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CHAPTER 1
THE TREND OF ECONOMIC THINKING
I
The position of the economist in the intellectual life of our time is unlike that of the practitioners of any other branch of knowledge. Questions for whose solution his special knowledge is relevant are probably more frequently encountered than questions related to any other science. Yet, in large measure, this knowledge is disregarded and in many respects public opinion even seems to move in a contrary direction. Thus the economist appears to be hopelessly out of tune with his time, giving unpractical advice to which his public is not disposed to listen and having no influence upon contemporary events. Why is this?
The situation is not without precedent in the history of economic thought; but it cannot be considered as normal, and there is strong reason to believe that it must be the result of a particular historical situation. For the views at present held by the public can clearly be traced to the economists of a generation or so ago. So that the fact is, not that the teaching of the economist has no influence at all; on the contrary, it may be very powerful. But it takes a long time to make its influence felt, so that, if there is change, the new ideas tend to be swamped by the domination of ideas which, in fact, have become obsolete. Hence the recurring intellectual isolation of the economist. The problem of the relation between the economist and public opinion today resolves itself, therefore, into a question of the causes of the intellectual changes which have conspired to bring about this cleavage. It is this subject which I have chosen as the main theme of this lecture.
II
The subject is a vast one, but the aspect which I wish chiefly to emphasise is that which the economist must, naturally, be most anxious to make clear to the public: i.e., the role played by purely scientific progress — the growth of our insight into the interdependence of economic phenomena — in bringing about these changes in his attitude to practical problems.
At first sight there seem to be only two reasons why economists should change their attitude towards questions of economic policy: either they may find that their knowledge has been inadequate, or their views on the fundamental ethical postulates (upon which, of course, every practical conclusion is based) may undergo a change. In either case the role played by science would be clear. But, in fact, the cause of the great historical changes which I am discussing seems to me to be of a more subtle kind. It consists neither of a change in the underlying ethical valuations nor of a refutation of the validity of certain analytical propositions, but rather in a change of view regarding the relevance of that knowledge for practical problems. It was not a change of ideals nor a change of reasoning but a change of view with regard to the applicability of such reasoning which was responsible for the characteristic features of the popular economics of today. How did this come about?
It is a common belief that, about the middle of last century, perhaps under the influence of socialistic ideas, the social conscience was aroused by the existence of human misery which had previously escaped recognition, and it was decided no longer to tolerate it. Hence the decline of 'the old political economy' which had been blind to these considerations. But, in fact, nothing could be farther from the truth. No serious attempt has ever been made to show that the great liberal economists were any less concerned with the welfare of the poorer classes of society than were their successors. And I do not think that any such attempt could possibly be successful. The causes of the change must be sought elsewhere.
III
It is probably true that economic analysis has never been the product of detached intellectual curiosity about the why of social phenomena, but of an intense urge to reconstruct a world which gives rise to profound dissatisfaction. This is as true of the phylogenesis of economics as of the ontogenesis of probably every economist. As Professor Pigou has aptly remarked: "It is not wonder, but the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science." The mere existence of an extremely complicated mechanism which led to some kind of coordination of the independent action of individuals was not sufficient to arouse the scientific curiosity of men. While the movement of the heavenly bodies or the changes in our material surroundings excited our wonder because they were evidently directed by forces which we did not know, mankind remained — and the majority of men still remain — under the erroneous impression that, since all social phenomena are the product of our own actions, all that depends upon them is their deliberate object.
It was only when, because the economic system did not accomplish all we wanted, we prevented it from doing what it had been accomplishing, in an attempt to make it obey us in an arbitrary way, that we realised that there was anything to be understood. It was only incidentally, as a by-product of the study of such isolated phenomena, that it was gradually realised that many things which had been taken for granted were, in fact, the product of a highly complicated organism which we could only hope to understand by the intense mental effort of systematic inquiry. Indeed, it is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals — if by 'Utopian' we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.
