Principles of the new economics

Front matter

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V

PRINCIPLES

Preface

The primary purpose of this volume is to integrate the varied developments of recent years in economic thinking, and to relate them to the body of economic ideas which have been evolved through a long history of economic reflection. A number of departures from the orthodox economic doctrines prevalent at the close of the last century have led to the development of several important schools of new economic thought. Each separate school has departed from the worn and beaten paths of economic theory in ways distinct and peculiar to itself, and each represents an independent and original direction of economic interpretation. In the early stages of such a movement in economic thinking, it is natural for both the adherents and critics of each branch of the movement to interest themselves in the unique and unusual features of the new doctrines of each independent branch. The stage has been reached, however, when it is of deep importance that the several divergent tendencies in economic interpretation should be integrated in their fundamental relations, The attempt at such an integration takes full cognizance of the many contradictions and inconsistencies between the various branches of thought, but it also acknowledges fully the many basic ways in which the various branches are supplementary and co-ordinate. The guiding principle of this volume is that the true value of all the independent developments in recent economic thought is realized not merely from a view of each branch of thought by itself, but more completely from a view of the composite evolution in economic thinking. The recent pluralistic progress in economic thinking has a fundamental unity.

vii viii Preface

Some of the outstanding branches of economic thinking may be mentioned for the sake of illustrating the scope of this undertaking. There has appeared within the last fewyears a powerful psychological school of economic thinkers, whose distinctive characteristic is not that they have introduced psychology into economic theory, for earlier schools of value theorists made that introduction some time ago; but that they have introduced a new type of psychology into economic thinking, — ^the scientific psychology which has made its monumental discoveries and progress during the last two decades or so. This scientific psychology has, as John Dewey observes, displaced the exploded psychology of the nineteenth century, and has brought out the advances embodied in modern social psychology, comparative psychology, behavioristic psychology, normal and abnormal psychology, and numerous other special fields of modern psychological research and discovery. The psychological developments in economic thinking are at bottom in thorough harmony with what has been called "institutional economics." Moreover, these schools of modern economic thought integrate in fundamental ways with descriptive economics, with functional economics, with social economics, with price economics, with dynamic economics, or with welfare economics. The paramount and striking feature of these several branches of economic thought is the fact that in their general bearing and broad scope they represent a great forward movement in the interpretation of the economic phases of life.

It should not be assumed that a recognition of recent advances in economic theory implies a repudiation of old economic theory. The old economic theory, it is true, is charged with many fallacies, but at heart its principles were enduring. Probably the chief cause of uneasiness in fields of economic thought has been the feeling that former economic theory was inadequate. Many of its doctrines are essentdal, but are too limited to account fully for economiQ

Preface ix

life. Hence, the present integration of recent tendencies in economic thinking has an ungrudging tolerance for a large part of previous economic thinking. The spirit of this study is not to cut loose from the orthodox theory of the recent past, but to associate the new with the old in their rightful relationships.

This process of integrating the new and relating it to the old necessarily involves much comparison and contrast of economic doctrines. The literature of the field presents an endless amount of controversy and dispute. However, the method of the present volume is not to controvert, to dispute or to argue, but rather to make as direct and clear a statement as possible of the integrated and related bodies of interpretation. No attempt is made to explain the ways and processes by which the present organization of thought has been arrived at, for the simple reason that such an explanation would involve a volume of controversy. Nor is the discussion contained in these chapters framed for the purpose of convincing professional economists of the defensibility of the author's views. The positive endeavor is to state the body of thought in a form which can be readily understood by a university student or by a general reader of good intelligence. It is hoped that such a statement of the body of thought will be convincing to economists, and the writer prefers to let the plain statement of the ease do what convincing it will, rather than to confuse the statement by entering constant anticipations of objections and criticisms. The method is expository and non-controversial.

