American Contributions to Economic Thought

lecture notes



            The first complete break from the European system of economic thought is the American contribution.  The frontier--an area of land which is outside the control of  a judicial establishment and outside the market process--accounts for what is distinctive in American thought, but not for all distinctions of American culture.  That experience of living outside the “law” forced the mountain men and pioneers to construct a problem-solving theory of value and economic thought.

            There may have been half-a-million Native Americans in North America at the time of Columbus.  The continent might be considered overpopulated for their stone-age state of the arts.  These “Indians” taught skills to the incoming Americans, such as trapping, stalking, agriculture, and eating habits.  This allowed the frontiersmen to supply themselves outside the European market.  They often treated Native Americans shamefully, but they engaged in productive activity much more than in exercising discretion over others.  Their basic problem was how to occupy new lands, as distinct from the common human experience of outsiders conquering dense populations of earlier inhabitants of new lands.

            On the frontier there was considerable separateness of individuals.  Every individual or family had to perform all operations for gaining a livelihood--without institutional prescription.  They were de facto almost anarchists, but they mastered the arts of sustainability, which included cooperation based on need--building a cabin requires more than one person.  An individual must do whatever he can according to his skills, and the community will help in those activities beyond his skills.  They agreed with the classical theory that the common interest is the same as individual interests.  But they rejected the corollary theory claiming that interests are brought into identity by market structures.  This is the unique American contribution that has led to the development of theories of collaboration that are generically democratic.

            Frontiersmen had a plethora of skills, and demanded the right to be different as long as these characteristics did not hinder the effort to live.  Freedom in the American experience means the enlargement of the area of genuine choice, whereas freedom in the European sense means an absence of prescription.  They recognized the relationship between ethics and productive activity--the congruence between material welfare and moral validity.  They were quasi-athiestic, rejecting an institutional idea of a Supreme being.  They were religious in identifying the instrumental concept of problem solving.  In that illiterate society, a man’s word was his bond.  Society could not function without honesty, so deception was treated harshly.  

             Frontiersmen found resources available outside of the market process.  No markets existed to correlate the factors of production.  Land was a free resource.  It was not necessary to accumulate money before buying land and earning a living.  Ownership depended on productive use.  Labor was viewed not as a cost but as necesssary and fun.

            The frontier experience led Americans not to accept the Wealth of Nations as Europeans did.  They rejected its premise that wanting is the essential economic problem and removing want is the solution.  They rejected the labor market as maximizing the wealth of nations.  They disassociated investment from personal saving.  Frontiersmen were always in debt, but built the most productive nation in history.  Money  cost was unimportant; bankruptcy came to be used to reassign debt without change of organization or cessation of production, permitting weak firms to compete with strong by eliminating fixed costs on interest-bearing debt and lowering average variable costs so that prices can be lowered.  Real costs are important, but don’t include work, which is necessary and fun.  The classical and utilitarian theories could not be used to solve problems. 




            Jefferson is the best spokesman for the central ideational content of American intellectual development found on the frontier.  He opposed all “isms” because he recognized that the actualities are non-institutional in nature.  His “Declaration of Independence” asserts that all invidious distinctions among men are figments of the imagination; it does not mean equal opportunity.  He rejected Smith, finding market assignment of labor and wealth to be fatal.  From the frontier he saw that work--not saving--creates the wealth of nations; that investment generates savings (anticipating Keynes), and that money has nothing to do with capital formation: price always equals cost.  Capital formation is not possible with the wage system unless debt is increased.

            Jefferson agreed with Smith that capital formation is related to progress, but disagreed on its nature.  He was willing to use markets to reach ends, but not to determine ends.  He found valid ends to be instrumental rather than utilitarian.

