Thorstein Veblen
The Preconceptions of Economic Science
The Quarterly Journal of Economics, 13 (1899)

            II

ADAM SMITH'S animistic bent asserts itself more plainly and more
effectually in the general trend and aim of his discussion than
in the details of theory. "Adam Smith's Wealth of Nations is, in
fact, so far as it has one single purpose, a vindication of the
unconscious law present in the separate actions of men when these
actions are directed by a certain strong personal motive."(1*)
Both in the Theory of the Moral Sentiments and in the Wealth of
Nations there are many passages that testify to his abiding
conviction that there is a wholesome trend in the natural course
of things, and the characteristically optimistic tone in which he
speaks for natural liberty is but an expression of this
conviction. An extreme resort to this animistic ground occurs in
his plea for freedom of investment.(2*)
    In the proposition that men are "led by an invisible hand,"
Smith does not fall back on a meddling Providence who is to set
human affairs straight when they are in danger of going askew. He
conceives the Creator to be very continent in the matter of
interference with the natural course of things. The Creator has
established the natural order to serve the ends of human welfare;
and he has very nicely adjusted the efficient causes comprised in
the natural order, including human aims and motives, to this work
that they are to accomplish. The guidance of interposition, the
invisible hand takes place not by way of interposition, but
through a comprehensive scheme of contrivances established from
the beginning. For the purpose of economic theory, man is
conceived to be consistently self-seeking; but this economic man
is a part of the mechanism of nature, and his self-seeking
traffic is but a means whereby, in the natural course of things,
the general welfare is worked out. The scheme as a whole is
guided by the end to be reached, but the sequence of events
through which the end is reached is a causal sequence which is
not broken into episodically. The benevolent work of guidance was
performed in first establishing an ingenious mechanism of forces
and motives capable of accomplishing an ordained result, and
nothing beyond the enduring constraint of an established trend
remains to enforce the divine purpose in the resulting natural
course of things.
    The sequence of events, including human motives and human
conduct, is a causal sequence; but it is also something more, or,
rather, there is also another element of continuity besides that
of brute cause and effect, present even in the step-by-step
process whereby the natural course of things reaches its final
term. The presence of such a quasi-spiritual or non-causal
element is evident from two (alleged) facts. (1) The course of
things may be deflected from the direct line of approach to that
consummate human welfare which is its legitimate end. The natural
trend of things may be overborne by an untoward conjuncture of
causes. There is a distinction, often distressingly actual and
persistent, between the legitimate and the observed course of
things. If "natural," in Adam Smith's use, meant necessary, in
the sense of causally determined, no divergence of events from
the natural or legitimate course of things would be possible. If
the mechanism of nature, including man, were a mechanically
competent contrivance for achieving the great artificer's design,
there could be no such episodes of blundering and perverse
departure from the direct path as Adam Smith finds in nearly all
existing arrangements. Institutional facts would then be
"natural."(3*) (2) When things have gone wrong, they will right
themselves if interference with the natural course ceases;
whereas, in the case of a causal sequence simply, the mere
cessation of interference will not leave the outcome the same as
if no interference had taken place. This recuperative power of
nature is of an extra-mechanical character. The continuity of
sequence by force of which the natural course of things prevails
is, therefore, not of the nature of cause and effect, since it
bridges intervals and interruptions in the causal sequence.(4*)
Adam Smith's use of the term "real " in statements of theory --
as, for example, "real value," "real price"(5*) -- is evidence to
this effect. "Natural" commonly has the same meaning as "real" in
this connection.(6*) Both "natural" and "real" are placed in
contrast with the actual; and, in Adam Smith's apprehension, both
have a substantiality different from and superior to facts. The
view involves a distinction between reality and fact, which
survives in a weakened form in the theories of "normal" prices,
wages, profits, costs, in Adam Smith's successors.
    This animistic prepossession seems to pervade the earlier of
his two monumental works in a greater degree than the later. In
the Moral Sentiments recourse is had to the teleological ground
of the natural order more freely and with perceptibly greater
insistence. There seems to be reason for holding that the
animistic preconception weakened or, at any rate, fell more into
the background as his later work of speculation and investigation
proceeded. The change shows itself also in some details of his
economic theory, as first set forth in the Lectures, and
afterwards more fully developed in the Wealth of Nations. So, for
instance, in the earlier presentation of the matter," the
division of labor is the immediate cause of opulence"; and this
division of labor, which is the chief condition of economic
well-being, "flows from a direct propensity in human nature for
one man to barter with another."(7*) The "propensity" in question
is here appealed to as a natural endowment immediately given to
man with a view to the welfare of human society, and without any
attempt at further explanation of how man has come by it. No
causal explanation of its presence or character is offered. But
the corresponding passage of the Wealth of Nations handles the
question more cautiously.(8*) Other parallel passages might be
compared, with much the same effect. The guiding hand has
withdrawn farther from the range of human vision.
    However, these and other like filial expressions of a devout
optimism need, perhaps, not be taken as integral features of Adam
Smith's economic theory, or as seriously affecting the character
of his work as an economist. They are the expression of his
general philosophical and theological views, and are significant
for the present purpose chiefly as evidences of an animistic and
optimistic bent. They go to show what is Adam Smith's accepted
ground of finality, -- the ground to which all his speculations
on human affairs converge; but they do not in any great degree
show the teleological bias guiding his formulation of economic
theory in detail.
    The effective working of the teleological bias is best seen
in Smith's more detailed handling of economic phenomena -- in his
discussion of what may loosely be called economic institutions --
and in the criteria and principles of procedure by which he is
guided in incorporating these features of economic life into the
general structure of his theory. A fair instance, though perhaps
not the most telling one, is the discussion of the "real and
nominal price," and of the "natural and market price" of
commodities, already referred to above.(9*) The "real" price of
commodities is their value in terms of human life. At this point
Smith differs from the Physiocrats, with whom the ultimate terms
of value are afforded by human sustenance taken as a product of
the functioning of brute nature; the cause of the difference
being that the Physiocrats conceived the natural order which
works towards the material well-being of man to comprise the
nonhuman environment only, whereas Adam Smith includes man in
this concept of the natural order, and, indeed, makes him the
central figure in the process of production. With the
Physiocrats, production is the work of nature: with Adam Smith,
it is the work of man and nature, with man in the foreground. In
Adam Smith, therefore, labor the final term in valuation. This
"real" value of commodities is the value imputed to them by the
economist under the stress of his teleological preconception. It
has little, if any, place in the course of economic events, and
no bearing on human affairs, apart from the sentimental influence
which such a preconception in favor of a "real value " in things