In the course of the work of constructing the book, deeply appreciated help has been received, either in the form of critical suggestions about the organization of the thought or of sympathetic reading of parts of the manuscript, from Dr. Leon C. Marshall, Dean of the School of Commerce and Administration, of the University of Chicago; Dr. Elmer Burritt Bryan, President of Ohio University; Mr. Ordway Tead, Bureau of Industrial Research of New York City;

X Preface

Dr. H. G. Good, Associate Professor of Psychology and Education, of Colgate University; Professor J. M. Shortliffe, head of the Department of Economics, of Colgate University; Professor E. W. Smith, head of the Department of Rhetoric ; Dr. F. H. Allen, head of the Department of History and Politics; Associate Professor C. E. Gates, Associate Professor C. A. Kallgren, and Mr. R. M. Gidney, Controller at Large, Federal Reserve Bank of New York. The author is, of course, solely responsible for the contents of the volume.

Cordial appreciation is also due many friends and students who have aided in many ways in carrying on the work.

I am especially glad to enter here a full recognition of the partnership of my wife in all phases of the undertaking. Her thoughtful and patient collaboration is embodied in each page of the volume.

Lionel Danforth Edie.

Part I— Economic Psychology Chaftbx Pagb

I. The Significance of Psychology in Economics . . 1

4 II. Economic Expression of Instincts 8

•^ The Instinct of Workmanship — The Instinct of Posses-

sion — Disposition to Self-Assertion — Instinct of Submissiveness — The Parental Instinct — Sex Instinct — The Gregarious Tendency — Instinct of Flight and Fear — Pugnacity and Rivalry — Some Instincts of Minor Significance — Hunting — The Housing Instinct — The Instinct of Migration — The Instinct of Play — Disposition to Mental Activity.

III. The Obganization of Human Natube 39

Habit — Imitation, Sympathy, Suggestion — Inequalities

of Human Equipment.

IV, Human Adaptation to Economic Environment . . 52 Discipline — Elimination — Sublimation — Rationalization — Revolt.

PART n~ECONOMIC INSTITUTIONS

AND FUNCTIONS

V. The Mechanical and Scientific Basis of Economics 72 Machinery — Transportation — Chemistry — Geology — Electricity — The Science of Economic Organization — Psychology of Industrial Engineering.

J VI. Labor: Its Part in Production 99

f^ The Job — Hours of Work — ^Wages — Standard of Living

— Incentives — Bargaining Power — Custom and Habit — Wages and Labor Efficiency — Power — Environment — The Mind of the Worker — Immigration — Population — ^Economic Significance of the National Character.

•2:

5?-^ xii Contents

CRAPTXK PACB

VII. Capital: The Rights and Duties of Ownebship . . 175 Statistics of Wealth and Income — Interpretation of the Facts — Property a Group of Rights — Ownership as a Corporate Phenomenon — The Principles of Minimum and Surplus — Inequalities Due to Unequal Privileges — Monopoly Privileges a Cause of Inequalities — Unforeseen Chance as a Cause of Inequalities.

VIII. Management: Its Technique and Responsibilities . 236 Classification of Types of Management — The Mechanism of Corporation Management — Technique of Executive Direction — Business Combination and Concentration of Management — Reasons for the Combination Movement — Successes and Failures in Combination.

IX. Markets: Their Principles and Strategy . . . 279 The Cost of Production Theory of Prices — Supply and Demand — The Analysis and Creation of Demand — ^Advertising — Sales Management — Guidance of the Ratio Between Supply and Demand — Variations from the General Principles of the Market — Market Mechanism Geographically Considered — Market Mechanism Functionally Considered — Price Movements in Various Stages of the Market Process — Price Policies — Below the Market Level — Above the Market Level — Business Combinations and Price Policies — Monopoly Price and What the Traffic Will Bear — Monopolies and the Steadying of Prices — Price Discrimination — The Science of Spending Money — Technology for Guidance of Consumption.

f

Money and Credit: Their Services and Dangers . . 366 Forms of Money — Banking and Commercial Credit — Forms of Loans — Discounts — The Network of Financial Institutions — Savings Banks — Trust Companies — Foreign Investment Banking — Other Financial Organizations — Federal Reserve System — Centralization — Note Issue — Deposit Currency — Reserves — Clearance and Other Functions — International Banking and Credit — The Principles of Foreign Exchange — The Dangers of the Credit System — Business Cycles — Psychological Foundations of the Credit System.

