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Purpose And Scope Of Economics

( Originally Published Early 1900's )

1. Economics defined.—Like any science economies, or political economy as it is often called, may be defined in different ways. For the practical man the simplest definition is this: Economics is the science which seeks to explain all business phenomena. Briefly, it is the science of business.

That definition, however, takes it for granted that the reader knows exactly what is meant by business. When we analyze the term we find that in its broadest sense business embraces all forms of human activity which have for their purpose the increase of wealth, that is to say, of all the things which men desire to possess. Viewing economics from this angle we may define it as the science which seeks to explain the phenomena incident to the production, consumption, exchange and distribution of wealth. A definition something like that will be found in the "Principles of Political Economy" of John Stuart Mill, England's greatest economist. This definition is some-times condensed as follows: Economics is the science of wealth. Modern economists seldom use this definition for the reason that the word "wealth," as we shall see later, is a popular term which cannot be de-fined in a clear-cut and scientific fashion.

When we consider that all forms of human activity have for their purpose the gratification of our wants we can quite properly define economics as the science which is concerned with all phenomena incident to man's efforts to get what he wants, especially in so far as those efforts lead him to hire the services of others or to buy and sell goods.

Whatever formal definition we accept it is sufficient at the outset for the reader to know that economics is concerned with the problems of values, prices, wages, interest, rent and profits, and with the human and physical factors upon which -these things depend. These are terms concerning which every business man has some knowledge. It is the purpose of economics to make that knowledge more definite, scientific and satisfactory.

2. Why economics is a science.-Science seeks to understand phenomena; it addresses itself solely to the intellect. It gives pleasure and satisfaction only to those who love the truth and enjoy intellectual achievement.

Art aims to utilize the qualities of material objects in such fashion as to give men pleasure or satisfaction. Its appeal is not to the intellect but to the emotions, or the senses, or the aesthetic side of human nature. The scientist seeks to know, to understand, to explain; the artist seeks to please, and in his efforts is often assisted by the discoveries of the scientist.

Economics deserves to be called a science because it aims at an understanding of business phenomena. Just as does the physicist or chemist, the economist first classifies the phenomena which he wishes to study and then proceeds to inquire into the causal relations existing between them. With him, as with every scientist, the eternal question is "why." In the complex field of business he sees changes constantly taking place, prices and wages rising, interest rates declining, wage earners striking, and he wants to know what causes these things.

His science cannot be an exact one like physics or mathematics for the simple reason that many of the causes of business phenomena are rooted in the variable and conflicting desires of men, and these desires he cannot accurately estimate, nor can he foresee changes in them.

Why are building rents higher on Broadway than in Jersey City?

Is the high rent of farm lands the cause of high prices for foodstuffs?

What effect will an increase in the country's money supply have upon prices and the rate of interest?

Why does a movie actor command the salary of several thousand dollars a day while a hired man on a farm can get only $30 a month and "keep"?

Why is the value of a country's exports sometimes for many successive years in excess the value of its imports of merchandise? Problems of this sort—and there are hundreds of them—are the kind over which the economist puzzles.

3. Why often, called political economy. — While the economist as a scientist is concerned altogether with the understanding of phenomena, nevertheless it has often happened that his conclusions have been helpful to statesmen in shaping the trade and industrial policies a nation Indeed the so-called father of political economy, Adam Smith, made his famous study of the subject for the purpose of discovering those policies of trade and production which were best adapted to enrich a nation. That is why he called his book, published in 1776, "The Wealth of Nations," a book which so greatly emphasized the ad-vantages of free trade that England in 1846 abandoned its historic policy of protection.

Because of this intimate relation between the conclusions of the economist and the welfare of a nation the science was commonly known as political economy for a hundred years after Adam Smith. That name, however, has been less used in recent years for the reason that modern economists are not, as a rule, politicians or statesmen and probably do not wish to have their efforts even seem to be colored. The economist, like the chemist or any other scientist, tries to find the truth and not to defend this or that policy. Just as the physical sciences have shown the way to more productive farming, more hygienic cooking, and more sanitary ventilation, so the discoveries and demonstrations of the economist are pointing the way to a wiser distribution of wealth, to better banking systems, and perhaps even to the abolition of poverty. When his work is considered in this aspect it is quite natural to call his science political economy, just as the Germans call it national economy.

4. English classical school.—Political economy is essentially a modern science. Prior to Adam Smith's time there had been much vague and rather unscientific discussion and writing about the problems which we now call "economic," but the ideas and conclusions of the authors of the earlier centuries would be deemed almost valueless at the present time. One group of writers known as the "mercantilists" exaggerated the importance of gold and silver, and held that a nation's wealth was best measured by the amount of precious metals in its possession. It was their view that a country should seek by every possible device to enlarge its exports and reduce its imports to the mini-mum in order that foreign nations should be compelled to send it gold and silver.

