The author of The Wealth of Nations (1776) is frequently classed as an eighteenth century economist. But Adam Smith was primarily a professor of moral philosophy, the discipline which I believe is the appropriate one for the study of human action and such subdivisions of it as may be involved in political economy.
Moral philosophy is the study of right and wrong, good and evil, better and worse. These polarities cannot be translated into quantitative and measurable terms and, for that reason, moral philosophy is sometimes discredited as lacking scientific objectivity. And it is not, in fact, a science in the sense that mathematics, chemistry, and physics are sciences. The effort of many economists to make the study of political economy a natural science draws the subject out of its broader discipline of moral philosophy, which leads in turn to social mischief.
Carl Snyder, longtime statistician of the Federal Reserve Board, exemplifies an economic "scientist." He wrote an impressive book, Capitalism the Creator.1
I agree with this author that capitalism is, indeed, a creator, providing untold wealth and material benefits to countless millions of people. But, in spite of all the learned views to the contrary, I believe that capitalism, in its significant sense, is more than Snyder and many other statisticians and economists make it out to be — far more. If so, then to teach that capitalism is fully explained in mathematical terms is to settle for something less than it really is. This leaves unexplained and vulnerable the real case for capitalism.
Snyder equates capitalism with "capital savings." He explains what he means in his Preface:
"The thesis here presented is simple, and unequivocal; in its general outline, not new. What is new, I would fain believe, is the proof; clear, statistical, and factual evidence. That thesis is that there is one way, and only one way, that any people, in all history, have ever risen from barbarism and poverty to affluence and culture; and that is by that concentrated and highly organized system of production and exchange which we call Capitalistic: one way, and one alone. Further, that it is solely by the accumulation (and concentration) of this Capital, and directly proportional to the amount of this accumulation, that the modern industrial nations have arisen: perhaps the sole way throughout the whole of eight or ten thousand years of economic history."
No argument — none whatsoever — as to the accomplishments of capitalism, or that it has to do with "capital savings." But what is capital?
The Ideas Behind Capital
The first answer that comes to mind is that capital means the tools of production: brick and mortar in the form of plants, electric and water and other kinds of power, machines of all kinds including computers and other automated things, ships at sea and trains and trucks and planes — you name it! These things are indeed capital, but is capital in the sense of material wealth sufficient to tell the whole story of capitalism and its creative accomplishments or potentialities?
Merely bear in mind that all of this fantastic gadgetry on which rests a high standard of living has its origin in ideas, inventions, discoveries, insights, intuition, think of that, and such other immeasurable qualities as the will to improve, the entrepreneurial spirit, intelligent self-interest, honesty, respect for the rights of others, and the like. These are spiritual as distinguished from material or physical assets, and always the former precedes and is responsible for the latter. This is capital in its fundamental, originating sense; this accumulated wisdom of the ages — an overall luminosity — is the basic aspect of "capital savings."
It is possible to become aware of this spiritual capital, but not to measure, let alone to fully understand it — so enormous is its accumulation over the ages. Awareness? Sit in a jet plane and ask what part you had in its making.
Very little, if any, even though you might be on the production line at Boeing. At most, you pressed a button that turned on forces about which you know next to nothing. Why, no man even knows how to make the pencil you used to sign a requisition. These "capital savings" put at your disposal an energy perhaps several hundred times your own. This accumulated energy — the workings of human minds over the ages — is capital!
With this concept of capital in mind, reflect on how unrealistic are the ambitions of the "scientific" economists. Carl Snyder phrases their intentions well in the concluding paragraph of his Preface:
"It was inevitable, perhaps, that anything like a "social science" should be the last to develop. Its bases are so largely statistical that it was only with the development of an enormous body of new knowledge that anything resembling a firmly grounded and truly scientific system could be established. It is coming; already the most fundamental elements of this knowledge are now available, as the pages to follow will endeavor to set forth." (Italics added)
Snyder is, indeed, statistical. He displays 44 charts. Nearly all of these show the ups and downs mostly ups — of physical assets in dollar terms. This, in his view, is a "truly scientific system." But how scientific can a measurement be if the units cannot be quantified and the measuring rod is as imprecise in value as is the dollar or any other monetary unit?
And what is truly scientific about showing the growth in coal production, for instance, if there be a shift in demand favoring some other fuel? This would be only a pseudo measurement with no more scientific relevance than a century old chart showing the dollar growth in buggy whip production.
Professor F. A. Hayek enlightens us: "All the physical laws of production" which we meet, e.g., in economics, are not physical laws in the sense of the physical sciences but people’s beliefs about what they can do…. That the objects of economic activity cannot be defined in objective terms but only with reference to a human purpose goes without saying. Neither a ‘commodity’ or an ‘economic good,’ nor ‘foods’ or ‘money,’ can be defined in physical terms but only in terms of views people hold about things."2
Economic growth for a nation cannot be mathematically or statistically measured. Efforts to do so are highly misleading. They lead people to believe that a mere increase in the measured output of goods and services is, in and of itself, economic growth. This fallacy has led to the forced savings programs of centrally administered economic systems — programs which decrease the range of voluntary choice among individuals. This is the heart of the failure of the socialistic policies of the underdeveloped nations of Asia, Africa, and Latin America. As Prof. P. T. Bauer has written so eloquently: "I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development; and I judge a measure principally by its probable effects on the range of alternatives open to individuals."³
Indeed, even an individual’s economic growth can no more be measured, exclusively, in terms of historical statistics than can his intellectual, moral, and spiritual growth. These ups and downs cannot be defined in physical terms but only in terms of views people hold about things. These views —highly personal — are in constant flux; you may care nothing tomorrow for that which you highly prize today.
