Luigi Einaudi: Selected Economic Essays

Volume II

L. Einaudi, R. Faucci, R. Marchionatti, L. Einaudi, R. Faucci, R. Marchionatti

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137344991
• eBook ISBN: 9781137345004
• Topic: Business
• Subtopic: Business General
• Index: Business

Luigi Einaudi (1874-1961) was a leading liberal Italian economist, economic historian and political figure: Governor of the Bank of Italy, Minister for the Budget and President of the Italian Republic. He was a prolific writer in all fields and his writings testify to his outstanding contribution to economics during his long career.

Part I
Einaudi’s Contributions to the Theory of Public Finance

1

Abstract Hypotheses and Historical Hypotheses and on Value Judgements in Economic Science*

The author studies the differences between abstract hypotheses and uniformities and empirical-historical uniformities in the field of economic science, distinguishing those that are valid sub specie aeternitatis but within the limits of the premises that have been established, from those which cannot be extended, except with great caution, beyond the time and place considered. Do the models of the different types of state proposed by economists for the study of financial affairs belong to the category of abstract or historical tools of investigation? The concept of a state which, in pursuit of its own ends, focuses only on the individual or only the collective community, is logically incoherent. And finally, the economist’s decision to refrain from value judgements, which is legitimate if motivated by the scientific division of labour, but illogical from the perspective of the more general quest for truth.

1. Abstract uniformities and historical uniformities. The method of successive approximations. Use of experiments repressed in social science. Abstract uniformities are true sub specie aeternitatis.
2. Relations between abstract models and concrete situations. Economists – almost to a man – want to have their say in everyday disputes.
3. Close links between theorems and recommendation. Difference between positing economic problems in the general equilibrium versus partial equilibrium framework. Theoretical identity between the problem of first approximation solved by Walras and Pareto in the general equilibrium framework and the concrete problem of the price of wheat of a given quality at a given moment solved by the brokers of a great cereal market.
4. The solution that would be obtained by calculation, impossible to achieve due to lack of genuine data and the difficulty of fitting the data into equations, is replaced with the solution obtained intuitively by the operators.
5. The old economists, even the greatest among them, such as Cantillon and Ricardo, and not infrequently recent theorists as well, such as Gozzen and Walras, accompany abstract rules with recommendations and a project. Monetary truths have almost always arisen from concrete recommendations. The economist sometimes ‘discovers’ the solutions to problems, or at other times translates the solutions already found by practitioners into hypothetical language.
6. Abstract laws fertile if capable of explaining concrete reality. Empirical laws valid to explain links that existed in a given place and time. Value of empirical laws.
7. On the coincidence between abstract laws and concrete uniformities. On the so-called failure of economic science and on verification of its theorems in the case of war.
8. Tools of theoretical investigation and empirical testing of theoretical theorems. Theoretical-historical tools. Unproductiveness of the latter. Inability of theoretical-historical tools to explain historical events.
9. De Viti’s models of the monopolistic and cooperative state in public finance. Cautious use of models by their advocate.
10. On Fasiani’s models applied to the study of the effects of taxes. Note on the necessary nature of the connection between general taxation defined in a given manner and the hypothesis of the monopolistic state.
11. On the definition of the ‘monopolistic’ type of state and on the reasonableness of the hypothesis that illusions, in the form of a system, are well suited to it, whereas they may be absent in the other two types of the cooperative and modern state.
12. Exemplification of financial illusions in the monopolistic state is characteristic of the subtype of monopolistic state in which the dominant class, adopting a non-logical mode of behaviour, exploits the dominated in such a way as to prepare and bring about its own ruin. Need for careful revision of historical judgements on the finances of the states in the ancient regimes.
13. Analysis of the concepts of the cooperative and modern state.
14. If the dominators and the dominated are one and the same, the distinction between the cooperative and the modern state is an absurdity. Within the state there exist no individual citizens as distinct from the group, and the group does not exist as an entity in its own right, distinct from the citizens.
15. The state can pursue ends that are typical of individuals considered singly; but such an approach amounts to a technical device to achieve ends that individuals could achieve by themselves or in free associations, even without the action of the state. The example of the colonies: individual aims can also be pursued by means of private companies; the aims of the state are those of the motherland.
16. In the modern state power cannot be exercised with exclusive concern for the interests of the public group considered as a unit. If this were the case, we would not be dealing with a ‘modern’ state but rather with the deification of the state above the individual. Lack of consistency of the concept of dualism between the individual and the state, and of a state that transcends the individual, being placed outside of and above individuals.
17. The real contrast is the dialectical opposition between state and non-state, i.e., between two entities that have always coexisted and which continue to exist side by side. This is one aspect of the deep-rooted contrast between the forces of good and the forces of evil.
18. The economist’s abstention from passing value judgements, which is legitimate for reasons of the division of labour, cannot be sustained as a means of moving towards more general knowledge of truth. The will of the state is the same as that of the scientist. The alternatives offered by Demosthenes: war against Philip of Macedonia or festivities and entertainment. Difference between the chemist and the economist.
19. The economist’s attitude of indifference towards the reasons underlying choices is rooted in the study of price in the case of free competition. The study of cases of monopoly, limited competition and suchlike makes it crucial to go beyond the choice, and to seek to uncover the choices lying behind it, in order to gain a better understanding of the choice actually made and its manner of implementation. Even the automatism of the hypothesis of full competition is in itself an artifice.
20. The convention according to which the pure economist, the applied economist, the politician, the scholar of law etc. study different aspects of reality – a convention required by the scientific division of labour – is sometimes impossible to respect.
21. The right to insurrection, and the right to excommunicate, with regard to the limits on scientific investigation. Study of the political class does not exclude study of the elect class.
22. Models and reality. Once the reality of situations changes, the models likewise change.
23. The proposition taken as a starting point by politicians concerning the exemption of a social minimum of existence is not a final proposition.
24. The appeal by the ill-informed pope to the well-informed pope.
25. The proposition taken as a starting point by the legislator is subject to judgement based on the ends pursued by human society.
26. Can economists decline all obligation to formulate value judgements?
27. There are no artificial limits to scientific investigation. The ends and ideals of life play a crucial role in shaping men’s decisions. It is impossible to study choices while pretending to be unaware of the ends from which they sprang.

