I would refer again to the discussion by J. M. Keynes, quoted in Part II.[562] Reserves have absorbed enormous quant.i.ties of gold, easily obtained as a consequence of abundant gold production, in the past fifteen years. Proportions of gold reserves to bank-credit have grown.
In the preceding period, when gold production went on less rapidly than business development, percentages of reserves were lower. Most bankers feel better with large reserves. When they can get gold, they prefer gold to other subst.i.tutes. When they cannot easily get gold, they use other subst.i.tutes, of the various kinds of paper, particularly, which have been described. Gold differs from other things, in bankers" a.s.sets, in degree, rather than in kind. Instead, therefore, of the law of the proportionality of reserves to volume of bank-credit, I venture the generalization[563] that, as gold production increases rapidly, the tendency is for the proportion of gold reserves to volume of bank-credit to rise; with diminished gold production, the tendency is for the proportion of reserves to fall, a.s.suming that the factors other than volume of gold production which make for expansion of business maintain themselves.
Increasing volume of gold tends to increase the volume of trade. But there are other causes for the increase or decrease of trade as well.
These causes, working in harmony with rapidly expanding volume of gold, lead to a very rapid growth of trade.[564] Working in the face of a drag from less rapidly growing gold supply, they strain the possibilities of bank-credit expansion. Various subst.i.tutes for gold in bank reserves are employed. Subst.i.tutes in the form of other forms of credit are employed.
Barter is resorted to increasingly. Methods of employing other things than gold in the retail trade of a country are resorted to.
"Gold-exchange" standards are devised. Countries "wait their turns " to come on the gold standard. Cooperation, not only within countries, but among countries, seeks to economize the scanty stock of the precious metal. Very large slack is thus revealed. But the expansion of business is checked, the volume of business confidence is reduced, the values of future incomes in enterprises is lowered, production is checked, and prices are reduced, (a) because the value of money rises; and (b) because the values of goods and income-bearers is reduced. The exchange side of production is hampered. Subst.i.tutes for gold, through increased activities of bankers and other agents of exchange, are costly. Greater tolls on values are taken by those who handle the mechanism of exchange.
It does make a difference whether or not the world"s gold is abundant!
But the difference is not made solely, or even mainly, in the price-level.[565]
The reserve function of money is essentially a _dynamic_ function. The reserve function is merely a phase of the bearer of options function.[566] It is the practice of quant.i.ty theorists to speak of "normal" ratios between reserves and deposits (or reserves and demand liabilities), and to speak of the "static" laws governing this relation.
This in true of Kemmerer, of Fisher, of A. P. Andrew, and, in general, of contemporary quant.i.ty theorists. Kemmerer very explicitly puts it as a matter of static theory, "If we divide the money of the country into two parts; one, that used directly in daily cash transactions, and the other, that kept in banks as reserves, it may be said that, _under perfectly static conditions_ [italics mine], the proportion of the total represented by each of these parts would be constant. Each banker would find from experience what proportion of reserve to liabilities it was advisable for him to maintain, and would order his business, as far as possible, so that his reserve would neither exceed nor fall below that most desirable proportion."[567] Kemmerer quotes the following pa.s.sage from A. P. Andrew: "In the long run, _as apart from cyclic oscillations_, the quant.i.ty of bank-credit is governed by the quant.i.ty of money."[568] Fisher"s view we have considered at length in Part II.
It is essentially the same. He is working with the statics of the problem of money and credit. These different writers differ greatly in the extent to which they would insist on the validity of their static tendency in real life. Professor Fisher, as we have seen, is exceedingly uncompromising, holding tenaciously to his principle as subject only to slight modification during transition periods. Professor Kemmerer, in the chapter from which the quotation just given is taken, gives an important realistic a.n.a.lysis of dynamic conditions and makes liberal concessions to the view that the ratio is no constant in real life.[569]
Professor Taussig, whose view was summarized at length in chapter IX, finds, in real life, so many exceptions to the doctrine of proportionality of reserves and deposits that he virtually abandons that doctrine. What I wish to insist on here, however, is that there are no static laws _possible_ in this connection. The reserve function is a dynamic function. The theory of reserves must rest in an a.n.a.lysis of friction, of transitions, of dynamic uncertainty and dynamic change. It is a part of the general theory of liquidity of bank a.s.sets, of saleability of rights, and the like. If one can find a "normal" amount of dynamic change, a "normal" amount of uncertainty, a norm for the coming of technical inventions, a normal prospect of war, a normal rate of gold production, a normal rate of growth for population, a normal amount of Jew-baiting in Russia, with a norm for migration, and if one can hold these norms, and a mult.i.tude of similar norms, in fixed relation to one another, one might have justification for speaking of a "normal ratio" of bank reserves to bank demand liabilities!
