AN INTRODUCTION TO ECONOMICS by Maurice Dobb 1932
AS WE have mentioned, the exponents of the utility theory have commonly underlined a significant corollary of their theory. They have pointed out that the competitive equilibrium which their equations establish represents the system of prices which yields the greatest common gain (of utility) to all the parties concerned. This can be demonstrated to follow as a direct corollary from the cloth and com example which was cited above. lf the seller of cloth, for instance, stopped his exchange of cloth for corn before the equilibrium (or “normal”) rate of exchange was reached, he would be getting a smaller total utility than he might otherwise have done; for the marginal utility of the cloth he possessed would be less than the utility of the corn he might have got had he continued the act of exchange further. This will continue to be true up to the point where the utility of the marginal cloth he parts with is equal to the utility of the com he gets in exchange. And similarly for the seller of com. Again, it can be easily demonstrated that the distribution of the factors of production between their various uses in such a way as to equalise their marginal yield is the condition of their maximum productivity. This follows for the reason that, if the marginal unit of labour employed in cultivating, say, potatoes is producing more than the marginal unit of labour employed in cultivating carrots, there will clearly be a gain in shifting labour from carrots to potatoes – a gain which will only cease when labour is so distributed between potato-culture and carrot-culture that the marginal productivity of labour in both directions is equal. Hence, any interference with competitive equilibrium, and with the prices which competition tends to establish, is likely to decrease, rather than to increase, economic welfare.
Such conclusions were clearly of very considerable significance; and it seems evident that to establish these important conclusions was the primary concern of the earlier utility theorists. By the middle of the nineteenth century industrial capitalism had won its battle against the old society. There was no longer much need, at least in England, for a cudgel against the dominance of the landed interest; while America, having no feudal past to hamper it, was born bourgeois from the colonial days. Nor was there any longer the same need to create economic society as a conceptual unity in antithesis to the old authoritarian sanctions. Men were no longer interested in precisely those solutions which were the concern of bourgeois economists a hundred years before. Moreover, the tool which Ricardo had fashioned had been subsequently turned to dangerous uses in the hands of Marx. The new subjective economics, therefore, served a double purpose. It provided a new justification of the bourgeois order, and one more convincing to an age grown sceptical of the “unseen hand” of “natural law.” At the same time, as an analysis of market price it provided a technique better suited to the more detailed, more microscopic problems with which capitalism in its maturity increasingly engrossed the minds of its servants.
Actually this imposing apology of laissez-faire is hardly more than a clever sleight of-hand. The corollary follows simply because the necessary conditions to support the corollary are included in the assumptions from which one starts. And since these conditions are implicit in the assumptions, rather than explicit, the corollary can he produced in that atmosphere of surprise which (along with his “patter”) is so commonly the conjurer’s most valuable stock-in-trade. If two persons are equally situated, they will, by hypothesis, continue to perform the act of exchange with one another until it does not profit them to continue the transaction further; and therefore it follows that their common gain would be smaller if they carried on their transactions either further than or not so far as this point. On the other hand, if the two parties are unequally situated, there is nothing to say that the outcome of free exchange between them would not represent a smaller gain than they had been less unequally situated, or to say that laissez-faire will do anything but perpetuate this inferior state of affairs. Again, Professor J. B. Clark may assure us that he can convincingly demonstrate (by the Theory of Marginal Productivity) that “a natural law exists” which causes “free competition (to tend) to give to labour what labour creates, to capital what capital creates and to entrepreneurs what the co-ordinating function creates “; but the fact remains that if society were not a class society, where “labour” is provided by a proletarian class possessing no land or capital, the “creation” attributable to labour and the “creation” attributable to capital would be considerably different from what they are. Here, in particular, the demonstration of an “economic harmony” is a mere trick of words.
