VIII. The Special Features of Trade-Cycle Policy

CH.A.PTER VIII THE SPECIAL FEATURES OF TRADE-CYCLE POLICY The preceding analysis may have appeared COJn plicated enough, but it was, nevertheless, marked by one simplifying assumption. This assumption mUlit now be dropped. We shall no longer proeeed from an " equilibrium situation" as a starting-point and shall no longer assume that it is possible to isolate the politico-economic problems concerned to the extent of ignoring movements of the economic system as a whole, the "changes of position" of the economic system. It is in fact in just these movements that the predominant interest of economic policy is often centred. They take the form of a succession of cyclical fluctuations and consequently come within the scope of problems of trade-cycle theory. Although it is only in the last few years that trade-cycle research has received s,erious attention, its study has made considerable pro gress; yet little headway has heen made in the application of this new knowledge. It may be appro priate, therefore, to make a brief comment on trade cycle theory and at the same time to complete the remarks made in the beginning on the role and progress of general economic theory.

Trade-cycle theory belongs right at the end of economics, a fact which was very pertinently expressed by Bohm-Bawerk. As a formal discipline, it mu~t incorporate the whole of prior economic analysis of which it represents the quintessenee as applied to the phenomena of fluctuations. The more complete this 88 SPECIAL FEATURES OF TRADE-CYCLE POLICY 89 analysis is, the more complet,e can trad,e-cycle theory also be. If the analysis undergoes important changes, if new knowledge is acquired, then trade-cycle theory will be correspondingly affected. It will be subject to a continual process of transformation as general theory develops. Nowhere else, of course, is there such scope for decisive progress as here where the work of innumerable investigators is helping to lay the foundations. The fact that all theories in the main body of ,economic analysis are relevant to trade-cycle theory further indicates the general character of trade cycle phenomena and of the formidable obstacles that must lie in the way of applying the methods of partial equilibrium. Trade-cycle theory would in 'principle be associated with the methods of general equilibrium (in so far as there is no 0 bj ection to be raised against the whole idea of general equilibrium). Earlier exposition has shown the problems arising in the application of a theory when the data lack homogeneity. Trade-cycle theory repres,ents the extreme of this situation and this makes its problem of application different from the general problem, although the difference is purely quantitative in kind. There ar,e, however, cases-as we know from other sciences-where the quantitative shades into the qualitative.

The position of trade-cycle theory as an interpreta tion of the phenomena of fluctuations will differ accord ing as it can or cannot be proved that the cyclical movement follows a strict rhythm with cycles taking plaee within a fixed number of years and with the causes remaining the same from cycle to cycle. So far, however, no such proof has been found possible. This is no reason for underrating the importance of trade cycle research. It will nev,er be possible to establish 90 THE LIMITS OF ECONOMICS a fixed rhythm of the trade cycle and it signifies a serious misconception of the possibilities of trade-cycle theory when layman and scientist alike attach thes,e expectations to it. How incorrect such a view is becomes all the more obvious when the authors hold theories according to which the causes of industrial fluctuations ar,e to be found solely in the monetary mechanism of the economic system. This idea may be correct-that is no concern of ours here-but it excludes fundamentally the possibility of a regular rhythm. This could only be the case provided it were possible to discover one single cause and provided this were of a natural kind (such as a rain cycle, an astro nomical constellation, &c.). Since no such single natural cause can be found, the attractive theories based on such assumptions, even in quite recent years, must from the outset be dismissed from the scope of these considerations. As a matt,er of economic policy, such explanations of the trade cycle would be ideal, for the conclusion implicit in them is that no measures whatsoever could be taken against these industrial fluctuations so long as it is not within the power of man to change the weather, to change the course of the stars or to prevent sunspots. All conceivable correc tiv,es of the course of economic affairs would then be of the nature of the system of corn storage as practised in ancient times. If, on the other hand, the alleged single cause is determined by human action, as, for example, by the note-issuing banks, the situation is quite differ,ent. This is evident from the melancholy fact that in periods of crisis and depression the govern ments of many countries have, unfortunately, been able-w·e have only to think of the course of the recent SPECIAL FEATURES OF TRADE-CYCLE POLICY 91 depression in America, for example-to take successful measures agaJi,nst a recovery.