            Productive labor was the base of Jefferson’s theory of progress.  Agriculture was at first the only field where labor would be of value, but when small machines were invented for home manufacturing, that endeavor became productive.  He wrote the following to John Jay from Paris in 1785:


            Cultivators of the earth are the most valuable citizens.  They are the most

            vigorous, the most independent, the most virtuous, and they are tied to the

            country and wedded to its liberty and interest by the most lasting bands.  As

            long, therefore, as they can find employment in this line, I would not convert

            them into mariners, artisans, or anything else.  But our citizens will find

            employment in this line till their numbers, and of course their productions,

            become too great for the demand both internal and foreign.  This is not the

            case as yet, and probably will not be for a considerable time.  As soon as it

            is, the surplus of hands must be turned to something else.  I should then

            perhaps wish to turn them to the sea in preference to manufactures,

            because comparing the characters of the two classes, I find the former the

            most valuable citizens.  I consider the class of artificers as the panders of

            vice and the instruments by which the liberties of a country are generally

            overturned.  However, we are not free to decide this question on principles

            of theory only.  Our people are decided in the opinion that it is necessary for

            us to take a share in the occupation of the ocean, and their established

            habits induce them to require that the sea be kept open to them, and that

            line of policy be pursued which will render the use of that element as

            great as possible to them.[373]


            Agriculture was not only for one class of people.  If there were to be more than one class, it would be the base from which other institutions would grow.  He wrote in 1803:


            It is a science of the very first order.  It counts among its handmaids the most

            respectable science, such as Chemistry, Natural Philosophy, Mechanics, Mathe-

            matics generally, Natural History, and Botany.  In every College and University, a

            professorship of agriculture, and the class of its students, might be honored as

            the first.  Young men closing their academical education with this, as the crown of

            all other sciences, fascinated with its solid charms, and at a time when they are to

            choose an occupation, instead of crowding the other classes, would return to the

            farms of their fathers, their own, or those of others, and replenish and invigorate

            a calling, now languishing under contempt and oppression.


            Jefferson did not mention the price of hired labor.  His only relation with this problem was land owners bringing immigrants to the United States where they would be in servitude.  After his passage was paid, the laborer heard no mention of a time limit to his work.  The immigrant was expected to settle on his own land.  The subsistence for the farmer is the only labor cost mentioned, but the farmer acting in an entrepreneurial capacity.  When Jefferson referred to the word subsistence, he gives the impression that the living standard is much higher than the standard referred to in the classical definition.  He never defined the word because labor did not enter into the market process.




            The separate identification of economic inquiry in America didn’t really begin until around 1900.  This was a period of intellectual flowering: the beginnings of sociology and anthropology and the instrumental theory of Dewey.  Most PhDs had studied in Germany; some, like Ely, were escapting Euroepan influences.  Then came Veblen, who “compelled a whole generation of economists to search their hearts lest the truth be not in them”(Homan)  Here is the first real break in the character of economic analysis.  The heterodoxy of both Marx and Keynes maintained orthodox roots.

            Veblen rejected the orthodox preconception that the economic process is teleological--final causes worked out by selfish human nature, by an unseen hand rather than by cause-effect relationships--because it is both taxonomic and tautological; assumptions and conclusions are the same, self-contained and self-warranting.  Guidance by the invisible hand is non-causal in its determination.  Evidence of teleology: 1) the natural course may be deflected by man--who is not part of nature; 2) when the natural course of events is deflected, it recovers (heals itself) and continues to its intended end when obstruction is removed.  Since the course of economic events resumes, it must be determined by factors outside of process.

            Veblen rejected the universality of the market as an institutional structure, of selfishness as the dominant human motive, and price as the guide of human behavior.  He focused on the function of economic activities as providing the means of life for community continuity.  Anthropology provided the major subject matter for his method.  He recognized the foolishness of the orthodox explanation when applied to primitive societies--the impossibility of describing the fishing of South Sea islanders wading in the surf with sticks and chanting magic formulae as a division of labor guided by the market and the rational selfishness of the participants.  He saw that land, labor, and capital are not significant categories for identifying the means of production.  More important are customs and habits of the people, and their knowledge of technology.  He thus came to believe that economics should study the institutional patterns and technology of any people to understand their economy, without any preconception that these patterns and knowledge would lead toward any equilibrium.

