Thorstein Veblen The Preconceptions of Economic Science The Quarterly Journal of Economics, 13 (1899) II ADAM SMITH'S animistic bent asserts itself more plainly and more effectually in the general trend and aim of his discussion than in the details of theory. "Adam Smith's Wealth of Nations is, in fact, so far as it has one single purpose, a vindication of the unconscious law present in the separate actions of men when these actions are directed by a certain strong personal motive."(1*) Both in the Theory of the Moral Sentiments and in the Wealth of Nations there are many passages that testify to his abiding conviction that there is a wholesome trend in the natural course of things, and the characteristically optimistic tone in which he speaks for natural liberty is but an expression of this conviction. An extreme resort to this animistic ground occurs in his plea for freedom of investment.(2*) In the proposition that men are "led by an invisible hand," Smith does not fall back on a meddling Providence who is to set human affairs straight when they are in danger of going askew. He conceives the Creator to be very continent in the matter of interference with the natural course of things. The Creator has established the natural order to serve the ends of human welfare; and he has very nicely adjusted the efficient causes comprised in the natural order, including human aims and motives, to this work that they are to accomplish. The guidance of interposition, the invisible hand takes place not by way of interposition, but through a comprehensive scheme of contrivances established from the beginning. For the purpose of economic theory, man is conceived to be consistently self-seeking; but this economic man is a part of the mechanism of nature, and his self-seeking traffic is but a means whereby, in the natural course of things, the general welfare is worked out. The scheme as a whole is guided by the end to be reached, but the sequence of events through which the end is reached is a causal sequence which is not broken into episodically. The benevolent work of guidance was performed in first establishing an ingenious mechanism of forces and motives capable of accomplishing an ordained result, and nothing beyond the enduring constraint of an established trend remains to enforce the divine purpose in the resulting natural course of things. The sequence of events, including human motives and human conduct, is a causal sequence; but it is also something more, or, rather, there is also another element of continuity besides that of brute cause and effect, present even in the step-by-step process whereby the natural course of things reaches its final term. The presence of such a quasi-spiritual or non-causal element is evident from two (alleged) facts. (1) The course of things may be deflected from the direct line of approach to that consummate human welfare which is its legitimate end. The natural trend of things may be overborne by an untoward conjuncture of causes. There is a distinction, often distressingly actual and persistent, between the legitimate and the observed course of things. If "natural," in Adam Smith's use, meant necessary, in the sense of causally determined, no divergence of events from the natural or legitimate course of things would be possible. If the mechanism of nature, including man, were a mechanically competent contrivance for achieving the great artificer's design, there could be no such episodes of blundering and perverse departure from the direct path as Adam Smith finds in nearly all existing arrangements. Institutional facts would then be "natural."(3*) (2) When things have gone wrong, they will right themselves if interference with the natural course ceases; whereas, in the case of a causal sequence simply, the mere cessation of interference will not leave the outcome the same as if no interference had taken place. This recuperative power of nature is of an extra-mechanical character. The continuity of sequence by force of which the natural course of things prevails is, therefore, not of the nature of cause and effect, since it bridges intervals and interruptions in the causal sequence.(4*) Adam Smith's use of the term "real " in statements of theory -- as, for example, "real value," "real price"(5*) -- is evidence to this effect. "Natural" commonly has the same meaning as "real" in this connection.(6*) Both "natural" and "real" are placed in contrast with the actual; and, in Adam Smith's apprehension, both have a substantiality different from and superior to facts. The view involves a distinction between reality and fact, which survives in a weakened form in the theories of "normal" prices, wages, profits, costs, in Adam Smith's successors. This animistic prepossession seems to pervade the earlier of his two monumental works in a greater degree than the later. In the Moral Sentiments recourse is had to the teleological ground of the natural order more freely and with perceptibly greater insistence. There seems to be reason for holding that the animistic preconception weakened or, at any rate, fell more into the background as his later work of speculation and investigation proceeded. The change shows itself also in some details of his economic theory, as first set forth in the Lectures, and afterwards more fully developed in the Wealth of Nations. So, for instance, in the earlier presentation of the matter," the division of labor is the immediate cause of opulence"; and this division of labor, which is the chief condition of economic well-being, "flows from a direct propensity in human nature for one man to barter with another."(7*) The "propensity" in question is here appealed to as a natural endowment immediately given to man with a view to the welfare of human society, and without any attempt at further explanation of how man has come by it. No causal explanation of its presence or character is offered. But the corresponding passage of the Wealth of Nations handles the question more cautiously.(8*) Other parallel passages might be compared, with much the same effect. The guiding hand has withdrawn farther from the range of human vision. However, these and other like filial expressions of a devout optimism need, perhaps, not be taken as integral features of Adam Smith's economic theory, or as seriously affecting the character of his work as an economist. They are the expression of his general philosophical and theological views, and are significant for the present purpose chiefly as evidences of an animistic and optimistic bent. They go to show what is Adam Smith's accepted ground of finality, -- the ground to which all his speculations on human affairs converge; but they do not in any great degree show the teleological bias guiding his formulation of economic theory in detail. The effective working of the teleological bias is best seen in Smith's more detailed handling of economic phenomena -- in his discussion of what may loosely be called economic institutions -- and in the criteria and principles of procedure by which he is guided in incorporating these features of economic life into the general structure of his theory. A fair instance, though perhaps not the most telling one, is the discussion of the "real and nominal price," and of the "natural and market price" of commodities, already referred to above.