Apart from dynamic changes, from frictional elements which create uncertainties, in general, apart from uncertainty and irregularity and lack of "normality," there would be no occasion for bank reserves at all! To the extent that static conditions are realized, bank cash reserves may be, and _are_, dispensed with. It is well known that England gets along with surprisingly little gold. The total stock in the country has been smaller than the gold reserve of the Banque de France, and much of the gold in England was in use among the people, since small paper money (before the War) was not in use in England. The gold reserve of the Bank of England has been usually only a fraction of that of the Banque de France. Some years since, the distribution of gold as between England and the United States, was, roughly, England six hundred million dollars, the United States, one billion, six hundred million. A larger proportion of gold was in reserves in the United States than in England.
Yet England was doing the banking business of the world, while we had trouble in doing our own! The Bank of England carries virtually the only reserve in the country. The Joint Stock Banks, with demand liabilities vastly in excess of the demand liabilities of the Bank of England, carry only "till money" in cash or Bank of England notes, and for the rest, carry as their "reserve" their deposit credits with the Bank. A great deal of criticism, from Bagehot down (to go no further back) has been directed at the "inadequacy" of English banking reserves, and many dire predictions have been made as to the dangers that impended unless the reserves were increased. We shall probably hear less of this after the War! The Bank of England still stands! It has never failed to pay out gold over its counters, even though it has, with the aid of the government, doubtless restricted and controlled foreign shipments of gold. But it has met the unprecedented emergency better than any other bank in Europe, and to-day (Sept. 1916) is in exceedingly good shape.
Sterling exchange at New York seems "pegged" at the "lower gold point,"
and apprehensions regarding the stability of the English financial system seem definitely allayed. It is aside from our present purpose to discuss war time conditions. I am rather interested in a.n.a.lyzing the features of the English money market which have made it possible, in the period preceding the War, for English bankers to get on with so little gold. As will appear, it is because English business and financial affairs have been more nearly "static," have come nearer to realizing the a.s.sumptions of static economic theory, than is true of any other country on earth.
The very fact, for one thing, that England is the great _international_ banker has meant a scattering of risks. Acute panics do not come in all countries on the same date. Bad business in one country may be offset by good business in another; drains of gold to one country may be met with gold flowing in from others. The same considerations which tend to stabilize the railroad business, as compared with, say, cotton-growing, apply to the international banker as compared with the banks of a single country or section. But further, the London market has developed cooperating agencies for smoothing out friction and eliminating uncertainties to a degree unknown anywhere else. An anonymous writer in _The Americas_ for April, 1916,[570] has given an exceedingly interesting account of this organization of the London market,--the product of the development of generations. Let us enumerate some of the points: There is nowhere in the world so much expert judgment in the grading and evaluating of hundreds of commodities from all parts of the world. There is, coupled with this, a worldwide reputation for the experts of absolute integrity, so that producers in remote countries regularly ship ("consign") to London cargoes without definite arrangements, knowing that there are in London organized facilities by which the commodities are warehoused, expertly and fairly judged, and either sold at once or else made the basis of a collateral loan against which they can draw immediately. The inst.i.tutions which make this possible are (a) the system of warehousing, with its certificates or warrants which give absolute t.i.tle to the goods, and which are easily negotiable; (b) the organized arrangements in connection with the warehouses by which commodities are received and either graded as they are, or separated and mixed with others to form standard blends readily marketable--this with rigid integrity and expertness which the whole world trusts; (c) a speculative community which has unlimited banking credit, ready to buy at a concession in price virtually any commodity--honey in the comb, sealing wax, pianos, farm machinery, what not; (d) the organized markets or periodical auctions which speculation and final purchase together support; (e) the banks, which, relying on the standardization of the commodities and the readiness of the speculative community, can without hesitation lend the money on which the distant shipper is relying to conduct his business.
