Gregory Bodenhamer Mechanicsburg Pa However, he greatly underestimated the ability of American democracy to correct these abuses. None of Veblen's later works received the acclaim of his two earlier books. He remained a skeptic as he probed society's problems, and typical of his thinking is his Imperial Germany. Although the book is so critical of Germany that, at one time, the U.S. government wanted to use it for propaganda, the post office, for a time, barred it from the mails because it was uncomplimentary towards Great Britain and the United States. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. In the book, Veblen charged that the U.S. centers of learning were being transformed into centers of football and high-powered public relations. While given to extremes, Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics.

Veblen believed that the robber barons were interested in producing profits for themselves rather than in producing goods. An example of artificially high capitalization is the founding of U.S. Steel in 1901.

Against real assets of some $682,000,000, almost twice that amount of stocks and bonds were issued — at a capitalization cost of $150,000,000, all of which was paid for by public investors. So there was justification for Veblen's scorn of the American entrepreneur.

However, he greatly underestimated the ability of American democracy to correct these abuses. None of Veblen's later works received the acclaim of his two earlier books. He remained a skeptic as he probed society's problems, and typical of his thinking is his Imperial Germany. Although the book is so critical of Germany that, at one time, the U.S. government wanted to use it for propaganda, the post office, for a time, barred it from the mails because it was uncomplimentary towards Great Britain and the United States. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. In the book, Veblen charged that the U.S. centers of learning were being transformed into centers of football and high-powered public relations. While given to extremes, Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics.

Analysis

Veblen's two major works formed a keen description of the robber barons and their savagery. The phrase "robber barons" comes from the definitive and highly readable The Robber Barons (1934), by Matthew Josephson. Also highly descriptive of these titans of Big Business is Ida M. Tarbell's History of the Standard Oil Company (1903).

Veblen's "savage world" was savage on two counts. First, the practices of the actual business world which he observed were predatory. Second, in his examination into the nature of economy, Veblen concluded that by heredity, human nature itself is savage.

Thorstein Veblen has been largely ignored by many economists; however, it is fair to note at least two facts. In his Theory of the Leisure Class, Veblen coined the term "conspicuous consumption," and he anticipated the rash of current writings on "status symbols," which has proven correct. For example, Americans look down on physical work, compared with office work. Consequently, the executive and the financier enjoy a high prestige. Business executives continue to accumulate money beyond their normal needs. The modern-day status symbol, such as the sable coat, Lear jet, face-lift, or yacht, exemplifies the concept of conspicuous consumption.

As for his second major work, The Theory of Business Enterprise, Veblen foreshadowed "technocracy" — the belief in government by technical experts, with the use of work units of currency to be substituted for money. If alive today, Veblen would undoubtedly observe, with justification, the latest trend in the development and use of computers and robotics, as well as the fact that not only blue collar workers are being dispossessed from their jobs by the machine, but business executives find their positions increasingly threatened by computers.

Glossary

Robber Barons Unscrupulous titans of U.S. finance and industry, including Jay Gould, Jim Fisk, and Cornelius Vanderbilt. The term was derived from the title of a book by Matthew Josephson.

Conspicuous Consumption The use of material goods to flaunt a person's belonging to a moneyed or privileged class.

Technocracy Government run by technical experts, with money replaced by work units of currency.

Veblen died a few months before the "Great Crash" of 1929 — when stock values reached an all-time high before tumbling down. There were no official warnings that such a financial catastrophe could occur. In fact, quite the contrary. Prosperity was everywhere, from President Hoover down to the lowly clerk; optimism was the keynote. In the United States there were 45 million jobs, a total income of $77 billion, and the average American family enjoyed the highest standard of living in history.

Magazines featured articles on how everyone could get rich — the formula was to save a portion of one's earnings and invest regularly in good common stocks. The public listened, and not only bankers and businesspeople, but barbers, bootblacks, and clerks all rushed to place their orders on the stock exchange. It was easy to do, for they all could buy "on margin" — that is, for as little as 10 percent in cash.

