ECONOMICS. Because economics has to do with the wealth getting and wealth-using activities of men, it is of ten defined as "the science of wealth." This is not a wholly satisfactory defini tion, for the special characteristics of economics are determined not so much by its subject-matter as by the particular interests which have prompted the inquiries of economists and the particu lar questions which they have tried to answer. We define econom ics better, therefore, when we say that it is a science which is concerned with the communal problems of economic life. The ordering of the economic affairs of the household and the planning and management of business undertakings come alike under its purview, but its interests and problems are not the interests and problems of either household economy or business enterprise. How men acquire wealth and how they use it are matters of funda mental importance for economics, but its principal concern is with the intricate interrelations of various wealth-getting and wealth using activities and with the ways in which these activities affect the welfare of the community. The attention which economics gives to the general or social aspects of the interplay of economic activities is born of its central interest in the wisdom or unwisdom of measures which governments take or which conceivably they might take with a view to regulating, controlling or participating in them or to directing them into one channel rather than another. The older name, "political economy," still gives a right impres sion of the kinds of problems with which economics is mostly concerned.
Like every science, economics proceeds upon the assumption that there is some sort of order in the phenomena with which it deals. Just as and because the economic activities of men are not altogether aimless or directed wholly by chance, so the eco nomic life of the community, viewed as a whole, is not sheer con fusion, but has a discernible ordered pattern, showing itself in dependable "laws" or "tendencies" which are discoverable by means of careful observation and analysis. That there is some measure of regularity and predictability in economic phenomena is a commonsense assumption, one upon which men act in the daily conduct of their affairs. But there was only a very small field for economic science so long as the economic order, in its larger features, merely reflected the social or political order—so long, that is, as men's different economic activities and their economic relations were determined largely by their political status, by the position in the general institutional structure of society into which they were severally born or which they might be able to attain. Under such circumstances economic problems appeared in the guise of juristic and ethical problems. Economic activities were rated good or bad, not so much by their ultimate effects upon the economic welfare of the community as by their consistency with some supposedly rational or "natural" view of the general structure of society. Thus Aristotle's conclusion that trad ing for gain, as contrasted with trading to exchange goods, is "unnatural" was merely a corollary of his views of the nature and the functions of the family and the state. In the middle ages economic matters were discussed by some of the patristic writers and later by the schoolmen, but both groups were con cerned almost wholly with the ethics of trade and of money-lend ing, and their criteria were drawn either from authority or from their own systematic philosophies.
Long before there was anything deserving the name of economic science, however, there was much writing, mostly controversial, as there has been ever since, about such matters as the monetary, fiscal and commercial policies of governments. Among the partici pants in these early controversies were some of the ablest men of their time—philosophers, public administrators and successful men of affairs. At one point or another the best of them probed deeply into the mysteries of the world's economic mechanism and reached conclusions which the economists of a later day have reaffirmed. For the most part, however, the early writers were too heavily handicapped by the lack of a scientific organon. They had no consistent general view of economic processes taken as a whole, so that their views of particular issues were likely to be partial and short-sighted. Take for example the writings which had the purpose of expounding or defining the principles of that gen eral system of governmental economic statecraft known as "mer cantilism," which flourished from the i6th century down to the r 9th, and which was exemplified in the restrictive policies of such statesmen and rulers as Colbert, Burleigh, Cromwell and Frederick the Great. Whether mercantilistic measures met the immediate needs of the times, whether they helped or hindered the task of na tion-building, are disputed questions ; but there can be no doubt respecting the weakness of the grounds upon which the case for such measures was commonly supposed to rest. It is not quite true that, as their critics have often said, the mercantilists held that money alone is wealth ; but as a group they concerned them selves largely with the ways in which a country might secure and maintain a favourable balance of trade so as to conserve and increase its stock of money. They identified the economic interests of the nation with the interests of its merchants and they looked mostly at the immediate rather than the enduring interests of the mercantile classes themselves. The things which they thought conducive to national welfare were those they thought would stimulate trade and increase profits : plentiful supplies of money, low interest rates and low wages. Some of them appear to have thought of the nation as though it were itself a great trading firm, profiting from the excess of its foreign sales over its foreign purchases. Mercantilism, as the reader may have observed, is even now not wholly dead, but its errors were exposed long ago.
