Part I

So far we have considered the national economy in an idealized manner as that of a· unified people. Actually only a relatively small part of the process is carried forward under unified direction, i. e., that part in which the state enters with its economic leadership. The largest part by far is carried out independently by the private economies. These are numbered by the million in all the great na tions. In the present legal order these economies are independent. If they wish to bind themselves together, it can be done only by con tract. There are three forms of binding compensatory contracts: the social contract, the exchange contract and a contract of insurance. In the social contract a larger or smaller number of persons pledge them selves to unite values, goods or services, for some given purpose, espe cially acquisition. The contract of exchange as a rule is concluded by only two parties; by means of it the many-sided surrenders of goods, services or money are reconciled. The contract of insurance at times most resembles the social contract, at other times that of ex change. Its purpose is to distribute the effects of loss over many pri149 150 SOCIAL ECONOMICS vate economies. It has attained great importance in developed econ omies. But it has to do only with the security of the economic body, not with its creation. We shall give no more attention to this form of agreement than we do uncompensated contracts; fundamentally we are concerned only with the erection of the social economic organism.

Next we may disregard also the social contract. One should expect that it be adopted to the integration of the social economy. Neverthe less in its effect it is overshadowed by the exchange contract which, although it is made as a rule only between two parties, has manifested it.self the coordinating instrument that binds the individual economies into the national economy.1 The social contract is used in its fullest form only in a relatively small number of cases. We shall therefore make full reference only to those institutions that are created by its agency. Our main task is to describe the institutions of exchange and erection of the national economic body that is brought about by these. The private economies that are embraced in the national economic body retain in their domestic management rather the spirit of the simple economy. They associate themselves with the social body in only a few respects. These associated activities are for the purpose of attending to the fulfillment of consumption by means of common economic leadership. But in their external affairs these economies are bound fast to the economic body in which they have a most im portant function to perform. In a fully developed money economy, in which individual self-sufficiency disappears, all households must finally turn to the market for a satisfaction of their needs.. From them arise the consumer's demand, which in turn give rise to. a pro ducer's demand. In further sequence, everyone who maintains a self supporting household is faced with the necessity of securing a mone tary income. To do so, he must engage in acquisitive activity. He may do this as a large entrepreneur, a master-craftsman, a landlord or as some other type of independent producer. He may as a worker, a lessor, a creditor or in some other manner introduce goods or serv ices into the process of preparing values. Thus every private economy is doubly interwoven in the social economic process: on the one hand the demand Ior natural values emanates from the household; on the other, the individual pursues an acquisitive course that gives him 1 Trans. note: In this section VOllkswirtsahaft is rendered as national economy, geseUsahaftlichen Wirtschaft as social economy. The latter phrase almost never reappears in later sections of Wieser. Later, therefore, VolkswVrtschaft is ren dered as social economy or) simply, economy, unless the reference is clearly to the national economy.

THE 0 R Y 0 F S' 0 C I ALE, CON 0 M Y 151 products or other values. So long as a private economy wishes to maintain itself, it must sustain the circulation induced by these two movements with their manifold conditioning and with a counter movement of money. There are millions of minor circulatory movements that bind the private economies to the social body. These all unite in the great circulation of the national economy. In the latter, the total supply and demand are offset against each other. This process is spoken of as the distribution of goods. It is better spoken of as a process of transposition or exchange. In the. strictest sense one could refer to a distribution of goods only on the assumption that the aggregate pro duction had been conducted in common and that the resulting products were then apportioned for the satisfaction of the needs of individuals in some such manner as is contemplated for a socialist state. There is no division of goods in this sense in the established order. Products and other natural values are not produced by com mon effort; they are prepared by separate acquisitive organizations that are socially related. The process that follows their production is nothing more than one of exchange in which each individual economy surrenders the values which it has prepared for those that it requires.

