Economic motives : a study in the psychological foundations of economic theory, with some reference to other social sciences

Front matter

DICKINSON # ECONOMIC MOTIVES

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HARVARD ECONOMIC STUDIES

Preface

The following essay grew out of a doctoral thesis presented at Harvard University in 1919, and it was submitted in the Wells Prize competition in 1920.

It seems impossible to find a title that accurately and briefly covers the field of the inquiry. This field may be called the psychological problems and postulates of economics, which are most conspicuous, of course, in the matter relating to Wants, Self-interest, Value, Interest and Wages. These psychological questions are concerned, I believe, not only with seeking the chains of causation which make economic behavior what it is, and what it might be, but also with examining the effects of such activities on human welfare. In other words, it appears that there are psychological problems involved in the fullest investigation of Production and Economic Welfare, as well as of Value and Distribution.

The main purpose of this essay is to gather up whatever material is to be found in psychological science that offers help in dealing with the above problems, and to present this material briefly in a manner intelligible to the economist or other social scientist. A considerable background of psychological fundamentals is given (in Part II), the relevancy of which may not be apparent, for the reason that the psychological vocabularies now current in social science discussions are too confused to admit of clear statements unless one's own presuppositions are made quite explicit. The relevancy of the historical chapters (in Part I) to my main purpose may also be questioned, and perhaps they are over lengthy. But discussions of our topics in the past have clustered largely around the social-psychology dogma that economic theory suffers from false assumptions as to the ''rationality" of human behavior in regard to wealth, such misapprehensions being traced usually to the Utilitarians; and since my vi PREFACE

study of associationist and modern psychology convinced me that there is very much less discrepancy between the two than the above dogma assumes, I thought it worth while to give considerable space to the matter.

The conclusion emerges, as might be expected, that psychological problems of economics are at present to be attacked more effectively by the ordinary methods of economic science, which consists of statistical analysis of the behavior-data relevant to the case, than by means of psychological principles; for psychologists are making progress in understanding other types of behavior by similar statistical analysis. But apparently in every field of discovery the collection of facts will be the more enlightening, the more soHdly grounded the collector is in first principles. I think economic psychology is no exception, and it is my hope that this volume will contribute something to the wider understanding of the needed fundamentals.

Grateful acknowledgment is made of help received from scholars at Harvard, especially Professors Taussig, Carver, and Bullock, on the economic side, and Professors Holt and Perry on the psychological side. I cannot indicate how much I prize Professor Taussig's inspiration, counsel and encouragement. Among my colleagues at the University of Minnesota I must thank Professors R. M. Elliott, Mabel Fernald, and F. B. Garver, not only for reading the manuscript but for a large measure of suggestions and encouragement.

MiNNEAPous, Minnesota Aprilj 1922.

Part I Introduction And Historical Approach Chapter Page

I. Human Nature in Economics 3

II. Common-Sense Analysis of Motives 16

III. Associationist-Hedonism: Aristotle, Hobbes ... 26

IV. The Psychology of Adam Smith 43

V, The Utilitarian Psychology: Jeremy Bentham . 54

VI. Utilitarian Psychology: The Two Mills and Bain . 67

Part II The Psychological Analysis Of Motives

VII. The Newer Point of View in Psychology .... 83

VIII. Instincts, Aptitudes and Appetites, in General . 92

IX. The Human Instincts and Aptitudes 109

X. Emotion, Pleasure and Pain 131

XL The Learning Process 144

XII. Learning, Reasoning and Rationality 163

XIII. How May New Motives be Instilled? 196

Part III Some Applications Of Psychology To Problems Of Economic Theory

XIV. The Present State of Economic Psychology. . . 205 XV. Applications to Economic Wants 207

XVI. Utility and Cost 229

XVII. Psychology of the Valuation Process 239

XVIII. Psychology in Saving 254

XIX. Work 270

INDEX 297

For men have entered into a desire of learning and knowledge, sometimes upon a natural curiosity and inquisitive appetite: sometimes to entertain their minds with variety and delight; sometimes for ornament and reputation; and sometimes to enable them to victory of wit and contradiction; and most times for lucre and profession; and seldom sincerely to give a true account of their gift of reason , to the benefit and use of men: as if there were sought in knowledge a couch whereupon to rest a searching and restless spirit; or a tarrasse, for a wandering and variable mind to walk up and down with a fair prospect; or a tower of state, for a proud mind to raise itself upon; or a fort or commanding ground, for strife and contention; or a shop, for profit or sale; and not a rich storehouse, for the glory of the Creator and the relief of man^s estate.