In 1776 Adam Smith published An Inquiry into the Nature and the Causes of the Wealth of Nations, a work in which wis dom, learning and power of analysis were joined as they are in few books. Sharing the physiocratic prejudices ("in agriculture nature works with man"—as though she did not work with him in his every pursuit !) and holding that the interests of business men, as a class, are more often opposed to the interests of the community than the interests of landowners are, Adam Smith nevertheless gave the world a new interpretation of the ad vantages of trade, a new "philosophy of commerce." But he saw in commerce a means to welfare, not an end, and his book was, in effect, a formidable tract directed against mercantilism. Money, from the communal point of view, he held to be merely an instrument, a "wheel of trade." The real source of a country's wealth, he said is its "annual labour," and its wealth could be increased only by making its labour more effective and by hus banding and accumulating the products of labour. The division of labour, i.e., the specialization of tasks, is the principal factor in its effectiveness, and the degree in which the division of labour is practicable depends upon the extent of the market. These were Adam Smith's fundamental principles. He elaborated them with extraordinary skill, always discussing concrete problems, showing unusual powers of fresh observation in his selection and use of illustrative material, and passing large sections of economic history and the whole range of the contemporary commercial and fiscal problems of Great Britain under survey. Although the book is the most powerful brief ever formulated for unimpeded trade, neither hampered nor coddled by governments, its greatest im portance is not to be found in that circumstance, but in the general picture, at once simple and comprehensive, which it gives of the economic life of a nation. The apparent chaos of compe tition, the welter of buying and selling, are resolved or trans muted into an orderly system of economic co-operation by means of which the community's wants are supplied and its wealth in creased. This general picture has been in the minds of economists ever since, whatever their opinions with respect to the efficiency of the competitive system. Despite some sweeping phrases which invite a different interpretation, Smith's real concern was for the establishing and maintaining of competitive conditions rather than for a vigorous observance by governments of a hands-off policy in respect of economic matters. He was discussing a special set of problems. He was opposed to monopoly, to exclusive com binations, and special privileges of all kinds, quite as much as to the type of legislation which aims at fostering a country's pros perity by restricting its trade. Often styled the "apostle of self interest," he took no pains to conceal his dislike for some of the forms in which self-interest manifests itself in trade and industry. What his attitude would have been under the later conditions of the Igth and 20th centuries towards the factory acts, social in surance, and measures intended to help onward equality of com petitive opportunities, we cannot tell. But there is very little in these newer types of legislation which runs counter to his prin cipal contentions or is inconsistent with his general economic philosophy.
The particular trend which the development of economics took in Great Britain was determined very largely by the character of the economic problems which confronted the nation, partly by reason of swiftly progressive changes in its own industrial structure and partly in consequence of the Napoleonic wars. The rapid growth of population, the extension of agricultural culti vation and the rise of land rents, the expansion of industrial activities, the depreciation of the currency, the variations of prices, of interest rates and of profits, and, after the wars, the depression in both agriculture and industry, were phenomena at once conspicuous and important. Some of these developments commanded the attention of Parliamentary committees ; all of them attracted the interest of thoughtful men. With Adam Smith's impressive picture of the mechanism of organized eco nomic life in their minds, it was natural that men should think of such phenomena as interrelated and as susceptible of being explained in some consistent and comparatively simple way. At any rate, out of the discussions of the period, out of the pamphlets and the controversial tracts, there emerged a coherent system of political economy, owing much, of course, to Adam Smith, but putting stress on matters to which he had given little or no attention, and emending his views at a number of important points. This newer political economy was more formal and systematic than Adam Smith's, and was concerned more largely with abstract general relations, but it dealt with real problems and dealt with them in what was intended to be a practical way. There is an appearance of paradox, but only an appearance, in the circumstance that the particular type of economics which grew out of attempts to deal intelligently with the problems of a period of economic storm and stress should be one which gave particular attention to "normal tendencies" and to the conditions of eco nomic equilibrium rather than to the causes of economic malad justments. A parallel may be found in the way in which the study of pathology has contributed to men's knowledge of normal physiology.
