Papers and Proceedings of the Thirty-third
Annual Meeting of the American Economic Association,
Atlantic City, New Jersey (December, 1920)

Tuesday, December 28 (1920), 8:00 p. M. Evening Session

Paper:
Soundings in Non-Euclidean Economics, by John Maurice Clark pp. 132-143

The American Economic Review, VOL. XI, No. 1 Supplement (Mar., 1921), pp. 
132-143.

Discussion:
Irving Fisher p. 143
Frank H. Knight, p. 143
Carl E. Parry, p. 146
Discussion: The American Economic Review,
VOL. XI, No. 1 Supplement (Mar., 1921), pp. 143-147.
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[132]
Paper: SOUNDINGS IN NON-EUCLIDEAN ECONOMICS
By John Maurice Clark
The University of Chicago

It is fairly obvious, if one stops to think of it, that there are systems of 
economics with axioms fully as far removed from each other as the geometries 
of Euclid and the non-Euclideans; perhaps as far apart as the conventional 
physics and Einstein. Probably the foremost non-Euclidean economist is 
Professor Veblen, and his theory of invidious prestige might be called a 
theory of economic relativity.

Orthodox economics undertakes to interpret equilibrium: Veblen undertakes to 
interpret progressive change. And in the social world this is much the same 
as saying that orthodox economics studies the assumptions of contentment and 
Veblen the assumptions of discontent, both of which are undeniable facts. 
Since undeniable facts are difficult to ignore, the net result is very 
largely to call them by different names. So when Veblen says that the 
inherent nature of business is parasitism and that any modicum of service 
rendered is rendered incidentally and in spite of the inherent nature of 
business; and when orthodox economics says that the inherent nature of 
business is service, and that any modicum of parasitism that may remain is an 
incidental perversion of the true spirit of the institution — they may not be 
contradicting each other quite so flatly as they seem to be. Veblen is 
talking about the nature of the pursuit of profits; and the beneficial 
effects of competition, where competition works beneficially, are an 
incidental check and very partial (and possibly a temporary one) on the 
natural tactics of the pursuit of gain. Orthodox economics is talking about 
the nature of competition (or perhaps of an ideal form of competition) as a 
check on human selfishness in the pursuit of profits and to them any failures 
of competition to produce its full effects appear as incidental. In a general 
way most economists admit the same general mass of facts, but pick out 
different ones as the central axioms of their systematic economic theorizing.

What do I mean by non-Euclidean economics in the present instance? The 
question can best be answered by taking six axioms which represent in a 
general way what might be called the orthodox position on a number of 
important points, and inverting them. One reason for calling this "non-
Euclidean" is that, as I understand the attitude of non-Euclidean geometry, 
it does not necessarily insist that Euclid is nonsense nor declare implacable 
war on his system and insist on its immediate abolishment. It merely studies 
the possibilities and consequences of contrary assumptions. In the present 
instance this is not a mere game of logical gymnastics: it is the natural 
result of studying [133] those facts of human existence which Euclid, as 
represented by these six axioms, somehow fails to interpret. Much of what I 
shall have to say is not new — perhaps none of it is — but, after all, 
economic theory consists largely in organizing and interpreting known facts 
rather than in the independent discovery of raw^ facts hitherto unknown. Time 
permits little more than mention of the first four points, and a very brief 
development of the last two.

Proposition 1. 'Economics is the science of wealth, and wealth consists — of 
things (a) useful, (b) limited in supply, (c) exchangeable, (d) 
appropriable.'

The alternative proposition is that the most important subjects of economic 
study, while useful and limited in supply, are not appropriable and not fully 
exchangeable, and thus are not wealth in the full sense.1)

Since the consequences of this have been developed by a number of writers, I 
will merely mention one very interesting corollary: namely, that in the 
marginal-productivity economics power to produce cannot exist apart from 
power to withhold. Many things may be useful and limited in supply, but only 
those which the owner has the option of withholding have a marketable 
marginal product. What is marginal productivity? It is essentially the power 
to make a differential addition to the income of an enterprise. This means to 
make this income greater if one grants the enterprise the use of the 
productive factor he controls than it would be if one withheld this 
productive factor. In this sense an invention, once made public, is not 
"productive," and the inventor is not a productive factor, with respect to 
any past invention, except as he keeps patent rights which enable him to 
withhold it from the market, and hence to bestow it on the market. He cannot 
freely bestow it if he cannot also freely withhold it. Other applications of 
this proposition are interesting, but we must pass on.

Proposition 2. 'Consumption is the end of economic activity and production is 
a means to that end.'