            Veblen claimed to make no value judgments in his analyses, but in every one of his works he tests existing patterns against what was technologically feasible.  Thus, it is fair to say that he took technology to be the locus of validity, although many of his followers as well as his critics have not recognized this.  His method for testing the suitability of any pattern of economic activities was to apply the Veblenian distinction between instrumental behavior and ceremonial behavior.  His distinction between technology and institutions confused the constitution of institutions--patterns of habits--with the determination of institutions--their origin.  Veblen seems to be getting at the insight that all answers to economic problems take the form of institutional adjustment.  His basic mistake was to believe that institutions are a result of unconscious habituation, which denies any grounds for intelligent institutional adjustment.

            Veblen thought technology and institutions are independently progressive.  Neither depends upon the other.  Institutions come into being through habituation, and they change with something of a consistent sequence.  He didn’t know just what this sequence was; he found no direction in the process.  It is in terms not of an approach toward a particular institutional pattern but toward greater economy and efficiency.  He was thinking of instrumental efficiency but didn’t know it because he didn’t recognize the significance of science, he couldn’t validate it.  Individual scientists probably do proceed because of idle curiosity, but that does not mean that science is without significance or rational basis.

            Starting in his Theory of the Leisure Class in 1899 and continuing through most of his work, he identified conspicuous consumption as a pattern of behavior common to all societies above a mere subsistence level of production.  As a community increases its productivity, different classes develop methods for appropriating whatever part of the community’s produce is not strictly necessary for production, and using it in ways that are reputed to be productive and that the whole community accepts as proper.  Thus, early warriors would steal women and men to work for them; after they had a large number, they would have the women conspicuously display their exemption from labor as evidence of the wealth of their owner-husband, but always with the imputation that amassing wealth resulted from contributing to the wealth of the community.

            What does this have to do with economics?  It shows that the resources of communities are not distributed rationally by a market for the purpose of maximizing production.  It shows that a society with rank and status distinctions--i.e., all societies--does not leave individuals free to seek their selfish interests, since the structure of the society assigns functions to its members.  And it suggests that price is a symbol of the existing structure--that goods with high prices are consumed by the proper people--rather than an indication of what is intrinsically desirable and good.


Criticism of marginal utility theory:

            1)  Wants are taken as given.  Analysis is limited to the theory of distribution and has only a secondary bearing on any other economic phenomena.   But consumption is a cultural trait, and to explain either demand or supply, one must go beyond the market process.  The utility concept of value necessarily is a matter of valuation.  Valuation stems from choices of alternative utilities (anticipations of want-satisfaction) which are a function of previous consumption, which is the direct concomitant of distribution.

            2)  Prices of commodities are taken as given in order to reach answers about prices of commodities--tautology. Since this theory is necessarily concerned with adjustments of relative values to a given situation, it can add little, if any, to a theory of growth, change, or process--the most obtrusive and consequential facts observable in economic life--and thus can offer little to understanding the determination of the situation itself. 

            3)  The institutional structure is taken as given, and the analysis limited to adaptation to the demands of the main chance rather than to problem solving. 

            4)  Marginal utility analysis is confined to the ground of sufficient reason instead of proceeding on the ground of efficient cause.  Here is another revelation of Veblen’s basic mistake.  He thought that habit emerges full-blown, but it is a matter of choice in its initial deviation from an established pattern.  It involves discretion.  The only way that a cause-effect sequence comes into institutional structure is through becoming a sufficient reason, and so all effective cause at one stage in the process of institutional adjustment takes the form of sufficient reason.  This blocked Veblen and his followers, but was understood by Ayres.  An idea must become a sufficient reason in the comprehension of the community so that members can modify their behavior.  This mistake came from applying what is true in the physical sciences to humans: molecules don’t think and have discretion as humans do.

            5)  Marginal utility is limited to individual motivation and action, and to their arithmetic sums as aggregates.  Veblen’s genetic theory examines individual conduct, but only in those respects in which it leads toward habituation, and so toward change or stability in the institutional fabric.  Veblen was seeking a theory of institutional adjustment, but precluded himself from it by confusing the content (habits) of institutions with their determination (by discretion).

