This is an interesting early lance broken in the American version of the famed Methodenstreit that was taking place contemporaneously between Carl Menger and Gustav von Schmoller in Central Europe. Simon Newcomb represented the Menger side (pro-analysis and use of deduction) versus the historical/institutional side (pro-description and use of induction) that was represented by Richard Ely. While it is a 1884 brochure written by Ely that Newcomb explicitly addresses, an earlier version of Ely’s “The Past and Present of Political Economy” had been published in September 1883 in The Overland Monthly.
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THE TWO SCHOOLS OF POLITICAL ECONOMY.
Simon Newcomb
1884
EVERY careful observer of current opinion knows that the system of Political Economy which we have imported from England, and which we generally teach in our colleges, does not command that universal assent to which its scientific character and the eminence and influence of its expounders would seem to entitle it. That these, expounders are to be counted among the great men of our time none will deny; and when we find the opinion of the masses diverging from the principles held by such men, it is natural in the first place to attribute it to defective education. But in the present case it cannot be claimed that distrust of the teachings of political economy is confined to the less educated classes. As a matter of fact, it will be found difficult to name any one class of men who mingle with the world among whom at least a large minority, possibly a majority, will not be found to share the distrust in question. Farmers, men of business, college graduates, eminent philosophers, students fresh from the seats of learning in Germany, are all imbued with the same feeling.
There are yet other considerations which give seeming weight to the dissent in question. The general rule is that when a sound body of doctrine is assailed from fallacious standpoints, the views of the assailing parties are so confused and contradictory that they can be easily disposed of by pointing out their inconsistency. But in the present case a careful examination will show that these widely different classes of men assign substantially the same reasons for their dissent. Can views which are shared by such widely separated classes be other than sound? This is the question which it is the object of the present article to consider. It will assist the reader in following us if we begin by indicating our conclusion. It is in brief that the objections raised against the economic system alluded to, which is commonly called the English Political Economy, are founded on a misapprehension of what that system professes, or ought to profess, to do and to teach. It does not follow from what we say that there is anything erroneous in the general current of the views held by the objectors themselves. They are simply men who, in applying their views to the case in question, forget the limitations which are placed upon human knowledge in every department of inquiry, and the necessary imperfections of all scientific statement. We shall prove this conclusion by showing that the very same objections which they raise against the current system of economy can be raised against almost every branch of human knowledge with equal force and conclusiveness.
We must begin with a precise statement of what the objections are. This we can do by quoting, almost verbatim, propositions which may be found in the writings of such a logician as Wundt, in a brochure by Dr. Ely, recently issued by the Johns Hopkins University, and in the daily conversation of almost every man of business. These different men and classes all agree in framing an indictment of which the substance is the following:
The political economy of the schools is a deductive science founded on a-priori hypotheses respecting human nature, which are too wide of the actual facts of the world to form a sound basis for any practical conclusion. It assumes to subject all economic phenomena to a few formal laws, and fails to consider how these laws are modified or even reversed in practice. It takes no account of the very different circumstances in which different nations and communities are placed, but assumes all to be under the same system. It assumes universal self-interest and universal selfishness as the preponderating causes of economic phenomena. Some of its great expounders attempt to establish far-reaching principles without adducing one single illustration from actual life, without bringing forward a single historical fact, and without citing any event which ever occurred. It assumes an absolute lack of friction in all economic movements. Not only do capital and labor move with perfect ease from place to place, and from employment to employment, but this, it is implicitly maintained, is accomplished without the slightest loss. The silk-manufacturer diverts his capital into another employment, like the construction of locomotives, with precisely the same facility with which he turns his family carriage-horse from an avenue into a cross street. From such assumptions equality of profits and equality of wages are readily deduced, while the fact that inequality is the universal rule is entirely ignored. The result of thus substituting ideal for actual conditions is a body of doctrine which, however logically it may be reasoned out, does not agree with the state of things which actually exists around us.
Formidable as this indictment looks, we can easily show that it applies with equal force to every branch of pure science, when we consider the science in its relation to practical applications. It is in fact a most valuable illustration of a truth which every logical student should know, but which hardly any one always bears in mind—that all scientific propositions are in their very nature hypothetical. Let us take examples of the most familiar sort.
If we begin by examining any school arithmetic, we shall hardly find an illustration adduced from the actual history of mankind, and only here and there will we find any mention of a single event which ever occurred, or a single transaction which ever took place. The problems in arithmetical operations are all made up by the author out of his own head, or borrowed from others who made them up in the same way. When a boy is set to compute interest on a note, it will be found that no such note was ever drawn, and that the parties whose names are signed to it never existed. The same remark applies to the numerous grocers, laborers, custom-house officers, and merchants who are quoted in the book. Not one is an actual man, but all are hypothetical and imaginary products of the author’s brain.
