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University of California

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OCT 2 6 1933

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PRINCIPLES

OF

THE NEW ECONOMICS



CROWELL'S
SOCIAL SCIENCE SERIES

EDITED BY

SEBA ELDRIDGE

Department of Sociology, University of Kansas

Principles of tlie New Economics

By Lionel D. Edie, Colgate University

An Introduction to tlie Study of Labor Problems

By Gordon S. Watkins, University of Illinois

IN PREPARATION

History of Socialism

By Harry W. Laidler

International Government

By Jessie Wallace Hughan

The Nature of Culture

By Clark Wissler

Principles of Public Finance

By Jens Jensen

THOMAS Y. CROWELL COMPANY



PRINCIPLES

OF THE

NEW ECONOMICS



BY
LIONEL D. EDIE

ASSOCIATE PROFESSOB OF HISTORY AND POLITICS

DIVISION OF CURRENT INDUSTRIAL PROBLEMS

COLGATE UNIVERSITY



CROWELL'8 SOCIAL SCIENCE SERIES

EDITED BY

SEBA ELDRIDGE
University of Kansas



NEW YORK
THOMAS Y. CROWELL COMPANY

PUBLISHERS



^TVVl



Copyright, 1922,
By THOMAS Y. CROWELL COMPANY



Third Printing



Printed in the United States of America



H3



DEDICATED TO MY WIPE

MARIE BRUCE EDIE



EDITOR'S NOTE

There is an increasing recognition of the necessity of
approaching economic topics and problems from the psycho-
logical and historical viewpoints, as well as from the stand-
point of the classical economists; and also of taking into
account the far-reaching effects on economic processes pro-
duced by the industrial applications of modern science.
Indeed, it is safe to say that our economic system can
scarcely be comprehended unless it is viewed as an organi-
zation, on a grand scale, of historical, mental and physical
factors as these are prepared or revealed by scientific in-
quiry. Professor Edie's book offers an admirable intro-
duction to economics considered as a realistic description of
the economic system produced by these groups of factors.

S. E.



i PREFACE

The primary purpose of this volume is to integrate the
Sif varied developments of recent years in economic thinking,
and to relate them to the body of economic ideas which have
jjQ been evolved through a long history of economic reflection.
J A number of departures from the orthodox economic doc-
\\, trines prevalent at the close of the last century have led to
•» the development of several important schools of new eco-
nomic thought. Each separate school has departed from
I* the worn and beaten paths of economic theory in ways dis-
> tinct and peculiar to itself, and each represents an inde-
fJ pendent and original direction of economic interpretation.
-I In the early stages of such a movement in economic think-
ing, it is natural for both the adherents and critics of each
J branch of the movement to interest themselves in the unique
J and unusual features of the new doctrines of each inde-
•i^ pendent branch. The stage has been reached, however,
rjlwhen it is of deep importance that the several divergent
CA tendencies in economic interpretation should be integrated
in their fundamental relations, The attempt at such an
integration takes full cognizance of the many contradic-
tions and inconsistencies between the various branches of
thought, but it also acknowledges fully the many basic ways
in which the various branches are supplementary and co-
ordinate. The guiding principle of this volume is that the
true value of all the independent developments in recent
economic thought is realized not merely from a view of
each branch of thought by itself, but more completely from
a view of the composite evolution in economic thinking.
The recent pluralistic progress in economic thinking has a
fundamental unity.

vii



viii Preface

Some of the outstanding branches of economic thinking
may be mentioned for the sake of illustrating the scope of
this undertaking. There ha^ appeared within the last few?
years a powerful psychological school of economic thinkers,
whose distinctive characteristic is not that they have intro-
duced psychology into economic theory, for earlier schools
of value theorists made that introduction some time ago;
but that they have introduced a new type of psychol-
ogy into economic thinking, — the scientific psychology
which has made its monumental discoveries and progress
during the last two decades or so. This scientific psychol-
ogy has, as John Dewey observes, displaced the exploded
psychology of the nineteenth century, and has brought out
the advances embodied in modern social psychology, com-
parative psychology, behavioristic psychology, normal and
abnormal psychology, and numerous other special fields of
modern psychological research and discovery. The psycho-
logical developments in economic thinking are at bottom
in thorough harmony with what has been called "institu-
tional economics. ' ' Moreover, these schools of modern eco-
nomic thought integrate in fundamental ways with descrip-
tive economics, with functional economics, with social
economics, with price economics, with dynamic economics,
or with welfare economics. The paramount and striking
feature of these several branches of economic thought is the
fact that in their general bearing and broad scope they
represent a great forward movement in the interpretation
of the economic phases of life.

