Introduction

This investigation uses the method recently designated as the "psy chological." The name is applied because the theory takes its point of departure from within, from the mind of the economic man. I myself once spoke of economic theory in this sense as applied psy chology. The designation, however, is not a fortunate one. It may lead to the misunderstanding that the "psychological" economic theory starts from scientific psychology. This is by no means the case. It has still less to do with physiology, as an even more serious misunderstanding has tried to make it appear. The observations con c.erning the inner life of man, which our "psychological" theory of economics develops, have been made by it independently. They are entirely independent of the result which scientific psychology might reach with regard to the psychical elements, the analysis of which are within its province. Physiology is even more markedly outside of economic theory. One should especially emphasize the fact that Gossen's law of satiable wants, the foundation of the modern theory of value, has nothing to do with Weber's law. Economic theory would be benefited, had scientific psychology advanced further be yond its beginnings; but our discipline does not seek and could not find direct aid from this source. The tasks of the two branches of knowledge are entirely distinct.

It is the problem of economic theory to exhaust scientifically the content of everyday economic experience and to interpret it. All persons are familiar with a narrow, practical sphere. From these limited views theory deduces abroader interIJretation whiGh enables us 3 4 SOCIAL ECONOMICS to understand the meanings of the economy even in those wide social relations that far transcend the experience of the individual. In do ing this it cannot be expected that theory should. follow the sequence of ideas in the individual consciousness beyond the point at which the promptings to action are explained. It· should, on the contrary, avoid any more penetrating psychological analysis. Our theory finds in the consciousness of every economically active human being a wealth of experiences which are common property of all. These are experiences which every scientist shares with the layman, without resort to special scientific instruments. They are experiences concern ..

ing facts of the outer world, as for example, the presence of goods of various sorts; experiences concerning the source and current of the economic activity of mankind. Can we conceive of economic theory refusing to draw from a fountain-head· so inexhaustible in its riches,so dependable in its purity! It will be the natural method of its investigations, to follow the guidance offered by our recollection of the course and significance of the economy which is practically fam.iliar to all of us. No theorist will be able to ignore his practical consciousness of economic relations. Were he. even to regard with suspicion the results to which it leads, he could never silence the psychical consonances of his economic experiences. He can never obliterate his intimate knowledge of himself and his economic sur .. roundings. There never has been a theoretical school of economics which, ignoring these psychical consonances, has accomplished its aim unaided by them. The" psychological" school is distinguishable from its earlier confreres solely.by the fact that it has transformed a naIve procedure into conscious method. Let this method be aban doned today, and but little time will elapse ere logical precision will demand that we elevate once again this psychical aid from an un acknowledged cooperator to a carefully planned method.

The ... sphere of economic theory has the same limits as this common experience. The task of the theorist ends at the boundary of common experience; it ends where science feels constrained to collect its ob servations by historical or' statistical investigation or by whatever other means may be adjudged reliable. All information of this sort the elaborator of a theory must turn over to other workers in the field of scientific economics, men who by their method are qualified to utilize the results theoretically obtained. The theorist, neverthe~ less, will not have to dispense entirely with the consideration of the historical growth. There are numerous historical economic processes which, having filled decades and centuriee, persist to this very day, while common experience discloses their interconnection. Instances IN T ROD DC T ION 5 of this kind are the evolution of the division of labor, the amassing of capital, the increase of the rent derived from land, additions to the store of money and the displacement of barter by the use of money_ It is within the province of the theorist to deduce the law which regulates processes such as these, a law discoverable only in the gen eral relationship of economic facts. But it is the historian's task to collect historical proofs and to assign their share of importance to the historical events.

