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Economics - Fallacious View Of Economic Method

( Originally Published Early 1900's )

THE object of the present chapter is to point out certain misapprehensions respecting economic method, which are closely related to the subject of the preceding chapter. The most common mistake made by those interested in the subject is that of looking upon the propositions of political economy as real or pretended absolute truths which can be applied without regard to time, place, or circumstances. The fact is that these propositions are true only under certain conditions, which conditions may or may not admit of specification. Hence no one can correctly apply the method of economics without a clear appreciation at each step of the conditions which may modify the conclusion. The following is an instructive illustration

It is a general fact, accepted as the basis of an extended branch of economics, that by increasing the price offered for an article its manufacture is stimulated. The traders in a certain South American port once found a profitable business in purchasing a particular kind of basket which the natives sup-plied at a very cheap rate. The price for which the traders could sell these baskets in their own country was so many times greater than that which they paid for them that they thought to increase their profits by offering a double price to the natives for the articles. The result was, however, that instead of the natives being stimulated to produce more of these baskets the supply was actually reduced to one half. Investigation showed that the natives needed only a limited quantity of the trinkets or money which they received for their baskets, and that they could not be induced to make more baskets than would supply them with this minimum. Accordingly, when they found that they could get their supplies in exchange for half as many baskets as they had formerly made, their inherent idleness led them to reduce their manufacture.

Here, then, was a case in which a law of economics was completely reversed. The explanation is that this law tacitly presupposes a state of things which exists only among civilized men, namely, a desire for all the money one can get and a little more. Change this condition, make man want nothing but coarse food, coarse clothing and shelter, and the whole science of economics will have to be reconstructed.

The Doctrinaire's Error. Through failing to see this dependence of all economic propositions upon certain conditions men fall into two opposite errors. The first error is that of the "doctrinaire," who makes and applies sweeping generalizations without a detailed examination of the causes which may act to modify the results which he so confidently predicts. There can be no absolute conclusions in economics, and no result can be asserted as positive, until all the causes which may affect it have been considered. What the science does for us is, not to predict the result, but to show us the methods by which we can predict it ourselves when we know the causes and have measured the influence of each cause. It is not like a map in which is laid down every stone and pitfall in some mammoth cave, but rather like a lantern in the hands of an explorer by the aid of which he can discover all the stones and pitfalls for himself.

The Popular Error. There is a large and influential body of men who view the subject from the same point as the doctrinaire ; that is, they assume that economic science should be, or at least that it pretends to be, a complete body of doctrine which will enable the inquirer to get at truth by purely deductive reasoning. When they find this supposed pretension to be wholly unfounded, they conclude that we must either reject or completely reconstruct the science. We call this view the popular one because it is one which men seem naturally prone to take. When the men who have studied economics in college go out into the world, they find that the phenomena they actually meet with are much more complex, and are affected by a much more intricate combination of causes, than are presupposed in the science they have learned from their books. In studying the latter they have been led to consider the science as something exact and positive; and as they gradually find by experience of the world that it is neither exact nor positive, and that the actual course of trade often deviates from that which they supposed to be marked out by economical theories, they too hastily conclude that the latter are worthless. The fact is that this defect is inherent in all science when we consider the latter in its practical applications. For example, the engineer student begins by learning a science which- is called mechanics. If he applies the results of this science without any modification or allowance for circumstances, he will find his calculations contradicted by the facts.

Owing to this necessary defect a disposition to undervalue the practical usefulness of pure science is prevalent among all classes. Yet without science we should have nothing but vague speculation, inconclusive reasoning, and general confusion of thought ; while with it we have a collection of principles which, although they cannot be blindly applied, are nevertheless of inestimable value to one who understands them.

A careful consideration of the process of abstraction (15) will enable the student to see the origin of this difficulty in applying scientific conclusions. It is that the conclusions of pure science necessarily presuppose that no other cause than those which it considers comes into play. Now it is impossible in economics to consider every possible cause which may modify the result. All we can do is to trace out the action of general far-reaching causes as they affect great bodies of people, leaving it to the individual himself to see how they are modified by the peculiar circumstances of each case.

Some writers require much more of our science than that it shall be applicable without modification to the most complex phenomena of human society. They also demand that it shall be applicable to every state of things which their imagination can invent or their research discover. It is sufficient to say that such a requirement can proceed from nothing but defective knowledge, since no science whatever in any form could fulfil such a condition.