Bacon : Advancement of Learning, Bk. I.

CHAPTER I Mental and Physical Foundations

The object of this essay is to continue and bring down to date the old discussion of the constitution of human nature. While we are interested primarily in that part of the discussion which has significance for economics, yet it seems possible that our analysis may be helpful to a wider circle than just the economists. For when the present writer set himself to investigate the specifically economic motives, he found so little agreement on the fundamentals of social psychology involved that a reexamination of these fundamentals appeared to be necessary, and such a restatement constitutes the greater part of the essay. That these foundations are of considerable importance for psychology, ethics, and social science and art generally has been shown especially in the last decade, by the enthusiastic reception accorded to McDougall's Social Psychology.

In what connections are questions of human nature important for economics? This question must be answered at the outset, for there are many economists who believe that economics has little to gain from psychological importations. And, in indicating where psychological assumptions (whether accurate or inaccurate) are actually employed in this science, we can incidentally suggest some of the other social problems which involve exactly the same questions of human nature.

Logically the first step toward explaining the economic world is to explain the wants which broadly determine what goods shall be produced. There are, to be sure, other motives in production too; the want of poor John Jones for street-car service does not move the productive resources nearly so much as does rich Tom Trout's demand for transportation by limousine. But in a larger view the wants of consumers for moving-picture amusement cause men and money to turn out celluloid and studios, and other wants give rise to other industries. Hence many economic writers begin their treatises with this topic of Wants. It is closely related to the subject of Consumption of Wealth; the outstanding problem of both being to find why people want just what they do today — Teddy bears, or admission to professional baseball games, for example — and turn up their noses at things they wanted a year or a century ago, — say babies' cradles or detachable cuffs. Such an inquiry into the nature and natural history of economic wants soon pushes the student back to the psychological entities of instincts, ideas, association or what not, — questions of human nature.

Let us recognize at once that an economic treatment of consumption includes much matter which is in no wise psychological, for it goes on to show what are the long-run effects of wants (for necessities, luxuries and so forth) on the people who are actuated by them. It is one thing to show why people wish to act so and so, — to save part of their income, for example, or to live it all up as they go. It is another thing, and quite independent of their wishes, to show what happens to them as a result of their acts, in each case. This is one illustration of the general truth that the foundations of economics are only partially in human nature; they are also laid in the external world which goes its way whether we like it or not.^

It is materials of the latter nature which are chiefly used in the traditional sections on Production and Exchange. As John Stuart Mill put it (perhaps too strongly) , the economic principles in these divisions "have nothing optional about them," they are but elaborations of the data of physics, geology and biology. The advantages of division of labor, for instance, and of capital equipment (tools and machinery) ; the ' diminishing returns ' of agri-

1 ' Psychological ' and ' physical ' causes are presumably not ultimately different in nature. The qualification psychological as herein used means only that a human reaction or mental act is directly involved. It is doubtless true that one's motives, beUefs, tendencies or whatever the human springs of action be caUed, receive all their qualities ultimately from physical nature, partly by way of the molding effect of his environment (physical and social) and partly by way of natural selection or similar influences on his ancestors.

cultural produce per unit of capital and labor, as soil is more intensively cultivated; the economies of large-scale production through diminishing quota of overhead expense to the unit of output C increasing returns ') ; the dependence of prices on quantity of money; — these are among the more important orthodox economic laws which apparently can be little affected by changes in the winds of psychological doctrine.

Nevertheless there are psychological problems even in these sections. Adam Smith raised one when he attempted to explain how division of labor had originally come about.

This division of labour, 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."^

Of course Smith was a psychologist — • an uncommonly good one — and it might be said that he dragged these observations into his economics unnecessarily. What do we care how it all came about? Possibly nothing; but on the solution of a closely related problem may hang life or death, comfort or misery, for millions of people in the future. This problem is the part played by human nature in improvements of the arts, — in mechanical or other invention. We all talk glibly of the wonderful ' labor-saving machinery ' which is still to come forth, but how can we best assure that it will come? Does ' capitalism,' independent enterprise, patent monopoly, public or private research agencies, or some other means, best promote such advances? Economics can assist in answering questions like these only in proportion to its achievement of an increasingly accurate explanation of production, including the motives of inventors and other producers.^

Another portentous psychological issue raised in the study of production is this: What effect has the minute subdivision of tasks on the mental health and happiness of the humble worker? Many observers think, as Mill did at one time, that the monotony

' Wealth of Nations (1776), Book I, ch. ii.