may exert upon men's notions of what is the good and equitable
course to pursue in their transactions. It is impossible to gauge
this real value of goods; it cannot be measured or expressed in
concrete terms. Still, if labor exchanges for a varying quality
of goods, "it is their value which varies, not that of the labor
which purchases them."(10*) The values which practically attach
to goods in men's handling of them are conceived to be determined
without regard to the real value which Adam Smith imputes to the
goods; but, for all that, the substantial fact with respect to
these market values is their presumed approximation to the real
values teleologically imputed to the goods under the guidance of
inviolate natural laws. The real, or natural, value of articles
has no causal relation to the value at which they exchange. The
discussion of how values are determined in practice runs on the
motives of the buyers and sellers, and the relative advantage
enjoyed by the parties to the transaction.(11*) It is a
discussion of a process of valuation, quite unrelated to the
"real," or "natural," price of things, and quite unrelated to the
grounds on which things are held to come by their real, or
natural, price; and yet, when the complex process of valuation
has been traced out in terms of human motives and the exigencies
of the market, Adam Smith feels that he has only cleared the
ground. He then turns to the serious business of accounting for
value and price theoretically, and making the ascertained facts
articulate with his teleological theory of economic life.(12*)
    The occurrence of the words "ordinary" and "average" in this
connection need not be taken too seriously. The context makes it
plain that the equality which commonly subsists between the
ordinary or average rates, and the natural rates, is a matter of
coincidence, not of identity. Not only are there temporary
deviations, but there may be a permanent divergence between the
ordinary and the natural price of a commodity; as in case of a
monopoly or of produce grown under peculiar circumstances of soil
or climate.(13*)
    The natural price coincides with the price fixed by
competition, because competition means the unimpeded play of
those efficient forces through which the nicely adjusted
mechanism of nature works out the design to accomplish which it
was contrived. The natural price is reached through the free
interplay of the factors of production, and it is itself an
outcome of production. Nature, including the human factor, works
to turn out the goods; and the natural value of the goods is
their appraisement from the standpoint of this productive process
of nature. Natural value is a category of production: whereas,
notoriously exchange value or market price is a category of
distribution. And Adam Smith's theoretical handling of market
price aims to show how the factors of human predilection and
human wants at work in the higgling of the market bring about a
result in passable consonance with the natural laws that are
conceived to govern production.
    The natural price is a composite result of the blending of
the three "component parts of the price of commodities," -- the
natural wages of laborer, the natural profits of stock, and the
natural rent of land; and each of these three components is in
its turn the measure of the productive effect of the factor to
which it pertains. The further discussion of these shares in
distribution aims to account for the facts of distribution on the
ground of the productivity of the factors which are held to share
the product between them. That is to say, Adam Smith's
preconception of a productive natural process as the basis of his
economic theory dominates his aims and procedure, when he comes
to deal with phenomena that cannot be stated in terms of
production. The causal sequence in the process of distribution
is, by Adam Smith's own showing, unrelated to the causal sequence
in the process of production; but, since the latter is the
substantial fact, as viewed from the standpoint of a teleological
natural order, the former must be stated in terms of the latter
before Adam Smith's sense of substantiality, or "reality," is
satisfied. Something of the same kind is, of course, visible in
the Physiocrats and in Cantillon. It amounts to an extension of
the natural-rights preconception to economic theory. Adam Smith's
discussion of distribution as a function of productivity might be
traced in detail through his handling of Wages, Profits, and
Rent; but, since the aim here is a brief characterisation only,
and not an exposition, no farther pursuit of this point seems
feasible.
    It may, however, be worth while to point out another line of
influence along which the dominance of the teleological
preconception shows itself in Adam Smith. This is the
normalisation of data, in order to bring them into consonance
with an orderly course of approach to the putative natural end of
economic life and development. The result of this normalisation
of data is, on the one and, the use of what James Steuart calls
"conjectural history" in dealing with past phases of economic
life, and, on the other hand, a statement of present-day
phenomena in terms of what legitimately ought to be according to
the God-given end of life rather than in terms of unconstrued
observation. Account is taken of the facts (supposed or observed)
ostensibly in terms of causal sequence, but the imputed causal
sequence is construed to run on lines of teleological legitimacy.
    A familiar instance of this "conjectural history," in a
highly and effectively normalized form, is the account of "that
early and rude state of society which precedes both the
accumulation of stock and the appropriation of land." (14*) It is
needless at this day to point out that this "early and rude
state," in which "the whole produce of labor belongs to the
laborer," is altogether a figment. The whole narrative, from the
putative origin down, is not only supposititious, but it is
merely a schematic presentation of what should have been the
course of past development, in order to lead up to that ideal
economic situation which would satisfy Adam Smith's
preconception.(15*) As the narrative comes nearer the region of
known latter-day facts, the normalisation of the data becomes
more difficult and receives more detailed attention; but the
change in method is a change of degree rather than of kind. In
the "early and rude state" the coincidence of the "natural" and
the actual course of events is immediate and undisturbed, there
being no refractory data at hand; but in the later stages and in
the present situation, where refractory facts abound, the
coordination is difficult, and the coincidence can be shown only
by a free abstraction from phenomena that are irrelevant to the
teleological trend and by a laborious interpretation of the rest.
The facts of modern life are intricate, and lend themselves to
statement in the terms of the theory only after they have been
subjected to a "higher criticism."
    The chapter "Of the Origin and Use of Money"(16*) is an
elegantly normalised account of the origin and nature of an
economic institution, and Adam Smith's further discussion of
money runs on the same lines. The origin of money is stated in
terms of the purpose which money should legitimately serve in
such a community as Adam Smith considered right and good, not in
terms of the motives and exigencies which have resulted in the
use of money and in the gradual rise of the existing method of
payment and accounts. Money is "the great wheel of circulation,"
which effects the transfer of goods in process of production and
the distribution of the finished goods to the consumers. It is an
organ of the economic commonwealth rather than an expedient of
accounting and a conventional repository of wealth. It is perhaps
superfluous to remark that to the "plain man," who is not
concerned with the "natural course of things" in a consummate
Geldwirtschaft, the money that passes his hand is not a "great
wheel of circulation." To the Samoyed, for instance, the reindeer
which serves him as unit of value is wealth in the most concrete
and tangible form. Much the same is true of coin, or even of
bank-notes, in the apprehension of unsophisticated people among
ourselves to-day. And yet it is in terms of the habits and
conditions of life of these "plain people" that the development
of money will have to be accounted for if it is to be stated in
terms of cause and effect.

