Addendum II to the

Theory of Economic Progress


JOHN HODGES attended the University of Texas (circa 1925) and received a Bachelor of Arts degree in 1929, a Master of Arts in Economics in 1933, and a Ph.D. in 1937. His master's thesis was titled "The Emergence of Veblen's Distinction Between Industrial and Pecuniary Employments." Ayres directed this thesis as well as his Ph.D. dissertation, "An Historical and Critical Study of the Development of the Capital Concept." He was the first of eighteen Ph.D. students to write a dissertation under Ayres direction.

This review is interesting not only for its own sake, but also because of the correspondence between Ayres and Hodges. Hodges wrote the reply, rewrote it four times, and sent the fifth version to Ayres for his comments. Ayres and Hodges maintained a professional and personal relationship until Ayres died in 1972. A specific portion of their correspondence (from April to August of 1945) involves Hodges review of Lerner's review and is included here. These letters discuss the decision of the editor of the American Economic Review, Fritz Machlup, not to publish Hodges' reply to Abba Lerner's review of The Theory of Economic Progress. Although it is never specifically stated in the letters, it is almost certain that during this period Ayres was working on the "Addendum" to The Theory of Economic Progress. Regrettably only Ayres' responses to Hodges survive; A search of the Clarence Ayres Memorial Archives, located at the University of Texas, Eugene C. Barker History Center, has a wealth of Ayres/Hodges correspondence from 1933 to 1967, but not the Hodges side of the correspondence on the matter of this review.



Professor Lerner on

The Theory of Economic Progress

by John R.Hodges




THE EMOTIONALISM with which Professor Lerner attacked Professor Ayres's Theory of Economic Progress and the disinclination to perform the scientist's function of carefully hearing and testing a new theory is an indication of one of our greatest and most perplexing problems in economic science. For this emotionalism neither Professor Lerner nor any one else is entirely responsible. It is a collective responsibility. Ultimately it is due to the fact that economics has fallen heir to a major share of the violent emotions which accompany the conflict of contending evaluative systems­­conflicts which used to flow in other channels: the religious, the dynastic, and so on. For the past several centuries economic thought has been dominated by the dogmas of partisan groups some of which have been transparently apologetic, some of which have been imposing and ostensibly scientific. To them men have brought their strongest emotions and for them men have been prepared to fight. So we find ourselves in the difficult position of being torn between our allegiance to science and to economic creeds which possess a "meaning" far beyond anything that scientific and intellectual considerations could possibly produce in us. That "meaning" is due to the emotional conditioning adult society imposes upon each oncoming generation as a part of making it a full participant of culture. These allegiances are much closer to religious fervor than is comfortable for any scientist to acknowledge. If we no longer find ourselves emotionally disturbed over religious differences that is not so much because we have attained scientific objectivity as that our interests have drifted. By a process we did not deliberately create we are not "bothered" that way any longer. The test of our competence as scientists comes when we are confronted with widely divergent economic interpretations. If then we become enraged at having our economic concepts laid out upon the laboratory dissecting board and probed objectively we, like"sunshine patriots," are sunshine scientists.

I am not particularly concerned with Professor Lerner's liberal use of invectives. Professor Ayres has indeed said a few things in a manner which will raise the blood pressure of some readers, and so have even the most prosaic writers in the orthodox tradition even if they were not conscious of doing so. One cannot be blamed if he repays in kind, although there is a question whether Professor Lerner has not greatly exceeded that. The matter goes far deeper than the choice of adjectives; it involves the partial representations which distort, the closed mind which would bar the door to new inquiry while protesting its liberalism, and would claim a monopoly on economic interpretation.

