Popular Science Monthly/Volume 67/October 1905/Unconscious Assumptions in Economics

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AMONG the members of any such gathering as a meeting of the Economic Section of the British Association there are likely to be some who come to give information and some who come to get it. In the latter class may, I am sure, be included all those habitués of the section who have seized the opportunity which the visit of the association affords, with the view of learning something about the present condition and prospects of the enormous territory which we hope to be able to traverse. It may not be so to the same extent in all sections. Those who come from the great chemical and physical laboratories of Europe may have much to say as to the result of experimental investigation, which they can carry on under more favorable conditions than are at present generally available to students in South Africa. But in economics there is no room for experimental inquiries consciously undertaken in the interest of the advancement of science. The issues are too serious; the conditions on which they depend can not be arranged for the convenience of the inquirer. Economics is a science of observation, not of experiment; and we are fortunate to find ourselves in specially favorable circumstances for noting and appreciating the results of investigations which have been made by skilled observers on the spot.

While we gratefully acknowledge the pains that have been taken here in preparing papers for this section, we may yet feel that the task we are setting ourselves as visitors is not an easy one. There are few harder things in this world than to preserve a genuinely receptive frame of mind, and hold the judgment in suspense when we are brought face to face with the unexpected. There are so many assumptions we all make, and so many canons of criticism we have habitually accepted, that are not easily laid aside, even temporarily. 'The worst use of theory,' as a great Cambridge professor has warned us, 'is to make men insensible to fact'[2] and the danger may be most real when we are not aware of the influence exercised by some hypothesis which we habitually make.

I. The popular discussion of economic problems teems with unconscious hypotheses, which tend to obscure the facts of the case. Mill described political economy as a science which, assuming the facts of human nature and of the physical world, considers the laws of the production and distribution of wealth. But what are the facts of human nature which we may legitimately assume? At first sight we are inclined to take for granted that human nature is much the same all the world over. The late Professor Jevons gave clear expression to this view. "The laws of political economy," he says, "treat of the relations between human wants and the available material objects and human labor by which they may be satisfied. These laws are so simple in their foundation that they could apply, more or less completely, to all human beings of whom we have any knowledge." He adds: "I should not despair of tracing the action of the postulates of political economy among some of the more intelligent classes of animals."[3] It has seemed as if in the march of progress modern industrial conditions must inevitably be introduced in backward countries, and that they would everywhere result in molding individual aims and character on the same lines. Each individual is to some extent affected by his environment; and it has been supposed that the keen competition and struggle for existence, which in one form or another dominates economic life in all parts of the globe, would make for the survival in all areas of men of the type with which we are familiar in business circles at home. In England there is on the whole a condition of free exchange, where each individual puts in his quota of service to the community and bargains for payment. His success in the management of land is rewarded by an increase of rent; his enterprise in investing his capital, by larger profits; his diligence and skill as a workman, by the wages he draws. The man who is self-disciplined enough to follow routine work habitually for the sake of reward, and whose ambitions lie in the direction of better paid and more responsible service, is the normal man of such a society. But it must be remembered that modern civilization is also producing another class; whatever the force of social environment may be, it does not, as a matter of fact, form each unit of the rising generation on the same type. There are men who do not fit readily into our modern system; they dislike the monotony and stationary life which steady industry imposes, though they may be able to work well and hard when the fit takes them. The tramp of the American continent is as much the product of existing industrial conditions as the ambitious leader of an organized body of skilled artisans. The 'ins and outs' of Great Britain have characteristics which may be described as nomadic.[4] Economists recognize that the fluidity of labor is one of the assumptions that can be fairly made in regard to modern society.[5] The conditions under which labor is fluid give opportunity for the growth of a half-employed and migratory class, who are, as a class, a tax upon the well-being of society. It is the greatest of all problems in the old world to see how the educative influence of society can be brought to bear so that it shall rear as much as possible the sort of man who is 'capable of standing on his own feet and of contracting when and how to render services to those who are willing to offer services he wants in return.' The question, What is to be done with those who can not and will not thrive on this system? is constantly presenting itself in new forms. For our present purpose it may suffice to recognize that this question exists, and that even when the conditions of race and history and social surroundings are similar they do not produce one type of individual only. Under these circumstances we can no longer take for granted that human aims and activities are becoming closely similar in all parts of the globe, even for economic purposes. The individual estimate of the utility and disutility of labor at any given moment may often be very different from that which the economist would assume to be the natural conclusion. It is obviously absurd to suppose of vast numbers of our fellow-creatures that they are in the habit of acting in accordance with what appears to be common sense to the average traveling Englishman, but they need not necessarily be fools on that account.