1. The uniformities which economic science deals with are of two kinds: one is abstract, the other is historical.

The quest for an abstract law is preceded by if or similar hypothetical turns of phrase. Let us suppose that at a given time and place the hypothesis of full competition is fulfilled, and that under this hypothesis the state levies a personal tax on citizens’ net income; further, if we suppose that the society in question is static, i.e. that no new savings are accumulated within this society, and the population and its tastes undergo no variation, and if we also suppose etc. etc., then the consequences deriving from the tax thus construed are such and such. Subsequently, the hypothesized circumstances are made to vary, one by one, or additional circumstances are added to those already posited. With each variation in the data pertaining to the problem, suitable deductions are then made by adducing appropriate arguments. For ease of investigation, the problem is first set out according to the simplest hypothesis, bringing to bear only the minimum amount of data; then complications are gradually brought in by introducing new, more complicated and more numerous hypotheses. This logical procedure has long been known as the method of successive approximations. It has the advantage of drawing theoretical frameworks little by little closer to reality but without ever arriving at a true picture of the situation. The extreme models of perfect competition and perfect monopoly, the intermediate conceptions of imperfect competition and imperfect monopoly as well as their innumerable subspecies are not claimed by scholars to be a genuine portrayal or a photograph of reality: rather, they are rough outlines intended to depict reality at first with barely drafted strokes, and then with somewhat firmer brushwork, without it ever being possible to take into account the whole range of circumstances that shape its composition. Yet even though the results of the abstract line of reasoning cannot be checked by setting up a purpose-designed experiment under the desired conditions, as is the normal procedure in the physical and chemical sciences, it is still the case that if the premises are clearly enunciated and the argument is developed rigorously, then the theorems constructed by economists are true, within the limits of the premises stated. They are abstract laws, which tell us what would necessarily happen whenever all and only the premises stated by the thinker were to hold in actual reality.

