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:
A REVALUATION OF TRADITIONAL ECONOMIC THEORY, by Carl E. Parry,
Tulane University, pp. 123-131.

The American Economic Review, VOL. XI, No. 1 Supplement (Mar., 1921), pp. 
123-131.
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A REVALUATION OF TRADITIONAL ECONOMIC THEORY
By Carl E. Parry
Tulane University

The title of this paper is not to be taken too seriously. What I have to say 
might be better described by some such title as "Obsolete and obsolescent 
problems of economic theory." I am using the term "traditional" in a limited 
sense and am directing attention not so much to the earlier or classical 
tradition as to more recent developments most of which do not go back so far as 
John Stuart Mill.

My own generation of economists found itself born into a very stimulating 
intellectual environment. Spirited controversies were going on among the ablest 
economists with regard to some of the very foundations of economic science. And 
there was also radical scepticism, which repudiated all comprehensive thinking 
and devoted its constructive effort altogether to the study of miscellaneous 
particulars. The situation was both confused and confusing. Intellectual 
orientation was difficult to the last degree.

Speaking as one member of my own generation, I believe that we are at last 
beginning to find our bearings. We are beginning to see our way ahead and to 
recognize amongst us the definite unfolding of a common scientific purpose. I 
shall try to present as clearly as I can one formulation of this purpose, in 
order to explain, in part, why any of us has the assurance to designate as 
obsolescent certain problems of general theory with which we at one time found 
ourselves absorbed.

An eminent European economist, writing seventeen years ago, ascribed the 
confusion to which I have referred to our general preoccupation with the theory 
of value.1) He declared in so many words that "the most radical and effective 
cure for this confusion would be to do away with the whole theory of value" and 
to begin at once with "an explanation of prices and the general causes governing 
them." He held this procedure to be quite possible and wholly advantageous. The 
thesis which at that time sounded so radical has since become almost 
commonplace. Seven years ago the man now President of this Association, after a 
devastating criticism of traditional definitions of economics, published his 
ringing declaration that economics "treats phenomena from the standpoint of 
price."2 Another eminent American economist, now a man of international 
eminence, writing about nine years ago, pointed out some extremely serious 
"limitations of the value concept,"3) [124] and so helped to remove the theory 
of value from current consideration and to relegate it to its proper place in 
the history of economic doctrines. Still another American economist, 
distinguished alike in the fields of economics and statistics, speaking before 
this Association five years ago, traced with approval "the tendency to make the 
use of money the central feature of economic analysis," and advanced cogent 
reasons for expecting the development of this tendency to broaden the scope and 
to enrich the content of economic theory.4) The general point of view indicated 
by these references may be designated as the catallactic point of view. As its 
meaning comes to be more fully appreciated, the confusion which came down from 
earlier generations and enveloped us for so long is being gradually dispelled.

The full description of the catallactic point of view cannot be put into a 
sentence. But its meaning is somewhat precisely indicated by saying that the 
central task of economics is to study the causes and the effects of the rise and 
fall of prices — taken both one by one and as related in groups — with the 
purpose of forecasting their future and possibly controlling their movement. In 
this formulation, of course, the prices referred to are market prices and they 
include many things, such as rates of interest and wages, which are not called 
prices in the language of the street. And the formula is somewhat unsatisfactory 
in several other respects: It makes no explicit mention of incomes, especially 
profits; it involves no specific reference to the institution of the market and 
the technical processes of marketing; and it fails to call sharp attention to 
the social, ethical, and political motives which alone make the task outlined 
seem to some of us worth while. But anyone who has worked with this formula, 
following any problem suggested by it through whatever concrete facts of human 
nature and the social order turn out to be both relevant and essential, will 
testify to the enthusiasm which such work engenders. With respect to the one 
central question about prices and markets, in all its aspects, economists, as I 
believe, are coming to look upon themselves and to be looked upon as genuine 
experts, qualified to meet the challenge of all other experts and of the public 
at large. They are coming to see more and more clearly why this is the one 
special and expert capacity in which they must participate in the advancement of 
human welfare, and to feel less and less acutely the obligation to speak with 
any special authority, as economists, upon matters irrelevant to their central 
question, however fully these other matters may still be treated in textbooks of 
the traditional type.