    The few scattered passages already cited may serve to
illustrate how Adam Smith's animistic or teleological bent shapes
the general structure of his theory and gives it consistency. The
principle of definitive formulation in Adam Smith's economic
knowledge is afforded by a putative purpose that does not at any
point enter causally into the economic life process which he
seeks to know. This formative or normative purpose or end is not
freely conceived to enter as an efficient agent in the events
discussed, or to be in any way consciously present in the
process. It can scarcely be taken as an animistic agency engaged
in the process. It sanctions the course of things, and gives
legitimacy and substance to the sequence of events, so far as
this sequence may be made to square with the requirements of the
imputed end. It has therefore a ceremonial or symbolical force
only, and lends the discussion a ceremonial competency; although
with economists who have been in passable agreement with Adam
Smith as regards the legitimate end of economic life this
ceremonial consistency, or consistency de jure, has for many
purposes been accepted as the formulation of a causal continuity
in the phenomena that have been interpreted in its terms.
Elucidations of what normally ought to happen, as a matter of
ceremonial necessity, have in this way come to pass for an
account of matters of fact.
    But, as has already been pointed out, there is much more to
Adam Smith's exposition of theory than a formulation of what
ought to be. Much of the advance he achieved over his
predecessors consists in a larger and more painstaking scrutiny
of facts, and a more consistent tracing out of causal continuity
in the facts handled. No doubt, his superiority over the
Physiocrats, that characteristic of his work by virtue of which
it superseded theirs in the farther growth of economic science,
lies to some extent in his recourse to a different, more modern
ground of normality,-- a ground more in consonance with the body
of preconceptions that have had the vogue in later generations.
It is a shifting of the point of view from which the facts are
handled; but it comes in great part to a substitution of a new
body of preconceptions for the old, or a new adaptation of the
old ground of finality, rather than an elimination of all
metaphysical or animistic norms of valuation. With Adam Smith, as
with the Physiocrats, the fundamental question, the answer to
which affords the point of departure and the norm of procedure,
is a question of substantiality or economic "reality." With both,
the answer to this question is given naively, as a deliverance of
common sense. Neither is disturbed by doubts as to this
deliverance of common sense or by any need of scrutinising it. To
the Physiocrats this substantial ground of economic reality is
the nutritive process of Nature. To Adam Smith it is Labor. His
reality has the advantage of being the deliverance of the common
sense of a more modern community, and one that has maintained
itself in force more widely and in better consonance with the
facts of latter-day industry. The Physiocrats owe their
preconception of the productiveness of nature to the habits of
thought of a community in whose economic life the dominant
phenomenon was the owner of agricultural land. Adam Smith owes
his preconception in favor of labor to a community in which the
obtrusive economic feature of the immediate past was handicraft
and agriculture, with commerce as a scarcely secondary
phenomenon.
    So far as Adam Smith's economic theories are a tracing out of
the causal sequence in economic phenomena, they are worked out in
terms given by these two main directions of activity, -- human
effort directed to the shaping of the material means of life, and
human effort and discretion directed to a pecuniary gain. The
former is the great, substantial productive force: the latter is
not immediately, or proximately, productive.(17*) Adam Smith
still has too lively a sense of the nutritive purpose of the
order of nature freely to extend the concept of productiveness to
any activity that does not yield a material increase of the
creature comforts. His instinctive appreciation of the
substantial virtue of whatever effectually furthers nutrition,
even leads him into the concession that "in agriculture nature
labors along with man," although the general tenor of his
argument is that the productive force with which the economist
always has to count is human labor. This recognised
substantiality of labor as productive is, as has already been
remarked, accountable for his effort to reduce to terms of
productive labor such a category of distribution as exchange
value.
    With but slight qualification, it will hold that, in the
causal sequence which Adam Smith traces out in his economic
theories proper (contained in the first three books of the Wealth
of Nations), the causally efficient factor is conceived to be
human nature in these two relations, -- of productive efficiency
and pecuniary gain through exchange. Pecuniary gain -- gain in
the material means of life through barter -- furnishes the motive
force to the economic activity of the individual; although
productive efficiency is the legitimate, normal end of the
community's economic life. To such an extent does this concept of
man's seeking his ends through "truck, barter, and exchange"
pervade Adam Smith's treatment of economic processes that he even
states production in its terms, and says that,, labor was the
first price, the original purchase-money, that was paid for all
things."(18*) The human nature engaged in this pecuniary traffic
is conceived in somewhat hedonistic terms, and the motives and
movements of men are normalised to fit the requirements of a
hedonistically conceived order of nature. Men are very much alike
in their native aptitudes and propensities;(19*) and, so far as
economic theory need take account of these aptitudes and
propensities, they are aptitudes for the production of the
"necessaries and conveniences of life," and propensities to
secure as great a share of these creature comforts as may be.
    Adam Smith's conception of normal human nature -- that is to
say, the human factor which enters causally in the process which
economic theory discusses -- comes, on the whole, to this: Men
exert their force and skill in a mechanical process of
production, and their pecuniary sagacity in a competitive process
of distribution, with a view to individual gain in the material
means of life. These material means are sought in order to the
satisfaction of men's natural wants through their consumption. It
is true, much else enters into men's endeavors in the struggle
for wealth, as Adam Smith points out; but this consumption
comprises the legitimate range of incentives, and a theory which
concerns itself with the natural course of things need take but
incidental account of what does not come legitimately in the
natural course. In point of fact, there are appreciable "actual,"
though scarcely "real," departures from this rule. They are
spurious and insubstantial departures, and do not properly come
within the purview of the stricter theory. And, since human
nature is strikingly uniform, in Adam Smith's apprehension, both
the efforts put forth and the consumptive effect accomplished may
be put in quantitative terms and treated algebraically, with the
result that the entire range of phenomena comprised under the
head of consumption need be but incidentally considered; and the
theory of production and distribution is complete when the goods
or the values have been traced to their disappearance in the
hands of their ultimate owners. The reflex effect of consumption
upon production and distribution is, on the whole, quantitative
only.
    Adam Smith's preconception of a normal teleological order of
procedure in the natural course, therefore, affects not only
those features of theory where he is avowedly concerned with
building up a normal scheme of the economic process. Through his
normalising the chief causal factor engaged in the process, it
affects also his arguments from cause to effect.(20*) What makes
this latter feature worth particular attention is the fact that
his successors carried this normalisation farther, and employed
it with less frequent reference to the mitigating exceptions
which Adam Smith notices by the way.
    The reason for that farther and more consistent normalisation
of human nature which gives us the "economic man" at the hands of
Adam Smith's successors lies, in great part, in the utilitarian
philosophy that entered in force and in consummate form at about
the turning of the century. Some credit in the work of
normalisation is due also to the farther supersession of
handicraft by the "capitalistic" industry that came in at the
same time and in pretty close relation with the utilitarian
views.