What comes to London is fluid. Everything comes to London! The multiplicity of items dealt in gives stability to that business which deals with all--the banking business. The London Stock Exchange is no provincial affair, easily demoralized by an adverse rate decision!
Securities of every country on earth are listed there, and speculated in. It must be a world catastrophe which really demoralizes the London stock market!
It will doubtless seem strange to many to say that New York cannot displace London as the centre of world finance, that the dollar cannot displace the pound sterling in financing international trade, because New Yorkers do not speculate enough! They do speculate enormously, but not in many things. A restricted list of stock exchange securities--almost wholly American; cotton--in which New York is the world centre; coffee, in which New York has the largest volume of speculative futures, though yielding precedence, ordinarily, to Havre, Hamburg and Santos[571] in spot transactions. There is extensive sugar speculation at the New York Coffee Exchange, which has, indeed, recently changed its name to indicate the fact. There is a produce exchange in New York, but it is a very small affair as compared with the Chicago Board of Trade, and its operations and scope are infinitesimal when compared with the produce speculation in London. Of course, there is a vast deal of _unorganized_ speculation in many things in New York, as in business everywhere, particularly in America. But, while the pecuniary magnitudes of organized speculation in New York are very great, the range of items dealt in is restricted. New York banks cannot possibly get such a variety of collateral, based on standardized and readily marketable goods and securities, as can London. New York, consequently, cannot finance international trade, save as an auxiliary to London--and New York banks must have vastly more gold in their vaults than London bankers need! As goods and securities become _more_ marketable, gold--whose services are needed because of its _superior_ marketability--becomes _less_ necessary.
The whole story of London"s organization would be a long one. London financial inst.i.tutions have a degree of expertness, growing out of specialization, in large part, which makes all manner of paper fluid in the London money market which would lack fluidity in New York. The Acceptance Houses are a sort of international Bradstreet and Dun. They know intimately the standing and business of houses all over the world.
They do not give out their information, but they do put their stamp on the paper of business houses, thus standardizing it, lending, not money, but "pure credit," while the other banks, relieved of the necessity of investigating the paper, can buy it as a miller might buy No. 1 wheat.
There is the extraordinary extension of insurance, so that virtually any kind of risk may be shifted to those well able to bear it. All this makes for liquidity, for "static" conditions in the money market, and dispenses with the need for gold.
As we approach static conditions, we need less and less gold reserve behind bank demand liabilities. _The static law of bank reserves is that none are needed!_ I think we have here the real reason why writers who have sought to give us the law for a "normal" ratio have given us such vague phrases as "shown by experience to be necessary," and the like.
When irregularity of income and outgo in a bank"s business, non-liquid a.s.sets, business cycles, uncertainties, legislative changes affecting business, crop failures, changes in demand, new inventions, wars, are abstracted from, no reason can be given why a banker should keep any reserve at all! But these things are dynamic things. And it is characteristic of irregularities that they are irregular. To get a "normal" ratio out of them is not easy.
On the static a.s.sumptions, an "ideal credit economy" is perfectly possible. If everything that needs to be marketed is perfectly marketable, if the stream of business flows regularly and without friction in the same channels, if all contingencies are foreseen and dated in advance, a bank needs no cash reserve. All payments can be made by bank-credit. Banks bookkeeping becomes merely a refinement of barter, with _money_ remaining as a measure of values, a unit for reckoning, but not being used as a medium of exchange, or as a bearer of options, or in reserves. The measure of values function is the great static function of money.
To the extent that static a.s.sumptions are not realized, we need money in bank reserves. This extent is a thing that varies from time to time, and from place to place. It is not the same for a given place from time to time, nor is it the same at all places at a given time. It is not the same for the whole world from time to time.