Recent developments in the field of social philosophy have clarified [126] our 
understanding of the relations between human nature and the social order. Social 
psychologists, for instance, have done much to increase our appreciation of the 
organic nature of society and to show that human nature, as we know it today, is 
the product of institutional development reacting upon those impulses and 
aptitudes which came down to us from our animal ancestors. Thus human nature or 
human personality serves to integrate the institutions which make up the social 
order and these institutions in turn are indispensable to the integration of 
human personality. Among the institutions involved are the family, the church, 
the state, and various social classes each of which is identified by its 
community of interest in some specialized phase of the social process. One such 
institution is the market, which is like all the others in being inspired to 
some degree by human nature, in exercising its own influence upon human nature, 
and in penetrating and being penetrated by all the other institutions which make 
up the social order. My view of the function of the economist is largely 
determined by the results of this analysis. He is not primarily concerned with 
the interpretation of human nature as a whole, nor primarily concerned with the 
study of the social order as a whole, nor yet responsible for the development of 
any comprehensive science of human behavior. His primary business is to discover 
the truth about the institution of the market. Economics studies the market as 
political science studies the state. Appreciation of this analysis seems to me 
to be fundamental to the catallactic point of view.5)

One feature of this point of view, likely to appeal most strongly to economists 
who have the greatest confidence in human intelligence and intellectual power, 
is its promise of integration and unification. For a full appreciation of it 
will bring all of us, to the extent that we pose as general economists, to 
interpret the institution of the market as a whole, and the intricate 
interlocking price system as a whole, while it brings each of us, to the extent 
of his special professional qualifications, to interpret the institution in some 
one of its parts, such as the money market, the market for coal, the field of 
railway rates, or the labor market. When such appreciation becomes general, if 
it ever does, we shall probably witness the disappearance of those traditional 
distinctions, practically genuine enough but never scientifically satisfactory, 
between the topics of production, exchange, distribution, and consumption, which 
have for a hundred years been almost standard practice in the textbooks. We 
shall also demonstrate that there is no sharp contrast between pure theory and 
applied theory. Who shall say, for [126] instance, whether work on the rate of 
interest, designed to make possible more accurate forecasts in respect to 
impending movements in that rate and more intelligent control over these 
movements, falls in the one field or the other? Most of the older work in the 
theory of prices has been done with reference to ideal or hypothetical prices in 
ideal or hypothetical markets. These markets are liquid markets in which there 
is, literally by hypothesis, a tendency toward the establishment of a single 
price at which the rate of demand is made equivalent to the rate of supply and 
vice versa. Such a market, literally by hypothesis, "tends toward equilibrium." 
But there are no actual markets in which a single price prevails; even in the 
money market, the most liquid of all actual markets, we find, at present, rates 
of interest which vary in different parts of the world from perhaps 4 1/2 per 
cent to 12 or 15 per cent or even more. The money market, then, is not 
altogether liquid. No other market, however, is nearly so liquid as the money 
market, and most markets are very far indeed from being liquid markets. If we 
are to understand prices in these other markets we must study these other 
markets as they are, collecting the essential facts about each one and 
interpreting these facts. Both the work of description and the work of 
interpretation will be helped along by checking the organization of each market 
against the organization of that perfect or liquid market which the older 
economic theory has been accustomed to study, but I venture to believe that 
nothing more is to be learned about perfectly liquid markets. We are at last 
fully equipped to study actual markets. As we proceed, then, to do so, as 
dictated by acceptance of the catallactic point of view, we shall be giving to 
our general subject a degree of unity, precision, and timeliness which will 
enable economics to sit among the other sciences without an uneasy conscience, 
and will give to the great body of economists coherence and power beyond 
anything that the profession has known for a full century. The accomplishment of 
our common task, as here outlined, has little or no need for any abstruse theory 
of value. Realization of this fact comes home to most of us, steeped as we have 
been in value theory, with some surprise. But the truth seems to be that we are 
dropping the term value from our vocabularies — except as we refer to market 
values or appraised values, made definitely intelligible by reference to market 
prices, either in some actual market or in some such market modified in 
specified direction and degree. Our procedure in this respect follows rather 
closely the usage of business men; it differs from that usage chiefly in that we 
make more distinctions and finer distinctions, such as the one between what the 
market value has been, as a matter of historical fact, or is now under given 
circumstances of time and place, and what the market value 'ought to be' in view 
of some legitimate requirement [127] of social progress or public policy. 
Economists who work, for instance, on the practical problem of evaluating the 
property of a public utility, say for purposes of rate-making, and who realize 
explicitly just what they are about, afford one of the most striking instances 
of the newer procedure.6) Great confusion results, however, from the attempt 
sometimes made to consider prices as reflecting exchange relations as they are, 
and values as indicating exchange relations as they ought to be. The distinction 
we really need is that between what the market price or market value is, on the 
one hand, and what the market price or market value ought to be, on the other. 
This distinction emphasizes the importance of the great range of ethical and 
moral considerations with which we, in common with all other social scientists, 
must become familiar in order to preserve our intellectual and moral integrity, 
to avoid using our technical knowledge and skill in the service of powers that 
prey, and to direct our effort in public affairs along truly progressive lines.

