What Is Economics About?

by Faustino Ballvé

Economic activity. Economic thought. Xenophon, Aristotle, Rome, St. Thomas, Oresmius, Biel, Erasmus, Luther, Calvin. Mercantilism. The physiocrats. Adam Smith and the classical school. Nationalism. The Historical School. Socialism. The controlled economy. The Austrian School. The Mathematical School. The Critical School. The domain of the economic: action chosen by man in the market.

As far back as we go in our study of the way mankind has lived, from the earliest reaches of recorded history and even from the times of the prehistoric monuments studied by archeology, we find men applying their labor to the resources of Nature in order to satisfy their needs. That is to say, we find them producing—even if only by bagging game or catching fish or gathering from fields and forests the wood and the wild fruits they found growing there, transporting these to the place where they were to be consumed, and then treating them as marketable commodities—and we find them exchanging their produce with other men, whether directly by barter or indirectly through the medium of a neutral commodity, viz., money. We find them, too, competing in offer and demand, according to the conditions of scarcity or abundance in the supply of specific goods, and exercising the right of choice—the producer producing what he expects will yield him the greatest profit, and the consumer buying what seems to him cheapest and most suitable to his needs. We also find them holding on to goods or money, sometimes with the object of securing a greater advantage later, sometimes with that of building up a reserve for hard times. We find those in possession of goods or money lending, for some consideration, what they could spare to those in urgent need of it, and we find different people banding together for production or consumption.

All these human activities, consisting in the exercise of individual initiative and of the faculty of choice for the satisfaction of wants and the improvement of what we call today the standard of living, are, in a more or less primitive and undeveloped form, as old as mankind. Their modern forms are every day being extended from the advanced to the backward countries at the same time that their primitive forms persist into the present day. Indeed, the latter are still current among civilized peoples, as we see in the recrudescence of barter during and after the war even among nations as enlightened as France, Germany, and the United States.¹

From the earliest times, too, this manifestation of human activity has engaged the minds of scholars and thinkers. To go no further back than the days of ancient Greece,² Plato concerned himself with the division of labor and of the various occupations; Xenophon dealt with the increase in rents in Attica and formulated a theory of money; Aristotle spoke of the chrematistic occupations, expressed the hope that slave labor might be replaced by machinery, and anticipated the distinction that Adam Smith was to make twenty-two centuries later between value in use and value in exchange. Rome made the protection of agriculture an economic policy—one that was supported in the Middle Ages by the Catholic Church’s condemnation of trade, its prohibition on the charging of interest, which it characterized as usury, its repudiation of value in exchange, and its refusal to accept, as the basis for prices, anything but value in use.

St. Thomas Aquinas advocated a kind of communism that was later, from 1610 to 1766, to be practiced by the Jesuits of Paraguay. The French bishop Nicholas Oresmius published a treatise on money, and Gabriel Biel of Württemberg made investigations into the nature of money and the formation of prices.

Humanism, with Erasmus, esteemed commerce as honorable. Martin Luther, the founder of Protestantism, postulated that “man was born to work,” studied the division of labor, and stressed the importance and utility of trade, recommending the free market even though he continued to condemn “usury.” On this last point Calvin disagreed with Luther and was, besides, the first to advocate the intervention of the state in economic life—an intervention that already existed in his age and, to a greater or lesser degree, has always existed and in the last thirty years has been considered as an economic panacea.

The establishment of absolute monarchies in the sixteenth and seventeenth centuries and the rise of modern nations imbued with an ardent and youthful spirit of nationalism produced at the same time a control over economic activity and a theoretical justification of that control that is known historically as mercantilism. Its fundamental principles, of which those of the present age, aptly called neomercantilist, remind us, are: the direction of economic life by the public authorities, the consideration of money as true wealth, a concern with a favorable balance of payments with the object of obtaining more money in international exchange, the protection of industry for the purpose of having articles of export in order to bring money into the country, a system of subsidies and privileges for exporters and for industries producing for export or avoiding imports, an increase in the population in order to augment the productive forces of the domestic economy, competition with and isolation of foreigners by means of tariff barriers, and, above all, the belief that the prosperity of one country is possible only at the expense of the others.

