The Economic Point of View: An Essay in the History of Economic Thought

5

Economic Affairs, Money, and Measurement

Running through the literature dealing with the problem of uniquely identifying economic affairs there has been a recurrent tendency to introduce the phenomenon of
money as the distinctive feature. The present chapter outlines the different views that have at various times seen the use of money as the criterion of the economic.

Money, Wealth, and Exchanges

Adam Smith, in his exposition of the nature and causes of the wealth of nations, had found it necessary to point out that the accumulation of a national stock of gold does not, of itself, secure national prosperity. There has, of course, been controversy about whether or not Smith was unjust to the mercantilists in ascribing to them this identification of national wealth with gold.
*1 It is, in any event, true that the early definitions of political economy in terms of wealth were not confined to, and did not even particularly stress, the monetary form of wealth. On the contrary, writers tended rather to emphasize that money in itself lacks many of the characteristics of wealth. The problems of production and distribution in which the classical writers were interested pertained to the goods that directly satisfied human wants or to the productive factors for such goods. The pronounced disregard for the purely monetary effects on the economy, which is a characteristic of classical economics, helped to keep interest from focusing on the medium of exchange.

Nevertheless, there were soon several economists who wrote in terms that made wealth tantamount to money. “Political Economy,” wrote the French Dupuit in 1844, “being concerned only with wealth, can take account of the intensity of a wish only through its monetary expression.”
*2 Bagehot, who defined political economy as the “science of business,” wrote that “as far as people are what we now always call ‘men of business,’ money, the thing
they look for and the thing they want, is their sole object…”
*3 The passage by Robert Lowe (Viscount Sherbrooke) in which he justifies the possibility of a science of economics is famous: “In love or war or politics, or religion, or morals it is impossible to foretell how mankind will act…But once place a man’s ear within the ring of pounds, shillings, and pence, and his conduct can be counted on to the greatest nicety.”
*4 When Cliffe Leslie wished to attack the notion of a single wealth-seeking motive in human beings, he did so, as we have seen, in an essay entitled
The Love of Money (1862) and quite obviously assumes that by exposing the nonexistence of such a homogeneous love of money he is demolishing the economic man, in whose breast nothing is implanted but the desire for wealth.

In itself there is perhaps not much significance to be attached to this identification of wealth with money. In the earlier formulations in which an objective wealth was the focus of attention, we have seen this identification to have been lacking. The stress on the monetary form of wealth appears in the writings of those who give paramount importance to an economic man, intent on the accumulation of wealth. Since in a market economy the drive for wealth is most easily fulfilled by translation into a drive for money, there is little difference whether one describes economic man by reference to a passion for wealth or to a passion for money.

What these citations do suggest, however, is a tacit assumption that exchange is essential to actual economic affairs. And this circumstance suggests a fresh link between definitions of economics in terms of exchange and the endowment of economic man with an exclusively pecuniary self-interest. Bagehot’s definition of economics as the “science of business” shows the connection quite clearly.
*5 Bagehot had been impressed by the criticisms of classical political economy made by the historically-minded economists. He acknowledged the “relativity” of economics with respect to time and place and wished to salvage economic theory by restricting its scope to the “business world,” where its assumptions of self-interest, rationality, and the like were reasonably fulfilled. The degree to which the self-interest assumed by the economist is actually at work in the business world, and certainly the treating
of this assumption as the unifying thread of economic theory, postulated the introduction of a sharp division into the whole of human action separating the activities of men in their capacity as consumers, on the one hand, from their activities in the capacity of business-type producers, on the other. Of course, what motivates the earning of income is hope of the pleasures to be purchased by spending it, but it was believed that only in their capacity as “men of business,” as income-earners, does the behavior of men admit of economic “laws.” Only in this sphere of activity could it be seriously maintained that pecuniary self-interest is the exclusive passion. In this context the desire for wealth becomes crystallized very definitely into a desire for money, the form in which men of business earn income.