This proposition may be broadened; increased productive power is used to make 
working hours shorter and to some extent to make work easier and more 
pleasant. This is in general harmony with the proposition that production is 
looked on as a necessary evil and a means to an end: the less time we spend 
at it the better. The general proposition seems obvious, and is obvious from 
the point of view of the individual. When it comes to society's interest, the 
question is not so clear. Society's [134] purposes arc supposed to have 
something ethical about them. To take consumption as the end of all things 
corresponds to hedonistic ethics, whose standard is the receipt of 
pleasurable sensations, but the more modern ethics emphasizes rather the 
well-rounded development and use of human faculties. It is an active and not 
a passive standard, a standard of output of energy and not of receipt of 
sensation.

This makes it seem that our activities are more important than the passive 
pleasures we receive, and the activities that really develop us most are 
those where we are faced with the biggest difficulties. This means, commonly, 
things we would not voluntarily do simply for the fun of doing them. It means 
work, in one form or another, rather than play. The conclusion is that the 
quality of the activity involved in work is more important as a positive 
social value than the quantity or quality of consumption.2)

There is a twofold need: for work of a sort which, if a man gives his best to 
it, will develop and not crush him; and for incentives that will make him 
give his best. And the two needs are more nearly one than economic theory is 
accustomed to assume. Starvation, poverty, and ambition for increased wealth 
have successively worked themselves past the point of diminishing return as 
incentives for the mass of labor, and the search for new incentives must 
focus on other things than wage-scales. In this respect, the worst evil is to 
deny those incentives that represent what man recognizes as best in him. If 
selfish incentives cease to work, that is a failure: if unselfish incentives 
have no opportunity to work, that is a tragedy. The partial breakdown of the 
traditional selfish incentives in industry, which is now disturbing many 
minds, may prove a blessing in disguise, and one of the greatest of social 
opportunities.

Proposition 3. 'The standard of economic service is the gratification of 
human wants through the increase of marketable goods and services.'

This does not intend to deny that the development of good types of human 
beings is a more important thing, but it singles out increased wealth as the 
economic way of making possible the development of the best human type, 
leaving humanity to use its power as its wisdom or folly may suggest.

In this matter economics has tried to keep itself separate from ethics and to 
take the attitude that it is not concerned, as economics, with the wisdom of 
the use men make of wealth. Its ideal is well [135] expressed in the maxim of 
Francis Bacon, quoted by Jevons in the introduction to his Theory of 
Political Economy: "While philosophers are disputing whether virtue or 
pleasure be the proper aim of life, do you provide yourself with the 
instruments of either."3) It has, then, as an ideal a sort of 
undifferentiated power over nature which man is to secure, and which he can 
then put to any use, good or bad. The increase of this power is economic 
gain: the quality of the use made of it is a separate question and not an 
economic one. This is a very natural position, but there is one trouble with 
it. The methods of production which increase our power have in themselves 
qualitative effects on human living of a very direct sort, some of which have 
already been mentioned. And these effects on the quality of life are not 
marketable commodities which can be weighed in the same financial scale with 
the increased supply of commodities which modern industry furnishes.

Moreover, it may be argued that the tendency of population to increase has 
the effect of neutralizing the greater part of man's increased productive 
power, so that by far the greater part of it goes in maintaining increased 
numbers in the face of the principle of diminishing returns, and the increase 
in per capita wealth is but a small fraction of the percentage of increase in 
our essential power over nature. One might go farther and say that it is a 
positive injury for humanity to learn enough about the arts of production to 
use up all the best of the earth's limited natural resources and occupy all 
the available territory, until they have learned how to put them to some 
better use than, for example, they have been making of them in the past six 
years.

I am not advocating inefficiency, though there are some sorts of inefficiency 
for which a good deal might be said. So long as war exists, any civilization 
that systematically practiced inefficiency for the good of future generations 
would be speedily displaced by one with less refined ideals and more 
immediate horsepower. Efficiency is inevitable and, in moderation, not 
undesirable. But what I am suggesting is that, instead of taking the quality 
of man for granted and focussing attention on quantity output, it is much 
more pertinent for the social student to take quantity output for granted — 
business will not neglect that — and direct his chief attention to the 
qualitative effects on humanity of the things they do in their inevitable 
(but largely self-defeating) striving after increased per capita wealth.

One might suggest that in the economy of nature and of her creatures means 
and ends are reversed: that the creature's ends are nature's means of gaining 
her ends, and the activities which serve the creature as means of attaining 
his ends are the things nature is really after.4)

[136] Primitive man is interested in stilling his hunger and to get food he 
endures enormous fatigues, taxes his rudimentary ingenuity, and perhaps makes 
a minute improvement in the stone axe or the bow. Nature is not interested in 
stilling his hunger; in fact, she takes very effective measures to see to it 
that he shall be chronically hungry in order that he may continue to endure 
fatigues, to tax his ingenuity, to struggle, and as a result to develop 
biologically into a type with higher faculties. Now that we have supplanted 
nature's jungle with our man-made jungle of mines, factories, railroads, 
hotels, jails, hospitals, almshouses and what not, who is strong enough to do 
what the older jungle did for our ancestors — overrule our purposes for our 
own good and save us from the danger and possible biological disaster of 
getting what we think we want?