Once we grasp the point that the value of any good or service is whatever others will give in willing exchange, and that the judgments of all parties to all exchanges are constantly and forever changing, it should be plain that even physical assets — money, food, or whatever — do not lend themselves to measurements in the scientific sense.
And when we further reflect on the fundamental nature of "capital savings," — that they emerge out of ideas, inventions, insights, and the like — the idea of scientific measurement becomes patently absurd.
In any event, it is this penchant to make a science of political economy, to reduce capitalistic behavior to charts, statistics, theorems, arbitrary symbols, that leads to such nonsense as the Gross National Product (GNP), "national goals" and "social gains."4 The more pronounced this trend, the less will the economics of capitalism and the free society be understood — "a dismal science," for certain. Indeed, could the ambitions of the "scientific economists" be realized, dictatorship would be a viable political system. At the dictator’s disposal would be all the formulae, all the answers; disregarding personal views and choices, he would simply run his information through computers and thus meet production schedules.
When we grasp the point that no man who ever lived has been able to foresee his own future choices, let alone those of others, economic scientism, as it might be called, makes no sense.
How did we ever get off on this untenable course? Perhaps we can only speculate. A flagrant display: At one point in a recent Seminar discussion I repeated, "Only God can make a tree." And then this exclamation by a graduate student, "Up until now!" This, it appears to me, is the reflection of a notion, so prevalent in the eighteenth and nineteenth centuries, that every facet of Creation, even life itself, lies within the powers of man. Merely a matter of time!
To tear human action asunder and then to assign symbols or labels to the pieces, as the scientists properly do with the chemical elements, is no service to economic understanding. This method makes understanding impossible for the simple reason that it presupposes numerous phases of human action that can be mathematically or scientifically distinguished one from the other when such is not the case. Why am I motivated to write this or you to read it? Doubtless, each of us can render a judgment of sorts but it will not be, cannot be, in the language of science.
Political economy is as easy or, perhaps, as difficult to understand and practice as the Golden Rule or the Ten Commandments. Economics is no more than a study of how scarcity is best overcome, and the first thing we need to realize is that this is accomplished by the continued application of human action to natural resources.
Natural resources are what they are, no more, no less — the ultimate given! The variable is human action.
Political economy, then, resolves itself into the study of what is and what is not intelligent human action. It should attempt to answer such questions as:
Is creative energy more efficiently released among free or coerced men?
Is freedom to choose as much a right of one as another?
Who has the right to the fruits of labor — the producer or non-producer?
How is value determined — by political authority, cost of production, or by what others will give in willing exchange?
What actions of men should be restrained — creative actions or only destructive actions?
How dependent is overcoming scarcity on honesty, respect of each for the rights of others, the entrepreneurial spirit, intelligent interpretation of self-interest?
Viewed in this manner, political economy is not a natural science like chemistry or physics but, rather, a division of moral philosophy — a study of what is right and what is wrong in overcoming scarcity and maximizing prosperity — the problem to which it addresses itself.
Once we drop the "scientific" jargon and begin to study political economy for what it really is, then its mastery becomes no more difficult than understanding that one should never do to others that which he would not have them do unto him.
1 Carl Snyder, Capitalism the Creator (New York: The Macmillan Company, 1940; Arno Press, 1972), 492 pp.
2 See The Counter Revolution of Science by F. A. Hayek (New York: The Free Press of Glencoe, The Crowell Collier Publishing Co., 1964), p. 31.
3 P. T. Bauer, Economic Analysis and Policy in Underdeveloped Countries (Duke University Press and Cambridge University Press, 1957), p. 113.
4 For more on the GNP fallacy and how economic growth cannot be "factually" reported, see "A Measure of Growth" in my Deeper Than You Think (Irvington-on-Hudson, N. Y.: The Foundation for Economic Education, Inc., 1967), pp. 7084.
Freedom, an Illusion
Freedom is an illusion, though an important one; in any society, restraints and restrictions, obligations and compulsions are the realities.
"Free as the wind" is such an illusion. Consider the restraints and restrictions and obligations and compulsions. For wind is nothing but air being pushed from areas of high pressure to low, cold and heavy air displacing warmer and lighter air, its course modified by solid objects of nature and man in its path, subject to all the laws of gases, gravity, mass, matter, and so on.
The illusion of freedom has been broad indeed in America with its unique government of limited and specific powers — limiting the restraints and restrictions, the obligations and compulsions to which Americans might be subjected. No such illusions of freedom persist in totalitarian societies, be they Communist, Fascist, Socialist or whatever. For it is made abundantly clear that the people subject to these regimes are free only to support and serve the state, with ample restraints and restrictions to shatter any other illusions of freedom.
Why is this illusion of freedom so vitally important? Because the more free men feel to serve themselves, their fellows, and their Creator, the better they do in fact serve all.
J. KESNER KAHN, Chicago, Illinois