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Economics - Special Features Of Economic Method

( Originally Published Early 1900's )

ALTHOUGH the processes just described are common to all science, yet in the case of political economy they have to be applied in a way entirely different from that of physical science. The reason of this difference is that one great object of political economy is to foresee how men will act. Now, human acts are not governed by necessary and invariable laws of the class recognized in physics, but by will and choice. There is no law of nature which compels goods to be sent to the best market, or which requires men to dig mines and build steamships. Should we attempt to reduce the phenomena of manufactures, commerce, mining, etc., to the same kind of laws which prevail in inanimate nature, we should never get at any certain result, but might be wrong as often as right. Hence an investigator ignoring human will and motives and studying the work of mankind as if it were a product of natural forces would be at a great disadvantage.

But we have a resource which compensates this disadvantage in our knowledge of the operations of our own minds. We each know individually that in deciding how we shall employ our time we are governed by a consideration of the relative benefits and evils of the various courses of action between which we have to choose. As a rule we choose that course which will yield us most good or pleasure. Looking at our fellow-men, we are irresistibly led to the belief that their acts proceed from like motives. We instinctively trace their actions to hopes, fears, and desires similar to those which animate our-selves. We feel that, like ourselves, they seek to reap the maximum of enjoyment from the minimum of disagreeable labor.

This conclusion is verified by universal experience. We never see men voluntarily wasting their labor unless the labor itself is a source of enjoyment. In no case do they spend more money or time on an object than is necessary for the purpose.

The significance of our knowledge of human nature is this : it gives us an understanding of the forces at work in the social organism which we cannot command in the case of those living organisms with which we are familiar. We have already seen that the forces which animate the former are the desires and activities of individual men who bear the same relation to the whole organism that the molecules which make up an animal body bear to the body itself. But in the case of an animal we know nothing about the vital forces which animate the mole-cules, and can only study the organism from outside, as it were, while in economics we do know all about the motives which animate men in general, and can see how these motives lead to all the forms of human activity. The economist therefore has a great advantage over the physiologist in being able to understand the working of the minute machinery of which the physiologist remains entirely ignorant.

The fundamental and most general hypotheses of political economy may now be formulated as follows :

1. That man is a being moved to action by an unlimited series of desires.

2. That these desires can be partially satisfied by the exertion of those faculties, bodily and mental, with which the Creator has endowed him.

3. That he is a reasonable being capable of adapting means to ends.

4. That in consequence of being a reasonable being he will exert his faculties in such a way as to secure the maximum gratification of desires with the minimum of inconvenience under the circumstances in which he is actually placed.

Our science therefore recognizes all the complicated machinery by which human wants are gratified as the result of the single prime moving force defined in, namely, human desires. These desires are to be regarded as the first cause of economic effects. And this cause, considered in its relation to the effects produced, is not of the kind commonly investigated in physical science, but belongs to the class of final causes. The laws which prescribe how railroads shall be built, or when ships shall sail, or where manufactories shall arise, can only be laws of human action ; and such actions are determined by a final cause, the will of man. They are subjects of scientific investigation only because, as assumed in the third and 'fourth of the preceding hypotheses, we can foresee how men will act under given circumstances, by knowing what, from their point of view, will be the course of action best adapted to lead to their ends.

It is sometimes considered that political economy makes abstraction of every human passion or motive except the desire of wealth and aversion to labor, and that it represents man as a perfectly selfish being. But this is true only under a great modification of the sense in which we are to understand the terms used. Man is considered as a selfish being to this extent, and to this only, that he has his own desires which he is exerting himself to gratify. The desires themselves may be of the most benevolent kind. The labor of the Sunday scholar who is trying to earn a few pennies to put into the missionary-box may be included in the domain of political economy as well as any other labor. A man may spend his entire income in sending missionaries to the heathen or in charitable objects with-out violating the laws of political economy; for it is certain that he will not spend his money in this way unless he desires to have the heathen converted or the wants of his fellow-men relieved. These benevolent desires are part of the man's nature as much as the desire for a good dinner is. They lead him into making the best bargains he can for himself in buying and selling, just as other desires do, because the better bargain he makes the more money he will have for the heathen and the poor.

The Deductive Method. In so far as we can construct a purely deductive science of economics, based on the above hypotheses, our methods may be stated in the form of answers to two problems, as follows :

PROBLEM I. To foresee how men will proceed to attain any given end by their industry.

Method of Solution. Discover, from the condition in which they are placed and with the knowledge which they possess, what seems to them the easiest way of attaining that end : that way they will adopt.

PROBLEM II. To find how. men will spend their labor.

Method of Solution. Discover, from the condition in which they are placed and from the character of their desires, in what way they can derive the maximum of enjoyment from their labor, in what way they will spend it.