    After Adam Smith's day, economics fell into profane hands.
Apart from Malthus, who, of all the greater economists, stands
nearest to Adam Smith on such metaphysical heads as have an
immediate bearing upon the premises of economic science, the next
generation do not approach their subject from the point of view
of a divinely instituted, order; nor do they discuss human
interests with that gently optimistic spirit of submission that
belongs to the economist who goes to his work with the fear of
God before his eyes. Even with Malthus the recourse to the
divinely sanctioned order of nature is somewhat sparing and
temperate. But it is significant for the later course of economic
theory that, while Malthus may well be accounted the truest
continuer of Adam Smith, it was the undevout utilitarians that
became the spokesmen of the science after Adam Smith's time.
    There is no wide breach between Adam Smith and the
utilitarians, either in details of doctrine or in the concrete
conclusions arrived at as regards questions of policy. On these
heads Adam Smith might well be classed as a moderate utilitarian,
particularly so far as regards his economic work. Malthus has
still more of a utilitarian air, -- so much so, indeed, that he
is not infrequently spoken of as a utilitarian. This view,
convincingly set forth by Mr. Bonar,(21*) is no doubt well borne
out by a detailed scrutiny of Malthus's economic doctrines. His
humanitarian bias is evident throughout, and his weakness for
considerations of expediency is the great blemish of his
scientific work. But, for all that, in order to an appreciation
of the change that came over classical economics with the rise of
Benthamism, it is necessary to note that the agreement in this
matter between Adam Smith and the disciples of Bentham, and less
decidedly that between Malthus and the latter, is a coincidence
of conclusions rather than an identity of preconceptions.(22*)
    With Adam Smith the ultimate ground of economic reality is
the design of God, the teleological order; and his utilitarian
generalisations, as well as the hedonistic character of his
economic man, are but methods of the working out of this natural
order, not the substantial and self-legitimating ground. Shifty
as Malthus's metaphysics are, much the same is to be said for
him.(23*) Of the utilitarians proper the converse is true,
although here, again, there is by no means utter consistency The
substantial economic ground is pleasure and pain: the
teleological order (even the design of God, where that is
admitted) is the method of its working-out.
    It may be unnecessary here to go into the farther
implications, psychological and ethical, which this preconception
of the utilitarians involves. And even this much may seem a
taking of excessive pains with a distinction that marks no
tangible difference. But a reading of the classical doctrines,
with something of this metaphysics of political economy in mind,
will show how, and in great part why, the later economists of the
classical line diverged from Adam Smith's tenets in the early
years of the century, until it has been necessary to interpret
Adam Smith somewhat shrewdly in order to save him from heresy.
    The post-Bentham economics is substantially a theory of
value. This is altogether the dominant feature of the body of
doctrines; the rest follows from, or is adapted to, this central
discipline. The doctrine of value is of very great importance
also in Adam Smith; but Adam Smith's economics is a theory of the
production and apportionment of the material, means of life.(24*)
With Adam Smith, value is discussed from the point of view of
production. With the utilitarians, production is discussed from
the point of view of value. The former makes value an outcome of
the process of production: the latter make production the outcome
of a valuation process.
    The point of departure with Adam Smith is the "productive
power of labor." (25*) With Ricardo it is a pecuniary problem
concerned in the distribution of ownership;(26*) but the
classical writers are followers of Adam Smith, and improve upon
and correct the results arrived at by him, and the difference of
point of view, therefore, becomes evident in their divergence
from him, and the different distribution of emphasis, rather than
in a new and antagonistic departure.
    The reason for this shifting of the center of gravity from
production to valuation lies, proximately, in Bentham's revision
of the "principles " of morals. Bentham's philosophical position
is, of course, not a self-explanatory phenomenon, nor does the
effect of Benthamism extend only to those who are avowed
followers of Bentham; for Bentham is the exponent of a cultural
change that affects the habits of thought of the entire
community. The immediate point of Bentham's work, as affecting
the habits of thought of the educated community, is the
substitution of hedonism (utility) in place of achievement of
purpose, as a ground of legitimacy and a guide in the
normalisation of knowledge. Its effect is most patent in
speculations on morals, where it inculcates determinism. Its
close connection with determinism in ethics points the way to
what may be expected of its working in economics. In both cases
the result is that human action is construed in terms of the
causal forces of the environment, the human agent being, at the
best, taken as a mechanism of commutation, through the workings
of which the sensuous effects wrought by the impinging forces of
the environment are, by an enforced process of valuation,
transmuted without quantitative discrepancy into moral or
economic conduct, as the case may be. In ethics and economics
alike the subject-matter of the theory is this valuation process
that expresses itself in conduct, resulting, in the case of
economic conduct, in the pursuit of the greatest gain or least
sacrifice.
    Metaphysically or cosmologically considered, the human nature
into the motions of which hedonistic ethics and economics inquire
is an intermediate term in a causal sequence, of which the
initial and the terminal members are sensuous impressions and the
details of conduct. This intermediate term conveys the sensuous
impulse without loss of force to its eventuation in conduct. For
the purpose of the valuation process through which the impulse is
so conveyed, human nature may, therefore, be accepted as uniform;
and the theory of the valuation process may be formulated
quantitatively, in terms of the material forces affecting the
human sensory and of their equivalents in the resulting activity.
In the language of economics, the theory of value may be stated
in terms of the consumable goods that afford the incentive to
effort and the expenditure undergone in order to procure them.
Between these two there subsists a necessary equality; but the
magnitudes between which the equality subsists are hedonistic
magnitudes, not magnitudes of kinetic energy nor of vital force,
for the terms handled are sensuous terms. It is true, since human
nature is substantially uniform, passive, and unalterable in
respect of men's capacity for sensuous affection, there may also
be presumed to subsist a substantial equality between the
psychological effect to be wrought by the consumption of goods,
on the one side, and the resulting expenditure of kinetic or
vital force, on the other side; but such an equality is, after
all, of the nature of a coincidence, although there should be a
strong presumption in favor of its prevailing on an average and
in the common run of cases. Hedonism, however, does not postulate
uniformity between men except in the respect of sensuous cause
and effect.
    The theory of value which hedonism gives is, therefore, a
theory of cost in terms of discomfort. By virtue of the
hedonistic equilibrium reached through the valuation process, the
sacrifice or expenditure of sensuous reality involved in
acquisition is the equivalent of the sensuous gain secured. An
alternative statement might perhaps be made, to the effect that
the measure of the value of goods is not the sacrifice or
discomfort undergone, but the sensuous gain that accrues from the
acquisition of the goods; but this is plainly only an alternative
statement, and there are special reasons in the economic life of
the time why the statement in terms of cost, rather than in terms
of "utility," should commend itself to the earlier classical
economists.
    On comparing the utilitarian doctrine of value with earlier
theories, then, the case stands somewhat as follows. The
Physiocrats and Adam Smith contemplate value as a measure of the
productive force that realises itself in the valuable article.
With the Physiocrats this productive force is the "anabolism " of
Nature (to resort to a physiological term): with Adam Smith it is
chiefly human labor directed to heightening the serviceability of
the materials with which it is occupied. Production causes value
in either case. The post-Bentham economics contemplates value as
a measure of, or as measured by the irksomeness of the effort
involved in procuring the valuable goods. As Mr. E. C. K. Gonner
has admirably pointed out,(27*) Ricardo -- and the like holds
true of classical economics generally -- makes cost the
foundation of value, not its cause. This resting of value on cost
takes place through a valuation. Any one who will read Adam
Smith's theoretical exposition to as good purpose as Mr. Gonner
has read Ricardo will scarcely fail to find that the converse is
true in Adam Smith's case. But the causal relation of cost to
value holds only as regards "natural" or "real" value in Adam
Smith's doctrine. As regards market price, Adam Smith's theory
does not differ greatly from that of Ricardo on this head. He
does not overlook the valuation process by which market price is
adjusted and the course of investment is guided, and his
discussion of this process runs in terms that should be
acceptable to any hedonist.