Proposition 4. 'As a general rule, cost varies in proportion to output: 
"overhead costs" which are independent of output are the exception and arise 
in connection with large flawed capital only.'

As an alternative, consider the proposition that overhead costs are not 
merely the general rule but are universal, and that the costs that are 
"direct," or "variable" or "prime costs" from the standpoint of the employer 
are overhead costs from the point of view of society. Every laborer is his 
own "overhead" and has his constant costs to meet, whether he is working or 
not. Society has so much productive power. It cannot avoid the cost of either 
(1) maintaining this productive power, including the human beings who compose 
most of it, or (2) seeing it depreciate. The power of the entrepreneur to 
reduce expenses by reducing his working force, where this means unemployment, 
is for the most part a financial illusion arising out of the fact that the 
individual employer does not have to pay the constant costs of the labor he 
turns off.5)

This principle has many possible applications, largely in the direction of 
placing the burden of labor's overhead cost on those bearing chief 
responsibility for the industrial cycle, and where it will have the greatest 
effect in stimulating people to do things to relieve the irregularities. It 
is one tremendously important instance in which social accounting and 
business accounting diverge and in which the social accounting is not yet 
organized and explicit.

Proposition 5. 'The rational foresight of individuals is at the basis of 
individualistic economics. In particular: business men know the [137] "best 
combination of factors" and the marginal productive worth of different 
factors, and on this the efficiency of individualism depends. The question at 
issue is not whether people are thus intelligent, but whether an economics, 
founded on the idea that they are, is really a sound basis for 
individualism.'

Let us study for a moment a hypothetical society made up of individuals 
gifted with this degree of intelligence and foresight. Would this be 
peculiarly favorable to individualism? Business would be highly efficient, it 
is true, but there is serious question how long beings with this much 
foresight would continue to compete. Such beings would not let the coal 
business run in the wasteful way which was described to us this morning. They 
would long since have introduced such methods as Mr. Mason and others spoke 
of, and in the process they would have integrated the industry to a point 
where wagon-mines and backyard wheelbarrow mines could not offer serious 
competition to the organized large-scale producers. And there would be a 
Federal Commission.

Perhaps in this hypothetical society employers and employees in, let us say, 
the building trades, might both get tired of the competitive struggle and 
unite to assist each other in excluding competitors. If they were very 
foresightful they might cover up their tracks so well that even Mr. Untermyer 
might have difficulty in getting evidence enough to make a case. The "best 
combination of factors" in this case would consist in putting some of the 
very best brains to work on covering up tracks, and the marginal worth of 
high-grade brains in this occupation would be extremely high. Since the 
employers would know all this, high-grade brains would be so employed and 
lavishly rewarded. On the other hand, the marginal worth of brains spent in 
detecting such conspiracies would also be very high, and government would 
know this (by hypothesis) and would bid against private enterprise for the 
same grade of brains. Thus a large part of society's ability would be devoted 
to this interesting game of hide-and-seek; to making and contesting 
valuations of properties; to checking up accounts, inspecting products to 
enforce standards of quality and service, and many other similar occupations; 
and their pay would absorb a considerable part of the national income.

Meanwhile, if people in general could choose intelligently for the future 
they could and would vote intelligently and select able and honest officers 
of government, and government departments would be very efficiently run 
because their heads would know the "best combination of factors," and the 
"marginal worth" of talent, and would be able to get appropriations that 
would enable them to bid for it. Their budget system, based on knowledge of 
the relative marginal worth of different [138] lines of public expenditure, 
would furnish something society has long needed — a system of social 
accounting in terms of national welfare. Thus we should have on the one hand 
enormous waste in the attempt to control private industry, and on the other 
hand government departments quite as efficient as private concerns and able 
to avoid the wastes and duplications either of competition or of regulation. 
Under these conditions any people with such intelligent foresight as we have 
assumed could not fail to see the obvious advantages of national 
collectivism, and we might expect to see it adopted as rapidly as an 
efficient government bureau could handle the necessary accounting.

But suppose, on the other hand, we assume a population of little foresight, 
who therefore cannot safely depart far from custom, who are governed much by 
imitation and suggestion from their fellows, who learn only by making 
mistakes and being hurt, and who do not know the "best combination of 
factors" nor the marginal worth of different factors of production. In such 
an imaginary society, private production would not be very efficient, judged 
by absolute standards of what is technically possible. On the other hand, a 
considerable amount of competition would survive for a long time, perhaps 
indefinitely; partly because it is customary, partly because competitors do 
not look far ahead, and partly because they are influenced by the suggestive 
force of a moral code which considers monopoly as contrary to the public 
interest.

