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American Economic Association The Economic Problem by R. G. Hawtrey Review by: John Ise The American Economic Review, Vol. 16, No. 3 (Sep., 1926), pp. 455-457 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/698 . Accessed: 02/05/2014 20:52 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org This content downloaded from 130.132.123.28 on Fri, 2 May 2014 20:52:24 PM All use subject to JSTOR Terms and Conditions

The Economic Problemby R. G. Hawtrey

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American Economic Association

The Economic Problem by R. G. HawtreyReview by: John IseThe American Economic Review, Vol. 16, No. 3 (Sep., 1926), pp. 455-457Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/698 .

Accessed: 02/05/2014 20:52

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

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American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to TheAmerican Economic Review.

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1926] General Works, Theory and Its History 455

clear the exact meaning they wish to give to demand, whether that of a schedule or of the amount demanded at any given price.

The principle that "in the long run, price must be sufficient to cover both operating and overhead costs to marginal concerns," is true enough; but has it any definite meaning? Is this not somewhat like saying that a man's legs "must be" long enough to reach to the ground, or the ocean "must be" large enough to reach the shore? Every ocean is large enough to reach to the shore, and any price whatever is suf- ficient to cover the costs of concerns that are marginal under the circumstances.

Attributing great causal or determinative significance to various margins and marginal units and forces seems poor logic. For instance, Professor Edie states that "it is the demand of the marginal buyer, the man who can just barely afford to buy at the stated price, which tends to establish the price of the good." Can it be said that, in the market, the demand of a marginal buyer has any more influence than the demand of any other buyer? Surely not. It is only when we reason in the other direction,-when we try to ascertain the effect of price on the amount demanded,-that we find the marginal buyer of any special significance. He is the significant factor here because he is the variable element as the price changes.

A question may well be raised as to whether this book is adapted to the use of college freshmen and sophomores. It is a large book, nearly 800 large pages; and the author makes no pretense of avoiding or glossing over difficult questions. Yet it is more concrete, and has more illustrative material, than most textbooks, and for that reason should be more interesting and more intelligible to students. It seems better adapted to upperclassmen than to underclassmen, although the character of the material is such that students of any grade will profit from anything they are able to absorb.

JOHN ISE.

University of Kansas.

The Economic Problem. By R. G. HAWTREY. (New York: Longmans, Green. 1926. Pp. xii, 417. $3.75.)

This is not a hash of already much-hashed economic doctrine; it is original in its scope and treatment, and is a significant contribution to economic literature.

The book offers a careful analysis of the different kinds of markets, the commodity market, the labor market and the several branches of the capital market, showing how "organization through markets reacts upon production and transport and upon the distribution of mankind over the surface of the earth." These markets are considered from the national and from the international point of view; in fact the author

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456 Reviews and New Books [September

holds a broad international point of view in his treatment of most problems. His discussion oI the development and significance of com- mercial "interposts" is interesting.

In treating international trade, Mr. Hawtrey is much at home; and his analysis of international financial problems, mercantilism, and mercantile iinperialism, is suggestive and in some respects original. His discussion of protective tariffs seems quite too charitable to the pro- tective policy, although, like Professor Carver, he winds up with the admission that, notwithstandingf the theoretical possibilities of pro- tection, it is in most respects an unfortunate policy. The burden of protection is assumed to depend in considerable measure upon the "displaccability" of the industries affected. "If the imports are very displaceable, and the exports very undisplaceable, the burden might be reduced to nothing."

Several chapters are devoted to human nature, in an effort "to disentangle the principal motives, instinctive, traditional and rational, whlich especi.ally affect m'an's capacity for joint action." (The economic problem, according to Professor Hawtrey, "is that of utilizing man's capacity for Joint action.") Among the traditional motives are noted the taboos, religious and social, which still play so large a part in human society; and among the rational motives are emphasized those which are wholly or mainly subconscious.

Following this comes a criticism of the individualist system, from the point of view of the welfare Of the individual, on two main grounds: first, that by reason of the inertia of human nature, the individual is not competent to direct dem-and wisely; and second, that the individualist system leads mainly throughi the operation of profit, to an exaggerated inequality of incomes. Then follows a discussion of false economic ends, of wages and the labor movement, of collectivism and nationalism, and of taxation.

In his theories of distribution, the author is far from orthodox. Without any very definite theory of value, other than a tacit as- sumption of a badly working theory of supply and demand, he makes wages depend upon the powe, of the unions, within certain limits, the labor market, which "ought to secure a balance between supply and demand," halving "broken down." His analysis of the effects of trade union efforts to raise wages is careful and penetrating.

Interest is determined by the demand for investible savings rather than by the supply; for the supply is largely independent of the rate of interest. Like the WVebbs, Mir. Ilawtrey believes that a "high yield will not necessarily strengthlen the mnotivTes for saving"; and he argues for this view with ingenuity. He criticizes the description of interest as the price of waiting, on the ground that present satisfactions are not

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1926] General Works, Theory and Its History 457

"generally speaking, preferred," and on the ground that "the intention is, not merely to postpone the expenditure of the capital, but never to spend it at all." The latter point has always seemed sound to the reviewer.

Profit is "the difference between two market prices or between cost and selling price"; but it is not a differential gain in the sense that rent is, because this would mean that the marginal business would yield no profit, and a man "will not enter a business that promises him nothing in excess of the return hie could expect by merely lending his capital." Profit includes wages of management, and as such is part of the cost of production; but it includes more than this. It is a very important element, being the source of most savings. The rate of profit in any trade tends to be "just not so high as to attract new competitors, that is to say, it must not offer, from the moderate turnover that a new competitor can expect to secure, an income large in comparison with that which he could earn in the labor market." Yet, with apparent inconsistency, the rate of profit is stated to have little, if any, relation either to the skill or to the industry of the trader. The treatment of the functions and services of the entrepreneur or "trader" is one of the best to be found anywhere.

Rent is apparently not regarded as important enough for full or careful treatment. "The huge city ground-rents are really a by- product of the huge incomes amassed from profits." Rent is one of the elements of cost of production. It appears, in this, and in another connection, that the author has not grasped the exact nature of rent. For instance, he speaks of the reduction of economic rent as if it were a social loss. Rent is not a social cost nor a social income, in the same sense that interest is, because land is a gift of nature, and does not have to be paid for socially. One class may have to pay another class for its use; but a rise or fall in rents does not necessarily suggest either a gain or loss in the social income.

Much attention is given here to the problem of consumption; and the analysis is acute and suggeistive. The author distinguishes two broad classes of objects of consumption: "defensive," that is, those intended to prevent pains, inj uries or distresses, and "creative," or those intended to supply some positive gratification or satisfaction. His conclusions are far from hedonism.

The discussion of collectivism is original and ingenious. The con- clusions are generally unfavorable to the socialistic ideal, although nationalization of coal mining and banking seems to be regarded with some favor.

JOHN ISE.

University of Kansas.

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