This obviously arbitrary and artificial division is made possible only by the existence of indirect exchange. The fact that the division of labor in a modern economy is made feasible solely by the intervention of a medium of exchange between producer and consumer is responsible for the conception of a distinct area of activity in which men do act as businessmen. From this point of view, exchange, or even more accurately exchange for money, becomes a criterion of economic activity in an entirely novel sense. Economic analysis must be confined to activity revolving around monetary exchange, because only in such activity can an exclusively pecuniary self-interest be reasonably postulated. When men act in spending their income, economic analysis is admittedly baffled by the multiplicity of motives actuating their spending habits. But in so far as men do engage in a separate kind of activity in securing a money income, their actions are susceptible of analysis. Because men do not directly secure the innumerable and heterogeneous goods they desire, but first channel their demand for these goods into a demand for a
single good, money, economics can proceed to analyze man’s business behavior in terms of a single motive, viz., the desire for money, or in terms of the maximization of this single good.
*6

No doubt this conception of economic activity involves some circularity. We must confine economic analysis to human action
only in so far as it has a single object in view, the maximization of money income, and we proceed to postulate an “economic” area of “business” defined in terms of such a single object of desire. The justification for such a procedure is the sharp distinction made possible, as we have seen, by the existence of a monetary bridge that both accentuates and spans the gulf between earning income and buying goods. There is, in fact, a twofold aspect to men’s lives. Men do mark off part of their time for the earning of income and part for the enjoyment of income, however hazy the line of demarcation may be. And it is a fact that economic analysis has historically dealt predominantly with the first of these areas. Definitions of economics in terms of money are thus different from definitions of it in terms of wealth. The criterion of money fences off the area of income-earning and makes it a field fruitful for economic analysis.

The long-range trend in the conception of economic activity has consistently been to broaden its scope to cover
all human action. Not a part of human activity, but an aspect of its entire range is selected as relevant to economics. The definition in terms of money in the sense here outlined is a special case of the older type of definition that marked off a part of the activity of men for economic analysis, postulating in the area so circumscribed a homogeneous mass of phenomena that did not occur elsewhere. It is of interest that even with the more recent “broad” definitions of economics, which recognize the essential homogeneity of
all human action, the applicability of economic analysis is still over-whelmingly to be seen in the “business” or “money” sector of action. For this reason it is apparently still tempting to suppose that there is a clear-cut division between man’s money-making activities and the rest.
*7

Money as the Measuring Rod

A definition of economic activity in terms of money that involves more sophisticated (and perhaps more controversial) considerations is that which sees money as a
measuring rod. Economic
analysis is concerned with that part of human activity, with that area of human welfare, which can be measured by the yardstick of money. The literature citing this definition reveals some confusion as to its origin. Usually this formulation of economics is ascribed to Pigou. In fact, Pigou seems to have simply taken over this definition from Marshall without much ado. It was Marshall who first most thoroughly expounded the conception of economics in terms of the money measure, and this despite the fact that his conception of economics is almost always presented by exclusive citation of the opening references in his
Principles to “the ordinary business of life” and the “material requisites of well-being.”
*8

Marshall developed his thesis
in extenso in his inaugural lecture at Cambridge in 1885.
*9 It must be emphasized that Marshall did not consider that he was in fundamental disagreement with his fellow economists, but only that he was presenting a more appropriate characterization of the commonly recognized scope of the subject. In the practical world Marshall is content to consider economics as examining

that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.
*10

But Marshall was well aware of the misleading character of such a definition, in so far as the
essence of economic activity is concerned. In his inaugural lecture he said:

The outward form of economic theory has been shaped by its connection with material wealth. But it is becoming clear that the true philosophic
raison d’être of the theory is that it supplies a machinery to aid us in reasoning about those motives of human action which are measurable. In the world in which we live, money as representing general purchasing power, is so much the best measure of motives that no other can compete with it. But this is, so to speak, an accident…
*11

Marshall is at pains to explain that it is in the
measurability of motives that the homogeneity of economic activity is to be found. That it is money which in real life lends itself to such measurement is merely a convenient accident. In the course of developing this point, Marshall uses the arguments of Cliffe Leslie.