Nevertheless, the legally independent acquisitive enterprises are instruments of a great social productive and acquisitive process fol lowing a division of labor. This social productive and acquisitive process and, with it, the inseparable process of exchange together com prise the social economy. The theory of the simple economy is an essential prerequisite to the description of this social economic process that is encumbent upon the following study. The collective private economies that are as sociated in the national economy are in themselves simple economies. Without a theory of the simple economy we would be unable to under stand the law that they follow within the social body. Nevertheless, the preface thus afforded is incomplete. We must add to it a still further prelude. For the theory of the simple economy only explains the condition of the isolated and idealized individual economy that follows its laws of motion without restraint. But in the social economy these individual units meet from all directions. Indeed, they clash with great force. We must, therefore, ascertain whether their con junction does not alter their law of motion and whether in particular the amount of power does not exercise a decisive control. Under some conditions it will be noted the individual movements are so well coordinated that the spirit of the economy is fulfilled for aU partic152 SOCIAL ECONOMICS pants and therefore for the entire ,social economy. This is true in the case of institutions, such as money, that serve the common interests of all. Where this is the case, we must ask by what power the in dividuals, each of whom independently follows his own law, are held to a common purpose and enabled to work to a single end. Under other conditions the personal interests cross and in the resulting con flict the stronger wins. In this victory still greater power arises that is capable of dominating entire classes of society. In these instances we must inquire if there is not also a law for the economic movements of power. It is especially necessary to ascertain whether the social significance of the economy is destroyed. The question becomes still more important as we notice that power is ,not always introduced into the economy from without but frequently develops from within. .As soon as this fact is established one must inquire whether the exchange economy of the people is not perhaps erected on a foundation that leads to absurdity .

.All these questions relate to general social theory. Theyinvolve the unity of society and the source and operation· of power. The national economic process is a social one. It must, therefore, present the same problems that arise. in all social intercourse. If there were a complete theory of society, we might resort to it for an explanation of the fundamental types or social activity that concern us. But sociology is still in the making. If we wish such explanation as seems to be needed, we must offer it ourselves and describe the fundamental types of social activity as fully as an explanation of the economic process requires. Naturally, this must be brief. Therefore, without any attempt at demonstration, we shall set forth in brief sentences those sociological phenomena with which we must introduce a descrip tion of the economic process. If these concepts prove to be useful in the explanation of the economic process this is in itself the best proof that could be adduced for them.

The extraordinary interest. of private persons and governments in the succeS8 of economic endeavor led scientific thinkers' to inquire into the social relations of the national economy at an earlier date than was the case in any other field of social intercourse. Furthermore, the fact that economic value is a com mensurable quantity in which the motives that lead to economic intercourse are clearly expressed made possible more rapid and more certain progress in explain ing these relations than in other sociological fields. This explains the fact that economic theory has peen an advance guard of sociology. From the start, the economist has had to rely upon himself in dealing with sociological problems. Economics is only one phase of social science, but it has developed more rapidly than the main body of the theory of society. Therefore it has been placed in a position of being able to render greater service to the latter than it could receive THE 0 R Y 0 F SOC I ALE CON 0 M Y 153 from it. The scientific greatness of the classical masters manifested itself in the force with which they attacked the sociological problems of economic theory.

In their doctrines they laid certain of the foundations for later social science. The classicists dealt especially with the first problem that we set forth above, -the problem of the unity of economic society. Their healthy optimistic thinking left them in no doubt of the parallelism of individual and social eco nomic interest. They maintained that every individual best recognizes his own advantage and that he is led to protect it more effectively by his own egoism than would be possible by any other method. But as one must always serve others in exchange in order to profit oneself, in competitive exchange it must follow that the strongest personal f()rces which are used in the national economy are intro duced for the service of society. F'rom this simple premise the classical masters deduced the law of price and explained the erection of the acquisitive economy. Of the principles that they established, that of the division of labor is outstand ing. It offers a deep insight into the erection of the national economic body.

It is the most important and at all events the best established contribution of the classicists to social science. The classical theory of economic society is cal\ed individualistic. It is; but one must add that the individualism of the founders of the classical theory was by no means so far-reaching as their critics have maintained. They always conceived of the economy as restrained by law and morality. They demanded freedom of action for the individual only on the assumption that the state and other social organizations that set standards are responsible for the protection of law and morality. They never maintained that the state itself is an individualistic creation. Therefore, the responsibility is not theirs if an extreme school has carried indi vid ualism to anarchy and the breakdown of the state. Just as the classical masters conceived of the individual, so when they dealt with freedom of a,ction they conceived of personal egoism as controlled by law and morality. Moreover, they clearly recognized that certain dangers inhered in personal egoism and that certain precautions must be taken against them. The belief in personal liberty grew out of the historical setting in which they lived. Their error lay in the fact that they gave somewhat too much room for the play of personal freedom. The methodological instrument of idealization was carried by them to a point at which it became idealized observation. As a consequence they overestimated man's ca,pacity for freedom.