Beneath this surface boom, however, lay disturbing, but unnoticed facts. There were two million unemployed. Banks failed at the rate of 700 a year. Ominously, the distribution of income placed 24,000 families at the upper level of income, and some 6 million at the bottom — a ratio of 1 to 250. In this era of prosperity, the average American family was heavily mortgaged from excessive installment buying. When the crash came, it caught the public by surprise, as well as titans of finance, government officials, and expert economists.

The crash occurred in late October. Within two months, losses in stock value were awesome. Forty billion dollars of value disappeared. The downward trend continued. Fortunes were lost; suicides rose in number. Nine million savings accounts vanished as banks failed by the thousands. Over 85,000 individual businesses were wiped out. Working women labored for 10-25 cents per hour. In New York City, breadlines formed at the rate of 2,000 people a day. The "Great Depression" loomed.

By 1933, the national income had dropped by almost half; the average standard of living declined to the level of 1913. There were 14 million unemployed. The economy lay like a fallen giant as a feeling of hopelessness swept the land. What no respectable economist admitted could happen seemed a reality — a permanent depression.

In this situation, one would expect a radical like Marx to appear to attack the plight of the unemployed and to offer a drastic remedy. On the contrary, a respectable Englishman offered a solution. Well-schooled in the theories of orthodox economics, John Maynard Keynes (1883-1946) was Alfred Marshall's most brilliant pupil. Nevertheless, Keynes proved adaptable enough to make a practical attempt at solving the problem of permanent depression.

In contrast to Veblen, John Maynard Keynes' life was characterized by good fortune. Born into an old traditional English family, he attended the best schools. Reminiscent of John Stuart Mill's intellectual powers, Keynes studied the meaning of interest at age four. He won a scholarship to Eton, where he earned superior grades and won numerous prizes.

At King's College in Cambridge, his grasp of economics was such that Marshall urged him to follow an academic career — which he declined in favor of something more lucrative. He placed second in civil service examinations for a position in the India Office but despised the work.

Resigning his position, Keynes returned to Cambridge, where he began a thirty-three-year stint as editor of the Economic Journal, England's most influential economic periodical. Keynes' diverse interests made him the exception to the saying "jack-of-all-trades and master of none." Indeed, he mastered debate, bridge, mountain climbing, modern and classical art, currency and finance, and economics. In later life, he became Lord Keynes, Baron of Tilton, and while serving as a director of the Bank of England, he also operated a profitable theater.

His greatest opportunity came with World War I when he undertook key roles in the Treasury and the Paris Peace Conference of 1919. Shortly afterward, he made a fortune of over $2 million by spending half an hour in bed each day studying and speculating in the international markets.

Keynes attained national fame with the publication of his book The Economic Consequences of the Peace (1919). He stated that peace treaties are unjust and unworkable, with their apparent solutions ending in fiasco. While he was not the sole possessor of this observation, his view was the first written version which encouraged a complete revision of the treaties. The book succeeded, and international developments confirmed his thesis.

Keynes' A Treatise on Money (1930) attempts to explain how the economy operates and to examine in particular the problem of unexplained bursts of prosperity followed by lows. Earlier writers accounted for this phenomenon by such theories as mental disorders of the economy or the effect of sunspots. Keynes returned to Malthus' warning — saving can result in depression.

To understand Keynes' thesis, it is necessary to grasp the meaning of prosperity in market economy. The true measure of a nation's prosperity is not gold and silver nor physical assets, but its national income, which is the total of all individual incomes in a country. The chief characteristic of income is its flow from pocket to pocket via daily purchases and sales. Thus, this movement is largely natural and arises from the use and consumption of goods.