For convenience the period of which we are now speaking may be taken as having definitely begun when David Ricardo's Principles of Political Economy and Taxation was published (181 7) and as having culminated with the publication of John Stuart Mill's Principles of Political Economy (1848) . One who compares the economic tracts and the systematic treatises of that period with the Wealth of Nations, will be impressed with the increased importance given to a group of problems which have remained ever since among the principal concerns of economics, problems now commonly grouped under the head of "the theory of value and distribution." The theory of value, of course. has to do with the explanation of why goods exchange at particular ratios, why some goods are expensive and other goods are cheap. The theory of distribution is really an extension of the theory of value so as to explain the magnitude of the shares of the total national product which are secured by those who contribute either their own services or the use of their property to the communal task of production. With the problem of personal distribution, the problem, that is, of why some men are rich and some arc poor, economic theory, of the type which we are now discussing, has not directly concerned itself. Its problem has been that of the distribution of the product among the so-called factors of production. These factors and their respective shares were classi fied as labour and its wages, capital and its profits, and land and its rent. Later on the conception of a fourth share, the profits of enterprise, or of the successful direction of production, was taken over from the French economists, the earnings properly imputable to capital, as distinct from enterprise and direction, being put down as interest. But British economists, more than those of other countries, still continue to speak, in realistic fashion, of "the profits of capital," and there is no general agree ment among economists anywhere that enterprise should be treated as a separate factor in production, even though the profits of enterprise be conceded to be a separate distributive share. The three-fold, or f our-fold, classification of factors is in some respects arbitrary. Some economists use a two-fold classification, treating land as a particular form of capital, while others hold that a really adequate classification would take account of many different kinds of capital and of various grades or qualities of labour. The truth is that the three-fold classification is adequate in the analysis of some problems (the simple contrast between labour and capital, taken as including land, is all that is needed to bring certain important problems into clear relief), and in adequate in the analysis of others. It has been suggested that the three-fold classification was in its origins merely a reflection of the actual political and social structure of the society of the day. Be that as it may, the classification still corresponds very closely to the way in which some of the most important of communal economic problems present themselves.
An element in the theory of value which for a long time was stressed to the comparative neglect of almost everything else was the tendency for the exchange values or relative prices of goods produced and sold under competitive conditions to be equal or at any rate proportionate to the respective costs of producing them, as a result of the continuous shifting of productive re sources from less profitable to more profitable channels. By costs were meant not the money outlays of employers but "real" or communal sacrifices. At first these real costs were conceived to be measured by or proportionate to the amounts of labour re quired to produce different goods, but later the "abstinence" or waiting involved in accumulating capital by using resources so as to get a larger future product instead of using them in provid ing for immediate wants was held to be a distinct and separate cost. This innovation was first suggested by N. W. Senior in 1836. At this point, it may be observed, the economic theory of the "scientific" socialists, including the predecessors as well as the followers of Karl Marx, branches off from that of the more orthodox economists, for the socialists refused to adopt the innovation.
The distribution of the product was held also to be determined in considerable part by costs. Thus the doctrine that in the long run the standard of living of the labouring people determined their wages was in effect a cost-of-production theory of the value or price of labour. This doctrine rested upon the theory of popu lation generally associated with the name of T. R. Malthus, and particularly with the revised form which Malthus gave his theory in the second edition (i 803) of his famous Essay on Population. In its revised form the theory was to the effect, not that popula tion would normally increase faster than the means of subsistence could be increased, but that it would normally increase at least as fast as the means of subsistence would permit. For "means of subsistence" read "standard of living," understanding by that term the general scale or standard which labourers think must be maintained if a family is to be supported, and the essential basis of the standard-of-living theory of wages is obvious. If wages fall below that level, it was thought, the rate of growth of the population will fall off, the supply of labour will be relatively smaller, and wages will rise. If wages rise above that same fixed point, the increase of the population will be quickened (except so far as a better standard of living may become effective) and wages will fall.
The rent of land, however, was held not to be governed or determined by the principles of cost. This was because (I) the supply of land is fixed, so that a rise of rents does not tend to counteract itself by stimulating supply, and because (2) the prices of agricultural products cover the costs of cultivation on lands which, prices and wages being what they are, are barely worth using, and hence yield no rent. Rent, from the communal point of view, was held to be neither determined by cost nor itself a determining element in the prices of commodities, but to be a surplus arising from the circumstance that the value of the produce of the better lands is more than enough to pay the cost of cultivating them. Closely connected with the doctrine of rent—although in point of historical fact preceding it instead of deriving from it—was the law of diminishing returns. With the growth of population and the extension of cultivation, the theory ran, resort must be had to poorer lands, or lands already in use must be cultivated more intensively, or more probably both things must occur. In any case the increase of product would not be proportionate to the increase of the amount of labour required. In manufactures, it was thought, increasing returns were normally operative, because a larger population, with a larger demand for goods, affords larger opportunities for the economies of the division of labour, and for the inventions and the applications of the fruits of scientific progress to industry which the division of labour facilitates. Agriculture, too, benefits by technical progress, but here the possibility of improvements in methods were thought to be somewhat smaller and to be more than counterbalanced by the increasingly disadvantageous pro portioning of labour and land which comes as an inevitable result of the growth of population. Some of the older economists, in cluding both Ricardo and Mill, went so far as to hold, in what is perhaps the most vulnerable part of their analysis, that with the increase of the amounts of labour required to produce the labourer's own subsistence, coupled with advance of land rents, the profits of capital must decline. This would dampen men's desire to accumulate capital, and finally the growth of population and of wealth would come to an end. In the law of diminishing returns, taken as a statement of a tendency, there was nothing fallacious. Taken as a prophecy, however, it was, or has been thus far, mistaken. The possibilities of improvements in agri cultural technique were underestimated, and the rapid extension of the cultivation of new lands of good quality, brought nearer to the world's industrial centres by cheap transport, was unfore seen.