II. What is true of unconscious assumptions in regard to individuals personally also holds good for the mechanism of society; we can not assume that it works everywhere in the same way. The classical economists were inclined to limit their investigations to the areas and regions where free competition has been dominant, and thereby to exclude from consideration all those important problems which arise from the contact of individuals of two races, with different economic habits and ideals, upon the same soil. But even if the ages and areas of free competition could be cut off from the rest of the world, and we fixed our attention exclusively on this single plane, we should not find simplicity and uniformity throughout the whole region. The habits of business practise and labor organization differ in different lands; the banking system in Scotland is by no means the same as that in England, and a form of currency which finds favor in one is illegal in the other. There is also a want of complete conformity between the eastern and the western states in this matter; we can not argue directly from the one to the other. When this is true about the medium of exchange, it is obvious that the differences between one highly advanced community and another in regard to the terms on which labor is carried on, or the method in which land is managed, will be even more striking.

The great difference in the working of the mechanism of society, as we know it in England and as we find it in other lands, was the chief impression which was left on my mind on the occasions when I have had the opportunity of traveling far afield. A quarter of a century ago it was my good fortune to spend a few months in India, and to get some insight into the extraordinary contrasts between Britain and her great dependency. At that time many of the changes which had revolutionized English industry and internal traffic were beginning to make themselves felt throughout India. Railway communication was being opened up in all directions, and cotton spinning was carried on at mills in Bombay and in Hyderabad in the Deccan. The results of the age of mechanical invention had begun to invade the changeless civilization of the east. Still the persistence of the old order was also noticeable. The village community, as an exclusive group, with the headman who supervised all transactions with the outer world, forced itself upon my attention when I attempted to hire a pony to visit the cave at Karli. I passed a granary in Kathiawar where the officials of a native state were measuring out the crop and collecting the revenue in kind. The highly developed gild system at Ahmedabad was the very image of much that I had read of regulated industry in medieval towns. On every side it seemed as if the survivals of the past had been preserved in the east, so as to make the story of bygone ages in the west alive before my eyes. On the other hand, the transition from the old to the new, which had gone on steadily in England for centuries, seemed to be ready to sweep over Hindustan like a flood that would disintegrate existing institutions, while it showed little constructive power. And when I heard discussions on the incidence of taxation, the pressure of the salt tax, or the impossibility of imposing an income tax, I at least realized that the conditions were strangely unlike those of which a chancellor of the exchequer would have to take account in England. The mechanism of society is entirely different; the expedients which would make for convenience and equality and inexpensiveness in England would not necessarily be feasible in India at all.

Five years ago I had occasion to reside for some months in the United States, and once again I came away with a strong impression that the mechanism of society was very unlike that with which I am familiar in England—the differences were more subtle, but not less real, than those between English and Indian economic life. Throughout the states there are few vestiges of past history; the alleged relics of Norse invasion have disappeared under the solvent of critical investigation; and though frontier life has been till lately an abiding factor in American civilization, comparatively little influence has been exercised by the native races on the economy of America to-day. The English stock, with grafts of many kinds, has had a clear space in which to grow. In India the conflict of the past and the present seemed to be the dominating condition, but in America there had been room for the development of a new country pure and simple, unhampered by the traditions and customs of bygone days, except in so far as their wisdom was confirmed in present experience. Hence, on the other side of the Atlantic the practical economic problems as to the development of a large and wide territory are presented in their simplest form. It is there that we can note most clearly the lines on which modern industry and commerce develop with the full employment of modern appliances and the minimum of control from traditional habits and institutions.