2 Cf. L. Wolman, "The Theory of Production," Am. Ec. Rev. Supplement for March, 1921.

and fatigue attributable to machinery offsets its advantage in productiveness. Again the economist may say that this is a sociological or ethical or medical question, and so is beyond his province. Undoubtedly many of the special investigations necessary for answering the question are beyond his technique, but even if he refrains entirely from pronouncements on economic welfare (few economists do so refrain) , such effects on the worker should be considered so far as they reduce his economic productivity.

Value is the central problem of economics. Production follows values, even if these are expressed by ballots instead of by purchases; and Distribution into Rent, Interest, Wages and Profits is merely a matter of the value of land, loans and kinds of labor. As Mill saw, psychological and social factors are especially important in this division. The individual's evaluation of alternative purchases seems preeminently a mental act, a matter of choosing or deciding how many apples or doughnuts he wants just as much as he wants a dime, — how many A are just as valuable to him as B. This individual subjective process is studied by economists principally for the purpose of explaining the fluctuations of market exchange values, that is, to ascertain as completely as possible why a bushel of wheat, say, becomes exchangeable for two chickens now, whereas a year ago it would buy but one.

The older economists — Ricardo conspicuously — maintained a labor theory of value, to the effect that things exchange, on the whole, in proportion to the labor-times required in their production. This theory proved so inexact as to be nearly worthless except to the Socialists for propaganda; and the supplementary marginal utility theory of Gossen, Menger and Jevons (1871) is one of the great triumphs of economic science. The latter states that goods are not valued because they have cost labor, — for example, land and many other objects which are gifts of nature are valuable, simply because they are so scarce as not to satisfy all wants for them; but labor is valuable because of the goods it is the means toward getting. The key to value, then, is in wants and in the way that any one of them becomes progressively ' saturated '

as successive units of the same good are possessed (diminishing utility). We are not attempting a discourse on value here, our point is that economic discussions of value have become much occupied with this psychology of wants and of choice ; so much so that a large group of economists who specialize on the subject of value are called the "Psychological School."

Beyond this branch of the general theory of value, the lore of motives looms large in discussions of the special values of capital and labor; or let us rather say in respect to matters of public policy based on these branches of the theory. The economic distinction between interest and rent is chiefly a matter of motives, in that the supply of capital (savings out of which new buildings, machinery, etc., can be provided) appears to be kept up only on condition that interest is paid to savers; whereas the amount of land is practically a fixed quantity regardless of whether private property is permitted in it and rent paid to the owners. It seems even clearer that labor will not be forthcoming unless wages are to be paid for it, and that if the employer is to take the chief risks of loss in carrying on production, he must be induced to do so by prospects of possible profits.

But of late years it has become orthodox economic doctrine that there are ' rents ' in interest, wages and profits, as well as in the rent of land. What is the distinguishing feature of this common element? It is the amount which the capitalist or laborer can get for his service (at the market rate which is uniform for all like services) , which is in excess of the least he would be willing to sell it for if he could not get more. Much of the interest paid on the accumulations both of the poor and of the rich is of this character; the poor save for a rainy day, and the rich save from force of habit, — in either case the amount of principal saved would be about the same if interest were half or a quarter what it is. In the same way there are numerous men of talent in business, in the professions or in art, who would do just as good work if the market value of their services happened to be half or a hundredth what it is. Caruso presumably would have caroled just as melodiously if the riches of America had not existed and he could sing only to his poorer countrymen in Italy. The fortunate possessor of talent or capital often gets the same kind of lucky ' rent/ therefore, as does the owner of a farm on which oil is discovered. And a great part of the significance of distribution theory depends on the assumptions as to producers' motives with which you start.