Contents xiii

PART in— ECONOMIC ADAPTATION

CHAPTM r^GS

XI. Public Control 453

General Regulations of Business — Governmental Control of Labor — Reform — Public Opinion and Public Control.

XII. Economic Radicalism 487

General Characteristics of Radicalism — Particular Types of Radicalism — ^Economic Analysis of Socialistic Proposals.

XIII. Economic Democeacy 499

Fundamental Conceptions — Democracy a Process of Growth — Works Councils — Labor Unions.

INDEX 621

PART I ECONOMIC PSYCHOLOGY

Chapter I The Significance Of Psychology In Economics

I Economics is the science of human nature in its relations to the ordinary business of life. It involves a threefold analysis, — ^first, of the motives and satisfactions of men in their dealings with wealth; second, of the processes and organization by which wealth is controlled; third, of the forces and directions of improvement and change. Thus economics has a human factor, an organization factor, and a progress factor. Economics is the science of all three as a unit and to study any one exclusively is to secure only a partial analysis of the science.^

The human side of economics is approached chiefly by psychology. Men are the vital part of the economic order. It is men who invent machinery and make scientific dis-i coveries. It is men who operate machines and guide th& process. It is men who compete for the ownership of property and who manage the economic system from top to bottom. It is men who bring about progress in the countless parts of the system. It is to satisfy the needs and wants of men that all economic activity is carried on. -The human factor of economics is fundamental, and the science of this human factor is economic psychology.

Psychology approaches the problem by a study of the primary motives of conduct. Psychology attempts answers

iSee Alfred Marshall, "Principles of Economics," p. 1. Seventh, edition.

to the questions, — Why do men behave in the business world as they do? Do these forms of behavior make for the proper amount of satisfaction and welfare? What other forms of behavior are possible and practicable? What are the chief motives which urge men forward in their whole dealing with these questions of wealth?

Men are bundles of tendencies to act. Whether in the banker 's office, or around the table of the board of directors, or on the salesman's route, or at the worker's machine, men are aggregates of urges to act in certain directions. In technical psychological terms, these tendencies are instinctive tendencies. For purposes of economic thinking they are as well termed dispositions, or urges, or motives, or drives,^ A comprehensive definition of them is given by McDougall as follows: "The human mind has certain innate or inherited tendencies which are the essential springs or motive powers of all thought and action, whether individual or collective, and are the bases from which the character and will of individuals and of nations are gradually developed under the guidance of the intellectual faculties. . . . Directly or indirectly the instincts are the prime movers of all human activity; by the conative or impulsive force of some instinct (or of some habit derived from an instinct), every train of thought however cold and passionless it may seem, is borne along toward its end, and every bodilj^ action is initiated and sustained. The instinctive impulses determine the ends of all activities and supply the driving power by which all mental activities are sustained. . . . Take away these instinctive dispositions with their powerful impulses, and the organism would become incapable of activity of any kind; it would lie inert and motionless like a wonderful clockwork whose mainspring had been removed or a steam engine whose

1 For discussion of definitions of instinct, see McDougall, "Social Psychology," pp. 23-29; O. Tead, "Instincts in Industry," p. 5; T. Veblen. "Instinct of Workmanship," Chapter I; G. Wallas, "The Great Society," Chapter I; M. Parmelee, "Science of Human Behavior," Chapters XI, XII, XIII; E. Thorndike, "Original Nature of Man," pp. 1-5; J. B. Watson, "Psychology from the Standpoint of a Behaviorist," pp. 231-240, 261; H. C. Link, "Instinct and Value, American Journal of Psychology/, Jan., 1922, flf. 1-17.

fires had been withdrawn. These impulses are the mental forces that maintain and shape all the life of individuals and societies,"^