(9*) The "real" price of commodities is their value in terms of human life. At this point Smith differs from the Physiocrats, with whom the ultimate terms of value are afforded by human sustenance taken as a product of the functioning of brute nature; the cause of the difference being that the Physiocrats conceived the natural order which works towards the material well-being of man to comprise the nonhuman environment only, whereas Adam Smith includes man in this concept of the natural order, and, indeed, makes him the central figure in the process of production. With the Physiocrats, production is the work of nature: with Adam Smith, it is the work of man and nature, with man in the foreground. In Adam Smith, therefore, labor the final term in valuation. This "real" value of commodities is the value imputed to them by the economist under the stress of his teleological preconception. It has little, if any, place in the course of economic events, and no bearing on human affairs, apart from the sentimental influence which such a preconception in favor of a "real value " in things may exert upon men's notions of what is the good and equitable course to pursue in their transactions. It is impossible to gauge this real value of goods; it cannot be measured or expressed in concrete terms. Still, if labor exchanges for a varying quality of goods, "it is their value which varies, not that of the labor which purchases them."(10*) The values which practically attach to goods in men's handling of them are conceived to be determined without regard to the real value which Adam Smith imputes to the goods; but, for all that, the substantial fact with respect to these market values is their presumed approximation to the real values teleologically imputed to the goods under the guidance of inviolate natural laws. The real, or natural, value of articles has no causal relation to the value at which they exchange. The discussion of how values are determined in practice runs on the motives of the buyers and sellers, and the relative advantage enjoyed by the parties to the transaction.(11*) It is a discussion of a process of valuation, quite unrelated to the "real," or "natural," price of things, and quite unrelated to the grounds on which things are held to come by their real, or natural, price; and yet, when the complex process of valuation has been traced out in terms of human motives and the exigencies of the market, Adam Smith feels that he has only cleared the ground. He then turns to the serious business of accounting for value and price theoretically, and making the ascertained facts articulate with his teleological theory of economic life.(12*) The occurrence of the words "ordinary" and "average" in this connection need not be taken too seriously. The context makes it plain that the equality which commonly subsists between the ordinary or average rates, and the natural rates, is a matter of coincidence, not of identity. Not only are there temporary deviations, but there may be a permanent divergence between the ordinary and the natural price of a commodity; as in case of a monopoly or of produce grown under peculiar circumstances of soil or climate.(13*) The natural price coincides with the price fixed by competition, because competition means the unimpeded play of those efficient forces through which the nicely adjusted mechanism of nature works out the design to accomplish which it was contrived. The natural price is reached through the free interplay of the factors of production, and it is itself an outcome of production. Nature, including the human factor, works to turn out the goods; and the natural value of the goods is their appraisement from the standpoint of this productive process of nature. Natural value is a category of production: whereas, notoriously exchange value or market price is a category of distribution. And Adam Smith's theoretical handling of market price aims to show how the factors of human predilection and human wants at work in the higgling of the market bring about a result in passable consonance with the natural laws that are conceived to govern production. The natural price is a composite result of the blending of the three "component parts of the price of commodities," -- the natural wages of laborer, the natural profits of stock, and the natural rent of land; and each of these three components is in its turn the measure of the productive effect of the factor to which it pertains. The further discussion of these shares in distribution aims to account for the facts of distribution on the ground of the productivity of the factors which are held to share the product between them. That is to say, Adam Smith's preconception of a productive natural process as the basis of his economic theory dominates his aims and procedure, when he comes to deal with phenomena that cannot be stated in terms of production. The causal sequence in the process of distribution is, by Adam Smith's own showing, unrelated to the causal sequence in the process of production; but, since the latter is the substantial fact, as viewed from the standpoint of a teleological natural order, the former must be stated in terms of the latter before Adam Smith's sense of substantiality, or "reality," is satisfied. Something of the same kind is, of course, visible in the Physiocrats and in Cantillon. It amounts to an extension of the natural-rights preconception to economic theory. Adam Smith's discussion of distribution as a function of productivity might be traced in detail through his handling of Wages, Profits, and Rent; but, since the aim here is a brief characterisation only, and not an exposition, no farther pursuit of this point seems feasible. It may, however, be worth while to point out another line of influence along which the dominance of the teleological preconception shows itself in Adam Smith. This is the normalisation of data, in order to bring them into consonance with an orderly course of approach to the putative natural end of economic life and development. The result of this normalisation of data is, on the one and, the use of what James Steuart calls "conjectural history" in dealing with past phases of economic life, and, on the other hand, a statement of present-day phenomena in terms of what legitimately ought to be according to the God-given end of life rather than in terms of unconstrued observation. Account is taken of the facts (supposed or observed) ostensibly in terms of causal sequence, but the imputed causal sequence is construed to run on lines of teleological legitimacy. A familiar instance of this "conjectural history," in a highly and effectively normalized form, is the account of "that early and rude state of society which precedes both the accumulation of stock and the appropriation of land." (14*) It is needless at this day to point out that this "early and rude state," in which "the whole produce of labor belongs to the laborer," is altogether a figment. The whole narrative, from the putative origin down, is not only supposititious, but it is merely a schematic presentation of what should have been the course of past development, in order to lead up to that ideal economic situation which would satisfy Adam Smith's preconception.