Risk, Uncertainty, and Profit - Free

Part II, Chapter IIIThe Theory of Choice and of ExchangeWe turn now from historical and critical considerations to the real work of construction. We have seen that the historic body of economic theoryrests upon the assumption of perfect competition, but that the precise character of this assumption has been partially implicit and never adequatelyformulated. We do not criticize the older economists for making abstract assumptions in order to simplify and analyze their problem, but contendthat the assumptions actually made and their implications need to be brought to the surface and emphasized. To display these implicit premises oftheoretical reasoning is, we have argued, to explain the problem of profit, the absence of which is the essential distinction between theoretical andactual economic society. This explanation will immediately take the form of a general inquiry into "Uncertainty," the presence or absence of whichwill appear as the most important underlying difference *1 between the conditions which theory is compelled to assume and those which exist infact. The present chapter and the two next following will be taken up with the attempt to define and analyze perfect competition. The argument is tobe regarded as a condensed summary of classical economic theory, with especial reference to and emphasis upon those premises andimplications which have not been adequately emphasized in the theory itself and have been liable to escape the observation of its readers. Asidefrom this special emphasis the argument will differ not a great deal from that of J. S. Mill and very little from Marshall's "Principles."Economics is a human science; its foundations are laid in the principles of human behavior, and consequently we must begin with someobservations on the psychology of human conduct which controls economic life. Economic analysis may be truly said to deal with "conduct," in theSpencerian sense, of acts adapted to ends, or of the adaptation of acts to ends, in contrast with the broader category of "behavior" in general. Itassumes that men's acts are ruled by conscious motives; that, as it is more ordinarily expressed, they are directed toward the "satisfaction ofwants." *2 At the very outset the science is thus subjected to notable restrictions, since it is only to a limited extent that our behavior, even oureconomic behavior, is of this character. Much of it is more or less impulsive and capricious. The conclusions of economic theory must in general beadmitted subject to the qualification, in so far as men's economic activities are rational or planned.This limitation is far more sweeping in its scope and import than is easily imagined. It raises the fundamental question of how far human behavior isinherently subject to scientific treatment. In his views on this point the writer is very much of an irrationalist. In this view the whole interpretation of lifeas activity directed toward securing anything considered as really wanted, is highly artificial and unreal. To be sure, this characterization seems tohold good for an individual at a given time and place, if the time is short enough. It is the way we think of ourselves as acting, not for the sake of theaction or experience itself, but in order to some ulterior object. If, however, the object is merely accidental and temporary, such "wants" are of littleservice in interpreting an economic process which must look far forward. It is the writer's belief that this view of behavior, even though it is the viewtaken by the subject himself, is superficial at best. It appears that a relatively small fraction of the activities of civilized man are devoted to thegratification of needs or desires having any foundation beyond the mere fact that an impulse exists at the moment in the mind of the subject.Most human motives tend on scrutiny to assimilate themselves to the game spirit. It is little matter, if any, what we set ourselves to do; it isimperative to have some objective in view, and we seize upon and set up for ourselves objectives more or less at random—getting an education,acquiring skill at some art, making money, or what-not. But once having set ourselves to achieve some goal it becomes an absolute value, weavingitself into and absorbing life itself. It is just as in a game where the concrete objective—capturing our opponents' pieces, carrying a ball across amark, or whatever it may be—is a matter of accident, but to achieve it is for the moment the end and aim of being. And, as in a game again, so withlife generally, the social situation furnishes much of the driving power, though again there are many who can become intensely interested insolitaire.The basis of a science of conduct must be fixed principles of action, enduring and stable motives. It is doubtful, however, whether this isfundamentally the character of human life. What men want is not so much to get things that they want as it is to have interesting experiences. Andthe fact seems to be that an important condition of our interest in things is an element of the unanticipated, of novelty, of surprise. We must bewareof the temptation to judge the nature of our conduct by the way in which we think about it. To think about it is, of course, to rationalize it, at least to"think" in the scientific sense, which has pretty well preëmpted the word. Logical thought is instrumental in character, a device for controlling andusing the environment. It is, perhaps, a vice of Western civilization that the habits of thought which condition our wonderful material achievementstend to be carried over into the sphere of our personal lives. The writer ventures to surmise that this sort of thing is approaching, if it has not alreadyreached, a climax. The fever of achievement in an external sense which now dominates our attitude toward life may be expected to give place to asaner, more epicurean view. Men will think more in terms of thought, beauty, and joy for their own sakes and less in terms of what things are goodfor, what can be done or gotten with them. *3Economics, as we have observed before, is the science of a certain form of organization of human activities. The fact of organization still furtherlimits the scope of the discussion to the rationalistic view of activity as directed to the satisfaction of wants conceived as given and permanententities. Conduct itself is necessarily forward-looking, but organized conduct is still more so. Any machinery of organization implies relatively muchtaking thought, since it requires time for its development and time for its operation. A most essential feature of economic organization as it exists isits anticipation of the wants of the consumer over a long and ever longer period of production; and this anticipation implies stability in the characterof the wants themselves.A clear view of what we are doing demands special emphasis on this character of economic theory as the science of a system of organization.Human activity might be relatively unorganized or it might be organized in many different ways. History, and especially modern history, is largely thestory of progressive organization and its changes in form. Organization is nearly synonymous with division of labor. In organized activity individualsperform different tasks, and each enjoys the fruits of the labor of others. The two fundamental problems of organization are the assignment of tasksand the apportionment of rewards. In unorganized action each person performs all the tasks by whose performance he benefits, and his reward isthe immediate, physical benefit of his own work. But when men work together some machinery must be provided to give each his special work andto determine the amount of the results of others' effort which he shall obtain and the amount of his own product which he shall give up to others.