younger generation of American economists have been largely trained in the German universities, and have in the main accepted the positive doctrines of the German Historical School. Without depreciating the work of the great English economists it may be said that American investigation is marked by the attempt to test and supplement deductive reasoning by an appeal to statistics, law, and history. In a typical American university the specialist in economic theory works harmoniously with associates whose special domain lies in economic history, statistics, finance, or the practical problems of the day. All methods are acknowledged to be useful, and all are employed. The period of criticism has given way to a period of construction; but American economic thought is still profoundly affected by the optimism and what may be called the anticosmopolitanism of the early American reaction.

The Austrian School represents a reaction within the limits of the classical economy itself. The name Austrian School is used simply because the marginal utility theory of value, which constitutes the essence of this reaction, has been most thoroughly developed and most widely applied by a group of Austrian economists, including Professors Menger, Wieser, Sax, and Boehm von Bawerk; though the theory itself was propounded almost simultaneously in 1871 by Professor Jevons in England and Menger in Austria, and is now used by a large majority of economists everywhere. The adherents of this school hold, in brief, that the utility (i.e. power of satisfying want) possessed by a commodity decreases per unit as the amount consumed increases, and that value itself is, or expresses, the utility of the last or marginal increment of the commodity supplied for consumption. It cannot be doubted that they have transformed economic theory; the old unit of real value — the pain and sacrifice of labor — has given way to a unit of utility; and the cost-of-production theory of exchange has been replaced by a wider conception which holds that value determines the expenses of production rather than the expenses of production value, that capital receives its value from the finished product, and not vice versa, etc. The whole tendency of this theory (see Value) has been to shift the centre of gravity in economics from the capitalist to the consumer and to block the movement to confine political economy to a study of exchange value. It has undoubtedly clarified our general conceptions of wealth and exchange much in the same way that the theory of evolution has clarified our general conception of progress.

Scope and Method. Relation of Political Economy to Sociology. The most inclusive and fundamental question of scope is the relation of political economy to the general science of human association. Two extreme views of this relation have been maintained: (1) that because of the intimate and inseparable connection between all forms of social activity, the study of economic phenomena cannot be divorced from the general study of sociology (e.g. Comte, H. von Scheel, Ingram); (2) that political economy is an absolutely independent science, dealing with the phenomena of wealth alone (e.g. Senior, Mill, Cairnes). At the present time there is a strong consensus of opinion that both these views are ill advised. While it is now admitted with practical unanimity that political economy is a social science, the bewildering complexity of social phenomena, together with the slow progress of sociology conceived as the general science of human association, has deeply strengthened the conviction, borne out in other departments of scientific investigation, that specialization and the isolation of phenomena are indispensable.

