Dr. Paton is Professor Emeritus of Accounting and of Economics, University of Michigan, and is known throughout the world for his outstanding work in these fields. His current comments on American attitudes and behavior are worthy of everyone’s attention.
Achieving and maintaining an intelligent awareness of the economic process — the means and methods by which man makes a living on this rugged planet — requires understanding, and firmly gripping, a few fundamentals. Only in this way, I’ve long believed, can even the observing and thoughtful individual develop an immunity to economic nonsense, avoid being hoodwinked and misled by proposals and programs presented by politicians and pseudo-reformers, in bright colors, that range from the downright fraudulent to emotional daydreaming.
As the first fundamental to be considered in beginning the systematic study of economics I propose the truism: The total amount consumed can’t exceed the total amount produced. This is an indisputable fact of life if we rule out manna from heaven and either take in the whole race or assume a self-sufficient group, large or small.’ It has the special merit, as an initial stepping stone on the path to knowledge and understanding, of being applicable to any community or society, however made up, whatever the production methods and kinds of output, whatever the form of government and other institutional arrangements, and without regard to customs, habits, attitudes, religious views, and so on. Thus it holds in the case of a primitive tribe (ignoring the story-book case of finding food by merely stretching out a hand while lolling comfortably on a sandy beach or on the grass in the pleasant shade of a palm tree), and is also valid in the complex type of economy, endowed with an advanced technology, with which we are familiar. This proposition should perhaps be regarded as an adaptation of Say’s law, which proclaims the equality —and identity — of supply and demand in the aggregate, and is likewise a universal truth, not to be gainsaid, anywhere, in any economic framework.
Basic Proposition One is so plainly in view to any intelligent mind that calling for its stressing may seem to be hardly necessary. In today’s cloudy atmosphere, however, I feel that there is ample justification for explicit statement and restatement of this inescapable limitation on the many schemes designed to banish poverty — as officially defined — that are being currently proposed. To puncture the dreams of pie-in-the-sky with which the air is filled — to counter political promises to provide this or that level of living for everybody — there is surely need for renewed emphasis on the point that the total amount we can eat depends on the size of the pie rather than the cutting pattern.
Production Is Primary
Here I come to an important corollary of Proposition One: production, not consumption, deserves recognition as the primary sector of economic activity. This position conflicts with the widespread and persistent tendency to be concerned with the consumer’s needs and problems — a tendency that has currently found expression in a wave of governmental interference in producing and marketing processes, and a lot of popular clamor for more of the same. The ultimate objective of economic activity, of course, is to provide goods to meet consumer needs. This is just as true in an economy equipped with an elaborate structure of factories and machines, and yielding a wide range of consumable commodities and services, as in a primitive community subsisting on the results of hunting and fishing. We don’t use machines simply to make more machines. But since the level of consuming, in total, depends on the level of output it may well be urged that maintaining and enhancing productive efficiency is the matter of prime importance, and worthy of broad popular support. Thus the long history of opposition to technical advance, and the current slackening of concern as to diligence and workmanship on the assembly line and elsewhere, are at odds with Proposition One, so can’t be justified in terms of overall welfare and progress. Preoccupation with "consumerism", to the neglect of improved use of available resources, and expansion of productive capacity through capital accumulation, does not represent praiseworthy public policy. The campaign to "protect" the consumer by government action becomes especially objectionable when it reaches the point — as it now has — where business firms are subjected to a degree of harassment that clearly impedes operation and increases costs. Indeed this state of affairs is truly ominous, and should be viewed with alarm rather than acclaim. The wheels of production don’t keep on rolling automatically, without an encouraging overall climate and the efficient participation of all hands — attendants and operatives, technicians, managers, and fund furnishers.
Opening the Door on Problems
Acceptance of Proposition One, with the accompanying view of economic activity as a dichotomy of producing and consuming, solves no problems. But recognition of this axiomatic, universally applicable, feature of economic life does provide a useful approach, a good starting point, for further study; it serves to open the door to an examination of important issues and problems.
The bare statement of Proposition One leaves untouched the criteria of "producing" and "consuming" and further inquiry is needed to ascertain the essential character of these broad divisions of economic activity, particularly in an economy where specialization and exchange are highly developed and a myriad of consumer commodities and services flow from a complex array of plants and equipment. What are the earmarks of productive conduct versus nonproductive action? It’s easy to say that producing consists of making a contribution somewhere along the production pipeline but this doesn’t tell us much. For one thing we must distinguish between economic and noneconomic goods (the latter being rather hard to find these days, when even the air breathed may not be entirely free of cost to the user or someone else). And who or what determines the composition of the output either in a particular enterprise or for the whole economy? Proposition One, as such, leaves this important question unsettled.
The problem of drawing a line between the producing and consuming stages, and distinguishing resources employed in producing ("capital goods") from end product ("consumer goods"), is less important, but perhaps deserves a few comments. Where does production end and consumption begin?