With competition, however, goes a weeding out of the least efficient, which 
means eliminating the widest departures from the "best combination of 
factors" and from the system of paying factors of production according to 
their marginal worth to the employer, and placing them in industry on the 
same principle. The survivors would be those who, by luck or intuition, came 
nearest behaving as they would if they had known what the "best combination" 
was and what the marginal worth of productive factors was. The force of 
competition would put pressure on business to install cost accounting systems 
in order to lessen its ignorance of how much productive factors are worth, 
and to employ engineers and efficiency experts who, although they may not 
know the absolute "best combination," may at least be able to devise ways of 
improving the combination that exists. Thus there would be forces working in 
the general direction of efficiency and of a rough approximation to an 
organization on the basis of marginal productivity.6)

On the other hand, government departments would not only suffer [139] from 
not knowing what the "best combination of factors" was, but they would lack 
the saving grace of competitive elimination to work automatically in that 
direction, or to put pressure on their administrative heads to install 
efficient systems of accounting and research. In such a purely hypothetical 
society, we might expect that the accounting systems of government 
departments would be far inferior to those of private business; and would be, 
in fact, inadequate to show how much public services cost, let alone the 
marginal worth of different productive factors taking part in those services.

Not knowing how much factors of production were worth, government would tend 
to underpay the highest employees and fail to secure the highest talents in 
competition with private industry. Moreover, a people of this mental type 
would be less able to vote intelligently than to buy goods intelligently, 
since voting makes peculiar demands on the powers of foresight, while the 
buying of goods can be much less wastefully done by the method of trial and 
error. Most marketable commodities are renewed far oftener than is the 
incumbent of a political office, and of those that are not, few commodities 
are selected without more intelligent study of values than the average voter 
makes of the average candidate on the average American long ballot.7) Thus in 
this hypothetical society there would be less chance of getting able public 
officers than able business men. And though the absolute efficiency of 
private enterprise would be far less than in our first hypothetical society, 
that of public enterprise would suffer still more. In the second society, 
private enterprise would be more efficient than public.

The tendency to combination would undoubtedly appear, though restrained by 
the custom of competition and the moral mandate for it. The attempts of 
government to curb combination would be largely abortive, but the people 
might still prefer a moderate degree of exploitation to the inefficiency of 
government operation, or to the effort and uncertainty of conceiving and 
working out some other substitute for individualism. After some trying 
experiences, business would probably learn to keep its exploitation within 
the limits of the people's toleration, not so much from shrewd calculation as 
from natural hesitation to break with custom and morals, and from the habit 
of feeling one's way in any new policy. And thus individualism might 
continue.

Thus it appears plausible that the strongest basis for individualism is not 
the intelligence of individuals and their irrevocable devotion to the pursuit 
of their own self-interest, but rather their stupidity and their 
susceptibility to moral suggestion. Individualism may be [140] regarded, not 
so much as the system calculated to get the utmost out of a people of 
extremely high intelligence as the system in which human stupidity can do the 
least harm. All of which is not so very new, but is more akin to the general 
trend of Adam Smith's economics than to the Austrian school, and really harks 
back from marginal utility economics to the earlier classical proposition 
that individuals can choose for themselves — not with absolute accuracy — but 
better than any government agent can do it for them. This is a theory of 
relativity rather than one of the absolute efficiency of individualism as a 
system by itself.

After all, at the present time one of the most important facts concerns, not 
the general level of intelligence, high or low, but the differing degrees of 
training and special information on different topics; the extent to which the 
specialist in this age of specialists has information beyond the 
unspecialized man in the street, and the ability of the unspecialized 
"people" to cope with the specialist who has his axe to grind. This is one of 
the very large problems for the "economic man" of the twentieth century.

Proposition 6. 'Capital, including machinery, consists of instruments of 
production utilized by human beings for the production of wealth.'

Let me suggest the alternative proposition that human beings are instruments 
of production utilized by machines for the machines' increase and biological 
development. This is not a new idea. Samuel Butler carried it to the point of 
suggesting that machines might develop consciousness and thus enslave 
mankind, though in these days of behaviorist psychology the question whether 
the ruling race possesses consciousness or not may be regarded as obsolete. A 
more real question is: how many and how important and far-reaching are the 
things the machines have done to us which we did not intend nor foresee, 
compared to the things we specifically employed them to do? On this point, 
some things have already been said (sections 2 and 3 above).