If then the convenient hypothesis of a regular cycle falls to the ground, there remains only the possibility of explaining the course of the cycle, with its recurrent booms and depressions, anew lor every case and of allowing only for a loose rhythm. This does not necessarily mean that it is impossible to formulate and apply any theory at all, but only means that this theory must exhibit a lesser degree of internal con sistency than the g'eneral economic theory on which it is based and of which it is the continuation and the offshoot. The number of variables involved becomes so large as to be sufficient in itself to cause a different distribution of emphasis in successive historical cases. A change-over of determinants takes place because the emphasis of the facts has shifted. All these circumstances must be taken into account by trade-cycle policy. Here it is even more neces sary, than in the cases discussed earlier, to develop the theoretical analysis ad hoc. Often this need only take the form of constructing new combinations of already known and available elements of a potentially general trade-cycle theory. How closely this fits in with reality is evidenced by the high correlation between the progress of trade-cycle theory and the actual course of the depression. This" progress" is, in part of course, only relative, in that while it may indeed contribute to the better elucidation of the sequence of events which stimulated it, it still does not promise to represent more than one stone in the mosaic of all theoretically possible variants of the theory of the trade cycle. Thus the formulation of a new variant of the theory gives no assurance that 92 THE LIMITS OF ECONOMICS in the course of the next depression we shall be able to appeal again to this same theory rather ~han have to fall back on a much older variant.

The conclusion that trade-cycle theory is in this sense subject to a continuous process of transforma tion and that the procedure appropriate to it is essentially a development of casuistry, means the death-blow to all schemes-to which there are also objections on other quite general grounds-of rigid trade-cycle policy. The idea that, if we want to base trade-cycle policy in some way or other on economic theory (that is, to give it a rational founda tion), we can do so by formulating a single recipe guaranteeing a patent and rapid swing-over from the depression to the boom is obviously absurd. Such inapt conceptions do not merit further concern and we may pass on to the examination of the effective possibilities, positive and negative. The considerations on economic policy so far out lined have been of a purely formal character. Two statements of a more factual nature can however be made which, without contravening the principle of keeping scientific economics free from value judg ments, help to clarify both the positive and the negative sides of the argument. Firstly we should keep in mind the following: Trade cycles in modern economIC life are phenomena of an international character. They spread from country to country by way of the trading relations of every con ceivable kind which subsist between these countries.

International trade, however, means international competition, even when every country applies itself to the production o£ only those goods which fall to its lot under the full application of international division of SPECIAL FEATURES OF TRADE-CYCLE POLICY 93 labour and when no other country competes with exactly the same goods on a common third market. The competition is in that case a process taking place inside the country, and through it is determined whether the so-called " real terms of trade " turn out in favour of the country or not, and so whether they correspond to its international position; in other words, whether it is in a position to obtain large quantities of :foreign goods in exchange for small quantities of its own. When permanent changes take place in any country-we are thinking here not of cyclical move ments but of changes due to an alteration in the technical conditions of production, for example-other countries are likewise affected by way of the terms of trade. The widening of markets gives rise to a much closer connexion than formerly between different pro ducers. The Canadian farmer secures an advantage :from being able to sell his grain in any of the countries of Europe against which he must balance the circum stance of having to reckon not only with the direct competitive factor of the returns and production costs of the European grain producer, but also with the risks associated with changes in the structure of industry in Europe (such, for example, as an altered distribu tion of purchasing power and demand, a shift of demand from grain to other agricultural products, European tariff policy, &c.).The inhabitants of the older countries of Europe for their part are generally even less inclined than the American farmer to accept the risks to which they are correspondingly exposed, although they want to have the advantages of the larger market.