It was recognized, of course, that at any given time the prices of goods and of productive services might be considerably out of line with the norms established by long-run tendencies. But these deviations were held to be self-correcting, and for the most part the older economists were content to attribute them to "variations of supply and demand." In some instances, however, they pushed their analysis of the factors which control the tem porary state of the market a little further. Thus, for the time being, the supply of labour is determined by the present numbers of the working population. The demand for labour was held to be determined, not by the demand of final consumers for the products of labour, but (since most labour has to be paid for and the labourers supported before their products are ready for the market) by the amount of capital that can be devoted to the making of "advances" to labour. This was the famous wages fund doctrine. It was found to be so misleading, however, that it has been pretty generally abandoned, the elements of truth which it contained being taken account of in other ways. Again, the equally famous doctrine (which has withstood criticism better) that the value or purchasing power of money at any given time depends, other things being equal, upon its quantity as compared with the volume of production and trade, may be regarded as a supply-and-demand theory of money. It was supplemented by the doctrine that the "normal" value of money, i.e., its value in the long run, is determined, when gold or silver is the monetary standard, by the marginal costs of mining, that is, by the costs of producing that portion of the supply which would not be produced if the metal were a little less valuable. Similarly, and quite naturally, short-lived fluctuations of the rate of interest were ascribed to temporary changes in the supply of and demand for loanable funds.
It would be an error, however, to think of these earlier econo mists as altogether preoccupied with theories of value and distribu tion, and it would also be an error to fail to recognize that their interest in those theories was born of their interest in practical problems. In general moreover they were not such uncompro mising opponents of any sort of interference by the government in industry as some of their critics and some of the lesser writers who pretended to expound their views might lead one to think. Their attitude towards legislation intended to improve the condi tion of the working classes was sometimes sceptical but rarely hostile.
Another group of writers, for whom there is no better general descriptive name than "the critical school," come much closer to meeting the economists of the orthodox line upon their own grounds. One of the earliest and easily the most influential of them was Sismonde de Sismondi (Nouveaux principes d'economie politique, published in 1817, and other works) . Other able writers, of ten without any conscious discipleship, have taken a position much like Sismondi's. These critics urge that insufficient attention is given to the defects of the existing economic mechanism, even if it be viewed merely as a means of providing for the material needs of the community. They suggest that the economists, in their contemplation of such things as "long-run" or "normal" tendencies, the advantages of the division of labour, and the seeming perfections of the automatic processes by means of which the things men do in the pursuit of their own economic interests become knit together into a vast scheme of communal economic co-operation, forget how often the mechanism breaks down and the "normal" progress of the community's economic life is interrupted by a crisis ; how unemployment, partly chronic and partly epidemic, is a persisting disease of the present eco nomic order; how unequally the aggregate product is distributed among the members of the community ; and how many of the things which men do in pursuit of their own economic advantage are, in point of fact, inimical to the economic interests of the community. As some contemporary critics put the matter, men to-day are interested first of all in making money, and only incidentally in making goods. To look at the activities of a com petitive, acquisitive, society as though such activities constituted, in their entirety, a communal process of wealth production, re quires, it is surged, rather more rationalizing and sophisticating of the facts than the orthodox economists and their followers realized. Such criticisms undoubtedly go too far. They give an in correct impression of the place of the more abstract parts of the older economics in the general view of the community's economic activities which one finds in the works of the economists. No economist of the first rank has ever been a devotee of the "eco nomic harmonies." The critical school, nevertheless, has had a wholesome influence upon the progress of the science. This school, it may be observed, occupies a position midway between that of the economists of the more orthodox line and that of the socialists who denounce the parts of economics that are incon sistent with their tenets as being merely an apologetic for and a product of the existing economic order.