On the other hand, one part of income which does not flow in daily transactions is savings, which represent the portion that is removed from the even flow of income. If that portion is hoarded, it serves no useful purpose. Significantly, no harm comes from the act of saving in modern nations because savings are usually put into banks and invested in stocks and bonds, becoming available when business wishes to expand production. In this event, savings flow into the economy. The increased capacity for production of more goods assures jobs and greater prosperity. Depression arises when savings are not invested into capitalistic expansion but are allowed to lie idle.

Keynes' line of reasoning, which he did not invent, but only helped to explain, is known as the see-saw theory of savings and investment. As a see-saw go up and down, savings goes up when investment goes down. The reverse is also true. In his polished examination of the see-saw theory, Keynes concluded that depression arises from a decline of investment on one side and an increased accumulation of savings on the other. However, depression is only temporary, for an abundant supply of savings reduces interest rates, leading to a higher rate of return to be gained from investment. Thus, prosperity returns.

Unfortunately, the see-saw theory has one shortcoming — its failure to explain a prolonged depression, such as the Great Depression of the 1930s. While interest rates declined during that period, no upswing of investment occurred. Recognizing this shortcoming, Keynes pondered the problem and published a revolutionary solution: The General Theory of Employment, Interest, and Money (1936). In it, he made the following pessimistic diagnosis of capitalism:

1.There is nothing automatic in economic developments which will relieve a depression. An economy in depression can remain so indefinitely.

2.Prosperity depends on savings being put to use. Otherwise, a descending spiral will result in depression.

3.Investment cannot be counted on, as it depends on the expansion of production. The entrepreneur cannot be expected to increase production beyond demand for goods, so the capitalistic economy continuously lives in the shadow of collapse.

Keynes described how savings, in a time of depression, cannot continue to accumulate. Savings actually dry up, reduced to a trickle rather than a flow. When funds are needed for investment to stimulate the economy, there is no savings accumulation available. So the seesaw theory is invalid — replaced by the elevator theory.

The elevator concept maintains that the economy, like an elevator car, can stall at any level. Even worse, a depression is a natural development, with every surge followed by a low. This phenomenon occurs because the economy, to avoid depression, must continually expand. However, capital expansion of any business is restricted by that business' market. So capital expansion does not move at an increasing rise, but in spurts. Understandably, Keynes' book proved as revolutionary as those of Adam Smith and Karl Marx. Keynes turned the classical view that depression is only temporary into the bleak conclusion that depression is inherent in the system itself and can be permanent.

Of course, Keynes' vigorous mind did not halt on a dismal outlook for the future. He provided a cure — government needs to "prime the pump" by deliberately undertaking heavy government investment to stimulate the economy. By absorbing capital goods and spending whenever private enterprise is unable to expand, government can insure a high level of economic movement. Therefore, governments should incorporate judicious spending programs into their permanent plans.

Keynes visited Washington in 1934 and observed President Franklin Roosevelt's New Deal methods to combat depression. This practical demonstration of Keynes' thesis became a defense for such policies. The WPA (Works Progress Administration) and a host of other New Deal projects existed specifically to "prime the pump." Such measures increased the national income by fifty percent and made a large dent in unemployment rolls.

Unfortunately, New Deal projects failed in the long run. The number of unemployed still amounted to around 9 million. What finally ended the Great Depression was World War II. Yet, the failure of pump-priming measures did not invalidate Keynes' thesis because government did not have enough funds to stem the tide and because opposition from the private sector feared government intervention in the economy.

Keynes next attacked one of the chief problems of World War II with his simple, original book, How to Pay for the War. He proposed a compulsory savings plan for wage-earners for the purchase of government bonds during wartime, to be reduced at the war's end. In this way, inflation would be defeated by putting into savings the extra war income. Prosperity at the end of the war would be stimulated by the flow of money available for the purchase of consumer goods from the cashing in of bonds. Ironically, this cure was just the opposite of Keynes' cure for depression because a wartime situation is just the reverse of an economic low. Nothing came of the plan, however, for political leaders preferred to use the old method of taxation and rationing, along with the purchase of bonds on a voluntary basis.