Increasingly, indeed, to-day economists are stressing “exceptions” to this supposed harmony of laissez-faire; even while they still customarily admit laissez-faire as a “general principle.” Marshall himself was particularly careful to fence his analysis with a careful regard for the “exceptions” and modifications which special conditions (ignored in the more abstract formulation of theory) imposed. And Professor Pigou, developing certain hints of Marshall, has (in his Economics of Welfare) turned a powerful battery against the laissez-faire position, stressing the inadequacy of laissez-faire to achieve the optimum result in the case of industries subject to “increasing returns” (or decreasing cost) as the scale of production is expanded and in the case of various social costs and social utilities which do not figure in the economic calculations of individuals. At any rate, with the competitive capitalism of the nineteenth century passing increasingly into the monopolist capitalism of the twentieth century, discussions of the value of competitive equilibrium retain little more than their academic interest; and the increasing need of the new capitalist forms for systems and methods of economic control, whether by the State, public corporations, or trade associations, has rendered the vindication of laissez-faire largely otiose.
It is, however, in the realm which economists term “the Theory of Distribution” that the modern proletarian challenge to capitalism has mainly come; and here economic theory is still successful as an apologetic. Not all economists may be so daring in their verbal agility as Professor Clark. Few to-day would join him in explicitly enunciating that the distribution of income is governed by “the hidden hand” of “natural law.” Yet the theory that the returns to labour and capital correspond to the “effort and sacrifice” involved is a definite bulwark against Marxist criticism. Interest and profit, as well as wages, are the “necessary” reward for an essential economic contribution; and without the reward the contribution would not be forthcoming. True, rent remains as a surplus, a deduction from producers for the enrichment of a passive class. But pure economic rent today, when land has been improved by decades of capital investment, represents only a relatively small portion even of the return to land, while “surplus” elements are also found in other incomes, including wages. Marshall’s theory of “normal profit” was clearly fashioned to demonstrate that, from a long-period standpoint, profit contains no surplus, no “non-necessary” element; while Cassel is at pains to demonstrate, by the “scarcity principle” that interest would still exist in a socialist State. Welfare may be augmented by any measures which reduce the inequality of incomes; certain surplus elements in income may be desirably appropriated by the community for the common good. Still, economic theory postulates various limits to such remedial action in the connection which exists between incomes and the supply of necessary services. At any rate, even in the treatment of the matter by J. A. Hobson (who has carried Marshall’s surplus and surplus price distinction furthest), there appears no defined class antithesis between qualitatively contrasted class-incomes – an antithesis such as figured in the treatment of Ricardo and Marx, holding the possibility of a revolutionary change of institutions.
To the extent that Economics concerns itself with this type of consideration, it is clearly attempting to answer somewhat similar questions to those which the older Political Economy sought to answer. Most noticeably with Marshall, we find the attempt to use the new technique and to fit it to a classical framework. Yet we have suggested that it has really set out to answer not the same but a different set of questions. Is it then competent to answer the former, as well as the latter questions? Or is it claiming competence over a sphere from which it is properly debarred by the very assumptions which lie implicit in its method of enquiry? Clearly, if modern economics is simply a theory of market price and no more, it cannot provide a criterion by which to gauge the significance of any particular arrangement of prices. Being simply a theory of equilibrium – a group of equations showing the relationship between a system of variables – it can do no more than postulate the system of prices appropriate to a number of possible situations (for instance, the prices appropriate to a competitive situation, on the one hand, and to monopoly, on the other; to a class society and a classless society). It says nothing about the relative character or significance of these various situations; and hence it can make none of the normative judgments which economics is usually required to make, for the simple reason that a mere system of simultaneous equations by itself contains no norm (or standard). It was such a norm that the old Political Economy sought to provide in its theory of value (as distinct from market price). But a mere equilibrium theory, which expresses market price as a function of certain variables, cannot itself supply such a norm.