These were the principles that inspired the regulation of economic life by the omnipotent governments of the sixteenth to the eighteenth century and were developed, albeit with considerable differences of detail, by Serra, Broggia, and Genovesi in Italy; by Francis Bacon (Lord Verulam), Thomas Mun, Child, and Temple in England (while Sir Walter Raleigh attributed the economic superiority of Holland to its greater economic freedom); by Melon and Forbonnais in France; by Klock, Seckendorff, Becher, and Baron von Schoeder in Germany; and by Luis Ortiz, Moncada, Damián de Olivares, Gracián Serran, Jerónimo Ustariz, and Bernardo de Ulloa in Spain. The statesman who has come to be regarded as the most representative historical exemplar of this tendency is Colbert, the minister of Louis XIV.

The mercantilist system led to disastrous consequences; for the fragmentation of economic and political groups ended by strangulating general economic life and producing internal misery and external war. The example of Holland led Queen Elizabeth of England to grant greater freedom to commerce and to reduce the importance of the guilds. Incipient liberalism, supported by the doctrine of natural law, immediately inspired a critique of the whole mercantilist system and a scientific trend in the opposite direction that is known as the physiocratic school. Its initiators were Pierre de Boisguillebert, Marshal Vauban, and, above all, Quesnay, personal physician to Louis XV. They were followed by Vincent Gournay, the elder Mirabeau, and, to some extent, the celebrated statesman Turgot.

As its name indicates, this doctrine was founded on the principle that there are natural laws of economic life that operate automatically. The evils of mercantilism come from interference with these laws on the part of the state. Hence, it is advisable to abstain from all regulation of economic activity and to leave it entirely to individual initiative. This principle Gournay reduced to the celebrated phrase: laissez faire, laissez passer.

The physiocratic doctrine, in so far as it was a reaction against mercantilism, found propitious soil in England. There neither the mercantilist worship of money nor the veneration of agriculture as the sole foundation of national wealth, which the physiocrats had taken over from the canonists, had ever completely prevailed. However, the English did not content themselves with the mere affirmation of the existence of natural laws with whose operation the state ought not to interfere, but wanted to investigate these laws and determine what they are; and thus they gave the world the so-called classical school of economics. The way was opened by Hutcheson and David Hume, who in turn influenced Adam Smith, the author of the first treatise on economics properly so called, entitled Inquiry into the Nature and Causes of the Wealth of Nations (1776). In England David Ricardo and, to a certain extent, both James Mill and his son John, in France Jean-Baptiste Say and Frédéric Bastiat, and in Germany Henry and J. H. von Thünen, Rau, Hermann, and Nebenius took their inspiration from Smith.

A discordant note was struck in England by Robert Malthus, an Anglican curate, with his theory that population tends to increase faster than the means of subsistence. He advised recourse to measures designed to avoid the disastrous consequences of simply allowing the laws of nature to run their course. In the United States the classical doctrine was embraced by Franklin and Hamilton (who was, notwithstanding, a protectionist). The chief exponents in Spain were José Alonso Ortiz, who translated Smith’s work and wrote a commentary on it, and Alvaro Flores Estrada, who nevertheless also initiated the movement of agrarian reform that almost a century later was to bring renown to the American Henry George.

The apogee of the classical school coincided with the fabulous increase in production and international exchange consequent upon the introduction of machinery (the Industrial Revolution)³ and the improvement of communications. But three circumstances brought the classical doctrine into disrepute. The first was the discovery that what had been taken for laws presumably deducible from the observation of economic phenomena in a limited geographical area (England and France in particular), and about which there was considerable disagreement among the adherents of the classical school, were not really laws at all, but mere regularities that, when treated as infallible laws, often failed in their application. The second was the inferior competitive position in which the younger countries, especially Germany and the United States, felt themselves to be on the world market. The third was the general opinion, more or less well founded, but disseminated by propaganda and unreflectingly accepted by the intellectuals and the middle class, that the lower classes and especially the workers were not benefiting from the material progress engendered by free enterprise.

