Chapter XXV: The Reconciliation of Statics and Dynamics (1)

In the foregoing discussion of the value of money it has appeared that the value of money is not an isolated problem! Not only have we found it necessary to consider it as part of the general theory of value, but it has been advisable to bring it into relation with a large number of the special theorems of economics, including the law of supply and demand, cost of production, the capitalization theory, the doctrine of appreciation and interest, the theory of international gold movements, Gresham's Law, the theory of elastic bank-credit, and the general theory of prosperity. The book has thus become a book on general economic theory, viewed from the standpoint of the theory of money. It has been as contributing to the problem of the value of money that these other doctrines have been discussed, but I trust that they, too, have gained something of clarification from being considered in this relation, and that the emphasis on the role of money in general economic theory has helped in bringing the various elements in our current theory into a closer-knit interdependence.

The present chapter seeks to carry the conclusions so far reached toward a further unification of economic doctrine, by finding for certain contrasts, like that between statics and dynamics, a higher synthesis, so that it may be possible for students of dynamics and students of statics to speak a common language, to use common measures, to find that their phenomena are not, after all, of essentially different nature, and to come to agreement as to the relative importance of "static" and "dynamic" tendencies. It will appear that the theory of money and exchange plays an important role in effecting that higher synthesis, and is itself clarified by it.

The "theory of goods vs. the theory of prosperity," "statics vs. dynamics," "normal vs. transitional tendencies," "long run vs. short run" laws, "market vs. normal price," "abstract theory vs. concrete description," "historical or evolutionary study vs. cross-section analysis," "temporal vs. logical priority," "causation as a temporal sequence vs. causation as timeless logical relationships"--these, and similar contrasts have appeared frequently in the history of social thought, and have been especially refined and elaborated in the history of economics. We have even compounding of the notions into more complicated distinctions, as by Seligman,[572] in his two statements of the law of costs: in the short run, normal price tends to be the maximum cost of production; in the long run, normal price tends to be minimum cost of production. Seligman has illustrated his notion by an adaptation of the familiar figure of the sea-level and the waves: for short-run purposes, we may contrast the surface waves, the market prices, with the sea-level, the normal price; for longer run purposes we may see the level of the sea itself changing, under the influence of the tide, and may have a dynamic normal, which is still to be distinguished from the fluctuations due to the play of winds on the surface.

We have further an increasing recognition of the up and down play of forces accelerating and retarding the processes of industry and trade. For earlier writers, panics and crises were anomalies; since Mill's _Principles of Economics_, to go back no further, we have had increasing recognition of such occurrences as more or less periodic and inevitable, bound up in the very nature of economic life itself, and of late there has been a fairly general acceptance of the notion of the business cycle, of an alternating rhythm of prosperity and depression. The explanation of this alternation has been attempted by numerous theories, one of which, that of Joseph Schumpeter,[573] rests the whole case definitely in the distinction between static and dynamic tendencies, and in the conflict between the opposing sets of forces which statics and dynamics undertake to describe.

We are told by the orthodox economist that war is wasteful, destroying laborers and goods, and lessening the wealth and productive power of society. We are told that it diverts labor from productive employments, that it turns huge masses of capital and labor to the production of goods which men cannot enjoy, that it burdens the people with taxes, etc. Static theory can see nothing but evil in war, from the standpoint of minimizing human sacrifices, and maximizing human enjoyments. None the less we see many war periods--notably that of our Spanish-American War, and the present World War, so far as the United States are concerned--periods of marked prosperity, growing out of the new expenditures which war itself involves. Mules and other farm products rose in price with the Spanish-American War, as the Federal Government bought them for the army; various factories concerned particularly with war munitions increased their activity, the gains of factory owners and farmers led them to increase their purchases, wages rose, and rose in part because part of the labor force was in the army. The Civil War did spell demoralization and economic ruin for the South, but for the North it gave a great dynamic impetus to trade, transportation and industry--an impetus, strangely enough, that was so great that the new industries and enterprises which had grown up were able to absorb with little shock the million men set free from the Northern armies when the great struggle was over.[574]

For static theory, scarcity is an evil. A general overproduction is impossible. For the practical business man, confronted with the momentous problem of marketing his output, overproduction is a vital reality, and there are few times indeed when much more could not be produced if only a satisfactory market could be found for it. Static theory would see the whole explanation of this in maladjustment, too much of some things being produced, too little of others. This simple statement does explain much of the phenomenon, but it is far from telling the whole story, and even if it were a complete explanation, it would by no means dispose of the reality of overproduction as a constant menace, even when not a dire reality, facing almost every business man. Static theory at best tells what a completed adjustment would be; it does not touch the problem of how adjustment is brought about, and maladjustment overcome. Yet just that problem is the vital concern of the business man.

For static theory, high or low prices are matters of no concern. And abundance or scarcity of money and credit make no real difference in the economic process. Abundant money and credit exhaust themselves in raising prices, and the rest of economic life goes on unchanged. This doctrine of the quantity theory is, as I have undertaken to show in Part II, bad even as a matter of static theory. But it is only as a matter of static theory that it is even thinkable.