As an example of the latter, consider the pontifical judgment that the book is suitable only for those having "fairly complete ignorance of economics" and that economists "will not like the book" (160) . As a matter of fact, all but the most adamant traditionalists are likely to find much in The Theory of Economic Progress that is of vital interest and with which they can concur. The reason for thinking this is that tremendous strides have been made in the study of man and society in this century and these have influenced economic thought, although somewhat less than they have other social disciplines. A new accumulation of knowledge has made all of generally aware of the metaphysical basis of eighteenth century rationalism; this has enabled us to recognize its presence in established theory. Much has been learned concerning cultural mores and ethnocentric group evaluations; this has caused a large and growing number of economists to consider a reappraisal of traditional concepts imperative. Modern psychology has made the continued acceptance of hedonism in economics, or naive denial of its presence, a matter of grave concern. We are learning to appreciate the decisive role of culture in molding human thought and conduct and, accordingly, economists are seeing that economic desires and institutions have not stemmed from the elements of human nature, as we traditionally assumed.

This is only a portion of the fund of information which has been changing the twentieth century mind, and its significance for economics is inescapable. It has had a part in creating a skepticism toward accepted theory which not even its most persistent defenders have been able to escape. It has had much to do with the latter's shift of attention from general theory to the mathematical exposition of price relationships, with emphasis upon problems which they agree may have no practical bearing upon the realities of economic life. It has been one cause for the retreat among some orthodox members into the realm of the occult and the "intuitive." No matter how much some economists may dread the prospect we must sooner or later make our peace with this new knowledge. The great merit of Professor Ayres's book is that it shows some of the meaning of this new concept of man and society for economics more clearly than has been done before. In view of the importance of such problems there is every reason to think economists will welcome the opportunity to consider them.

No one could possibly know by relying on Professor Lerner's review that Professor Ayres had shown cause for holding that orthodox theory confuses the relationship between material and funds capital. This is perhaps the crux of Professor Ayres's analysis and his account of the disorders of economic society derives largely from it. It is instructive to notice that Professor Lerner ignores the evidence and the problems raised, assumes the impeccability of the orthodox position, and closes the issue with the perfunctory charge of "elementary error." Upon what grounds does a reviewer­critic ignore a thesis of major importance in a work, and do we not usually consider a man's deliberate failure to meet carefully reasoned evidence and objections as inability to do so? A less important abuse, although one which also indicates distortion, is Professor Lerner's statement that Professor Ayres rejects the time preference theory of savings "on the grounds of an alleged dependence of this relationship on an alleged excess of short­term interest rates above long­term interest rates" (161) . The reader will find that Professor Ayres was calling attention to a minor inconsistency when referring to interest rates and that the major point of criticism regarded the relationship between large incomes and savings. Professor Ayres observed that most savings are made by the wealthy and that the saving process is unavoidable because their incomes are greater than they can spend on personal consumption; this, rather than time preference, accounts for most savings.

Professor Ayres called attention to two important aspects of accepted price theory: first, that it contained metaphysical premises and, second, that it was related to justificatory elements of the capital concept. Professor Lerner denies the existence of justification, saying that all reputable economists today do likewise. They do, but is denial all that is needed to dismiss evidence to the contrary? Imagine, for the moment, that the shoe were on the other foot and that Marx had failed to draw the logical conclusions toward which his analysis drives. Socialists might then dismiss our charge of justification by denying that the Marxian analysis warranted such conclusions, its founder had not drawn them, and that all reputable socialists avoided them. Should we then consider the issue closed or would we proceed to submit overwhelming evidence indicating that irrespective of their intentions and denials they have "explained" economic society in such a manner as to make justificatory conclusions seem plausible and inescapable? There can hardly be a reasonable doubt what the preponderance of objective opinion would be in such a situation. While it may have been politically naive for J.B. Clark to draw justificatory conclusions out of orthodox theory, they are implicit in it; it was both logical and honest to face them rather than to bury the head in sand. The partisan sentiments of such past leaders as Ricardo, Senior, McCulloch, Bohm­Bawerk and a host of others are an open book for all to read, although let us grant that the situation has altered in our day. It would seem the obligation of traditional theorists to prove that their theory does not explain in such a way as to justify, not merely deny that it does so.