It is in providing such a norm to a simple equilibrium theory that the Hedonist basis of the utility theory has its importance. For a pure theory of equilibrium such a basis is quite unnecessary, as various writers such Pareto and later Cassel have indicated. It is sufficient for the theory of price to postulate simply certain choices – to take the observed fact of a certain scale of preferences among consumers as between different goods. Nothing need be assumed concerning the significance of these preferences – whether the market’s preference for cocaine, quack-medicines or diamonds is because they yield more satisfaction or welfare than opera and working-class houses. Given one set of preferences, there will be a set of prices appropriate to them; to another set of preferences another set of prices. There is nothing postulated about the value of the first set of preferences against the second This may be very convenient so far as a mere equilibrium theory goes – more economical in its hypotheses. At the same time, without these further inconvenient assumptions one’s scope is strictly limited. One cannot say that an economic system which adjusts production so as to satisfy those preferences to the full is any more economically desirable than a system which deliberately ignores those preferences and establishes a set of prices appropriate to something quite different. If, however, one assumes that the demand for goods which is expressed by consumers on the market is a true index of some fundamental satisfaction (the old sense of utility) which they derive from these goods, then one can postulate the conditions under which this satisfaction will be maximised. A criterion then exists by which, for instance, it can be said that the set of prices appropriate to competitive conditions tomes nearer to this optimum than that appropriate to monopoly. A criterion exists by which it can be said whether an economic society based on the price system and the market is economically preferable to a communist society which strictly subordinates the open market and curtails the price mechanism.
The modern tendency, however, is explicitly to sever this connection between Economics and Hedonism and to define “utility” in a purely empirical, behaviourist sense as measured by a person’s observed desire for a commodity. Cassel goes even further, and bases his theory of price on observed demands on the market expressed in money. Price becomes, ‘therefore, on the side of demand a reflection or a product of consumers’ preferences, or choices. For the purpose of the equilibrium theory these choices are taken as ultimate – as the data of the problem. They are “constants,” which in the concrete case give the actual numerical value of the equations. But, in fact, these choices are not necessarily the reflection of anything ultimate: they may be arbitrary, ephemeral. They may be the result of a passing whim, of a convention or the creation of a cunning advertiser. They may, indeed, themselves be partly dependent on price – for example, the changes of habits and conventional desires which accompany changes in relative prices or in the general price-level. In Cassel’s treatment, indeed, they are largely a function of the distribution of income, not merely through the influence of the distribution of income on conventional standards and desires of different classes, but because the distribution of wealth between rich and poor will directly affect the market preference (as expressed in money-demand) for, say, rare luxuries as against cheap articles of mass consumption. At any rate the theory of price endows these market preferences with no other significance than as the data for a theory of market equilibrium. In any wider sense they are entirely non-significant.
Some economists, particularly those of the school of Marshall and Jevons, still attempt to retain the old notion of utility as implying satisfaction of needs, and so to make economics into a normative science of economic welfare – that is, a science which implies judgments as well as merely describing things as they exist. Marshall pointed out (though in no more than a footnote) that desires and satisfactions may diverge. But since, he said, the measurement of satisfaction is impossible, “we fall back on the measurement which economics supplies of the motive or moving force to action: and to make it serve, with all its faults, both for the desires which prompt activities and for the satisfactions that result from them.” Following him, Professor Pigou has admitted the possibility of a “gap” between them: one may “desire” a patent medicine and at the same time acquire a negative amount of lasting satisfaction from it. But he has suggested that such a divergence is probably not serious in the case of “most commodities, especially those of wide consumption that are required as articles of food and clothing.” These, being “wanted as means of satisfaction, will consequently be desired with intensities proportioned to the satisfaction they are expected to yield." This is probably true of prime necessaries – precisely the basic commodities which a communist society, for instance, could distribute without any difficulty on a ration-system, dispensing with a price system. But as soon as we pass from prime necessaries to comforts and semi-luxuries, coincidence of desire and satisfaction seems to become increasingly questionable. In all matters of acquired taste a large number of biasing circumstances seem likely to play a part in determining the taste that is actually acquired. There seems no warrant for assuming that the choice which ultimately results will necessarily be any more conducive to welfare than ·an alternative taste which might have been nurtured in a slightly altered set of circumstances. Moreover, purely conventional standards – particularly class conventions – enter surprisingly deeply into nearly all our tastes other than the primary needs of the body-a point which Thorstein Veblen illustrated with so much acumen. And these days, when advertisement plays the prime rôle in business supremacy, thriving as it does on “educating the consumer,” afford much temptation to regard consumers’ preferences as significant of little else than the persuasive skill of the publicity agent, the poster artist and the insinuating salesman.