While labeled a radical by conservative economists, John Maynard Keynes had nothing but scorn for socialism and communism. Opposed to Marx's view that capitalism was doomed, Keynes believed in a policy of managed capitalism, one which would invigorate and save capitalism. Basically, he was a conservative with one major aim — the creation of a capitalistic economy in which its greatest threat, unemployment, would be forever eliminated. Consequently, he engineered a plan to foster a living and growing capitalism.

Analysis

John Maynard Keynes observed a world sick with widespread depression which almost ruined trade and brought nations to the brink of bankruptcy. Exports fell, national banks failed, leading countries abandoned the gold standard, foreign debts went unpaid, and workers suffered mass unemployment. The result in Europe was a definite tendency toward dictatorial forms of government, as in Germany, Italy, Austria, and Rumania. The less favored nations, notably Germany, Italy, and Japan, embarked on territorial expansion.

In the United States, against the background of the Roaring Twenties and the legacy of Coolidge prosperity, the air was filled with optimism. Herbert Hoover, president from 1929-33, promised "two chickens in every pot and two cars in every garage." Suddenly, the doomsday of Wall Street prosperity arrived without warning on October 24, 1929. By October 29, 16 million shares had been sold at staggering losses; by November 13th, $30 billion in capital values vanished. By the end of two months, the figure had increased to $40 billion. Just prior to the crash, the total value of stocks had been $87 billion. By March of 1933, it dropped to only $19 billion. This crash triggered the Great Depression for these reasons:

1.Agricultural overexpansion resulted in surpluses.

2.Industry overexpanded with too many factories and machines to meet demand for goods.

3.Labor-saving machines replaced workers and produced more goods.

4.Capital surpluses were created, producing an inequality in income distribution.

5.Overexpansion of credit led to stock market speculation and installment buying.

6.High tariff policies produced a decline in international trade.

7.Political unrest contributed to defaults on foreign debts.

By 1930, in a typical U.S. industrial city, one out of four workers had lost their jobs. In major cities, many workers slept in public parks because they could not afford housing. Residential construction fell off by 95 percent. 1933 saw the turning point, with over 16 million workers unemployed out of a total population of better than 120 million. Stunned like the rest of America, congressional leaders stood helpless, waiting for the new president to take action.

This was the situation when Franklin D. Roosevelt was inaugurated in March 1933. He immediately called a special session, which began emergency legislation under the slogan of "Relief, Recovery, and Reform." Under Roosevelt's leadership the following acts became law: the Emergency Banking Act; Federal Emergency Relief Administration; Civilian Conservation Corps (CCC); National Recovery Administration (NRA); Agricultural Adjustment Act (AAA); Federal Deposit Insurance Corporation (FDIC) — which guaranteed savings deposits in banks; Federal Securities Act, which led to the SEC (Securities and Exchange Commission) to regulate the stock market; Home Owner's Loan Corporation (HOLC); and the Tennessee Valley Authority (TVA), plus a host of other New Deal measures.

Basic to the New Deal philosophy was the concept of "priming the pump" through federal action, which Keynes so ably defended in his major work, The General Theory of Employment, Interest, and Money. The result of the New Deal was that while the measures failed to end the Great Depression, the downward trend of the economy was halted and national confidence bounced back. In a world beset by communism and fascism, FDR saved American capitalism by using the goals and objectives of John Maynard Keynes.

Glossary

The Great Crash The Wall Street Crash of October 1929, when the New York Stock Exchange collapsed after a selling wave in which stock values tumbled in a panic following an all-time high.

The Great Depression Worldwide depression triggered by the Wall Street Crash. The era extended from 1930-39, with the depths reached in 1933.

The New Deal Social and economic reforms carried out by President Franklin D. Roosevelt between 1933 and 1939 to combat the Great Depression.

The Hundred Days The period of remarkable cooperation between President Roosevelt and Congress, beginning with a special session on March 9, 1933, when the basic measures of "Relief, Recovery, and Reform" were enacted into law.