(15*) As the narrative comes nearer the region of known latter-day facts, the normalisation of the data becomes more difficult and receives more detailed attention; but the change in method is a change of degree rather than of kind. In the "early and rude state" the coincidence of the "natural" and the actual course of events is immediate and undisturbed, there being no refractory data at hand; but in the later stages and in the present situation, where refractory facts abound, the coordination is difficult, and the coincidence can be shown only by a free abstraction from phenomena that are irrelevant to the teleological trend and by a laborious interpretation of the rest. The facts of modern life are intricate, and lend themselves to statement in the terms of the theory only after they have been subjected to a "higher criticism." The chapter "Of the Origin and Use of Money"(16*) is an elegantly normalised account of the origin and nature of an economic institution, and Adam Smith's further discussion of money runs on the same lines. The origin of money is stated in terms of the purpose which money should legitimately serve in such a community as Adam Smith considered right and good, not in terms of the motives and exigencies which have resulted in the use of money and in the gradual rise of the existing method of payment and accounts. Money is "the great wheel of circulation," which effects the transfer of goods in process of production and the distribution of the finished goods to the consumers. It is an organ of the economic commonwealth rather than an expedient of accounting and a conventional repository of wealth. It is perhaps superfluous to remark that to the "plain man," who is not concerned with the "natural course of things" in a consummate Geldwirtschaft, the money that passes his hand is not a "great wheel of circulation." To the Samoyed, for instance, the reindeer which serves him as unit of value is wealth in the most concrete and tangible form. Much the same is true of coin, or even of bank-notes, in the apprehension of unsophisticated people among ourselves to-day. And yet it is in terms of the habits and conditions of life of these "plain people" that the development of money will have to be accounted for if it is to be stated in terms of cause and effect. The few scattered passages already cited may serve to illustrate how Adam Smith's animistic or teleological bent shapes the general structure of his theory and gives it consistency. The principle of definitive formulation in Adam Smith's economic knowledge is afforded by a putative purpose that does not at any point enter causally into the economic life process which he seeks to know. This formative or normative purpose or end is not freely conceived to enter as an efficient agent in the events discussed, or to be in any way consciously present in the process. It can scarcely be taken as an animistic agency engaged in the process. It sanctions the course of things, and gives legitimacy and substance to the sequence of events, so far as this sequence may be made to square with the requirements of the imputed end. It has therefore a ceremonial or symbolical force only, and lends the discussion a ceremonial competency; although with economists who have been in passable agreement with Adam Smith as regards the legitimate end of economic life this ceremonial consistency, or consistency de jure, has for many purposes been accepted as the formulation of a causal continuity in the phenomena that have been interpreted in its terms. Elucidations of what normally ought to happen, as a matter of ceremonial necessity, have in this way come to pass for an account of matters of fact. But, as has already been pointed out, there is much more to Adam Smith's exposition of theory than a formulation of what ought to be. Much of the advance he achieved over his predecessors consists in a larger and more painstaking scrutiny of facts, and a more consistent tracing out of causal continuity in the facts handled. No doubt, his superiority over the Physiocrats, that characteristic of his work by virtue of which it superseded theirs in the farther growth of economic science, lies to some extent in his recourse to a different, more modern ground of normality,-- a ground more in consonance with the body of preconceptions that have had the vogue in later generations. It is a shifting of the point of view from which the facts are handled; but it comes in great part to a substitution of a new body of preconceptions for the old, or a new adaptation of the old ground of finality, rather than an elimination of all metaphysical or animistic norms of valuation. With Adam Smith, as with the Physiocrats, the fundamental question, the answer to which affords the point of departure and the norm of procedure, is a question of substantiality or economic "reality." With both, the answer to this question is given naively, as a deliverance of common sense. Neither is disturbed by doubts as to this deliverance of common sense or by any need of scrutinising it. To the Physiocrats this substantial ground of economic reality is the nutritive process of Nature. To Adam Smith it is Labor. His reality has the advantage of being the deliverance of the common sense of a more modern community, and one that has maintained itself in force more widely and in better consonance with the facts of latter-day industry. The Physiocrats owe their preconception of the productiveness of nature to the habits of thought of a community in whose economic life the dominant phenomenon was the owner of agricultural land. Adam Smith owes his preconception in favor of labor to a community in which the obtrusive economic feature of the immediate past was handicraft and agriculture, with commerce as a scarcely secondary phenomenon. So far as Adam Smith's economic theories are a tracing out of the causal sequence in economic phenomena, they are worked out in terms given by these two main directions of activity, -- human effort directed to the shaping of the material means of life, and human effort and discretion directed to a pecuniary gain. The former is the great, substantial productive force: the latter is not immediately, or proximately, productive.(17*) Adam Smith still has too lively a sense of the nutritive purpose of the order of nature freely to extend the concept of productiveness to any activity that does not yield a material increase of the creature comforts. His instinctive appreciation of the substantial virtue of whatever effectually furthers nutrition, even leads him into the concession that "in agriculture nature labors along with man," although the general tenor of his argument is that the productive force with which the economist always has to count is human labor. This recognised substantiality of labor as productive is, as has already been remarked, accountable for his effort to reduce to terms of productive labor such a category of distribution as exchange value. With but slight qualification, it will hold that, in the causal sequence which Adam Smith traces out in his economic theories proper (contained in the first three books of the Wealth of Nations), the causally efficient factor is conceived to be human nature in these two relations, -- of productive efficiency and pecuniary gain through exchange. Pecuniary gain -- gain in the material means of life through barter -- furnishes the motive force to the economic activity of the individual; although productive efficiency is the legitimate, normal end of the community's economic life. To such an extent does this concept of man's seeking his ends through "truck, barter, and exchange" pervade Adam Smith's treatment of economic processes that he even states production in its terms, and says that,, labor was the first price, the original purchase-money, that was paid for all things."