IV
Now, since economic analysis originated in this way, it was only natural that economists should immediately proceed from the investigation of causal interrelationships to the drawing of practical conclusions. In criticising proposals for improvement, they accepted the ethical postulates on which such proposals were based and tried to demonstrate that these were not conducive to the desired end and that, very often, policies of a radically different nature would bring about the desired result.
Such a procedure does not in any way violate the rule, which Professor Robbins has so effectively impressed upon us, that science by itself can never prove what ought to be done. But if there is agreement on ultimate aims, it is clearly scientific knowledge which decides the best policy for bringing them about. No doubt the economist should always be conscious of this distinction; but it would certainly have been nothing but intolerable pedantry if, in discussing practical problems, the economist had always insisted that science by itself proves nothing, when in fact it was only the newly gained knowledge which was decisive in bringing about the change in their attitude towards practical affairs.
The attitude of the classical economists to questions of economic policy was the outcome of their scientific conclusions. The presumption against government interference sprang from a wide range of demonstrations that isolated acts of interference definitely frustrated the attainment of those ends which all accepted as desirable.
V
But the position of the young science which led to conclusions so much in conflict with the result of more primitive reflections was bound to become difficult as soon as — following its first triumphant success — it became more conscious of its remaining defects. And those who disliked its conclusions were not slow in making the most of all the defects they could find. It was not the practical preoccupations of the economist which were responsible for this result. It is by no means certain that economics would have been less disliked if economists had been more careful to distinguish the pure theory from the more applied parts of their conclusions. It is true that economics was contemptuously dubbed a mere utilitarian science because it did not pursue knowledge for its own sake. But nothing would have aroused more resentment than if economists had tried to do so. Even today it is regarded almost as a sign of moral depravity if the economist finds anything to marvel at in his science; i.e., if he finds an unsuspected order in things which arouses his wonder. And he is bitterly reproached if he does not emphasise, at every stage of his analysis, how much he regrets that his insight into the order of things makes it less easy to change them whenever we please.
The attack on economics sprang rather from a dislike of the application of scientific methods to the investigation of social problems. The existence of a body of reasoning which prevented people from following their first impulsive reactions, and which compelled them to balance indirect effects, which could be seen only by exercising the intellect, against intense feeling caused by the direct observation of concrete suffering, then as now, occasioned intense resentment. It was against the validity of such reasoning in general that the emotional revolt was directed. Thus, temporarily, social enthusiasm succeeded in destroying an instrument created to serve it because it had been made impatient by the frequent disappointments which it had occasioned.
It is not to be denied that, at this early stage, economists had not yet become quite conscious of the precise nature of their generalisations. Nor can it be questioned that on some points, such as the theory of value, they proceeded on very unsatisfactory general assumptions. To what extent the actual foundations of the classical system were influenced by the fashionable philosophy of the day has been made clear by the distinguished author of Philosophy and Political Economy. But the abandonment en bloc of analytical economics was mainly due, not to the detection of faults in the foundation of concepts, but to the fact that, just at the time of this revolt, what professed to be a substitute method of analytical reasoning offered itself to the more practical-minded economist — a method which, from their point of view, had none of the objectionable features of the existing body of economics. I refer to the methods of the famous Historical School in Economics. Although in the proper sense of a school aiming at the replacement of theoretical analysis by description, this is now a thing of the past, yet it is of tremendous historical importance because of its influence on popular thought at the present time.
It is clear that anything which justified the treatment of practical problems as something unique, determined only by their own historical development, was bound to be greeted as a welcome relief from the necessity of controlling emotions by difficult reasoning. It was just this advantage which the historical method afforded. Refusing to believe in general laws, the Historical School had the special attraction that its method was constitutionally unable to refute even the wildest of Utopias, and was, therefore, not likely to bring the disappointment associated with theoretical analysis. Its emphasis on the unsatisfactory aspects of economic life, rather than upon what was owed to the working of the existing system, and what would be the consequences if we tried directly to control some of the recognised evils, strongly recommended it to all those who had become impatient.