    The shifting of the point of view that comes into economics
with the acceptance of utilitarian ethics and its correlate, the
associationist psychology, is in great part a shifting to the
ground of causal sequence as contrasted with that of
serviceability to a preconceived end. This is indicated even by
the main fact already cited, -- that the utilitarian economists
make exchange value the central feature of their theories, rather
than the conduciveness of industry to the community's material
welfare. Hedonistic exchange value is the outcome of a valuation
process enforced by the apprehended pleasure-giving capacities of
the items valued. And in the utilitarian theories of production,
arrived at from the standpoint so given by exchange value, the
conduciveness to welfare is not the objective point of the
argument. This objective point is rather the bearing of
productive enterprise upon the individual fortunes of the agents
engaged, or upon the fortunes of the several distinguishable
classes of beneficiaries comprised in the industrial community;
for the great immediate bearing of exchange values upon the life
of the collectivity is their bearing upon the distribution of
wealth. Value is a category of distribution. The result is that,
as is well shown by Mr. Cannan's discussion,(28*) the theories of
production offered by the classical economists have been sensibly
scant, and have been carried out with a constant view to the
doctrines on distribution. An incidental but telling
demonstration of the same facts is given by Professor
Bucher;(29*) and in illustration may be cited Torrens's Essay On
the Production of Wealth, which is to a good extent occupied with
discussions of value and distribution. The classical theories of
production have been theories of the production of "wealth"; and
"wealth," in classical usage, consists of material things having
exchange value. During the vogue of the classical economics the
accepted characteristic by which "wealth" has been defined has
been its amenability to ownership. Neither in Adam Smith nor in
the Physiocrats is this amenability to ownership made so much of,
nor is it in a similar degree accepted as a definite mark of the
subject-matter of the science.
    As their hedonistic preconception would require, then, it is
to the pecuniary side of life that the classical economists give
their most serious attention, and it is the pecuniary bearing of
any given phenomenon or of any institution that commonly shapes
the issue of the argument. The causal sequence about which the
discussion centers is a process of pecuniary valuation. It runs
on distribution, ownership, acquisition, gain, investment,
exchange.(30*) In this way the doctrines on production come to
take a pecuniary coloring; as is seen in a less degree also in
Adam Smith, and even in the Physiocrats, although these earlier
economists very rarely, if ever, lose touch with the concept of
generic serviceability as the characteristic feature of
production. The tradition derived from Adam Smith, which made
productivity and serviceability the substantial features of
economic life, was not abruptly put aside by his successors,
though the emphasis was differently distributed by them in
following out the line of investigation to which the tradition
pointed the way. In the classical economics the ideas of
production and of acquisition are not commonly held apart, and
very much of what passes for a theory of production is occupied
with phenomena of investment and acquisition. Torrens's Essay is
a case in point, though by no means an extreme case.
    This is as it should be; for to the consistent hedonist the
sole motive force concerned in the industrial process is the
self-regarding motive of pecuniary gain, and industrial activity
is but an intermediate term between the expenditure or discomfort
undergone and the pecuniary gain sought. Whether the end and
outcome is an invidious gain for the individual (in contrast with
or at the cost of his neighbors), or an enhancement of the
facility of human life on the whole, is altogether a by-question
in any discussion of the range of incentives by which men are
prompted to their work or the direction which their efforts take.
The serviceability of the given line of activity, for the life
purposes of the community or for one's neighbors, "is not of the
essence of this contract." These features of serviceability come
into the account chiefly as affecting the vendibility of what the
given individual has to offer in seeking gain through a
bargain.(31*)
    In hedonistic theory the substantial end of economic life is
individual, gain, and for this purpose production and acquisition
may be taken as fairly coincident, if not identical. Moreover,
society, in the utilitarian philosophy, is the algebraic sum of
the individuals; and the interest of the society is the sum of
the interests of the individuals. It follows by easy consequence,
whether strictly true or not, that the sum of individual gains is
the gain of the society, and that, in serving his own interest in
the way of acquisition, the individual serves the collective
interest of the community. Productivity or serviceability is,
therefore, to be presumed of any occupation or enterprise that
looks to a pecuniary gain; and so, by a roundabout path, we get
back to the ancient conclusion of Adam Smith, that the
remuneration of classes or persons engaged in industry coincides
with their productive contribution to the output of services and
consumable goods.
    A felicitous illustration of the working of this hedonistic
norm in classical economic doctrine is afforded by the theory of
the wages of superintendence, -- an element in distribution which
is not much more than suggested in Adam Smith, but which receives
ampler and more painstaking attention as the classical body of
doctrines reaches a fuller development. The "wages of
superintendence" are the gains due to pecuniary management. They
are the gains that come to the director of the,, business," --
not those that go to the director of the mechanical process or to
the foreman of the shop. The latter are wages simply. This
distinction is not altogether clear in the earlier writers, but
it is clearly enough contained in the fuller development of the
theory.
    The undertaker's work is the management of investment. It is
altogether of a pecuniary character, and its proximate aim is
"the main chance." If it leads, indirectly, to an enhancement of
serviceability or a heightened aggregate output of consumable
goods, that is a fortuitous circumstance incident to that
heightened vendibility on which the investor's gain depends. Yet
the classical doctrine says frankly that the wages of
superintendence are the remuneration of superior
productivity,(32*) and the classical theory of production is in
good part a doctrine of investment in which the identity of
production and pecuniary gain is taken for granted.
    The substitution of investment in the place of industry as
the central and substantial fact in the process of production is
due not to the acceptance of hedonism simply, but rather to the
conjunction of hedonism with an economic situation of which the
investment of capital and its management for gain was the most
obvious feature. The situation which shaped the common-sense
apprehension of economic facts at the time was what has since
been called a capitalistic system, in which pecuniary enterprise
and the phenomena of the market were the dominant and tone-giving
facts. But this economic situation was also the chief ground for
the vogue of hedonism in economics; so that hedonistic economics
may be taken as an interpretation of human nature in terms of the
market-place. The market and the "business world," to which the
business man in his pursuit of gain was required to adapt his
motives, had by this time grown so large that the course of
business events was beyond the control of any one person; and at
the same time those far-reaching organisations of invested wealth
which have latterly come to prevail and to coerce the market were
not then in the foreground. The course of market events took its
passionless way without traceable relation or deference to any
man's convenience and without traceable guidance towards an
ulterior end. Man's part in this pecuniary world was to respond
with alacrity to the situation, and so adapt his vendible effects
to the shifting demand as to realise something in the outcome.
What he gained in his traffic was gained without loss to those
with whom he dealt, for they paid no more than the goods were
worth to them. One man's gain need not be another's loss; and, if
it is not, then it is net gain to the community.
    Among the striking remoter effects of the hedonistic
preconception, and its working out in terms of pecuniary gain, is
the classical failure to discriminate between capital as
investment and capital as industrial appliances. This is, of
course, closely related to the point already spoken of. The
appliances of industry further the production of goods, therefore
capital (invested wealth) is productive; and the rate of its
average remuneration marks the degree of its productiveness.(33*)
The most obvious fact limiting the pecuniary gain secured by
means of invested wealth is the sum invested. Therefore, capital
limits the productiveness of industry; and the chief and
indispensable condition to an advance in material well-being is
the accumulation of invested wealth. In discussing the conditions
of industrial improvement, it is usual to assume that "the state
of the arts remains unchanged," which is, for all purposes but
that of a doctrine of profits per cent., an exclusion of the main
fact. Investments may, further, be transferred from one
enterprise to another. Therefore, and in that degree, the means
of production are "mobile."