Another angle of attack was adopted by the "historical school" —using that term broadly so as to include critics who might easily be put into several different groups. This school has had and still has adherents in all countries, but it has been especially in fluential in Germany. The most important of the early exponents of its views were Friedrich List (Nationales System der politischen Oekonomie, 1841) and Wilhelm Roscher (Grundlagen der Nationaloekonomie, 1854, and other works). The structure of a nation's economic life, said these critics, is a "historical cate gory," something peculiar to a given nation at a given time, a product of its past, and to be understood, therefore, only by the study of that past. The wisdom of particular economic policies is relative to place and time, and the general or supposedly universal "laws" of abstract economics need to be supplemented by or even subordinated to an analysis of the concrete facts of each nation's economic growth. If they had gone no further these critics would have found many to agree with them. But the founders of the school (Karl Knies, whose work, Die politische Oekonomie vom Standpunkte der geschichtlic/ien Methode, ap peared in 1853, is a notable exception) made of what they called the historical method something peculiarly arbitrary and doc trinaire. Instead of looking to history for the particular ante cedents of those concrete differences of economic structure in which they professed to be interested, they proposed to derive from history universal and binding laws, akin to the laws of the physical sciences. In naming certain stages of economic develop ment through which they thought every nation must pass they were really elaborating suggestions which they got, not from historical research, but from the Greeks. Like some of their followers, they regarded the forms which economic life has taken in the past as inevitable products of historical forces, while at the same time they contended for a rather heavy-handed control of economic activities by the state. The French and British econo mists had looked upon the way in which the economic life of the community is organized as being shaped and determined by the interplay of the activities and interests of individual men, and they had treated the state as though it were an instrument of men's purposes, a utilitarian device. The spokesman of the historical school, on the other hand, strongly influenced by Hegel, ascribed a prior and independent value to the state, and looked upon the economic activities of individuals as though moving in grooves determined by the general structure of society and expressing at the same time the controlling purposes of the state. Despite the extremes to which they pushed their contentions, the historical economists gave a needed emphasis to what may be called the institutional as contrasted with the free or contractual aspects of economic activities. Their work and that of their successors has made economists more mindful of the way in which institutions are the masters as well as the servants of men, and less ready to asume that the particular economic order with which their analysis is mostly concerned is inevitably permanent or final. The historical economists also gave a needed impetus to the study of economic history—a most valuable complement to the study of economic theory. With the growth of careful and painstaking historical research the old dogmatism of the historical economists has pretty generally given way to a realization of the variety and complexity of the fabric of economic history, and the new schools of historical economics under the leadership of such scholars as Gustav Schmoller in Germany and George Unwin in Great Britain (to name only men who are no longer living) are, as they should be, schools of historical research.
Economics makes use of two general classes of data: (1) ob served facts respecting the behaviour of men in their various economic activities and relationships, including all classes of activities that have economic consequences; (2) such economic phenomena or events as movements of population, production, trade, incomes, prices, wages, profits, interest rates, etc. The most trustworthy evidence respecting the characteristics of human behaviour is often supplied by its results, and so the second class of data has often been drawn upon for knowledge respecting the first class. In the actual processes of constructive thought men doubtless pass forward and backward from one sort of knowl edge to the other. The earlier economists, however, presented their findings in such a manner as to show that the known phe nomena of the second class could be explained by (i.e., were con sistent with) the known facts of the first class—the known char acteristics of human behaviour. This circumstance undoubtedly accounts for the mistaken impression that they "deduced" their findings, including the second class of facts, from the first. What they really did, of course, was to examine such experience as was at hand and seemed relevant to their problems, with a view to discerning the systematic relationships which ran through it and to explaining the more puzzling or apparently more complicated happenings in terms of their relationships to what was familiar or more easily understood.
The growing accumulations of precise numerical information covering a wide variety of economic facts, coupled with the ad vance of statistical technique, bids fair to accomplish a notable change in the character and content of economics. More and more it is found that records of measurable economic phenomena, care fully interpreted, may be used to provide a basis for more reliable and in some respects more sensitive accounts of the economic activities of the community than can possibly be derived from even the most careful observation of how individual men conduct their affairs. The economic science of the immediate future, it is safe to say, will give a relatively larger place to the study of the movements of averages and aggregates. It should not be sup posed, however, that this means that economics will be or can be altogether statistical—a new kind of "political arithmetic." Every average or aggregate is in some measure unique, the re sultant of the play of a particular combination of circumstances, such as may never be encountered again. In order that we may know just how dependable and how significant the variations of these statistical magnitudes are, we need to analyse them so that we can explain them. That is, we need to weave them into the general texture of our knowledge, so as to relate them to other things which we know. In short, although economics is beginning to utilize new materials effectively, and although some of these new materials call for the use of a new technique, it cannot change its general logical method, for outside the field of the experimental sciences there is no other method of getting useful and reliable knowledge.
