Plausible Capitalism

2. But is not all that we might be tempted to infer from “maximum performance of an optimally selected group” invalidated by the further fact that that performance is not geared to social service—production, so we might say, for consumption—but to money-making, that it aims at maximizing profits instead of welfare?

Outside of the bourgeois stratum, this has of course always been the popular opinion. Economists have sometimes fought and sometimes espoused it.

In doing so they have contributed something that was much more valuable than were the final judgments themselves at which they arrived individually and which in most cases reflect little more than their social location, interests and sympathies or antipathies. They slowly increased our factual knowledge and analytic powers so that the answers to many questions we are able to give today are no doubt much more correct although less simple and sweeping than were those of our predecessors.

To go no further back, the so-called classical economists2 were practically of one mind. Most of them disliked many things about the social institutions of their epoch and about the way those institu tions worked. They fought the landed interest and approved of social reforms—factory legislation in particular—that were not all on the lines of laissez faire.

But they were quite convinced that within the institutional framework of capitalism, the manufacturer’s and the trader’s self-interest made for maximum performance in the interest of all. Confronted with the problem we are discussing, they would have had little hesitation in attributing the observed rate of increase in total output to relatively unfettered enterprise and the profit motive— perhaps they would have mentioned “beneficial legislation” as a condition but by this they would have meant the removal of fetters, especially the removal or reduction of protective duties during the nineteenth century.

It is exceedingly difficult, at this hour of the day, to do justice to these views. They were of course the typical views of the English bourgeois class, and bourgeois blinkers are in evidence on almost every page the classical authors wrote.

No less in evidence are blinkers of another kind: the classics reasoned in terms of a particular historical situation which they uncritically idealized and from which they uncritically generalized. Most of them, moreover, seem to have argued exclusively in terms of the English interests and problems of their time. This is the reason why, in other lands and at other times, people disliked their economics, frequently to the point of not even caring to understand it. But it will not do to dismiss their teaching on these grounds. A prejudiced man may yet be speaking the truth. Propositions developed from special cases may yet be generally valid. And the enemies and successors of the classics had and have only different but not fewer blinkers and preconceptions; they envisaged and envisage different but not less special cases.

From the standpoint of the economic analyst, the chief merit of the classics consists in their dispelling, along with many other gross errors, the naïve idea that economic activity in capitalist society, because it turns on the profit motive, must by virtue of that fact alone necessarily run counter to the interests of consumers; or, to put it differently, that moneymaking necessarily deflects producing from its social goal; or, finally, that private profits, both in themselves and through the distortion of the economic process they induce, are always a net loss to all excepting those who receive them and would therefore constitute a net gain to be reaped by socialization. If we look at the logic of these and similar propositions which no trained economist ever thought of defending, the classical refutation may well seem trivial. But as soon as we look at all the theories and slogans which, consciously or subconsciously, imply them and which are once more served up today, we shall feel more respect for that achievement. Let me add at once that the classical writers also clearly perceived, though they may have exaggerated, the role of saving and accumulation and that they linked saving to the rate of “progress” they observed in a manner that was fundamentally, if only approximately, correct. Above all, there was practical wisdom about their doctrine, a responsible long-run view and a manly tone that contrast favorably with modern hysterics.

But between realizing that hunting for a maximum of profit and striving for maximum productive performance are not necessarily incompatible, to proving that the former will necessarily—or in the immense majority of cases—imply the latter, there is a gulf much wider than the classics thought. And they never succeeded in bridging it. The modern student of their doctrines never ceases to wonder how it was possible for them to be satisfied with their arguments or to mistake these arguments for proofs; in the light of later analysis their theory was seen to be a house of cards whatever measure of truth there may have been in their vision. 3

3. This later analysis we will take in two strides—as much of it, that is, as we need in order to clarify our problem. Historically, the first will carry us into the first decade of this century, the second will cover some of the postwar developments of scientific economics. Frankly I do not know how much good this will do the non-professional reader; like every other branch of our knowledge, economics, as its analytic engine improves, moves fatally away from that happy stage in which all problems, methods and results could be made accessible to every educated person without special training. I will, however, do my best.

The first stride may be associated with two great names revered to this day by numberless disciples—so far at least as the latter do not think it bad form to express reverence for anything or anybody, which many of them obviously do—Alfred Marshall and Knut Wicksell. 4

Their theoretical structure has little in common with that of the classics— though Marshall did his best to hide the fact—but it conserves the classic proposition that in the case of perfect competition the profit interest of the producer tends to maximize production. It even supplied almost satisfactory proof. Only, in the process of being more correctly stated and proved, the proposition lost much of its content—it does emerge from the operation, to be sure, but it emerges emaciated, barely alive. 5

The analysis of the mechanism of the profit economy led not only to the discovery of exceptions to the principle that competitive industry tends to maximize output, but also to the discovery that proof of the principle itself requires assumptions which reduce it to little more than a truism.

Its practical value is however particularly impaired by the 2 following considerations:

1. The principle applies to a state of static equilibrium.

Capitalist reality is first and last a process of change. In appraising the performance of competitive enterprise, the question whether it would or would not tend to maximize production in a perfectly equilibrated stationary condition of the economic process is hence almost, though not quite, irrelevant.

2. The principle, as stated by Wicksell, is what was left of a more ambitious proposition that, though in a rarefied form, can still be found in Marshall—the theorem that competitive industry tends to produce a state of maximum satisfaction of wants.

But this theorem, even if we waive the serious objections to speaking of non-observable psychic magnitudes, is readily seen to boil down to the triviality that, whatever the data and in particular the institutional arrangements of a society may be, human action, as far as it is rational, will always try to make the best of any given situation. In fact it boils down to a definition of rational action and can hence be paralleled by analogous theorems for, say, a socialist society. But so can the principle of maximum production. Neither formulates any specific virtue of private competitive enterprise. This does not mean that such virtues do not exist. It does mean however that they are not simply inherent in the logic of competition.

Still it can be shown, within the general assumptions of the Marshall-Wicksell analysis, that firms which cannot by their own individual action exert any influence upon the price of their products or of the factors of production they employ—so that there would be no point in their weeping over the fact that any increase in production tends to decrease the former and to increase the latter—will expand their output until they reach the point at which the additional cost that must be incurred in order to produce another small increment of product (marginal cost) just equals the price they can get for that increment, i.e., that they will produce as much as they can without running into loss. And this can be shown to be as much as it is in general “socially desirable” to produce.

In more technical language, in that case prices are, from the standpoint of the individual firm, not variables but parameters; and where this is so, there exists a state of equilibrium in which all outputs are at their maximum and all factors fully employed. This case is usually referred to as perfect competition. Remembering what has been said about the selective process which operates on all firms and their managers, we might in fact conceive a very optimistic idea of the results to be expected from a highly selected group of people forced, within that pattern, by their profit motive to strain every nerve in order to maximize output and to minimize costs. In particular, it might seem at first sight that a system conforming to this pattern would display remarkable absence of some of the major sources of social waste. As a little reflection should show, this is really but another way of stating the content of the preceding sentence.