Were our knowledge of the whole world, including every man in it, complete in every particular, and were we able to apply all this knowledge at every moment, we might imagine ourselves to predict all economic phenomena by this method much as the astronomer predicts the motions of the planets. Our knowledge being obviously so imperfect that we cannot predict in this way, the preceding solutions express, not our method of discovering facts, but our method of arranging them after they are discovered. That is to say, having learned from the statistics of manufactures and commerce what employments men engage in, we. conclude that these are the employments from which they derive the maximum of enjoyment. We thus can put together our deductive chain by a reverse or inductive process.. But, so far as the form of our conclusions is concerned, the final result is the same whether we reason in one direction or the other.

Requisites for the Deductive Method. In order to apply the above method the economist must be supplied with three classes of data.

First, the conditions which surround mankind.

Secondly, the nature and objects of human desires.

Thirdly, the extent and kind of knowledge which men possess on the subject of how they may secure the satisfaction of their desires.

These several data can be found only by observation, and their discovery is therefore a process of induction into which abstract reasoning should not enter. Let us see in a general way what these data are.

I. The general condition of man is one in which nature offers him an infinite variety of services, provided he will adopt the proper means to command those services. She offers him land by cultivating which he can supply himself with food; she offers him coal on condition that he will dig it, and ores by smelting which he can supply himself with metals. She rewards him for every improvement which he will make in his tools. If he builds and properly equips a mill, she will turn it by the power of the wind ; if a steam-engine, she provides him with the expansive force of steam. But she offers very different gifts to different countries. One she supplies with a fertile soil : here man expends his energies in raising wheat and corn. Another she supplies with coal and iron : here man becomes a miner. Another she supplies with timber and water-power : here man becomes a manufacturer.

Men will find out for themselves these natural advantages very much sooner than a political economist can discover them for him; no inductive logic is therefore necessary for their discovery.

II. The Character and Objects of Human Desire. The desire of men for special objects is in general to be learned from observation of their acts on a large scale, so that no general conclusion can be stated. But in the case of civilized men there is one general characteristic which lies at the bottom of the difference between his state and that of the savage. It is that he seeks to provide against his future wants, as ,well as to gratify his present ones. Hence his future happiness is an object of present desire. We shall see hereafter that without this regard for the future no accumulation of wealth would be possible.

Yet another feature of the desires of civilized man is that they are practically unlimited. If every man were satisfied as soon as he had accumulated the things necessary to supply his current wants, the whole fabric of economics would be changed. Our science takes account of the fact that great numbers of men accumulate all the riches they can, regardless of their already having enough for their own uses.

III. Influence of Knowledge. Man seeks his ends, not necessarily in that way which is absolutely the easiest, but in the easiest way he knows. As his knowledge increases he discovers ways of increasing his power which lie did not before know; and so important is this knowledge that it has been more instrumental in enabling him to improve his condition than his labor has. Thus, our knowledge of the expansive power of steam has caused the labor spent in making engines to be almost infinitely more efficient than would have been the same amount of labor without that knowledge.

Limitations on our Knowledge of the Fundamental Data. Supposing ourselves to be equipped with a complete knowledge of all the preceding data, we might be able by deductive reasoning to predict and explain all human acts devoted to the production and enjoyment of wealth. Unfortunately, however, our knowledge is so limited that we cannot make absolute predictions as we can in a physical science. The reason is that many of the data belong to the future and therefore cannot be foreseen. Moreover, we know very little about individual men, and so we have to reason about them in large masses. Thus two limitations are placed upon our powers of foresight, which at first glance might appear fatal to our success as investigators, namely :

I. We know very little about each separate man ; we cannot tell what notion may enter his head, or how absurdly he may behave.

We do not know what causes may, to-morrow or next year, come into play to upset or alter our conclusions.

But an examination will show that after all there is a great deal of value which we can learn, and that these limitations are not so destructive to satisfactory conclusions as they at first sight appear. Let us begin with a consideration of general or average results, to which we are confined by the first limitation.

The law of Averages. What we are concerned with in political economy is, not the interests of single individuals, but those of society at large ; that is, the average interests of great masses of individuals. It is true, and we must never lose sight of this truth, that the community is made up of individuals, and that nothing can be beneficial to a community unless it be beneficial to some or all of its members. But since we cannot consider all the members individually, we must take general averages.

Now it is a familiar fact that many events which considered individually are matters of pure chance occur with extreme regularity in the long -run. A familiar example is the proportion of misdirected letters and of letters without direction which are dropped into great post-offices like those of London and New York. The number of such letters increases almost as regularly, from year to year, as the number of letters posted.

Another example is afforded by the tables of mortality. Although out of the hundred thousand members of our largest Life Insurance Company it is impossible to say who will be living and who dead at the end of five years, the actuary can nevertheless predict the total number who will die within that time with hardly a possibility of being wrong by 5 per cent.