When the pupil gets into Algebra the case is intensified. He is set to work on quantities called x and y without a shadow of proof that any such quantities ever existed. It is yet worse when he reaches Geometry. He is taught that lines have no thickness, when, as a matter of fact, every line that anybody ever saw or conceived of had thickness. He is set to work on purely imaginary triangles, quadrilaterals, and circles; and throughout the whole treatise there is not one allusion to a geometrical figure which ever had a visible existence outside the book.
But is not the matter improved when he gets to Physics? Is he not now confronted with the actual facts of nature? No : on the contrary, all natural phenomena are positively contradicted by the propositions he is taught. Not satisfied with talking about things which never did exist, he is introduced to things of which we cannot define the existence without a contradiction in terms—such absurdities as a material point, for example. He is told how a body acted upon by no force will move, when, as a matter of fact, no one ever saw in the universe a body which was not acted on by some force. He learns the law of falling bodies, which tells him that a body falls sixteen feet in the first second, three times that distance in the next, five times in the third, and so on, without end. As a matter of fact no body ever did or ever could fall according to this law. It rests upon two perfectly unattainable hypotheses: (1) that there is no atmosphere to resist the motion of the body, and (2) that the force of gravity is the same at all heights. The fact is that not only did no body ever fall according to this law, but no body was ever known to move in accordance with the law for any considerable period. When the mechanical powers are taught, no allowance is made for friction, altho this agent modifies the effect in all cases, and is sometimes the most potent factor in producing it. Thus all the laws of power in machines which the student learns are not applicable to any actual machine, but only to ideal conditions, which never existed on earth and could rarely be produced if men tried to. In fine, the whole of physics as taught in our schools and colleges is a purely ideal science, which is concerned with a kind of matter and a state of things which never existed in the world, and which would lead any firm of machinists into pecuniary ruin should they apply its principles unmodified in their calculations.
We have made it quite clear, we trust, that the indictment under consideration lies with as much force against all the exact sciences as it does against Political Economy as taught by the English school. As a matter of fact, every one who has studied the views of the class of so-called “practical men” who undervalue what they term “theory” knows that this class really does bring against the practical value of scientific training objections substantially identical with those under consideration. The question which now meets us is whether it is possible to construct a system of Political Economy which shall be free from such objections. Our object is to answer this question in the negative, by showing that the imperfections alluded to are inseparable from all exact knowledge. Paradoxical tho it may appear, the fact that the phenomena of nature cannot be reduced to simple formal laws does not render less necessary the consideration and study of such laws. Most of the effects which we observe either in nature or in human society are the products of a complex combination of causes, acting and interacting in such a way that it is impossible to trace their combined action by any direct process. If we expect to study their action by any rational method, only one mode of proceeding is open to us—that of analysis. We begin by isolating each separate cause, and considering what would be its action were all the others absent. But, since the causes act only in combination, the separate study of each is necessarily the study of a state of things which as a matter of fact does not exist. Thus the introduction of ideal conditions instead of the real conditions is a necessary first step in any rational system of exact knowledge.
We are now in a condition to illustrate more fully the proposition already alluded to—that all science is from its very nature founded on hypothesis. The expression of a law of nature is merely an assertion that under certain circumstances a certain result will be produced. So far as the law is concerned the circumstances may or may not exist; they may even be such as never did exist without at all impairing the validity of the law. Let us take a proposition so simple as that gunpowder explodes. It presupposes as an hypothesis the existence of gunpowder. There may be large regions of country where there is no powder, and there the law is entirely without application. Again, the powder will not explode unless it is touched by fire. Here we have again another hypothesis—fire. Thus, so familiar a proposition as that under consideration is only hypothetically true. But this is not all. We must always assume not only some positive hypothesis, but the negative hypothesis that all causes which might influence the result are absent. In other words, the enunciation of all natural laws is to be understood with some such limitations as “other conditions being equal,” or “if no other cause intervenes to modify or prevent the effect.” These same qualifications must be understood in all applications of the principles of political economy. The writer does not for a moment pretend that economists always remember this qualification. But they are perfectly excusable for not always expressing it, because they must leave something to be supplied by the reader. Gunpowder will not explode if it is wet, nor if it is treated in any one of many other ways. Is it therefore necessary in every chemical treatise where the properties of gunpowder are described, that an exhaustive statement of the conditions under which it will not explode must be made? Is chemistry a delusion and a snare because a hunter may have considered the law that gunpowder explodes true, whatever the condition of his powder-flask, and may have missed a shot in consequence? The person who expects either economic or physical phenomena to occur according to formal laws, regardless of circumstances, is justly stigmatized as a doctrinaire, and one who interprets these laws in accordance with the doctrinaire method should be relegated to the same place of perdition to which we assign the doctrinaire himself.