            Veblen criticized price and utility theory extensively, but his positive contributions came mostly in the area of economic growth.  For orthodox economists, economic growth meant and still tends to mean more of the same--more land, labor, and capital to produce more of the goods already used in a society.  For Veblen, growth was an evolutionary process wherein the structure of a society changed.  The reason for change he identified as the pressure of technology.  Much like Marx, he recognized that new methods of production caused strains in the patterns of habits followed by a community.  With technology as his standard, he said that a community could change its institutions to fit the new productive processes, or it might maintain patterns of institutions which inhibited production and even led to the destruction

of society.

            Foster thinks Veblen’s best book on development is Imperial Germany.  Here he studied the reasons for England’s leading role in the adoption of industrial technology in the 1700s, and the reasons for Germany’s rapid assimilation of those techniques after 1870.  He shows how England’s backwardness in the Elizabethan Era made her able to borrow then-current handicraft techniques from the continent, and then to develop these into new production methods because of her relative freedom from the wars, political intrigues, and rigid class structures of Europe.  But by the middle 1850s technological progress was leaving England behind.  Because much of her capital was obsolete--small railroad cars suitable for wooden or iron rails but inefficient when steel rails were perfected--her captains of industry focused on protecting their investments; sports were highly developed as a means of lessening industrial efficiency by consuming time and energy nonproductively; women were forced into Victorian clothing and forbidden to produce.  While in Germany, the Prussian rulers had an educated work force used to constant application, women still worked in the fields, and the wealthy were not burdened with obsolete investments.  In addition, since the Germans had not developed the democratic institutions which grew up in England with handicraft and machine industry, the rulers could give orders and be certain of obedience.  Thus within decades Germany came to surpass the productivity of England.

            Not only did Veblen explain this case of economic development, he also predicted the warfare which was apt to result from the use of modern technology by a primitive dynastic state such as Germany was--a state in which the people blindly followed the leader and where the leaders were high-powered bullies convinced that might makes right.


Veblen’s contribution:

            1)  Distinction between technology and institutions, although not accurately stated.  He realized that given data must be taken from technology--the state of the industrial arts--but he didn’t go far enough.  He failed to recognize that institutions have both instrumental and ceremonial functions.

            His critics say that since he was not going toward any “ism,” he was not going anywhere--his analysis was directionless and meaningless.  But he recognized that the identification of direction--meaning the criterion of judgment--cannot be stated validly in terms of institutional structure.  To Veblen, an “ism” exists as an idea, and is a useful structure for identifying ideas in reference to a theory of value.  He noted that these patterns are accepted as natural, but in fact are not so.

            Foster maintains that Veblen’s distinction between technologically valid patterns of behavior and ceremonial patterns which falsely claim to be productive is what economists need today to help develop the many backward economies of the world.  We can’t tell India to get more capital as long as Indians allow cows to roam the streets eating rather than providing food.  We can’t tell them to work harder with their ox-drawn plows.  We must educate them to recognize which of their institutions are obstacles to a modern economy, and also help them protect other institutions which are undoubtedly valuable.

            2)  The test of the maturity of scientific theory is its ability to predict, and Veblen is the only social scientist who ever lived who was able to predict.  Next to him was Keynes.

            What Veblen started is the development of the theory of institutions, of which economics is one phase.  He gives us a chance to work toward a general theory, which is now lacking.  He does away with ismatic criteria for the judgment of direction.

            Eric Roll, in A History of Economic Thought (Englewood Cliffs, NJ: Prentice Hall, 3rd edition 1956), dismissed the significance of the Veblenian distinction (449) and lamented the little that Veblen left to replace classical economics (447).  That is like asking an atheist what he will put in the place of the Holy Trinity.  If classical economics focused on the market system, and Veblen’s analysis shows that the market system just describes what a community does and not at all what it should do, then is it pertinent to ask Veblen to provide an alternative analysis of the market?  Is it not necessary that economists redefine their subject?  Keynes forced economists to concern themselves with institutional patterns such as the consumption function.  Now work on economic development is forcing many to come to grips with technology and culture.  But still the content of theoretical economics is to describe how a series of forces will push us to a static equilibrium if we will only let them work or help them at the right times.  Where does Veblenian analysis lead?  To genetic study of culture and technology.