Among economists and social scientists, Veblen has described how machines 
train and educate human beings.8) A. S. Johnson has pointed out how the 
nominal captain of industry is ruled by the processes he presides over.9) 
Cooley has asserted the existence of impersonal forms of life with life-
processes independent of those of the human beings who impinge on them and 
further their growth, and he mentions industrialism as one of these forms of 
life.10) The Economic Interpretation of History implies that the machines 
control human life and organization in its highest forms.

[141] Machines may be conceived as making bargains with man in which they 
offer him things he very much desires, and in exchange bind him to serve and 
maintain them, to eliminate the unfit among them and promote their racial 
progress, and to alter his own social and political arrangements In whatever 
ways may be necessary In keeping pace with the increasingly complex social 
organization of the machines themselves, and in keeping the children of man 
faithful to the service the machines require. The full nature of the terms of 
these bargains are not revealed to man until he Is so fully committed that it 
Is too late to turn back, and thus the machines outwit him. For example, they 
took Adam Smith into their confidence, but only so far as suited their 
purposes. By such methods they have succeeded in Imposing on man many things 
he never bargained for, some of which he finds extremely unwelcome.

Some might think this shows a low standard of honesty on the part of the 
machines, but we must remember that honesty is the morality of equals toward 
equals, not of superior to inferior races, and that our own conduct toward 
Inferior races will hardly stand a critical examination. At least machines 
have not forced their culture upon us by armed violence. Among their own 
kind, they show a sense of the superior Importance of biological progress to 
immediate gratification and a subordination of the interests of the 
individual machine to the progress of the race, which demonstrate a clear 
moral superiority. Seldom or never, as in Arnold Bennett's 'Milestones', does 
the older generation cramp the development of the younger. They give way 
without complaint, youth is served, and the Interests of mechanical posterity 
are paramount.

The machines appear to have kind intentions toward man, but to lack 
understanding of many of his feelings and needs; as is frequently the case 
with ruling and subject races. They have revolutionized both work and 
product, taking the element of universal individual initiative out of both. 
They have given man unnatural working conditions which are now leading to 
incipient revolt, and living conditions that go far to defeat democracy. They 
are responsible for the "industrial cycle," and as long as their own overhead 
costs are covered in periods of depression, they have not assumed full 
responsibility for the corresponding overhead costs of human beings. They 
have largely taken over the drama without caring to preserve what human 
beings regard as the highest standards of taste, and they have, intentionally 
or unintentionally, gone far to undermine the church and even religion 
itself. They have incontinently switched us from a paternalistic to a 
laissez-faire type of government and are now busily switching us back again, 
according to the temporary needs of the stage of development they have 
reached. These are merely examples.

[142] As for their methods of maintaining control: some classes they bribe 
with large rewards, other classes, largely technicians, and technical-
scientists, do not need to be bribed: their minds are captured by the 
material they work in. And the unspecialized "ruling classes," voters or 
congressmen or others, cannot cope with these specialists, who are left to do 
more and more of the governing in the shape of the actual working out of 
things. The ordinary man cannot even speak the dialect in terms of which many 
of these issues are settled; for example, the accounting language used in 
settling the justice of street-car fares. The machines have cleverly limited 
human cooperation by splitting human language up into many dialects of many 
specialist groups, so that the highest common factor of intelligibility, so 
to speak, for humanity as a whole, consists of relatively simple ideas, 
largely obsolete in the sense of not actively gripping the newer issues. 
Among these ideas might be mentioned the simple ideas of public and private 
ownership. As men become more dependent on machines, the latter become able 
to rule by penalties as well as by rewards: for example, our recent heatless 
Mondays and other penalties imposed by failure to develop our railroad system 
to a continually increasing size and complexity of articulation. Thus mankind 
moves in directions it never intended, getting largely things it never 
definitely wanted as the unexpected result of engaging the services of 
unexpectedly powerful instruments.

What I have called Euclidean Economics, in general, serves the interests of 
the machines. It directs attention to the bribe they offer, and away from the 
conditions they exact. It has countenanced the machines in neglecting to 
assume the burden of human overhead costs, and in this, as in other matters, 
by insisting on putting man on a higher level than machines in respect to 
freedom, it has sometimes put him on a lower level in respect to care for his 
material needs. This has its fine side, but by teaching man that he is the 
end of all things, when he is not, his subjection is concealed and thus 
perhaps perpetuated.