Following this denial Professor Lerner produced a new variation on the old metaphysical theme of harmony, which has run throughout orthodoxy: by a process which would appear to be the newer Cueism "we are all socialists now;" those who oppose economic change are no more; and "if there are no reactionaries now to be found to whom the theory (i.e., price theory) is to be surrendered, they have to be invented" (163) by Professor Ayres. This is a rare benediction to pronounce upon a world torn by intellectual confusion and dissention but its purpose is to suggest that we need not examine the premises of accepted price theory. This disposition on Professor Lerner's part to think in terms of "socialists" and "reactionaries," to emphasize the possibility of using price theory to achieve the socialist's goals, and so on, represents the carry­over of an old tradition of thought which we need to bend every effort to free ourselves of. It is the disposition to see issues on the partisan level and it leads, as it has always led, to interminable fracticidal disputes and ends in men deciding to stop thinking and start doing. How else is one to account for a distinguished economist like Professor Hayek writing a book which incites, as does The Road to Serfdom? It is one of the major obligations of economists to uncover the dubious elements of all egocentric economic evaluations. One of the most promising possibilities which may come from admitting the study of culture into economics is that possibly for the first time we shall have a chance not only to free ourselves from the hidden emotive elements of past theories but also to rebuild in a way which effectively excludes them.

Liberals often view with incredulity evidence showing the relationship between price theory and the perpetuation of the status quo largely because they may subscribe to price theory while assuring themselves they are interested in no such goal; and this seems to constitute sufficient proof to them that they need not take the evidence seriously. It is an understandable reaction and we must eventually learn to see how it comes about that liberals may subscribe to that which justifies. Our liberal is, I think, laboring under the rationalistic assumption that his and others' activities and convictions are the outcome of deliberate and reasoned processes. He either rejects the idea that culture plays a powerful role in the formation of his ideas or, and this is much more likely, is completely unaware of such knowledge and influences. He knows that the impressive ideologies of the past have justified ­­ and this is always easy to see of past systems, such as physiocracy or medieval economic thought ­­ but feels that has little to do with him; today we are more enlightened. This view is dictated by the folkbeliefs but is too simple and complacent. Many of the schoolmen of the Age of Faith, for example, were true liberals in their day and quite unwilling to speak for the narrow partisan views of a privileged group. Yet seen from our point of view they did just that. Why? I think we must look for the answer by considering the cultural environment. They were induced intellectually and emotionally to accept the "universals" of their day ­­ those truths which were too deeply imbedded to permit of question ­­ just as we are induced into the truths of our day. They saw nothing peculiar about their views; rather, it seemed inconceivable that anybody should think otherwise. The same is true of us. In both our cases, the ideas that are fundamental do not challenge attention nor become the subject of doubt. Our blindness to the presence of justificatory elements in these universals, exactly as in their case, is due to the fact that the mores induce the blindness; they encourage faith in what is. None of us sees his social world with the unspoiled vision of pure reason, as the rationalistic mythology of the eighteenth and nineteenth centuries has taught us to believe. We see it from the point of view of the stereotypes prescribed by the folkbeliefs, mores and institutions. This need not be taken to mean that we are perfect automatons. Intellectuals have always been able to see and criticize some of the customs and folkbeliefs of their time ­­ and even to use their energies in creating new variations on old institutionalized themes ­­ but almost without exception they have concurred in the larger generalizations of their society. These larger generalizations have usually purported to show why established ways are right and should persist and have supported some system of power, whether it be that of churchmen, warriors, business men, or some other. Until economists become conscious of the role of culture it is unlikely they, liberals included, will free themselves from the seemingly scientific systems which justify some established system somewhere.

Because orthodox theory has enjoyed almost universal acceptance in our society its peculiarities, provincialisms and biases have been difficult to appreciate. Anthropology and the other social disciplines are, however, helping dispel our innocence of the fact that there can be other social arrangements and creeds, other ways of thinking and acting that are entirely different from our own. We are approaching the perspective which will release us from the notion that the inherited local ways and beliefs are identical with human nature and that our economic convictions are the product of pure reason. If we can eventually come to see the predominant influence culture has exercised hitherto in the formation of our economic theories we may be able to avoid the mistakes of the past and so place economics on a new level of scientific objectivity. Here, again, Professor Ayres's analysis is of great help in pointing the way to such an undertaking.