If with Cliffe Leslie we analyse all the infinite variety of motives that are commonly grouped together under the term “love of money,” we see that they are of all kinds. They include many of the highest, the most refined, and the most unselfish elements of our nature. The common link that binds them together is that they can be more or less measured; and in this world they are measured by money.
*12

Marshall envisages the possibility of an economy in which incentives are in the form, not of money, but of a graduated system of decorations of honor. All this attributes “high and transcendent universality to the central scheme of economic reasoning.”
*13 Nevertheless, “for practical purposes…” it will be best to go on treating it as chiefly concerned with those motives to “which a money price can be…assigned.”
*14 In brief, economics deals with the play of measurable motives reinforcing and counteracting one another, “but it also sets out that most complex play of human motives that changes the purchasing power of money, and thus alters the measure of all motives.”
*15

In his
Principles Marshall expresses himself quite frequently in similar terms. “The
raison d’être of economics as a separate science is that it deals chiefly with that part of man’s action which is most under the control of measurable motives.” This is a characteristic statement of Marshall’s position.
*16 It will be noticed that Marshall does not consider this definition to be a watertight one, since he is constantly employing qualifying phrases such as “chiefly,” “more or less,” and the like. This was, indeed, frankly acknowledged by Pigou. In 1912 Pigou had stated that economic welfare arises from that part of the community’s income that enters “easily into relation with the measuring rod of money,”
*17 and had asserted that the “methodological principle at the basis of economic science, and that which separates it from the other social
sciences, is the reference it makes to a measure, namely, money.”
*18 Later, in his
Economics of Welfare, Pigou admits the haziness of such definitions:

It is not, indeed, possible to separate [the economic part of welfare] in any rigid way from other parts, for the part which
can be brought into relation with a money measure will be different according as we mean by
can, “can easily” or “can with mild straining” or “can with violent straining.” The outline of our territory is, therefore, necessarily vague.
*19

Money as a Universal Measuring Rod

Before we discuss this fresh conception of economic affairs, it will be of interest to draw attention to a view that has the doubtful distinction of running precisely counter to that of Marshall while yet being built on the very same foundation. The French sociologist Gabriel Tarde, in the course of a campaign to prove that most of the “economic” categories are really common to all the social sciences, attempted to show that
money too is not a strictly economic phenomenon. It is true, Tarde wrote, that money is a measure of wealth, but it is not a measure of wealth alone. Money, besides measuring wealth, measures desires and beliefs; it is a universal measure of all social “quantities,” of which wealth is only one.
*20 Tarde believed that he had thus broken the link that chained money exclusively to economics, whose subject matter, despite some fairly advanced statements in his writings, he still identified solely with
richesses.

Both Marshall and Tarde, it will be observed, look upon money as significant primarily on account of its suitability to serve as a measuring rod of human motives. But in postulating the suitability of money as a measure of human motives, Marshall had by the same token held these motives to be
economically relevant. Tarde, on the other hand, working unwaveringly on the assumption that only the phenomena of wealth are economic, and confronted with his own conception of money as measuring human
desires, is forced to the triumphant conclusion that money itself pertains to noneconomic phenomena.