It should not be assumed that a recognition of recent
advances in economic theory implies a repudiation of old
economic theory. The old economic theory, it is true, is
charged with many fallacies, but at heart its principles
were enduring. Probably the chief cause of uneasiness in
fields of economic thought has been the feeling that former
economic theory was inadequate. Many of its doctrines are
essential, but are too limited to account fully for economic



Preface ix

life. Hence, the present integration of recent tendencies in
economic thinking has an ungtudging tolerance for a large
part of previous economic thinking. The spirit of this
study is not to cut loose from the orthodox theory of the
recent past, but to associate the new with the old in their
rightful relationships.

This process of integrating the new and relating it to the
old necessarily involves much comparison and contrast of
economic doctrines. The literature of the field presents an
endless amount of controversy and dispute. However, the
method of the present volume is not to controvert, to dis-
pute or to argue, but rather to make as direct and clear a
statement as possible of the integrated and related bodies of
interpretation. No attempt is made to explain the ways
and processes by which the present organization of thought
has been arrived at, for the simple reason that such an
explanation would involve a volume of controversy. Nor is
the discussion contained in these chapters framed for the
purpose of convincing professional economists of the de-
fensibility of the author's views. The positive endeavor is
to state the body of thought in a form which can be readily
understood by a university student or by a general reader
of good intelligence. It is hoped that such a statement of
the body of thought will be convincing to economists, and
the writer prefers to let the plain statement of the case do
what convincing it will, rather than to confuse the state-
ment by entering constant anticipations of objections and
criticisms. The method is expository and non-controversial.

In the course of the work of constructing the book, deeply
appreciated help has been received, either in the form of
critical suggestions about the organization of the thought
or of sympathetic reading of parts of the manuscript, from
Dr. Leon C. Marshall, Dean of the School of Commerce and
Administration, of the University of Chicago ; Dr. Elmer
Burritt Bryan, President of Ohio University; Mr. Ordway
Tead, Bureau of Industrial Research of New York City;



X Preface

Dr. H, G. Good, Associate Professor of Psychology and
Education, of Colgate University; Professor J. M. Short-
liffe, head of the Department of Economics, of Colgate
University; Professor E. W. Smith, head of the Depart-
ment of Rhetoric ; Dr. F. H. Allen, head of the Department
of History and Politics; Associate Professor C. E. Gates,
Associate Professor C. A, Kallgren, and Mr. R. M. Gidney,
Controller at Large, Federal Reserve Bank of New York.
The author is, of course, solely responsible for the contents
of the volume.

Cordial appreciation is also due many friends and stu-
dents who have aided in many ways in carrying on the work.

I am especially glad to enter here a full recognition of the
partnership of my wife in all phases of the undertaking.
Her thoughtful and patient collaboration is embodied in
each page of the volume.

Lionel Danforth Edie.

March 21 ,1922.



\^}

y-



CONTENTS

PAUT I— ECONOMIC PSYCHOLOGY

CHAPTER PAGE

I. The Significance of Psychology in Economics , . 1

II. Economic Expression of Instincts 8

The Instinct of Workmanship — The Instinct of Posses-
sion — Disposition to Self-Assertion — Instinct of Sub-
missiveness — The Parental Instinct — Sex Instinct — The
Gregarious Tendency — Instinct of Flight and Fear —
Pugnacity and Rivalry — Some Instincts of Minor Sig-
nificance — Hunting — The Housing Instinct — The In-
stinct of Migration — The Instinct of Play — Disposition
to Mental Activity.

III. The Organization of Human Nature 39

Habit — Imitation, Sympathy, Suggestion — Inequalities

of Human Equipment.