If they also failed to formulate theoretically the necessary restrictions on free dom, it was hecause they regarded such restrictions only as important exceptions, whereas freedom should be the general rule. If they are not completely in dividualistic in their theory, the fact remains that from a practical point of view they carried their individualism too far. The full application of this individualism was first made by their disciples, their Epigones. These accepted the rule of freedom word for word without noting any of its accompanying restrictions as set forth by the masters. The disciples were the first to develop the doctrine of the harmony of all interests. In their doctrinaire presentation they committed the serious blunder of maintain ing a dogma of unrestricted freedom, although the conditions of life had so changed in the meantime that unlimited freedom must have worked sodal ill.

It follows from this that the classicists must have left open the second problem mentioned above,-that of power. Only incidentally did one or the other of them note that the product which originally belonged to the worker 154 SOCIAL ECONOMICS was later reduced by those in power who would reap where they had not sown. There is an emphatic passage in Smith that is particularly quoted. Never theless Adam Smith, as well as Ricardo and the later leading theorists, neglected to draw any particular theoretical conclusions from their observation. They all accepted the existing conditions of power. Their Epigones accepted the con clusion that the prevailing inequality was necessary. As conditions stood in the classical period-particularly as they were idealized-,.it was possible to dispose of the problem of power in the economy far more easily than was later the case. One might at that time rest content with· the statement that the general interest of society would be furthered if the higher service of the talented and proficient were' rewarded by a larger income, while the unskilful, the lazy and the poor workman were left behind. That the individualistic dogma failed to take into account the fact of power, first became apparent when capitalistic development reduced great strata of the population to the direst straits. An economic theory that should suffice for our times is inconceivable without a social theory that is consistent with the fact of power.

Modern economic policy has departed from the theory of freedom represented by the individualist school. A detailed discussion of this transition forms no part of our theoretical presentation, but belongs rather to a study of the periods that comprise the history of dogma and method and of the economic and socio political concepts. It is no more a part of our task to determine whether or not modern economic policy has set the correct limits to the freedom of individual action. Our duty is rather, in this as in all other connections, to determine the theoretical basis in which such marginal determinations may be fixed. What valid substitute may we offer for the individualistic theory of society? In its naive formulation it has become inadequate. But one cannot get away from its fundamental concept, that the individual is the subject of social intercourse. The individuals who comprise society are the sole pos sessors of all consciousness and of all will. The "organic" explanation, which seeks to make society as such, without reference to individuals, the subject of social activity, has patently proved a failure. One must hold himself aloof from the excesses of the individualistic exposition, but the explanation must still run in ter'ms of the individual. It is in the individual that one must look for those tendencies that make the social structure,-that dove-tail (if we IDay use that expression) in such IDanner as to give the firm cohesion of social unity and at the same time provide the foundation for the erection of social power.

§ 27. THE BASIC FORMS OF S.OCIAL ACTION The somal eaJistenoe of man-N atuf1'al controls,l compulsion and dominatiorv-Leaders and masses,--Aoonymous leadership and power-Glasses and social stratification. In the following section is briefly presented a view of the basic types of social intercourse. From this we shall proceed to a descrip tion of economic activity. 1 Trans. note: The author here writes Freiheitsmachte, for which I know no English equivalent. He means, as is explained in the text, those forces, natural THEORY OF SOCIAL ECONOMY 155 Man is too weak to assure his preservation and to develop his life if he stands as an isolated individual. The impulse to self-preservation and to further development,-the egoistic interest that grows from an appreciation of weakness,-leads to social organization. In part, men are thus led by conscious deliberation. But fundamentally, a social impulse is operative; man is by nature a social being. When first he appears in history he was also associated in social groups, hordes or clans that possessed a social power over their members. In the course of historical development, the social organizations became even more inclusive. They spread by the power of success. Those tribes that are victorious in war and prosperous in peaceful endeavor, expand, while the others lag behind.

There are two types of social force: natural controls and compulsion. Natural controls are recognized by the individual as aids to the asser tion and development of his being. He feels them as increasing his individual power. He hardly recognizes that he is ruled by them. The deeper their dominion is bedded in man himself, the less conscious is he of their control,and the more readily does he fulfil their com mands. And precisely when he is most completely dominated by them,-when his innermost being assents to them,-then for the first time does he believe himself to be quite free. True freedom does not consist in total lack of control. It consists rather in a relation of the individual to society. Compulsion, on the other hand, is recognized as a restriction on the individual life. Its powers are most keenly appreciated when they arise from the armed force which has subdued the vanquished to the will of the victor. But as we shall show later, these forces also develop within the ordinary intercourse of a society. The victorious people may themselves be subject to a prince. Domination is oppres sive compulsion.