Measurement and Economics

What Marshall had in mind is a means of escape from the dim, hazy realm of desires and feelings into a sharply defined world of quantities brought into clear focus, free of the fuzziness of merely qualitative differences. There is a groping towards the “quantification” and the endowment with “objective measurability” of the numberless subjectively felt urges and drives. Economic phenomena, we are to understand, are in the unique and apparently highly-prized position of being able to reflect in measurable (and hence presumably “scientific”) terms, at least some part of the uncharted wilderness of the human mind. Now there is, no doubt, some satisfaction in feeling that not
all human desires remain submerged within individual consciousness; that some of them at least register delicate, but measurable, changes on some external scale for all to see. But it is not clear that the inherence of such a fortunate property in certain motives and feelings offers a valid criterion for a common scientific treatment. As Croce asked Pareto on a slightly different point: “What intrinsic connection is there
between this merely accidental attribute, measurability, of the objects which enter into an economic action, and the economic action itself?”
*21 At least Marshall himself shows appreciation of the good fortune that the motives measured by money all admit of analysis by similar types of reasoning. “The problems which are grouped together as economics,” he wrote, “because they relate specially to man’s conduct under the influence of motives that are measurable by a money price, are found to make a fairly homogeneous group.”
*22 But surely this homogeneity, under Marshall’s definition, is no more than a happy accident.

Moreover, the whole idea of the measurement of subjective desires by means of money is one that involves serious and controversial problems. It may be readily conceded that human motives, acting in the market place, exert definite effects on money prices. It is by no means clear that the resultant prices offer in any valid sense a means of
measuring such motives. Discussions on the possible conception of a cardinal utility may invite ingenious suggestions purporting to measure such a utility. Money has never in any but the crudest of senses been able to serve as such a measure. Undoubtedly Marshall’s idea of money as a measuring rod is related to his frequent use of the hypothesis that money is exempt from the “law” of diminishing marginal utility, but this was never more than a simplifying analytical technique. Prices are not
measuredin money; they are simply amounts of money given in exchange for goods. Prices are expressed in terms of money, not because money represents any sort of “measuring rod,” but simply because it is money that is commonly used as the
quid pro quo for goods.
*23 One need not draw attention (as Marshall himself did) to the violent fluctuations in the purchasing power of money in order to feel the force of a characteristic sentence of Professor Knight: “If we accept the aphorism, ‘science is measurement,’ as a definition of science, which is its only intelligible meaning, then there is no such thing as ‘economic’ science…”
*24

Marshall’s was not the only attempt to see economic science as essentially a consequence of measurability. An interesting point of view in this regard was presented in an essay in 1893 by an eminent American contemporary of Marshall, Simon Patten. In
the classical economic system, Patten explained, economics was unfortunately divorced from utilitarianism.

Utilitarianism was abstract, and treated of pleasures and pains as purely subjective phenomena. Economics was concrete and treated of utilities as material wealth conditioned by the laws of the objective world…
*25

The achievement of subjective economics and the development of the theory of consumption makes possible their unification.

When the basis of economics is broadened by making the unit of measurement subjective, and the basis of utilitarianism narrowed by separating it from ethics, the unity of the two, both in the method they use, and in the field they occupy, becomes apparent… There is only one science for measuring the welfare of society and its progress through the gains or losses of those positive utilities which men create or destroy.
*26

The term “positive utility” is used by Patten in contradistinction to “absolute utility.” By “absolute utilities” Patten understands those which cannot be measured and hence cannot enter into the utilitarian calculus. As instances of such absolute utilities, Patten cites “water in a desert,” “honesty,” and the like. “Positive utilities” are those which, by their susceptibility to measurement, enter into the utilitarian calculus.

Economics is the science of positive utilities—the realm where no other motives are recognized except those resulting from changes in the amount of our measurable pleasures and pains.
*27

It is true that Patten’s stress on the measurability of economic motives refers to their comparison with one another. Honesty is not directly relevant to economics because it is immeasurable, in the sense that no finite utilities can reach up to it. It is an absolute good.
*28 But Patten’s position reflects also the felt need for a conception of “quantities” of utility. Of course, in a scheme in which a label bearing for each individual a definite number of “units”
of utility is mentally attached to every good, it is difficult to treat in terms of such units those values to whose utility the individual can imagine no limit to be assigned. This difficulty led to the postulation of a difference
in kind between “positive” and “absolute” utilities. Economics became neatly identified with the first of these; and measurement, for Patten as for Marshall, constituted the decisive criterion.

