The Ethics of Competition

Peter F. Drucker, Frank Knight

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780367201272
• eBook ISBN: 9781351303989
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The Ethics of Competition is a book of Frank H. Knight's writings on a common theme: the problem of social control and its various implications. Knight believed in free economic institutions but was also aware that the competitive economic system could be improved. One of the central figures of neoclassical economics in the twentieth century, Knight pursued a lifelong campaign against irrationalities of nationalism, religious fanaticism, and group conflict, while conceding that these were fundamental orientations of human action that might yet frustrate his own work as an economist. While Knight vigorously defended human freedom and the liberal order, he also was sufficiently moved by the shortcomings of liberalism as to condemn it as rife with abuse.

As Richard Boyd writes in the new introduction, The Ethics of Competition is nothing short of visionary. Knight foresaw virtually all of the reductionistic tendencies that have come to plague the discipline he cultivated, neoclassical economic theory. Even more impressively, Knight related these disciplinary proclivities back to themes as grand as the fate of liberal democracy and human nature. Boyd discusses Knight's belief that the human craving for simple, mechanical explanations inevitably leads to frustration rather than material satisfaction. Chapters in The Ethics of Competition include "Economic Psychology and the Value Problem," "The Limitations of Scientific Method in Economics," "Marginal Utility Economics," "Fallacies in the Interpretation of Social Cost," and "Economic Theory and Nationalism." This volume will be of essential value to economists, political theorists, philosophers, and sociologists.

XI

ECONOMIC THEORY AND NATIONALISM*

IN this essay I propose to consider briefly three systems of economic institutions. These are economic individualism, economic democracy or socialism, and fascist-nationalism. The world of what we call European civilization appears to be in a state of transition from the first to the third; the second is not really an intermediate stage, but rather an alternative goal which the historical movement, as might figuratively be said, once tentatively chose, but after a little progress in that direction, changed its mind.

PART ONE

ECONOMIC INDIVIDUALISM: ECONOMIC THEORY AND REALITY

I. NEGATIVE CONSIDERATIONS

§I. Economic theory is not a descriptive, or an explanatory, science of reality. Within wide limits, it can be said that historical changes do not affect economic theory at all. It deals with ideal concepts which are probably as universal for rational thought as those of ordinary geometry. Our first main step must be to clarify the relation of such theory to economic reality; and the first subdivision —and perhaps the one most needing emphasis—will deal with negatives, with what the relation is not.

Economic theory, in the meaning which the expression has actually come to have, includes two branches, or, in a sense, stages. The one deals with a type of individual behaviour, the other with a type of social organization. To both, the adjective “economic,” or perhaps even better, “economistic,” may be applied, in harmony with established usage. At the same time, both, like all human behaviour, real or idealized in any relevant and useful way, are social, which is to say, institutional.

A. INDIVIDUAL ECONOMIC BEHAVIOUR

§2. Economic theory treats of economic behaviour in much the same way, up to a certain point, that medical science treats of hygienic and therapeutic behaviour. It is no part of its task to describe actual behaviour, the activities of “consumers” or “producers,” any more than it is the task of medical science to describe medical practice. It is only necessary to mention the contrast between the content of a description of, say, classical Greek or Chinese medical practice and that of a treatise on medicine. Actual medical practice is also a legitimate and interesting subject for study, but its study falls under other disciplines than medical science, such as history, and perhaps sociology. Similarly for economic behaviour and economic science.

(1) No generalizing science, even a natural science, is concerned with describing events in time and space. The statements that arsenic is poisonous and that salt is soluble in water are scientifically true, whether or not anyone is ever poisoned by arsenic or any salt is ever dissolved. And it might or might not be necessary to have one or more instances from experience to suggest such a proposition or to establish its truth.

(2) Moreover, not only may the practical significance or relevance of such propositions be independent of the occurrence of instances, but the practical significance of the propositions typically is that knowledge of them prevents instances from occurring. This is true to the degree that possible events which we desire to prevent outnumber those we desire to bring about, which is a very high ratio indeed. “Arsenic is poisonous” is again an illustration (as regards its effect on human beings).