The m:ethod of economic theory is empirical. It is supported by observation and has but one aim, which is to describe actuality. Nevertheless, economic theory does not attempt to describe the actual in its entirety, as purely empirical sciences are wont to do. 'rhey strive to remain true to nature in every minut'e detail. But the economist is like an historian unfolding an individual historical course of events or a statistician summarizing a series of cases. He en deavors to place before us the typical phenomenon, the typical development, and to eliminate whatever may be subordinate, ac cidental or individual. Isolation and idealization are his instruments, just as without de mur they have always been the instruments of man pursuing other truly empirical sciences, for example, the exact physical sciences. Like the naturalist performing an experiment, the theoretical econo mist is bound to isolate, when making observations. It is even more necessary for him to do so because reflectively he will have to per fect his observation by the memory image of his experience. It is thus perfected with all the greater difficulty and requires consequently all the greater scientific caution in its process. Complex experiences cannot possibly be interpreted as wholes. They must be isolated and separated into their elements in order that their· effects may be known.

The elements, moreover, must ideally be protected from all disturbing influences,in order that the pure effect may be recognized. When these disturbing factors are themselves introduced into the thought, they in turn must be stripped of everything accidental in order to study their typical progress. Side by side with the isolating as sumptions which embrace less than the entire truth, the theoretical economist then proceeds to form numerous idealizing assumptions which embrace more than the truth. In these he raises the empirical fact reflectively to the highest degree of perfection conceivable. But the most perfect state is at the same time the most simple and the most readily understood. Thus the theorist assumes the existence of a model man, a man such as actually has never existed, nor can ever exist. One of the best known instances of isolating assumption 6 SOCIAL ECONOMICS is Thiinen '8 "State in Isolation." The name only imperfectly indi cates the idea. This state is isolated not only against its surroundings.

More important still it is conceived of as idealized in itself. Thiinen assumes that within' its boundaries the conditions of agriculture are uniformly distributed about the central point of a single market-an arrangement which actually is never met with and can never be ex pected to be found. This example establishes,. moreover, the fact that the "psychologi cal" school is not the first to introduce the idealizing assumption. This instrument of thought was used by the economists of all schools in Thiinen's day and since. B'efore Thiinen the classical school re sorted to it, as indeed investigators generally have resorted to it ever since .the earliest rise of scientific thought among mankind. Mathe matics and· mathematical physics could never approach their problems without the idealizing assumption. The geometrical point, the line, the plane, the regular solid, all these are idealized forms employed with the utmost success in spite of the fact that everybody is aware that they lack actuality and can never attain it. They are bodiless construc tions of purely ideal forms. Without their aid the irregular forms of actual experience would defy computation. Whenever the eco nomic theorist idealizes, his object is this only: he endeavors like the ,mathematician to simplify experience, in order more perfectly to understand his problem. This alone prompts him to idealize.

No more than the geometrical point or the line, are his idealizing assumptions hypotheses. Hypotheses are assumptions concerning the unknown. The idealizing assumptions, here discussed, are conscious transformations of the known. The naturalist makes use of the hypo thesis in order to explore fields where observatIon fails. But economic theory may not exceed those 'limits within which observation may be practiced. It is held, strictly to the confines which, according, to the testimony of common experience, the economic sense traverses in wit nessing the formation of the econo~y. If we may use as an analogy one of the most effective· means of artistic expression, we would say that the idealizing assumption is a stylicism designed to accentuate essential features. The theorist starts from the most abstract isolating and idealizing assumptions. In these he seizes the unalloyed elements of actuality, without disclosing the fulness of its image. However, if hewouldac complish his task he must not stop with these extreme abstractions.

Should ~he do so, he would fail to convey an understanding of reality. Step by step by a system of decreasing abstraction, he must render his assumptions more concrete and more multiform. The means at his INTROD'UC'TION disposal do not allow him to show the full picture. Some details can result only from historical proof, statistical compilation or the insights vouchsafed to a statesman in uninterrupted contact with national life. The economist cannot draw upon those details. They may be inserted only when theory enlists the continuous labors 'of other scientific methods, of practical politics even. These other sciences will give the further realism that a stylistic theory must eschew. To this extent the final theorems of theory are not empirical, they are too general in their formulation. But they are not conceived un empirically; they are formulated only as looking to their empirical complements. True economic theory shuns speculation in a vacuum.