    Under the hands of the great utilitarian writers, therefore,
political economy is developed into a science of wealth, taking
that term in the pecuniary sense, as things amenable to
ownership. The course of things in economic life is treated as a
sequence of pecuniary events, and economic theory becomes a
theory of what should happen in that consummate situation where
the permutation of pecuniary magnitudes takes place without
disturbance and without retardation. In this consummate situation
the pecuniary motive has its perfect work, and guides all the
acts of economic man in a guileless, colorless, unswerving quest
of the greatest gain at the least sacrifice. Of course, this
perfect competitive system, with its untainted "economic man,"is
a feat of scientific imagination, and is not intended as a
competent expression of fact. It is an expedient of abstract
reasoning; and its avowed competency extends only to the abstract
principles, the fundamental laws of the science, which hold only
so far as the abstraction holds. But, as happens in such cases,
having once been accepted and assimilated as real, though perhaps
not as actual, it becomes an effective constituent in the
inquirer's habits of thought, and goes to shape his knowledge of
facts. It comes to serve as a norm of substantiality or
legitimacy; and facts in some degree fall under its constraint,
as is exemplified by many allegations regarding the "tendency" of
things.
    To this consummation, which Senior speaks of as "the natural
state of man,"(34*) human development tends by force of the
hedonistic character of human nature; and in terms of its
approximation to this natural state, therefore, the immature
actual situation had best be stated. The pure theory, the
"hypothetical science" of Cairnes, "traces the phenomena of the
production and distribution of wealth up to their causes, in the
principles of human nature and the laws and events -- physical,
political, and social -- of the external world."(35*) But since
the principles of human nature that give the outcome in men's
economic conduct, so far as it touches the production and
distribution of wealth, are but the simple and constant sequence
of hedonistic cause and effect, the element of human nature may
fairly be eliminated from the problem, with great gain in
simplicity and expedition. Human nature being eliminated, as
being a constant intermediate term, and all institutional
features of the situation being also eliminated (as being similar
constants under that natural or consummate pecuniary regime with
which the pure theory is concerned), the laws of the phenomena of
wealth may be formulated in terms of the remaining factors. These
factors are the vendible items that men handle in these processes
of production and distribution and economic laws come, therefore,
to be expressions of the algebraic relations subsisting between
the various elements of wealth and investment, -- capital, labor,
land, supply and demand of one and the other, profits, interest,
wages. Even such items as credit and population become
dissociated from the personal factor, and figure in the
computation as elemental factors acting and reacting though a
permutation of values over the heads of the good people whose
welfare they are working out.