These impulsive forces cannot be classified in any hard and fast, absolute divisions. Indeed, such a cut and dried classification is unnecessary; as will appear from the following list of some of the paramount tendencies. There is an urge to self-assertion toward leadership, mastery, » power, which makes men move heaven and earth to sit on a coveted board of directors and map out the policies of corporations. There is an instinct of possession or ' acquisition which drives men to the collection of great blocks of real estate or of multimillionaire fortunes. There is an instinct of workmanship or constructiveness, which * determines whether production shall be 50 per cent, or 100 per cent, of its possibilities, and which virtually compels men of great genius |o~Vuild up the large business organizations of the modern\ day f?f?**#i^^sheer joy of achievement. There is a parektal instinct whiclMSnderlies • kindliness, sympathy, sacrifice and service, wherever it appears in the economic world, whether strictly within one's own immediate family or through the community at large. There is a sex instinct which is utilized effectively in a large part of advertising display, and which makes the proper entertainment of workers while off the job a highly important business problem. There is a herd in- ' stinct under whose force a rumor of pessimism may aid in dragging the financial community to a temporary or prolonged state of depression, which may influence in vital ways the formation of labor unions, or which may determine degrees of congestion of population in large industrial centers. There is an instinct of suhyiission which • may lead a corporation manager to prefer the status of a subsidiary in a large amalgamation to the status of an independent cut-throat competitor, or which may detei'mine the attitude of workers toward movements for industrial democracy. There is an instinct of pugnacity which flashes . out from time to time in strikes or in the bitter struggles 1 "Introduction to Social Psychology," p. 45.

of commercial competition. There is an instinct of curiosity or thought which inspires the inventiveness of men, concentrates their mental powers on the possibilities of an ever better science of organization, and encourages countless endeavors at increased efficiency. There is a disposition to fear which worries the business man with the dread of bankruptcy and strikes into the heart of the laborer the terrors of unemployment.

It is not meant to give the impression that this sort of classification is all in all. The significance of the list is that it brings within small compass some of the paramount dispositions of men in so far as those dispositions affect their economic conduct. From other standpoints, other groupings might be of greater practical value, but from the economic standpoint, the most useful procedure is to draw from psychology those parts which have most value for the study of economics. In the economic world, therefore, it is indispensable to recognize that men move and work and plan and achieve in response to certain primary springs of action, — ^^such as the desire for power, or ownership, or achievement, or parental satisfaction, or sex contentment, or herd unity, or submission, or pugnacity, or thought.

With this brief picture of some of the predominant tendencies in mind, some important characteristics of their activity can be pointed out with greater definiteness. Fijst of all they are born into the human being. Through hundreds of generations they have been built into the life blood of the human race. They are hereditary tendencies in human nature, passed on from generation to generation, primitive, ineradicable, inescapable, the stuff of which human nature is made. They are all part and parcel of man's inheritance, his racial birthright, and in their applications to his modern economic life, this origin, with all that it implies of vitality and power, needs to be held vividly in mind.

A second important characteristic of these tendencies is their dynamic quality. They push and urge and drive men from mthin. There is something compelling about them. They do not make for quiet, but for change. They are the restless qualities, the forces behind initiative. They are motives to behavior, sources of animation, filled with purpose and desire and aspiration. From the town loafer to the captain of industry, they are drives toward behavior. Under their urge, growth, life, change is the keynote of the economic world. They are the incentives behind the hundreds of thousands of inventions of industry, behind the explorations which have opened the world to commerce, behind the gigantic business combinations and the myriads of lesser enterprises, — behind the whole economic organization.

A third important feature is their pliability. At birth, they are general tendencies, indefinite urges, broad forces. By development and experience the tendency to self-assertion may lead to the struggle for power as a labor leader or as a corporation president. Environment, family, school, reading all serve from early life to mold and shape and fashion a particular tendency in certain ways. Every outside influence counts in the application of the basic tendencies to the channels of life. A man born with a dominant love of power will weld all these outside influences into the real metal of his nature, and whether in statesmanship or finance or education or labor, will be a leader under the domination of the original tendency to power. So with all the instincts. At birth they are ''unlearned tendencies. ' ' Childhood and the experiences of adult years color and shape them, but they are still true to their essence.