            Commons’ principle of agreed compromise--what people think rather than what criterion of judgment is in fact true--led him to view the administrative commission as the American answer to the major economic problems which have arisen out of the new technology in combination with corporate organization.  His view was that the traditional separation of legislative, judicial, and executive functions rendered our economy helpless when confronted with such problems as monopoly, public utilities, labor organisation, currency control, investment banking, taxation, etc.  Problems of this sort require, he thought, agencies which combine the three functions because we must have a practical method of “correlating law, economics, and ethics ...”   And his concept of the correlating function is embodied in his theory of “due process of law” which, again, is an application of his principle of agreed compromise and, in another of its applications, constitutes what judicial institutions identify as “reasonable.”  “Reasonable” is a very important concept in contemporary legal theory: note ratemaking rules.  According to agreed compromise, findings of commissions may be held reasonable when all parties affected by the findings are given full opportunity to present their opinions and intentions and their reasons for them.  Findings of agreed facts are then held “reasonable” and the courts may judge interpretations.

            Commons took the validity of compromise as his basic principle because he lacked a rational theory of value, an evidence-based criterion of judgment.  Thus he arrived at five “principles of explanation” which determine the complex of transactions:  They are prescient but amorphous and non-generic.

            1) efficiency “in terms of managerial transactions, measured as the rate of output per unit of input, the man hour.”    Commons viewed this as a relation of man to nature.  He was never quite clear as to what was put in and what came out.  He finally decided about what Marshall said: labor and materials went in and commodities came out.  He found no way to measure both other than utility, despite Veblen’s fatal attack on it.  But he did think efficiency was determined by technological aspects of management--use-value in engineering terms.

            2) scarcity “in terms of bargaining transactions, measured as the rate of proprietary income from other persons relative to the rate of proprietary outgo, measured by the dollar.”  Commons viewed this as a relation of man to man.  Without the instrumental-ceremonial distinction between the functions of institutions, this is about all he could do--with the added explicit recognition that the sets of relations are inseparable aspects of the economic process.  Of course both producing for use and bargaining for scarcity involve man-man relations--the institutional structure.  Commons thought the two could be harmonized through collective action resulting in a “reasonable” economy retaining capitalistic motives.

            3) working rules (customary behavior) compel individuals.  Contract is not “freedom from custom;” rather, it is another custom.  It is not rational choices as indicated by the classicists, but plain custom that determines choices in the market--and Commons couldn’t explain how customs come about, or even recognize as did Veblen that that question is the central one in economic theory.  Its answer must constitute the theory of the economic process.

            Commons did feel the necessity of referential content for his principles, but did not understand the place of ideas in the determination of “customary behavior.”  He did not even understand that the significant inquiry is what does determine (bring about) the complex of behavior patterns.  But we must give him credit for understanding that institutions are man-made, not natural or imposed by some outside-of-man guide to man’s destiny.  He makes man responsible.

            4) sovereignty: “the changing process of authorizing, prohibiting, and regulating the use of physical force in human affairs.”  What Foster calls mandamus and injunction.  Its function is to ration factors and commodities in the economic process--the function accomplished by supply and demand in orthodox theory.  The “rationing transactions” determine the pattern of economic power.  Commons got coordination of law and economics, since both have a common effect in terms of rationing.  But sovereignty works both ways--really through futurity, judging the future correctly and acting accordingly.

            5) futurity: the dynamic in the economic process.  Transactions are determined by expectations, as for Keynes.  But transactions are not repetitive reciprocations within a given pattern.  There is no “closed” economy; rather there is an ongoing process, constantly changing.  And therefore the indeterminacy of expectation permits continuity of the process because it results in different appraisals--and therefore transactions--which constitute the process.  Shades of Marshall: the economy works not because of disagreements and institutions, but because peoples’ expectations differ.