If some more general theory of value were needed anywhere, we might suppose it 
would be most needed when we come to treat the value of money. We continue, of 
course, to speak of the value of money, but the catallactic meaning we give to 
this expression, while somewhat abstract, is neither abstruse nor vague. "We 
mean the purchasing power of money as reported or expressed by the money prices 
of other things."7) And we say, without mincing matters, that "there is no such 
thing as 'the general purchasing power of money,'" because neither any human 
being nor any social group either buys or sells, at any price, on the market, 
any such tiling as a certain quantity of things-in-general. So money has in 
reality not one value but many values, a million indicated by the price 
quotations for a million different articles in almost as many markets, and a 
thousand for as many different groups of selected articles entering into the 
purchases or sales of selected families, business firms, and social groups. The 
values of money rise and fall, in all of these relations, as the prices 
concerned fall and rise; the causes involved are the same causes and the 
consequences are one and the same. Thus the theory of money, of the value of 
money, comes to be incorporated in the general theory of prices, where it forms 
one of the most difficult, interesting, and promising problems. No one anywhere, 
or at any time, so far as I am aware, has ever said that this problem belongs to 
anybody but economists; it is a typical [128] and characteristic problem. And no 
economist, if I may say so, has ever been helped toward its solution by starting 
his investigation on the basis of some general theory of value, particularly any 
theory of value which rested upon marginal utility or upon marginal disutility 
or upon some combination of the two. The really promising results have been 
obtained by work done on the history of price changes and on the scientific 
explanation of that history.

Our analysis now begins, then, with the immediate observation of market price 
and not, as formerly, with "the inscrutable depths of the private mind."8) It no 
longer proceeds from desire to utility, from utility to marginal utility, from 
marginal utility to subjective value, from subjective value to objective value 
or exchange value, then from exchange value to price and finally from price in 
general to market price. Utility and disutility, diminishing utility and 
increasing disutility, the utility curve once supposed to be back of market 
demand and the disutility curve once supposed to be back of market supply, 
marginal utility and marginal disutility — all these belong to that list of 
topics in which we were once deeply interested, but in which we are becoming 
less interested with every passing year. Along with them are departing all the 
other members of the utility family, such as marginal desirability and marginal 
significance, sub-marginal and extra-marginal utility and disutility, producers' 
surplus and consumers' surplus, social surplus and social deficit. All theories 
of value involving the hedonistic calculus, in short, are in process of complete 
disappearance from the consciousness of constructive workers in economic theory. 
It is no part of my present intention to specify in detail the shortcomings of 
these theories of value, but I will venture to make one sweeping generalization: 
To the extent that economists have been so strongly obsessed by the hedonistic 
calculus, they have placed in the foreground of investigation problems so 
phrased and so conceived as to make impossible both the appeal to history and 
the statistical attack.