It may happen that some one country, though similar in structure to another, feels the effect of an industrial 94 THE LIMITS OF ECONOMICS revival earlier because it has been fortunate enough already to have secured an adjustment of costs to the lower prices of the depression and so to have eliminated the expectation of a further fall in prices as a factor making for depression. Now a second country can only follow this first country and pick up and take advantage of the impulse emanating from it if it proves to be flexible in like measure. Different economic systems are, however, as is evident from experience, of varying flexibility, and this is undoubtedly one of the reasons why some countries succeed in making contact with an incipient world trade cycle much more rapidly than others, quite independently of the positive conditions which may prevail in the various countries. So far as it is to be presumed that the people of a country wish to share in the improvements of the general economic situation, one may deduce a maxim from what has just been said which, if followed as a long-run policy, would give prospects of an increase of general economic welfare. This maxim is that in periods of depression every effort should be made to increase the flexibility of the economic system. This obviously includes getting rid of all the rigidities which so easily develop in the boom period, diminishing the power of mono polies and cartels of all kinds, reshaping budgetary policy, removing as many as possible of the rigid factors in costs or at least damping them down to the minimum technically achievable, &c. In this way business prospects may be improv'ed without any influence being exerted on the material composition of the objectives aimed at except in so far as they are indirectly affected by way of the change in distribution of income which is generally bound up SPECIAL FEATURES OF TRADE-CYCLE POLICY 95 with measures for increasing flexibility. The indivi dual entrepreneur can, however, in no case do more than include this as a kind of datum among the things he bases his decisions on.

The second general 0 bserva tion of the kind men tioned which can be made in regard to trade-cycle policy is closely linked up with the first, and is, if anything, more important. At the same time, since it appears to find practically no echo at all in the practical decisions of economic policy, there is additional reason for giving it its proper emphasis. What is referred to here is the fact that adjustments of this kind, even the most fundamental-which are, of course, always associated with material sacrifices -can most easily be effected at the bottom point o£ a depression or crisis. However paradoxical this con tention may seem, the reason for it is not far to seek. It is explained by the fact that in an economic system which has reached the bottom point of a cycle so much capital has already been written off that this fact itself gives. the incentive for adjustments going far beyond those necessitated by a short-lived crisis.

The inflated figures of the boom period give a deceptive idea of the value of industries whose existence is perhaps dependent on extremely high tariff protection. The small value which these industries show in periods of depression, despite all protective measures, makes it comparatively easy to decide their fate in a manner which, indeed, means for them a permanent contrac tion or even complete stoppage of their activity, but which gives such a stimulus to all industries dependent on their products-which become cheaper as a result of the removal of the tariff, for example-as many times to compensate the loss. The importance of the 96 THE LIMITS OF ECONOMICS changes may, for instance, be measured by the number of workers employed and by changes in the value of capital invested, although this does not, of course, give any "scientific" justification for them. This argument applies in greater measure the more prominent the position in the general economy of the more important raw materials of production, such as coal, iron, steel, tin, yarns, &c. So long as the necessary impetus is present for getting rid of psycho logical and pseudo-moral obstacles, fundamental reorientations of economic policy can be best effected in periods of economic depression. In fact, however, what usually prevails in these periods is a wild con fusion of mutually inconsistent measures especially in the sphere of foreign trade, measures which are, moreover, planned for a very short period only and are perpetually being succeeded by others of even shorter duration. Contemporary events provide a shocking example of this in most countries.

The type of adjustments referred to here belongs to the sphere of a reorientation o£ the productive structure in industry and agriculture. They do not proceed from the initiative of individual firms, for the task of these has been fulfilled when they have adapted their production plans to the existing or perhaps anticipated data, whereas it is a question here of what may perhaps be called the setting up of the outer framework of data. The contention that this kind of change in the economic structure can take place most easily in time of depression leads to the further concl usion that the longer a boom lasts and the more violent its character, the greater will be the extent of rigidity introduced into the economic system. This is so despite the fact that the SPECIAL FEATURES OF TRADE-CYCLE POLICY 97 boom period is characterized by the setting up of new factories and the extension of old ones. Such changes as these take place exclusively on the foundations left by the liquidation of the previous depression, whereas the phenomenon now being considered is a reshaping of the foundation itself. In other words, the sharper and the faster the boom, the more slender are the possibilities of securing effective recognition of the new place which the given economic system holds in a fundamentally changed world-economic order. Consequently, it is the economic boom itself which often turns out to be the greatest hindrance to the taking account of long-period conditions of the economic system. To pursue further the theoretical aspects of the interconnexions here indicated would lead to a number of problems which are extremely inconvenient from the point of view of the methodology of business-cycle research and which, unfortunately, play very little part in current expositions.