For somewhat similar reasons the attempt to base a theory of distribution on a subjective conception of “real cost” seems equally based on shifting sand. The new conception of “real cost” as “effort and sacrifice,” which replaces the old classical concepts of an objective “real cost,” bears on its face the obvious disadvantage, which we have already mentioned, at it rests on a basic dualism. There is not one type of “real cost” but two; and there is no discoverable means of equating the two by a common term. It is no answer to say that a comparison between the disutility involved in an hour’s work and the disutility involved in saying, say, £10 for a year, depends on which a particular individual himself would prefer to do, because such a preference varies with his circumstances – how rich or how poor he is. A more fundamental difficulty than this is the very delimitation of “sacrifice” – the logical difficulty which Senior originally found in knowing whether to define “abstinence” as including or as excluding the “abstaining” from the .consumption of wealth that has been inherited. Similarly ‘with the sacrifice involved in “saving” something which has not been expected: is it an equal “sacrifice” to save a “windfall” gain as to save an income that has been fully expected? If the answer is “Yes,” the notion of sacrifice seems to fade into a bodiless ghost; if the answer is “No,” then the frontier of “sacrifice” turns out to be drawn along the highly unsuitable line of whether the income that is “saved” has been expected or is unexpected. One dearly cannot “sacrifice” what one does not possess; and sacrifice seems, on analysis, to be hardly distinguishable from “opportunity cost” – from the sacrifice of alternative opportunities. Reduced to these terms, it ceases to have any universal significance as a conception of “real cost” – it will change its coat with every change of regime. At any rate, it will have no significance which makes it at all com· parable to the “real cost” involved in working an eight-hour day. If one uses “sacrifice,” or “abstinence,” in any sense that is at all fundamental, then it is not the rich men of the world who do the “sacrifice” involved in capital accumulation. The “sacrifice” rests in the lowered incomes and narrowed consumption of the proletariat which permits the propertied class to enjoy its privileged income. But the “sacrifice” which in Marshall’s theory is the basis of supply price is clearly nothing so fundamental as this. If Pharaoh lent his slaves for building pyramids, it was not the slaves alone who, in Marshall’s sense of the word, performed a sacrifice: Pharaoh bore a “sacrifice,” too, proportioned to the alternative enjoyments which his slaves might have yielded if put to other use. That the “real cost” borne by Pharaoh was of the same kind and order as that of the pyramid-building slaves may have been the viewpoint of the scribes of the Egyptian Court. But it is hard to think that anyone but a casuist or a sycophant to-day could discover any useful sense in which Pharaoh’s “sacrifice” was of the same order as that which he would have incurred had he laboured at pyramid-building himself.
Modern economics seems to have developed a technique which may perhaps prove of lasting value, at least in the study of particular detailed aspects of the economic world. Here, it has made an important formal contribution. The conception of the functional equation and of increments at the margin makes possible a precision of thought entirely unattainable before, and renders the study of economic theory an intellectual discipline somewhat akin to the study of mathematics, even if of a more elementary and inferior order. At the same time, the glamour of the technique has concealed considerable contradiction in its use. The technique seems to have been put to employments which it is quite unsuited to support, and has become enmeshed in not a little confusion concerning the assumptions on which analysis has been based. By its assumptions modern economics is confined to a limited enquiry – the conditions of market equilibrium in face of a given scale of preferences on the part of consumers and in a given state of supply of the factors of production. That is all it can really ask and answer. Yet economists have generally thought that they were answering – at least their audiences have imagined them to be – the much wider type of questions with which classical Political Economy dealt: questions such as the relation between classes and the comparative merits of different types of economic system. “Economics” and “Political Economy” are something more than differences of name: they are different enquiries, different in scope and aim; and while the former may be superior in finish and precision, at the same time it is necessarily more limited in its range. The answers which economists offer to the major issues of to-day are apt to be either implied in their assumptions or else excluded by their assumptions: unknown to itself, contemporary economics seems to have become caught on the dilemma of being either a tautology or a contradiction.
1. Distribution of Wealth (1899), p. 3.
2. Theory of Social Economy (1923). vol. i., chapter vi.
3. Principles of Economics, pp. 92-93.
4. Economics of Welfare (1920), p. 25.