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SCIENCE OF POLITICAL ECONOMY (ECONOMICS).

Definitions

Political economy (Greek, oikonomia — the management of a household or family, politike — pertaining to the state) or economics (ta oikonomika — the art of household management) is the social science which treats of man's activities in providing the material means to satisfy his wants.

Economy originally meant the management and regulation of the resources of the household; that is, of the immediate family with its slaves and dependents. Political economy originally meant the management of the household of the State. It was so used as late as Adam Smith (Wealth of Nations, 1776), who defined it thus:

Political economy considered as a branch of the science of a statesman or legislator proposes two distinct objects, first, to supply a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public service. It proposes to enrich both the people and the sovereign.

The sum of the efforts and activities of the members of the household in acquiring the means to satisfy their wants may be designated as the economy of the household. Where a household is not economically self-sufficing, that is, where households are economically interdependent, we have a broader economy. Where this interdependence is state- or nation-wide, there exists a national economy or political economy.

The term political economy is used in yet a third sense. It is the name of the science which treats of this nation-wide complexus of economic activities.

Method

Deductive

English economists in the early part of the nineteenth century, beginning with Malthus and Ricardo, hoped to establish a science of political economy independent of the art of the statesman, which would vie with the natural sciences in the exactness of its conclusions. They narrowed the field as conceived by Adam Smith by variously defining political economy as the science of wealth, the science of value, or the science of exchanges. But along with this narrowing of the field and the attainment of scientific precision in the use of terms went a divorce of their science from the economic realities of life. Their method was strictly deductive. Beginning with three or four principles for which they claimed universal validity, they proceeded to deduce a complete system without further appeal to the facts of life. These English writers, known as the Classical or Orthodox School, held that political economy must not concern itself with ethical or practical considerations. To do so, in their opinion, would degrade it to an art, for the science of political economy was concerned merely with the explanation of the causal relations existing among economic phenomena. It was their business as economists simply to explain the existing economic system not to defend or condemn it, nor to show how it might be replaced by a better one. To them good and bad were concepts which concerned moralists and not economists.

Inductive

In opposition to this narrow and non-ethical view of the Classical School, there arose in Germany in the middle of the nineteenth century, the Historical School, holding that political economy is an inductive and an ethical science. They derided the abstractions of the Orthodox School, some extremists even going so far as to contend that the time was not yet ripe for a science of political economy. The business of their generation, they held, was to gather from observation and history and to classify the economic facts upon which future economists might construct a science.

Deductive and inductive

After a bitter struggle of half a century the opposition between the schools has almost disappeared, and it is now generally recognized that the economist must use both the deductive and the inductive methods, using now one predominantly and now the other, according to the nature of the problem upon which he happens to be engaged. The best usage of the present time is to make political economy an ethical science, that is, to make it include a discussion of what ought to be in the economic world as well as what is. This has all along been the practice of Catholic writers. Some of them even go so far as to make political economy a branch of ethics and not an independent science. (See Devas, "Principles of Political Economy".) For a further discussion of the relationship between the two sciences, see ETHICS.

Scope

For purposes of exposition the field of political economy is often divided into four parts: production, consumption, distribution, and exchange. Some authors omit one or another of these divisions, treating its problems under the remaining heads.

Production

The department of production is concerned with the creation of wealth through the united efforts of land, labor, and capital. The creation of wealth involves the bringing into existence of utilities, that is, of capacities to satisfy wants. Utilities are created by changes in form of goods, or in their location, or by keeping them from a time of less demand to a time of greater demand.

Consumption

Consumption is concerned with the destruction of utilities in goods. It is the utilization of wealth, the carrying out of the purpose for which wealth is produced.

Distribution

The department of distribution considers the manner in which the wealth which has been produced is divided among the agents which have produced it. The shares in distribution are: rent, which is paid to the landlord for the use of the land; wages, which is the return to the labourer; interest, which goes to the capitalist for the use of his capital; and profit, which is the reward of the entrepreneur or undertaker of the business.

Exchange

Finally, exchange has to do with the transfer of ownership of wealth. Under this head are discussed money and credit and international exchanges.

Other subjects

Outside of these four divisions separate chapters are usually devoted to a consideration of taxation, monopolies, transportation, economic progress, and other problems. Adam Smith and his immediate followers were more closely concerned with the problems of production. Owing to the world's remarkable progress in that direction in the last century, the inequalities of distribution have come more and more into prominence, and this is now the favourite field of the economist.

