by Owen Sullivan
On Jul 20, 2018
For the last decade, our enemies have been working together to disable America’s secret weapon — and they may have already succeeded. Jim Rickards goes in-depth…
THE GREAT ECONOMIC journalist Henry Hazlitt read Philip Wicksteed’s The Common Sense of Political Economy during the formative period of self-study as an economist and social thinker. He serendipitously picked the book up from the Flatbush, Brooklyn, branch of the New York Public Library as he was attempting to learn more economics to help him with his job at the Wall Street Journal. On his 80th birthday Hazlitt characterized his good fortune in stumbling upon Wicksteed’s The Common Sense by paraphrasing John Keats: “Much have I traveled in the realms of gold, etc. Yet never did I breathe its pure serene. Till I heard Wicksteed speak out loud and bold.”1
Hazlitt would move on from Wicksteed and embark on a lifetime of serious self-education in economics and develop close professional relationships with many leading economic thinkers of the time including Lionel Robbins and F.A. Hayek, and especially close personal and professional connections with Benjamin Anderson and Ludwig von Mises. But Hazlitt still had this special affinity for the book that you are about to read.
Hazlitt is not alone in this regard, as Wicksteed is an economists’ economist, while not being just an economist. The Common Sense reflects this persistent and consistent application of the economic way of thinking — the logic of human choice on the margin and the subjectivity of value and cost as revealed in the choices made in the context of acting. Wicksteed deploys the basics of economics to explain not just the universal applicability of decision making on the margin to all realms of human conduct, but develops a theory of the market process animated by exchange; a theory of factor pricing and the equalization of returns; and a general theory of social cooperation emerging out of the purposive behavior of individuals within the market economy.
I encourage the reader to take notice of Wicksteed’s prefatory quote from Goethe: “We are all doing it; very few of us understand what we are doing.” Wicksteed is about to explain to his readers how in our ordinary lives we continually exhibit the economic theory of decision making and interaction even when we ourselves have no idea what we are doing. “In the ordinary course of our lives,” Wicksteed begins his book, “we constantly consider how our time, our energy, or our money shall be spent.” Living a life without philosophical understanding does not mean that our behavior defies philosophical explanation and scientific examination. Economics, in this sense, is little more than applied common sense. As Frank Knight argued about Wicksteed’s work, the “master-theme is that economic theory is merely a clear working-out of the ‘common-sense’ of the administration of resources, and particularly that the same principle governs the organization of production and consumption.”2 The same principle at work on both sides of the market is the human capacity to strive to realize the biggest bang for the buck, and when played off against one another results in the equalization of returns for effort across all margins. But this isn’t true only in the commercial context. We strive to do this in all our endeavors. Consider the following examples Wicksteed uses to illustrate his point:
Thus the same law holds in intellectual, moral, or spiritual as in material matters. Caesar tells how when surprised by the Nervii he had barely time to harangue his soldiers, obviously implying that the harangue was shorter than usual. He felt that a few moments, even at such a crisis, were well devoted to words of exhortation to his troops; but their value declined at the margin, and the price in delaying the onslaught rapidly rose; so the moment was soon reached when the time could be better spent than in prolonging a moving discourse. In a story of South America, after the war, we are told of a planter who, when warned by his wife in the middle of his prayers that the enemy was at the gate, concluded his devotions with a few brief and earnest petitions, and then set about defending himself. Had he been a formalist those final petitions would never have been uttered at all; but under the circumstances the impulse to prayer, though sincere and urgent, became rapidly less imperative and exacting relatively to the urgency of taking steps for defense, as the successive moments passed.
With a wide assortment of such examples, Wicksteed believes that in the first book of The Common Sense of Political Economy he has established once and for all the fact that in the administration of all our resources, man acts upon the same universal principles: “Our preferences and selections as between two or more alternatives are regulated in every case by the terms on which the alternatives are offered and the supply of the desired things or experiences which we command.”3
What I have talked about so far is what you will read in the coming pages that established Wicksteed as a leading figure in the rise of modern neoclassical economics. But as Robbins notes in his introduction, and Kirzner notes in his essay on Wicksteed as an Austrian economist, Wicksteed’s analysis of how the system achieves equilibrium is different from either Walras/Pareto or Marshall. “Wicksteed’s approach,” Robbins writes, “is by no means the same as Pareto’s. His analysis of the conditions of equilibrium is much less an end in itself, much more a tool with which to explain the tendencies of any given situation.” So readers should focus on how Wicksteed explains the working of economic forces to bring about the equalizations of returns, and not simply the fact of equalization; or prices being nudged until they equal money costs. Wicksteed’s economics is an economics of active human decision makers, adjusting their behavior to one another to realize gains from trade, and thus the gains from social cooperation under the division of labor.