Starting with this new way of explaining the values of the goods and services which consumers buy and use, a new type of explanation of the distribution of the aggregate product among the various productive factors was developed. The central point in this new analysis was the thesis that the value of productive agents, including labour, capital and land, is derived from or, we might say, merely reflects the value which consumers attach to the final products of such agents. The problem of distribution, viewed from this particular angle, is the problem of discovering the gen eral relations between the values of the final products of trade and industry and the values of the productive agents. If the demand of consumers for finished products could be construed to be a demand for definite quantities of land, labour and instruments, combined in fixed proportions, the problem would be relatively simple. But because, in fact, goods can be produced in different ways, and because, within limits, one factor can be substituted for another (as a given amount of agricultural produce can be grown by using more labour and less land or more land and less labour, or as simple and direct or highly roundabout methods, requiring small or large amounts of capital, may be ustd in indus try) the problem is really exceedingly complex.
One general principle which has been found to help towards clarifying the problem is nothing more than an extension or gen eralization of a principle which the older economists had taken account of in their doctrine, previously noted, that the expansion of agricultural production is attended by diminishing returns. It came to be seen that if it is true that the amount of product dependent upon the efforts of any one labourer or any one day's labour becomes smaller when the amount of labour "applied" to or combined with a given amount of land is increased, it must also be true that the amount of product dependent upon the use of any one particular acre of land becomes smaller when the available supply of land of equal quality and accessibility is in creased more rapidly than the supply of labour. Similarly, the larger the supply of capital as compared with the supply of labour and land, the smaller is the amount by which the product would be decreased if any one unit of capital were not available. How much of the aggregate product will have to be assigned to any one labourer or to the owner of a certain productive instrument or a certain piece of land will be determined, if competition is free and frictionless, by the extent to which the product really depends upon the work of that particular labourer or the use of that par ticular productive agent. The individual labourer, for example, counts for more, and indeed produces more, when there is a plenti ful supply of productive agents other than labour. He produces less—for less depends upon his own efforts—when labour is rela tively plentiful and other productive agents relatively scarce. What he earns will depend, of course, upon the value of what he produces, and his real wages—what he is able to buy—will de pend as well upon the values of other products. But—assuming again that competition is unimpeded and frictionless—labour, like capital and land, will move or be moved away from employments where the value of its product is relatively small, and will move or be moved into employments where the value of its product is relatively large. There is thus a tendency—effective in a meas ure, though never working itself out completely—towards an equality of the values of the products attributable in different employments to labourers of comparable efficiency and to other productive agents of comparable kinds. The significant outcome of this newer analysis is not the doctrine that everyone who con tributes to the communal product tends to get as his allotted share an amount equal to "what he produces." It must be remembered that differences in respect of training and of opportunity still affect men's productive capacities; that institutions, such as in heritance, help to determine how the products imputed to capital and land shall be distributed; that the swift process of industrial change often robs men of the advantages of acquired skill ; that impediments of one kind or another often prevent men from transferring their labour to employments in which its product would have a higher value ; that capital once fixed or invested in permanent forms is generally irretrievably committed to the for tunes of a particular type of enterprise, whatever those fortunes may prove to be. No, the doctrine that "rewards tend to be proportionate to products," taken by itself, has no particular significance, except as a corrective to the even more misleading notion that rewards are in no manner related to or dependent upon productivity. The real significance of this new way of sketching the outlines of the problem of distribution is that it brings clearly into view the general form, at least, of some very important rela tions between production and distribution and between one dis tributive share and another. Relations such as these have to be kept in mind when analysing the probable repercussions of almost any projected scheme for economic betterment.