In respect to the great problem of distribution a thoroughgoing renovation of 
traditional apparatus is in process. The problem retains all its passionate 
interest, but no longer seems to stand out by itself. There is nothing peculiar 
about such prices as the rent of land per acre per annum, wages per day per man, 
interest per annum per dollar and the like, and the respective markets in which 
these prices prevail, to any economist who has come to look upon the 
interpretation of all prices and all markets as the one great problem of general 
economics. The income problem, that of determining the reasons why individuals, 
business firms, and classes in society have so much or so little of salable 
things to sell in these markets at these prices, is part of the solution [129] 
of that one great problem. Little or no light is shed upon it, as we are coming 
to realize, by those theories of value and of distribution which involve the 
marginal productivity analysis.

We are beginning to see that the marginal productivity theory — apart from 
certain ethical implications explicitly repudiated by careful productivity 
theorists — has never contributed much to an understanding of distribution. Its 
general meaning can perhaps be summed up in one comprehensive formulation. Free 
enterprise, operating in open markets, tends to carry the substitution of 
measurable quantities of every factor for measurable quantities of every other 
factor to the point at which a dollar's worth of each, as valued on the open 
market, will accomplish the same mechanical result as a dollar's worth of every 
other. Formulated in this way, the marginal productivity theory of distribution 
can be seen to be nothing more than a refined elaboration of the law of single 
price in liquid hypothetical markets. All the work of studying actual markets 
remains to be done. And if we suspect this formulation of superficiality, and 
seek to "go behind" it in search for whatever additional meaning the theory 
possesses in the minds of its particular friends, we discover that the marginal 
productivity theory of distribution, resting at bottom upon the hedonistic 
calculus, asserts that the marginal disutilities involved in production 
correspond, after some fashion, with the marginal utilities involved in 
distribution and consumption. As to this apparently more refined formulation two 
observations are in order: First, it is incapable of statistical verification 
because of the fact that utilities and disutilities are not measurable 
magnitudes. Secondly, the more refined formulation is not one bit more profound 
than the other; it is in fact quite as meaningless as any other application of 
the hedonistic calculus.

We do more than suspect, therefore, that the marginal productivity theory of 
distribution is an explanation which does not do much to explain "why some of us 
are much better off and others much worse off than the average."9) Some of the 
most competent of its friendly expositors indeed say quite frankly that "the 
principle of marginal productivity is an illuminating way of stating the problem 
of the distribution of wealth, rather than a solution of it."10) And they go on 
to note that the purpose of the analysis of diminishing productivity is "to open 
the way for a discussion of the prices paid for the services of land, labor, and 
capital."11) Economists who have formed the habit of looking into markets, 
prices, and the great intricate interlocking price system, in all the 
concreteness with which these surround us, are [130] disposed to doubt the 
degree of the "illumination" and to wonder why "the way" to so obvious a task 
needs to be so very thoroughly prepared. The way is now open, in any case, so 
that we may feel quite free to proceed, without further preliminary, with our 
study of prices and incomes, searching out all those persistent historical and 
social influences — beneficent, malevolent, or neutral — which have determined 
and continue to determine the amounts of salable things which different 
individuals and classes are in a position to sell or to buy at these prices.