Between the natural· controls and compulsion,-between the latter and domination,-there are imperceptible gradations, extraordinarily difficult to distinguish, whether subjectively by those who are con trolled or objectively by those who observe from without. There may be cases where a power is still regarded by its victim as a natural control, although it already operates by compulsion, in that it restricts the development of his life. The weak man still feels himself to be supported by that which a stronger man, eager for independence, feels as restraint. It is one of the evil effects of slavery, that the slave loses all sense of oppression. or social, to which the freest man submits, whether willingly or unconsciously. To express this idea, I have coined the phrase "natural controls."

156 SOCIAL ECONOMICS The strongest social forces develop where unified common activity is necessary; for example, in resisting foreign attack. Such activity on the part of large masses demands leadership. The mass as such, the unorganized multitude, is incapable of action. In order to act, it must place .itself under the . direction and control of leaders. Originally, .foreign leaders were called to leadership, i. e., those who were qualified by their outstanding fitness. Later, when historical powers of leadership had· arisen, these forces control the selection of leaders. New leaders can establish themselves only by overcoming· the opposition of the old. The success that attaches to fortunate leader ship elevates the position of the leader and eventually transforms mere personal superiority into true personal power. In the course of our studies we shall show how this may develop historically to become domination.

As the major part of economic activity does not require a unified direction, so the power of economic leadership never attained the same strength as military, political, and religious leadership. It is only in the era of capitalism that large enterprises gave a basis on which to erect great power of economic leadership. Even in those cases of social intercourse where a legal right of self determination is preserved to the individual and in which unified leadership plays no part, leadership and the accompanying power of leadership do develop. Even in their personal affairs, the mass of individuals are too weak to rely upon themselves alone. They could not thus maintain life and develop further. Even the strongest man is not strong enough for this if he relies only upon his individual power. Everything· that man has accomplished whether in spiritual or physical evolution, has been attained only through social relations in that the best leadership has furnished the example, the advice, and the knowledge; and that others were induced to follow them because of the success which these leaders have attained. The decisions which the .common man regards as his own are induced by the power of his education and by the. widespread practice of others who have been placed in like circumstances. The play that is possible to freedom of action, which exists legally, is narrowly restricted by morality, the state of the technical arts and other conditions. The mass retains its independence for the most part only. in the selection of leaders or laws which shall be followed or in the precision with which the exist ing pattern is followed. Nonetheless, the mass plays a decisive role in the development of social powers. By its very weight it decides how far the examples offered by the leaders shall be realized. It THE 0 R Y 0 F SOC I ALE CO NOM Y 157 determines what shall and shall not be, and the leaders themselves in the final analysis subject themselves to popular opinion.

In private life the leaders are often not conspicuous. They may be known only to a small circle or may relieve each other in rapid suc cession, as now one, now the other has the happy thought that sets a standard for those about him. This type of leadership we shall call anonymous in contrast to personal leadership in which the personality of the leader stands out strongly and is widely known. Anonymous leadership operates on a small scale. It operates only to preserve a given cultural level or very slowly to advance beyond an existing level. Great advances to new practices require great leaders who occupy the centre of the stage, although that which they seek to bring about may be a matter for which the soil has been prepared for a long time. Corresponding to anonymous leadership, there are anonymous powers thatinure to the entire society or to a particular social group. Anonymous powers are felt by the mass of men to be natural controls that approximate compulsion only insofar as occasionally men submit unwillingly to social considerations that restrict individual movement.

The fate of society is dependent on the relationship of leadership and the masses. The contrast between them is necessary; it· must be more or less intense, if action is to result, but it must not be too great. Leadership is impossible without some inequality. Absolute equality would restrain all social progress. But too great a power conferred on the leaders may also restrain progress, indeed, it may lead to the oppression of the masses. An especially gifted manor one favored by external conditions possesses a certain superiority; but this alone cannot be referred to as power. It is only when this superiority is so great as to give its possessor a marked advantage that it gives him power. As examples we may cite the superior purchas ing power of rich consumers or the greater competitive ability of particularly favored producers. One speaks of social power, when the superiority places a large number of other people at a disad vantage and particularly when it is not individual possessors of power who are involved but social groups that are opposed. This· social power is most marked when these groups are legally superior and subordinate.