Any short summary is bound to make economic theories appear thinner and more remote from the concrete facts of economic life than they are. The structure of abstract general relations which constitutes the framework of modern economic theory has been built up, not like pure geometry, by a wholly intellectual process, but by a patient and persistent scrutiny of the complicated facts of economic life. In what is generally called "mathematical economics," however, one finds a comparatively high degree of abstraction. The one great advantage of the use of mathematics in economics is that in that way alone is it possible to depict the variety, the complexity and most of all the interdependence of the factors which determine prices, costs, supply, demand and distributive shares. Elaborate mathematical formulations of the conditions of "general economic equilibrium" have been devised, notably by Leon Walras (Elements d'economie politique pure, 1874, and later editions) and Vilfredo Pareto (Manuel d'economie politique, 1909, and other works) . The principal value of these elaborate and highly abstract systems is that they put the en quirer on his guard against over-simplifying his problems, as for example, by forgetting that a change of almost any economic variable has its indirect as well as its direct effects. Other writers, notably Alfred Marshall (Principles of Economics, 189o, and later editions) have shown that it is possible to put a proper emphasis upon the interdependence of economic phenomena while yet examining more closely and realistically into the operations of the different parts of the economic mechanism, and while taking account of factors which make for change as well as of factors which make for stability.
Among the economic phenomena to which a largely increased amount of attention has been given are interest and profits. In connection with interest two different though related types of questions present themselves. First, is interest a necessary or in any sense an "earned" income? For what sort of productive service or sacrifice is it a payment? Is there any perceptible relation between the amount of the payment and the amount of service or sacrifice? Second, what factors govern the fluctuations of interest rates, and what determines their general level or their movements, upward or downward through longer periods of time? The first of these two types of problems was brought into promi nence by the attacks of the socialists upon the private receipt of income from capital. Profits, as the term is used in the world of affairs, are generally a mixed form of income, containing elements of interest and sometimes of wages (as for superin tendence or managerial direction) along with a special element (which may be positive or negative) of what the economist calls "pure profits." The distinguishing characteristic of profits is that they are not paid in accordance with any contract or agreement, but are contingent upon the success of particular undertakings. Pure profits are what is left after allowance is made for the inter est and wages which would have to have been paid for capital and management upon a contractual instead of a contingent basis. Pure profits, therefore, are determined by all of the factors which make for the success of an undertaking, such as foresight, fortune, quickness to see opportunities for gain and to take ad vantage of them. In a completely stationary and unchanging economic order, it is pretty generally agreed, the advantages of different employments of capital and of managerial ability would be so completely equalized by competition that there could be no pure profits.
The Problems of Modern Economics.—The more general and abstract parts of economics cannot be taken to be completely true and adequate accounts of the mechanism of modern economic life. They are at best serviceable approximations to partial, though important, aspects of truth. There are other true generalizations which might be made. Some of these are obvious but unimportant ; others, doubtless, are important, but require further scrutiny of the facts or a more penetrating insight to bring them to light. But even in their present imperfect and incomplete state the generalizations which the economist has at his hand constitute an organon of proved effectiveness, an instrument by means of which some of the results of economic changes, whether planned or not planned, may often be predicted with a fair degree of certainty. The practical problems of communal economic life are many and various. At any given time they appear to fall into a number of fairly well defined groups or classes, but as new prob lems challenge attention and new interests emerge, new groups appear and some of the old problems fall into new relations. Each group or class of problems has its special literature, and each engages the attention of a corps of specialists.
Among the classical problems of economics are such subjects as the mechanism of money and credit and its proper management, the incidence and the effects of various kinds of taxation, the nature of international trade and the economic consequences of protective tariffs and other devices for controlling it. In none of these fields is the ground completely explored or all of the issues definitely settled. But in each field important findings have been reached which appear to have permanent value. The outcome of the various fiscal and monetary measures to which governments resorted during the World War, and the results of the various restrictions imposed at that time upon trade and industry were in general just about what competent economists predicted they would be. Post-war experience, too, in respect of such problems as reparations and monetary stabilization, were such as to give new confirmation of some long-established economic principles.