There is no need to set the premises, the problem, the argument and the theorem in a specific historical, political or moral place and time in order for a theorem resulting from a demonstration to be true. It is true sub specie aeternitatis: it is a truth whose conformity to events that genuinely occurred need not be demonstrated, precisely because the investigator never set himself such an aim.

2. However, if economic science consisted only in considering abstract problems and demonstrating similarly abstract laws, it would hardly benefit from even that minimal following among the lay public it does still enjoy, and it would not exert the least influence on human affairs, not even that infinitesimal trace which it can indeed boast. Following and influence are due to the connection scholars and the lay public believe to exist between abstract frameworks and concrete rea­lity, between problems and first approximation theorems and problems and the associated urgent solutions in the daily life of human society. Physicists, chemists and astronomers can, if they so desire, spend their entire life without the slightest concern for the concrete applications others will draw from the theorems they, as scientists, have discovered. Not so for the economist. No economist has ever stayed rigidly closed up in the ivory tower of first principles, first approximation theorems. Pantaleoni and Pareto, to mention but two celebrated late lamented economists of the past generation, were combative fighters in debate centring on the everyday problems of their time just as much as they were great theoreticians. The attitude they adopted in facing the battles of real life repeatedly moulded their manner of addressing theoretical problems. To be sure, they took immense care to distinguish a theorem from recommendations; they endeavoured to avoid any contamination between the one and the other; sometimes both men – especially Pareto – spoke scornfully and ironically of literary economists who blurred the boundaries between science and politics, and who gave recommendations to princes instead of declaring uniformities. Yet by dint of fine distinctions and clarifications, they never ceased to reproach, criticize, contemptuously belittle – and only very seldom did they deign to praise – governing figures and the governed, pointing out which path was best avoided and which was the right one to take. It is a fact that in economic science there exists a sphere of theorems properly speaking, and a sphere of recommendations; but these two spheres are not separate and independent from one another. Economists who do have something to say, even though sometimes delighting in contemptuously belittling the other and perhaps better part of themselves, tend their fields for the purpose of knowledge and dig the fields over for the purpose of acting upon reality; the imitators, the servile pen-pushers, incapable of perceiving the links between the two aspects of the whole person, construct insipid theory and supply the recommendations they know will find favour with the powerful.