    To sum up: the classical economics, having primarily to do
with the pecuniary side of life, is a theory of a process of
valuation. But since the human nature at whose hands and for
whose behoof the valuation takes place is simple and constant in
its reaction to pecuniary stimulus, and since no other feature of
human nature is legitimately present in economic phenomena than
this reaction to pecuniary stimulus, the valuer concerned in the
matter is to be overlooked or eliminated; and the theory of the
valuation process then becomes a theory of the pecuniary
interaction of the facts valued. It is a theory of valuation with
the element of valuation left out,-- a theory of life stated in
terms of the normal paraphernalia of life.
    In the preconceptions with which classical economics set out
were comprised the remnants of natural rights and of the order of
nature, infused with that peculiarly mechanical natural theology
that made its way into popular vogue on British ground during the
eighteenth century and was reduced to a neutral tone by the
British penchant for the commonplace -- stronger at this time
than at any earlier period. The reason for this growing penchant
for the commonplace, for the explanation of things in causal
terms, lies partly in the growing resort to mechanical processes
and mechanical prime movers in industry, partly in the
(consequent) continued decline of the aristocracy and the
priesthood, and partly in the growing density of population and
the consequent greater specialisation and wider organisation of
trade and business. The spread of the discipline of the natural
sciences, largely incident to the mechanical industry, counts in
the same direction; and obscurer factors in modern culture may
have had their share.
    The animistic preconception was not lost, but it lost tone;
and it partly fell into abeyance, particularly so far as regards
its avowal. It is visible chiefly in the unavowed readiness of
the classical writers to accept as imminent and definitive any
possible outcome which the writer's habit or temperament inclined
him to accept as right and good. Hence the visible inclination of
classical economists to a doctrine of the harmony of interests,
and their somewhat uncircumspect readiness to state their
generalisations in terms of what ought to happen according to the
ideal requirements of that consummate Geldwirtschaft to which men
"are impelled by the provisions of nature."(36*) By virtue of
their hedonistic preconceptions, their habituation to the ways of
a pecuniary culture, and their unavowed animistic faith that
nature is in the right, the classical economists knew that the
consummation to which, in the nature of things, all things tend,
is the frictionless and beneficent competitive system. This
competitive ideal, therefore, affords the normal, and conformity
to its requirements affords the test of absolute economic truth.
The standpoint so gained selectively guides the attention of the
classical writers in their observation and apprehension of facts,
and they come to see evidence of conformity or approach to the
normal in the most unlikely places. Their observation is, in
great part, interpretative, as observation commonly is. What is
peculiar to the classical economists in this respect is their
particular norm of procedure in the work of interpretation. And,
by virtue of having achieved a standpoint of absolute economic
normality, they became a "deductive" school, so called, in spite
of the patent fact that they were pretty consistently employed
with an inquiry into the causal sequence of economic phenomena.
    The generalisation of observed facts becomes a normalisation
of them, a statement of the phenomena in terms of their
coincidence with, or divergence from, that normal tendency that
makes for the actualisation of the absolute economic reality.
This absolute or definitive ground of economic legitimacy lies
beyond the causal sequence in which the observed phenomena are
conceived to be interlinked. It is related to the concrete facts
neither as cause nor as effect in any such way that the causal
relation may be traced in a concrete instance. It has little
causally to do either with the "mental" or with the "physical"
data with which the classical economist is avowedly employed. Its
relation to the process under discussion is that of an extraneous
-- that is to say, a ceremonial -- legitimation. The body of
knowledge gained by its help and under its guidance is,
therefore, a taxonomic science.
    So, by way of a concluding illustration, it may be pointed
out that money, for instance, is normalised in terms of the
legitimate economic tendency. It becomes a measure of value and a
medium of exchange. It has become primarily an instrument of
pecuniary commutation, instead of being, as under the earlier
normalisation of Adam Smith, primarily a great wheel of
circulation for the diffusion of consumable goods. The terms in
which the laws of money, as of the other phenomena of pecuniary
life, are formulated, are terms which connote its normal function
in the life history of objective values as they live and move and
have their being in the consummate pecuniary situation of the
"natural" state. To a similar work of normalisation we owe those
creatures of the myth-maker, the quantity theory and the
wages-fund.

NOTES:

1. Bonar, Philosophy and Political Economy, pp. 177, 178.

2. "Every individual is continually exerting himself to find out
the most advantageous employment for whatever capital he can
command. It is his own advantage, and not that of the society,
which he has in view. But the study of his own advantage
naturally, or rather necessarily, leads him to prefer that
employment which is most advantageous to the society... By
directing that industry in such a manner as its produce may be of
the greatest value, he intends only his own gain; and he is in
this, as in many other cases, led by an invisible hand to promote
an end which was no part of his intention. Nor is it always the
worse for society that it was no part of it. By pursuing his own
interest he frequently promotes that of the society more
effectually than when he really intends to promote it." Wealth of
Nations, Book IV, chap. ii.

3. The discrepancy between the actual, causally determined
situation and the divinely intended consummation is the
metaphysical ground of all that inculcation of morality and
enlightened policy that makes up so large a part of Adam Smith's
work. The like, of course, holds true for all moralists and
reformers who proceed on the assumption of a providential order.

4. "In the political body, however, the wisdom of nature has
fortunately made ample provision for remedying many of the bad
effects of the folly and injustice of man; in the same manner as
it has done in the natural body, for remedying those of his sloth
and intemperance." Wealth of Nations, Book IV, chap. ix.

5. E.g., "the real measure of the exchangeable value of all
commodities." Wealth of Nations, Book I, chap. v, and repeatedly
in the like connection.

6. E.g., Book I, chap. vii: "When the price of any commodity is
neither more nor less than what is sufficient to pay the rent of
the land, the wages of the labor, and the profits of the stock
employed in raising, preparing, and bringing it to market,
according to their natural rates, the commodity is then sold for
what may be called its natural price." "The actual price at which
any commodity is commonly sold is called its market price. It may
be either above or below or exactly the same with its natural
price."