The economic theory of the 19th Century, following the lead of Adam Smith and Ricardo, has been accustomed to dismiss as utter folly the notions of the Mercantilists as to the balance of trade, and the importance of an inflow of gold, and has conclusively proved that protective tariffs tend to divert the labor, capital and land of a country from those lines of production they are best adapted to to lines for which they are less well suited. Critics have pointed out, as in the "infant industries" argument, that we cannot treat the labor capacity and technical knowledge of a country as constants, that the temporary encouragement of one line of industry by a tariff may so modify the data of the situation that the country may in time become better adapted to the protected industry than to other lines. And I think that we may well go further, and make substantial concessions to the doctrines of the Mercantilists as they themselves stated them, seeing in a favorable balance of trade, and in expanding exports and diminishing imports sources of impetus which are not subsequently neutralized by the static process of equilibration. I do not conclude from this that protective tariffs are commendable, any more than I conclude that war is commendable. Both may give dynamic impetus, and lead to economic development. Both may lead to political corruption, to iniquities in the distribution of wealth, to waste and suffering of various kinds, in which honest and patriotic men suffer, and cunning and unworthy men gain. The point here is simply that static theory does not tell the whole story regarding either tariffs or wars. It may well be true--I think it is true--that static theory offers the more important principles for judging the results of wars and tariffs.[575] It is the central problem which I have set myself at the outset of this discussion to find a way to bring static and dynamic considerations _under a common measure_, to reduce them to homogeneity so that comparisons may be instituted, and so that the student of statics and the student of dynamics need not talk merely at cross-purposes. But we do not achieve this result by ignoring considerations in either sphere.

Bastiat, with a fine show of logic, has sought to rule out of court the doctrines that extravagance and tariffs, etc., are sources of prosperity by his emphasis on the "Unseen," as opposed to the "Seen." The prosperity growing out of the extravagant expenditures of one brother is open to all eyes. The consequences of the savings of the frugal brother men do not see so easily, and do not attribute to his frugality. Doubtless Bastiat is right in his main theses. But one point needs emphasis: that which is "Seen" stirs the imagination of men. And imagination energizes human activity. The motivation of economic life is a psychological matter.

And so at a host of points the contrast may be drawn, in one or another form. The pure, abstract, static theory gives one conclusion; the other approach suggests one different.[576]

How is it possible to give proper weight to considerations drawn from such divergent spheres of thought? Indeed, how shall we weigh the dynamic considerations at all? Static theory presents itself in quasi-mathematical form. At times, it parades itself in equations, and it readily enough, without arousing a feeling of incongruity, expresses itself in mathematical curves, with ordinates and abscissae. One static tendency finds itself in marginal equilibrium with another, and the margin is expressed in quantitative units, commonly sums of money. Static doctrine does, indeed, lay claim to precision and exactness, and static tendencies may be weighed against one another. But how shall one undertake to give quantitative measure to such a thing as the educational influence of a tariff on silk manufacture? How measure the dynamic impetus of a new chain of banks on the industry and trade of the region affected? How gauge the importance of a new advertising scheme, or a new invention? Dynamic considerations are commonly presented in vaguer, looser form than static theories. Usually we have merely a statement of a qualitative tendency, without effort to make the importance of the tendency quantitative. Indeed, I think it safe to say that one chief difference between statics and dynamics is that those tendencies which can be most easily formulated have been recognized by statics, while those which are less understood, and less precisely formulated, are left to dynamics! A big part of the difference is methodological, rather than inherent in the nature of the phenomena themselves.

I think that it needs little argument to show that all the contrasts listed at the beginning of this chapter do not run on all fours. Compare, let us say, the contrast between "statics and dynamics" with that between "historical and cross-section" study. Concrete, realistic history is not dynamic theory. A realistic description of society viewed at a given short period of time is not static theory. Both statics and dynamics are _abstract_. _Laws_ are not the same thing as description and narration. The assertions of both statics and dynamics are commonly made on the assumption, "_caeteris paribus_." A new bank will stimulate business in a western town if bank-robberies do not come into fashion! A tariff on wool will tend to educate the farmers in sheep-raising if the habit of relying on governmental assistance does not develop, and make them more, rather than less, inert,--or sharpen their political rather than their economic acumen. Concrete history need not always verify dynamic laws![577] It is, above all, important to insist that the distinction between statics and dynamics is not the same as the distinction between theory and description, or between the abstract and the concrete. Evolutionary study may result either in concrete history, or generalized laws; cross-section study may be either concrete description or abstract formulae concerning forces in equilibrium. And there may be varying degrees of abstractness in both cases.