There is yet a third prohlem, or rather group of problems, which is 0:£ very considerable importance for trade-cycle policy. To make its meaning clear, a brief observation on trade-cycle theory is necessary. As already indicated, despite the difficulties connected with the concept of the trade cycle here enumerated, it is, nevertheless, clear that the causes of the crisis and of the depression following it do not origina te in the period immediately preceding the actual crash but operate throughout the 'w:hole period of the boom. The germ at the crisis is already sown in the moment when the economic system raises itsel:£ above the level of the depression in greater degree than corresponds to the trend factors (increase of population, diminu tion of the death-rate, &c.). The greater the strength, H 98 THE LIMITS OF ECONOMICS and especially the speed of the boom, the more nourish ment does the first crisis germ receive. It is evident then that a rational trade-cycle policy should be directed toward preventing the boom from becoming too marked and toward cautiously damping it down.

If it can be shown that a credit expansion leads to a rise on the securities market, then credit restriction and the raising of the rate of interest will offer a suitable method of putting on the brake. If it is discovered, for example, that an overestimate of an increasing foreign demand due to incorrect informa tion leads to increased investment by every individual producer to an extent corresponding to the total increase in demand, then information as to the real circumstances, as well as consultations of the entre preneurs among themselves, will help at least to delay the extension of productive capacity. These examples could he increased indefinitely. The enormous opportunity which an incipient boom offers for rational economic conduct goes ,still further afield. It has become apparent in the present world economic crisis that one of the principal factors making for its protracted duration lies in the extraordinary height of State budgets and social charges (both being taken in the widest sense). These two factors lengthen the depression because they become higher absolutely, and still higher relatively, the more prices fall.

At the same time the political conditions for the reduction of these charges become the more unfavour able the smaller are the prospects that dismissed State employees can be absorbed by private enterprise. If State employees receive a pension, this provides but a limited and slow working relief of the burden of expenditure. Furthermore, the proportion of pro ducSPECIAL FEATURES OF TRADE-CYCLE POLICY 99 tion costs accounted for by State expenditure and social charges forms the absolutely most rigid element in the whole cost system, so that all adjustments appropri ate to a policy for the trade cycle, discussed above, are long delayed if not impossible, the result being a continuous process of capital consumption. Accord ingly, the smaller the charges imposed by State expenditure on production, the easier is the adaptation of the economic system to the rise and fall in economic activity, and the smaller are the actual fluctuations in economic activity. (Of course, it would be a grave mistake, as should be evident from the study of public finance, to regard every tax as a charge on production.) The burdening of industry with taxes and charges of all kinds, which have risen to many times their pre war level in almost every country, may have not a little to do with the very special gravity of post-war crIses.

The art of the statesman in face of such a con catenation of things will have to consist not only in making a virtue of necessity, but also in exercising this virtue more especially in the fat years. It will not be possible to go on indefinitely augmenting budgets, raising salaries and giving better conditions of employment; that would be possible only if the boom conditions lasted for ever or if these changes were limited to the movement of the trend. The general experience is that all achievements in the way of economies and simplification made at the bottom of the depression are abandoned at the moment when economic recovery has progressed beyond its first beginning. The foregoing analysis has disclosed a principle of trade-cycle policy which is remarkable for its simplicity and ready for application to all practical 100 THE LIMITS OF ECONOMICS cases, based as it is on principles of public finance which are all along of a predominantly concrete charact,er. This principle-especially in association with the two others mentioned previously-has the great practical advantage over almost all other pro posals for trade-cycle policy that it fits in with every tolerably reasonable explanation of the trade cycle.