I do not advocate revolting against the machines and abolishing or 
subjugating them: all I aspire to is a reasonable degree of racial equality. 
This would make for more friendly relations and would help to allay the 
distrust of the purposes of the machines which now prevents us from getting 
all the benefits which they are able and willing to give us. This is 
peculiarly true of labor, but not of labor alone. This morning the machines, 
via Mr. Mason and others, made us a most alluring offer of increased coal 
production and I noticed this intelligent assemblage looking this gift horse 
in the mouth, debating whether this would force upon us a federal commission 
or federal operation, and whether we wanted these changes in our economic and 
political order. This distrust is a hopeful sign so long as we cannot tell 
what kind or [143] degree of social and political transformation the machines 
would force upon us. It marks a notable advance on the usual method of 
accepting the offer first and railing at the consequences afterward. But we 
must become far better informed and surer of our own intentions before our 
dealings with the machines can be characterized by that confidence which 
marks the bargaining of equals. To attain this we must not merely develop the 
ability to rise superior, if necessary, to the immediate bribe that is 
offered us; we must become competent to bargain, as the machines do, with an 
intelligent eye to our long-run racial and social interests.

These interests are most seriously threatened in the case of labor. The 
machines tend to confine discretion in industry to the few whom they take 
into their confidence, while the bulk of labor has largely lost the power to 
make any constructive contribution to the technique of industry. The job 
belongs to the machine, and labor feels little responsibility for it. Labor's 
state of mind and conduct shows the consequences of this, and many laborers 
appear to alternate between the slave-morality of getting as much as possible 
and giving as little, and the spasmodic need of exerting power of some sort. 
Under the circumstances this can only be power to interfere with the orderly 
progress of industry by strikes or sabotage, since power to improve on the 
operations laid down by the machines appears to be beyond labor's present 
reach, either for lack of competence, ambition, or opportunity. Racial 
equality can never be established so long as the bulk of mankind are in this 
position of undignified and passive inferiority.

The situation demands social organizations capable of exerting the force of 
constructive human will enlightened by collective intelligence, at the point 
where things are being decided, in the processes of industry itself, rather 
than waiting till the decision is made and then, through our "political" 
machinery, taking belated and purely defensive action.

NOTES:
1) The germ of this proposition is at least as old as John Stuart Mill 
{Principles of Political Economy, Book V, Chap. XI, sec. 14); Sidgwick also 
develops it (Principles of Political Economy, Macmillan ed., p. 404 ff.) and 
it plays an important part in J. B. Clark's Philosophy of Wealth as the 
"theory of inappropriables."
2) This idea, again, is not new. It goes back to Ruskin and William Morris, 
and back of them to the Greeks who graded occupations according as the kind 
of activity involved was or was not consistent with the "good life" as they 
saw it. Modern studies of human nature are trying to give us more scientific 
standards of judgment in these matters, and the results so far are promising 
and valuable.
3) This is the concluding sentence of Jevons' Introduction (4th ed., 
Macmillan, p. 27.)
4) If this figurative personification of nature appears unscientific, 
nature's purposes with man may be translated as the requirements of man's 
biological development, which undoubtedly contain a sounder standard of human 
welfare than the gratification of his immediate conscious desires.
5) This general point has been developed by G. P. Watkins: "A third Factor in 
the Variation of Productivity." American Economic Review, V. 753, 770-77.
6) Professor J. B. Clark has, in lectures, made the point that the marginal 
productivity theory does not require perfect knowledge on the part of 
business men of what "marginal products" are; but that the force of 
competitive selection works in this direction automatically.
7) Cf. T. N. Carver's suggestive comparison of political and economic 
competition in his Principles of Political Economy, p. 328, and in his Essays 
in Social Justice, pp. 111-25.
8) The Instinct of Workmanship, pp. 311-27.
9) "The Soul of Capitalism," Unpopular Review, April-June, 1914, pp. 230-1.
10) Social Process, pp. 6-26.
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TRADITIONAL ECONOMIC THEORY - DISCUSSION

The American Economic Review,
Vol. XI, No. 1 Supplement (Mar., 1921), pp. 143-147.
-------------------------------------------------------------------------
[143]
TRADITIONAL ECONOMIC THEORY— DISCUSSION

Irving Fisher. — In commenting on the foregoing papers, I will only say that 
I feel that there is an undue tendency to react against theories of marginal 
utility because we have expected more of them than they have yielded. Such 
revulsions of feeling create alternate fashions in economic theory, and 
fashions should have no place in science. There is a solid basis of truth in 
the theories of marginal utility which should not be lost but used as 
foundations on which to build.

Frank H. Knight. — Considerable courage is doubtless required to say anything 
in defense of economic theory in any of its familiar aspects after the 
presentation of these two papers, not to mention those given this afternoon, 
in which "theory" has been pelted with missiles of every degree of [144] 
consistency. Yet the embarrassing fact to me is that I still see significance 
in our inheritance from the past hundred and fifty years, although I am also 
in agreement with much of the argument to which we have listened, on its 
positive side. Much controversy among economists is due to differences in 
their conceptions of problems and methods of attack, and not to real 
antagonism in theoretical position. In my opinion a great deal of it rests 
upon a single confusion, the failure to separate clearly the question of 
explaining the price system and the competitive organization of industry from 
the question of criticizing or evaluating it. These functions are most 
intimately connected and both are within the task of the theorist; but they 
are not identical and it is a mistake to criticize him because what he says 
on one of these problems is not directly relevant to the other.