A fourth important feature is their interplay. One separate tendency does not commonly hold exclusive sway. Parental love, possessiveness, self-assertiveness may, for example, combine in any proportion among themselves, or with any of the other tendencies to produce behavior. But in most of the affairs of industry, some one tendency or small group of tendencies is paramount in the policies of the individual, the class, or the nation. Different instincts may leap into the ascendency at different times. Pugnacity may master the man to-day and fear to-morrow.

JfU

There is interaction, combination, succession, waxing and waning, fitting the demands of the hour, rising to the occasion.

Finally, the instinctive dispositions involve the phases described by McDougall as follows: "Every instance of instinctive behavior involves a knowing of some thing or object, a feeling in regard to it, and a striving towards or away from that object. . . . We may then define an instinct as an inherited or innate psycho-physical disposition which determines its possessor to perceive, and to pay attention to objects of a certain class, to experience an emotional excitement of a particular quality upon perceiving such an object, and to act in regard to it in a particular manner, or, at least, to experience an impulse to such action. ' ' ^ For the biologist or physiologist or pure psychologist, it is often desirable to analyze and dissect the instinctive tendencies and concentrate attention upon their unit elements. But for purposes of economic psychology it is commonly more serviceable to think in terms of the whole disposition. We perceive danger, experience the emotion of fear and the impulse to escape. They are separate phases of a whole process, a total instinctive tendency. The usefulness of this conception is apparent from a more detailed definition of emotion. Angell explains that ''All the more profound types of human emotions are based upon the life of instinct." Sherrington remarks of emotion, "If developed in intensity, it impels toward vigorous movement," and Cannon writes, "That the major emotions have an energizing effect has been commonly recognized." The important conception therefore is the whole process, perceptual, emotional and energizing or impulsive, because the whole process is the determining factor in social and economic behavior.

Considered in these ways, economic psychology is not one of the exact sciences. It is true, of course, that certain phases of psychological study can be reduced to exact measurement, such, for example, as intelligence tests, advertising tests, fatigue studies, etc. However, in its gen- 1 Social Psychology, pp. 27, 30.

eral aspects, it has to proceed without the units of measurement which prevail in physics or electricity or chemistry. There are no calories or meters or volts or grams in human dispositions. The dispositions are incapable of measurement by any form of yard stick or weighing scale. Motives and tendencies are always matters of more or less. The combinations of instincts allow for infinite variation. Mathematical exactitude is not the exclusive mental power In psychological thinking; an important power is judgment. Economic psychology is not for this reason any less a science. The test of a human science is not whether it is amenable to statistical computation ; the test is whether it marshals knowledge and experience to effective and serviceable ends. Economic psychology endeavors to come up to that fundamental test. In this respect psychology works with essentially the same technique as is employed in most of the phases of economic thinking and of social science thinking generally.

CHAPTER II ECONOMIC EXPRESSION OF INSTINCTS The Instinct of Workmanship

Men have an innate desire for constructive effort. They are disposed toward making something, building something, fashioning something. Veblen has said, "Chief among those dispositions that conduce directly to the material well-being of the race and therefore to its biological success, is perhaps the instinctive bias here spoken of as' the instinct of workmanship." And James in a forceful chapter on the psychology of instincts declares, "Constructiveness is as genuine and irresistible an instinct in man as in the bee or the beaver. ' ' In explaining the paramount motive in his gigantic industrial achievements, Charles Schwab states, "Why do I work? What do I work for? ... I work just for the pleasure I find in work, the satisfaction there is in developing things, in creating."

It is not implied that this constructive motive is isolated from other motives in the lives of successful business men. The fundamental impression should be that with a substantial group of business leaders, an enjoyment of constructive achievement is a dominating motive. Such men are not animated solely or even primarily by the lure of a fortune, but by the lure of great creative achievement. This impulse is particularly outstanding in the engineering feats of recent years, such as the erection of large bridges, the digging of tunnels, the building of skyscrapers. Where this creative incentive is uppermost the achievements resulting usually have a high social value. The creative incentive is directed toward ends more serviceable to the community than are the incentives of pure profit and possession, and the tendency to consider business

Economic Exj^resdon of Instincts 9

as one of the professions is a sign that more and more men endowed with the creative incentive will play a leading part in the business world. Managerial positions are demanding in larger and larger proportions trained engineers whose chief ambition is not mere size of salary, but size of achievement. An economic society in which men imbued with this motive come to the top obviously has high social advantages.