It would, of course, not be very acceptable to the " expansionists" who look to large deficits to " keep the wheels moving." In this way the principle helps in some measure to cover the special problem of trad.e-cycle theory which is otherwise so exceedingly difficult and which falls outside of the problem of application dealt with up till now in this essay. I t may be noted also that the rule is of a general politico-economic nature. Not only is it applicable to cases of oscillations and disturbances of equilibrium; but it is indifferent whether the per centage which public expenditure bears to the national income is great or small. The theory of international trade teaches that the kind of goods a country exports sums up all advantages and disadvantages in production; that is, only those goods. find a sale in the world market which embody all the cost and other advantages present in the pro ductive structure of the country concerned. The more markedly, for example, the various stages of produc tion are burdened by tax·es and monopoly profits, the fewer goods will that country be able to export, pro vided that the burden in other countries is smaller.

A.n analogous case of the summation of all the existing advantages and disadvantages may he made, out in the sphere of scientific analysis with respect to trade-cycle theory and trade-cycle policy. These synthesize all SPECIAL FEATURES OF TRADE-CYCLE POLICY 101 the advantages and disadvantages of the preceding stages of analysis. W,e have already mentioned the poli tico-economic difficulties which general economic analysis, has to surmount at every stage of its develop ment; and some of the special complications of trade cycle policy have already em,erged. It remains now to develop certain ideas which, apart from their general significanee, touch on some of the newest flights in " pure theory." So far trade-cycle theory has been almost exclusively conducted on the same level of abstraction as general economic theory. This is apart from the exclusively quantitative-statistical-descriptive type of trade-cycle analysis which, on account of its far too narrow con nexion with a historical situation which occurs only once, could not arrive at propositions of general validity. There are more gaps among the stages between these two extremes than would seem necessary, judging by the posi tion of general theory. 'Trade-cycle theory should, for example, take account of monopoly factors. Whether we consider the develop men t of trade-cycle theory to take note of the fact that the economic system with which we are confronted in practice is not one of strict competition (as in the Paretian sens,e), as being on the same level or on a lower level of abstraction, is of no cons.equence. What is important is that work is being done at the present time along these lines in pure theory and that it is producing astonishing results.

Thus even the applicability of what has up till now been the usual demand-supply construction (best illus trated by the highly developed cost-curve apparatus) has been called into ques,tion. This is sufficient to show that the developments in pure theory of which we are speaking are by no means of a trivial nature.

102 THE LIMITS OF ECONOMICS Such lines of thought also indicate how far removed modern theory is from classical theory. This is a thing that should constantly be impressed on the minds of the adherents of so-called" scientific liberalism" to make it clear to them in what untenable contradictions they have entangled themselves. It must be emphasized that the question here is not primarily a matter of taking account of the circumstance that the economic systems of the great comm,ercial nations have become monopolistic. It is simply a question of creating an instrument of analysis for cases of imperfect competi tion or for those weak forms of competition which were present as types even to the mind of Ricardo or John Stuart Mill. Even the classical writers should have been in a position to formulate, on the basis of their analysis, a law of price formation for the product of a s.mall baker's shop instead of confining themselves to the simple case of the corn market for which perfect com petition may be assumed. It is simple, and therefore fundamental relationships such as these that are in question. "The tendencies towards the development of monopoly" in mod,ern economic systems mean nothing else than that an increasing number of markets, which previously approached the ideal type of free competition, begin to conform to the type of demand and supply configuration equivalent to the competitive position of the little baker's shop which competes with the baker at the next street corner for a narrow local demand. The apparent triviality of the example itself shows the importance of the advance which ,economic theory is in process of making but which has as yet made but little, if any, impression on trade-cycle theory.