A later group of writers called the "physiocrats," most of whom lived in France, attacked the reasonBing of the "mercantilists" and emphasized the importance of agriculture. The sources of a nation's wealth, they held, lay in Mother Earth and not in trade.

Adam Smith discussed the subject of wealth production and distribution more clearly, comprehensively and logically than any preceding writer. His successors in England during the next hundred years created a rich literature in economics, elaborating and amending his views. These writers are commonly referred to as the English Classical School of Political Economy. The most, important of them were Thomas Malthus, famous for his "Theory of Population," published in 1798; David Ricardo (1772-1823), author of "Principles of Political Economy," published in 1817, a successful business man who retired in middle life and devoted himself to economic studies, achieving distinction because of the remarkable clearness and vigor of his thought, especially when treating the subjects of rent and money; and John Stuart Mill, a distinguished English philosopher, whose "Principles of Political Economy," published in 1847, is the crowning work of the English school and is probably the greatest treatise on economics that has ever been written despite the fact that many of its conclusions are rejected by many modern writers.

Mill and his colleagues of the English school treated economics as a science of wealth. They thought of wealth as consisting of all desirable commodities the supply of which was less than the demand. Since their discussions were especially concerned with the production and consumption of material commodities, the science of economics fell into disrepute in many quarters as being materialistic.

5. Austrian and historical schools. About 1880 certain writers in Austria began to develop the science from the human side; starting with a study of the nature of human wants. They placed greatest emphasis, not upon material wealth, but upon psycho-logical income. The gratification of human wants, they proclaimed, is the real aim of labor and enter-prise, and this is attained as well thru labor or services which give men satisfaction but create no tangible, material products as thru labor which does create such products. The views of the so-called Austrian school have greatly influenced the thinking of all modern economists, and have served to throw light into many dark places. For example, the English classical economists taught that labor which produced no tangible commodity was unproductive. In their opinion, the farmer and the manufacturer were productive laborers, but lawyers, bankers, merchants, preachers, teachers, artists and musicians were unproductive. It is now plainly seen that such a division of the different classes of workers, cannot be made. All are equally productive if they succeed in rendering a desired service.

The so-called historical school of economists de-serves a word. It has flourished principally in Germany and was the outgrowth of a revolt against the ultra deductive method of the English classical school, its supporters holding that induction was the proper logical method. Only by a thoro study of the facts and statistics of the past, they claim, can we arrive at a scientific understanding of the laws governing the production and distribution of wealth.

Economists today are endeavoring to utilize as far as possible the advantages of the methods employed by the different schools.

6. Relation of economics to ethics.—Economics is chiefly concerned with the phenomena of the business world, with facts as they are, with what is, rather than with what ought to be. It is not the economist's primary purpose to defend or justify any existing industrial methods or policies.

Yet many ethical questions arise which he of all men is best fitted to answer. For example, he is able to show most clearly that employers who are indifferent about the health and welfare of their employes are at fault economically as well as ethically, that in the long run a country cannot greatly prosper if public sentiment tolerates injustice to the working classes, or if the rich are unwilling to make sacrifices in order that the condition of the poor and ignorant may be bettered.

In economics the word "ought" always connotes an increase in the productive power and welfare of the people. Should there be a minimum wage law? No economist will answer that question until he has carefully considered the probable effects of such a law, not merely upon the condition of the comparatively few laborers for whose special benefit it is to be enacted, but also upon the productive power of all the people, now and hereafter.

Hence it is wrong to say that economics is as in-dependent of ethics as is a physical science. It deals with most important human activities. If it finds that some of these activities are illegal, or are in violation of the moral law, or that they involve manifest in justice to certain classes of society, it cannot and does not hesitate to say so. s

7. Income.—It is well for the reader at the outset to get a clear idea of the full meaning of the word income, for it embodies the entire subject matter of economics. The purpose of all human labor is income.

In the last analysis all income is psychical or mental. It is the pleasure or satisfaction we get out of the consumption of material goods, out of our food and clothing, out of the comfort of our homes, out of our enjoyment of music, out of the wondrous beauties of nature, out of the charm of an oil painting, or even out of the very joy of living if we are in good health and have friends.

Much of this psychical income or satisfaction we get without labor thru the abundant generosity of nature, but with income of this sort the economist is not concerned .except in so far as men labor and save that they may be in a position to en joy it later in life undistracted by business cares. For example, a man and his wife may work diligently and live most economically until they are fifty years old, saving every possible dollar in order that they may spend their remaining years in a beautiful country home where their most prized income will not be in the form of money or material wealth, but in books, music, healthful exercise and the society of their children and grandchildren. All thoughtful men realize that things of this sort are generally worth working for far more than the ownership of any amount of material wealth which can be measured in terms of money.