(18*) The human nature engaged in this pecuniary traffic is conceived in somewhat hedonistic terms, and the motives and movements of men are normalised to fit the requirements of a hedonistically conceived order of nature. Men are very much alike in their native aptitudes and propensities;(19*) and, so far as economic theory need take account of these aptitudes and propensities, they are aptitudes for the production of the "necessaries and conveniences of life," and propensities to secure as great a share of these creature comforts as may be. Adam Smith's conception of normal human nature -- that is to say, the human factor which enters causally in the process which economic theory discusses -- comes, on the whole, to this: Men exert their force and skill in a mechanical process of production, and their pecuniary sagacity in a competitive process of distribution, with a view to individual gain in the material means of life. These material means are sought in order to the satisfaction of men's natural wants through their consumption. It is true, much else enters into men's endeavors in the struggle for wealth, as Adam Smith points out; but this consumption comprises the legitimate range of incentives, and a theory which concerns itself with the natural course of things need take but incidental account of what does not come legitimately in the natural course. In point of fact, there are appreciable "actual," though scarcely "real," departures from this rule. They are spurious and insubstantial departures, and do not properly come within the purview of the stricter theory. And, since human nature is strikingly uniform, in Adam Smith's apprehension, both the efforts put forth and the consumptive effect accomplished may be put in quantitative terms and treated algebraically, with the result that the entire range of phenomena comprised under the head of consumption need be but incidentally considered; and the theory of production and distribution is complete when the goods or the values have been traced to their disappearance in the hands of their ultimate owners. The reflex effect of consumption upon production and distribution is, on the whole, quantitative only. Adam Smith's preconception of a normal teleological order of procedure in the natural course, therefore, affects not only those features of theory where he is avowedly concerned with building up a normal scheme of the economic process. Through his normalising the chief causal factor engaged in the process, it affects also his arguments from cause to effect.(20*) What makes this latter feature worth particular attention is the fact that his successors carried this normalisation farther, and employed it with less frequent reference to the mitigating exceptions which Adam Smith notices by the way. The reason for that farther and more consistent normalisation of human nature which gives us the "economic man" at the hands of Adam Smith's successors lies, in great part, in the utilitarian philosophy that entered in force and in consummate form at about the turning of the century. Some credit in the work of normalisation is due also to the farther supersession of handicraft by the "capitalistic" industry that came in at the same time and in pretty close relation with the utilitarian views. After Adam Smith's day, economics fell into profane hands. Apart from Malthus, who, of all the greater economists, stands nearest to Adam Smith on such metaphysical heads as have an immediate bearing upon the premises of economic science, the next generation do not approach their subject from the point of view of a divinely instituted, order; nor do they discuss human interests with that gently optimistic spirit of submission that belongs to the economist who goes to his work with the fear of God before his eyes. Even with Malthus the recourse to the divinely sanctioned order of nature is somewhat sparing and temperate. But it is significant for the later course of economic theory that, while Malthus may well be accounted the truest continuer of Adam Smith, it was the undevout utilitarians that became the spokesmen of the science after Adam Smith's time. There is no wide breach between Adam Smith and the utilitarians, either in details of doctrine or in the concrete conclusions arrived at as regards questions of policy. On these heads Adam Smith might well be classed as a moderate utilitarian, particularly so far as regards his economic work. Malthus has still more of a utilitarian air, -- so much so, indeed, that he is not infrequently spoken of as a utilitarian. This view, convincingly set forth by Mr. Bonar,(21*) is no doubt well borne out by a detailed scrutiny of Malthus's economic doctrines. His humanitarian bias is evident throughout, and his weakness for considerations of expediency is the great blemish of his scientific work. But, for all that, in order to an appreciation of the change that came over classical economics with the rise of Benthamism, it is necessary to note that the agreement in this matter between Adam Smith and the disciples of Bentham, and less decidedly that between Malthus and the latter, is a coincidence of conclusions rather than an identity of preconceptions.(22*) With Adam Smith the ultimate ground of economic reality is the design of God, the teleological order; and his utilitarian generalisations, as well as the hedonistic character of his economic man, are but methods of the working out of this natural order, not the substantial and self-legitimating ground. Shifty as Malthus's metaphysics are, much the same is to be said for him.(23*) Of the utilitarians proper the converse is true, although here, again, there is by no means utter consistency The substantial economic ground is pleasure and pain: the teleological order (even the design of God, where that is admitted) is the method of its working-out. It may be unnecessary here to go into the farther implications, psychological and ethical, which this preconception of the utilitarians involves. And even this much may seem a taking of excessive pains with a distinction that marks no tangible difference. But a reading of the classical doctrines, with something of this metaphysics of political economy in mind, will show how, and in great part why, the later economists of the classical line diverged from Adam Smith's tenets in the early years of the century, until it has been necessary to interpret Adam Smith somewhat shrewdly in order to save him from heresy. The post-Bentham economics is substantially a theory of value. This is altogether the dominant feature of the body of doctrines; the rest follows from, or is adapted to, this central discipline. The doctrine of value is of very great importance also in Adam Smith; but Adam Smith's economics is a theory of the production and apportionment of the material, means of life.(24*) With Adam Smith, value is discussed from the point of view of production. With the utilitarians, production is discussed from the point of view of value. The former makes value an outcome of the process of production: the latter make production the outcome of a valuation process. The point of departure with Adam Smith is the "productive power of labor." (25*) With Ricardo it is a pecuniary problem concerned in the distribution of ownership;(26*) but the classical writers are followers of Adam Smith, and improve upon and correct the results arrived at by him, and the difference of point of view, therefore, becomes evident in their divergence from him, and the different distribution of emphasis, rather than in a new and antagonistic departure. The reason for this shifting of the center of gravity from production to valuation lies, proximately, in Bentham's revision of the "principles " of morals. Bentham's philosophical position is, of course, not a self-explanatory phenomenon, nor does the effect of Benthamism extend only to those who are avowed followers of Bentham; for Bentham is the exponent of a cultural change that affects the habits of thought of the entire community. The immediate point of Bentham's work, as affecting