The Relation of Political Economy to Ethics, Law, and Politics. In discussing this question attention may be confined largely to the relationship between ethics and political economy, since the decisive arguments apply to all three relationships. Substantial unanimity exists upon the following points; (a) that ethics and economics are, for purposes of investigation at least, two distinct sciences; their fields are not coextensive; (b) in applied political economy we must take account of ethical requirements; no economist would maintain that in actual life men are “freed from the ordinary obligations of justice and humanity;” (c) in so far as ethical forces affect economic activity, economic science must take account of these forces. The point at issue is the question whether the scientist, as scientist, is permitted or compelled to set up ideals and pass ethical judgments. The following reasons may be given for the conclusion that it is practically impossible for the scientist to abstain from passing ethical judgments: In the first place, every rational adult understands and accepts certain axiomatic ethical canons which in their practical application are universally accepted (e.g. that the satisfaction of hunger is a good thing). In the investigation of actual economic phenomena, such as the housing and food of the laboring classes, conditions are constantly met with that violate these ethical canons. It would be the sheerest pedantry under these conditions to refrain from passing ethical judgments. Secondly, an essential part of economic science is that subdivision which treats of economic progress. In economic life what ought to be done is intimately dependent upon what can be done; in other words, the law of economic growth is a powerful, if not the most powerful, factor in determining economic aims and ideals. If the fully equipped economist is forced to study economic growth and to explain economic movements and tendencies, it follows that he is forced to express opinions upon approximate economic ideals, and after having furnished the decisive arguments for ethical judgments, he must either apply his results or have some less qualified person apply them for him. Additional reasons appear when we examine such subjects as taxation or those public prices which the law declares must be just and reasonable. In the consideration of railroad rates, for instance, the economist is not only compelled to pass judgment upon what is just and reasonable, but he discovers upon investigation that economic considerations supply the most important factors in determining this judgment. There is, then, a broad zone of territory between ethics and economics which the moralist has not worked — and which for the science of ethics is probably unimportant — but which the economist must clear up before he can go on with his work. The assertion that the science of political economy may and should refrain from passing ethical judgments rests upon two misapprehensions: (1) the failure to grasp the fact that society is like an organism in that it is subject to a law of ordered change, which to a certain extent is under the control of the organism itself; (2) an illogical conclusion from the recognized truth that certain subdivisions of economic investigation (e.g. fixation of prices in wholesale markets) may be exploited quite thoroughly without determining economic ideals, and without introducing ethical considerations. From this it is logical to conclude that certain minor subdivisions of political economy may be investigated “without passing ethical judgments,” but illogical to conclude that the whole science may be so investigated and formulated. The above conclusions are strengthened when we consider the relation of economics to law or politics. In describing the progress of the past or the conditions of the present we are forced to pass judgment upon the economic success or failure of many laws and policies (e.g. tariff laws) which are still in force or under active consideration, and which will be indorsed or repudiated solely or largely upon economic grounds. Because of this fact the economist cannot refrain from judgment upon laws and political policies. Nor without being ridiculous can he refrain on occasion from laying down precepts. Gresham's law, for instance, is at once a law and a precept when a proposition to maintain a more valuable and a less valuable money side by side in circulation is under consideration. In conclusion it may be said that while political economy does not undertake the complete study of law, ethics, politics, etc., it must consider systematically the parts of those sciences which materially affect economic phenomena. It is neither possible nor desirable that the line of demarcation should be rigidly drawn, particularly in the applied science or art of political economy, which may be defined as the application of economic laws to the solution of those practical problems in which economic considerations are of predominent importance.

Relation to Other Sciences. Political economy is probably more dependent upon history than upon any other science, and indeed an extreme wing of the Historical School, of which Schmoller is the most prominent example, holds that until a larger store of historical results is accumulated it is of little use to attempt broad theoretical generalizations; thus confining economics for the present to the philosophy of economic history. This position seems untenable because of the evident logical deficiencies of the historical method when used alone, and because new problems are constantly arising upon which history throws little light. (See Deductive Method, below.) While the great majority of economists refuse to admit that political economy is merely history, the importance and necessity of economic history are now universally conceded. Dr. Keynes classifies the functions of economic history in connection with economic theory as follows: “First, to illustrate and test conclusions not themselves resting on historical evidence; secondly, to teach the limits of the actual applicability of economic doctrines; thirdly, to afford a basis for the direct attainment of economic truths of a theoretical nature.”

The connection with psychology is particularly intimate. As a study beginning with human effort and ending with the satisfaction of human wants, economics really has its beginning and end in psychology. The theory of value, particularly, takes its fundamental axioms from psychology (e.g. that the satisfaction afforded by commodities decreases per unit as the amount consumed increases). The difference between economics and psychology is, however, clear; the one deals with man in society, the other with man as an individual.