The contrast between long-run and short-run tendencies is not necessarily the same as that between statics and dynamics. This former distinction does recognize one factor which is sometimes classed as "dynamic," namely, "friction."--"Friction," by the way, is a blanket term which covers a multitude of sins of imperfect analysis and lazy thinking! It is far from a simple, unitary thing. Sometimes it seems to mean the action of the whole social order, other than the economic values!--But dynamic, as used by the two writers who have used the term most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for those factors in economic life which make for constructive _change_. Neither writer would call mere habit and inertia, which make readjustments slow, or the necessities of physical nature, which retard readjustment, by the name, "dynamic." It may be noted, in passing, that both writers limit the term quite strictly to changes _in_ economic life growing _out of_[580] economic causes. Schumpeter narrows the dynamic factors to one, namely, _enterprise_, while Clark gives five general classes of dynamic factors, all of which are primarily economic in character. Neither extends his study to cover forces which are not primarily economic in character, but which none the less lead to economic changes.

Again, the "theory of prosperity" is not identical with "economic dynamics," though the two in large measure overlap. For one thing, while some writers, as Schumpeter, find the business cycle to be a necessary consequence of dynamic changes, and would maintain that no business cycle, no up and down of tempo in production, no panics or crises, are necessary if changed methods of industry, etc., did not come in, not all writers would so explain the business cycle. Some writers would find the explanation in the inherent instability of a money and credit economy, some in the inherent weakness of a capitalistic system, quite apart from necessary dynamic change. Irving Fisher makes no use of changed methods of production in his explanation of business cycles, though he does mention invention as one possible cause of a disturbance in normal equilibrium.[581] But further, dynamics is largely concerned with problems, like invention, changes in the economic habits of a people, methods of organizing industry, etc., which, while they may well bear on the problems of prosperity and depression, yet have interest for their own sake, and would be studied if there were no business cycles. Further, the notion of statics, the other term in the static-dynamic contrast, is not identical with the "theory of wealth," or "theory of goods," or "theory of the wealth of nations" which such a writer as Veblen[582] would put in contrast with his "theory of prosperity." There is a normative, or practical, and polemical coloring in the body of doctrine growing out of Adam Smith, which Veblen would term, the "theory of the wealth of nations," which is lacking in the more colorless "statics" of to-day.

I do not find any of the contrasts thus far discussed quite satisfactory. I have been using the terms, statics and dynamics, as general terms to cover all these contrasts. I shall try to formulate a general contrast which includes most of the ideas passed in review, from a somewhat different angle, and then try to show that the contrast, while useful, is not absolute, and that it is possible to measure considerations drawn from one viewpoint in terms of considerations drawn from the other.

Let us take as our starting point the notion of a cross-section picture of society. I have set forth this notion in ch. 13 of my _Social Value_, and have elaborated it in the discussion of von Mises' theory in the chapter on "Marginal Utility" in this book. A cross-section picture may be made more or less concrete and descriptive, or abstract and analytical. If one looks at the picture of society in cross-section as given by Giddings in his _Principles of Sociology_ (Bk. II, chapters on "The Social Population," "The Social Mind," "The Social Composition," and "The Social Constitution"), one finds a picture in which organization and system are made clear, but in which vivid description of concrete social facts is the primary concern. The account given is largely qualitative rather than quantitative. It is a picture of flesh and blood, as well as an account of functioning. It is, perhaps, not easy to realize that Giddings is doing the same general sort of thing that the pure economic theorist is doing, with his picture of a static equilibrium of economic values. But what economic theory is concerned with is, after all, to be found in Giddings' scheme. The pure theorist takes for granted the physiographic environment, whose influence Giddings takes into account. The theorist abstracts from biological and racial factors. He assumes a social population, a social order, a political system. He has not taken into his purview the social mind as a whole, in his static theory. Rather, he has been concerned with only one part of the social mind, namely, the economic values. Economic values, and the objects of economic value, have been the data of the static theorist. Given scales of economic value, such that for one quantity of goods of a given kind, a given value per unit will obtain, given all of these value-scales, and given the quantities of goods and services whose values are in question, and static theory will furnish an equilibrium picture, in which the price relations of different kinds of goods are made clear, and their values are measured. The value-scales, and the absolute magnitudes of value at different points on the scale, are assumed, are data. Further, in order that the notions may be made mathematically precise, a unit of value is needed, and this is commonly the value of the money-unit, which is assumed to be constant. The picture then becomes systematic. There is a system of values, expressed in prices, which is stable, so long as the data do not change. It is mechanically conceived, and illustrated by various mechanical symbols, as balls in a bowl, or connecting reservoirs, or, best of all, by intersecting curves. It is an abstraction from the living, pulsing, organic whole of the social mind--the inter-mental life of men in society. It squeezes much of the life out of the phenomena it describes. It makes them exact, only by making them mechanical. It thus becomes exact by becoming, in considerable degree, superficial and abstract.[583] This is not to condemn static theory. Static theory has proved its usefulness by solving too many problems for such a statement of its limitations to involve a condemnation. But the statement of its limitations will aid us in seeing its relation to that vaguer body of doctrine which we call dynamics, or the theory of prosperity, etc.