            Mitchell adopted “pragmatic psychology” from Peirce, Dewey, and Veblen.  His quantitative analysis provided analytic description more than a catalogue, a systematic account of what is being inductively investigated.  Problems which are not subject to quantitative statement may be laid bare by statistical treatment of historical data, showing the relative importance of various factors which enter the problem and patterns of fluctuations of those factors.  Statistical norms--arithmetic mean, modal average, etc.--can reduce the number of interrelated, concurrently variable functions.

            Mitchell said economics “will be less concerned with puzzles about economic motives and more concerned about the objective validity of the account it gives of the economic process ...”  Foster says motives are facts in the sequence of events we call the economic process.  And if motives are in fact a determinant, can we say that we shall explain the economic process but not consider its determinants?

            Mitchell said that economics has in common with all other social sciences 1) “the understanding of human behavior,” 2)” the quantitative analysis of behavior records,” and 3) the ambition “to devise ways of experimenting upon behavior.”  He understood that “one who elaborates statistical series in ingenious ways may get as far out of touch with reality as one who excogitates a set of speculative assumptions.” (“Quantitative Analysis in Economic Theory.” American Economic Review, 1925)  In the same essay, he wrote “Qualitative distinctions must remain basic in all their [economists’] work.”

            In “The Scope of Economics,” Mitchell distinguished between evolutionary and systematic economics.  It is a distinction between theory and practice, parallel to the distinction between induction and deduction.  He thought--unlike Veblen--that they should reinforce each other, but that neither could substitute for the other.  He found economics concerned with four types of inquiries, the first two of which are objective the last two normative--having to do with welfare.

            1) “the continuous process of providing and using commodities and services.”

            2) “the making and spending of money,” from family budgets to high finance.”

            3) personal interests--the “dim inner realm of consciousness,” but somehow

            excluding motives.

            4) communal interests in the first two--serviceability to community rather than

            individual advantage.

He found that all four fields are brought into order by money--the integrator--which forces man to be rational, to make calculable decisions.

            Mitchell developed two new tools for the study of business cycles:

            1) A new theory of causation he called “analytical descriptions” applying his distinction between evolutionary and systematic theory.  Instead of “the cause,” he substituted “the conditions” which result in fluctuations.  But his “conditions” which constitute the description are “selective” and “typical.”

            2) New statistical techniques to handle the “conditions” at a level of inclusiveness which would permit their concurrent handling.

            Mitchell’s general theory of the cycle is that each phase contains the “conditions”  strictly within the market economy which eventuate into the succeeding phase--depression, recovery, prosperity, recession.  Depression evolves into recovery because stocks of goods are depleted, population continues to increase, new tastes and styles and commodities are developed, and investment demand revives.  Recovery merges into prosperity, in the self-generating sense, until costs and growing tension in the investment market becomes obstructive.  Recession evolves into depression, and depression proceeds until goods are depleted.

            Mitchell was right in working with pecuniary accountancy, but he never realized that he was blocked by the price theory of valuation.

            His eclectic theory of business cycles presumes that there are cumulative causal factors in each phase of the cycle that bring about the ensuing phase.  First, in the upswing, there is a lag in wages (payments to the factors) behind prices. This results in an opportunity for increasing rates of profits.  However, as this proceeds, surplus labor is absorbed and the less efficient units are brought into use, and wages go up in relation to the productivity of the labor purchased.  Second, the lending capacity of banks is approached, and banks raise the interest rate.  Third, the prices of raw materials begin to soar, especially as each raw material approaches its physical limits.  These increases result in a narrowing of the profit margin, which results in a constriction of banks’ willingness to lend.  Then businessmen make a strong effort to attain liquidity by selling immediately as many goods as possible.  To do this, they have to reduce prices.  Reduction in prices makes it more difficult to get liquid, and it gets worse.  The same cost factors that lagged going up also lag going down. Sticky prices cause the depression to deepen. This continues until:

            1. The banks get too much “stock” on hand, so they lower the interest rate.

            2. Wages fall below the immediately past normal relationship to prices.

            3. This continues until the prices of raw materials fall sufficiently to enable them to be

                used in production profitably, possibly.

Then, Mitchell says, you’re on the upswing again, in view of the profit margin newly arrived at.

Thus there is a true cycle inherent in the economy.