Since friction, preventing the free marketing of goods and securities and services, exists, since there are dynamic changes which require readjustments through exchanges, we need the work of the banker and he needs cash. But there are other things than money which make for the "statification" of the market. The speculator does it. And the other agencies of the sort represented in the London market do it. They are subst.i.tutes for gold. Gold has no monopoly. The services performed by gold can be performed in many other ways, and by many other agencies.
There is enormous flexibility in the matter.
PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS
CHAPTER XXV
THE RECONCILIATION OF STATICS AND DYNAMICS
In the foregoing discussion of the value of money it has appeared that the value of money is not an isolated problem! Not only have we found it necessary to consider it as part of the general theory of value, but it has been advisable to bring it into relation with a large number of the special theorems of economics, including the law of supply and demand, cost of production, the capitalization theory, the doctrine of appreciation and interest, the theory of international gold movements, Gresham"s Law, the theory of elastic bank-credit, and the general theory of prosperity. The book has thus become a book on general economic theory, viewed from the standpoint of the theory of money. It has been as contributing to the problem of the value of money that these other doctrines have been discussed, but I trust that they, too, have gained something of clarification from being considered in this relation, and that the emphasis on the role of money in general economic theory has helped in bringing the various elements in our current theory into a closer-knit interdependence.
The present chapter seeks to carry the conclusions so far reached toward a further unification of economic doctrine, by finding for certain contrasts, like that between statics and dynamics, a higher synthesis, so that it may be possible for students of dynamics and students of statics to speak a common language, to use common measures, to find that their phenomena are not, after all, of essentially different nature, and to come to agreement as to the relative importance of "static" and "dynamic" tendencies. It will appear that the theory of money and exchange plays an important role in effecting that higher synthesis, and is itself clarified by it.
The "theory of goods vs. the theory of prosperity," "statics vs.
dynamics," "normal vs. transitional tendencies," "long run vs. short run" laws, "market vs. normal price," "abstract theory vs. concrete description," "historical or evolutionary study vs. cross-section a.n.a.lysis," "temporal vs. logical priority," "causation as a temporal sequence vs. causation as timeless logical relationships"--these, and similar contrasts have appeared frequently in the history of social thought, and have been especially refined and elaborated in the history of economics. We have even compounding of the notions into more complicated distinctions, as by Seligman,[572] in his two statements of the law of costs: in the short run, normal price tends to be the maximum cost of production; in the long run, normal price tends to be minimum cost of production. Seligman has ill.u.s.trated his notion by an adaptation of the familiar figure of the sea-level and the waves: for short-run purposes, we may contrast the surface waves, the market prices, with the sea-level, the normal price; for longer run purposes we may see the level of the sea itself changing, under the influence of the tide, and may have a dynamic normal, which is still to be distinguished from the fluctuations due to the play of winds on the surface.
We have further an increasing recognition of the up and down play of forces accelerating and r.e.t.a.r.ding the processes of industry and trade.
For earlier writers, panics and crises were anomalies; since Mill"s _Principles of Economics_, to go back no further, we have had increasing recognition of such occurrences as more or less periodic and inevitable, bound up in the very nature of economic life itself, and of late there has been a fairly general acceptance of the notion of the business cycle, of an alternating rhythm of prosperity and depression.
The explanation of this alternation has been attempted by numerous theories, one of which, that of Joseph Schumpeter,[573] rests the whole case definitely in the distinction between static and dynamic tendencies, and in the conflict between the opposing sets of forces which statics and dynamics undertake to describe.
We are told by the orthodox economist that war is wasteful, destroying laborers and goods, and lessening the wealth and productive power of society. We are told that it diverts labor from productive employments, that it turns huge ma.s.ses of capital and labor to the production of goods which men cannot enjoy, that it burdens the people with taxes, etc. Static theory can see nothing but evil in war, from the standpoint of minimizing human sacrifices, and maximizing human enjoyments. None the less we see many war periods--notably that of our Spanish-American War, and the present World War, so far as the United States are concerned--periods of marked prosperity, growing out of the new expenditures which war itself involves. Mules and other farm products rose in price with the Spanish-American War, as the Federal Government bought them for the army; various factories concerned particularly with war munitions increased their activity, the gains of factory owners and farmers led them to increase their purchases, wages rose, and rose in part because part of the labor force was in the army. The Civil War did spell demoralization and economic ruin for the South, but for the North it gave a great dynamic impetus to trade, transportation and industry--an impetus, strangely enough, that was so great that the new industries and enterprises which had grown up were able to absorb with little shock the million men set free from the Northern armies when the great struggle was over.[574]
For static theory, scarcity is an evil. A general overproduction is impossible. For the practical business man, confronted with the momentous problem of marketing his output, overproduction is a vital reality, and there are few times indeed when much more could not be produced if only a satisfactory market could be found for it. Static theory would see the whole explanation of this in maladjustment, too much of some things being produced, too little of others. This simple statement does explain much of the phenomenon, but it is far from telling the whole story, and even if it were a complete explanation, it would by no means dispose of the reality of overproduction as a constant menace, even when not a dire reality, facing almost every business man.