Now this means that static theory is not _value_ theory. It assumes a theory of value. It assumes the value-scales as data. It assumes the value of money as a datum. Static theories of supply and demand, cost of production, capitalization, etc., assume the value of money, as has been shown in Part I, and static theory, resting in the notion of accomplished transition, normal equilibrium, abstracting from the difficulties of readjustment, abstracting from friction, etc., misses the whole point as to the functions of money, as shown in Part II. Static theory proceeds by assuming a change in one of the elements of its situation, say one of the value-scales, and then tells what the new equilibrium will be after readjustment takes place, assuming that other value-scales remain constant, and that quantities of the objects of value do not change. Or, it assumes a change in the quantity of one of the objects of value, and then predicts the new equilibrium. The new equilibrium will often involve changed values and prices all around, and will often involve altered quantities of other objects of value. But the initial change comes from an alteration _from outside_ the system in one or more of the data of the system.[584]

Now dynamics, theory of prosperity, etc., are concerned with the causes of changes in the data with which statics works, in large measure. Among the problems with which statics has not adequately dealt, and in large measure cannot deal, are (1) the nature of value itself, and the laws governing changes in the value-scales; (2) the problems of readjustment, including the problems of money, credit and exchange; (3) the psychology of invention, of enterprise, and the like. (4) The reactions of economic values and economic organization on the non-economic phases of social life. (5) The reaction of the non-economic factors, as law, morals, art, religion, etc., on economic life. (6) The problem of prosperity and depression. I say that statics has not dealt adequately with these problems. Statics in its present narrow form cannot deal with them. But in considerable degree, I am convinced, statics can be made to deal more adequately with them, if its scope be broadened, and its limitations be made less rigid. Schematically, at least, the central ideas of statics can be applied to a large part of these problems. I may add that my list of six classes of problems with which statics has not adequately dealt is not meant as a system of categories. The list is incomplete, and the classes are not mutually exclusive. Rather, they overlap in large measure. In a large way, it might be said that statics is concerned with the laws of the equilibration of values, and that dynamics, theory of prosperity, etc., are concerned with the nature and causes of variations in the values themselves. The contrast may be put, in general, as the contrast between the _theory of value_, and the _theory of price_, statics being price-theory, and dynamics being value-theory. But this is a thesis which calls for much elaboration and qualification before its significance is made clear, to say nothing of its justification being established.

* * * * *

We may approach the problem of bringing the two terms of the contrast together from either of two angles: (1) we may show that dynamic factors tend, in large degree, to submit themselves to measurement in terms of money-prices, which obey the laws of static marginal equilibrium. (2) We may show that all static prices presuppose values whose explanation is in terms of the same phenomena with which dynamics, the theory of prosperity, etc., have busied themselves, namely, considerations drawn from the study of social psychology, including the psychology of suggestion, imitation, mob-mind, the functional organization of minds into a social mind, social beliefs, social values of other than economic nature, and social institutions. (1) The evidence on the first point is already in considerable measure worked out, particularly by Veblen, in his _Theory of Business Enterprise_, and in his other writings on the nature of capital, etc. Something more in this direction I have done in my _Social Value_, and other writers have elaborated the notion. (2) The case for the second contention has been made in detail in my _Social Value_, and in what follows I shall rely chiefly on the discussion presented there, and in the chapter on "Value" in this book.

I take up first the thesis that dynamic factors may come under the static measure. Veblen has made much of the contention that modern "capital" is not, as Smith thought, and as orthodox economists in general have contended, a matter of physical accumulations of goods. The volume of business capital is a pecuniary concept, and may wax and wane with little variation in the physical stocks. "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." (_Theory of Business Enterprise_, p. 149.) And in large measure Veblen's work is given to showing how factors of legal and social psychological nature get a money-measure. The actual capital of a business enterprise does not rest chiefly on the physical equipment, stocks of raw materials, etc., etc., which it possesses. To be added is "good will," and this includes (p. 139) established customary business relations, reputation for fair dealing, franchises, privileges, trade-marks, brands, patent rights, copyrights, exclusive use of processes guarded by law or secrecy, exclusive control of particular sources of materials, etc. Veblen contrasts things of this nature sharply with the concrete equipment, saying that the former are serviceable only to the owners, while the latter are serviceable to the community at large as well. The physical, tangible, and ethically commendable character of the physical equipment is everywhere stressed, while the pathological, anomolous, and sinister character of the less tangible and more recent "capital items" is always set before us--all the more effectively because Veblen maintains a satirical attitude of moral indifference, and presents the case with Olympian aloofness. I am not here concerned with the social welfare aspect of the matter, though I shall later speak of that. My present purpose is to make clear two points in Veblen's doctrine: (1) that he does bring these intangible things, which are the variables involved in his theory of prosperity, under the price measure; and (2) that he considers these prices as anomalies from the standpoint of the general laws governing the values and prices of concrete goods. To this last point I shall later take sharp exception. For the present, I wish to develop further the extent to which such factors may be brought under the general static measure.