The Deductive Method. What is known in economics as the deductive method consists usually of three stages, the first and last of which are inductive. In the preliminary stage, either from common observation or more complex induction, the postulates of the deductive science are secured. In the English economic theory prevalent from Ricardo to Cairnes these postulates were excessively simplified. Ricardo, like Adam Smith, was fond of drawing his premises from an imaginary state of primitive industry. Senior reduced the postulates of political economy to four general propositions: “(1) That every man desires to obtain additional wealth with as little sacrifice as possible. (2) That the population of the world is limited only by moral or physical evil, or by fear of a deficiency of those articles of wealth which the habits of the individuals of each class of its inhabitants lead them to require. (3) That the powers of labor, and of the other instruments which produce wealth, may be indefinitely increased by using their products as a means of future production. (4) That, agricultural skill remaining the same, additional labor employed on the land within a given district produces in general a less proportionate return.” It is impossible to give a list of the postulates which have been assumed by different writers, but it is evident that they must vary widely in different branches of the science, and that almost every deductive writer has unconsciously assumed many postulates not specifically stated. In the ordinary deductive treatment of value and distribution there are usually postulated the propositions that men not only desire, but know how in general to obtain the maximum satisfaction with the minimum effort; that certain industries are subject to the law of increasing rather than diminishing returns; that the satisfaction afforded by a commodity decreases (per unit) as the amount consumed increases; that existing law, public opinion, and ethical standards, in general remain constant. It is the intermediate stage which is most appropriately called deductive. Here the familiar processes of the deductive logic are employed. It is evident, however, that the results obtained from the artificially simplified premises of ordinary deductive theory are of doubtful value. If the postulates be absolutely true and the deduction faultless, the conclusions express abstract tendencies which will be modified in real life by the action of secondary forces not taken into account in the premises. This, however, is the character of the pure theory of all sciences. If, on the other hand, the premises practically cover the predominant forces in any domain of economies, they may yield results capable of explaining actual economic conditions, and capable of affording the basis of prevision. In actual usage, however, these postulates have been sometimes untrue, often ambiguous, and always more numerous than was explicitly stated, so that Cliff Leslie and other writers of the Historical School have characterized the conclusions of English theory as utterly inapplicable in any sense either to the explanation of existing conditions or the solution of practical problems. This extreme antipathy to deductive theory is, however, plainly illogical. Whatever the necessity of studying the past, no one denies that the present and the future furnish the ultimate and principal problems of the science. And many of these problems are new; to solve them we must isolate the factors at work, calculate separately their effects, and try to estimate the net results. This process must be largely deductive, and it is strange that those who insist most strenuously that the science is a practical one should attack a method necessary in the solution of practical problems. The historical method alone is helpless in the face of such a problem as the proposition to introduce compulsory arbitration.

Of the third stage in the deductive process, that of verification by observation, little need be said. In practice it is exceedingly difficult, as was shown when Mill attempted to “apply” the Ricardian theories, but it is essentially a species of induction subject to all the limitations of the inductive method in general.

The Inductive Method. The ultimate aim of the inductive method is by systematic analysis and comparison of concrete economic phenomena “to observe the effects of a cause coming singly into action while all other forces remain unaltered.” The attempt to do this gives rise to two inductive processes: the method of difference and the method of agreement. In the method of difference we compare circumstances exactly similar with the exception of one factor, in order to discover the effect of that factor. Thus, in 1893, Messrs. Mather and Platt, of the Salford Iron Works, attempted to discover the effect of the eight-hour day on their profits and the general welfare of their workmen. Strictly speaking, their experiment required that, with the exception of the hours of labor, every causal condition in 1893 should be identical with those in preceding years, as their object was to discover the exact effect of the reduction in hours upon profits and conditions of employment. The chief instrument of the method of difference is thus the experiment, to which may he added in economics the observation of extraordinary instances in which the conditions of an experiment are closely approximated by some fortuitous or extraordinary event. Thus the Black Death in England furnishes a striking exemplification of the effect upon wages of a sudden diminution in the supply of labor. In theory the method of difference requires that the collateral or surrounding circumstances shall be absolutely alike. This condition is seldom fulfilled even approximately, and hundreds of instances might be cited in which the method has been abused. To refer to the experiment at the Salford Iron Works, which on the whole constitutes an ideal economic experiment, it is evident that grave doubt is thrown on the results of this experiment by the fact that the workmen themselves were interested in the success of the experiment, and probably worked with extraordinary care and diligence to make it a success. Finally, it is to be noted that the method of difference, while entirely satisfactory where the conditions are perfect, is always narrow and restricted. It shows with certainty that a given cause in a certain set of circumstances can produce a certain result, but tells us nothing of what will happen in another set of circumstances.

To generalize, to establish uniformities, use is made of the method of agreement. Here we compare circumstances wholly different, with the exception of two phenomena between which we expect to establish a causal connection. The causal connection is indicated by the repeated conjunction of the two phenomena. If we examine the movement of exports and the movement of the marriage rate, and find that a rise in the exports per capita is always accompanied by a rise in the marriage rate, we are safe in accepting this connection as an economic uniformity or law, provided that we have examined a very large number of instances in which the collateral circumstances have been infinitely diverse and varied. Theoretically this method requires that we should exhaust every possible combination of circumstances before concluding that a rise in the exports per capita will always cause an increase of marriages.