Compulsory Savings A deferred savings plan by which a government finances a war through a required deduction from all wages to pay for war bonds.

Unlike Thomas Malthus and Karl Marx in the previous century, John Maynard Keynes looked forward to better times for capitalism in the twenty-first century. In his Economic Possibilities for Our Grandchildren, he predicted that by the year 2030, the age-old problem of equal distribution of wealth might be solved. Even though Keynes did not foresee the panacea immediately after World War I, in later years he deduced that capitalism would continue its upward climb. Certainly he could not attribute the easing of hard times to the bounties of nature, since the supply of raw materials was quite obviously finite and dwindling. Instead he lauded the ability of factory workers to utilize technology, thereby making each succeeding generation more productive. For example, in the 1960s, American workers turned out over five times the goods per hour in comparison with their forebears a century earlier. In like manner, Keynes envisioned a rosy future for his native England, calculating that by the year 2060, the nation would produce seven and one half times the wealth of the past century.

The canny student of economy, however, cannot accept this cheerful prognostication without further delving, for a complete analysis of modern times requires a thorough study of more than Marx and Keynes. A third spokesman is necessary: the brilliant gadfly Joseph Alois Schumpeter (1883-1950), a spirited, histrionic Viennese aristocrat and Harvard professor, who saw capitalism in the twentieth century in terms of dynamic growth, yet he relegated it to destruction in the long run.

A contemporary of Keynes, Joseph Alois Schumpeter was a native of Austria, born of solid, yet undistinguished stock. Educated amid the upper crust at an exclusive school, he developed elitist airs that followed him throughout his life. From being a brainy enfant terrible who challenged his teacher at the University of Vienna, he moved to England, where he served successfully as a financial adviser to an Egyptian princess. While in her employ, the twenty-seven-year-old Schumpeter published The Theory of Economic Development (1912), an unassuming overview of capitalistic growth. Surprisingly, the book describes a capitalist economy which lacks accumulation of capital. Relying on a circular flow, the model, like a toy train maneuvering around a hearthside track, remains static and predictable, never altering or expanding.

In answer to the age-old stumper of where profits originate, Schumpeter declares that capitalism, grounded in inertia, has no momentum. Workers, he predicted, would, in time, receive full remuneration for their toil while owners will derive value equivalent only to the resources they contributed. Capitalists would obtain nothing except their wages as managers. Thus, in a changeless economy, profit does not exist.

As Schumpeter elaborates, the only explanation for profits occurs when the static economy fails to follow its circular path, a situation which occurs when capitalists introduce innovative technology or organizational changes. Such ephemeral profit disappears after competitors emulate the innovation. In rapid order, innovation becomes the standard operating procedure. Like a huge, insatiable maw, the system swallows up ideas, turning them into the well-digested fuel of everyday productivity. Because the introducers of these changes differ from the norm, Schumpeter awards them the title of entrepreneur, one who is a business trailblazer, or risk-taker.

An additional surmise of Schumpeter's Theory of Economic Development is his explanation of the business cycle. As a swarm of imitators follows the trail blazed by the business pioneer, investment spending leads to a short-lived economic boom. Competition, as always, forces prices down. Ultimately, profits disappear. Ironically, the entrepreneur is not necessarily the receiver of the profit generated by an innovative idea. As a rule, profits tend to go to the business owner, with the entrepreneur forced out of the picture by the dynamics of the new process.

Schumpeter paints an unappealing picture of the life of an entrepreneur — a talented specialist who differs markedly from the military leader or politician. Treated by society as an upstart or social pariah, the entrepreneur resides outside the limelight. Unlike people who are motivated by the urge for riches or title, the entrepreneur prefers instead to found a dynasty. Goaded by the will to conquer, to climb to the top of the heap, this creator resembles a paladin, or "knight errant of the system." For the entrepreneur, the carrot at the end of the stick is not the monetary reward but the challenge itself, the vacuum into which innovation falls.