Static theory at best tells what a completed adjustment would be; it does not touch the problem of how adjustment is brought about, and maladjustment overcome. Yet just that problem is the vital concern of the business man.
For static theory, high or low prices are matters of no concern. And abundance or scarcity of money and credit make no real difference in the economic process. Abundant money and credit exhaust themselves in raising prices, and the rest of economic life goes on unchanged. This doctrine of the quant.i.ty theory is, as I have undertaken to show in Part II, bad even as a matter of static theory. But it is only as a matter of static theory that it is even thinkable.
The economic theory of the 19th Century, following the lead of Adam Smith and Ricardo, has been accustomed to dismiss as utter folly the notions of the Mercantilists as to the balance of trade, and the importance of an inflow of gold, and has conclusively proved that protective tariffs tend to divert the labor, capital and land of a country from those lines of production they are best adapted to to lines for which they are less well suited. Critics have pointed out, as in the "infant industries" argument, that we cannot treat the labor capacity and technical knowledge of a country as constants, that the temporary encouragement of one line of industry by a tariff may so modify the data of the situation that the country may in time become better adapted to the protected industry than to other lines. And I think that we may well go further, and make substantial concessions to the doctrines of the Mercantilists as they themselves stated them, seeing in a favorable balance of trade, and in expanding exports and diminishing imports sources of impetus which are not subsequently neutralized by the static process of equilibration. I do not conclude from this that protective tariffs are commendable, any more than I conclude that war is commendable. Both may give dynamic impetus, and lead to economic development. Both may lead to political corruption, to iniquities in the distribution of wealth, to waste and suffering of various kinds, in which honest and patriotic men suffer, and cunning and unworthy men gain. The point here is simply that static theory does not tell the whole story regarding either tariffs or wars. It may well be true--I think it is true--that static theory offers the more important principles for judging the results of wars and tariffs.[575] It is the central problem which I have set myself at the outset of this discussion to find a way to bring static and dynamic considerations _under a common measure_, to reduce them to h.o.m.ogeneity so that comparisons may be inst.i.tuted, and so that the student of statics and the student of dynamics need not talk merely at cross-purposes. But we do not achieve this result by ignoring considerations in either sphere.
Bastiat, with a fine show of logic, has sought to rule out of court the doctrines that extravagance and tariffs, etc., are sources of prosperity by his emphasis on the "Unseen," as opposed to the "Seen." The prosperity growing out of the extravagant expenditures of one brother is open to all eyes. The consequences of the savings of the frugal brother men do not see so easily, and do not attribute to his frugality.
Doubtless Bastiat is right in his main theses. But one point needs emphasis: that which is "Seen" stirs the imagination of men. And imagination energizes human activity. The motivation of economic life is a psychological matter.
And so at a host of points the contrast may be drawn, in one or another form. The pure, abstract, static theory gives one conclusion; the other approach suggests one different.[576]
How is it possible to give proper weight to considerations drawn from such divergent spheres of thought? Indeed, how shall we weigh the dynamic considerations at all? Static theory presents itself in quasi-mathematical form. At times, it parades itself in equations, and it readily enough, without arousing a feeling of incongruity, expresses itself in mathematical curves, with ordinates and abscissae. One static tendency finds itself in marginal equilibrium with another, and the margin is expressed in quant.i.tative units, commonly sums of money.