(3) A “science” of human behaviour, to be relevant or practically significant, must describe ideal and not actual behaviour, if it is addressed to free human beings expected to change their own behaviour voluntarily as a result of the knowledge imparted. Reference to medicine as an illustrative case should make this clear without further argument (the doctor being the person whose behaviour is to be changed—the relation of the patient to medical knowledge is somewhat different).

(4) Since economic theory, like medical science, does not deal with actual behaviour, it is no more explanatory than descriptive.*

(5) There is a sense in which a science of ideal behavior is incidentally “explanatory”; the desire and effort to preserve or restore health may serve to explain actual behaviour, and may do so whether or not the act is effective in realizing the end pursued. The meaning of explanation where an act is explained by an end of action is teleo-logical, as contrasted with the positivistic meaning, and with what is meant by “scientific” in the literature advocating scientific procedure in the social disciplines. The fact that description of ideal behaviour in part explains actual behaviour operates as a source of confusion; the notion that economics is a science explanatory of actual behaviour is the most important single confusion in the methodology of the science.†

(6) Economic behaviour is ideal rather than actual in two sharply distinct senses (both distinct from theoretically ideal conditions in physics). It is ideal in the sense of being an objective which the individual does in fact strive to realize, and also in the further sense of a “value,” an end which the individual recognizes that he, and others, “ought” to pursue.‡

(7) The conception of behaviour as amenable to complete explanation, or to description in terms which would apply to future as well as past behaviour (i.e., complete prediction), would exclude all relevant or practically significant discussion of it, all possibility of formulating ideals which might operate to change the actual by appealing to the behaving persons as free agents. Discussion would be limited to historical description or to formulae for manipulation from without, implying that the subjects whose behaviour is to be affected do not so much as know what is going on.

(8) Moreover, the view of human behaviour as a mechanical sequence or as completely describable or explicable in natural-science terms, is impossible to human beings. For the description itself, the act of describing, would be behaviour, and any activity in which subject and object are identical is a contradiction in thought. The principle can be illustrated at the physical level. It is impossible to draw a picture which includes the drawer in the act of drawing; such an act would obviously involve an “infinite regress.” The statement that “man is a machine” involves saying either that “I am not a man” or that “I am not saying anything,” i.e., “I say that I am not saying anything,” and the contradiction is unescapable.

(9) In several respects, economic theory is much more remote from reality than medical science.

(a) Health is a more or less objective idea; how far and in what sense objective is not clear, but the point need not be discussed; in any case the doctor can empirically study examples of the condition he seeks to bring about whether thought of as a healthy body or hygienic living. The economic quality of behaving is purely subjective; no outside observer has any way of knowing the degree in which activity is “economical,” and even the individual subject cannot know at all accurately, even afterwards, and is in still deeper ignorance beforehand.

(b) Pure theory, in economics as in any field, is abstract; it deals with forms only, in complete abstraction from content. On the individual side, under consideration at the moment, economic theory takes men with (a) any wants whatever, (b) any resources whatever, and (c) any system of technology whatever, and develops principles of economic behaviour. The validity of its “laws” does not depend on the actual conditions or data, with respect to any of these three elementary phases of economic action.

(c) As a matter of fact, men obviously do not want their wants satisfied either completely or without difficulty and effort. We want not only wants but also resistance to be overcome in satisfying them. Ultimately, the real ends of action are not mainly of the concrete quantitative sort represented by utility functions, but consist rather in such abstract motives as interesting activity, satisfying achievement, self-approval, fellowship, and social position and power. There is no end completely “given” in terms of sense data. Every end is more or less redefined in the process of achieving it, and this redefinition is one reason for desiring the activity.

(d) It is worth repeating that the notion of perfectly economic behaviour involves contradiction or antinomy. It is essentially a concept of “limits” in something like the mathematical sense, but at the limit the behaviour would cease altogether to be economic and would become decidedly the reverse; it is not “economical” (nor moral) to attempt to behave “economically”!