Here again, however, the economist must have his eye on some external necessities which are not psychological, and cannot be changed by wishing. One of the chief of these is the principle of Proportionality, or ' diminishing productivity,' out of which the famous ' specific productivity ' theory of distribution was formulated by Clark. For the production of any consumable good numerous ingredients are necessary, including different kinds of labor. The proportion in which these ingredients may be used is usually not fixed; one may farm with much land and little capital and labor, or with much capital (tools) relatively to the others, or with varying proportions of skilled to unskilled men, and so on. By successively increasing the use of any one ingredient, all others remaining the same, the total product will be increased for a time at each step, but at a diminishing rate. Finally more land or machinery or one kind of labor will not result in any increase at all. Hence if the farmer is to be induced to buy anything which he already has in abundance (relatively to the factors with which he must combine it), this article must be offered him at a lower and lower price, until finally he will give nothing at all for more of it. It will be superabundant, as water is to some farmers, or apples rotting on the trees. In these circumstances, whatever water or apples or land he can use are physically just as necessary as any other ingredient in his process, and just as meritorious from a moral point of view, but it is impossible to conceive of his going into the market outside and buying more of them, for more would be of no use to him. He would spend his money on the scarcer elements, which would mean an increase in his final product. We must look for a strain of this policy to run through his acts, even though he makes mistakes in detail, and we assume he will always have his eye on the largest profit, which represents goods that consumers most want. (This assumption, however, is getting back to psychologizing.) So that all values of producers' goods, including the value of a given kind of labor, are governed by technical conditions quite as much as by the whims of the buyers ; which is a more accurate way of saying that value depends on supply and demand.

If the value of common labor or of school teachers is low, therefore, we must inquire how the supply of it got out of proportion to the more highly paid labor which is required in conjunction with it. We are thus presently led into the subject of Population, and the Malthusian discussion. The older economists prophesied, from what they saw of the facts of animal fertility, that wages must always remain near the minimum of subsistence, since if more were secured, population could increase until wages were brought down again. That was the purport of Ricardo's Iron Law of Wages. But the declining birth rates in all civilized countries over the past fifty years, with France's population now nearly stationary — and in the face of a considerably higher level of real wages than the preceding century knew — has called attention to the psychological factors of the Standard of Living and Birth Control, which must be studied in relation to the theory of wages.

Practical Uses of Knowledge oe Motives

So much for the more important psychological issues of economic theory. Though it is hard for most readers to avoid being deceived, by the abstract language of science, into thinking of these as mere ' academic questions,' we must, in the interests of economy of space, forbear to trace their emergence into such practical issues as tax systems, poor laws, trade policies, public regulations on business, state ownership of railroads or other means of production, and the whole general issue of collectivism vs. individualism. Taussig, discussing Socialism, says:

The questions between private property and socialism are thus at bottom questions as to men's character, motives, ideals. They are questions, in so far, of psychology; in more familiar language, of human nature. They are not simple, but highly complex; because human nature is highly complex.^

His two chapters on this subject would perhaps be the best introduction to our study, especially since they inspired the present

^ Principles of Economics, Ch. 65, sec. 6. Compare the excellent discussion, in the same spirit, in A. Wagner, Grundlegung der polit. Okonomie, 3d ed. (1892), pp. 72 ff.

lO ECONOMIC MOTIVES

writer to undertake it. In politics, education, ethics — in the study of human affairs generally - — the larger problems are still those questions of human nature with which Plato and his predecessors grappled : what is constant, what is variable and how is it variable, in man's mental endowment? Why do men fight? has been the stumbling block of schemes for international organization throughout the centuries, and of many other projects of brotherly love. Are some children innately more ' worth ' educating than others? At least, how may education and industry be best adjusted to their (supposedly) different natural capacities? Two branches of business psychology, having large money-making potentialities, also depend on these same fundamentals, — we refer to advertising and employment psychology.

Considering, then, the import which the obscure laws of human nature have for all our social institutions and even for private prosperity, we may condone somewhat the unbalanced exploitations of alleged discoveries in psychology which we see about us every day; and, realizing that it is hopeless to expect to answer most of the questions we have raised, do what we can toward fitting together whatever fragments can be found of the master key that will fit all these locks.

Now the objection may be raised by others than economists — and it is sure to be raised by many of the latter — that while all we have said may be true, there is still no evidence that economists have anything to gain from excursions into psychology. They (the economists) often speak of ' the economic motive,' meaning the general desire for more wealth, as distinguished from the motives of family, conscience, and so on, and then say that economics seeks only propositions which follow from this one powerful force (comparable, say, to gravitation), without denying that there are ' disturbing,' unbusiness-like motives, which make economic life in detail a little different from what it would be if all people were actually moved only by the desire to make money. Such was, theoretically, the position of leaders like Senior, Mill and Bagehot. It seems obvious that in modern business, at least, the most important single key to men's doings is search for the greatest gain; and so economics, the science of business, may take

HUMAN NATURE IN ECONOMICS II

this motive for granted, and leave to speculative dreamers the task of philosophizing over what men want money for. And similarly the practical man may say that the principle of self-interest — ' people are out for all they can get ' — is a good enough key to human affairs for him.