the habits of thought of the educated community, is the substitution of hedonism (utility) in place of achievement of purpose, as a ground of legitimacy and a guide in the normalisation of knowledge. Its effect is most patent in speculations on morals, where it inculcates determinism. Its close connection with determinism in ethics points the way to what may be expected of its working in economics. In both cases the result is that human action is construed in terms of the causal forces of the environment, the human agent being, at the best, taken as a mechanism of commutation, through the workings of which the sensuous effects wrought by the impinging forces of the environment are, by an enforced process of valuation, transmuted without quantitative discrepancy into moral or economic conduct, as the case may be. In ethics and economics alike the subject-matter of the theory is this valuation process that expresses itself in conduct, resulting, in the case of economic conduct, in the pursuit of the greatest gain or least sacrifice. Metaphysically or cosmologically considered, the human nature into the motions of which hedonistic ethics and economics inquire is an intermediate term in a causal sequence, of which the initial and the terminal members are sensuous impressions and the details of conduct. This intermediate term conveys the sensuous impulse without loss of force to its eventuation in conduct. For the purpose of the valuation process through which the impulse is so conveyed, human nature may, therefore, be accepted as uniform; and the theory of the valuation process may be formulated quantitatively, in terms of the material forces affecting the human sensory and of their equivalents in the resulting activity. In the language of economics, the theory of value may be stated in terms of the consumable goods that afford the incentive to effort and the expenditure undergone in order to procure them. Between these two there subsists a necessary equality; but the magnitudes between which the equality subsists are hedonistic magnitudes, not magnitudes of kinetic energy nor of vital force, for the terms handled are sensuous terms. It is true, since human nature is substantially uniform, passive, and unalterable in respect of men's capacity for sensuous affection, there may also be presumed to subsist a substantial equality between the psychological effect to be wrought by the consumption of goods, on the one side, and the resulting expenditure of kinetic or vital force, on the other side; but such an equality is, after all, of the nature of a coincidence, although there should be a strong presumption in favor of its prevailing on an average and in the common run of cases. Hedonism, however, does not postulate uniformity between men except in the respect of sensuous cause and effect. The theory of value which hedonism gives is, therefore, a theory of cost in terms of discomfort. By virtue of the hedonistic equilibrium reached through the valuation process, the sacrifice or expenditure of sensuous reality involved in acquisition is the equivalent of the sensuous gain secured. An alternative statement might perhaps be made, to the effect that the measure of the value of goods is not the sacrifice or discomfort undergone, but the sensuous gain that accrues from the acquisition of the goods; but this is plainly only an alternative statement, and there are special reasons in the economic life of the time why the statement in terms of cost, rather than in terms of "utility," should commend itself to the earlier classical economists. On comparing the utilitarian doctrine of value with earlier theories, then, the case stands somewhat as follows. The Physiocrats and Adam Smith contemplate value as a measure of the productive force that realises itself in the valuable article. With the Physiocrats this productive force is the "anabolism " of Nature (to resort to a physiological term): with Adam Smith it is chiefly human labor directed to heightening the serviceability of the materials with which it is occupied. Production causes value in either case. The post-Bentham economics contemplates value as a measure of, or as measured by the irksomeness of the effort involved in procuring the valuable goods. As Mr. E. C. K. Gonner has admirably pointed out,(27*) Ricardo -- and the like holds true of classical economics generally -- makes cost the foundation of value, not its cause. This resting of value on cost takes place through a valuation. Any one who will read Adam Smith's theoretical exposition to as good purpose as Mr. Gonner has read Ricardo will scarcely fail to find that the converse is true in Adam Smith's case. But the causal relation of cost to value holds only as regards "natural" or "real" value in Adam Smith's doctrine. As regards market price, Adam Smith's theory does not differ greatly from that of Ricardo on this head. He does not overlook the valuation process by which market price is adjusted and the course of investment is guided, and his discussion of this process runs in terms that should be acceptable to any hedonist. The shifting of the point of view that comes into economics with the acceptance of utilitarian ethics and its correlate, the associationist psychology, is in great part a shifting to the ground of causal sequence as contrasted with that of serviceability to a preconceived end. This is indicated even by the main fact already cited, -- that the utilitarian economists make exchange value the central feature of their theories, rather than the conduciveness of industry to the community's material welfare. Hedonistic exchange value is the outcome of a valuation process enforced by the apprehended pleasure-giving capacities of the items valued. And in the utilitarian theories of production, arrived at from the standpoint so given by exchange value, the conduciveness to welfare is not the objective point of the argument. This objective point is rather the bearing of productive enterprise upon the individual fortunes of the agents engaged, or upon the fortunes of the several distinguishable classes of beneficiaries comprised in the industrial community; for the great immediate bearing of exchange values upon the life of the collectivity is their bearing upon the distribution of wealth. Value is a category of distribution. The result is that, as is well shown by Mr. Cannan's discussion,(28*) the theories of production offered by the classical economists have been sensibly scant, and have been carried out with a constant view to the doctrines on distribution. An incidental but telling demonstration of the same facts is given by Professor Bucher;(29*) and in illustration may be cited Torrens's Essay On the Production of Wealth, which is to a good extent occupied with discussions of value and distribution. The classical theories of production have been theories of the production of "wealth"; and "wealth," in classical usage, consists of material things having exchange value. During the vogue of the classical economics the accepted characteristic by which "wealth" has been defined has been its amenability to ownership. Neither in Adam Smith nor in the Physiocrats is this amenability to ownership made so much of, nor is it in a similar degree accepted as a definite mark of the subject-matter of the science. As their hedonistic preconception would require, then, it is to the pecuniary side of life that the classical economists give their most serious attention, and it is the pecuniary bearing of any given phenomenon or of any institution that commonly shapes the issue of the argument. The causal sequence about which the discussion centers is a process of pecuniary valuation. It runs on distribution, ownership, acquisition, gain, investment, exchange.