8. Money income.—Nevertheless in business, the word income is always thought of in connection with money. If you ask what a man's income is you will be told it is so many thousand dollars a year. Nobody will undertake to describe his psychic income. That is the ultimate thing for which he works, yet it is imponderable and not even he himself can give you much idea of its extent or amount. The economist merely knows that a dollar means much more to one man than it does to another. He knows that some men waste money, that they do not get out of it the satisfaction or psychical income which they might obtain. He knows also that the man with the large money income is liable to squeeze less satisfaction out of a dollar than the man with a small one. It is sufficient for us now to know that in business the word income ordinarily implies the idea of money.

9. Real income.—Economists sometimes speak of a man's real income and it is not difficult to explain what they mean. By real income is meant the things which a man buys with his money income. Suppose, for example, that a skilled artisan in a small city is earning $1,200 a year and that he must spend all of his money income in the support of himself and family. If he moves to a large city where the prices of the necessaries of life are much higher than in his former home and his money income remains the same, his real income will decline, for he will be able to buy less. Yet we should note that possibly his psychical income will be greater, perhaps because his children have better opportunities for education, or perhaps because one of his daughters has a fine voice and can have it more properly trained and developed in the city than in the country. But the economist cannot make these fine distinctions. He is obliged to assume that, as a rule, working men think first and last of their money incomes and that they will not voluntarily and knowingly submit to a reduction of their real incomes.

In ordinary times men give no thought whatever to real income. The phrase would puzzle them. All they think of is money income, and if salaries or wages are raised they are pleased; but in extraordinary times circumstances may force the distinction upon them. When in 1914 the war between the Central Powers and the Allies caused a rapid and spectacular rise in the prices of foodstuffs and of many of the necessaries of life, no man had to be an economist in order to see clearly that real incomes were declining. To meet this situation the money wages of most of the laboring classes were greatly increased.

10. Private property.—Two most important institutions of human society are the family and property. The test of private property is (1) the exclusive right of use and control, (2) the recognition of this right by others and (3) the willingness and power of some constituted authority to maintain this right against all comers.

The pursuit of agriculture introduced the idea of permanent property in the soil. It became necessary to protect the tiller in his property rights in order to secure a continuance of tillage. The incentive to save, as well as the encouragement to produce, led in time to the creation of the capitalist system, under which, in most productive processes, the tools are owned by others than those who use them.

Private property has been established as an institution because it is potent to increase the power of society over the external conditions of existence. Nevertheless–society has seen fit to modify the right of private property in many instances. An owner may not withhold his property from public use when it is needed for the public good; nor may he use it in ways opposed to the public good.

The view that the right to private property is inherent and inalienable has been superseded by another, that this right is a matter of social expediency based on the needs of society. Consequently, the right may be restricted or abolished when in the judgment of society its disadvantages outweigh the advantages.

11. Social unrest.—Much discontent is manifested today, especially in newspapers and periodicals in-tended to circulate among the poor, with regard to the great fortunes which a large number of men have accumulated during the last generation. It is claimed that the disparity between the condition of the rich and the poor is evidence of social injustice which demands instant remedy. During the last twenty years legislative bodies in most civilized countries have as a result given much of their time to the enactment of laws intended to benefit the so-called working classes. Most economists are in sympathy with the purpose of all this legislation, such as the minimum wage law, child labor laws and the eight-hour day law, but they know very well that no permanent improvement in the condition of the so-called masses can be made until there is a clear understanding of the reasons why the incomes of certain classes are inadequate.

To people who are ill-fed and badly housed, whose wages are pitifully low, the attitude of economists toward them may seem one of callous indifference, but it is not. The economist forever dreams of an economic millennium in which every man shall do the work he loves best, be happy in doing it, and receive compensation that will enable him to support himself and family in comfort and secure for his children the training and education that will fit them for well-paid services. But the economist knows that dreaming, hoping and sympathizing will accomplish nothing. He must make clear what are the causes of the in-equality of incomes. Only when he does this can laws be enacted which will be more palliative.

For several thousand years the human race-guessed at remedies for malaria. Scientific investigation discovered the cause in the mosquito, and there is reason to hope that the disease will finally disappear. Unfortunately it is not likely that any such simple cause of economic evils will ever be discovered. The causes are complex. For that reason in this field of the distribution of income the economist faces many difficult problems.

12. Origin of the present economic order.--The present system of production is sometimes called the competitive system because of the part which competition plays, and sometimes the capitalistic system because of the great importance of capital as a factor of production.