From its very beginning it looks towards a union with the methods of purely empirical science for whose efforts it prepares the ground. It does not conflict with these methods; it remains in touch with them and complements their aims. The reproach that the classical school has indulged in speculation is not altogether unjustified. This reproach, however, applies only to the manner in which use has been made of the idealizing method; it does not apply to the method itself. The most striking mistake, the mistake of the classical school which has met with .the most heated opposition, is that its exponents stopped at abstractions too remote from actuality, and hence unequal to the task of making it fully intel ligible. Historical interpretation and practical politics have on this account lost sympathy with its trend. Over and above this, a more important and theoretically more disas trous error must be laid to their door. They have not appreciated correctly the very elements of economic life. Their fundamental assumptions are not rooted in adequate observation. When they stopped with abstractions that are separated by the breadth of the universe from actual conditions, they did so because, in the first place, they never idealized correctly. They constructed an economic body politic, calculated to accentuate emphatically the demand for free dom. In harmony with their times this was their first concern.

This demand they set out to vindicate. . Right or wrong, they meant to prove that freedom was the ultimate good. On this assumption they formulated their doctrine of economic life. If we would be just, however, we shall have to admit that even with the half-truths which they discovered, burdened though they were with prejudices of this sort, the men of the classical· school have accomplished a splendid scientific feat. Their theory reached the goal of their period, the goal of increased political liberty, a goal justly insisted upon. A theory equally successful in preparing the scientific basis for the 8 SOCIAL ECONOMICS. tendencies of our .own day, in as able a manner as the classical economists prepared for their own period, might confidently be said to have ac.complished a noble and far reaching task. Much of the store of common experience that is shared by the economic com munity is deposited in the national language, especially in the basic designations relating to economics and the, law of economic relations. A naturalist may dis cover a wealth of new· substances or relations, long inaecessible to naive observa tion. For these he must needs find names. But economic theory, like other pracUcal sciences, has for its subject the content of common eXJperience, long familiar and already named. Therefore it does not seek to invent a. general terminology. It is bound to preserve eXiiting terms, to interpret the meaning of those' already current and by means of the light that is shed on widely accepted concepts by the primitive roots to penetrate to the core of their meaning. The most important part of the task of economic· theory, as regards terminology, is to establish the limitations of terms, current in the market and in law, to purge them of confusing vulgar meanings ,and to restore them to their rich, inherent l:;plendor. New names which it may find itself called upon to add to its vocabu lary will have to be selected in a,ccordance with the radi'Cal fund of the language.

Were the theorist to essay the creation of an entirely new terminology, he would deprive himself· of one of· his most effective instruments. He would destroy the association of ideas., that is already established for the reader by familiar terms . .A discussion in novel terms would come like a discussion of strange and unheard of things, not like one of familiar occurrences, as by right it should come. Thus the author would deprive himself of one of the most effective means of enquiry, forgetful of the fact that the creative popular spirit has, in the concepts of language, laid down guiding traces of ideas which, understandingly used, pene trate to the depths of every most essential relation assignable to the economic impulse. In these concepts scientific acumen discovers the traces .leading to the phenomena. Anterior to all scientific observation, these present a first image of things. This image may sometimes be confusing in its movements but funda mentally it must be true.

The theoretical economist need neve·r deplore a lack of the instruments which are employed in the exact natural sciences. Whatever advantages they may otherwise enj~oy and great as are their achievements, they are none the less strangers to their object" nature. They may never scan the innermost recesses of nature. Let their instruments be· infinitely refined, still they must be con tent to describe' a succession of happenings, abandoning the hope of showing how the effect springs from its cause. The group of practical sCiences, of which eco nomic theory is one, can accomplish more. ,The object of investigation is man in a condition of activity. Hence our mind ratifies every accurate description of the processes of his consciousness by the affirmative declaration that such is the case, and by the compelling feeling that it must· be so necessarily. In this way the description· becomes an exposition, although it may always be true that the final "why" is never brought forward, as. no explanation is at any time forthcoming of stimuli which subconsciously affect consciousness. For all ac tions which are accompanied by a consciousness of necessity, economic theory need never strive to establish a law in a long series of inductions. In these cases we, each of us, hear the law pronounced by an unmistakable inner voice.