Hence arose three counter movements: nationalist protectionism, launched in Germany by Frederick List, of which the last and most eminent representative was Adolf Wagner (a policy advocated in the United States by Henry Carey and in England by the elder Chamberlain and the adherents of the tariff-reform movement); socialism in its diverse forms, of which the most prominent was the so-called “scientific socialism” of Karl Marx and Frederick Engels; and the so-called Historical School (Bruno Hildebrand, Knies, Roscher, Schmoller), itself a reflection of both romanticism and the positivism of Auguste Comte, according to which every country has its particular economy corresponding to its conditions and traditions and serving the national interest rather than that of the individual. These three trends of thought, including the socialist, which originally had a cosmopolitan character, tended toward acceptance of the myth of national wealth, to which they subordinated that of the individual, and in whose defense they affirmed that all measures are legitimate in the name of “sacred egoism.”

It is curious to note that these doctrines, which called themselves “modern,” and which we shall study in detail later, in spite of their professed opposition to classical liberalism, all (including Marxian socialism) followed in its footsteps and are not so much its adversaries as its offspring. In the first place, they conceive of the theme of economics, not as man’s universal struggle for well-being, but as national, political economy. Thus, quite recently, Professor Fuchs, of Germany, has defined political economy⁴ as “the study of the economy of a people” and considered its function to be that of the “ever increasing support and ever more perfect satisfaction of the necessities of a growing population in a given territory.” In the second place, these doctrines do not grasp the economy in its unity and totality, but continue to treat distribution and consumption separately and without any connection, as if they were independent entities and not merely parts of a general process. In the third place, they persist in the belief in the existence of laws that control the economic process independently of the will of man. Thus, Marx himself—contrary to all previous as well as all subsequent experience—conceived of the historical course of economic development as presided over by the great law of the concentration of capital, by virtue of which wealth is every day becoming concentrated in fewer hands while the “army of the proletariat” increases, until the inevitable moment comes when “the expropriators will be expropriated.”

It did not occur to the exponents of these doctrines that economic events are not inevitable, but the product of man’s free will; that production, distribution, and consumption are simply different aspects of a single economic process; that, in spite of nationalistic and isolationist experiments, the economy of the whole world constitutes a unified totality; or; finally, that no law or government has succeeded or indeed can succeed in preventing every man from striving after his own and his loved ones’ earthly well-being in the way he considers most suitable by making use of his faculty of free choice (the natural corollary of his liberty, as we see in the activities of smugglers in contravention of the laws limiting international trade and in the so-called “black market” in violation of the legal restrictions on domestic commerce).

These three “modern” tendencies—distrust of individual initiative, exacerbated nationalism (called chauvinism after the ultranationalist French Bonapartist Chauvin), and socialism—were, for all practical purposes, combined, at the end of the nineteenth century and the beginning of the twentieth, in neomercantilism. This began in the Germany of Bismarck and in the United States, spread by reaction to England, France, and other countries, produced the two world wars, and destroyed the international division of labor. Christened in Germany in 1920 the “planned economy” (Planwirtschaft) and later everywhere called the “controlled economy,” under the pretext of defending national interests against foreign competition and the humbler classes against domestic oppression, it has enthroned the omnipotent state wherever it has gained a foothold and has forced democracy and liberty, whose universal victory was once thought to have been finally assured, into retreat.

But the love of liberty is no less imperishable than the love of knowledge, that is, the unprejudiced and fearless quest for truth. It was this strictly scientific spirit that inspired Carl Menger, around 1870, to undertake a revision of the prevailing economic doctrines with the object of placing economics on a truly scientific foundation.