A good illustration is to be found in two articles in the current and 
preceding issues of our Review, in which Professor Fetter criticizes 
Professor Mitchell's paper presented to the meeting of five years ago, under 
the heading of a contrast between price economics and welfare economics. It 
is improbable that Professor Mitchell is less interested in human welfare 
than is Professor Fetter. The difference is in the two thinkers' conceptions 
of the meaning and use of scientific method.

In the field of explaining phenomena the critics condemn the theorist for 
using simplified assumptions, some even going so far as to accuse him of not 
knowing everything about our economic system and all the details of its 
workings. Knowledge of facts, even of details, is very good, and the more of 
it the better. But someone must think out the general problems, too. And 
since detailed knowledge of any large part of the field is impossible to any 
one man, it is inevitable that the theorist must see his facts largely 
through other men's eyes. Division of labor is indispensable. The business 
man and practical worker must complete and correct the general principles 
worked out by the theorist in applying them to their own problems. They 
cannot, however, usurp the theorist's place. Their knowledge of facts though 
fuller, applies to a limited field and is necessarily one-sided. They are in 
the position of being unable to see the forest for the trees. Moreover, a 
clear and consistent body of general theory is necessary as a guide to the 
observation of facts.

It is an oft-told tale but will bear repeating with emphasis until it is more 
commonly understood, that the general theory of a subject is not supposed to 
give a realistically complete account of it. The function of theory is to 
identify, isolate, and trace out to their final consequences the more 
fundamental tendencies discernible in a complex mass of phenomena. The 
effects of causes must be investigated separately, and be combined after we 
know what they are. To ascertain just which causes are at work in any case 
and to what extent, and to combine their results in a concrete prediction of 
outcome, is the province of the application of principles, not of the 
derivation of principles. Moreover, the general principles are always very 
incomplete. The scientific method has rather narrow limits, especially in 
dealing with human behavior and social phenomena. A large proportion of the 
forces which must be taken into account cannot be reduced to general 
principles. Such problems can never be dealt with by formula or rule of 
thumb. It is no criticism of general principles that their application must 
call for a large use of common sense and trained judgment.

One speaker this afternoon (Dr. Wolman) was candid enough to admit [146] that 
the critics of the simplified psychology used by economic theorists have made 
little headway in bringing forth substitute principles. I do not believe they 
ever will. Their strictures are valid as limitations on the familiar 
reasoning, not as negations. The principles of the established economics are 
partial statements, but sound as far as they go, and they go about as far as 
general principles can be carried. If theorists and practical economists are 
to get together, the latter must be moderate in their demands, accepting the 
service that theory can render and not expecting the impossible; and on the 
other hand theorists must be more modest in their pretensions than some of 
them have sometimes been. General theory is a first step, but never a very 
long step toward the solution of practical problems.

So I see nothing antagonistic to the spirit of the "Euclidian" economics in 
Professor Clark's proposal of reversing certain of its assumptions. Opposite 
tendencies may be and often are real and effective in different situations, 
and even in the same situation. Economists have habitually studied both 
monopoly and competition, which are opposite tendencies, without any feeling 
that they were manipulating a paradox. Some of the inverted postulates which 
he suggests are important and neglected. I think this is especially true of 
the relation between production and consumption as means and end. In many 
cases it is far more nearly true that consumption is the means than that it 
is the end, but it would surely be "advancing backwards" to work out our 
economics on the assumption that such is always the case. The correct course 
for general theory is to study both tendencies and leave it to the 
practitioner to use the results which fit his own problem — or rather perhaps 
to find the proper combination of the two, for I imagine that the relation 
between means and end is usually more or less reciprocal, one or the other 
direction predominating in various degrees.

Professor Parry's attack on the two cornerstones of established theory, 
utility and productivity, illustrates, I think, in a particularly apt way the 
confusion between explanation and evaluation. I fully agree with him that 
utility is misleading as an explanation of economic behavior. The consumer is 
not in the sort of situation assumed in the theory, and when utility is made 
over into relative utility in terms of money there is nothing left of it but 
the fact of pecuniary demand. Utility is not meaningless or unreal, however; 
it is only irrelevant to some of the purposes for which it has been used. 
When we come to pass judgment on the workings of the price system, we have to 
have a theory of utility as a starting point; and when the theory is worked 
out from this point of view most of the familiar features will be recognized 
in it. (Personally, I question the usefulness of total utility and the 
"surplus" even here.) Utility is an ethical category, as indeed is 
illustrated by the most important conventional application of it, in 
justifying progressive taxation.