The groups that are thus distinguished are called classes. It is customary to contrast a superior ruling class with a subordinate class. In regard to economic conditions, it is customary to speak Ofi the ruling class is propertied; of the ruled, as a propertyless or proletarian class. But a correct analysis must distinguish at least three classes 158 SOCIAL ECONOMICS of which one is a clearly distinguished middle class. There are gradual transitions from this to the higher and the lower classes. Property alone is not necessarily a criterion of superiority. No less decisive for the domination of large groups are conditions for his torical growth. There are large groups that belong to the propertied class, but who attain a position that enables them to gain large in comes only because of their higher education. It may be that they possess no acquisitive wealth. We shall speak of this relationship of social domination and sub ordination, whether it is established legally or by actual superiority, as stratification. We shall speak of dominant and subordinate strata.

,As such, not· only are the classes themselves significant but also the individual gradations within each class. Various similar social groups are divided by their callings or in some other manner. This horizontal division of society is to be distinguished from the vertical one which we have been discussing. The division of labor described by the classical school is a horizontal division of economic society. An economic theory that studies the problem of power may not overlook the fact of stratification. § 28. THE INDIVIDUAL IN ECONOMIC SOCIETY The social training as economic education-The social nature Of needs and impulses-The associative economic principle-The social egoism of the in dividual. In his economic conduct also the individual is· determined by social forces. Law and morals, of which the classicists made mention, are not the only forces. A man is also influenced in aU·those relations where law and morals leave him free. He is a creature of his period and his environment-of his nation, his class and his profession.

That which appears as individual in him is a particular form of the typical manner of life. The latter he receives through the education that flowsfrom historical powers that operate through his circle. That his knowledge and skill are the result of his education in the school, the family and life requires no further discussion. But some further elaboration is necessary to show that this social education penetrates to the very heart of his individual being. Needs, impulses and egoism itself are dominated· by social powers. The social nature of needs is the most easily recognized. Educative social forces determine not only the so-called social needs, but also the personal ones that are usually contrasted with the former. It is THE 0 R Y 0 F SOC I A L 'E, CON 0 M Y 159 even true that the bare physical need has a social cover; not even the measure of the physiological minimum of existence is determined entirely individually. Such strata of the people as have been op pressed for a long period have been educated to an almost incon ceivable poverty with a decided narrowing of the impulse to improve themselves economically. This is the" damnable absence of need" of the worker of which Lassalle complains. Fundamentally every man requires that which the standard of living of his circle forces him to demand. Only a few are strong enough to be more independent.

He who rises to a higher class ordinarily accepts the standard of living of that class. If, perhaps, for his own person he maintains the simpler habits of the class to which he has been educated, still he does not feel that his children should be forced to accept any other standards than the needs of the class to which they will belong. Even man's senses are socially educated. Sight is not merely a physiolog ical impression on the retina but it is at the same time an apprecia tion of the significance of the image. This is determined by a com parison of things earlier apprehended that are called up in memory images. In every period, men see from a different artistic and technical point of view because their interests differ and that which they see therefore has a different significance. Indeed these changes may direct their attention to entirely different details. Also the impulses to activity are not purely personal. Fo!" the average man they are entirely dependent upon the practice of his time and environment for their direction and their strength. In one period it may be a warlike spirit, in another, an acquisitive one that stimulates the mass of men under the given conditions and their historical education. Will is schooled impulse; even more than the impulse itself, will is socially developed. Every nation has a certain average degree of energy of will. This is determined not only by race, but also in every period by the historically transmitted culture.

The will to economy is of one order for the mass of the Russians, and another for the mass of Englishmen or Anglo-Americans; it differs as between the propertied class and the proletariat. The goals of economy are derived from the needs; its powers come from the impulses and will. Therefore the direction and standard of economic endeavor cannot be determined entirely personally. The injunction to achieve the highest utility with the lowest cost is in terpreted by everyone in the light of his social environment. The spirit of his times leads him. For the mass of average men the economic principle that they follow is simply to "be as economical as your associates" : i. e., fulfill the law of lowest costs and highest utility 160 SOCIAL ECONOMICS as far as is customary in the circle· to which you belong and in which you would maintain yourself. The current individualist concept of the economic principle is a theoretical idealization. 1fethodologically it is well adapted,-indeed it is essential, to a deduction of the ele ments of economics. From this idealization one must luake a transi tion, by decreasing abstraction, to the social concept that is actually current, if one would understand the concrete phenomena of life.