            Clark was uniquely imbued with received doctrines because his father John Bates Clark was a Neoclassical theorist--far and away the most able.  But as the son attained maturity, he came to recognize that something had to be done with the received theory.  He set out deliberately to find out what that was.  His best treatment of the ideas which comprise the American contribution are to be seen in Studies in the Economics of Overhead Costs, published in 1923.  He stated as his purpose “to come to grips with the dynamic movements and resistances to movement” which characterize the organic economy in its modern state of development.

            The son criticized his father’s concept of capital.  J.B Clark developed the concept of capital as nonmaterial and immortal.  Capital changes its form from ships to tractors to sealing wax.  It can be created but never destroyed; it is something central to civilization itself.  Its physical evidences, like plant and machinery, are temporal.  But the key to civilization itself is the development and accretion of the means of providing the means of life--and thereby the quality of life.  The means of providing the means of life are primarily know-how--the technological continuum--which is immaterial.  

            J.B. Clark asked how capital accrues and what determines its quality?  What determines the character of production and its level?  His answers were a compelling presentation of the neo-classical general theory.

            J.M. Clark accepted the concept of capital as nonmaterial and immortal, but began to notice discrepancies between the analysis and the run of the facts.  He began his attack with  the problem of wages, because of their impact on civilization since most people live from wages.  He found it strange that his father and all teachers in the world considered wages a cost, since labor is the embodiment of a large part of human experience itself.  He thought about what it really costs a community to carry on the economic process, trying to get at what Keynes called user costs--the only costs to the community at large since all other “costs” to individuals are really income to the community.  If Clark had started directly with user costs rather than overhead costs, he probably would have gotten farther in his analysis.  But he did get beyond prime costs of orthodox analysis--profits, rents, wages, etc. that constitute income--to some notion of the residual costs to the community.

            Clark recognized that labor is not a cost in the economic sense.  Inefficient or mistaken use of labor costs the community, but efficient labor is one of the rewards of life.  It was thought, for example, that we could produce a lot more goods if people would just work longer.  The pecuniary accountancy makes it seem that the community has a choice between leisure and efficiency.  Clark suspected that this analysis of the labor problem was incorrect.  He started thinking about the social benefits of maximum hour legislation and minimum wage legislation--ideas of growing importance.  In textbooks today, authors prove in their principles chapters that the only way efficiently to organize labor in relation to other factors of production is through market-driven wage bargaining.  Then in their problems chapters they propose solutions such as minimum wages already disproven theoretically.

            Working longer hours means giving up leisure for the worker, but not for the community where the work increases rather than decreases alternatives.  Clark suspected that the Neoclassical theory was wrong to claim that alternative choices of the community parallel those of the individual.  It is true that if you buy or produce a recording machine, you cannot  with those funds as an individual, or with those factors as a producer, buy or produce brief cases.  The choice of one causes the other not to exist.  By assuming full employment and a productivity theory of wages, the classicists asserted that a community faces the same alternatives.  Clark came to the conclusion that the classicists were wrong, and his thinking here is prescient of the multiplier. In view of the inclusive character of overhead costs, he recognized that the fact of depression requires the community to take responsibility for maintaining aggregate demand.  The fact of depression shows that the free market process fails to determine the allocation of factors.

            Clark’s analysis led him to conclude that the large amounts of fixed capital prevent the attainment of equilibrium in the classical sense.  If there weren’t so much fixed capital which must be paid for, maintaining effective demand would become a minor problem.  Given our theory of accounting, which comes out of the Neoclassical economic theory, it is necessarily the case that the period of payment for fixed capital be shorter than the productive life of that capital.  If asset life and accounting payments were co-terminal, Clark thought, the community would not have a problem--reminding one of underconsumption analysis asserting that you have to withdraw from the stream of effective consumer demand to pay for fixed capital.  Clark should have rejected that conclusion because his analysis suggested that raw material and labor are not overhead costs.  Foster says the trouble is not that the economy cannot attain classical equilibrium; it is always there, by definition; and we don’t want it--it is beside the point.  It means commercial efficiency and, as Clark saw, that does not lead to economic efficiency.  We must replace the price theory of valuation--commercial efficiency--with the instrumental theory of valuation.