SPECIAL FEATURES OF TRADE-CYCLE POLICY 103 Under the stimulus of the slow fall of the index of " controlled prices" (the prices of monopolized goods, cartellized and proprietary articles) compar,ed with other prices since 1929, some attention has, indeed, been given to the application of pure monopoly analysis to the recent depression, but there is no sign of any systematic incorporation of such ideas into a genm-al analysis of the trade-cycle. We have only to think, for instance, of the schematic exposition of the monetary theory of the trade cycle which leaves no room for these elements, a fact which giv,es grounds, so far disre garded, for considerably depreciating its significance. Of course, the view of some circles, based on defec tiv,e knowledge and often voiced only for political purposes, that there no longer exists any competition worth the name merits the most decisive rej ection.

Because people do not experience competition in its pure form they fail to understand that even if it has changed its form and its way of manifestation, it has, nevertheless, far from disappeared and often breaks forth with greater force and more unexpectedly than before. Denial of the existenee of effective competi tion represents an offshoot of Marxian ideas and must be dismissed as false. A second element of at least equal importance in the process of reconstructing general economic theory is the growing interest in the so-called "time factor." This was mentioned already in Chapter IV where reference was made to the way in which it complicates problems of economic policy. The position as regards economic theory is that the introduction of the time element leads to the discovery of new connexions between events, connexions which had previously been unobserved. Moreover, it appears that in spite of the 104 THE LIMITS OF ECONOMICS discovery of these new connexions the economic process is characterized by a much higher degree of indeter minacy than had previously been supposed. ltIuch can be said about the time element as it relates to trade cycle theory. Here, too, a synthesis of the isolated fragments into a system of propositions is still lacking .

The theorems relating to the time element must be connected up into a systematic whole before they are entirely relevant for trade-cycle policy and the same applies in other fields that are still new. We may look for a real leap forward in economic theory in the near future once these at present still disconnected fields are classified and linked up with each other from a single angle of approach. The tim,e factor and monopolistic competition really have a great deal in common. Closely allied to the time factor is the factor of anticipation and fore~ight. Weare concerned here with the extremely important circumstance that all the single individuals in an economic system entertain certain views about the future. Without this element of expectation, the smooth running of economic affairs would be inconceivable. Now the difficulty is that the future is to everybody very largely unknown, but that at the same time it is its.elf dependent on, and partly determined by, these expectations, since they form the basis for the behaviour of the individuals. The degree of foresight varies from individual to individual according to his experience and environment and it has a different effect according to his position in the economic process. Add to this the, fact that all the anticipation coefficients of the separate individuals are mutually interdependent and it becomes clear, even to the layman, what an extraordinarily complicated matter it is. But what is particularly troublesome is SPECIAL FEATURES OF TRADE-CYCLE POLICY 105 that economic theory has so far giv.en very inad,equate attention to it. It is not too much to say that nobody has yet gone so far as properly to formulate the pro blems involved. It is thus not known precisely how these factors come into theorems where so far their presence has been unobserved. Consequently, we can hardly talk of a real solution of the problem. Attempts hav,e recently been made to introduce anticipations into theory, but in a very inadequate way.· We can not yet know whether the role of expectations is greater in the movement of the trade cycle than it is under the rigid static relationships assumed in the con struction of general theory. It seems, therefore, that trade-cycle policy has here a field before it of which we can only say at pres,ent that its potentialities are enormous but that it is, unfortunately, for the most part unexplored. A great d,eal more re:B.exionwill pro bably be necessary before trade-cycle policy can be set on a more definitely rational basis in this respect.

The main defect of trade-cycle policy is not, how ever, due to the incompleteness of economic theory. Even more important is the problem how far the con ,crete historical instance to which trade-cycle policy has to apply, as, for example, the situation in the United States in 1933, can be made the object of learning and experience. Referenee has already been made in Chapter II to what was called" every-day experience," that is, the experience gained gradually by everybody through his daily life. It was, pointed out that such experience may afford an excellent basis for certain branches of theory, as, for example, the theory of the simple economy (or in other words value theory), but it is far from an adequate basis for decisions of * Compare references to articles and books in the appendix.

