American Economics

IT has been a long-standing indictment preferred against the few American economists that they have borrowed both their methods and their doctrines from the English school. While this criticism, which does not ask what is true, but where it came from, is of course eminently captious, still it is apt to make us look with more than usual interest to the appearance of any work by our own writers. Our anxiety to satisfy American pride is, perhaps, even yet a frailty which draws us slightly from the strictness of scientific estimates. So that there would seem to be a fine opportunity for patriotic felicitations at finding two volumes by our own writers, one of which covers the field of political economy proper, and the other that of American public finance to the breaking out of the late war.

But, like the long-awaited American novel, the ideal text-book on political economy is yet to be written. Although General Walker 1 possesses in a high degree the qualities for success, — long experience as a teacher, familiarity with wide reaches of economic literature, close acquaintance with industrial and public affairs, and a strong hold on the community as a man of earnestness and ability, — yet it must be remembered that these qualifications for larger work do not necessarily imply success in so adjusting an economic system that it may be symmetrical and clear to readers who have had little experience with such questions. It is one thing to produce, quite another thing to impart; it requires one set of qualities in a man to grow a potato, but a very different one to prepare it for a fastidious palate. The style is frank and easy, but we are confident that few persons, although trained by previous study, can gain a clear and definite conception, from. General Walker’s book, of such elementary ideas as competition, cost of production, demand for money, or value. In fact, we have heard a dozen men, all accustomed to the discussion of these questions, prejudiced in favor of the writer, wishing only to understand him, differ widely as to his meaning. The book, however, must stand or fall, as regards matters of doctrine, on the peculiar tenets of the author respecting the wages question, and that part of profits called by him the entrepreneur’s profits, but generally known as wages of superintendence. As to wages, he holds to his former position, that they are not paid from capital previously accumulated, but from the product of the labor. This has been discussed in past years, but today it is probable that most students yet concur in believing that wages are, in any extended division of labor such as appears in modern industrial life, necessarily guaranteed and paid from wealth previously accumulated and set aside for production. The exceptional cases presented by General Walker, where wages have been paid out of the finished product, have happened where division of labor is imperfect. Of course, the final outcome of the crop or product is the fund out of which rent, profits, and wages can be paid; and if it is generally large, wages are high, as are profits also. Compare, for instance, wages and profits in England and in the United States. The size of the final product no doubt affects the promise of wages which the employer makes to the laborer ; but, in actual fact, the hirer provides from previous accumulations machinery, buildings (which require large advances), materials, tools, and hats, shoes, clothing, bread, and shelter (by the payment of money with which these articles are purchased), for the laborer, and then takes all the risks of reimbursement from the ultimate product. It is almost a truism to state this. Were it necessary to go further in showing that wages are not paid out of the final result, attention should be called to the fact that wages would not be altered were the product to fall short in any operation. Suppose all the finished goods to turn out unmarketable, by a change of fashion during the time of production : the laborers have been hired at stipulated wages; and if the employer has not at hand the gathered store of capital out of which labor may be paid, he will be obliged to convert his wealth, not previously intended for investment, as his house or horses, into such capital as will pay the men. The failure in the result will not diminish wages. But it may be said that reference is had to a permanent and continuing state of affairs ; that if product should be a long time short or large, it would affect wages in general correspondingly. This is true, but it would modify only the promises to give larger or smaller amounts permanently out of previous accumulations, for which the employer expected to be recouped from the final result. In short, every business man knows that he takes all the risks, pays his laborers wages, no matter what happens, and stands between them and uncertainty ; he it is who gains or loses by variations in the final product. The employer, without doubt, but not the laborer, is paid out of the completed articles. If so, General Walker’s theory is not consistent with the facts of industrial life, and is no argument against a fair statement of the principle that capital is the fund out of which wages are paid, Mr. Henry George’s hallucinations to the contrary notwithstanding.

This brings us to an examination of the author’s central idea of distribution, and to the pivotal part of his system.