(e) Economic analysis must run in terms of variables treated as quantities. But they are not really quantities, since no subjective state is measurable. (One vessel of water is hotter than another by a certain multiple in a physical interpretation, but not to the sense of temperature.) To some extent, the notion of an “index function’ with the property of varying in the same direction as the non-measurable economic magnitude meets this difficulty, but it cannot do so in any fully satisfactory way. For economic variation must be discussed in terms which imply curvature as well as slope, and probably higher derivatives of the functions as well.*

B. THE UNREALITY OF ECONOMIC THEORY IN ITS SOCIAL ASPECT

§3. In its second aspect or stage, economic theory deals with social, in the sense of inter-individual, relations. But the “economic man” is not a “social animal,” and economic individualism excludes society in the proper human sense. Economic relations are impersonal. The social organization dealt with in economic theory is best pictured as a number of Crusoes interacting through the markets exclusively. To the economic individual, exchange is a detail in production, a mode of using private resources to realize private ends. The “second party” has a shadowy existence, as a detail in the individual’s use of his own resources to satisfy his own wants. It is the market, the exchange opportunity, which is functionally real, not the other human beings; these are not even means to action. The relation is neither one of cooperation nor one of mutual exploitation, but is completely non-moral, non-human. It particularly needs emphasis that economic competition implies no feeling of rivalry or emulation. The economic man feels no such emotions, and does not “compete,” in the ordinary sense of the word, at all. This is one of the main differences between the real human being. In a perfect market there is no higgling or bargaining and no effort to manipulate other human beings in any way. The relation is theoretically like the “silent trade” of some barbarian peoples. Economic theory takes all economic individuals in an organization as data, not subject to “influence,” and assumes that they view each other in the same way.*

II. Positive Relations to Reality

A. IN A “SCIENTIFIC” VIEW

(AA) Individual Economic Behaviour

§4. (1) The economic quality of behaviour is real; it is not only real as a moral ideal, that waste is “wrong,” and as an actual goal which men do strive to realize, but actual behaviour is more or less economical.† In that sense the conceptions of economic theory are “descriptive” in a formal sense, though an infinite variety of behaviour will fit the principles.

(2) All theorizing which aims at relevance takes for granted if it does not specify some of the more general conditions of actual behaviour, conditions under which economy is to be achieved. That is, the theory places some restriction of a factual sort on the nature of the “wants, resources and technology,” making them relevant to the world in general and to certain regions in space and time. In particular, it recognizes the general character of the social situation in which the individual lives.

(BE) Social Organisation

§5. Here much greater concessions have to be made to reality. Any attempt to say definitely what is meant by an abstractly ideal “economic” organization raises at once a number of possibilities too complicated to treat impartially and exhaustively, and among which choice must be made on grounds of practical relevance. Undoubtedly the notion of individual behaviour which has the character of “economic” in a maximum degree implies social organization through voluntary exchange, i.e., a market organization of some sort. But there are theoretical difficulties in the notions of a perfect market, and perfect competition, and serious ambiguity in the notion of a system of market or competitive organization of an economic society.

With respect to content on the side of social organization, economic theory has actually developed and flourished only in societies where the form of organization is more or less typically that of “enterprise economy.” In this type of organization, individuals get a living in two stages; first they sell productive services, of “person” and “property,” for money, to enterprises, which carry on actual production; second, with this money income, they buy, from enterprises, the products which they consume. In addition, these societies have undergone a transition from individual to corporate enterprise during the historical period in which enterprise was becoming established, and evidently as a phase of the process of its establishment. Enterprise is especially to be contrasted with “exchange economy,” in which individuals (families) produce and exchange products. In an exchange economy, the phenomena most important from a theoretical and practical standpoint in economic theory as now studied would not be met with at all. There would be no pecuniary distribution; the phenomena of wages, rent, interest, and profit would not exist.*