But what of the rank and file? Does an instinct of constructiveness exist in a coal miner or a machine feeder ? Probably most business men have believed at one time or another that the great bulk of laborers are utterly lacking in creative ambition and are dominated by an innate laziness, a native disposition to soldier on the job. In spite of a widespread impression of this sort there have developed in the industrial world hundreds of plant organizations where the laborers speed up production spontaneously, enjoying the effort, displaying keen enthusiasm and a real instinct of workmanship. What has often been thought to be a disposition to loaf is found to be, on the contrary, a lack of opportunity for expression of a dormant impulse to create and construct.

Modern machine industry not only fails to present an opportunity for creative expression but positively stifles inclinations in that direction. To quote Herbert Hoover, "With the high specialization and intense repetition in labor in industrial processes there has been a loss of creative interest. ' ' ^ And from a business viewpoint, John D. Rockefeller, Jr., states, "What joy can there be in life, what interest can a man take in his work, what enthusiasm can he be expected to develop on behalf of his employer, when he is regarded as a number on a payroll, a cog in a wheel, a mere * hand ' ? " ^ In the same vein an industrial engineer of wide experience writes, "If we take the standard of production as one hundred, I can say that it is impossible to force a man much above fifty and even then after a few days he will become rebellious and lag

'^Industrial Management, May, 1920, p. 346. 2 lUd., Nov., 1919, p. 404.

and the quality of the work will suffer. But if the creative power of that man be stimulated, he can almost constantly touch one hundred, apparently without the slightest effort."^

Recent experience in industrial effort is sufficient to indicate that production is doomed to remain at low levels, labor unrest is inevitable, human satisfaction in workmanship is out of the question, high economic standards are hopeless unless industrial organization devises ways and means for bringing out this potential energy of the worker. A due expression of the instinct of workmanship, both in employers and in employees, has profoundest bearings upon wealth production.

The Instinct of Possession

Ownership, like constructiveness, satisfies a natural craving. Men instinctively seek to acquire objects of which they can say, ''These are mine."

For a large class of people this impulse is paramount. To possess more and ever more brings to them the great joy of living. They are insatiable^ they never possess enough. The possession of money, or the property or goods which it represents, gives a real relish to life, and they acquire purely for the sensation of possessing on a gigantic scale. This motive has amassed many of the multimillionaire fortunes of the present day and has driven men on to the accumulation of properties vastly beyond the point where the properties could do them any personal good.

Men animated primarily by acquisitiveness are found remarking, ''I'm not in business for my health," or "I'm after my pile and I'm going to get it," or "I admit I'm after the Almighty Dollar. Business is business." Men in whom this impulse is supreme have frequently been notorious for lack of a high social and ethical sense. When carried to extremes under its spell some captains of industry have discredited themselves in the public esteem. But it has proved one of the most irresistible of human

1 W. R. Bassett, "When the Workmen Help You Manage," p. 254.

motives and has fired men of great genius to mighty accomplishments, sometimes good, sometimes otherwise.

The wage worker too has a possessive disposition. In the eyes of the employer the wa,ge worker often appears to be animated almost solely by avarice for higher wages. There are many obstacles however to the worker's expression of such an instinct. The worker has, of course, no claim to possession of the machine which he operates, or of the raw material which he handles, or of the finished product which he turns out. He has no possessive title to his job ; his employer has the right to hire and fire at will. If he lives in a tenement district or a company town he owns nothing in the form of a house, a garden, or a lawn. One thing he does own, however, and that is his labor. This he possesses and aims to sell under as good a bargain as he can strike. Here his impulse of possession often comes into vehement play. Demands for wage increases come in rapid succession. A great labor leader has offered to digest the aims of labor under three headings, "More, more, more." Laborers assert, ''"We're not in for a boom unless it booms us; ' ' Wage incentives, bonuses, piece-rates, rewards, are the ceaseless efforts of progressive employers to control and harness the workers' acquisitive nature.