106 THE LIMITS OF ECONOMICS economic policy. Otherwise there would be a peculiar disparity hetween the elementary character of the experience and information and the refined nature of the instrumen t (in so far as this is given to us in the form of advanced economic theory). Every-day experience must be amplified with the aid of history and statistics. The practical importance of statistics in our daily life is seldom fully realized. It may, in fact, be said that our social existence as a conglomera tion of millions of human beings would become impossible in the mom,ent when statistics in all their forms were to be removed from it. Such statistics are, indeed, needed in all possible forms for economic and trade-cycle policy. There arises, however, the follow ing difficulty. Only such things can be statistically analysed as can be somehow measured in the form of figures. However many elements in economic life may he of this kind, certainly not all are so. Moreover, it cannot be assumed in advance that the processes and ev,ents which are possible of description in t,erms of figures are also really more important than those that are not statis tically measureable. It is, for example, impossible which lueans in this case in/conceivable-to determine the feelings and ,expectations of individual economic subjects and entrepreneurs in this way. These feelings and anticipations play, how,ever, an important role in the course of the trade cycle, a role which so outstand ing an economist as Professor Pigou holds to he so great -and certainly not without much justification-that he s,ees in these factors the leading cause of industrial fluctuations. A striking proof of the enormous import ance of the psychological factor is given by the course of the depression in the United States especially since SPECIAL FEATURES OF TRADE-CYCLE POLICY 107 the advent to power of President Roos,evelt, and yet this element cannot be measured statistically. All that we can do is to show laboriously ex post, by way of the repercussions it causes, that it existed at a previous time. In the moment when it is desired to adopt a measure of trade-cycle policy, there is no reliable quantitative material available relating to it. This is perhaps the easiest way of all of demonstrating that the totality of economic events cannot be portrayed statis tically. But there are still more important grounds.

Economics is not in the same position as mathematics where, for example, if we take a sphere, for every point in space outside the surface of the sphere a point can be found on the surface of the sphere itself which deter mines this point in space. A description of this kind is theoretically possible without more ado; it can even take place in a " one-one relationship?' as the most up-to-date mathematical analysis has shown. To set about it in practice, on the other hand, would give rise to insurmountable difficulties by reason of our not being in a position to construct the necessary apparatus. When we speak here of the difficulties of statistics, how ever, we are not thinking of the analogous difficulties of collecting the figures, of having to classify them and above all of keeping them up to dat,e, but of their inherent difficulties ,even if all the other obstacles were surmounted. There are, however, such obstacles as never can be surmounted. Consequently, economic policy must always remain unexact.

The enormous difficulties which have to be faeed are attributable once more to the time factor of which Alfred Marshall has justly said that it is to be found everywhere where there are unsolved and frequently insoluble problems. It would mean penetrating much 108 THE LIMITS OF ECONOMICS too deeply into theoretical economics and would, there fore, be too much of a digression were we to go into a more detailed exposition of the influences of the time factor in respect to this group of problems. It may suffice to point out that the difference introduced into economic data by time, as compared with the condi tions of the economic system which seem to rule accord ing to the picture portrayed by the figures as such, can never be described-or in many cases at least not with any tolerable degree of accuracy-in terms of statistics. In price theory I have designated the properties of the most important economic quantities in this respect, their" time qualities." The demonstration that these are not explicit but are only deducible from other premises (empirically obtained, of course) has not been challenged.

The most serious misuse which has been made of business-cycle research are the attempts at " scienti fic," detailed" economic prognosis." These have been made on the basis of an attitude which is anti theoretical and, consequently, entirely misguided as to the uses ot statistics, and have rested on the appeal to a completely mistaken empiricism. It must be emphasized, to avoid misunderstanding at the outset, that the kind of prognosis to which objection is made does not of course includ·e that which is implicitly made when any particular theorem is being applied to a concrete case under the strict assumption of ceteris paribus. This kind of prognosis takes place in every science that has any connexion with empirical events; it raises no practical problem as long as it proves possible to isolate the initial conditions and so long as there is assurance that the latter do actually remain constant throughout the period under conSPECIAL FEATURES OF TRADE-CYCLE POLICY 109 sideration. In this case it is simply a question of the application of scientific analysis pure and simple: this situation is the same for all sciences. The special difficulties which economics presents in this respect have been made only too clear in the course of the preceding analysis. We shall not go into them further here, hut shall only add a few words on general economic prognosis.