(30*) In this way the doctrines on production come to take a pecuniary coloring; as is seen in a less degree also in Adam Smith, and even in the Physiocrats, although these earlier economists very rarely, if ever, lose touch with the concept of generic serviceability as the characteristic feature of production. The tradition derived from Adam Smith, which made productivity and serviceability the substantial features of economic life, was not abruptly put aside by his successors, though the emphasis was differently distributed by them in following out the line of investigation to which the tradition pointed the way. In the classical economics the ideas of production and of acquisition are not commonly held apart, and very much of what passes for a theory of production is occupied with phenomena of investment and acquisition. Torrens's Essay is a case in point, though by no means an extreme case. This is as it should be; for to the consistent hedonist the sole motive force concerned in the industrial process is the self-regarding motive of pecuniary gain, and industrial activity is but an intermediate term between the expenditure or discomfort undergone and the pecuniary gain sought. Whether the end and outcome is an invidious gain for the individual (in contrast with or at the cost of his neighbors), or an enhancement of the facility of human life on the whole, is altogether a by-question in any discussion of the range of incentives by which men are prompted to their work or the direction which their efforts take. The serviceability of the given line of activity, for the life purposes of the community or for one's neighbors, "is not of the essence of this contract." These features of serviceability come into the account chiefly as affecting the vendibility of what the given individual has to offer in seeking gain through a bargain.(31*) In hedonistic theory the substantial end of economic life is individual, gain, and for this purpose production and acquisition may be taken as fairly coincident, if not identical. Moreover, society, in the utilitarian philosophy, is the algebraic sum of the individuals; and the interest of the society is the sum of the interests of the individuals. It follows by easy consequence, whether strictly true or not, that the sum of individual gains is the gain of the society, and that, in serving his own interest in the way of acquisition, the individual serves the collective interest of the community. Productivity or serviceability is, therefore, to be presumed of any occupation or enterprise that looks to a pecuniary gain; and so, by a roundabout path, we get back to the ancient conclusion of Adam Smith, that the remuneration of classes or persons engaged in industry coincides with their productive contribution to the output of services and consumable goods. A felicitous illustration of the working of this hedonistic norm in classical economic doctrine is afforded by the theory of the wages of superintendence, -- an element in distribution which is not much more than suggested in Adam Smith, but which receives ampler and more painstaking attention as the classical body of doctrines reaches a fuller development. The "wages of superintendence" are the gains due to pecuniary management. They are the gains that come to the director of the,, business," -- not those that go to the director of the mechanical process or to the foreman of the shop. The latter are wages simply. This distinction is not altogether clear in the earlier writers, but it is clearly enough contained in the fuller development of the theory. The undertaker's work is the management of investment. It is altogether of a pecuniary character, and its proximate aim is "the main chance." If it leads, indirectly, to an enhancement of serviceability or a heightened aggregate output of consumable goods, that is a fortuitous circumstance incident to that heightened vendibility on which the investor's gain depends. Yet the classical doctrine says frankly that the wages of superintendence are the remuneration of superior productivity,(32*) and the classical theory of production is in good part a doctrine of investment in which the identity of production and pecuniary gain is taken for granted. The substitution of investment in the place of industry as the central and substantial fact in the process of production is due not to the acceptance of hedonism simply, but rather to the conjunction of hedonism with an economic situation of which the investment of capital and its management for gain was the most obvious feature. The situation which shaped the common-sense apprehension of economic facts at the time was what has since been called a capitalistic system, in which pecuniary enterprise and the phenomena of the market were the dominant and tone-giving facts. But this economic situation was also the chief ground for the vogue of hedonism in economics; so that hedonistic economics may be taken as an interpretation of human nature in terms of the market-place. The market and the "business world," to which the business man in his pursuit of gain was required to adapt his motives, had by this time grown so large that the course of business events was beyond the control of any one person; and at the same time those far-reaching organisations of invested wealth which have latterly come to prevail and to coerce the market were not then in the foreground. The course of market events took its passionless way without traceable relation or deference to any man's convenience and without traceable guidance towards an ulterior end. Man's part in this pecuniary world was to respond with alacrity to the situation, and so adapt his vendible effects to the shifting demand as to realise something in the outcome. What he gained in his traffic was gained without loss to those with whom he dealt, for they paid no more than the goods were worth to them. One man's gain need not be another's loss; and, if it is not, then it is net gain to the community. Among the striking remoter effects of the hedonistic preconception, and its working out in terms of pecuniary gain, is the classical failure to discriminate between capital as investment and capital as industrial appliances. This is, of course, closely related to the point already spoken of. The appliances of industry further the production of goods, therefore capital (invested wealth) is productive; and the rate of its average remuneration marks the degree of its productiveness.