7. Lectures of Adam Smith (Ed. Cannan, 1896). p. 169.

8. "This division of labor, from which so many advantages are
derived, is not originally the effect of any human wisdom, which
foresees and intends that general opulence to which it gives
occasion. It is the necessary though very slow and gradual
consequence of a certain propensity in human nature which has in
view no such extensive utility, -- the propensity to truck,
barter, and exchange one thing for another.  Whether this
propensity be one of those original principles in human nature of
which no further account can be given, or whether, as seems more
probable, it be the necessary consequence of the faculties of
reason and speech, it belongs not to our present subject to
inquire." Wealth of Nations, Book I, chap. ii.

9. Wealth of Nations, Book I, chaps. v.-vii.

10. Wealth of Nations, Book I, chap. v.

11. As e.g., the entire discussion of the determination of Wages,
Profits and Rent, in Book I, chaps. viii.-xi.

12. "There is in every society or neighborhood an ordinary or
average rate both of wages and profit in every different
employment of labor and stock. The rate is naturally regulated...
partly by the general circumstance of the society... There is,
likewise, in every socity or neighborhood an ordinary or average
rate of rent, which is regulated, too... These ordinary or
average rates may be called the natural rates of wages, profit,
and rent, at the time and place in which they commonly prevail.
When the price of any commodity is neither more nor less than
what is sufficient to pay the rent of the land, the wages of the
labor, and the profits of the stock employed in raising,
preparing, and bringing it to market, according to their natural
rates, the commodity is then sold for what may be called its
natural price." Wealth of Nations, Book I, chap. vii.

13. "Such commodities may continue for whole centuries together
to be sold at this high price; and that part of it which resolves
itself into the rent of land is, in this case, the part which is
generally paid above its natural rate." Book I, chap. vii.

14. Wealth of Nations, Book I, chap. vi; also chap. viii.

15. For an instance of how these early phases of industrial
development appear, when not seen in the light of Adam Smith's
preconception, see, among others, Bucher, Entstehung der
Volkswirtschagt.

16. Book I, chap. iv.

17. See Wealth of Nations, Book II, chap. v, "Of the Different
Employment of Capitals."

18. Wealth of Nations, Book I, chap. v. See also the plea for
free trade, Book IV, chap. ii: "But the annual revenue of every
society is always precisely equal to the exchangeable value of
the whole annual produce of its industry, or, rather, is
precisely the same thing with that exchangeable value."

19. "The difference of natural talents in different men is in
reality much less than we are aware of." Wealth of Nations, Book
I, chap. ii.

20. "Mit diesen philosophischen Ueberzeugungen tritt nun Adam
Smith an die Welf der Engahrung heran, and es ergiebt sich ihm
die Richtigkeit der Principien. Der Reiz der Smiths'schen
Schriften beruht zum grossen Teile darauf, dass Smith die
Principien in so innige Verbindung mit dem Thatsachlichen
gebracht. Hie und da werden dann auch die Principien, was durch
diese Verbindung veranlasst wird, an ihren Spitzen etwas
algeschliffen, ihre allruscharfe Auspragung dadurch vermieden.
Nichtsdestoweniger aber bleiben sie stets die leitenden
Grundgedanken." Richard Zeyss, Adam Smith und der Eigennutz
(Tubingen, 1889), p. 110.

21. See, e.g., Malthus and his Work, especially Book III, as also
the chapter on Malthus in Philosophy and Political Economy, Book
III, Modern Philosophy: Utilitarian Economics, chap. i,
"Malthus."

22. Ricardo is here taken as a utilitarian of the Benthamite
color, although he cannot be classed as a disciple of Bentham.
His hedonism is but the uncritically accepted metaphysics
comprised in the common sense of his time, and his substantial
coincidence with Bentham goes to show how well diffused the
hedonist preconception was at the time.

23. Cf. Bonar, Malthus and his Work, pp. 323-336.

24. His work is an inquiry into "the Nature and Causes of the
Wealth of Nations."

25. "The annual labor of every nation is the fund which
originally supplies it with all the necessaries and conveniences
of life which it annually consumes, and which consist always
either in the immediate produce of that labor or in what is
purchases with that produce from other nations." Wealth of
Nations, "Introduction and Plan," opening paragraph.

26. "The produce of the earth -- all that is derived from its
surface by the united application of labor, machinery and capital
-- is divided among three classes of the community... To
determine the laws which regulate this distribution is the
principal problem of political economy." Political Economy,
Preface.

27. In the introductory essay to his edition of Ricardo's
Political Economy. See, e.g., paragraphs 9 and 24.

28. Theories of Production and Distribution, 1776-1848.

29. Entstehung der Volkswirtschaft (second edition). Cf.
especially chaps. ii, iii, vi, and vii.

30. "Even if we put aside all questions which involve a
consideration of the effects of industrial institutions in
modifying the habits and character of the classes of the
community... that enough still remains to constitute a separate
science, the mere enumeration of the chief terms of economics --
wealth, value, exchange, credit, money, capital, and commodity --
will suffice to show." Shirres, Analysis of the Ideas of
Economics (London, 1893), pp. 8 and 9.

31. "If a commodity were in no way useful... it would be
destitute of exchangeable value;... (but), possessing utility,
commodities derive their exchangeable value from two sources,"
etc. Ricardo, Political Economy, chap. i, sect I.

32. Cf., for instance, Senior, Political Economy (London, 1872),
particularly pp. 88, 89, and 130-135, where the wages of
superintendence are, somewhat reluctantly, classed under profits;
and the work of superintendence is thereupon conceived as being,
immediately or remotely, an exercise of "abstinence" and a
productive work. The illustration of the bill-broker is
particularly apt. The like view of the wages of superintendence
in an article of theory with more than one of the later
descendents of the classical line.

33. Cf. Bohm-Bawerk, Capital and Interest, Books II and IV, as
well as the Introduction and chaps. iv and v of Book I.
Bohm-Bawerk's discussion bears less immediately on the present
point than the similarity of the terms employed would suggest.

34. Political Economy, p. 87.

35. Character and Logical Method of Political Economy (New York,
1875), p. 71. Cairnes may not be altogether representative of the
high tide of classicism, but his characterisation of the science
is none the less to the point.

36. Senior, Political Economy, p. 87.