After the publication of his ingenious work, Schumpeter served as commissioner on the nationalization of industry, an arm of the socialist German government, as well as finance minister of Austria.

Unfortunately, the unstable times did not permit his creative beacon to shine very far. After Schumpeter moved into a position as bank president in Vienna, the collapse of Europe's financial structure led to huge personal debts. During this trying period, Schumpeter's young and charming wife, whom he had groomed for her role as his helpmeet, died in childbirth.

Like the fabled phoenix, Schumpeter rebounded. He built a career as a visiting professor in Japan, Germany, and the United States. At Harvard, he married economist Elizabeth Boody. Renewed, he allowed his creative juices to flow at will.

In his thousand-page, two-volume Business Cycles, Schumpeter attempted to account for the Great Depression. He based his explanation on a description of three distinct types of business cycles:

1.A short cycle.

2.A second span lasting 7-11 years.

3.A fifty-year cycle evolving from blockbuster inventions like the steam engine or automobile.

The Great Depression, which stands out from the norm of economic ups and downs, was the cataclysm that erupted when a series of all three cycles hit bottom simultaneously.

Schumpeter's conclusion produced a major economic contribution: the belief that capitalism, which evolves from the values of the civilization itself, was losing its steam. Even though his prediction emphasizes a moribund state of the economy, the author appends a small hope that there are still three decades in which capitalism will struggle before dying out completely.

A more complete economic vision appears in Schumpeter's Capitalism, Socialism, and Democracy (1942), in which the author mounts an offensive thrust against his arch-enemy, Karl Marx. Departing from his predecessor's obsession with the antagonism between capitalist and worker, Schumpeter fastens onto the bourgeois nature of the capitalist. Crucial to his denouncement of the wearer of the lounging suit is the author's depiction of plausible capitalism, which describes capitalism as an economic success but a sociological failure. The system bogs down in a bureaucratic nightmare of red tape, where entrepreneurial input counts for little. Yet, even though Schumpeter's scenario plays well on the surface, it is riddled by the disease of rationalism, which gobbles up its own reason for being.

Schumpeter, from the vantage point of his cleverly constructed soapbox, appears to defeat Marx at his own game. The whole breastwork of logic carries some measure of significance in that it predicts the bureaucratization of business and government as well as the ebb and ultimate foundering of the middle-class ideal. Still, the fabric of his logic is weakened in fiber. The mood of Western capitalism did indeed follow his predicted trends through the 1960s. However, it has not resigned itself to the benign socialism he envisioned.

The overwhelming weakness of "the world according to Schumpeter" is that the prognosis is more social and political than economic. In guessing which way the tide of history will direct itself, he lends credence to a belief in a noncapitalist elite, who will form the dynamic core of an otherwise inert society. Unlike Marx's paradigm, which centralizes a disgruntled proletariat in the heart of change, Schumpeter's model places a changing cast of creative movers and shakers at the lead position of capitalistic innovation.

Analysis

Like the consummate poker player shoving the whole pot into a grandstand showdown, Schumpeter begs the whole question of economics by reducing it to a single quibble: Is the function of economics analytic or predictive? Do economists merely compartmentalize facts about life as we know it or do they serve as visionaries? In other words, is it better to know where the market has been rather than where it's going? Obviously, Schumpeter himself chose the latter role, opting to lay out a vision of future generations than to muck about with the nuts and bolts of mundane money matters.

The driving force in Schumpeter's world-picture is his accolade to the talented few, the idea people who render service to an otherwise not-very-engaging business machine set in the well-worn ruts of sameness. An even more intriguing possibility is that Schumpeter, imbued with elitist notions from childhood, may have set up this paradigm as a means of self-glorification, seeing himself as the swami of elitism.

Whatever his motivation, he has produced a passionate interest in the captains of industry — not the grasping, dog-eat-dog Vanderbilts, Rockefellers, and Morgans of the previous generation, but the Lee lacoccas and Donald Trumps, the Sam Waltons and Ray Krocs, whose genius expresses itself in the proverbial "better mousetrap."