Menger, a Viennese professor of economics, formulated the theory of marginal utility (Grenznutztheorie)⁵ almost at the same time as Stanley Jevons did in England and Léon Walras in France. From it issued two distinct currents of thought: the Mathematical School and the so-called “Austrian” School represented by Menger himself, Böhm-Bawerk, Wieser, and others, and at present by Ludwig von Mises, author of Human Action,⁶ and his pupil, Friedrich von Hayek, author of the famous book entitled The Road to Serfdom.⁷ Both are today professors in the United States with an increasingly large number of disciples, and supporting their position is the American economist Henry Hazlitt, author of the famous Economics in One Lesson.⁸

The Mathematical School, which reached its height in the work of the French economist Cournot, has given rise to two divergent streams of thought: one branch, starting with Walras, Pareto, and Pantaleoni, has developed so-called “econometrics,” which professes to be able to attain complete exactitude in economic calculation and is the chief bulwark of the ideology of central economic planning at the present time;⁹ while the other, starting with the English economist Marshall, uses mathematics solely as a graphic means of expressing economic doctrines without pretending in any way to have made of economics an “exact science.” Among these mathematical economists should be mentioned John Bates Clark and Irving Fisher.

Walter Eucken and Wilhelm Röpke, both German (although the latter has done most of his work in Egypt and Switzerland), represent a liberal, nonmathematical tendency. In France, which has maintained a high rank in economic science, the liberal movement is represented by such eminent figures as Charles Gide, Rist, and, more recently, Jacques Rueff, Louis Baudin, Pierre Lhoste-Lachaume, and many others.

Several other contemporary schools of economic thought could be mentioned, like that of “dynamic” economics, which originated in the Scandinavian countries, and of which Schumpeter (an Austrian who died recently in the United States) is a representative; but they have no definite form or any significant influence. On the other hand, it is noteworthy that Ludwig von Mises and his disciples represent a considerable advance over their predecessors of the so-called “Austrian” School; in fact, they can be considered as the founders of an altogether new school that could well be called “critical.”

According to this strictly scientific new school of thought, the economic domain is constituted by human action directed toward the satisfaction of wants by the exercise of the power of choice. Economics is, accordingly, the study of this economic activity on the part of man. It is not concerned with philosophical or moral problems, since economic science is not adjudicative, but descriptive. Nor, by the same token, does economics deal with political problems, since the economist does not give advice: he confines himself strictly to explicating the nature of economic activity, leaving it to the good sense of the statesman and the citizen in general to draw from this knowledge whatever consequences may recommend themselves. Finally, economics pays no attention to historical problems, since history tells us—and therein it can serve as an adjunct to political science—only what has been, but not what is, much less what will be. Nor can statistics, which refers only to past events, be anything more than an adjunct to history.

It is thus that we arrive at the unique domain that constitutes the true subject matter of economic science. Because economic activity takes place in time and space, it involves concurrences, contrarieties, and concatenations of events. These external variations are the proper subject matter of history and of economic geography. But behind these variations reflection discovers (though not by a process of mere observation and comparison) certain uniform and invariant aspects of man’s economic activity, of which we have cited a few examples at the beginning of this chapter. These general and constant forms of man’s economic activity constitute the subject matter of economic science, while its variations in time and space constitute the field proper to geography and history.

Having thus set forth, in necessarily brief form, the nature and history of economics, and the true character of its subject matter, we propose to take up in turn, in the nine succeeding chapters, the study of the various topics into which this subject can be broken down, the questions to which they give rise, as well as the various solutions that have been suggested to present-day economic problems, and to criticize these from the scientific point of view. The topics of these chapters will be: (2) the market (the division of labor, competition, value, and price); (3) the role of the entrepreneur and economic calculation; (4) capital, labor, and wages; (5) money, credit, and interest; (6) monopolies, crises, and unemployment; (7) international trade; (8) nationalism and socialism; (9) the controlled economy; and (10) what economics is not about.