Two thousand years ago economic goods were produced in the main by slaves. During the Middle Ages slavery in Europe gave way to what is known as the feudal system, under which men had certain property rights but little choice of occupation. In towns and cities arose the guild system, in which men employed in a particular industry were organized with power to prevent outsiders from entering the industry except by permission of the guild or organization. With the development of the spirit of democracy, especially after the French Revolution, the economic as well as the political rights of the individual gradually received greater recognition, and the competitive regime began.

The reader should note that all these changes in the industrial structure have taken place as the result of forces in society itself and that they were not planned ` in advance by any great leader or by any group of men. Unthinking men sometimes speak of the existing order as if it had been deliberately created by the rich and strong for their own benefit in order that they might take advantage of the weak and poor. This is an entirely baseless assumption. The world's rich and great men are no more responsible for the existence or continuance of the present order than are the poor and weak. They do not have under their control the forces which are, so to speak, the seeds or germs of the future. No man knows today how men will make their living one hundred years hence, what they will produce and consume, or how they will be organized and captained.

All social institutions are the products of an evolution, in the development of which most men are as unconscious of the part they play as is the ant in the building of an ant hill or the bee in the construction of a honey comb. The greatest force making for change or progress is not material and is in no way related to wealth. It is the brain of the thinker, the scientist, the philosopher. A new idea, or an old idea given new expression, is the kind of force, and the only kind, that causes new shape and form to be given to human institutions.

13. Importance of economics to the business man.—Physics is a science concerned with the laws governing the forces of nature. Engineering is a technical art aiming to utilize those forces to the advantage of man. Alen built bridges, towers and roads long before they had mastered the science of physics. They worked by what is known as the rule of thumb, guessing and experimenting until they arrived at a satisfactory method, but they never could have constructed the marvelous machines and towering structures of today. The modern engineer must know physics as well as mathematics.

In the same way, the science of economics is essential to the training of any man who wants to give his business talent the greatest possible opportunity for achievement. Business is the art whereby man produces wealth for the gratification of his wants; economics is the science which studies the laws and conditions under which wealth is and must be produced. A man unfamiliar with the principles of this science, unless he has most extraordinary ability, is at a disadvantage in modern competition and will have to be satisfied with small business affairs and small results.

Economics is primarily concerned with the values of things and services. It seeks to explain the causes of existing prices of goods and to discover the forces or conditions which indicate or precede an advance or decline of prices. In the same way it studies rent, the price paid for the use of land and buildings; wages, the price paid for human services; and interest, the price paid for the use of capital. Is it not evident that the business man who knows something about the laws that determine these various prices occupies a position of advantage over the ignorant man who works, as it were, in the dark? The one is like the trained chauffeur who knows his engine intimately, detects the first symptoms of trouble, and makes real repairs in case of unavoidable accident; the other is like the unskilled driver who has learned by practice merely how to push buttons, press pedals and turn a wheel, but is stumped when his engine stalls.

14. Perils of business.—The business organism is much more complicated than the machinery of an automobile and is exposed to an almost infinite variety of perils and accidents. But these are nearly always preceded by symptoms which, do not escape the eye and ear of the business man whose judgment has been sharpened by science as well as by experience.

Business is subject to recurring periods of activity and depression, of expanding and contracting credit, of active and depressed markets, of rising and falling prices. How important it is that the business man should recognize the signs that forerun a change from one period to another, for not otherwise can he protect himself against unexpected losses or prepare himself in time to take advantage of better conditions and make larger profits ! There are quack advisers in business as there are quack doctors in medicine, and all these quacks seek the business man's patronage and money thru advertisements and circulars in which rhetoric gives to pseudoscience the lustre of real gold. No quack will deceive a business man who has grasped the fundamentals of economics. He will weigh care-fully the opinions and conclusions of others, but his final judgment will be his own, and with respect to his own business and its prospects will be nearer the truth than any opinion or judgment he could extract from an outsider.

Finally there is a national or patriotic reason why the business men of a country should understand the principles of economics. When it became evident that the United States would be drawn into the European war, Mr. Vanderlip, President of the National City Bank of New York, while discussing his country's state of unpreparedness called it "a nation of economic illiterates." 1 He meant that the business men of the United States were, as a rule, untrained in the science of economics and were, there-fore, carrying on their affairs in haphazard fashion, Very much as men cultivated the soil a thousand years ago. No nation can make the most of its resources and natural advantages, no government can secure for its people the greatest possible welfare and happiness, unless its business men can wisely control, direct and stimulate the production of wealth.


How would you define economics? Show by an illustration why economics should be called a science.

Describe the views of the English classical school of economics. How do their methods and conclusions differ from those of the Austrian and historical schools?

What is to be understood by the statement that in the last analysis all income is psychical?

What does the business man understand by income? What is real income?

What advantages have followed the establishment of private property and what limitations have been placed upon it?

How does knowledge of economic principles prove useful to the business man?

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