There is one economic conception which is deeply ingrained in English habits, and which seems to me to have no corresponding hold in America—that of the markets. Its former importance as the center of trade in many towns is sufficiently vouched for by the space that it occupies, and its legal history takes us back to the very beginning of urban life in England. In medieval opinion a sale in open market, where buyers and sellers met together publicly, had all the guarantees of an honest transaction; it was important both as evidence of the sale and as an indication that the bargain was above board and fair, since there was one price for all alike. Private transactions which did not come into the market—forestalling and such like—were viewed with suspicion; they were supposed to be methods by which some wily person drove an extortionate bargain or gained at the expense of others. And, in modern times, organized markets, where there are facilities for public information, are common, not only in every locality, but in a great variety of trades. Commercial transactions in the United States seem to have sprung up and developed on rather different lines; markets are frequented in the country towns of Lower Canada, but there is little sign of them in the cities of the states. It almost seems as if commercial practise there were based on the habit of 'having a deal' privately, and took its character from transactions outside a market rather than from the higgling which occurs where many buyers and sellers meet. There can, at least, be little doubt that the methods of bargaining which are current in the states have been favorable to the building up of great organizations—both the industrial organizations which control all parts of some industrial process, and the trusts which monopolize some line of business. The lack of public markets, either for produce or for goods, at various stages of the process of manufacture, has apparently rendered it easier to form great monopolies in America than it would have been in Great Britain. Indeed, it may almost be said that the struggle for existence among business rivals takes a different form in the two countries. As Professor Jenks points out, the whole terminology which is habitually employed to analyze the movements of prices in England is inapplicable to the United States. 'The normal price of economists has been based upon cost of production under a system of competition among small capitalists.' But in such an industry as sugar-refining, in the United States, this condition does not hold good. 'There is no normal level of competitive price based on the cost of production.'[6] The whole industrial organization takes other forms, and the mechanism of competition does not work in the fashion which English economists would assume. We have need to be doubly on our guard, since unconscious assumptions may not only affect our powers of observation, but may also be present to color the language we use in describing unfamiliar phenomena.

III. It is not easy to overrate the services which the classical economists rendered in their day to the progress of economic science, owing to the clearness of the conceptions they applied to the limited field they studied, and to the accuracy they endeavored to introduce in regard to the use of familiar languages. It was their misfortune, rather than their fault, that their manner of treating individual human nature and the mechanism of society has given some excuse for the popular misuse of their teaching. In the public mind, principles which had been legitimately put forward as convenient hypotheses for the investigation of a particular sphere have been transmuted into axioms of universal applicability. But when we turn to other subjects of economic inquiry, the limitations, and consequent defects, of the classical school become more apparent. The idea of the growth of society was not easily brought within the limits of a system which makes so much use of terminology borrowed from physics. Some of the precursors of economic science in England had treated national life as organic, and had relied on biological conceptions. Hobbes had devoted a chapter of the 'Leviathan' to the nutrition and procreation of States;[7] and Sir William Petty, who had held the chair of anatomy in the University of Oxford, entitled an important statistical work 'The Political Anatomy of Ireland.' But another and less fruitful habit of thought existed side by side; the mercantilists, in discussing the benefits of commerce, wrote much of the balance of trade; and the physical analogies they introduced—especially the notion of equilibrium—exerted a dominating influence over the form which the science took in the hands of the classical economists. These last were so much absorbed in the discussion of the mechanism of exchange and the mechanism of society that they failed even to recognize that it is essentially organic. As has been well said, "the classical economists belonged to the pre-Darwinian age. We differ from them in our whole view of life and of the ends of life—in our whole mental method as well as in our possession of the practical experience of the last sixty years."[8] It is only in recent years, when we have passed beyond the arbitrary limits they accepted and imposed, that it has been possible to enter on new fields of research. Carl Bücher[9] has brought out the importance of the relations which subsist between economics and anthropology, and Thorold Rogers proved himself a vigorous pioneer in the interpretation of history. In this fashion the whole range of the phenomena of economic life, in its earlier as well as in its later forms, is being brought within the sphere of scientific treatment as exhibiting various stages of growth. The men of the classical period of economics, who devoted themselves to the study of new countries, were not in a position to deal with the subject properly, and their writings seem singularly lacking in grasp. Times have changed since their day, both politically and economically. Lord Brougham wrote at a date when responsible government was undreamed of; he pleaded for the benevolent treatment of dependencies, and his language is wholly inapplicable to the great self-governing nations, which have been formed partly under English influence and partly through English neglect. But none the less is his writing, and that of some other enthusiasts for the development of the colonies, of abiding value as a monumental warning against a sort of pseudo-philosophic habit of mind. There is an underlying assumption that the one type of colony he had in mind was the only one worth taking into account; he was really thinking of a particular case, but he allowed himself to write of it in general terms, and thus to give an air of philosophical detachment to his remarks,[10] In the year 1803 there were many circumstances that gave prominence to questions connected with the West Indies; the agitation in regard to the slave trade was one, the trade rivalry between the French and Spanish and English islands was another. Brougham was thinking of the West Indies; all that he said of the dependence of these little islands on the mother country for defence, of the necessity of the colonists relying on English help to repel prospective invasions and annexation by France or Spain, was true enough; it might well lie at the basis of the economic relations between the planters and the government in England, but it has no bearing on the actual conditions of the great continental countries which are still called colonies, and which are at least under no anxiety as to their ability to repulse a foreign invader.