In fact, it is upon just these questions within the field of distribution that there is now rightly the most discussion among economists. As we all know, the value of the total product is the fund from which comes the amounts to be divided as wages, profit, and rent. The sum to be paid as rent is determinate, and settled by the Ricardoan formula, leaving the remainder of the amount to wages and profits. There is no dispute here. The second element, profits, is separated into (1) interest, or a payment to capital solely for abstinence ; (2) insurance, for risk on the investment; and (3) the profits of the entrepreneur, or manager, for wages of superintendence. The payment for the entrepreneur is separated from that of the capitalist. But, says the author, the interest and insurance are likewise determinate, and settled by general rules, leaving the value of the product yet remaining to the entrepreneur and laborer. Then he attempts to show that the entrepreneur’s share is also one fixed by a general law, so that the only undetermined portion, which can rise with improvements in processes, goes to the laborer. With this position we are certainly not in agreement. The capital objection is that it is not in accordance with the facts of business. We have indicated above our reasons for believing that it is the entrepreneur’s share which is variable, rising or falling with the success or failure of production. Indeed, in his work on the Wages Question, when entering his objections against productive coöperation, General Walker pointedly urges that it is essential to the proper temper of the entrepreneur, or “ captain of industry,” that he should gain what is gained and lose what is lost. But this volume holds that there are varieties of business skill, just as there are varying grades of land ; that at the bottom there are entrepreneurs who gain only mere laborer’s wages, while above that their gains are fixed by their superiority over the poorest managers, the “ no-profits entrepreneurs.” In this way, it is desired to explain that the entrepreneur’s profits from the value of the product are fixed by a regulating principle, and that, by a process similar to economic rent, they form no part of the price of commodities ; meaning that skillful management allows the goods to be produced cheaper in proportion to the manager’s superiority, and that the difference between this cost and that under the no-profits entrepreneur is the source of profits for skill. This, however, cannot be reconciled with industrial facts. To begin with elementary law, all know that there is admitted to be a difference between the production of articles which can be increased in quantity only by an increasing cost (whenever the law of diminishing returns acts) and those whose cost generally falls with larger production, and whose supply is practically limited only by the application of labor and capital. Wheat and corn are examples of the former class, and cotton goods and shovels of the latter. A great business is now a question of fractions. Any manager of large cotton mills would tell you that his business depended on a small fraction of an ounce in the weight of his thread, or of a per cent. in the market price. An advantage of one half a cent a yard would allow him to undersell the market, and add indefinitely to the production of his mill. In brief, there is nothing in the shape of a law of diminishing returns to prevent him from supplying the whole market. In actual trade it means that his commission house offers the goods cheaper, sells increasing amounts of goods, and drives other firms out of business. The greater the quantity of goods manufactured, the greater the division of labor and use of other economical devices, and the easier to sell his goods cheaper. But our author would hold that the no-profits entrepreneur, who could not produce his goods as cheaply, would fix the market price at which the great managers sell their goods. It seems hardly necessary to say that this is not true. If we are right, then the price of commodities which are capable of unlimited increase depends on the cost of production under the most skillful entrepreneur, and so the market price in continuous production must tend to conform to this. We cannot, therefore, agree with General Walker’s treatment of distribution, and consequently do not think that his is a good book to be put into the hands of beginners.

Even in the theory of rent, which the writer accepts, of course, he would convey a wrong impression when applying it to mines. That theory points out that rent is due to the superiority in advantages of one mine to another. The author adds that mines present a special case, in that they are ultimately exhausted, while land is not. But if this is a consideration applicable to all mines, it does not in the least affect their comparative advantages, and it is wholly upon a comparison between different grades of the same things — not the absolute advantages of any one — that we arrive at the amount of rent. The attempt, therefore, to amend the doctrine as applied to mines by adding something as a payment for the destructibility of its powers seems to us like placing an extra plank under a whole row of soldiers in order to determine which is the tallest.

The manly tone of General Walker’s book invites full and fair discussion, and it will stimulate the already great interest in economic problems in this country. Even in our best universities little instruction was furnished in this department fifteen years ago. But the impetus given to the study of public finance by cur late war is conspicuously seen in every quarter. The history of our own finances is a story of great interest. We have committed gigantic errors, blundered into successes, made some capital “ hits,” and to-day have the ability to place bonds on the market more advantageously than any country in the world. It is like the history of a big boy of genius from the back districts, whose hair yet shows some of the hayseeds, but who is likely to come out right in the end, as soon as he gains discretion and experience. Mr. Bolles,2 however, is only an annalist, and not wholly trustworthy. He never rises above his facts to see the principles at work in the details ; in short, he does not seem to be sufficiently equipped as an economist to catch the real spirit in operation. Perhaps the most notable failure in the book is the slight and insufficient treatment of banking in its connection with the finances and with the great commercial crises. In the chapter treating of the second United States Bank there is a superficial statement of events, but the reader would not gain a clear insight into the operations of credit and banking which attended the crisis of 1837. In short, no serious economic study has been made of a single crisis, either at this time or in 1857. This was the writer’s opportunity ; but it was not seized. When quoting Gouge’s report on the sub-treasury system in 1855, he sees that the banks in increasing their liabilities would have been affected by the government deposits ; but in another connection, in speaking of the “pet banks” in 1833, he finds the cause of this increase in “ their desire to earn fat dividends.” In general the facts given on the history of government deposits are more satisfactory than any account to be found elsewhere, and have an especial value at this time, when the treasury is so actively interfering with the money market. When we turn to his two chapters on coinage, to glean his testimony as to the experience of the United States in its long experiment in bimetallism, very little else than undigested facts confronts us. No conception of principles is to be found. There is no reference to the culminating effect of the large silver production since 1780 (to be compared only with that of the sixteenth century in its excess over gold), but mention is made of the unfounded statement that the change in the ratio between the two metals in 1818 might be due to the resumption of cash payments by the Bank of England. Yet on the next page it is said that “ it was apparent, even before the war of 1812, that gold was more desirable for exportation than silver.” If so, then the fabled “gold hunger” in England from 1819 to 1821 had little to do with the change in this country. That was clearly explained by a fall in the bullion value of silver. In fact, our coinage history is a striking illustration of the impossibility of keeping two metals in concurrent use, when both are an unlimited legal tender; but the details of mint operations are more attractive to our author than such explanations. In the wider field of tariff legislation the theory of protection receives rather inadequate treatment. Mr. Bolles says that in the beginning of the century “protection of American industries from foreign competition was a principle very widely accepted;” but we find that the grounds of the policy were not those which would command universal acceptance among protectionists, if we read the statement on the next page, that “ home manufactures were encouraged, not solely to get them cheaper, either immediately or prospectively, but because revenge [that is, against England] was sweet, even if purchased at considerable cost to the avenger.” In these chapters on the history of tariff legislation Mr. Bolles has essayed an ambitious task, but has not treated it in the proper historical spirit.

  1. Political Economy. By FRANCIS A. WALKER. New York: Henry Holt & Co. 1883.
  2. The Financial History of the United States from 1789 to 1860. By ALBERT S. BOLLES. New York: D. Appleton & Co. 1883.