But in the absence of a demand to know the “quantity” of a utility, the distinction between “positive” and “absolute” utilities disappears of itself. The modern idea of the role of
preference in human action offers a completely adequate view of the matter. When forced to choose between two alternatives, the individual exercises his preference in a way that remains essentially the same regardless whether the alternatives represent “positive” or “absolute” utilities. In the process of preferring,
all possible values are placed in an ordered array. “If honor cannot be eaten, eating can be forgone for honor.”
*29 Measurability becomes a criterion of doubtful worth simply because any results that it brings for comparing utilities with one another can be obtained even more easily without it. A considerable number of writers who cite the Marshall-Pigou view of economics have drawn attention to these weak points in the whole idea of measurement.
*30

Money and Price-Economics

In a chapter on the role of money in definitions of economics, mention should be made of the part that it has played in the emergence of so-called “price-economics.” In the literature of the second and third decades of this century there was a lively discussion of whether economics should deal with subjective utilities, with welfare itself, or whether it should deal only with the external manifestation of those utilities, with objective prices. The “price-economists” attempted to avoid reference to the underlying motives, desires, and satisfactions that are reflected in market prices. They rejected “explanations” of prices that invoked these subjective concepts. They conceived of economics as concerned, not with the causes of human behavior, but with its consequences
as seen in the patterns of prices. Pareto, Cassel, Davenport, and Mitchell are representative of this line of thought. Writers such as Fetter and Viner in the United States, on the other hand, were among those who saw price-economics as an inadequate means of understanding the operations of the market and insisted on the need to dig below the surface phenomena of prices for their explanation.
*31 It is not necessary for present purposes to go further into the origin and causes of the emergence of a price-economics. In so far as it represents a distinct outlook on the nature of economic phenomena, price-economics can be largely subsumed under the catallactic view of the subject, especially under that conception of the latter that stresses the purely functional relationship between different prices.
*32

What is of relevance to the present chapter is the degree to which the presence of a general medium of exchange and the identification of economic activities with those involving such a medium may have contributed to the price-economics line of thought. Prices are the corollaries of acts of exchange. Every act of exchange, by definition, is associated with a definite ratio according to which the goods are exchanged against each other. The phenomenon of price is one with a peculiar fascination of its own, especially when the whole
structure of prices—the interrelationships between different prices in the same market and between prices at different times—is grasped. It is not difficult to understand the temptation to treat these ratios as “things” in themselves, moving in accordance with their own “laws of motion,” rather than as the manifestations of acts of human choice. The part played by money in the market has only heightened this temptation.

Money prices make possible a system of rational calculation in which any economic decision is influenced by all the relevant factors. The producer and the consumer are alike guided by money prices to adjust their actions in the most advantageous way to the real conditions of the market. In the discussion over the possibility of rational economic calculation of gain and cost in a socialist economy, one fact has emerged with overwhelming unanimity. It is almost universally conceded that in an economy without prices,
real or “quasi,” there is no means of judging the economic wisdom or folly of any action. Every prospective buyer or seller, if he is to act in a rational way, must be able to compare his prospective situation at the completion of the transaction with his present situation. This involves the comparison of innumerable “economic quantities” with one another: those actually under his control initially, those to be brought under his control through the transaction, and those possibilities of control which his initial position enables him to command through alternative transactions. The expression of market prices in terms of money is an inestimable boon to the solution of this complex problem. As a common medium of exchange for
all marketable goods, money fuses all the alternatives confronting the marketer into an immeasurably simpler chain of decisions. The money price paid for one good expresses succinctly, and more convincingly than is ever conceivable in a barter transaction, a preference for this good over a definite set of alternative goods.