Certainly, Schumpeter's contribution to economics places an emphasis on the part of the whole, which has, in past overviews, tended to fall between the cracks. Instead of stressing the inevitability of money following money or of workers locked into a predetermined social stratum, he opens a window on the spectrum of creativity. To Schumpeter, economics is less dry, less stultifying when interpreted as an outgrowth of wit, talent, and innovation.

From his perspective, the future of capitalism appears less the function of an inevitable movement toward some predetermined end and more like a shapeless lump of clay in the potter's hand. A truly humanistic approach, Schumpeter's evaluation leaves hope that there's always room at the top for the tinkerer, the visionary, or the risk-taker. In his scheme of things, the world beckons perpetually to a Walt Disney, an Estee Lauder, a Steven Jobs, or a Liz Claiborne, whose brain children never capitulate to mundane limitations.

Glossary

Plausible Capitalism A capitalistic system that perpetually renews itself through growth.

Monopoly Literally, "single seller"; an economic situation in which one firm controls an entire market.

Circular Flow A static system which channels productivity and profits into an endless exchange.

Entrepreneur A risk-taker, or innovator, in the business world.

The concluding chapter addresses the achievement of economists as a whole. How useful have their writings been in interpreting actual events? Has prediction been the economist's aim? Is this undertaking a worthy endeavor? Among the economists described in the book, John Stuart Mill came closest to functioning as an economic prognosticator.

Unlike Mill, most theorists narrowed their perspectives, offering little more than a single option for the future. In comparison to the rest, Thomas Malthus' Essay on Population is the most limited and dogmatic in its prediction of doom from overpopulation. Conversely, Karl Marx, the "Great Predicter," remained cautious about carving his predictions in stone.

The reason that economic prediction remains nebulous and hazy is that economics differs from more scientific studies, such as astronomy or physics. Because society exists in a state of flux, its behavior is less predictable than the motions of the planets or the status of atoms in a molecule. Therefore, economists are willing to forecast only a generalized picture of future trends rather than particular details. These economic generalizations, or laws, exist in a kind of historic vacuum, without recourse to inevitable changes in background situations. Thus, the savvy student of economics expects some ambiguity in predictions and knows to apply common sense to any grand schematic design. In its normal state, prognostication is possible only on two conditions:

1.Behavioral regularities must govern the lives of individuals. These "givens" allow the economist to create "if . . . then" statements, such as Thomas Malthus' surmise that if workers continue to expand their families during boom times, then world population will soon outstrip necessary resources to feed the multitudes. In similar fashion, Karl Marx believed that if capitalists continued oppressing the working classes, their actions would lead to a class war and the inevitable collapse of capitalism.

2.The outcome of the economy will influence society as a whole. Economists as a group share the common belief that how people spend their money affects the "overall shape of things to come." Because money is an integral part of the totality of society, it cannot be overlooked in any analysis of civilization as a whole.

These two conditions clarify how Schumpeter arrived at the conclusion that capitalists would evolve into hidebound bureaucrats. He believed that a change would occur in human nature. Significantly, however, he was the first economist to declare that economics was less crucial to human history than politics or sociology. In summary, it is remarkable that economics, apart from other social sciences, is able to predicate laws of any kind, especially definitive laws which describe how buyers and sellers will react in the marketplace.

In assessing how well the laws of economics describe actual behavior, the student will notice immediately the limitations of time. Economists like Adam Smith were unable to foresee how factory systems would change following revolutionary discoveries, such as the steel-making process, which replaced the lowly pin factory. Likewise, David Ricardo did not envision improvements in nineteenth-century agricultural productivity; nor did John Stuart Mill or Karl Marx clearly predict innovative changes in the political control of economics. In more recent times, even Keynes' and Schumpeter's theories have already suffered major setbacks as events have moved in directions neither man could foresee.