IV. Human Adaptation to Economic Environment . . 52
Discipline — Elimination — Sublimation — Rational-
ization — Revolt.

PART II— ECONOMIC INSTITUTIONS

AND FUNCTIONS

V. The Mechanical and Scientific Basis of Economics 72
Machinery — Transportation — Chemistry — Geology
— Electricity — The Science of Economic Organization —
Psychology of Industrial Engineering.

VI. Labor: Its Part in Production 99

The Job — Hours of Work — Wages — Standard of Living
— Incentives — Bargaining Power — Custom and Habit —
Wages and Labor Efficiency — Power — Environment —
The Mind of the Worker — Immigration — Population
— Economic Significance of the National Character.



xii Contents

CHAFTEX PAOB

VII. Capital: The Rights and Duties of Owneeship . . 175
Statistics of Wealth and Income — Interpretation of the
Facts — Property a Group of Rights — Ownership as a
Corporate Phenomenon — The Principles of Minimum
and Surplus — Inequalities Due to Unequal Privileges —
Monopoly Privileges a Cause of Inequalities — Unfore-
seen Chance as a Cause of Inequalities.

VIII. Management: Its Technique and Responsibilities . 236
Classification of Types of Management — The Mechanism
of Corporation Management — Technique of Executive
Direction — Business Combination and Concentration of
Management — Reasons for the Combination Movement
— Successes and Failures in Combination.

IX. Mabkets: Their Principles and Strategy . . . 279
The Cost of Production Theory of Prices — Supply and
Demand — The Analysis and Creation of Demand — Ad-
vertising — Sales Management — Guidance of the Ratio
Between Supply and Demand — Variations from the
General Principles of the Market — Market Mechanism
Geographically Considered — Market Mechanism Func-
tionally Considered — Price Movements in Various
Stages of the Market Process — Price Policies — Below
the Market Level — Above the Market Level — Business
Combinations and Price Policies — Monopoly Price and
What the Traffic Will Bear — Monopolies and the Steady-
ing of Prices — Price Discrimination — The Science of
Spending Money — ^Technology for Guidance of Con-
Bumption.

X. Money and Credit: Their Services and Dangers . . 366
Forms of Money — Banking and Commercial Credit
— Forms of Loans — Discounts — The Network of Finan-
cial Institutions — Savings Banks — Trust Companies —
Foreign Investment Banking — Other Financial Organi-
zations — Federal Reserve System — Centralization — Note
Issue — Deposit Currency — Reserves — Clearance and
Other Functions — International Banking and Credit
— ^The Principles of Foreign Exchange — The Dangers of
the Credit System — Business Cycles — Psychological
Foundations of the Credit System.



Contents xiii

PART in— ECONOMIC ADAPTATION

CBAPTEK PAGE

XI. Public Control 453

General Regulation of Business — Governmental Control
of Labor — Reform — Public Opinion and Public Control.

XII. Economic Radicalism 487

General Characteristics of Radicalism — Particular
Types of Radicalism — Economic Analysis of Socialistic
Proposals.

XIII. Economic Democracy 499

Fundamental Conceptions — Democracy a Process of
Growth — Works Councils — Labor Unions.

INDEX 521



PART I
ECONOMIC PSYCHOLOGY



CHAPTER I

THE SIGNIFICANCE OF PSYCHOLOGY IN ECONOMICS

Economics is the science of human nature in its relations
to the ordinary business of life. It involves a threefold
analysis, — first, of the motives and satisfactions of men in
their dealings with wealth ; second, of the processes and
organization by which wealth is controlled; third, of the
forces and directions of improvement and change. Thus
economics has a human factor, an organization factor, and
a progress factor. Economics is the science of all three
as a unit and to study any one exclusively is to secure only
a partial analysis of the science.^

'*"' The human side of economics is approached chiefly by
psychology. Men are the vital part of the economic order.
It is men who invent machinery and make scientific dis-
coveries. It is men who operate machines and guide the
process. It is men who compete for the ownership of
property and who manage the economic system from top
to bottom. It is men who bring about progress in the
countless parts of the system. It is to satisfy the needs
and wants of men that all economic activity is carried on.
The human factor of economics is fundamental, and the
science of this human factor is economic psychology.