If, in thus rejecting all economic propositions, men had nothing to substitute for them, their views would have at least the merit of consistency. But there is a popular method of thinking on the subject which consists in tacitly assuming that whatever is seen to follow any cause is the effect of that cause. For example : to the question, "How would you determine the effect of a change in the tariff ?" the answer of the majority is, " I would wait and see the effect." This method is defective because every fact that we can observe is the product of a multiplicity of different causes. For example, a fall in the price of iron may arise from the discovery and opening up of new mines, from a falling off in the building of railways, from a diminished demand from abroad, from the discovery at home or abroad of improved methods of manufacture, as well as from a change in the tariff. In consequence it might well happen that after the tariff on imported iron was raised the iron would be cheaper than before, and that it might be dearer after the tariff was lowered. It would therefore be illogical to conclude that the fluctuations in price were due to any one cause until all the causes were investigated. This example should make it perfectly clear to the student that there is no rational method of tracing cause and effect in economics, except to begin by considering the action of the various causes one at a time.

But the main defect of the popular method is that of ignoring what we may call the self-sufficiency of man, and of looking upon man as a victim of blind forces which he follows as a leaf follows the course of the wind. The fact is that men in making their bargains and doing their work are not the creatures of any such forces. They may be relied upon to take the best possible measures for guarding their own interests, and their movements are determined by their own wills and not by any blind laws which we can formulate from statistics.

This way of looking at economic phenomena is so natural that some illustrations of its dangers may be adduced. Let us suppose an investigator seeking to learn the relation between quinine and the public health by statistical observation. He might reason thus: "If quinine conduces to the cure of intermittent fever, then where people take most quinine they will have least intermittent fever, and each new importation of quinine will be followed by an improvement in the public health. But looking at the facts of the case, we find them to be directly the reverse of this. In the low lands along the lower part of the Mississippi valley and among the swamps of the Gulf States people take more quinine than anywhere else in the country. Yet, far from being more healthy, they suffer from intermittent fever more than any other people. Not only so, but we find that the large importations of quinine which take place annually in the summer are regularly followed in the autumn by an increase in the frequency of intermittent fevers. Therefore let the advocates of quinine propound what abstract reasons they please, the facts are against them and show conclusively that quinine causes intermittent fever in-stead of curing it."

This example belongs to the class which the reader who desires to train himself in habits of accurate thought should study very closely. What is the defect in the logical process by which the conclusion is reached ? We have a phenomenon, intermittent fever; we have a cause, quinine. The relation of the two is fully proved. The only question that can arise is whether the fever is the cause of the quinine or the quinine the cause of the fever. Since the introduction of the quinine precedes the annual breaking out of the fever, we have in the former hypothesis the apparent difficulty that the effect comes before the cause. To the average unthinking man, looking at society from the outside, this difficulty would be insurmountable. But when we recognize in men the quality of adapting means to future ends, we see that if we arrange events according to the order in which we observe them the effect may precede the cause. The general cause of the annual importation of quinine is the belief on the part of great bodies of men that the fever will break out. Now, belief is a mental state leading to action on the part of men ; and if we ignore it, and the consequent adaptation of means to future ends, we not only lose a valuable means of explaining economic phenomena, but we run the danger of falling into error.

The reader may inquire whether there is really any danger that people should fall into errors so gross as that above sup-posed. We reply by asking, Why do they not fall into that very error ? The reply to this last question is that the error itself is so obvious that there is no danger of falling into it. The common-sense of the average man familiarizes him with the whole process. Common-sense is the lantern by which he sees the relation of things. But if the process is not familiar to him, if this lantern does not shine, then he is in darkness so far as this way of seeing his error is concerned, and he will inevitably fall into mistakes of the kind above illustrated. We have only to read the newspapers and the writings of great numbers of intelligent men to find any quantity of reasoning of the form of that above given; and how are we to know when its conclusions are right and when they are wrong?

At first sight it may seem discouraging to the student to ask him to devote much close thought to a science all of whose rules and conclusions are imperfect. But there is no occasion for such discouragement. If he has carefully mastered the spirit of this and of the preceding chapter, he will see that the imperfections which we have just been describing are only those which are common to all human knowledge. No knowledge of the future affairs of mankind is perfect, because we cannot possibly tell what causes may come into play to disappoint our expectations. But notwithstanding these imperfections, we can form more or less probable judgments of the action of causes and effects in the world generally which are of the greatest value. The imperfections of political economy are less than those of meteorology.