Most significant to the trouncing of economic prediction is the fact that economists as a group have not been able to predict three trends:

1.The growth of technology. Adam Smith was unable to guess that mass production would vastly alter the factory system. Moreover, David Ricardo had no inkling how drastically steam power would alter production. In general, these market seers failed to understand how machines could displace labor. Only Karl Marx surmised that machines might replace workers and even he would be astounded at modern computer-driven machinery, particularly the sophisticated robotics that bolsters the automotive industry.

2.Changes in society's attitudes and behavior. Adam Smith assumed that workers would remain complacent when, in fact, they became more militant. Karl Marx, assuming that human outlook would remain static, failed to see that workers could resolve their differences with capitalists within the confines of a democratic society

.

3.More profound than the other two trends is the fact that regularities of economics are no longer regular. Adolph Lowe, who questions how the random behaviors of individuals in the marketplace manage to provide for the entire community, reveals that people establish economic order because of their singleminded acquisitiveness. However, the will to maximize personal finances is waning as capitalism develops. Human lives are so well furnished that modern capitalism resorts to advertising to convince the public that it needs the new products which factories are turning out. Thus, one of the dependable "givens" of the economic equation is no longer a sure thing.

In short, economic vision has been bounded by turns and twists in the historical path. Each economic theory has reached only so far as the prevailing technology and lifestyle of the times allowed it. These aforementioned alterations in capitalism are therefore producing a less predictable market behavior.

In a demonstrative break with his predecessors, Lowe contends that economics can no longer be governed from within. In order to maintain a balance, the economy requires active interference, such as tax inducements. Thus, the new function of economics is not to predict but to control. The old philosophical system, now completely out of date, must give way to an upgraded version — political economics.

At this point, one quality of economic prognostication seems more pertinent than at any other time — Schumpeter's "preanalytic" grasp, which enables the economist to recognize coming trends, such as Schumpeter's cadre of entrepreneurial elite or Mill's vision of human improvement. Even though these projections derive from the personalities and backgrounds of the economists themselves, they must not be dismissed as whimsical or unimportant. Rather, they merit distinction for being penetrating, courageous, and intellectual acts.

In summary, economics, because it is rooted in human behavior, cannot be reduced to a list of mathematical formulae. Economic exchange functions as a single building block of the total social picture. While economics is a thrilling study of one aspect of what it means to be human, it is still only one view of a complex and ever-changing world picture.

Analysis

The role of economics in society has never seemed more crucial than it does today. There are tens of thousands of practicing economists who influence decisions in banks, corporations, and government. However, the field of vision among today's economists is greatly reduced. Lacking the scope of an Adam Smith, a Thorstein Veblen, or a John Maynard Keynes, these professionals concentrate on smaller spheres of interest, such as Paul Samuelson's work in mathematical economics, for which he won a Nobel prize.

Breaking with earlier traditions, modern economics lauds such figures as Milton Friedman, spokesperson for the free market, and John Kenneth Galbraith, whose philosophy runs counter to Friedman. Whatever the area of interest, economists at present suffer no lack of problems to solve, whether depression or inflation. Under the stimulus of massive change — globalization of the marketplace, third world starvation in an era of affluence, and threats to the industrial order as Japan faces off against the American giant — economists look out on a host of possibilities. What mixed blessing will technology bring? Will the earth survive the pollutants produced by industry? Has ecology gone too far toward destruction to be rescued? Will the depletion of fossil fuels spell the end of the factory system? Is a global depression possible? Will technology extend into outer space?

In none of the above troubling situations will economics bear the final resolution. The citizen of tomorrow will find the role of politics encroaching more heavily on economic growth. Never again will the market chug along on its own steam, as it appeared to do in Adam Smith's day. Consequently, the day of the worldly philosophers appears to have ended. Yet, their role in teaching humanity how to assess a major cog of civilization has brought about a worthwhile reaction — a better understanding of itself.

Glossary

Behavioral Regularities Predictable aspects of the marketplace, such as competition and demand.

Preanalytic Creative; predicting change.