No wonder Hazlitt took such inspiration from Wicksteed’s work, and how these themes would be further elaborated in Mises’s Human Action,4 and then again utilized in Hazlitt’s own The Foundations of Morality.5 One of the core problems with ethical theory is that no two people will find happiness or ultimate purpose in precisely the same way. We cannot resolve this problem by appeal to a deity anymore than we can rely on our moral intuitions. But Hazlitt argues that an answer can be found by focusing on social cooperation under the division of labor. “For each of us,” he argues,
social cooperation is the great means of attaining nearly all our ends. For each of us social cooperation is of course not the ultimate end but a means. It has the great advantage that no unanimity with regard to value judgments is required to make it work. But it is a means so central, so universal, so indispensable to the realization of practically all our other ends, that there is little harm in regard it as an end-in-itself, and even in treating it as if it were the goal of ethics. (1964, p. 36)
The division of labor is the greatest example of social cooperation and massively improves the productive capacity of each of us. For our purposes, what matters for Hazlitt is, what general rules are we to live by, that will enable us to live better together so we can realize the benefits from social cooperation. Those general rules are embedded in the private-property system. “All production, all civilization, rests on recognition of and respect for property rights” (Hazlitt 1964, p. 303). Free enterprise, competition, the division of labor, and wealth creation are not separate institutions, but are all grounded in private-property rights and mutually reinforce one another. Without private property, the gains from social cooperation would go unrealized. The free-enterprise system, Hazlitt points out, can exist only within a framework of law and order and morality. In other words, the free-enterprise system presupposes the acceptance of moral rules of just conduct. But the workings of the free market, the vibrancy of competition, the productivity gains from the division of labor, and the generalized benefits from social cooperation also serve to preserve and promote that morality. “Thus, social cooperation,” Hazlitt argues, “is the essence of morality” (1964, p. 359).
Wicksteed, the Unitarian theologian, agreed with Hazlitt as he wrote, “A man can be neither a saint, nor a lover, nor a poet, unless he has comparatively recently had something to eat.” There is a reality constraint that an economic system must produce a certain level of material wealth; otherwise the interactions between individuals will devolve into a struggle for biological survival. Nature is indeed “red in tooth and claw” and mankind is not uniquely equipped to survive in isolation against nature. By cooperating, however, humans have not only survived, but flourished. Through the evolution of rules of just conduct, and judicious establishment of various formal institutions of governance, human beings have been able to realize the gains from social cooperation.
Economic relations to Wicksteed
constitute a machinery by which men devote their energies to the immediate accomplishment of each other’s purposes in order to secure the ultimate accomplishment of their own, irrespective of what those purposes of their own may be, and therefore irrespective of the egoistic or altruistic nature of the motives which dictate them and which stimulate efforts to accomplish them.6
Wicksteed argues that while it may be intellectually important to distinguish between the economic nexus and other social nexuses of human interaction, in practical life it is impossible to permanently isolate the economic from the non-economic. “We may either ignore motives altogether,” Wicksteed argues later in The Common Sense,
or may recognize all motives that are at work, according to the aspect of the matter with which we are concerned at the moment; but in no case may we pick and choose between the motives we will and motives we will not recognize as affecting economic conditions.
The economic way of thinking applies to man in all walks of life and in all his comings and goings. We each have our purposes and plans. We strive to realize those plans as efficaciously as humanly possible. In so doing, we enter into exchange relationships with individuals whom we will never know, and who will never know us, and yet we engage in mutual cooperation to realize our purposes and plans. This is the foundation for human society. Ludwig von Mises perhaps summed up this basic position best when he argued that “within the frame of social cooperation there can emerge between members of society feelings of sympathy and friendship and a sense of belonging together. These feelings are the source of man’s most delightful and most sublime experiences.” But, Mises argued, these feelings “are not, as some have asserted, the agents that have brought about social relationships. They are fruits of social cooperation, they thrive only within its frame” (Mises 1949, p. 144).
There is more to The Common Sense of Political Economy than I can convey in this foreword. I think the readers of this particular edition will be enticed by the connection to Hazlitt and by implication to Mises, as I have tried to draw out in my brief remarks. But let me end by going back to what I said in the beginning. Wicksteed is an economists’ economist, while not being only an economist. So not only do you get the technical economics of marginal analysis and the beginnings of a process perspective on market theory and the price system, but in wonderful prose you have a full methodological exposition of why economic behavior cannot be artificially separated from other forms of rational action, and the social theoretic foundation for the theory of social cooperation under the division of labor. The Common Sense of Political Economy is, simply put, a masterful work in the history of “mainline” economic and political-economy thought.7
1. Henry Hazlitt, “80th Birthday Talk” (Universidad Francisco Marroquin, November 27, 1974).
2. Frank Knight, “The Common Sense of Political Economy (Wicksteed Reprinted),” Journal of Political Economy 42, no. 5 (1934), reprinted in Knight, On the History and Method of Economics (Chicago: University of Chicago Press, 1956): p. 105.
3. In chapter 9 of book 1, Wicksteed restates this principle again when he writes,
The guiding principle of all administration, as we have often seen, is to select between open alternatives as to direct our resources towards the fulfillment of that purpose which, given the terms on which it is open to us, takes the highest place on our scale of preferences. And seeing that the securing of that alternative perpetually lowers its marginal significance, and the neglect of other alternatives raises theirs, we shall always be able to bring our marginal increments of satisfaction into balance with the respective terms on which they are open to us.
Interestingly enough for the reader of an Austrian bent, this equilibrium story is quickly appended by one where an error of judgment is made by the decision maker and thus results in plan revision in future actions.
4. Ludwig von Mises, Human Action (New Haven, CT: Yale University Press, 1949).
5. Henry Hazlitt, The Foundations of Morality (Princeton, NJ: Van Nostrand, 1964).
6. Advanced students of political economy might want to consult the outstanding work of David Levy and Sandra Peart, “Common Sense at 100: A Classic of Behavioral Economics” (unpublished manuscript, 2010); and also Mario Rizzo’s recent work on the rationality postulate in economics and behavioral economics.
7. On the importance of “mainline” economic and political-economy thought, as opposed to the “mainstream” of contemporary economic science, see Boettke, Living Economics: Yesterday, Today, and Tomorrow (Guatemala City, GT: Universidad Francisco Marroquin Press, 2012).