History

Ancient

In ancient Greece and Rome there was little likelihood of the emergence of a science of political economy. Their industrial system was founded on slavery, the great estates were for the most part self-sufficient economic units, leaving comparatively little room for commerce, and labour was held in contempt by the thinking element. However, fragmentary discussions on economic subjects, mingled with ethical and political considerations, are to be found. Xenophon has a rather extensive treatment of household economy. Plato, in the "Republic", advocates an ideal communistic State. Aristotle presents a defense of private property, and writes against the taking of interest on the ground that money is barren. He defends warmly the institution of slavery. Among the Romans there was not much originality. We find frequent discussions of the relative merits of large and small farms. Cicero, Pliny the Elder, and other writers deplored the introduction of gold as a medium of exchange and preferred the age of barter. Seneca wrote upon the ethics of political economy and pleaded for the simple life.

Patristic writers

Under Christian influence labour, which had been held in contempt by the Pagans, came to be respected and honoured. The rigors of slavery were mitigated and the milder form of serfdom grew up, which later gave way to free labour. The Roman law had insisted on the rights of property; the early Fathers on the other hand, insisted on the rights of man. Some even went to the extent of advocating a system of communism as the ideal state, merely tolerating private property. "The soil," says St. Ambrose, "was given to rich and poor in common." St. Gregory the Great, St. Augustine, St. Basil the Great, St. John Chrysostom, and St. Jerome write in similar vein. The taking of usury was universally condemned.

Middle Ages

By the end of the Middle Ages there was developed a complete and systematic economic doctrine. This doctrine differed from modern political economy in two important aspects. In the first place it was made to fit the economic institutions of that day, and would be inadequate if applied to ours; and secondly, the emphasis was placed upon the ethically desirable rather than upon the actually existent, However, this latter distinction is now very much less marked than it was in the first half of the nineteenth century. Such questions as property, wealth, consumption, value, price, money, loans, monopoly, and taxation were treated in detail. To the medieval theologian, the "just price" of an article included enough to pay fair wages to the worker, that is, enough to enable him to maintain the standard of living of his class. In a like manner, a reasonable profit was defended as the wages of the merchant. With certain limitations, the taking of interest for money loans was forbidden. On the other hand, there were certain classes of productive investments, such as the buying of rent-charges, where interest was allowed. Among the writers of the period on economic subjects, St. Thomas Aquinas takes first place. Other writers of importance were Henry of Ghent, Ægidius Colonna, Petrarch, Nicholas Oresme, Bishop of Lisieux who wrote a work on money for his pupil Charles V, and finally St. Antoninus, Archbishop of Florence, and St. Bernardine of Siena.

Mercantile system

In the sixteenth and seventeenth centuries a revolution in industrial activities was taking place which had a profound influence upon the economic literature. The great geographical discoveries, the invention of gunpowder and printing, the decay of feudalism and the rise of modern states, the increase in the supply of the precious metals, and the growing use of credit — all these united to furnish problems for endless discussion. Statesmen, feeling the need of money to support war, adopted various restrictive measures to obtain it. The economic writers who defended these restrictions are usually classed together as the Mercantile School. Sometimes the attempt was made to keep money in the country by prohibiting its exportation or by debasing the coinage. Another way was to encourage the exportation of finished commodities and the importation of raw material in order to secure a balance of trade. Mercantilism reached its highest perfection under Colbert, the Minister of Finance under Louis XIV, and is sometimes referred to as Colbertism. Later imitators of Colbert were less successful, and Mercantilism often degenerated into a system of special privileges and exemptions, without any adequate advantage to the nation. Prominent among the Mercantilist writers were Jean Bodin (d. 1596), Giovanni Botero (d. 1617), Juan Mariana (d. 1623), Antonio Serra (published in 1613), Antoine* de Montchrétien (Traité d'économie politique, 1615), who was the originator of the term political economy, and Thomas Mun (d. 1641), author of "England's Treasure by Foreign Trade".

System of natural liberty

During the Mercantile period statesmen had interested themselves in industry principally for the purpose of carrying on war; in the following period wars were carried on in the interest of industry and commerce. Under Mercantile influence, the attitude of governments had been decidedly paternalistic. In the eighteenth century those who speak for commerce and industry demand that these be allowed to develop freely, unhampered by the guiding strings of government. In France there grew up a school of economic writers later known as the Physiocrats, who protested against the balance of trade doctrine of the Mercantile School and summed up the duties of the government towards industry and commerce in the famous phrase "laissez faire et laissez passer". They believed in a beneficent "order of nature" which should be allowed free play. To them, agriculture alone was productive. The Physiocrats had been strongly influenced by such English writers as Locke, Petty, and Hume, and they in turn were destined to further influence English political economy.