(33*) The most obvious fact limiting the pecuniary gain secured by means of invested wealth is the sum invested. Therefore, capital limits the productiveness of industry; and the chief and indispensable condition to an advance in material well-being is the accumulation of invested wealth. In discussing the conditions of industrial improvement, it is usual to assume that "the state of the arts remains unchanged," which is, for all purposes but that of a doctrine of profits per cent., an exclusion of the main fact. Investments may, further, be transferred from one enterprise to another. Therefore, and in that degree, the means of production are "mobile." Under the hands of the great utilitarian writers, therefore, political economy is developed into a science of wealth, taking that term in the pecuniary sense, as things amenable to ownership. The course of things in economic life is treated as a sequence of pecuniary events, and economic theory becomes a theory of what should happen in that consummate situation where the permutation of pecuniary magnitudes takes place without disturbance and without retardation. In this consummate situation the pecuniary motive has its perfect work, and guides all the acts of economic man in a guileless, colorless, unswerving quest of the greatest gain at the least sacrifice. Of course, this perfect competitive system, with its untainted "economic man,"is a feat of scientific imagination, and is not intended as a competent expression of fact. It is an expedient of abstract reasoning; and its avowed competency extends only to the abstract principles, the fundamental laws of the science, which hold only so far as the abstraction holds. But, as happens in such cases, having once been accepted and assimilated as real, though perhaps not as actual, it becomes an effective constituent in the inquirer's habits of thought, and goes to shape his knowledge of facts. It comes to serve as a norm of substantiality or legitimacy; and facts in some degree fall under its constraint, as is exemplified by many allegations regarding the "tendency" of things. To this consummation, which Senior speaks of as "the natural state of man,"(34*) human development tends by force of the hedonistic character of human nature; and in terms of its approximation to this natural state, therefore, the immature actual situation had best be stated. The pure theory, the "hypothetical science" of Cairnes, "traces the phenomena of the production and distribution of wealth up to their causes, in the principles of human nature and the laws and events -- physical, political, and social -- of the external world."(35*) But since the principles of human nature that give the outcome in men's economic conduct, so far as it touches the production and distribution of wealth, are but the simple and constant sequence of hedonistic cause and effect, the element of human nature may fairly be eliminated from the problem, with great gain in simplicity and expedition. Human nature being eliminated, as being a constant intermediate term, and all institutional features of the situation being also eliminated (as being similar constants under that natural or consummate pecuniary regime with which the pure theory is concerned), the laws of the phenomena of wealth may be formulated in terms of the remaining factors. These factors are the vendible items that men handle in these processes of production and distribution and economic laws come, therefore, to be expressions of the algebraic relations subsisting between the various elements of wealth and investment, -- capital, labor, land, supply and demand of one and the other, profits, interest, wages. Even such items as credit and population become dissociated from the personal factor, and figure in the computation as elemental factors acting and reacting though a permutation of values over the heads of the good people whose welfare they are working out. To sum up: the classical economics, having primarily to do with the pecuniary side of life, is a theory of a process of valuation. But since the human nature at whose hands and for whose behoof the valuation takes place is simple and constant in its reaction to pecuniary stimulus, and since no other feature of human nature is legitimately present in economic phenomena than this reaction to pecuniary stimulus, the valuer concerned in the matter is to be overlooked or eliminated; and the theory of the valuation process then becomes a theory of the pecuniary interaction of the facts valued. It is a theory of valuation with the element of valuation left out,-- a theory of life stated in terms of the normal paraphernalia of life. In the preconceptions with which classical economics set out were comprised the remnants of natural rights and of the order of nature, infused with that peculiarly mechanical natural theology that made its way into popular vogue on British ground during the eighteenth century and was reduced to a neutral tone by the British penchant for the commonplace -- stronger at this time than at any earlier period. The reason for this growing penchant for the commonplace, for the explanation of things in causal terms, lies partly in the growing resort to mechanical processes and mechanical prime movers in industry, partly in the (consequent) continued decline of the aristocracy and the priesthood, and partly in the growing density of population and the consequent greater specialisation and wider organisation of trade and business. The spread of the discipline of the natural sciences, largely incident to the mechanical industry, counts in the same direction; and obscurer factors in modern culture may have had their share. The animistic preconception was not lost, but it lost tone; and it partly fell into abeyance, particularly so far as regards its avowal. It is visible chiefly in the unavowed readiness of the classical writers to accept as imminent and definitive any possible outcome which the writer's habit or temperament inclined him to accept as right and good. Hence the visible inclination of classical economists to a doctrine of the harmony of interests, and their somewhat uncircumspect readiness to state their generalisations in terms of what ought to happen according to the ideal requirements of that consummate Geldwirtschaft to which men "are impelled by the provisions of nature."(36*) By virtue of their hedonistic preconceptions, their habituation to the ways of a pecuniary culture, and their unavowed animistic faith that nature is in the right, the classical economists knew that the consummation to which, in the nature of things, all things tend, is the frictionless and beneficent competitive system. This competitive ideal, therefore, affords the normal, and conformity to its requirements affords the test of absolute economic truth. The standpoint so gained selectively guides the attention of the classical writers in their observation and apprehension of facts, and they come to see evidence of conformity or approach to the normal in the most unlikely places. Their observation is, in great part, interpretative, as observation commonly is. What is peculiar to the classical economists in this respect is their particular norm of procedure in the work of interpretation. And, by virtue of having achieved a standpoint of absolute economic normality, they became a "deductive" school, so called, in spite of the patent fact that they were pretty consistently employed with an inquiry into the causal sequence of economic phenomena. The generalisation of observed facts becomes a normalisation of them, a statement of the phenomena in terms of their coincidence with, or divergence from, that normal tendency that makes for the actualisation of the absolute economic reality. This absolute or definitive ground of economic legitimacy lies beyond the causal sequence in which the observed phenomena are conceived to be interlinked. It is related to the concrete facts neither as cause nor as effect in any such way that the causal relation may be traced in a concrete instance. It has little causally to do either with the "mental" or with the "physical" data with which the classical economist is avowedly employed. Its relation to the process under discussion is that of an extraneous -- that is to say, a ceremonial -- legitimation. The body of knowledge gained by its help and under its guidance is, therefore, a taxonomic science. So, by way of a concluding illustration, it may be pointed out that money, for instance, is normalised in terms of the legitimate economic tendency. It becomes a measure of value and a medium of exchange. It has become primarily an instrument of pecuniary commutation, instead of being, as under the earlier normalisation of Adam Smith, primarily a great wheel of circulation for the diffusion of consumable goods. The terms in which the laws of money, as of the other phenomena of pecuniary life, are formulated, are terms which connote its normal function in the life history of objective values as they live and move and have their being in the consummate pecuniary situation of the "natural" state. To a similar work of normalisation we owe those creatures of the myth-maker, the quantity theory and the wages-fund. NOTES: 1. Bonar, Philosophy and Political Economy, pp. 177, 178. 