The feature of static theory which Veblen chiefly employs in giving a money-measure to his "intangible capital" is the capitalization theory.[585] The capital magnitude of the items of good will previously mentioned is a capitalization of the _income_ which they are expected to bring in. And it may be said that a large part of Veblen's doctrine of the causes of the ups and downs of business rests on the complaint that this capitalization process is not rationally carried through--that incomes are overestimated, and that business men are tenacious of capital magnitudes once built up, and refuse to mark them down properly when the facts in the situation have changed. His theory of prosperity thus rests on non-rational enthusiasm on the one hand, and a certain kind of "friction" on the other hand, and apparently the difficulties in the situation as he sees it would largely disappear if these two elements could be rationalized, and the static theory work more perfectly. The elements involved in the capitalization theory, as shown in the chapter on that topic, are three: the anticipated income, the prevailing rate of discount, and the capital value, the last named being the child of the first two. The capital magnitude is a shadow, where the income is the substance. Veblen seems to find the trouble arising in that the capital magnitude takes on a substantial character, and refuses to play the passive role of shadow. It is interesting, in passing, to compare this theory of Veblen's with the theory of crises developed by Irving Fisher, from the standpoint of a body of doctrine which is purely static, and which Veblen has criticised as "taxonomic" in a high degree. For Fisher[586] the trouble arises from friction in connection with another element in the capitalization problem, namely, the interest rate. Business men think that "a dollar's a dollar," and refuse to let the interest rate be marked up in accordance with the doctrine of "appreciation and interest." This, likewise, leads to overcapitalization, leaves the passive shadow too big. I must confess that it seems to me that one theory is about as "taxonomic" as the other--that both rest on pointing out divergences from a static, "taxonomic" norm. In general, Veblen's work in this field consists in assimilating the "intangible" capital to the class of land, and other long time concrete income-bearers, but that is after all classification, systematization, "taxonomy." In saying all this, I am as far as possible from questioning the value of Veblen's work. Rather I rate it as of extreme significance. "Taxonomy" does not appear to me so dreadful a word as it does to Veblen. I should rather say that some taxonomy is good and some is bad, depending on whether or not it leads to fruitful generalizations, and deeper insights.

It is, as I have said, chiefly the capitalization theory which Veblen applies to these newly important intangible "capital-items." The phenomena of the stock-market, where such things are most actively bought and sold, and where they appear as differential portions of the capital values of securities, doubtless first called attention to them--though the item of "good will" as a business asset, for which a money-price is paid when businesses change hands, is doubtless older and wider than modern corporation finance. The capitalization theory applies to them most readily and obviously, as compared with other elements in the static theory of prices.

But as we become better used to the large role which these phenomena play,--not that the phenomena are new, but that their present importance is new, and hence our serious study of them is new--we are increasingly able to see that other elements of static theory also apply. _Static theory applies increasingly as understanding increases!_ The vaguely discerned, the novel, the imperfectly analyzed, can be stated only in qualitative terms. As things are better understood, the mind seeks system, taxonomy, quantitative measurement. Business men to-day are well accustomed to applying _cost_ concepts to many of these intangible magnitudes. Advertising, for example, is being worked out with increasing exactness, and business men are increasingly applying accounting processes to the determination of the question of _how much_ advertising "pays." Well-known brands are capital items. Well-known brands have cost money! Business men contemplating the marketing problem may well balance the cost of creating a new brand against the cost of buying an old one, and may balance the cost of creating a new brand against the profit to be made from allowing an old one to deteriorate, through cheapening its process of manufacture. Trade-connections are capital items. They are also items which have been created by patient thought and labor and expense. Franchises, since the days when the public awoke to their value, have cost money to the corporations that possess them, and figure in corporate bookkeeping often. Even in the old days, they often had a cost, which commonly stayed _out_ of the corporations' books, at least in that form,--bribes, entertainments to legislators and members of councils, and so on. In Part II of this book,[587] I have discussed "selling costs" as contrasted with costs of production in the narrow sense, and have pointed out how high a proportion of total costs these selling costs are. I have also indicated how many of these costs tend to be "capitalized." These selling costs are static measures of the elements of "friction" which interfere with the smooth working of static laws! An extension of statics, however, can in considerable degree take account of them. It is, of course, far from true that cost doctrine will explain all of these intangible capital magnitudes. But this is likewise true of the prices of many tangible items. Cost doctrine does not hold universal sway even in the confines of the strictest static theory.

