Morgenstern The Limits of Economics
.pdfTHE LIMITS OF ECONOMICS
THE LIMITS OF ECONOMICS
BY
OSKAR MORGENSTERN
Professor at the University of Vienna
Director of the Austrian Institute for Trade Cycle Research
TRANSLATED BY
VERA SMITH, B.Sc.(Econ.), Ph.D.
LONDON |
EDINBURGH |
GLASGOW |
WILLIAM HODGE AND COMPANY, LIMITED
1937
MADE AND PRINTED IN GREAT BRITAIN
BY
WILLIAM HODGE AND COMPANY. LIMITED
LONDON |
ImlNBURGH |
GLASGOW |
FOREWORD
The prevailing lack of understanding as to the significance of economics fqr practical economic life, and its usefulness for purposes of economic policy, makes it apparent that there are many unsettled problems connected with theoretical analysis and its application to concrete circumstances. The study which follows is intended for the general reader as well as the specialist, and it seemed therefore appropriate to refrain from any detailed discussion of the underlying theoretical apparatus since this would have introduced unnecessary complications into the exposition of the main theme. rrhe really essential references are given in an appendix.
The book will have served its purpose if it succeeds in making clear that theoretical economics is neutral as between all the possible circumstances to which it luay be applied. Economics can never, and should never, be made dependent on any particular ideology or attitude towards economic policy. Those who are concerned for the future of research in the sphere of economic science are becoming increasingly aware of the need for the clear recognition of this point. A further point which is emphasized in the subsequent pages is that although scientific formulations relating to economic policy are admittedly subject to limitations, there is little chance of achieving any sort of rationality in economic policy without the aid of economics: the obstacles that scientific analysis is unable to overcome can be dealt with no more effectively by any other conceivable means.
My exposition may seem to many to be unnecessarily sceptical. It will probably be argued that I have subjected economic science to too narrow limitations,
vi FOREWORD
and, besides, that economic policy is, even so, conducted on a higher intellectual level than I am prepared to admit. This would however be to miss the point of my remarks. One of the essential preliminaries to progress is to know exactly what are the questions at issue. If this is true in general it is all the more true that absolute precision of thought is necessary just at the present time, when we are forced to be the unhappy witnesses of an almost unprecedented decay of intellectual life in so many countries. Only if we know exactly where we stand, and have firmly entrenched our positions, can we hope to gain new ground. There are many problems which only give the appearance of having been solved, and that is why this book treats also of questions which many may consider to have been already settled.
I would point out further that my observations on economic policy are founded on very close asso.. ciations with it. In the course of the last few years I have had occasion to deal with a wide range of practical questions, and the observations and comments which I have formulated in the following chapters are the outcome of these contacts.
As compared with the German edition of this book, which appeared in 1934, the present edition has been revised to a considerable extent. It is not therefore simply a translation. I have to acknowledge my thanks to Dr. Vera Smith for the trouble she has
taken |
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the careful |
rendering of the original text. |
I t is |
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merit if |
the translation conveys to the |
English reader some ideas and arguments with which he may not so far have been familiar.
OSKAR MORGENSTERN.
January, 1937.
C()NTENTS
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PAGE |
Chapter 1. |
Introduction, |
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1 |
II. |
The Problem |
of Application, - |
6 |
III. |
Rigid Systems of Economic Policy, |
16 |
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IV. |
The Distribution of Effects of Economic |
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Policy, |
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29 |
V. |
The Mutual Interdependencies of Measures |
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of Economic Policy, |
47 |
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VI. |
The Limits set by Power, |
64 |
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VII. |
Inherent Difficulties of Economic Policy, |
73 |
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VIII. |
rrhe Special Features of Trade-Cycle Policy, |
88 |
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IX. |
The Dangers of Economics, |
113 |
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X. |
The State and Economic Policy, |
141 |
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Appendix, |
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153 |
CHAPTER I
INTRODUCTION
Economic policy consists in all those actions and measures which aim, outside or quite independently of the economic interests of their framers, at bestowing advantages (rarely disadvantages) on a chosen group of economic subj ects or entrepreneurs, and of which the motive lies primarily in this social effect.
All those who are concerned with the introduction of proposed measures of economic policy have to consider what will be their effects. For the purposes of the subsequent analysis the question of the aims or ideals involved will be disregarded, or rather they may be assumed to be given. The appraisal of the effects depends, firstly, on a judgment as to the actual condition of the economic system already prevailing, that is, on a fairly exact knowledge of facts. It depends, secondly, on the view as to how the course of economic events will be changed as a consequence of the acts of intervention as compared with what it would have been without them. As a result of these two views taken together, the measure in question is then either actually put into effect or is dropped (in the case that its non-application appears in the circumstances to be more advantageous). The evaluation of the facts requires a wide experience which can be further extended by special investigations, especially statistical investigations. These are almost invariably necessary since the more far-reaching are the aims of ,economic policy and accordingly the more
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2 THE LIMITS OF ECONOMICS
comprehensive are the measures, the less adequate is the personal experience of an individual for thoroughly sifting the facts.
The process of estimating the effects of these measures is dependent likewise primarily on direct experience, as, for instance, where similar methods have already been applied in other circumstances. Often these experiences can be condensed into propositions of a general character, and capable of precise formulation, about the causal connexion between measures and effects. Rules drawn up in this way can be handed down from one economic politician to another and can be used to build up a groundwork of maxims for his guidance. It may be noted also that these maxims and opinions play an especially important role in the press.
The theories-as in fact they are-which originate in this way are no different from the propositions of general economic theory as regards their construction and the manner in which they are acquired, for pure theory is also, as was once aptly observed, " congealed experience." They do, however, differ from general theory by the fact that there exists between the single propositions no systematic coherence uniting the different maxims which they contain. Moreover, they do not display the same logical validity since they arise out of the mere observance of concrete facts and do not in general guarantee that the events singled out as the "effects" are the right ones and do in fact exhibit a causal connexion with the measures concerned. There is always therefore the suspicion that one and the sam·e proposition is supposed to belong sinlultaneously to different levels of abstraction, which is impossible. This explains the permanent state of