2. "Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society... By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." Wealth of Nations, Book IV, chap. ii. 3. The discrepancy between the actual, causally determined situation and the divinely intended consummation is the metaphysical ground of all that inculcation of morality and enlightened policy that makes up so large a part of Adam Smith's work. The like, of course, holds true for all moralists and reformers who proceed on the assumption of a providential order. 4. "In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance." Wealth of Nations, Book IV, chap. ix. 5. E.g., "the real measure of the exchangeable value of all commodities." Wealth of Nations, Book I, chap. v, and repeatedly in the like connection. 6. E.g., Book I, chap. vii: "When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labor, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price." "The actual price at which any commodity is commonly sold is called its market price. It may be either above or below or exactly the same with its natural price." 7. Lectures of Adam Smith (Ed. Cannan, 1896). p. 169. 8. "This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility, -- the propensity to truck, barter, and exchange one thing for another. Whether this propensity be one of those original principles in human nature of which no further account can be given, or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to inquire." Wealth of Nations, Book I, chap. ii. 9. Wealth of Nations, Book I, chaps. v.-vii. 10. Wealth of Nations, Book I, chap. v. 11. As e.g., the entire discussion of the determination of Wages, Profits and Rent, in Book I, chaps. viii.-xi. 12. "There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock. The rate is naturally regulated... partly by the general circumstance of the society... There is, likewise, in every socity or neighborhood an ordinary or average rate of rent, which is regulated, too... These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail. When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labor, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price." Wealth of Nations, Book I, chap. vii. 13. "Such commodities may continue for whole centuries together to be sold at this high price; and that part of it which resolves itself into the rent of land is, in this case, the part which is generally paid above its natural rate." Book I, chap. vii. 14. Wealth of Nations, Book I, chap. vi; also chap. viii. 15. For an instance of how these early phases of industrial development appear, when not seen in the light of Adam Smith's preconception, see, among others, Bucher, Entstehung der Volkswirtschagt. 16. Book I, chap. iv. 17. See Wealth of Nations, Book II, chap. v, "Of the Different Employment of Capitals." 18. Wealth of Nations, Book I, chap. v. See also the plea for free trade, Book IV, chap. ii: "But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or, rather, is precisely the same thing with that exchangeable value." 19. "The difference of natural talents in different men is in reality much less than we are aware of." Wealth of Nations, Book I, chap. ii. 20. "Mit diesen philosophischen Ueberzeugungen tritt nun Adam Smith an die Welf der Engahrung heran, and es ergiebt sich ihm die Richtigkeit der Principien. Der Reiz der Smiths'schen Schriften beruht zum grossen Teile darauf, dass Smith die Principien in so innige Verbindung mit dem Thatsachlichen gebracht. Hie und da werden dann auch die Principien, was durch diese Verbindung veranlasst wird, an ihren Spitzen etwas algeschliffen, ihre allruscharfe Auspragung dadurch vermieden. Nichtsdestoweniger aber bleiben sie stets die leitenden Grundgedanken." Richard Zeyss, Adam Smith und der Eigennutz (Tubingen, 1889), p. 110. 21. See, e.g., Malthus and his Work, especially Book III, as also the chapter on Malthus in Philosophy and Political Economy, Book III, Modern Philosophy: Utilitarian Economics, chap. i, "Malthus." 22. Ricardo is here taken as a utilitarian of the Benthamite color, although he cannot be classed as a disciple of Bentham. His hedonism is but the uncritically accepted metaphysics comprised in the common sense of his time, and his substantial coincidence with Bentham goes to show how well diffused the hedonist preconception was at the time. 23. Cf. Bonar, Malthus and his Work, pp. 323-336. 24. His work is an inquiry into "the Nature and Causes of the Wealth of Nations." 25. "The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labor or in what is purchases with that produce from other nations." Wealth of Nations, "Introduction and Plan," opening paragraph. 26. "The produce of the earth -- all that is derived from its surface by the united application of labor, machinery and capital -- is divided among three classes of the community... To determine the laws which regulate this distribution is the principal problem of political economy." Political Economy, Preface. 27. In the introductory essay to his edition of Ricardo's Political Economy. See, e.g., paragraphs 9 and 24. 28. Theories of Production and Distribution, 1776-1848. 29. Entstehung der Volkswirtschaft (second edition). Cf. especially chaps. ii, iii, vi, and vii. 30. "Even if we put aside all questions which involve a consideration of the effects of industrial institutions in modifying the habits and character of the classes of the community... that enough still remains to constitute a separate science, the mere enumeration of the chief terms of economics -- wealth, value, exchange, credit, money, capital, and commodity -- will suffice to show." Shirres, Analysis of the Ideas of Economics (London, 1893), pp. 8 and 9. 31. "If a commodity were in no way useful... it would be destitute of exchangeable value;... (but), possessing utility, commodities derive their exchangeable value from two sources," etc. Ricardo, Political Economy, chap. i, sect I. 32. Cf., for instance, Senior, Political Economy (London, 1872), particularly pp. 88, 89, and 130-135, where the wages of superintendence are, somewhat reluctantly, classed under profits; and the work of superintendence is thereupon conceived as being, immediately or remotely, an exercise of "abstinence" and a productive work. The illustration of the bill-broker is particularly apt. The like view of the wages of superintendence in an article of theory with more than one of the later descendents of the classical line. 33. Cf. Bohm-Bawerk, Capital and Interest, Books II and IV, as well as the Introduction and chaps. iv and v of Book I. Bohm-Bawerk's discussion bears less immediately on the present point than the similarity of the terms employed would suggest. 34. Political Economy, p. 87. 35. Character and Logical Method of Political Economy (New York, 1875), p. 71. Cairnes may not be altogether representative of the high tide of classicism, but his characterisation of the science is none the less to the point. 36. Senior, Political Economy, p. 87.