3. In fact, there is an extremely close link between theorems and recommendations. When Walras and Pareto constructed the theory of general equilibrium, they based their arguments on no more than a small handful of premises, yet these were at the same time a substantial array of presuppositions. A small handful, in the sense that Walras and Pareto worked on certain simplified assumptions: perfect competition or perfect monopoly, unlimited reproducibility of production factors or limitation of this or that factor, free market or closed market and the like. A substantial array, because they did not suppose that when one of the premises of the problem changes, all the other premises remain unaltered. Quite the opposite: they supposed that when there is a variation in one of the data of the problem, all the other data change accordingly, at the same time. Thus in their vision, on account of and during the movement of one of the dots in the economic firmament, all the other dots likewise shift, influenced by and, in turn, acting on the motion of the first dot. In this manner they achieved the most general and certainly most fertile breakthrough of modern economic science: what reigns supreme on the market is the law of interdependence, with the result that it is not possible to alter the price of a given good without this entailing a change, slight or great, in the price of all other goods, whether close or distant, present or future. But what a long road had to be travelled before it became possible to take a step forwards from this principle, or from the one which holds that the price of a consumption good is, on a given market, the price that makes the quantity demanded equal to the supply and which, at the same time, achieves equality between demand and supply of producers’ durable goods and of production services, and between the savings and capital that was required for production of the consumption goods. And what a long road had to be travelled before a step forward could be taken from extremely general theorems to the formulation of theorems closer to real people. For it is only this latter type of theorem that is of any interest to real people, whose concern is to try to understand why the price of a quintal of wheat, at some given time and place and under the particular market conditions in question, is 25 and not 30, 240 and not 300 liras! Such a long winding path that no-one has even ventured to set out along it at all! Marshall, in despair, embarked on the route of partial equilibria, i.e. the study of price laws under the hypothesis that not all the premises of the problem change simultaneously but, coeteris paribus, that change occurs in only one premise at a time or in only a restricted few: in other words, that change affects only the number of premises whose variations can be grasped and followed and recombined by the limited human mind. By proceeding along this route, which is, after all – with due respect for the theory of general equilibrium – the one followed by all theoretical economists, notable progress has indeed been made. But, as a result of the above-mentioned limitation of the human mind, it has so far been impossible – and is likely to be for the foreseeable future – to complicate the problem and multiply the data or the underlying premises so as to take into account even just a small number of the countless data that would have to be considered in order to solve the concrete problem on a case-by-case basis. Advancing along the road of successive approximations, sooner or later there comes a point when one has to come to a halt. Only very rarely do economists move beyond a second or third stage in approximating reality. To reach the final arrival point, just imagine the number of steps leading down from the lofty abode of the contemplators of first truths! If the likes of Walras and Pareto could descend from that lofty summit whence their gaze takes in and dominates the horizons and sees the price laws in the different types of market, and could move further and further down to the bottom of a concrete market, for instance right down to the bottom of the ear-splitting Chicago cereal market, its air filled with raucous cries and wild gesticulations, then they would solve a scientific problem of precisely the same nature as the problems they solved earlier when they set the corrected equations of their first approximations. Were the likes of Walras and Pareto to possess the necessary penetrating depth of vision, they would silently set to work in that place where at this very moment the heaving crowds jostle and butt one another, and they would posit the thousands of equations required by the thousands of unknowns to be determined. And just imagine how many unknowns there would be amid the myriad data, all of them needing to be known! Do we know or can we guess – in other words, can we determine by setting the appropriate equations at lightning speed – the answers to questions concerning the extent of the area, fertility, position etc. of the lands that were or will be destined for wheat growing in Dakota, Iowa, Indiana, Alberta, Calabria, Lombardy, Sicily, Russia, Australia, Argentina and India etc., the number and productivity of the workers who will be assigned to wheat cropping, the quantity of savings necessary to produce the tools and agricultural machines, the means and costs of river, land, sea and air transport, the tastes and incomes of wheat consumers scattered over the different countries of the world, and at the same time the types of land, production factors and consumption patterns relating to all the products that may be competitors or replacements of wheat? Laid out before them, visible as equations, those sovereign intellects would have the entire picture of the economic and social world photographed at that very instant, and the photograph would be a thumbnail vision of that world, offering a preview of its future evolution and, at the same time, an overview of all the repercussions its evolution exerts on action in the present world. If that calculation could be carried out and if at that instant the price calculated were 1 dollar and 17 cents per bushel of wheat of the given variety and quality, then that price would have the value of a necessary scientific law. Necessary because it would be the inevitable logical consequence of all the appropriate premises clearly posited by a rational argument.

4. In fact, such calculations are beyond the potential of the reasoning human mind. Instead of the likes of Walras and Pareto, what we see in the Chicago wheat pit – and, for other economic goods, in the other stock markets where the prices of the main goods or public securities traded are publicly negotiated – is the pandemonium of hundreds or thousands of frenzied individuals vociferously hollering and elbowing their way to the front, who, lo and behold, amid the h...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Editors’ Introduction
• Contributed Essays
• Part I Einaudi’s Contributions to the Theory of Public Finance
• Part II Einaudi’s Contributions to Monetary Issues
• Part III Einaudi’s Contributions to the History of Economic Thought
• Notes
• Index of Names
• Index of Subjects