Static doctrine does, indeed, lay claim to precision and exactness, and static tendencies may be weighed against one another. But how shall one undertake to give quant.i.tative measure to such a thing as the educational influence of a tariff on silk manufacture? How measure the dynamic impetus of a new chain of banks on the industry and trade of the region affected? How gauge the importance of a new advertising scheme, or a new invention? Dynamic considerations are commonly presented in vaguer, looser form than static theories. Usually we have merely a statement of a qualitative tendency, without effort to make the importance of the tendency quant.i.tative. Indeed, I think it safe to say that one chief difference between statics and dynamics is that those tendencies which can be most easily formulated have been recognized by statics, while those which are less understood, and less precisely formulated, are left to dynamics! A big part of the difference is methodological, rather than inherent in the nature of the phenomena themselves.
I think that it needs little argument to show that all the contrasts listed at the beginning of this chapter do not run on all fours.
Compare, let us say, the contrast between "statics and dynamics" with that between "historical and cross-section" study. Concrete, realistic history is not dynamic theory. A realistic description of society viewed at a given short period of time is not static theory. Both statics and dynamics are _abstract_. _Laws_ are not the same thing as description and narration. The a.s.sertions of both statics and dynamics are commonly made on the a.s.sumption, "_caeteris paribus_." A new bank will stimulate business in a western town if bank-robberies do not come into fashion! A tariff on wool will tend to educate the farmers in sheep-raising if the habit of relying on governmental a.s.sistance does not develop, and make them more, rather than less, inert,--or sharpen their political rather than their economic ac.u.men. Concrete history need not always verify dynamic laws![577] It is, above all, important to insist that the distinction between statics and dynamics is not the same as the distinction between theory and description, or between the abstract and the concrete. Evolutionary study may result either in concrete history, or generalized laws; cross-section study may be either concrete description or abstract formulae concerning forces in equilibrium. And there may be varying degrees of abstractness in both cases.
The contrast between long-run and short-run tendencies is not necessarily the same as that between statics and dynamics. This former distinction does recognize one factor which is sometimes cla.s.sed as "dynamic," namely, "friction."--"Friction," by the way, is a blanket term which covers a mult.i.tude of sins of imperfect a.n.a.lysis and lazy thinking! It is far from a simple, unitary thing. Sometimes it seems to mean the action of the whole social order, other than the economic values!--But dynamic, as used by the two writers who have used the term most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for those factors in economic life which make for constructive _change_.
Neither writer would call mere habit and inertia, which make readjustments slow, or the necessities of physical nature, which r.e.t.a.r.d readjustment, by the name, "dynamic." It may be noted, in pa.s.sing, that both writers limit the term quite strictly to changes _in_ economic life growing _out of_[580] economic causes. Schumpeter narrows the dynamic factors to one, namely, _enterprise_, while Clark gives five general cla.s.ses of dynamic factors, all of which are primarily economic in character. Neither extends his study to cover forces which are not primarily economic in character, but which none the less lead to economic changes.
Again, the "theory of prosperity" is not identical with "economic dynamics," though the two in large measure overlap. For one thing, while some writers, as Schumpeter, find the business cycle to be a necessary consequence of dynamic changes, and would maintain that no business cycle, no up and down of tempo in production, no panics or crises, are necessary if changed methods of industry, etc., did not come in, not all writers would so explain the business cycle. Some writers would find the explanation in the inherent instability of a money and credit economy, some in the inherent weakness of a capitalistic system, quite apart from necessary dynamic change. Irving Fisher makes no use of changed methods of production in his explanation of business cycles, though he does mention invention as one possible cause of a disturbance in normal equilibrium.[581] But further, dynamics is largely concerned with problems, like invention, changes in the economic habits of a people, methods of organizing industry, etc., which, while they may well bear on the problems of prosperity and depression, yet have interest for their own sake, and would be studied if there were no business cycles.
Further, the notion of statics, the other term in the static-dynamic contrast, is not identical with the "theory of wealth," or "theory of goods," or "theory of the wealth of nations" which such a writer as Veblen[582] would put in contrast with his "theory of prosperity." There is a normative, or practical, and polemical coloring in the body of doctrine growing out of Adam Smith, which Veblen would term, the "theory of the wealth of nations," which is lacking in the more colorless "statics" of to-day.