The general form which economics took at first was determined very largely by its preoccupation with certain special types of problems, notably problems of national commercial policy. But as new types of economic problems have forced themselves upon the attention of the community, economics has had to deal with them, and in the process not only its scope but its general pattern has inevitably been altered. The way in which a new group of "labour problems" has emerged from the labour movement of the 19th century is a case in point. Up to the last quarter of that century there was very little careful analysis of those prob lems, apart from discussions of the general theory of wages. Now, however, there is hardly a field of economic inquiry which is more thoroughly cultivated. The trades union movement and its significance, the possible gains of collective bargaining, the length of the working day, factory legislation, profit-sharing, the organi zation of control within the factory and its administration, labour turnover, the minimum wage, the prevention and settlement of industrial disputes, compulsory arbitration, the causes and possible cures of unemployment and social insurance in its various forms are subjects which suggest the increasing range of this new field of economic interest. It is important to observe that the atten tion now given to these subjects marks a change of interest rather than a change of attitude. The earlier economists, interested as they were in the exploding of popular fallacies with respect to the ways in which the prosperity of the community can best be secured and (with that end largely in view) in showing how the economic activities of individuals are so inter-related that they constitute, in their entirety, a great communal economic mecha nism, often give the impression—an impression which careful study of the writings of the ablest of them will dispel—that they regarded that mechanism as self-sufficient, needing neither inter ference nor any sort of direction on the part of the community. They concerned themselves more with what governments could not do than with what they could wisely attempt. Modern economics strikes a different note. Its tone is less negative; it is more insistent in its search for and scrutiny of possible ways of altering the organization of the community's economic life for the better. Almost every gain has its cost, and accordingly almost every such problem resolves itself into a question of a balance of advantage. The advantages and disadvantages are hardly ever purely economic, and no purely "scientific" analysis, therefore, can completely dispose of such questions. The economist, how ever, may be able to gauge the general character of the probable effects of a specific change upon the production of wealth or its distribution, so that the wisdom of proposed changes can be dis cussed upon the basis of some knowledge of their probable consequences.
Questions associated with monopoly—its roots, its various types, its effects, its possible advantages in some circumstances, the ways in which it may be controlled—are matters with which economics have long been concerned. Economists have learned, for one thing, to distinguish between the types of monopolies which are inevitable, and have to be recognized and treated as such, and the types of monopolies which might be prevented or suppressed, in so far as the maintenance of competitive con ditions in fields where competition is feasible is held to be a sound public policy. Changing methods of business organization and particularly the rise of the limited liability company have created new problems for economics. On the one hand there is a new opportunity for large numbers of people, not merely to put their savings out at interest, but to participate in the profits (and losses) of large undertakings. On the other hand, along with this larger diffusion of industrial ownership, there are new oppor tunities for the concentration of industrial control. This situation gives rise to new communal problems, and these, in turn, create new fields for economic inquiries. The general theory of economic equilibrium, which includes an analysis of how exchange values and distributive shares "tend" to be determined under the operation of the forces which make for a general balancing of supply and demand, retains its importance in economics. But in recent years economists have come to give increased attention to the factors which make for economic change and to the persistence of mal adjustments in the mechanism of production and trade. The recurring phenomena known as industrial fluctuations or business cycles, with their attendant costs and wastes, are receiving a very much larger amount of study than was formerly given to them.
The most striking and possibly the most important characteristic of the newer work in economics, as contrasted with the older, is its greater realism. Not that it manages to do without abstract conceptions, but that it takes its conceptions, so far as it can, from the world of affairs. The older economists, for example, in their efforts to dig beneath that surface view of economic life which had deceived the mercantilists, held that money was merely a convenient instrument or tool. From their point of view, which remains a significant point of view, they were right. They also held that money prices were "exchange values" expressed in terms of money, making value the basic and price the derived conception, and thus inverting their real relation. This procedure, again, was not without reason, and in some special types of economic analysis it remains convenient to assume that trade is conducted by barter, without the use of money. In general, however, modern economists find it better to deal with money prices rather than with "exchange values." They have observed that modern processes of price-making and distribution depend upon the use of money and credit, not only in the sense that processes so complex would be unthinkable otherwise, but also in the further sense that the use of money and credit has certain special and discernible effects upon the outcome. Reliable records of economic activities—or at any rate of their results—are now brought together and published by governments or made public by business organizations on a scale, in respect of both volume and variety, which would have excited the envy of the older economists. A much wider range of economic experience is now available for study and analysis. In dealing with this new ma terial—virtually a by-product of the activities which it records— economics again has to accommodate itself to a more realistic view. It has to deal with economic events in the forms in which they really occur, and it has to search for the systematic rela tions which run through these masses of real events. But although the interests of economics have become more varied and concrete, and although its conceptions have become better adapted to the handling of the facts of economic life in the form in which those facts present themselves, economics remain a communal or political science. Particular findings or tenets have been dis carded, and new ones have been set up in their stead. But the general picture of a scheme of communal economic life, sufficiently ordered to make an analysis of it possible, and imperfect enough to give point and purpose to such an analysis in spite of changes of view-point and method, remains.