Economic leaders raise themselves above the mass of their associates, but they themselves cannot get away entirely from the social concept of the economic principle. They also are unable to attain complete individual freedom. They cannot neglect entirely the force of the exam pIes set by their associates. Through long experience, the plan of domestic management and acquisition in all of its most general phases has been socially tested and determined for every income-class and for every type of calling. Every newly-established individual economy finds a pattern already set. It is not necessary that a man make a personal choice of tasks to determine the direction of productive uses on the standard of the al lowable margin of use. All these things have been done by his fel lo,vs. There are few economies which do not hold strictly to the social example. Most men confine thenlselves quite closely within the boundaries laid down for them, and anxiously avoid the blame or criticism of their fellows. Personal energy expresses itself for the Inost part in the degree to which one approximates the prevailing rule, or in the independence with which one fits the rule to the partic ular conditions in individual instances. He who lacks independence will be led astray by the associative principle whenever his conditions depart from the rule. Therefore it happens so often that those at the lower margin of an income-class are seduced into living beyond their means because they believe that .they must conform to the practice of their associates. When an entire class lives beyond its means, this usually occurs because for historical reasons they have been educated to maintain themselves on a level with or above some richer class.

Even the consciousness of self,-the inner assurance of each man that he is a being apart from allothers,-is influenced by social forces, and thus takes a direction that is not merely personal. There are innumerable breaches in consciousness through which social influences enter, impelling it to courses prescribed by society. We do not wish to lay stress at this point on the fact that the outlook of men who have been educated in a similar culture is made uniform. But we note that the socially educated individual in his efforts to serve himself, THEORY OF SOCIAL E:CONOMY 161 fits himself perfectly 1 ,vith the social organism. His Ego is not satis fied unless it finds itself in all important respects at one with society. If one is truly socially educated, his Ego departs from him and finds its end in society; it ceases to be purely personal and becomes social egoism; it wishes to conform in all respects to law and custom and in general to the social forces ·of the economy; it demands only so much for itself as social precept indicates that it may and should demand.

This statement holds true not only of those cases in which a man clearly feels hiInself bound by social conscience but also where he believes himself to be entirely independent. In lllOSt matters a man accepts the social code of the industrial or social group .of which he is a member; it is only in certain major relationships, that are uni form for the whole of society, that a universally accepted rule obtains. By reason of the social egoism a man is ready to fit into a social order which includes both submission and domination. The feeling of fellowship makes easier the submission of the masses to the his torically maintained power or domination of a class of leaders-one submits more readily when others are seen also to submit. In a class of servitors, content with its lot, there arises a class-spirit which re gards submission as a point of honor and creates the g'ood will of the faithful servant. In one not content with its fate, there arises the spirit of class-conflict with a feeling of solidarity. It becomes a point of honor to stand faithfully by one's fellows and to dedicate and sacrifice individual welfare for the welfare of the class. .A slavish class that has been pressed to the ground and has become callous to its state loses the power to maintain a strong egoism. Its egoism is linlited to the most proximate personal needs. It degenerates to a short-sighted and impotent selfseeking. Each individual thinks only of himself. The mass is really nothing more than a loose multitude without ties; it is not a people, but a mob. On the other hand, the class of leaders, accustomed to command, unites its members in the demands made upon their underlings and in the sternness of attitude that they must maintain in order to carry their demands into effect.

The class resents, as a weakness and as an insult to its honor, the failure of one of its members to use to the full his lordly right of domination. At its apex this class-egoism of the leaders becomes a social egoism. It recognizes its social task. It incites to high service, and feels ennobled by the knowledge that its own advantage marches with the advance of society. Enlightened absolutism, that accom plished such ,great things in economic education and did so with 1 In einem iiberaus hohen Grade.