For example, is the housewife’s activity in preparing the family meal and setting the table in the producing sector or a step in the process of consuming? Are the oranges in the picker’s basket, or in a package or pile in the supermarket, or even on a shelf in the pantry, to be counted as resources devoted to production? The fussy folks insist that the true consumable is not even the glass of orange juice on the breakfast table but the satisfaction derived from drinking it. This line of inquiry becomes of some consequence in periodic economic measurement in the case of consumer durables such as cars, washing machines, and residences.
The second underlying proposition that should be stressed — as I see it — in launching systematic study of economics may be phrased as follows: the individual (or family unit) has the inherent right to consume or otherwise dispose of what he (or the unit) produces —a restatement of the old saying that the worker is entitled to the "fruits of his labor". This fundamental can hardly be regarded as a truism, and certainly is not an arithmetic axiom. Its support must be found in human nature and motivation, with an eye open to the limitations imposed on consuming by the amount of output available. Undoubtedly there is at least a trace of a sense of fairness and justice in most people and some degree of acquiescence in the merit of this second proposition. It is indeed a dull child who doesn’t promptly see the distinction between his toys and those of a playmate, and who will fail to protest when his sand castle is demolished by someone other than himself. Close observation of human behavior, moreover, currently and historically, brings to light much evidence of blighting effect on the productive effort of the individual of the seizure by others of all or part of the results of such effort.
Acceptance of Proposition Two has always been widespread in the primitive and simple situation, and we don’t need to go back to Robinson Crusoe to bring this fact to light. On the current scene, in the midst of all the confusion and folly with which we are beset, there are few who would propose or attempt to justify despoiling someone of the product that plainly results from his personal effort. Thus we see no campaign to commandeer for the use of others the product of the chap who has planted and tended a garden patch, or built a raft to use out at his cottage on the lake, or made a couple of rustic chairs for the porch. But the same people who show a willingness to go along with this principle in these elemental, clear-cut cases, often become confused and change their stance completely, when confronting the complex requirements of a modern economy, with its elaborate structure of division of labor and exchange, pouring forth a fantastic variety of commodities and services. And it is not difficult to become a bit bewildered by our intricate network of methods and techniques and maze of related markets, with their many millions of interdependent participants, coupled with an impressive array of business organizations and an all-pervasive web of monetary and credit facilities. Indeed, the only way for the intelligent layman to avoid being befuddled, and victimized by the clever humbug peddlers, is to acquire a solid understanding of a few ever-present fundamentals, as I’ve already pointed out.
Tom and Dick as Berry Pickers
As a means of bringing out sharply this familiar lack of insight and consistency of attitude I often employed in my classes an example that I labeled the "Fable of the Berry Pickers" (along with much other illustrative material). While a boy on the farm I spent literally hundreds of hours, over a period of years, picking wild raspberries for my mother, and became quite expert as a picker.
And this experience undoubtedly accounted for my use of this fable in my teaching. I’ll outline the story here, as I recall presenting it in my beginning course in "principles of economics".
Assume a big swamp, with many acres of wild red-raspberry bushes, to which no one claims title or maintains any financial interest. On a particular summer day two neighbor boys, Tom and Dick, equally equipped with pails and both physically fit, spend ten hours in the swamp picking berries, as directed by their respective mothers. Tom is a careful, persistent, systematic picker, with a strong urge to make a good showing. Dick, in contrast, is a carefree and careless lad, who likes to roam around among the bushes, picking sloppily here and there. At day’s end Tom has sixteen quarts of clean, ripe berries, while Dick has about twelve quarts of a mixture of green, overripe, and good berries, with a liberal sprinkling of leaves and small twigs throughout. With this condition, I’m sure you will all agree, Dick cannot reasonably lay claim to a share of Tom’s berries, and I don’t believe that many of you would object to Tom’s conduct if he should reject the idea of pooling and dividing equally the results of the day’s operations, if Dick — or anyone else — should propose such action.
Tom and Dick in the Berry Plant
Now let’s move on a few years with our berry story. Tom and Dick have grown up and both are employed by a company that has been established in the neighborhood and is engaged in growing and canning berries for the market. Diligent Tom has moved up the ladder to the position of operating manager of the plant, but Dick has not advanced beyond the status of sweeper and handyman. Each is paid weekly by check for his services and the amount of Tom’s check is about four times that of Dick’s. What are the equities, the respective rights, in this situation? Should a substantial slice of Tom’s money income be seized by taxation or other form of coercion for use to supplement Dick’s earnings, or render assistance to some other person or persons regarded as needy poor, or expended in some other way without Tom’s consent? Many people seem to be willing to approve such arbitrary action, including most of those who would not support taking part of the berries Tom picked as a boy and awarding them to his inefficient fellow-picker, Dick.