The great mistake made by the objectors is that of supposing that the economist considers all his hypotheses as susceptible of universal application without any restriction or modification whatever. We avoid this error by remembering that the correctness and applicability of the hypothesis are always open to challenge, but that the fact of its incorrectness or inapplicability no more invalidates the general law founded upon it than the fact that there may be no gunpowder within a thousand miles of the north pole invalidates the truth of the theorem that gunpowder explodes. A careful study of human nature would perhaps show that the power of always distinguishing between the truth of the hypothesis and the truth of the connection between the hypothesis and conclusion is rarely acquired by the large majority of men. We may define a wise man as one equipped with a large and well-selected stock of hypotheses, properly arranged for use, each with its conclusion attached. To foresee what will occur to-morrow he selects from his hypotheses such as correspond most nearly to the state of things to-day, and then forms his conclusions accordingly. If he applies an hypothesis which is not valid to-day, and thus reaches an erroneous conclusion, that is his fault, and not the fault of the law. So also if the hypothesis is itself true, but other causes come in to modify its action, we have a case of defective knowledge which may lead to a mistaken conclusion. But no science that ever existed professes to give formal rules by which conclusions can be worked out without any exercise of judgment on the part of the individual.
In the light of these considerations, let us inquire how we must proceed to establish a sound system. The causes with which the economist has to deal differ from those which appear to us to operate in nature in this important point—that final causes or the ends which men have in view come into play. This fact makes it necessary to follow quite different methods in physical and in economic investigations. But in both classes of inquiry we have this in common, that to reach a really satisfactory conclusion we must analyze the causes which act into their component elements. The first step of the economist must be to discover and define the most general and widely diffused tendencies of human nature, just as the physicist commences by teaching the most general laws of force. Now, if we study civilized men, we shall find that notwithstanding the wide diversity between the motives which actuate different men, and the conditions in which they are placed, they have this in common: that when they want to reach an end, they adopt the easiest and shortest way to it which they can find, unless they have some special reason for preferring another way. This is as sound and comprehensive a law as that a stone will fall directly downwards unless it is turned aside by some intervening force. Not an objection can be made to the one that may not also be made to the other.
Again, a large majority of the intended acts of every man are executed for gaining some end which he, the man, has in view. The good he seeks is his own, and not that of anybody else, except so far as he may make the good of others an object to himself. Economically and scientifically there is no difference between the acts of the man working to get a loaf of bread for himself, and of the man working to get a loaf of bread for his neighbor, except that the former are more common. Thus the actuating motives of men in general may be called “selfish” in a scientific sense, however disinterested they may be in a popular sense.
Again, nearly all human acts with which the economist is concerned are those directed towards the acquisition of wealth. These acts have this common feature, that the man so directs his exertions as to obtain from them the maximum amount of wealth, unless his course is modified by some other cause than the desire of wealth. The objection that the latter is not the sole and universal motive among men has no more force than the objection that the tendency to fall is not the sole and universal force which acts upon bodies upon the surface of the earth.
Again, economics can concern itself only with average results as they arise in the general action of great bodies of men. It takes no account of the individual bargaining in a desert between John, who owns the only camel within reach, and William, who has the only bucket of water within reach. It is not concerned with the fact that Smith gives double wages to his coachman out of pure sentiment, except so far as this sentiment may be common to all men. Now, however capricious may be the acts of the individual, it is certain that when we consider only average results common to the whole, these results have a certainty, permanence, and freedom from caprice which individuals do not exhibit. Where the individual may be travelling or residing at any moment no man can predict. But the centre of gravitation of the whole population of the United States has during the past thirty years moved past Cincinnati and along the neighborhood of the Ohio River with a slow and regular motion, which statistics show to be as exact and definite as the change in the pointing of the magnetic needle.