To present the matter briefly: in a market without money prices
exchange ratios are of a type almost completely analogous to the transformation functions under which a Crusoe economy operates. In a Crusoe economy no analysis is possible without explicit assumptions regarding subjective categories that price-economics is anxious to avoid. The attempt to see economics as a system of laws governing the movements of prices that are the consequences of human behavior must depend on a common monetary denominator.
*33 The possibility, of course, exists that improved means of calculation could enable rational comparison of alternatives to take place without guidance by external market prices. But this possibility would destroy the entire field investigated by price-economics. From a point of view that sees economics as essentially concerned with prices, it has been asserted, for example, that if linear programming could set up a system of shadow prices to guide managers, the borderline of economics might need to be reviewed.
*34 In so far as the signals of shadow prices are not available and guidance must be sought in money prices, it is the preoccupation of economic activity with money that made possible the idea of an economics that could be “positive,” disregarding the realm of dim mysteries of feelings and dealing with definite, observable market prices.

Money as an Economic Institution

Closely associated with the considerations of the previous section is the stress that has been laid on the essentiality of money for economic activity because of its unique role as an
institution. Economic affairs, on this view, are monetary affairs, not because money is a passive
sign of the presence of economic activity, but because it plays an active role in shaping the character of such activity. According to Marshall, as has been seen, money characterized economic activity by serving as a measure of certain motives. The presence of money was not seen in any way as influencing these motives themselves, or at least it was not because of any such influence that money was taken to be the criterion of the economic. Money was seen as merely expressing the real motives operative in the phenomena of the market. The fact that it served
at the same time as a measuring rod was the reason why economics came to be defined in monetary terms.

But it is clear that the use of money is a real factor that has profoundly affected the entire pattern of economic activity. And in the literature on this subject attempts have been made to treat money as the definitive criterion of the economic by virtue of the peculiar influence it exercises on human action. Economic activity becomes such through its reflection of this influence. Professor Mises has pointed out that rational economic activity became possible only with the widespread adoption of a medium of exchange.
*35 As we have seen in the previous section, the recognition of this fact led to the emergence of the concept of price.

It was Wesley Mitchell who stressed the role of money as an active institution that has shaped human activity in a definite pattern. Of the writers on this subject Mitchell was perhaps the most insistent on the necessity of confining economics to monetary affairs. “Money may not be the root of
all evil, but it is the root of economic science.”
*36 Most of all, Mitchell wanted to avoid discussions on subjective concepts. “When the definite and objective interrelations among money prices have been analyzed it is time enough to penetrate into the dim mysteries of our feelings about utilities…
*37 But Mitchell paid considerable attention to the positive influence that money has exerted.

Writing within the framework established by Veblen, Mitchell contrasts his “institutional” view of the economic significance of money with Marshall’s concept. The latter sees money as “an indispensable tool for measuring the force of opposing motives; but it remains merely a tool… ” To predict what men will do “one needs to know the motive force of the satisfactions and sacrifices promised by alternative lines of action. That force can best be expressed in terms of money; but the use of money does not alter the substantial character of economic behavior.” But, Mitchell continues, on Veblen’s view of the matter, the whole picture changes.

Money becomes a most significant thing in the economy of society, because it shapes the habits of thought into which our native pro-
pensities grow. Instead of being a machine for doing quickly and commodiously what would be done, though less quickly and commodiously, without it, the use of money “exerts a distinct and independent influence of its own” upon our wants as consumers, upon our skill as planners, and upon our ideals as citizens.
*38

Because of the manner in which the monetary calculus promotes rational behavior, the student of economics cannot picture economic logic without money and without prices.
*39

Now, while the positive influence on economic activity that money exerts has been rather widely recognized,
*40 this does not of itself provide a valid criterion of economic activity. Professor Robbins, for example, has complained that the restriction of economics to monetary phenomena confines the subject to a particular institutional setting.
*41 The influence that money and monetary calculation has exerted is not so much a matter of innovating as of accelerating and facilitating a pattern of activity that, at least in principle, could exist without it. Nevertheless, the role that money has played in the conception of economic phenomena has been broadened by the “institutional” concept. Money has, in fact, played a role in economic activity, not merely as a passive tool, but also as an active force. The superposition of the ideas on the money criterion presented in this section contributes to fuller appreciation of what has been meant by the statement that money is an essential element in economic affairs.