If it be assumed that the respective contributions of Tom and Dick to the output of the plant at which they are employed are being accurately determined it follows that Tom is just as fully entitled to spend the money income he receives as plant manager as he sees fit as he had a right to consume or otherwise dispose of all the wild berries he personally picked in the swamp, years before.² The two cases, with this assumption, are on all fours, and anyone who holds otherwise is throwing logic and common sense to the winds. Those who don’t agree with this conclusion either fail to grasp the basic identity of the two situations, or don’t mind being inconsistent when it suits their convenience or is in line with their prejudices.
There is a possible out, however, for persons who give lip service, at least, to the need for fair-mindedness, consistency, in thinking and conduct. They may challenge the assumption that the contributions of Tom and Dick to the output of the berry plant are fairly and accurately determined; they may urge that in practice — in real life — the Toms are overpaid and the Dicks underpaid. In the system as it stands, they may contend, common labor is exploited and managers and owners are on the gravy train. There is certainly widespread expression of opinion to this effect.
(There should perhaps be mentioned here, parenthetically, the view that the more efficient and productive individuals should be forced to share the results of their efforts with their less capable brethren, and currently this extreme position has a great deal of support. The advocates of this stance are of course refusing to acknowledge the validity of Proposition Two, as well as ignoring or minimizing the probably adverse effect on total output of large-scale and persistent seizure and diversion of the contributions made by the more energetic and competent individuals.)
Measuring Productivity and Awards—Major Alternative Systems
Via Propositions One and Two I have now come to the crucial measurement problem and issue: How is the contribution of the individual participant to be determined in a complex economy such as that in which we find ourselves where a host of individuals join hands, so to speak, in operating an elaborate, highly mechanized, productive process or system? And should any limitation be placed on the right of the individual to consume or otherwise dispose of the amount of his contribution, validly measured?
The study of economics consists essentially in searching for an answer to these questions. It is precisely at this point that the battle between competing isms and ideologies is joined. In the existing situation the determination is still largely made by the forces of an intricate structure of markets, and hence systematic economic inquiry must include an intensive examination of the price-making forces of the market, and their results, at all levels. Such an examination, including a survey of historical evidence, will undoubtedly provide a substantial backing for the conclusion that a broad and free market structure, registering automatically and impersonally the net impact of the attitudes and reactions of many buyers and sellers to changing conditions, has long since proved itself as a truly amazing instrument for directing productive activities and awarding shares of output to participants in the process. Unfortunately our markets are now so heavily laden with interferences and restrictions, especially through governmental intervention and control, that a free market structure, with strong competitive pressure present throughout, no longer exists, and this condition constitutes an obstacle in analyzing and appraising the performance of a market system under more favorable circumstances.
In any event, no fair and firm judgment can be reached, as to the merit and potency of a market apparatus in measuring contributions to production, slicing up the output pie for the Toms and Dicks, without giving careful attention to the limitations of this instrument at the best, as well as under conditions of substantial interference. The fact that ingrained superstition, traditions, taboos, and other attitudes and traits, may make the development of a suitable market structure difficult if not almost impossible, should also not be neglected. Some consideration, moreover, must be given to the proper means to be employed to relieve acute economic distress in a humane society, even if the market is generally relied upon to guide both production and distribution of final output, with adequate recognition of the inclination of the Toms to take steps — voluntarily — to ameliorate the hardships of the Dicks.
The major alternative to reliance on the market for economic guidance, I’m sure we’ll all agree, is statism, collectivism, some form of governmental, bureaucratic, compulsion. And I strongly believe that the study of economics, in colleges or elsewhere, should include a careful, thoroughgoing examination of the case for this alternative, as it has been made by the outstanding defenders and advocates of socialistic programs, including the dictatorial system represented by modern communism. The route to sound conclusions is not by way of glorification of the market and wholesale condemnation — without study — of the socialist approach. Taking something for granted in this world is seldom advisable.
This brief statement, I should make it plain in conclusion, is intended to do nothing more than provide a crutch on which the intelligent and inquiring layman may lean, and outline a useful approach — push open the door — to the crucial measurement problems and issues which deserve intensive study.
1 Not to deny, of course, the possibility of a level of consuming in excess of output in a specific time-period, by tapping stores. Some will recall the account of the seven lean years following seven fat years in Egypt, long ago.
² The intervention of the money and credit mechanism, a necessary instrument to facilitate specialization and exchange, should certainly not be allowed to obscure the basic facts, although many people at times seem to be blinded by fixing their attention on the flow of cash or equivalent rather than services or other economic contributions for which payment is being made. I’m reminded of a tussle on our city council one evening years ago, during my five-year experience as a member, when a fellow councilman proposed that one of our firemen be dismissed because he lived in a community outside our city limits, and spent "his entire salary" in his home neighborhood rather than where he worked. I had some trouble in getting support for the point that the main question for us was not where or how the chap got rid of his cash but the value of the services he provided to our fire department.