162 SOCIAL ECONOMICS benevolence, spirit and boldness, may well serve as an example. But the egoism of a dominating class of leaders all too easily degenerates when it no longer meets an opposition that restrains it. It changes to a short-sighted, selfseeking of dominion. As in all other activity, so in the negotiation of economic contracts, the aver age man is governed by the social power of the associative principle. In his individual dealings he uses the type of contract that has been generally developed. As a rule he adds nothing more to this form than a specification of the partic ular persons and values involved. For example, in contracts of exchange he is satisfied to establish the contracting parties and the kind and the amount of the consideration; for the rest, it is understood that the given case follows the requirements that typically prevail in the market. If one looks more closely, one finds that as a rule even in the selection of persons and the specification of consideration he is governed by class and social powers; and. his legal freedom of contract as matter of fact shrinks into an extremely limited freedom of choice. If one points to private contract as the unifying medium of the national economy, and if one seeks to faithfully reproduce actual conditions, one must add that the private contracts are themselves governed by class and social powers.

§ 29. SOCIAL INSTITUTIONS The ongtn of money-The individualistic sig11iificanoe of social institutions, Menger's Theory-Historioal power. The economy is full of social institutions which serve the entire economy and are so harmonious in structure as to suggest that they are the creation of an organized social will. Actually they can only have originated in the cooperation of periodically independent per sons. Such a social institution is illustrated by money, by the economic market, by the division of labor in acquisition, and finally by the national economy itself, which is the greatest of these institu tions, and includes all the others. Economic inquiry has long been concerned with the origin of such social institutions. The earlier, naIve explanation that regarded them as institutions of the State, or as dependent on a social ,contract, now has few adherents. Money, for example, existed before the state and, as world-money, is today more extensive than the state. How could any general contractual agreement be reached as to institu tions whose being is still hidden in the mists of the future, and is only conceived in an incomplete manner by a few far-seeing persons, while the great mass can never clearly appreciate the nature of such an institution until it. has actually attained its full form and is gen erally operative 1 Also the mere contract into which one freely en ters, and from which one may freely withdraw, could never establish THE 0 R Y 0 F S' 0 C I ALE, CON 0 M Y 168 the binding, compelling power that characterizes all true social in stitutions.

Much more satisfactory is the explanation based on gradual his torical evolution, which takes into account the powerful factor of time. A.s the ~onstantly repeated impact of falling water cuts a deep course in the hardest rock by the power that is in each separate drop of water, or as the cretaceous animalculre in the course of ages may tower into mountains, so the service of individual forces working to gether and working in successive generations, through centuries and millennia, toward the same end, may slowly build great economic structures. Thus one may understand the evolution of the acquisitive process with its division of labor that has now spread to tremendous proportions and diversity. Step by step one occupational group after another abandoned the closed natural domestic economy for the money economy, but each of these groups in itself developed further and was subdivided. To understand this process,however, one must first perceive the readiness of the individual to range himself in the social order. One must see him as a social being who develops through social education.

For complicated social institutions the historical explanation re quires further refinement. We shall show this by the classic illustra tion of money, whose unknown origin has provoked almost as much in terest among men as the origin of the state or of speech. But we must also show that the more subtle explanation at· which one finally ar rives, necessarily involves a reduction of the individualistic stress. The long series of writers who sought to explain money as an in dividualistic institution, ends with Menger's penetrating investiga tion. He uses the phenomenon of money as a paradigm by which he assumes to show that all social institutions of the economy are noth ing more than "unintended social results of individual-teleological factors. ' ,1 The factual presentation of the origin of money that he gives in this connection is in itself conclusive. But from these same facts we are forced to a different conclusion as to the significance of his torical social institutions..

Without following Menger's presentation word for word, we shall next reproduce its essentials. The advantage of exchange can be availed to the greater extent, the greater the number of persons who take part in it. In this fact originated the desire to split up an act of natural barter into a num ber of exchanges. Here and there, under certain conditions it OC1 Untersuchungen, pp. 171-187.

164 so C I ALE CON 0 M I C S curred to some bright men that they would be in a position to in crease the advantage of their exchanges, if, instead of arranging for the barter with some one contracting party, they should introduce a third into the trade. Let us assume that a hunter wishes to exchange game against wine. It may happen that he will have better results if he does not deliver the game directly· to the possessor of the wine. The latter may himself be a hunter, and therefore have no use for the game. .. He may do better to offer it to a farmer who. is prepared to offer grain in exchange, which the hunter knows that the man with the wine requires. To accomplish this purpose the natural exchange must be divided into two acts in which one deals with two different contracting parties. The first act is the surrender of a particular good for an intermediate exchange good that one does not wish to re tain. The second act is to exchange the intermediate good for that commodity which he originally desired. Little by little, this process, as it justifies itself by success and is improved, is employed by more and more persons. They are able, by comparing expenses, to de termine which goods are best fitted to be used as media of exchange.