Psychology approaches the problem by a study of the
primary motives of conduct. Psychology attempts answers

1 See Alfred Marshall, "Principles of Economics," p. 1. Seventh
edition.



2 The Significance of Psycliology in Economics

to the questions, — Why do men behave in the business
world as they do? Do these forms of behavior make for
the proper amount of satisfaction and welfare? What
other forms of behavior are possible and practicable?
What are the chief motives which urge men forward in
their whole dealing with these questions of wealth?

Men are bundles of tendencies to act. Whether in the
banker's office, or around the table of the board of directors,
or on the salesman's route, or at the worker's machine, men
are aggregates of urges to act in certain directions. In
technical psychological terms, these tendencies are instinc-
tive tendencies. For purposes of economic thinking they
are as well termed dispositions, or urges, or motives, or
drives.^ A comprehensive definition of them is given by
McDougall as follows.- "The human mind has certain in-
nate or inherited tendencies which are the essential springs
or motive powers of all thought and action, whether indi-
vidual or collective, and are the bases from which the
character and will of individuals and of nations are grad-
ually developed under the guidance of the intellectual
faculties. . . . Directly or indirectly the instincts are the
prime movers of all human activity; by the conative or
impulsive force of some instinct (or of some habit derived
from an instinct), every train of thought however cold and
passionless it may seem, is borne along toward its end, and
every bodily action is initiated and sustained. The instinc-
tive impulses determine the ends of all activities and sup-
ply the driving power by which all mental activities are
sustained. . . . Take away these instinctive dispositions
with their powerful impulses, and the organism would
become incapable of activity of any kind; it would lie
inert and motionless like a wonderful clockwork whose
mainspring had been removed or a steam engine whose

1 For discussion of definitions of instinct, see McDougall, "Social .
Psychology," pp. 23-29 ; O. Tead, "Instincts in Industn-." p. 5 ; T. *
Veblen. "Instinct of Workmanship," Chapter T; G. Wallas, "The
Great Society." Chapter I; ]M. Parmelee, "Science of Human Be-
havior," Chapters XI, XII, XIII; E. Thorndike, "Original Nature
of IMan," pp. 1-5; J. B. Watson, "Psychology from the Standpoint of
a Behaviorist," pp. 231-240, 261; H. C. Link, "Instinct and Value,
American Journal of Psychology, Jan., 1922, pp. 1-17.



The Significance of Psychology in Economics 3

fires had been withdrawn. These impulses are the mental
forces that maintain and shape all the life of individuals
and societies."^

These impulsive forces cannot be classified in any hard
and fast, absolute divisions. Indeed, such a cut and dried
classification is unnecessary; as will appear from the fol-
lowing list of some of the paramount tendencies. There
is an urge to self-assertion toward leadership, mastery,
power, which makes men move heaven and earth to sit
on a coveted board of directors and map out the policies
of corporations. There is an instinct of possession or
acquisition which drives men to the collection of great
blocks of real estate or of multimillionaire fortunes. There
is an instinct of workmanship or constructiveness, which
determines whether production shall be 50 per cent, or
100 per cent, of its possibilities, and which virtually
compels men of great genius to build up the large business
organizations of the modern day for the sheer joy of
achievement. There is a parental instinct which underlies
kindliness, sympathy, sacrifice and service, wherever it
appears in the economic world, whether strictly within
one's own immediate family or through the community at
large. There is a sex instinct which is utilized effectively
in a large part of advertising display, and which makes
the proper entertainment of workers while off the job a
highly important business problem. There is a herd in-
stinct under whose force a rumor of pessimism may aid in
dragging the financial community to a temporary or pro-
longed state of depression, which may influence in vital
ways the formation of labor unions, or which may deter-
mine degrees of congestion of population in large indus-
trial centers. There is an instinct of submission which
may lead a corporation manager to prefer the status of a
subsidiary in a large amalgamation to the status of an in-
dependent cut-throat competitor, or which may determine
the attitude of workers toward movements for industrial
democracy. There is an instinct of pugnacity which flashes
out from time to time in strikes or in the bitter struggles
1 "Introduction to Social Psychology," p. 45.



4 The Significance of Psychology in Economics

of commercial competition. There is an instinct of curi-
osity or thought which inspires the inventiveness of men,
concentrates their mental powers on the possibilities of
an ever better science of organization, and encourages
countless endeavors at increased efficiency. There is a dis-
position to fear which worries the business man with the
dread of bankruptcy and strikes into the heart of the
laborer the terrors of unemployment.