I have said that dynamic factors tend to come under the rules of static taxonomy to the extent that they become more accurately understood. The understanding here referred to is not merely on the part of the scientific theorist! The subject-matter of economic science is itself psychological. It includes the psychology of the business man, as well as the psychology of purchasers and laborers, and the general field of social-mental life that bears on economic processes. It includes the theories of the business men, as well as their aspirations and "motives." It includes their methods of computation, and the accuracy or inaccuracy of their prognostications. It has been pointed out recently that at the current price of copper (22c. per pound in Jan. 1916) the prices of copper stocks are very much lower than they were when copper reached the same price some years ago. Calumet and Hecla stands some two or three hundred points lower than it did then, and the same percentage difference is manifest in the case of many other stocks. But the explanation which the broker and market writer offer is that people have awakened to the fact that mining stocks are stocks with wasting assets, that the incomes from copper stocks cannot, therefore, be capitalized on so high a basis as similar incomes from other securities; that people to-day realize this fact as they did not some years ago; that the earlier capital-prices of copper stocks were vastly exaggerated on the basis of a careful estimate of probable total future income, etc. Japan, little used to the great prosperity growing out of sudden great increases of special kinds of business, found herself in such an orgy of war stock speculation that it was necessary to close the stock exchange in 1915. The United States, better familiar with the phenomena of boom and depression, seasoned by many experiences of similar nature, have found that on the whole,--at least in the opinion of many competent judges in January of 1916,--war stock speculation has been kept in reasonable bounds, thanks in large part to the conservatism and caution of bankers and brokers, and that the general economic situation is in fairly stable equilibrium, with most of the probable sources of disaster foreseen and "discounted." To "discount" is to make "static"![588] Whatever the business man can reduce to bookkeeping terms, and whatever he can measure by money in the market, the economist should be able to bring within the "orderly sequences of economic law."

In _Social Value_, I have pointed out how wide is the scope of the money measure. Waves of public opinion, of waning or waxing hope and belief, of patriotic fervor, of religious exaltation, of political movements of one or another kind--all these find some sort of money measure in the market. In the gold market in the early '60's in New York, the "bulls" sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic to be a bear, and unpatriotic to be a bull. These considerations affected the prices very appreciably, at times, especially at the beginning of the speculation in Greenbacks. Waning and waxing belief in the triumph of the Northern armies manifested itself very strikingly in the prices in the gold market, as W. C. Mitchell has conclusively proved, with a wealth of detailed evidence, in his _History of the Greenbacks_. But in less systematic markets, in less organized and regular ways, many things besides are given a money measure: "Against what, indeed, shall wealth be measured? Where are the markets which measure its fluctuations?

"But such markets exist, always have existed. Are there not streets where woman's virtue is sold? Are there not commonwealths where there is a ruling price for votes? Do not the comparative rewards of occupations indicate what inducements will overcome the love of independence, of safety, of good repute? We see men sacrificing health, or leisure, or family life, or offspring, or friends, or liberty, or honor, or truth, for gain. The volume of such spiritual goods Mammon can lure into the market measures the power of money.... When gold cannot shake the nobleman's pride of caste, the statesman's patriotism, the soldier's honor, the wife's fidelity, the official's sense of duty, or the artist's devotion to his ideal, wealth is cheap. But when maidens yield themselves to senile moneybags, youths swarm about the unattractive heiress, judges take bribes, experts sell their opinions to the highest bidder, and genius champions the cause it does not believe in, wealth is rated high." (Ross, _Foundations of Sociology_, pp. 171-172.) Ross is here interested chiefly in the problem of measuring the varying significance of wealth, symbolized by money, in terms of other and non-economic, goods. But it is equally true that money measures these goods. The range of the money measure is very wide. Nor is it confined to the exchanging process. Gabriel Tarde[589] has pointed out that money may function as a measure of non-material goods through gifts, public subscriptions, etc.

It is surely no extravagant claim to make that the methods of static economics may be extended at least as far as the money measure goes! We shall later see reason for believing that fruitful results may come from an even wider extension of the static notion, at least as a schematic device.

In reducing static and dynamic considerations to common terms, we have now gone far. We have shown that a wide range indeed of the phenomena deemed dynamic, and largely ignored by current static theory, left to the discussion of such innovating students of the "theory of prosperity" as Veblen, are really in the actual practice of the business world treated in the same way as are the "static" phenomena of the values of physical goods and concrete services. And we have further shown how wide indeed is the scope of the static yardstick, the dollar. But this is only a part of the story. We have generalized statics. Can we similarly generalize dynamics? Or has our generalization of statics merely narrowed the field of dynamic considerations?