Adam Smith (1723-90), "the father of political economy" was a result of the combination of both the English and the French currents. His work, "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), gained immediate popularity and exercised profound political influence in the next generation. Smith held that while the individual selfishly seeks his private gain, he is led by an invisible hand to promote the public good, and that since the individual and social interests are identical, the sphere of state action should be narrowed. He thus followed up the attack on the Mercantile system begun by the Physiocrats. He differed from the Physiocrats in making labour as well as land productive. Among the followers of Smith are to be noted Malthus ("Essay on Population", 1798), author of the startling statement that population tends to increase in a geometrical ratio while subsistence tends to increase in an arithmetical ratio, and Ricardo ("Principles of Political Economy and Taxation", 1817), whose name is associated with the differential rent theory, the subsistence theory of wages, and the labour theory of value. Other writers of the English Classical School, who followed closely in the footsteps of Malthus and Ricardo, were James Mill, MacCulloch Senior, and John Stuart Mill. The last named in his later life renounced the individualism of the Orthodox School in favour of socialistic views.

Historical school

About the middle of the nineteenth century there began in Germany under the leadership of Wilhelm Roscher, Karl Knies, and Bruno Hildebrand, a reaction against the Orthodox-English School. These writers insisted on the relativity of economic theory, that is, they did not believe that economic principles, good for all times and places, and all degrees of economic development, could be established. Moreover, they insisted strongly on the need of the study of economic history and upon the ethical and practical character of political economy. They were soon in complete control of the economic teaching of Germany. They differ radically from the Physiocrats and Adam Smith in their repudiation of the doctrine of natural liberty. In fact many of them have gone so far in the opposite direction as to be designated Kathedersozialisten (Professorial Socialists), because of their reliance on state help in accomplishing social reforms.

Austrian school

Since 1871 there has grown up in Austria a group of writers who make of political economy a deductive and psychological science of value. They oppose to the cost-of-production explanation of value of the Classical School, a theory of value based upon marginal utility. It is a well known psychological fact that the utilities of additional units of a commodity to a consumer diminish as the supply increases. Now it is the utility of the last or marginal unit consumed, says the Austrian School, which determines value. Menger, Wieser, Boehm-Bawerk, in Austria, the late W. Stanley Jevons, in England, and J. B. Clark, in America, are the leading representatives of this school.

Socialism

Socialism represents the extreme of reaction against laissez faire or the system of natural liberty of the Physiocrats and Adam Smith. Laissez faire professes to believe in the identity of the interests of the different industrial classes and hence decries the need of restrictive legislation, while socialism emphatically denies that this solidarity exists under our present system and seeks to develop a "class consciousness" among the workers that will overthrow the influence of the dominant class. Economic socialism borrowed the labour theory of value from Ricardo and gave it an ethical interpretation, holding that since labour is the sole producer of wealth, the labourer should receive the entire product. Accordingly, the socialists deny the right of the capitalist to interest and of the landlord to rent, and would make capital and land common property. According to Karl Marx ("Das Kapital", 1867), the founder of so-called scientific socialism, the labourer under the present system does not receive more than a bare subsistence. The "surplus value" which he produces above this amount is appropriated by landlords and capitalists. Another contribution of Marx to socialism is the materialistic conception of history, according to which such factors in history as religion, ethics, and the family, undergo changes corresponding to the changes in the underlying economic organization of which they are a product.

Christian Democracy

The movement which has been gaining ground for the last half century among Christian churches, both Catholic and non-Catholic, to emphasize the importance of religious and moral elements in a healthy economic life, and which protests more or less strongly against laissez faire, is usually designated as Christian Socialism. This name is, however, not well chosen, since none of the so-called Christian socialists hold to the fundamental principle of socialism, namely the abolishment of private ownership in the means of production.

The Protestant writers in this field have naturally lacked an authority which would hold them together. In England their adoption of co-operative associations as a substitute for competition has given them a unity which they have not attained elsewhere.

The Catholic School agrees with the socialists in much of their criticism of the competitive system, but parts company with them by insisting on the place of religion, the family, property, and the employer system in the social scheme. In the matter of state intervention, there are among Catholic writers two general tendencies. The more "liberal" wing, led by such economists as Le Play, Périn, and Victor Brants, would reduce state action to a minimum, while others, looking to Bishop Ketteler, Cardinal Manning, and Count de Mun, would invoke a considerable measure of so-called State socialism. A strong impulse towards unity of effort among Catholics was given by the publication of the encyclicals of Pope Leo XIII, "Rerum Novarum", of 15 May, 1891, and "Graves de Communi", of 18 January, 1901.