It is not meant to give the impression that this sort of
classification is all in all. The significance of the list is
that it brings within small compass some of the para-
mount dispositions of men in so far as those dispositions
affect their economic conduct. From other standpoints,
other groupings might be of greater practical value, but
from the economic standpoint, the most useful procedure
is to draw from psychology those parts which have most
value for the study of economics. In the economic world,
therefore, it is indispensable to recognize that men move
and work and plan and achieve in response to certain
primary springs of action, — such as the desire for power,
or ownership, or achievement, or parental satisfaction, or
sex contentment, or herd unity, or submission, or pug-
nacity, or thought.

With this brief picture of some of the predominant ten-
dencies in mind, some important characteristics of their
activity can be pointed out Avith greater definiteness. First
of all they are born into the human being. Through
hundreds of generations they have been built into the life
blood of the human race. They are hereditary tenden-
cies in human nature, passed on from generation to gen-
eration, primitive, ineradicable, inescapable, the stuff of
which human nature is made. They are all part and
parcel of man's inheritance, his racial birthright, and in
their applications to his modern economic life, this origin,
with all that it implies of vitality and power, needs to be
held vividly in mind.

A second important characteristic of these tendencies
is their dynamic quality. They push and urge and drive
men from within. There is something compelling about



The Significance of Psychology in Economics 5

them. They do not make for quiet, but for change. They
are the restless qualities, the forces behind initiative. They
are motives to behavior, sources of animation, filled with
purpose and desire and aspiration. From the town loafer
to the captain of industry, they are drives toward be-
havior. Under their urge, growth, life, change is the key-
note of the economic world. They are the incentives
behind the hundreds of thousands of inventions of industry,
behind the explorations which have opened the world to
commerce, behind the gigantic business combinations and
the myriads of lesser enterprises, — behind the whole eco-
nomic organization.

A third important feature is their pliability. At birth,
they are general tendencies, indefinite urges, broad forces.
By development and experience the tendency to self-asser-
tion may lead to the struggle for power as a labor leader
or as a corporation president. Environment, family, school,
reading all serve from early life to mold and shape and
fashion a particular tendency in certain ways. Every out-
side influence counts in the application of the basic ten-
dencies to the channels of life. A man born with a dom-
inant love of power will weld all these outside influences
into the real metal of his nature, and whether in states-
manship or finance or education or labor, will be a leader
under the domination of the original tendency to power.
So with all the instincts. At birth they are "unlearned
tendencies." Childhood and the experiences of adult years
color and shape them, but they are still true to their
essence.

A fourth important feature is their interplay. One
separate tendency does not commonly hold exclusive sway.
Parental love, possessiveness, self-assertiveness may, for
example, combine in any proportion among themselves, or
with any of the other tendencies to produce behavior.
But in most of the affairs of industry, some one tendency
or small group of tendencies is paramount in the policies
of the individual, the class, or the nation. Different in-
stincts may leap into the ascendency at different times.
Pugnacity may master the man to-day and fear to-morrow.



6 The Significance of Psychology in Economics

There is interaction, combination, succession, waxing and
waning, fitting the demands of the hour, rising to the
occasion.

Finally, the instinctive dispositions involve the phases
described by McDougall as follows: "Every instance of
instinctive behavior involves a knowing of some thing or
object, a feeling in regard to it, and a striving towards
or away from that object. . . . We may then define an
instinct as an inherited or innate psycho-physical disposi-
tion which determines its possessor to perceive, and to pay
attention to objects of a certain class, to experience an
emotional excitement of a particular quality upon per-
ceiving such an object, and to act in regard to it in a par-
ticular manner, or, at least, to experience an impulse to
such action."^ For the biologist or physiologist or pure
psychologist, it is often desirable to analyze and dissect
the instinctive tendencies and concentrate attention upon
their unit elements. But for purposes of economic psychol-
ogy it is commonly more serviceable to think in terms of
the whole disposition. We perceive danger, experience
the emotion of fear and the impulse to escape. They are



Online LibraryLionel Danforth EdiePrinciples of the new economics → online text (page 1 of 47)