As a third example the curious student may enumerate the names found in the directory of any large city, and find what proportion of them are Smith. This proportion, in cases where the numbers are large enough, will be found to vary wonderfully little from 1 in 85. At the census of 1880 the population of Chicago was 500,000. This proportion would give 5882 Smiths, and we may conclude with much confidence that this result is within 5 per cent of the truth.

The limitations to which economic investigations are subjected, so far as the law of averages is concerned, maybe defined as follows:

I. In cases where some individual opinion or habit is alone concerned, we cannot apply scientific method to determine what conclusion the individual will reach. For example, there is no law by which the economist can determine beforehand the salary which a railway manager or the President of the United States can command. Presidents are too few in number, and railway managers too diverse in the character of the operations which they control, to enable any reliable average to be fixed.

II. But where the acts of thousands or millions of men are concerned, and where the question is to reach a conclusion respecting sums total in which the part of each separate individual is so small as to be lost in the mass, we may apply scientific method. This is the case with nearly everything which concerns the great operations of agriculture, manufacture, and commerce, the settlement of the country, the cultivation of the land, the raising of crops, their transportation to market, the growth of manufactories, the prices of goods, and countless other results of human effort. When considered in the mass, these processes go on in accordance with definite and fixed laws, which scientific method enables us to understand and investigate.

Unknown Economical Causes. Suppose that we de-sire to know what a ton of Bessemer steel will be worth three years from the present time. It would be impossible for any economist to answer the question owing to the multiplicity of unknown causes on which the price may depend. The supply of crude iron, the discovery of new processes of manufacture, the number of railways to be built, the tariff to be levied, the wages to be paid, all come in to influence the result.

But this does not prevent us from predicting what effect any given cause will have on the price with almost as much certainty as we can predict the properties of a chemical compound or the power of an engine. Suppose, for instance, that an economist is asked what effect a diminution of ten per cent in the tariff would have. Assuming him to be a master of scientific method and to have all the attainable data, he could give his answer with sufficient precision to afford a basis for action. The same remark would apply if asked what effect a rise in wages would have upon the price, or how the latter would be influenced by the building of a railway across the Asiatic continent which should require a great amount of the metal. In a word, the fact that we do not know all the causes does not prevent us from predicting the effect of those causes which we do know. In this respect political economy may be compared to a science which tells a traveller exactly how fast a vehicle of any kind will convey him, and at what cost per mile, but cannot give him any estimate of the total expense of his journey because its length is unknown. The science will be of value to him be-cause it will enable him to seek the cheapest and easiest conveyance notwithstanding his ignorance of the absolute expense. We may even say that any criterion which will enable him to learn which conveyance is the quickest will be of the same value whether the length of the journey is known or unknown.

Physiology and hygiene teach men the laws of healthy living, by following which they will be enabled to prolong their lives. But no science will tell a man whether he will be living or dead at the end of ten years. This, however, does not diminish the value of the knowledge he actually possesses respecting the laws of health. So the economist may be able to say to the statesman who consults him about a proposed reduction of one dollar a ton in the tariff on iron, "I do not know what the price will be after the reduction you propose; but this I do know, it will be fifty cents a ton lower than it will be if you leave the tariff unchanged, and the importation from abroad will be thirty per cent greater."

Summary of Results. The conclusions to which we are led by these considerations may be summed up as follows :

I. The ability of mankind to secure those objects of desire for which they spend a considerable portion of the labor of their lives is subject to certain laws and limitations, and is affected by a multitude of causes.

Examples of economic causes are : the greater or less abundance of the crops; the building of new railways; improvements in machinery and manufactures; changes in the fashions and public tastes on the subject of clothing; changes in the tariff on imported goods; laws to regulate labor; combinations among workmen; increase of population; the discovery of new mines of gold, silver, or other metals.

II. Some of these causes cannot be known until after they occur; others can to a greater or less extent be foreseen ; while yet others are the acts of individuals or of governments.

III. Economics is the science which shows us how these numerous causes act, and thus enables us to predict the effects when the causes become known. This is done by taking the machinery of the social organism all to pieces, as it were, examining its component parts, studying their mutual action and interaction, so as to learn the separate action of each cause.

IV. But such predictions are generally confined, in the first 'place, to general average results as affecting either the whole mass of the community, or great classes of men, as farmers, mechanics, laborers, etc. Their effects upon each individual may thus to a certain extent be foreseen, but we need not attempt to predict how any given individual will act in consequence.

V. Such predictions are subject to the further limitation that the final result is liable to be modified by the coming into play of unknown or unforeseen causes. But this does not generally alter the relative effect.

VI. The economist has completely attained the object of his science when he has learned how to predict the effect of any cause whatever upon the interests of each class of men and not before.

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