It is also to be admitted that unknown causes play a very important part in Political Economy, more important, perhaps, than they do in the applications of Physical Science. The result of this partial ignorance is that economic phenomena cannot be predicted as physical phenomena can; and thus one proof of the soundness of scientific conclusions, which appeals so strongly to the human mind in the work of the astronomer, is not at the command of the economist. But this defect again is less of a drawback in Political Economy than it might appear at first sight. The unknown causes which we cannot predict are generally such as men cannot influence. When we come to those which men can influence there is not the slightest doubt that scientific prediction can be applied. In other words, the unknown quantity is the cause itself, and not the relation of the cause and its effect.
Hence confining economic science within certain necessary bounds—that is, regarding it firstly as concerned only with general averages, and secondly as concerned only with the relation of cause and effect, and not merely with known causes— its applications are not subject to any greater limitations than are those of Physical Science. Upon the widely diffused tendencies of human nature, which we have described, we can build up a system bearing the same relation to the transactions of the commercial world that theoretical physics bears to the working of machinery. Such a system is that commonly known as the “school economy,” and taught by Ricardo and Mill. The objections to the deductive features in this school can arise only from a misapprehension. Its deductions being only hypothetically true, are not to be applied in practice unless the actual case is shown to apply to the hypothesis. But it does not follow that the method is useless because it needs modification when applied to particular cases, because this is true of all science.
Deduction is an essential process in every rational explanation of human affairs. To say that we are not to apply it to any subject is equivalent to saying that we can have no rational conception of the relation of cause and effect. A subject of which this is true would be quite unworthy of the study of men. It is a familiar fact to those who have studied human nature, that the so-called “practical men” who proclaim most loudly their distrust of what they call “theories” are extremely liable to become the victim of the most unfounded theories and injurious superstitions. Any one pretending to have a system of economics must be able to say that some assigned cause will produce definite effects, which he can foresee, upon the interests of society. If he cannot foresee what effect would be produced by any cause whatever, he has nothing worth talking about in his system. Now, the prediction of any effect of this kind is in its very nature an operation of deduction, and subject to the same limitations which have to be imposed on the deduced consequences of the purely theoretical economy. The conclusion of the protectionist, that the free competition of low-priced labor will diminish the wages of high-priced labor, is reached by a purely deductive process. Even if such a conclusion could be reached by induction,—that is to say, if we actually found by the collection of statistics that wages had been lowered by such competition,—the conclusion that they would be lowered in future would be a deductive one. It would in the first place presuppose that the competition had in times past been the true cause of the lowering of wages. And the conclusion would rest on the hypothesis that no cause would come into play to modify the effect. The conclusion would therefore be subject to all the limitations imposed on deductions generally.
Let us now look at what the objectors have to offer us in exchange for our system. Some of the more intelligent and distinguished of them profess to be disciples of a new school known as the German, statistical, or historical school. The one fundamental principle of this school is, that instead of beginning with certain hypothetical principles of human nature it professes to start from the great facts of history and statistics. Starting in such a way would be as bad as commencing the study of geometry by instructing the pupil in land-surveying, or commencing physics by taking the student around to see all the machinery in a city at work. Moreover, the new school has not really put any new system into practice. When we examine its writings we find them divisible into three classes. First, we have works like those of Roscher, which, whatever merit they may possess, do not, in their mode of development, differ radically from the system to which we are accustomed, and which therefore cannot be considered as forming a separate school unless we ascribe an extraordinary importance to differences of detail, and regard the works of every different writer as forming a different school. We have, secondly, a large mass of statistical investigation and social studies affecting the well-being of nations. But this is applied, not pure, political economy, and is at best only an application of principles of political economy to be otherwise learned. Finally, we have a very large mass of mere nonsense, of no interest or value to anybody except the student of psychology, who may use it to illustrate the aberrations of the human intellect.
Our judgment of the new-school economist must therefore depend upon his position. In so far as he is one who points out that the old system, however consistent and logical it may be, cannot be safely applied without due consideration of all the modifying causes which may act in each particular case, he is a sound teacher, how little soever common-sense people may need his teaching.
When he tells us that he has found out a better way of developing the subject,—a method by which the incompleteness inherent in all scientific systems is avoided,—he takes a position which he lamentably fails in making good. There is not a stone in his foundation capable of bearing any weight at all which is not taken from the English system. He can and does make valuable additions to the superstructure, but has added nothing better than platitudes to the foundation.
When he denounces and professes to reject the commonly received propositions which lie at the base of the subject because they are not absolute and universal, he is guilty of a proceeding so irrational that only the number and strength of his following entitle him to serious refutation.
Source: The Princeton Review, v. 60, November, 1884, pp. 291-301.
Image Source: Simon Newcomb in Leading American Men of Science, David Starr Jordan, ed. New York: Henry Holt and Company, 1910. Page 363.