To this I reply that we may view the whole field likewise from the angle of what we have called dynamics, or theory of prosperity, or similar name. These terms are not satisfactory, in my view, and I have already used terms that appear to me better. My exposition on this point will be briefer than in the generalization of statics, since I may refer to what I have said elsewhere. In stating Veblen's contrast between "business capital" and "the wealth of nations," I quoted him as follows: "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." The capital, or the wealth in general, of older and simpler days was a material matter, concrete goods and services, in his view. The newer items of capital are anomalies, presenting something strange and novel, and sinister. I should maintain that, whether sinister or no, they are in principle at least not _novel_ or _anomalous_. _All economic values are matters of folk-psychology!_ All economic values are social values. All are to be explained on the same general principles that explain the values of the most complicated stock-market phenomena--except of course, that the application of the principles involves less complication in the case of such values as that of a loaf of bread. But value is always a matter of psychological significance, and never a matter of mere material fact. And these psychological significances are not explained by such simple individual phenomena as labor-pain, or marginal utility, but always by reference to the total social-mental system, including its laws, its mores, its institutions, its centres of power and prestige, its modes and fashions, etc. If Veblen has in mind the contrast between goods whose values rest in labor-pain or marginal utility, on the one hand, and values which rest in a folk-psychology on the other hand, the contrast is a false one. The first class does not exist. I shall not elaborate this point. I have developed it at length in _Social Value_, and in the chapter on "Economic Value" in this book. I should make the contrast, then, which seems to me to gather up the central significance of most of the contrasts we have been discussing, as follows: on the one hand, we may view the matter mechanically and abstractly, in terms of the equilibration of values conceived of like physical forces, expressed in prices; on the other hand, we may view the economic situation more fundamentally and realistically, seeing the interplay of men's minds, viewing economic values as parts of a social mind, a functional unity of many minds. We may treat society as a mechanism, or we may treat it as a living, pulsing, psychological organization. In short terms, our contrast may be between the theory of value, and the theory of price. And here we are back to our thesis set forth on p. 559 of this chapter.

The theory of value, as thus marked out, is still an abstraction from the totality of our cross-section picture of social, or even of economic, life. The essence of society is indeed psychological. But men have bodies, and live in a material world, and have an elaborate technology. Many of the factors which students of dynamics are concerned with grow out of biological and technological relationships, and are connected with physiographic influences. Can we bring all these into our scheme? Giddings and Spencer would answer affirmatively. For Giddings (_Principles of Sociology_, ed. 1905, p. 363): "All social energy is transmuted physical energy." Giddings guards himself (pp. 365-366) against a thoroughgoing monism, which would leave no distinction between mind and matter, but in general he would hold to the scientific goal of reducing the physical and psychical phenomena in society to a parallelism, so that concomitant percentage variation could be predicated of them, and so that considerations in one sphere could be expressed by considerations in the other. In the hands of Giddings and Spencer, such notions are handled with caution and discrimination, and command respectful consideration. One feels, however, that the starting point is a monistic metaphysics, and that the philosophical doctrine does not justify itself in its scientific application. In the hands of such a writer as Winiarski, however (_Rev. Philosophique_, vol. XLV, pp. 351-386; vol. XLIX, pp. 113-134; summarized by Ross, _Foundations of Sociology_, pp. 156-157), who makes all mental states mere forms of physical energy, and applies to mental processes the laws of mechanics, the doctrine becomes merely bad poetry! From the standpoint of the needs of social science, and from the standpoint of our present knowledge of social facts--to say nothing of general philosophical considerations--it seems clearly best to me to assume the common-sense doctrine of dualism as a premise: mind and matter are two different things; mind acts on matter, and matter acts on mind. We are then at this position, when it comes to bringing technological and physiographic factors into our scheme: on the one hand, the values control technological applications, and control the course of industry. New technological devices will be employed when the present worth of their anticipated products is great enough to overcome the values that compete with them. Land will be employed on that crop which gives the largest rent, etc. Men's physical activities, and their employment of their physical resources, are _motivated_ by values. That is the _function_ of values. On the other hand, physiographic and technological factors modify the lives and characters of men and peoples. _Values_ are in part controlled by physiographic and technological conditions of life. But these technological and physiographic factors, in order to influence economic _conduct_, must first influence the value system. This they do, (1) by affecting the quantities of _objects_ of value, and so modifying the marginal relations among the value-scales and the marginal values; (2) by affecting the lives of the people directly, and so modifying the value-scales themselves. Similarly I see no way of bringing the vitally important factor of heredity into our scheme in a direct manner, _in propriore persona_, but only mediately, as it (1) affects the character of the society, and so changes its value-system or its technological activity and volume of products, or (2) as heredity becomes a matter of concern to the society, and so an object of value, with its own place in the value-system.

There remains, therefore, in the field of technological, biological, and physiographic features affecting economic life a considerable residuum of economic problems for which, so far as I can see, no extension of the static method can be devised. I propose no scheme of static price analysis for balancing the effects of poor land and good heredity on the character of a society.[590] The problem must be approached by other methods specially suited to it, which we need not here discuss. But, given the values that rule in that society, we may be sure that our static picture of that value system will sum up much of the influence of the bad land and the good heredity, mingled with the other factors which have determined that set of values.