B. POSITIVE RELATIONS TO REALITY FROM A PRACTICAL POINT OF VIEW

§6. (1) First, a brief note is called for on the relation between knowledge and social ideals and social activity.* We have taken the view that the justification for theory in human affairs is practical significance. The function of theory is to formulate and clarify some conceptual pattern of action to the end that men may better conform to it if it is already accepted, either as desired or as (normatively) desirable, or so that its appeal may be better judged if it is in question— or even so that it may be more surely avoided if already recognized as bad. These principles give rise to serious intellectual difficulties even at the level of discussion dealing with individual behaviour patterns, but the difficulties are still greater at the social level. Yet if the formulation and clarification of social patterns or systems of organization are to be fruitful in the same way, we must be able to assume that society also is in some sense, as a unit, a free agent in moulding itself.†

(2) The development of modern economic theory has undoubtedly been due in the main to the practical drive of concern for social policy as expressed in political (legal and administrative) action. It became a pure science, to the extent that it become such, by way of an interesting development from directly hortatory or propagandist political discussion. Smith’s Wealth of Nations, from which modern economic theory may be dated, has with much justification been called a political pamphlet. A relatively small fraction of the work requires interpretation in terms of an interest in pure-science, and its main significance is that of propaganda or preaching of policy. Yet it is also the first important general work in scientific economic theory. It becomes scientific without ceasing to be chiefly concerned with advocating a policy. The preaching of a policy naturally takes on the character of a science, when the policy preached is negative, when it is the policy of allowing events to take their natural course. For then the content of the discussion consists chiefly of description or analysis of a “natural” course of events, in the absence of conscious human interference, and this is obviously the character of a science.*

(3) The argument just given will show why in discussing the practical significance of economic theory there is no call for distinguishing between individual and social viewpoints as was done under previous headings. The political ideal of the age was negative, individualistic Its ideal was individual liberty; i.e., there should be no ideal of individual life enforced by society. It looked toward making society a mutual aid organization of a mechanical sort, by which each individual would achieve maximum efficiency in using his own means to his own ends. In the main, this ideal still stands, though it is visibly crumbling, in America and other countries which have not yet repudiated democracy outright for a dictatorial regime. There is a “burden of proof” against any proposal of a sweeping change away from free labour, private property, and a free market.†

(4) A little examination will show, however, that the ultimate moral and social ideal of the Liberalistic period (we may say, for short, the nineteenth century) was not that expressed in the conception of economic efficiency. The economic man, and his concomitant in society, the dual order of negativistic political democracy and economic laissez-faire, represent a rationalization carried to extremes, of a direction in which people wanted to go from a preceding state embodying the opposite extreme. On its face, the system treats liberty for the individual and mutuality in the relations between individuals as instrumental, i.e., as conditions for maximizing individual want satisfaction, and treats the individual as an absolute datum in his three aspects of wants, ultimate resources or productive capacity, and knowledge of processes.*

But in a reasonably generous interpretation of the accepted values of nineteenth-century civilization, neither liberty nor mutuality are properly instrumental to maximum individual economic utility. Rather, they are themselves ends. And they are ends in the two senses already distinguished. Not merely are individuals assumed to want liberty and mutuality, even at some sacrifice of objective material well-being, but these are moral ideals, which the individual “ought” to want even if he does not.j It was definitely a principle of social policy that the individual should not merely be free to make his own mistakes but should be expected and required to assume his own responsibilities. This was conceived as a part of the dignity of man, which it is the obligation as well as the privilege of the individual to assume. Thus personal liberty is made, in more or less set terms, an “inalienable right,” in the constitution of every liberal state.*

As to mutuality, too, there can be no fair doubt either of the general acceptance in the modern commercial era of the principle of “a man’s a man for a’ that,” or of the fact that the so-called “commercial spirit,” more accurately the “spirit of enterprise,” as it actually worked out in the era beginning with the Industrial Revolution, was a spirit of individual a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Introduction to the Transaction Edition
• Preface
• Bibliography
• I Ethics and the Economic Interpretation
• II The Ethics of Competition
• III Economic Psychology and the Value Problem
• IV The Limitations of Scientific Method in Economics
• V Marginal Utility Economics
• VI Statics and Dynamics
• VII Cost of Production and Price over Long and Short Periods
• VIII Fallacies in the Interpretation of Social Cost
• IX Value and Price
• X Interest
• XI Economic Theory and Nationalism
• Index