Let me present one more crucial instance, the problem of the so-called business 
cycle, arising naturally in all minds which contemplate those alternating 
periods of prosperity and depression, good times and bad times, which have 
become so profoundly significant during the last hundred years. This is another 
of those problems which has always been conceded to economists by common 
consent. The public looks to them both for an explanation of why such things 
occur and for constructive suggestions looking toward their prevention and 
mitigation. The challenge presented by this problem is unescapable, and an 
increasing amount of scientific work is being devoted to it. Business 
barometers, so-called, indices of general business conditions, the correlation 
of statistical series of a hundred kinds are being worked upon, analyzed, 
interpreted, and used for purposes of forecast and control. Those who have 
aptitude for this great problem, and who have once felt its fascination, cannot 
be drawn away from it; they feel its intellectual charm, and they know how much 
its correct solution means to the welfare of humanity. In many respects it is 
the primary problem of our time, and there is no other problem, be it noted, 
which cuts so sharply and so unmistakably across the traditional divisions of 
production, exchange, distribution, and consumption.

Yet how little attention is given to this problem in current textbooks on the 
principles of economics. How little, in fact, has been contributed to the 
solution of this problem by that whole body of effort which was centered about 
the theory of value, and interested in distilling the relative amounts of truth 
in the marginal utility theory and the marginal disutility theory. And the 
reason is not far to seek. The problem of the business cycle is a social 
problem, the phenomena of antecedence and consequence are social phenomena, 
whereas the preoccupations of several generations of economists have been 
individualistic. They could use no such thing as social marginal utility or 
social marginal disutility, for there are no such things; such shadows of shades 
afforded no means of attack upon social problems, such as the problem of crises 
and depressions. The root of this problem is surely in the price system, and can 
be arrived at only by going into the history of crises, which means the history 
of modern society — and the value theorists [131] never found any genuine place 
in their analysis for the history of anything. Even historical chapters used as 
introduction to textbooks on principles of economics were little more than 
patchwork, for they were seldom referred to in any other part of the book.

We need to know what profits have been, how they have been made, to what uses 
they have been put, and the effects upon human nature and the social order of 
the profit-making motive: no light on these matters is shed by the analyses of 
value, of utility and disutility, that have preoccupied so many of us for so 
long.

The bewildering period into which my own generation of economists was born seems 
to have been blessed with a noble scientific heritage, but one that was already 
in process of thoroughgoing regeneration. Magnificent critical work has now been 
done on that heritage and painstaking intellectual experiment, based on certain 
traditional methods of attack, has measurably' demonstrated the inadequacy of 
those particular methods. The way to constructive work has meanwhile become more 
and more evident, and there seems to me every reason to believe that the 
scientific outlook for the next ten or twenty years is highly encouraging. A 
most encouraging feature of that outlook, in my judgment, is a growing 
disposition amongst us to recognize the obsolescent character of some of the 
questions with which we have ourselves but recently been wrestling and to call 
them })y their right name. They belong to that group of questions found now and 
then in the history of science and philosophy "which are settled, if at all, not 
by being decided one way or the other, but by becoming obsolete."12)


NOTES:
1) G. Cassel, The Nature and "Necessity of Interest, (London and New York: 
Macmillan, 1903), pp. 68-69.
2) H. J. Davenport, The Economics of Enterprise (New York: Macmillan, 1913).
3) Allyn A. Young, "Some Limitations of the Value Concept," Quarterly Journal of 
Economics, vol. 25, (May, 1911), pp. 409-28.
4) W. C. Mitchell, "The Role of Money in Economic Theory," American Economic 
Review, Supplement, vol. VI (Mar., 1916).
5) See especially the three works of Professor Charles H. Cooley: Human Nature 
and the Social Order (New York: Scribner's, 1903); Social Organization (New 
York: Scribner's, 1909); Social Process (New York: Scribner's, 1918).
6) See for instance remarks of Joseph Mayer, American Society of Civil 
Engineers, Transactions, 1915. Vol. 79, pp. 177-89.
7) R. T. Ely, Outlines of Economics (New York: Macmillan. 1916), p. 317. This is 
the third revision of Professor Ely's Outlines. The reference is to a part of 
the book for which Professor Young was presumably responsible.
8) Cooley, Social Process, p. 297.
9) Edwin Cannan, Wealth (London: King. 1914).
10) Ely, Third Edition, p. 400.
11) Ibid., p. 394.
12) Cooley, Human Nature and the Social Order, p. 19.
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