What unequalled advantage to the naturalist, could he, too, appeal to the voices INTRODUCTION 9 of nature for their confirmation of the laws prevailing in the organic and in.. organic world! vVhere the natural sciences can only offer proof, the theory of economics can persuade; it can enlist the unqualified inner consent of readers. In this way the appearance of the classical theory exerted an influence· on the governments of all countries and on the people, which stands unparalleled in the history of science. Public opinion has only deserted its standards when, pitted against the rising capitalistic power, the doctrine of freedom lost prestige. If, in our day, socialism has won over the assent of the multitudes, it has to ascribe most of its strength to the, theoretical force of its doctrines, doctrines derived from assumptions idealized pessimistically, just as the assumptions of the classi ..

cists were idealized optimistically. Are those, who do not follow either the classical or the socialist theory, to renounce altogether the powerful aid of theory? :Just as the classical period experienced the need of a theory of free .. dom, our own period feels the needs of a modern theory. This should interpret the practical tendencies of the present age according to their true meaning. It should be equally remote from optimism and pessimism. It should appraise both the lights and the shadows. It should discern the community of interests, but no less should it recognize power, the conflict of motives and the economic evil. It should furnish a sound theoretical basis for freedom and also for re strictions on freedom. § 2. THE DIVISION OF THE SUBJECT MAT'l'ER Th.e author's attitude towards the mathematical method. There are four parts of the following study. The first starts with the most idealized assumptions. The later ones proceed by de creasing abstraction to conditions of reality.

The theory of the "simple economy" in the first book begins with the idealizing assumption that the subject is a single person. I-Iow ever, we do not have in mind here the meagre economy of an isolated Crusoe. The imagined conditions of production have a breadth that is only realized in the activities of an entire nation. .At the same time millions of persons are regarded as a massed unit. In the same ·way one contrasts humanity and· nature or thinks of a people directing its great forces to some common goal. Up to a certain point the theory of the simple economy coincides with the presentation current in German economic texts under the heading ,, Fundamental Concepts. " The theory is not .confined, however, to mere concepts of speech. Great as is the aid which it finds in these, it is concerned with phenomena themselves. This gives it an entirely different approach to its subject matter. It seeks the elementary laws of economic activity, especially those laws cqn..

cerning value which provide the standard of economic comparison. In this connection our exposition follows the lead of the doctrine of marginal utility as set forth by the Austrian school. The individual 10 SOC I ALE C 0 NO M I C S in the simple economy is assumed to be an ideal economic subject. In full possession of his powers he obeys economic principles and is liable neither to error, passion or weakness. The presentation is that of pure theory. The conditions of wealth and the state of the technical arts are considered, but we maintain independence from time and· place. As mankind is treated as a unit and is contrasted with nature, there can .be no more consideration of conflicting interests or of economic justice than there would be in the economy of a Crusoe. All problems that are presented in the theory of the simple econ omy are capable of ultimate solution. The task may be difficult, but the assumptions can always be so definitely formulated as to overcome all obstacles. Why should the theorist be forbidden to follow the same path that common sense leads the businessman to traverse daily?

As there is no opposition of interests and no problem involving the justice of relationships, the most extreme individualists and socialists will be able to agree with our results without abandoning their points of view. Despite attendant difficulties, there is no doubt that in the near future the theory of the simple economy will be scientif ically settled. It will lead the way for a doctrine destined to be common property of all future economic schools. This justifies severing this theory from the entire remaining content of economic doctrine. The latter will, at all times, be the subject of sharper dis pute, as unavoidably it becomes involved in the conflict of interests. The second section, the theory of exchange, presupposes a social economy,· unhampered by interference on the part of the state. The theory of the simple economy having shown in what manner a single subject manages and calculates his economic affairs, we now show how the· numerous juridical subjects, who meet in the course of ex change as they seek their economic advantage, determine prices and thus erect the structure of a social economy. Private property is presupposed. To this extent the subject matter of the second section is the same as that on which the attention of the classical school was centered. But in the first place we shall be more. fully prepared to treat it, inasmuch as the theory of the simple economy forms a pref ace, that was almost entirely lacking to the classicists. Moreover we shall enrich the material employed. The classicists confine themselves in the main to cases of well regulated, balanced competition. True enough, they mention various; instances of disturbance by superior power, especially by monopolies; but they look upon all these as ex ceptions, unworthy of consideration in establishing an exhaustive theory. At the present day monopoly and other inequalities of power make .themselves felt more sharply than during the classical··period.