The economists of an earlier day deliberately connected their theory on this point with the doctrine of motives generally believed by philosophers of the time, called Psychological Hedonism. This doctrine avers that all men act cannily to secure the greatest possible pleasure or, what was supposed to come to the same thing, the most complete exemption from pain. Any person was supposed, that is, before willing any action, to make a quick calculation of the probable results in pleasure or pain to himself of each of the possible courses he might take, and then to choose and carry out that course which promises the largest hedonic results. So that the philosopher-economists no less than the business-men-economists of the time, found it easy to assume that the pursuit of ' utiUty,' ' pleasure,' ' wealth,' all mean about the same thing, and all are carried on rationally, calculatingly, by mankind in general.

Everyone will see, however, if he stops to think, that theory on this simple premise of motivation is but a rough approximation, and often badly misleading in practice.

Many of us are willing enough to believe that certain socialistic leaders are actuated only by gain-seeking, but we protest vigorously against their ' economic determinism ' so far as it means that we are fighting merely to hang onto our ' privileges ' and are ' exploiting ' every other human being so far as we possibly can. When the nation is in danger, or some catastrophe has made thousands hungry or homeless, do we think it vain to appeal to other than mercenary motives? It is only by a shrewd knowledge of the human springs of action which will cause large numbers to act against their economic advantage, that such enterprises can be carried on. War and extraordinary distress are not the typical situations, is the reply usually given by economists. What people will do in such times they will not do in ordinary business. That is true, but are we so sure of what human nature is ultimately capable, in ordinary business? Is it so certain that patriotism cannot some day be invoked by everyday tasks?

And even at the level of everyday business life, there are many observers who contend that economic self-interest by no means furnishes the main clue to men's actions. A certain large department store, for example, allows none of its buyers or other representatives to travel on Sunday, and since but few outsiders are aware of this rather expensive policy, it cannot be attributed to clever advertising. Many other examples of conscientious scruples thwarting the motive of gain might easily be collected. Or consider the case of powerful daily newspapers, having lists of the proprietor's personal enemies who are not on any account to be mentioned favorably. A certain highly successful motor-car manufacturer is reported to be implementing his vast business organization in a bitter anti-semitic campaign upon which he became launched apparently by personal associations. Consulting experts in business organization testify that practically every large concern they enter is honeycombed with prejudices, jealousies and cliques which must be analyzed and taken account of before purely efficiency measures can be suggested. Labor conciliators say that pride, resentment, the itch for power, are often more important in disputes than the dollars and cents at stake.

On the other hand, instances may be multiplied in which business men have learned to increase their profits by analyzing out some of the * human nature ' quirks of the people they deal with.^

The salesman long ago found the theory of one economic motive, self-interest, too simple for his purposes, and so he turned to psychological inquiry to discover how he might persuade people to buy his article at a higher price rather than a competing article just as good for a lower price. The employer is just beginning to find that his labor problems do not turn entirely on wages, and is developing incentives such as pride in the business, approbation for good work, or a variety of tasks for each worker.

Considerations like these have tended to discredit the old hedonist psychology, and have raised a host of critics in the economic world against many points of economic doctrine which 1 See, for instance, Fred C. Kelley, Business Profits and Human Nature.

they consider based on an * exploded ' psychology. These attacks are often met by the statement that economics takes as premises only what men are seen to do, and consequently is not involved in psychological disputes as to why they act.^

As will appear in Part III of the present work, we consider that there is a large field in economics for which the reply just noticed is valid; in which the economist need no more worry about the ultimate facts of the spiritual nature of man than the carpenter concerns himself about the higher chemistry of wood. At the same time, as we have attempted above to show, economic explanation, even as it is most narrowly conceived, does bristle with premises that are really psychological, in which it is a question of fact whether the hedonist assumption or some quite different version is true, and on the answer to which the accuracy of the economic principle depends. Some of these are narrow and specific questions, such as, How far do the facts of industry bear out the marginal utility theory of value? — while others are vague and general, like Is self-interest ineradicable?

In general it may be said that increased accuracy in explanation of the processes of human behavior will bring forth more effective practical control in all the social fields, just as the art of medicine is continually improved by physiological research, or the arts of engineering and carpentry by physical research ; but this is possible only on the condition that some one carries the results of the pure sciences which are relevant, over to the practical fields in such form that they may be of use.

Psychology and Economics Both 'Behaviorist' Sciences

One more scruple of the economist may be noticed. He is perhaps doubtful if psychology has really been working on problems that are relevant to economics. We venture to say there are much