The greatest of all Brougham's contemporaries who wrote on the art of colonization was not exempt from a similar defect; he professed to write in general terms. Few names are more deserving of honor than that of Edward Gibbon Wakefield, and there is something very extraordinary in the contrast between the strong practical sense which distinguished him as a man of action, and the doctrinnaire spirit which pervades his writings. He fell into the error which characterized the classical school when they dealt with practical problems, and generalized from the special conditions of his own day.[11] There was, to Wakefield's mind, one, and one only, method of successful colonization; all others were to be condemned in so far as they departed from the true system which he had devised. Wakefield, too, was the victim of unconscious assumptions; the type of colony he had in mind was a white man's country, in which raw produce might be obtained for export. He showed under what conditions Australia, Tasmania and New Zealand might be most successfully developed;[12] but his scheme is certainly unsuited to tropical regions, and it need not necessarily be preferable to the alternative of developing a community on the lines of subsistence farming. On this point at least we can make a very definite comparison: Virginia, Carolina and Georgia have all been colonies which raised such commodities as tobacco and rice and cotton for export; they started more rapidly than the New England colonies, where the settlers were engaged in subsistence farming; but as we look at these states at the present time, we can hardly say that the type of community to which Wakefield devoted exclusive attention is that which has given rise to the most healthy and vigorous economic life.

Even Adam Smith, in writing of the growth of societies, fell into a similar error; he passed out of the region of actual life, where he showed himself such a master, and attempted to discourse in a pseudophilosophical strain on the manner in which countries ought to have developed, but never had. He allowed himself to elaborate an account of a supposed natural progress of opulence, which might have occurred in an isolated state. There is scope for a pretty play of fancy and much elegant writing in such a theme, but no attempt was made to show that isolated states ever do develop, so long as they remain isolated. Much may be said for the view that the chief stimulus to development is supplied by contact with communities on a different plane of economic conditions. In the history of England there are long periods of apparent stagnation and decline, and occasional epochs of rapid advance; but, whether in the days of the Danes or the Norman kings, of the Edwards or the Georges, the opening up of new trading relations has been the impetus to internal development. Economic experts are not even yet acquainted with philosophical principles as to the manner in which communities ought to develop, and therefore we are not justified in pretending to train up a young country in the economic way it should go.

IV. Every undeveloped country presents a network of fresh problems, each of which must be studied separately; but they must also be considered as interrelated and viewed in their mutual dependence. There is a mass of experience in the past which may be drawn upon as a help; we may appropriate it, and save ourselves the expense of buying fresh experience in a costly fashion; but in order to reap the fruit of human experience in the past we must be prepared to take a great deal of trouble; it is not lying about for any one to pick up at haphazard. The teachings of history as to the rise of great nations from small beginnings, or as to the causes which have led to premature decay, do not lie on the surface. Since the days when Lord Burleigh recognized that the mineral wealth of the Spanish conquests in the new world did not really add to the strength of the monarchy at home, there has been a tendency to disparage extractive industries. "Moile not too much underground," said Lord Bacon, "for the hope of mines is very uncertain, and useth to make the planters idle in other things";[13] and Adam Smith does not at all dissociate himself from this view.[14] It appears to have been thought that mining for the precious metals, however attractive it might be for a time, could never be a secure foundation for the building up of stable society. But, after all, it would be wise to discriminate a little before we adopt this conclusion, and to examine the condition of different parts of Spanish America separately.[15] The richest mines of all, those of Peru, were situated on the arid slopes of the Andes, where cultivation was impossible, and there were insuperable obstacles to the planting of well-ordered and prosperous communities; but very different results were achieved in Mexico. These workings occurred on a plateau where cultivation and settlement were possible, and the wealth which was obtained by mining reacted on the prosperity both of agriculture and manufactures. Extractive industry served to give a stimulus to that varied life, partly urban and partly rural, which is necessary for a community that hopes to take a real and independent place in the civilized activities of the world. It is foolish to jump to the conclusion either that mining gives a feverish and unhealthy stimulus, or that the Spanish system of regulation was incurably bad; we ought to distinguish carefully, and to try to learn from Spanish experience, both in South and in Central America, what are the conditions under which mining for the precious metals can be pursued so as to be not merely of temporary, but of permanent advantage to the welfare of the community.