We may compare the prediction of a specific future economic event to an attempt to predict the weather on the 8th of January of some future year. We can make no such pre-diction with any approach to certainty. Are we to conclude from this that no attempt to foresee changes of weather and of seasons is of any value ? Not at all. We know that the seasons go through an annual course ; that the weather is hot in July and August, and then on the average grows colder until January. We make our plans for seed-time and harvest, for winter fuel and summer journeys, with well-founded confidence that the changes of seasons will go through their regular course. Now, rejecting the conclusions of political economy on the ground that, being uncertain, they can be of no practical value is like rejecting all the rules about seed-time and harvest because meteorology can never tell us what kind of weather we shall have on any particular day. We must do in economics just as we would do in the scientific investigation of. all other general causes. We must frame hypotheses which shall come as nearly as possible to the general average of things as they exist in the world. Every observing man has fairly clear ideas as to how men in general act ; that is to say, he has a certain conception of an average or typical man. From this type every man we meet may differ in some detail, yet it strikes a general average amongst them. But it does not at all follow that we are to stop here and assume that no other man than this average one exists. We may go on and classify men in regard to their differences from the average man to any extent we please. What we have to do is to be careful that our classification corresponds as nearly as possible to the actual characteristics of men.

We have to carry the same system through our whole study. We must at every step distinguish between far and wide reaching average causes affecting large classes of men, and the temporary disturbing causes which sometimes act in one direction and sometimes in another. By proceeding in this way we shall find human society to be a most interesting and satisfactory object of study, in which we can trace the action of cause and effect with nearly as much certainty as we can trace out any system of natural operations going on in the world.

With fallacies respecting economic method we may associate certain imperfections in ways of thinking to which mankind are prone, and which every student of science should carefully train himself to avoid. The most common defect of this kind is that of confounding statements of how things are with statements how we would like them to be, or how things might or ought to be. Those who pursue inquiries in a purely partisan spirit, for the purpose of proving some theory or bringing about some result, are naturally prone to this defect. The defect sometimes reaches such proportions that the person affected by it becomes incapable of understanding a truth simply as a truth, and cannot conceive the state of mind of one who describes things as they are without any ulterior purpose.

Now science is primarily concerned with things as they are. Just as no astronomer ever claimed that Jupiter was any too large, or that those nearly invisible little planets which are being discovered every year are a great deal too small, so the economist, considered as a purely scientific inquirer, pursues his investigations without any spirit of praise or depreciation. His business is to describe human society exactly as it is, feeling that the question how he would like it to be, or how it ought to. be, belongs to another branch of the subject.

It does not follow from all this that the student of economics or any one else should divest himself of human sympathies and refuse to consider what men ought to do to promote their interests. It is not necessary that he should absolutely confine himself to what we have above defined as the field of scientific economics. But what he must carefully do is to distinguish between his thoughts as a scientific economist and his feelings as a promoter of human welfare. The defect we have described does not consist in a person feeling an interest in how things ought to be, and how ends can be attained, but it consists in confusing this feeling with statements of fact. We cannot form the best judgment of what society ought to do to promote its own welfare until we understand as well as possible what the state of things in society really is. We must therefore begin by studying economical causes without any sentiment of praise or blame, and without any feeling that we wish they were otherwise or that we are glad they are as we find them. When we have done this, and not before, we shall be able to form an intelligent judgment about questions of the policy which society ought to pursue in order to secure its own well-being.

A common mistake is that the conclusions of the plain unlettered man differ from those of economists in being more immediately founded on observed facts and less on deduction. The truth is that the plain unlettered man is more prone to rely on deduction from unproved hypotheses than the economist is. All classes must equally use deduction, because it is only by this logical process that we form any conclusion about the future effect of any present cause. Drawing the conclusion that rain will follow a certain direction of the wind with certain appearances of the clouds is an act of logical deduction. The main point in which men's logical methods differ lies in the care with which hypotheses are formed by induction from observed facts, and the readiness of men to test them. Now it is the plain man who is most prone to form hasty generalizations from insufficient facts, to consider the conclusions which he thence deduces as final, and to be blind to all facts which do not tally with his theory. One object of science is to train men into the habit of carefully taking account of all facts whether they do or do not agree with their hypotheses.

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