It is understandable that people should be curious as to how the trade cycle will develop. The idea behind economic forecasting-apart from the forecast ing which was carried on and followed in business in Am'erica-was more exactly that it should serve as the instrument for a general ' , stabilization " 01 economic activity, more particularly of the price level. The course of events in the recent depression has somewhat discr'edited such ideas of stabilization every where, except in the United States, and the false hopes raised by attempts at economic prognosis have likewise suffered a setback, but only temporarily, since they push their way again into the foreground with the growing popularity of the idea of a monetary system based on an index number and similar things that are even worse than economic prognosis. Every economic prognosis must needs be based on the discovery of symptoms which in turn stand for more fundamental causes. The analysis of symptoms would, therefore, need to be in complete harmony with general economic theory. Tha t this is not the case follows directly from the circumstance that theory belongs to one of the high planes of abstraction spoken of previously, whereas the symptoms helong to a completely different, that is, historical, plane. To revert again to the monopoly theme, the facts are 110 THE LIMITS OF ECONOMICS that trade-cycle theory describes the movements of a purely competitively organized system of equilibrium and reality diverges widely from this ideal schematic description by the presence of all types and varieties of monopoly. Even if the set of symptoms used for describing economic changes should harmonize, it is still not directly suited to theoretical purposes.

This would also seem to be the real reason why the adherents of the mere statistical type of business-cycle research were unable to make much use of theory and therefore betook themselves to an emphatic denunciation of it, only, however, to make practical claims for the "practical economics " they had in view which placed the most daring dreams of former theorists in the shade. Since prognosis must work on the basis of symptoms, it becomes necessary to distinguish between primary and secondary symptoms according as they lie nearer or farther from the real causes. It is often just the secondary symptoms which, even if they occur at a later time, make themselves most visible and, there fore, enlist the attention of economic politicians. Economic policy is often conducted for a long time entirely on the basis of these secondary symptoms although they are not always indicative of the forces operating most actively. Thus, for example, if the unemployment insurance fund shows a deficit, the responsible authoritv corrects this on the basis of quite secondary economic conditions instead of investigating the state of production costs generally in the country concerned and aiming at improving the finances. of the insurance authority by way of making a total adj ust ment adapted to these much wider conditions. Such a procedure is quite understandable: but it illustrates SPECIAL FEATURES OF TRADE-CYCLE POLICY 111 the fact that the prevailing t,end,ency in the conduct of economic policy will be to "treat for symptoms": the course of the recent depression, at least in its earlier stages in all countries of the world, provides a glaring ,example of this.

I dealt in detail with the whole range of the extremely difficult and complicated problems that crop up in connexion with economic prognosis some years back in a special monograph (" Wirtschaftsprognose," Vienna, 1928). I have nothing essential to add to-day to the arguments I advanced at that time, although the march of events in the years between and the new developments in economic analysis would make it possible to reformulate certain statements, yet with out changing any of the basic theses. I shall, therefore, here content myself with the :few short remarks above and for the rest may refer the reader to the special study on the subject, the con clusions of which I still maintain. To sum up this discussion, we may say that the propositions formulated at the beginning on the special problems which trade-cycle policy raises over and above the pro blems of general economic policy are confirmed both in theory and practice ; its special features are evident the whole way through. We reached this conclusion without making more than quite small excursions into the field of trade-cycle theory, thus digressing but little from the main theme of this exposition which is concerned with the formal relationships between theory and practice.

Nevertheless, there is no cause :for regarding the situation as in any way hopeless. It is the aim o:f this essay to mark out the limits to the application of economic theory, in the first place, and so to 112 THE LIMITS OF ECONOMICS secure that, within the field thus won, theory may come fully into its own. There is nothing else that can replaee this science: it possesses an exclusive monopoly. Neither can it be pushed out of the saddle by the large group of people who fall a prey to the dangers which economics holds. In what these dangers consist will be treated in the next chapter.