VI
For a considerable time, mainly during the last third of the nineteenth century, the two schools which now existed not only employed different methods, but also turned their attention to different problems. The more theoretically minded had to concentrate rather on the revision of the fundamental principles which had been damaged by decades of attack, and had to leave the more applied parts to others who were coming more and more under the influence of the historical method. So long, however, as this part of the task was left to men who had previously become acquainted with the general principles of analysis — and who were, therefore, immune from the more popular fallacies — the full effect of this change did not become apparent. The distinguished economist to whose memory this chair is dedicated, and with whose long and fruitful career Professor Gregory has made us familiar, offers a conspicuous example of the nature of this change. Thomas Tooke could never have become one of the leaders of the free-trade movement in his early years, and remained its lifelong advocate, if he had applied to the problems of international trade the same purely inductive methods which, in his later years, he considered as exclusively decisive in the discussion of monetary problems.
As so frequently happens, it was only in the second generation of the new school that the lack of the tools necessary for the interpretation of the intricate phenomena they were busy describing made itself felt. And so it came about that, just at the time when the theorists were most successful in constructing a sounder analytical basis for their science, the superstructure of more concrete applications which had been left in the hands of the more practical-minded men fell gradually, more discredited than disproved, into oblivion. And, in consequence, many of the palliatives and quack remedies which, in the past, had been rejected because, even judged by the analysis of the classical system, their indirect effects were seen to be obviously more objectionable than their immediate benefits, were introduced by the new generation of historical economists, until the reaction was carried to a point at which the futile attempts to redress special grievances by short-sighted State action could hardly have been more numerous if an analytical science of economics had never existed. It is no accident that the return of protectionism which followed the free-trade era of the nineteenth century was the work of men under the influence of this school.
VII
It takes a long time to rebuild the structure of a science if one starts by revising the fundamental concepts. And the modern revision of theoretical economics has occupied sufficient time to allow what was at first the heretical view of a number of radical economists — who had to fight what was then the conservatism of the practical men who were still under the influence of economic liberalism — to pervade the thought of the public and to establish itself as the dominating doctrine, not only among advanced social reformers, but even among the most conservative businessmen. The public mind in all the leading countries of the world is now completely under the domination of the views which spring from the revolt against the classical economics of seventy years ago.
But, in the meantime, theorists have carried their work to a more realistic stage and have discovered with surprise how often the older writers, with their cruder instruments, had come to the right conclusions with regard to the concrete problems of the day. And this advance of theoretical reasoning has been borne out by the practical experience of our time. Times of great upheaval sometimes afford clearer demonstration of the broad principles of economic analysis than times when the movement of things is much less perceptible. In what, following a phrase used by Alfred Marshall in a similar connexion regarding the Napoleonic period, we may call the temporary return of Europe to a reign of violence, the old doctrines have been once more tested; and while the descriptive-interventionist school had nothing to contribute, many of the classical maxims have emerged with renewed credit.
But while the task of the historical economist was comparatively simple because what he had to say on all problems of policy was not, and could not be, in any way different from what the man in the street would want if he had never heard of economics; that is, while the task of the historical school could be accomplished by simply waiting until the public had forgotten what it had previously learned, the task of the theoretical economist is a much more difficult one. It consists essentially in the demonstration of inconsistencies in a kind of ordinary reasoning which everybody employs and the validity of which no one would ever doubt were it applied to simple cases where it can easily be understood. The difficulty really arises from the fact that the same kind of reasoning from familiar and undoubted facts, which even those who are most scornful of theoretical reasoning cannot avoid applying to simple cases, becomes suspect and calls for empirical confirmation as soon as it is applied to somewhat more complicated phenomena where it cannot be followed without some effort, or even special training.
(Continues…)
Excerpted from "The Trend of Economic Thinking"
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Copyright © 1991 F. A. Hayek.
Excerpted by permission of The University of Chicago Press.
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