In fact, we must remember that the experience on which we rely in regard to economic growth has been obtained, not by experiment in a laboratory, but by observation in the world itself. The investigator in a laboratory can note all the conditions under which an experiment is conducted; he can be certain that under the same conditions the same result can be secured over and over again. But in the world of political and economic activities we never find the same conditions repeating themselves; the fundamental inquiry must always be, How far were the conditions of some growing community in the past similar to those of some growing community to-day? How far are they on all fours, so that we can argue from one to another directly? Sometimes we may get a very close analogy, and instructive comparisons may be possible; but even when the conditions are very different, when there is hardly any close parallel, we may still get a suggestion as to a mode of development that might prove fruitful or as to a danger which it may be well to bear in mind.

There is pleasure in completing, so far as the limits of time and energy allow, an empirical economic investigation; but to those who have any vigor of mind at all there is a keener delight in seeing new fields of possible inquiry opened up. It is very enjoyable to renew acquaintance with an old difficulty in a fresh form, or to find that some question which seemed to be settled is forcing itself clamorously on our attention for reconsideration; and hence we have, as economists, set out for our too hurried visit here with eager anticipation. The conditions of South Africa seem to be very different from those of any other part of the world, and therefore every particular economic problem presents itself in an unfamiliar aspect. There has not been such a clear field for the working out of new ideas as was presented in the great West, or even in Australasia; and all questions as to the opening up of the country and the economic aims and aspirations of the settler are necessarily more complex. There may not be the sharply defined conflict between the old and the new which renders British India such a fascinating field for study, but the African problems are not simplified on that account. It is, rather, true to say that there is additional complication with regard to all industrial activity in a land where the natives have not been schooled to regular.habits of work by the discipline of a high traditional civilization. As passing tourists we can obviously make little progress in understanding how these practical difficulties are to be solved, but at least we hope to learn to know better how the questions ought to be stated. We shall have our reward if we carry back with us as a cherished possession a not wholly unintelligent interest in the great economic problems which must be worked out in South Africa.

  1. Address by the president to the Economic Science and Statistics Section of the British Association for the Advancement of Science, South Africa, 1905.
  2. Lord Acton, English Historical Review, I. p. 40.
  3. W. S. Jevons, 'Principles of Economics,' p. 196.
  4. J. C. Pringle in Economic Review, XV., p. 60.
  5. W. Bagehot, 'Economic Studies,' p. 21.
  6. J. W. Jenks, 'The Trust Problem,' p. 141.
  7. Pt. II., Ch. XXIV., Camb. Univ. Press edition, p. 175.
  8. C. L. Garvin, 'Principles of Constructive Economics,' in 'Compatriots' Club Lectures,' I., p. 2.
  9. 'Arbeit und Rhythmus.' His 'Industrial Evolution' has been translated by Dr. S. M. Wickett, and I desire to acknowledge my indebtedness to the volume.
  10. Lord Brougham, 'The Colonial Policy of European Nations' (1803), I., 108.
  11. Cunningham, 'Growth of English Industry and Commerce in Modern Times,' p. 740.
  12. E. G. Wakefield, 'Art of Colonization.'
  13. 'Essay on Plantations.'
  14. 'Wealth of Nations' (Nicholson's Edition), pp. 71, 73.
  15. Merivale, 'Colonization and Colonies' (1861), pp. 25, 27.