            Clark tried to apply the Veblenian distinction when distinguishing “commercial efficiency” from economic efficiency, which he called “social values.”  He was trying to get at the continuing factor Foster calls “value”--the criterion of judgment--but used the word “values” which are things we hold dear.  They refer to temporary situations rather than to continuing conditions, and thus cannot serve as ground for judging what is good and what is bad.  “Social values” are created by non-market institutions; they may be intangible assets such as a patent created by legislation.  Market--exchange--values cannot be determined by alternative utility of the marginal unit because it would destroy the economic process, as in the case of railroads.  Rather, for Clark, the unit exchange value comes from the contribution to social value--an offhand acceptance, after disproving it, that the market process brings exchange value into some kind of tolerable approximation to social value.

            Clark is really saying that the whole concept of exchange value embraces things created not by some natural order but rather by institutional adjustment.  They are institutional, not technological, matters.  He says what ought to determine exchange value is contribution to the social process.  We need, therefore, a new accounting system to indicate social values as a parallel check against the business accounting.  We need an accounting system to show the actual contributions of any and every economic enterprise.  Clark thus gets closer to a comprehension of the theory of value, as subsequently expressed by Ayres, than any of his predecessors.

            What Clark is getting at under the caption of “variable costs” is identifiable specifically in terms of institutional inefficiency, and only there.  It is identifiable only in the ceremonial functions of institutions.  What he calls “overhead costs” Foster says don’t exist.  But what he is getting at are the real costs that Keynes conceived as user costs, costs that are experienced anyway.  For example, one could certainly start off with subsistence as an overhead cost in that relationship--it is there whether one produces or not.  Beggars who are getting subsistence are a cost to the community as much as workers receiving a subsistence wage.  Clark did not realize that cost is a function of value--the destruction of value.

            Clark made the same mistake as the classical theorists by raising the experience of the individual to the level of the community.  There are not two kinds of value--personal and social--but the data are different.  The alternative choices to the individual are not the same as to the community.

            Clark applied the American philosophical development we used to call modern pragmatism--the word has lost all meaning now--when he pointed out that wants may be good or bad.  Now in the neo-classical formulation that is impossible and nonsensical.  It is no concern of economists whether a want is good or bad.  That judgment is determined by operations with which  the economist is not and cannot be concerned.

            It has always sort of amused Foster that scientists who establish the normative-positive dichotomy insist that, because they are scientists, they can’t carry out other operations.  They can’t tell the difference between good and bad, but since the difference exists the rest of the community must tell them.  It makes us look on scientists as children--naive.  They know many things but are just like children when it comes to good and bad.  Foster finds this plain silly: what science is is the study of good and bad.

            Clark said that “the goal of the scientific method is the uncovering of economic truth.”   And the economic truth includes judgments between good and bad wants.  Thus, economic analysis involves more than price analysis.

            John Gambs Beyond Supply and Demand [Columbia University Press, 1946] is simply stating in an inferior and confused way what Clark had stated twenty years earlier, that the determinants of the economic process are beyond price theory.  The determinants lie in the operations that eventuate into decisions regarding good and bad wants, and the institutional devices for the satisfaction of those wants. 

            Thus you will find in Clark a peculiar double play.  When he says that each generation must “discover anew the essence of economic truth,” he is carrying along the Neoclassical dichotomy between individual and social problems in trying to apply the Veblenian distinction.  He is seeking to identify the continuing factors, but claims that each generation must discover them anew because their structural appearance changes:

            Conditions change; therefore human behavior changes; therefore economic

            operations change; therefore there are no continuing factors, and each generation

            has to learn it over again.

He says we must discover anew those things which don’t change, but the immediate emanations of which change.  And the reason he gets into that paradox is because of this confusion between personal and social problems. 

            But Clark made clear that the continuing factors cannot be stated in terms of conditions

or situations.  And their correct identification permits resolution of the seeming paradox of continuing change in the presence of continuity.  Resolving that paradox constitutes the American contribution in economics.