Professor Lerner denies any relationship between the economist's concept of value and the ethical; as he put it, "Professor Ayres builds up a magnificent structure on the basis of an obstinate identification of the two words ­­ presumably because they have the same spelling, the same sound, and perhaps a related etymology" (162) . The denial has been made before. But economists have consistently taught that value analysis explains (1) the ratio at which goods exchange in the market, and (2) that price is not just an accident, is not due to custom except in minor instances, and is not arbitrarily fixed by sellers. The prices at which goods exchange do not make one man's gain another man's loss; theory tells us that both parties to the exchange gain. It has been this second range of interests in which ethical considerations have appeared. The effort has been made to show a fundamental reason for all prices being what they are and behaving as they do. Orthodox economists have never seriously entertained the idea that these things are the outcome of the complex mores and institutions under which we live and the pressures and manipulations possible within them. But they are. This second set of price problems and relationships has arisen out of the historical circumstances attending the rise of commercial society out of the bosom of medieval civilization. Moral and justificatory views abounded in the latter and commercial society acquired its own there and by imitation. Medieval mores denied the justice of the trader's price and his profits; commercial mores validated them. Yet the old idea has persisted to our time in a greatly weakened form and the tension over the moral meaning of price has continued, although again in a much weakened form. Whether intended or not, the equating of price with "costs" of production was a powerful argument against the grumbling of consumers. The classical economists looked to competition to attain the moral, the "fair" price. They, like the physiocrats, saw competition as "the mainspring of human perfectibility" when harnessed with private self­interest, "the born servant of the general interest." The hedonistic, subjective, explanation of price has been even more effective in making it seem that value, and hence price, rested upon the bedrock of human nature and that the existing price system is necessarily and inevitably what it is.

In no case is there any indication that the theory was deliberately invented ad hoc to rationalize; what seems to happen is that new ethical interpretations grow up as variations on old ones. But the point of emphasis is that the meanings of price indicated here have arisen out of ethical issues, and the effort to account for the entire price structure has grown out of metaphysical interests and considerations. The classicist's conviction that there was an overall principle which causes all prices to be as they are was not arrived at by careful empirical inquiry; it was suggested by the theological belief that there was a plan or natural order governing society, and the successor to this idea is the concept of the "normal" and "equilibrium." So prominently has this meaning of price featured in price theory that one must question the accuracy of those who maintained that value theory is intended to account for the rates at which goods exchange and nothing more.

Professor Lerner concludes with the pronouncement that Professor Ayres has developed a new "absolutist theory of faith in Progress through the automatic development of the economic machine" (164) . I can see how some people might think this, but a careful reading should remove any basis for such a judgment. Professor Ayres has proposed that economists undertake the same constructive reappraisal of the cultural heritage that is already under way in related social disciplines. We have firmly believed heretofore that our material well­being, our power over the physical environment through science and industry, our modern enlightenment, and even our achievements in the "fine" arts, have been due to a higher type of knowledge and the creative forces of the human mind which have been set free by the particular social and economic institutions under which we live. The information which has been accumulating in modern times fails to give any support to this view. It is becoming increasingly clear that these things rest upon the technological aspects of culture and that the latter developed independently of the institutional features of culture. In proposing a theory of value which recognizes this Professor Ayres is not setting up a new absolute, he is pointing out that the time has come to square our conception of the causes of human achievement and social well­being with the newer, verifiable, knowledge.