I do not find any of the contrasts thus far discussed quite satisfactory. I have been using the terms, statics and dynamics, as general terms to cover all these contrasts. I shall try to formulate a general contrast which includes most of the ideas pa.s.sed in review, from a somewhat different angle, and then try to show that the contrast, while useful, is not absolute, and that it is possible to measure considerations drawn from one viewpoint in terms of considerations drawn from the other.
Let us take as our starting point the notion of a cross-section picture of society. I have set forth this notion in ch. 13 of my _Social Value_, and have elaborated it in the discussion of von Mises" theory in the chapter on "Marginal Utility" in this book. A cross-section picture may be made more or less concrete and descriptive, or abstract and a.n.a.lytical. If one looks at the picture of society in cross-section as given by Giddings in his _Principles of Sociology_ (Bk. II, chapters on "The Social Population," "The Social Mind," "The Social Composition,"
and "The Social Const.i.tution"), one finds a picture in which organization and system are made clear, but in which vivid description of concrete social facts is the primary concern. The account given is largely qualitative rather than quant.i.tative. It is a picture of flesh and blood, as well as an account of functioning. It is, perhaps, not easy to realize that Giddings is doing the same general sort of thing that the pure economic theorist is doing, with his picture of a static equilibrium of economic values. But what economic theory is concerned with is, after all, to be found in Giddings" scheme. The pure theorist takes for granted the physiographic environment, whose influence Giddings takes into account. The theorist abstracts from biological and racial factors. He a.s.sumes a social population, a social order, a political system. He has not taken into his purview the social mind as a whole, in his static theory. Rather, he has been concerned with only one part of the social mind, namely, the economic values. Economic values, and the objects of economic value, have been the data of the static theorist. Given scales of economic value, such that for one quant.i.ty of goods of a given kind, a given value per unit will obtain, given all of these value-scales, and given the quant.i.ties of goods and services whose values are in question, and static theory will furnish an equilibrium picture, in which the price relations of different kinds of goods are made clear, and their values are measured. The value-scales, and the absolute magnitudes of value at different points on the scale, are a.s.sumed, are data. Further, in order that the notions may be made mathematically precise, a unit of value is needed, and this is commonly the value of the money-unit, which is a.s.sumed to be constant. The picture then becomes systematic. There is a system of values, expressed in prices, which is stable, so long as the data do not change. It is mechanically conceived, and ill.u.s.trated by various mechanical symbols, as b.a.l.l.s in a bowl, or connecting reservoirs, or, best of all, by intersecting curves. It is an abstraction from the living, pulsing, organic whole of the social mind--the inter-mental life of men in society. It squeezes much of the life out of the phenomena it describes. It makes them exact, only by making them mechanical. It thus becomes exact by becoming, in considerable degree, superficial and abstract.[583] This is not to condemn static theory. Static theory has proved its usefulness by solving too many problems for such a statement of its limitations to involve a condemnation. But the statement of its limitations will aid us in seeing its relation to that vaguer body of doctrine which we call dynamics, or the theory of prosperity, etc.
Now this means that static theory is not _value_ theory. It a.s.sumes a theory of value. It a.s.sumes the value-scales as data. It a.s.sumes the value of money as a datum. Static theories of supply and demand, cost of production, capitalization, etc., a.s.sume the value of money, as has been shown in Part I, and static theory, resting in the notion of accomplished transition, normal equilibrium, abstracting from the difficulties of readjustment, abstracting from friction, etc., misses the whole point as to the functions of money, as shown in Part II.
Static theory proceeds by a.s.suming a change in one of the elements of its situation, say one of the value-scales, and then tells what the new equilibrium will be after readjustment takes place, a.s.suming that other value-scales remain constant, and that quant.i.ties of the objects of value do not change. Or, it a.s.sumes a change in the quant.i.ty of one of the objects of value, and then predicts the new equilibrium. The new equilibrium will often involve changed values and prices all around, and will often involve altered quant.i.ties of other objects of value. But the initial change comes from an alteration _from outside_ the system in one or more of the data of the system.[584]