INTROD'UCTION 11 It is thus that the social economy of which we are about to treat, ac quire.s novel and typical features. Over and above the idealized current of the economic process which becomes active in the sense of the utmost economic efficiency, a complete economic theory is now bound to des.cribe, as well as the principal types, the displacements brought about by the occurrence of power, especially of the capitalis tic power. The current, as progressing in the conflict with power, is of far greater practical interest to us today than that of normal, unimpeded action. If our theory is to smooth the way of political progress, it must shed light on these problems that are the most im portant ones we face today. A modern theory in its assumptions will, therefore, have to consider the inequality of possessions as well as the inequality of personal aptitudes due to natural talents and education.

It must modify the idealizing assumption of the model householder in so far at least as to place in his stead the types of the principal classes of society in all their most important gradations. There can be no doubt but what common experience is altogether adequate to this end also and that the theorist employing the aids at his command, can cope with the situation. In still another direction a modern theory will have to advance beyond the confines roapped out by the classical theory. So long as the assumption of a well regulated, balanced competition is brought prominently forward, the conclusion is justified that self-interest is being forced into subserviency to the general welfare. One may take it for granted that the power of com petition will direct selfseeking efforts towards that goal and may acquiesce in a theory of the economic society, which merely analyses it into a sum of individuals. This is no longer true, once attention has been drawn to the full extent of the conflict waged between power and weakness. Thereafter it will be possible to acknowledge social unity only if more effective unifying forces than self-interest are observed, forces that are strong enough to bend even the most power ful. In order to be convincing, therefore, a modern economic theory requires for its completion a more profound theory of society. This also may be adequately treated by the method of social. theory that invokes common experience. The knowledge of self and of others which everyone possesses, embraces all the material required by such a theory of society as we contemplate.

Our third section introduces the theory of state economy_ Today there is not an economic school bent upon excluding the state from the social economy. Scarcely anyone will longer gainsay the statement that the state is an indispensable factor in this field. But if the co operation of the state is needed in order that the well regulated cur~ 12 SOCIAL ECONOMICS rent of the economic process be secured, economic theory, on its part, will have to be described in it.s most general features the influence which it exerts. In doing this, it does not trespass upon the territory of political science· and the theory of finance. The problems of economic administration and the administration of the state are not its problems. For a -task of this sort the means at its disposal are inadequate. Its endeavor must be to respect the limits ascribable to the general forms of governmental influence in economics. In com mon experience are to be found whatever facts are demanded for .such an investigation. The theory of state economy sets out _from the original idealizing assumption of a model householder guiding the private concerns of the household; in decreasing abstraction it pro ceeds to the concrete assumption, approximating actuality, that pri vate households are under the regis of a central power, the state.

This power, directed to the tasks of public economy, complies with the interests of society and with the economic principle, as far as social means permit. The theory thus - takes for granted an ideal state. It is well aware that the law deduced by it for a state of this sort, does not find concrete application in a single instance. It does so in precisely the sense in which it has laid down the ideal ·law of the simple private economy.·By these means it is led to under stand the general forms governing the economic action of the state. It can then leave to other methods and to practical political wiRdom the enterprise of suggesting trend and standard in individual in stances~ The final section treats of world economy. The problems falling under this head have always been treated since Political Economy first took its rise, and they have always been counted among the most im portant of all economic problems. The classicists, also, turned their attention to them~ and the fr·ee-trade doctrine at which they arrived in connection' with the commerce of the world. numbers among their mo.st significant achievements. Nevertheless they here make one of their most disastrous errors. In strict anplication of their funda mental- -individualistic views, the classicists have transferred the theorems discovered by them with reg-ard to national division of labor. to an international division of labor.Btut -actually the course of affairs in national commerce is conditioned very differently from that in the commerce of the world; the individuals in the one place and -1n the other are actuated by different socio-historical nowers.