Our present knowledge of the mores makes it certain that we cannot expect to go on accepting the value systems of the past very much longer, for all of them have their foundations in disintegrating mythology and metaphysics. Anthropologists are perhaps more generally aware of this than most people in the social sciences because of the nature of their work. Professor Ruth Benedict, for example, points out in closing Patterns of Culture that it is one of the greatest and most immediate tasks of social scientists to understand the meaning of cultural relativity for our own civilization. This realization is spreading, however. The activities of all cultures have always been oriented around some particular set of interests and there seems reason to believe that such must continue to be the case. If so, then it is essential that we rebuild around a set of interests and values which will be free of the mythological and justificatory elements of the past, which will utilize the knowledge we now possess and which will, unlike those of the past, admit of future change and development. This is no easy task, and I do not doubt but that Professor Ayres would be among the first to agree that much work, clarification, and deliberation will be required before we can hope to attain consensus on a new value theory. It is significant, in the meantime, that Professor Ayres should have outlined a theory which may serve as a basis for consideration and further inquiry.

Professor Lerner's general treatment would be appropriate enough in the shrewd atmosphere of the famous Eskimo Drum Dance, or in political debate, but it fails to attain the level of objective appraisal. His entire review is loaded with the old and familiar arguments of those who deplore change and object to the consideration of alternate views. For this reason it does not begin to indicate the importance of the new theory for economics. Economists who are capable of performing their function as scientists should examine The Theory of Economic Progress themselves.

John Hodges -- Kansas City, Missouri --1945


Ayres - Hodges Correspondence

THE FOLLOWING is the full text of the relevant letters from Ayres to Hodges regarding the review episode. The only changes made to the original letters is the spacing between lines.

[I haven't heard anything about the prospects of a review in the SSSQ. Weeks runs that you know. Unless you have heard from him, I don't think you need give it another thought. This is much better!]*

THE UNIVERSITY OF TEXAS

DEPARTMENT OF ECONOMICS

AUSTIN

14 April 1945

John!

This is wonderful! And I mean it quite above and beyond the fact that it is wonderful of you to come to the defense of TOEP so energetically. I mean you have done a wonderful job. It's calm, judicious, informed, thoughtful, altogether scholarly. I don't know at all what the reactions of the present editor of the AER (Machlup is holding forth as acting editor) is likely to be. I'm afraid price theory occupies the fortress. But I just don't see how he can refuse to print a manuscript as well written as this. My guess is that it will be accepted and will be read with respect and will do you as well as me a lot of good. For it certainly is wonderfully mature: a manifestation of clear, calm certainty of understanding far beyond anything you have ever done before (that I have seen) . The penciled suggestions I have made here and there in your manuscript all have to do with very minor matters of diction, just the sort of thing, I'm sure, that you had in mind doing yourself. It would be amusing to compare notes and see how many of the changes I have suggested coincide exactly with alterations you have already made. All can be made in the present stypescript (sic) .

Shoot it in right away, and let me know what happens. I have been working on a short communication not so much in protest at Lerner's review (which, as a matter of fact, I haven't even mentioned) as in the attempt to bring the focus of attention back to the real issues. But your piece is ever so much better. If I had the choice which I would rather see published and were deciding solely in terms of my own professional interest, my instant and emphatic choice would be yours. So I'm going to hold mine up at least until yours has been accepted or rejected, so that Machlup will have no excuse for returning yours on the ground of a prior commitment. I do hope no one else has got ahead of you. Hurry!

How are things going there? I understnad (sic) you are living on a mountain top with the whole world spread out before you for your rejection. Sounds great! Please give my best to Amelia, and accept my heartiest congratulations.

Yours, [Clarence]




THE UNIVERSITY OF TEXAS

DEPARTMENT OF ECONOMICS

AUSTIN

Cloudcroft, New Mexico

23 July 1945

Dear John:

Isn't Machlup's behavior foul? My first impulse on reading his letter was to try to get you to let me submit the whole issue to the Executive Council of the Econ. Ass'n. But on second thought I think it would be more profitable, at least at first, to try something else. The trouble is, even if the council were to spank Machlup, there would probably be no percentage in it for you or me.