Once a factor has been introduced into the value system, once it has modified the value-scales, we may treat it by the methods of static price theory. The analysis of the factors controlling the value-scales is the problem of value theory. And here is, indeed, the central problem of the "theory of prosperity." What are the causes controlling the _mutations_ of values? What factors cause values to rise, intensifying economic activity, stimulating trade, spreading prosperity? What brings about the crash in economic values (and consequently in prices), in panics and crises? Why the low values of the period of depression, giving slight stimulus to industry and trade, leaving economic life lethargic, inert? Increasingly it is recognized that the problems are problems of values and prices. It is no part of my plan to give answers in specific terms to these questions. That were the task of a large book! And very much of it has already been done. It is my purpose here, simply, to show that price theory, as developed on the basis of static notions, may be extended, and has in considerable measure been extended, to cover these problems, and that for the same reason that price theory is unable to give really fundamental answers to them, often, it is likewise unable to give fundamental answers to the value problem anywhere--that the phenomena of value are of the same stuff and substance as the phenomena treated by "dynamics" and "the theory of prosperity," and that static theory has been busied chiefly with a limited portion of the field only because the problems were easier there. Much has been made, especially in such a book as W. C. Mitchell's _Business Cycles_, of technological factors, and of factors in the psychology of the business man and of the laborer in the ups and downs of business, and particularly of certain elements of scarcity or overabundance of productive resources at critical parts of the economic system, which raise values and prices unduly at certain points, compelling radical readjustments of values and prices elsewhere. Virtually all of these considerations will fit into the scheme here outlined. They work _through_ modifications of the system of values and prices. H. L. Moore's recent _Economic Cycles_ lays heavy emphasis on physiographic factors, particularly variations in rainfall. But these, too, act on the economic situation through affecting the quantities of objects of value, and so through modification of the marginal values of goods. The psychological theory of economic value by no means excludes any amount of influence one can find in physiographic or technological factors.

One of the most important factors in the minds of many writers who would treat business cycles, and a factor to which virtually all writers give attention, is the waxing and waning of business confidence, and of the volume of credit. I have given an extended analysis of the psychology of confidence, and of the psychological nature of credit, in my chapters on that topic. It is enough to say here that we have in credit phenomena things which are of the very stuff of economic values in general. Beliefs and hopes are factors in economic values, and values wax and wane with them. There is little indeed in the psychological and institutional aspects of the theory of prosperity which an adequate theory of value would not contain.

The theory of _prices_, as an abstract formula of description, is of primary interest to the scientist, who has nothing to do with the manipulation of concrete values, and who has no interests at stake in the behavior of particular values at a particular time. His purposes are ultimately practical, no doubt, but the practical ends he has in view are, after all, only to lay down general rules of public policy, of a high degree of generality, and he consequently may abstract from a great deal of the concrete causal process. The theory of _value_, in its concrete fulness, is the special interest of the active business man, and especially of the business man who wishes, not merely to _adapt himself_ to changes in values, but also in part, to _control_ and _manipulate_ those values. _He_ must study every factor which does, in fact, bring about changes in the value system. We do not find the market-letter of a brokerage house, or the calculations of a captain of industry, or trust promoter, troubling themselves about marginal utilities or labor-pains! Notions of supply and demand, and the relations of the prevailing interest rate to the capital values of securities, they do employ. Notions of money-costs of production they make use of. But they also give very close attention to questions of governmental policy, to court decisions, to movements in the field of labor organization, to money-market phenomena, and particularly to gold movements and the state of the exchanges, to political campaigns, to the strength of the prohibition movement, to changing fashions and modes, and, above all, to the general _tone_, the _consensus_, so far as it is ascertainable, as to whether business is good or bad, whether men are buoyant or depressed, to the ups and downs of business confidence. They pay marked attention to the opinions expressed by certain men, great bankers or industrial leaders, not merely because they think these men good judges, but also, and in part primarily, because these men are centres of power, "radiant points of social control," whose opinions make the opinions of others, and whose statements that times are good tend to make them good, and that times are bad tend to make them bad. For static theory, nothing is more contemptible than the view which "demagogues" often express in Congress that great men in Wall Street make and unmake prosperity, bring about and check panics. For static theory, the only way that big men can lower prices is by selling, and the only way they can raise prices is by buying.[591] Their power to raise and lower prices is thus limited by the amount of their wealth which they are willing to employ in this way. As it is not likely to be profitable to be a bull when the general condition of the "fundamentals" calls for falling prices, and as bear operations, contrary to the fundamentals, are likewise usually costly, the inference would be that the big men will not, even if they could, alter the course of the market. Their wealth is, after all, not so tremendous, as compared with the aggregate wealth of the rest of the community. But the market takes the big men more seriously! When they are selling heavily, other men are often _afraid_ to buy, such is their prestige. When they give out opinions, these opinions _become_ the opinions of a host of others, almost automatically. When Morgan stepped into the breach in the Panic of 1907 with $25,000,000, it was quite as much the fact that _Morgan_ had acted, as it was the millions themselves, which relieved the situation. Indeed, it was in no small degree the prestige of Morgan which relieved the _disorganization_, which restored the discipline, and made it possible for the elements in the market to work in harmony and cooeperation again. Society is a functional unity, and the "tone of business," the ups and downs of prosperity, depend in large measure indeed on the degree to which the lines of communication between the different parts are kept open, on the question of whether each part does its expected task at the right time and in the right way, on the all-together-functioning, the _integration_, of the elements. These are phases of the matter from which static theory abstracts. They are organic problems, not mechanistic problems. Of course, mechanisms get out of order too. But tightening a bolt is a very different thing from restoring confidence and discipline to a market!