With productivity the situation is in a sense reversed. The mistake, as now 
generally recognized, was in giving it ethical significance. It tells us 
nothing as to the income which any member of society ought to receive. But it 
does explain the income which individuals actually get, or tend to get, under 
the system of private property and free competition. And the theory also 
shows the manner in which any society, even an ethical Utopia, would have to 
impute income to productive factors in order to organize production 
intelligently, however it might distribute that income among producers and 
non-producers. Progress in theory is to be looked for not from repudiating 
[146] the past and starting over, but from reorganizing the results in 
relation to the problems to which they are relevant and carrying the work 
forward along similar lines.

Carl E. Parry. — I welcome this opportunity to speak again because I should 
like to make a few remarks in more informal fashion than seemed possible in 
my original paper.

It seems to me that differences of opinion on special subjects like the ones 
we are discussing arise largely out of a general difference of opinion 
concerning the kind and degree of specialization appropriate to economists. 
According to men's differing views on this general question they are disposed 
to see different meanings in the same situation. Thus I have attended the 
same sessions of this meeting as Professor Fetter but have been struck by a 
very different aspect of them. The proposition that they seem to me to 
illustrate is that we find ourselves able to make headway with a concrete 
question by bringing to bear upon it the counsel of experts of various kinds. 
Thus two of the best papers on the bituminous coal situation have not been 
given by economists at all; one of them has come from a professional 
geologist and the other from a professional engineer. The discussion of this 
coal question exemplifies the exact point that I have been trying to make; 
namely, economists are more effective in advancing human welfare when they 
enter a conference in the capacity of experts without attempting "to play all 
the bases themselves."

I have observed that none of the speakers has attempted to defend the 
principle of marginal utility as an instrument for getting at the reasons for 
the rise and fall of prices, which signifies that my central attack on this 
principle was not altogether without foundation.

The only contention which has really disturbed me to the extent of "drawing 
any blood" is the one advanced by Professor Fisher and apparently endorsed by 
Dr. Knight, that I make a mistake in repudiating the hypothetical method of 
approach. There must have been something in my paper that sounded more 
extreme on this point than I intended it to sound, for I have great respect 
for the use of this method of approach when used in the right way. The 
method, as I understand it, is that of "successive approximations," used most 
effectively so far as I know by Ricardo. Of course, as Professor Fisher says, 
we must cast typical statements in the form: If A is true then B is true. Now 
I feel perfectly free to use this method and to employ this form of 
statement. I can say "if" as well as anybody. Thus if foreign governments 
carry out their present intention to borrow large sums in this country, and 
if large corporations execute pending plans for new financing, then the long-
time rate of interest will not fall within the next few months to anything 
like the extent often predicted. This illustration should show how the 
hypothetical method is properly employed by economists who embrace the 
catallactic point of view.

Let me add one discriminating comment on the work of the value theorists. 
They have certainly rendered a great service in attempting to unify the whole 
science of economics through the application of their general principle; in 
so doing they have given us a new vision of the possibility of unification. 
Their own principle, however, has failed to accomplish the unification 
largely because it has been so full of antiquated ethics and antiquated 
psychology. What we now have to do is to attack the task of unification [147] 
along somewhat different lines. The value theorists failed to accomplish the 
end in view, not because they failed to make a study on their own account of 
everything in any way relating to human welfare, including such matters as 
ethics and psychology, but because of their failure to see exactly what they 
were about in their own special line, meanwhile keeping in close touch with 
the work of modern specialists along other lines. In the days of Adam Smith 
and Ricardo, for instance, there may have been some excuse for economists 
inventing their own psychology, but that justification exists no longer. Thus 
the psychology of psychologists in Ricardo's day was what we now know as 
phrenology, and perhaps Adam Smith had some excuse for inventing that 
"propensity to barter or exchange" which has given rise to so much ridicule 
in modern psychological circles. But in this modern day many of us have no 
such justification, because we are so situated that we can keep in close 
touch with colleagues whose particular business it is to keep abreast of 
modern thought in such fields as those of ethics and psychology. It is along 
lines of such cooperation that I see our ultimate salvation. Social progress 
calls for general cooperation among specialists in accord with "the round-
table principle" and if the economist is to sit at the table he must know 
more than anybody else about some special and particular phase of the matter 
in hand. He must be some sort of expert if he is to sit in with other 
experts, and my belief is that he can qualify in this way by recognizing his 
special duty with reference to markets and prices. Growing recognition of 
this necessity will bring us to discard a number of ideas and methods that 
are already obsolescent although they have not yet ceased to be cherished by 
recent tradition.
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