A modern theory must never ignore the economy of the world, when formulating-its doctrines. For its deduction as well common experi ence affords ample 'material.

INTRODUCTION 13 In our exposition we shall put infrequently resort to the mathematical ex pression of propositions. Only occasionally formuloo of the lower branch of tha t science will be used; those of the higher branches, however, will be in~ variably avoided. With by far the greater number of readers they are not con ducive to ready understanding, and they offer no advantage that could outweigh the objection on this score. There can be no doubt that the mathematical method is properly applicable in economic theory; but the field of its useful~ ness is to be found in those portions of the material in which the most abstract, idealizing assumptions are admissible; namely, the theory of value and the theory of price, in so far as these doctrines are presented with the assumption of a static economy, showing neither progress nor retrogression. As regards an economy in process of development, even the doctrines of value and price can no longer be presented in strictly mathematical form. An investigation confining itself to this narrowest group of theoretical problems, a group open to extreme idealization, may resort to mathematical expression a-s the most exact instrument for formulating results. But an investigation passing by decreasing abstraction to the remaining problems of theory will find itself compelled to discard, in its further advance, the mathematical formula. None of the great truths of eco nomic theory, none of their important moral and political applications, has been justified by mathematical means. The justification could not have been thus established. The classical school retained its dominion thru several generations without resorting to mathematical proofs. Similarly the socialist school has won over armies of votaries without appeal to mathematics. A modern theory, too, should be able to present convincingly the theoretical bases of domestic and foreign economic policies a.nd of taxation without the aid of mathematical for~ muloo. The theory of the economic organization impresses the reader by opening the understanding to the meaning of economic action. By the constraint of nu merical expression it would abjure the force of vital imagery.

Even in that narrowest field, empracing the doctrine,s of price and of value under the most extreme idealization, the fundamental truths may be expressed without the aid of mathematical symbols. In fact the true problem does not consist here in assigning to the relation of the discovered magnitudes the most exact numerical expression po~sible. it consists ill the seal'ch of an explanation as to the right by which the life-values of the economy can be appraised in nu merical money values. It is imperative that we first explain the meaning of the computation in money. To solve this problem, pecuniary computation must be deduced from the significance of the economy. If we succeed in presenting convincingly the meaning of the economy and, concurrently, the significance of the method of economic computation, we shall have accomplished far more toward understanding quantitative economic relations than the most far-reaching employment of the mathematical method could ever achieve.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 BOOK I THE THEORY OF THE SIMPLE ECONOMY Gossen, Entwickelung der Gesetze des menschliohenVerkehrs, 1854, new ed. 1889; Jevons, Theory of Pol. Econ., 1871, 3. ed. 1888; Menger, Grundsiitze de1' Volkswirtschaftslehre, 1871, 2. ed. 1923; L. Walras, Elements d'econ. pol. pure, 1874, 4. ed. 1900; Gide, P1'incvpes d'ccon. pol., 1884, 19'.ed. 1917; also, Oourrs d'ccon. pol., 5. ed. 1921; Wieser, Ursprung und Hauptgesetze des wirtsch. Wertc.9, 1884 also, Der naturliche Wert, 1889 (English edition 1893); Pierson, Leerboc7i der Staathuishondkunde, 1884-1890; Bohm-Bawerk, Grundziige der Theorie des Ut'irtsch. Gilter'wertes, J. f. N.,N.·F. :Bd. 13 .(1886); also, Kapital und Kapi talzins, 2. Bd. 1889, 4. ed. 1921; Pantaleoni. Principii di economia pura, 2'. ed. 1894; Marsh~ll, Principles of Ecornomics 1890, 8. ed. 1922; Patten, Theory of Dynamic Econ. 1892.; Philippovich, Grund'risz der Pol. Oekon. I, 1894, 15. ed.