It seems to me that you would be smart to go on and try to get your piece into print in one or the other of two ways. One is by taking Machlup's suggestion and cutting your piece--not to 600 words--but to the average length of AER "communications." Go through a few numbers and estimate the wordage of the communications, strike an average, and cut your piece to that length. Machlup couldn't object to such length, and probably 600 words is his "asking price" anyhow. [Let me know the figure you get]*

The other possibility would be that of sending it to some other journal. I feel pretty sure the Southwestern (Miss Allen) would take it. But I think you might do better. If that seems the best thing to do, I'd be glad to transmit it to Frank Knight for the JPE with a letter of explanation.

In deciding between these two alternatives you would have to give special consideration to the degree of connection between your piece and Lerner's review. The closer the connection is, the more point there would be in AER publication (and less in JPE) and the more obligation there would be on Machlup to print it. In the event you decide on this I would like to be allowed to write Machlup a letter (I could say that you had informed me of your unsuccessful attempt to answer Lerner) letting him know that I shall submit nothing to him myself. This would put him in the position either of accepting your communication or in violating all precedent by refusing publication of any rejoinder to an important review. I don't believe he would do that, and if he did I would certainly take it up with Sharfman.

I enclose a copy of the note I wrote last spring and have been holding. As you see, it makes no direct reference to Lerner, and so could be sent to the JPE. (Tell me, has the JPE ever reviewed the book? Who did it, and what did he say? Would my note be altogether inappropriate to that review?) On the other hand, if you decide on the other alternative, I'll send this to Machlup.

Would you let me help you? If you have a copy of your piece that you could send me, I wish you would do so. I would like to go through it again both with the alternatives in mind and also with an eye of possible cutting.

[Yours Clarence]

[Tell me about the K C job. Does it look good?]*


THE UNIVERSITY OF TEXAS

DEPARTMENT OF ECONOMICS

AUSTIN

Cloudcroft, New Mexico

4 August 1945

Dear John:

Your proposal to make a general article of your Lerner piece puts me in a difficult position. I feel that I ought to deter you from focussing your interest and effort on my book. But I have no wish to divert your interest or your efforts from the ideas which are our common property, and I can see how a critical analysis of a group of reviews could be used as a vehicle for restating and clarifying those ideas. It would be a real job--indeed, a tour de force. I shouldcaution (sic) you on that point, too. But it would be very much more worth while, intellectually, than a reply to any one reviewer. This would be true especially to the degree to which you are able to organize your points in such a way as to bring out and make clearer to your own readers the intellectual substance of the position they have failed to apprehend correctly.

Another point on which no warning is necessary is the question what journal would accept such an article. The more I think about it the more doubtful I become is (sic) Knight would take it for the JPE. There is no reason why you shouldn't sent it to the AER again, of course. And it isn't impossible that a stronger article of more general appeal would be accepted. (I doubt if Machlup is the determining factor. If his associate editors found the article valuable, that would be decisive, I think. And of course it's possible Homan might be back.) But I think the Southern Economic Review would be favorably disposed, and I think that would be better than the Southwestern Quarterly. Think about it.

As a member of the AAUP Council probably I should chide you for going to a censured institution. (I had forgotten it was!) But circumstances do alter cases. It isn't by any means impossible that the situation at KC may actually be as represented by Hill. The considerations he mentions would have no effect on AAUP judgment and action, of course. If Hill is right, it should be an attractive opportunity. And there will be others, especially during the next few years. When I was in Chicago in May I met Martin Krueger, head of social science teaching in the College of U. of C., at the apartment of Helen Goldbaum and Milton Singer. He inquired if I knew where people are learning to teach social science, and who, and I mentioned you as having learned at Texas! Let me know how things turn out. Yes, I have the revision of my lay book nearly done.

[Yours]

[Clarence]

_______________

*Brackets enclose handwritten material or typewritten marginal notes. [Note: the piece that Ayres was working on was almost surely what was latter published in the AER and is now referred to as the Addendum to the TEP.]

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