With respect to the general utility of the inductive method, it is plain that, though little can be done without it, it seldom, if ever, suffices to convince. Take the case of the exports and the marriage rates cited above. Hundreds of instances might be adduced from English statistics in which a rise in the per capita exports has been followed by a rise in the marriage rate. Yet no one believes that a mere increase in exports would cause an increase in marriage. Both are evidently the results of a single cause — active business, etc. Brisk trade, high wages, constant employment, etc., stimulate marriage and show themselves usually in an increased volume of exports, yet if commercial prosperity at any time increased without stimulating exports, we have every reason to believe that the marriage rate would rise irrespective of exports. And in less developed countries where trade and commerce are relatively unimportant no connection is observed between exports and marriage. The great difficulty of induction in economics is due to the complexity of economic phenomena: we are seldom able either to bring about a satisfactory experiment or to secure a sufficiently diverse number of instances of agreement. Current literature is full of sweeping generalizations based upon far less agreement than that observed between marriages and exports. The twenty-five years preceding the repeal of the corn laws in England were, on the whole, far less prosperous than the twenty-five years which succeeded the repeal; ergo, concluded many writers, free trade would be advantageous to every country of the world. On the other hand, the method of agreement has been equally abused. Because the creation of the great modern European monarchies was in most instances accompanied by protective tariffs, colonization schemes, and a certain harshness and brutality toward strangers, therefore, concluded the extremists of the German Historical School, it is not only expedient, but ethically right, that the German Empire in the last half of the nineteenth century should start in with protective tariffs, colonization schemes, and the policy of the mailed fist. To-day it is universally conceded that both methods must and should be used wherever possible.

Other Methods. In actual practice a large number of complicated combinations of the deductive and inductive methods are used in economics. Induction in its quantitative aspect gives rise to the statistical method. No school of political economy has ever disputed the importance and value of statistics, and in the last few years it has made more rapid progress perhaps than any other branch of the science. This is due to the increased public expenditures in statistical investigations, and the impetus given to the improvement of the study by such associations as the International Statistical Institute, the Royal Statistical Society, the American Statistical Association. So great has been the development of statistical technique at the hands of such men as Quetelet, Bertillon, Engels, Von Mayr, Edgeworth (to whom should be added from other sciences, Galton, Venn, Karl Pearson, etc.), that the technique of quantitative induction constitutes in reality a new branch of science. (See Statistics.) Deduction in its quantitative aspect gives rise to the mathematical method of political economy, which at the present time is employed to a greater or less extent in all branches of economic theory, particularly in the investigation of prices, incidence of taxation, etc. Opinions differ upon the usefulness of mathematics except in statistics. Mathematical diagrams for purposes of illustration, at least, have undoubtedly made a permanent place for themselves in the science, but the utility of algebraic mathematics, except for him who computes them, is doubtful.

See Mercantilism; Physiocrats; Interest; Rent; Labor; Finance; Sociology; Protection; Free Trade; Laissez-faire; Socialism; Trade Unions; Value; Usury.

Bibliography. The most important works of the earlier English economists are: Smith, Wealth of Nations (London, 1776; many later editions); Say, Traité d'économie politique (Paris, 1803); Ricardo, Principles of Political Economy and Taxation (London, 1817); Malthus, Political Economy (ib., 1820); Mill, Principles of Political Economy with Some of Their Applications to Social Philosophy (ib., 1848); Senior, An Outline of the Science of Political Economy (ib., 1850). Prominent modern general treatises are: Marshall, Principles of Political Economy (4th ed., ib., 1898); Nicholson, Principles of Political Economy (New York, 1893-1901); Ely, Outlines of Economics (New York, 1893); Wagner, Lehr- und Handbuch der politischen Oekonomie (Leipzig, 1883-1901). The new theories are best represented by Wieser, Natural Value (London, 1893); Boehm-Bawerk, Positive Theory of Capital, Eng. trans. (ib., 1892); Clark, The Distribution of Wealth (New York, 1899). The most important socialistic contribution to economics is Marx, Capital (London, 1887). Consult, also: Ingram, A History of Political Economy (New York, 1888); Ashley, An Introduction to English Economic History and Theory (London, 1888-93); Palgrave, Dictionary of Political Economy (ib., 1894-99).