·Those goods that are particularly acceptable in exchange may be taken by a shrewd trader even though .. in the particular case he has not decided for what good he will further exchange them; for he may expect that they will be willingly taken by anyone. It will finally come about that certain goods, whose successful use shows them to be particularly fitted to serve as media of exchange, will be universally used, because everybody may be convinced that there is no one who will refuse to accept them. At this point a universal medium of ex change has arisen; money has developed. If we grasp .the operative motives in general by whose introduc tion Menger nas elaborated the explanation of the development of money, we find that they are two that are already thoroughly familiar from our presentation of the fundamentals of social activity. On the one hand, we see that the participating persons are divided into the two groups of the leaders and the masseg-. On the other hand we see that success is the driving force that moves the masses to copy the example of the leaders. The type of leadership that Menger invokes is what we called anonymous leadership. Menger's explanation would be entirely satisfactory if he had appreciated as fully the part that the masses play in the development of money as he did· that taken by the leaders. The function of the masses consists in the case of money as in all other social activity in that their imitation establishes the universal practice which gives to a rule its binding force and social power. It is in the nature of money that an obligation to accept it is THE 0 R Y 0 F SOC I ALE: CO NOM ¥ 165 felt that protects the payer against the shifty refusal of payment.

This obligation arises from the mass habit of accepting money. It is in keeping with Menger's individualistic point of view that he should not fully appreciate the part played by the masses in the creation of money. He sees in money as in all social institutions of the economy nothing more than unintended social results of individual-teleological tendencies. Therefore it is impossible for him to say the last word in the explanation of money, and to concede that money represents something more and stronger than the will of participating individ uals. A money for which a mass habit of acceptance has once been established is no longer the mere result of the individual aims of leaders whom the masses follow. Neither in the beginning nor later did the leaders have in mind a social institution. Their wishes were confined to much smaller, more proximate goals. For their personal purposes they wanted a well-adapted or better-adapted medium of exchange that they could use as they desired. None of them dreamed nor could have dreamed of a universal medium of exchange with a binding power that could compel them like all others to make use of it. The tremendous influence of the mass practice which grew up ex tended the final result far beyond their expectations. None of them would recognize in the final form of money an exact embodiment of their purpose. The final form of money is not a mere resultant; because of the universal social resonance that it awoke it represents a tremendous strengthening of their endeavors. It needs no special discussion to establish the fact that it passed far over the goal of the imitating mass. Indeed, the mass never acts with a clear conscious ness of aim. It is not teleological. Rather it follows the path of success opened by the leaders without measuring its operation. In following this course they give it the weight of their mass and release a power which produces results far beyond those set by the masses or desired by the leaders. Only a part of the force that builds social institutions is directed by purpose; the final decisive mass-influence operates beyond the purpose.

In the presence of social institutions we must drop the rationalistic utilitarian assumption to which we might hold in the theory of the simpIe economy. The fundamental error of individualism appears in dealing with social institu tions. It views individuals as though by nature they were entirely independent and carry through their activity entirely lly their own will. Men always act with diverse emotions.. They act under the control of the more or less felt influence of the natural controls or compUlsion that give them the power or force them to decision. From the influence of these powers not even thp.

166 SOCIAL ECONOMICS strongest leaders can entirely free themselves. From the cooperation of un numbered persons, each independent in his sphere and each of whom is in contact with few others, harmonious institutions with a universally binding force arise. This could not be explained if the participating individuals were not disposed by nature to adjust themselves to each other and to fit themselves into the general situation. The further evolution of social institutions occurs in the same manner as their origin. The older institution creates a historical force because of its binding power. This may be broken only by new leaders whose success sets the masses in motion. Until the general power to adopt new practices is found, the old institution remains valid in SO far as its services are required. This is true even if the institution itself is incom'plete or because of changed conditions is unable to render its service as fully as earlier. The much-quoted phrase "the good is the enemy of the better" holds especially for social institutions and their historical power. The individual is helpless against the historical force of old institutions. He must take them as he finds them. But when we say that the individual is helpless one should not merely understand that this or that individual is helpless. Rather, we have in mind all the individual members of society in so far as they do not cease to be isolated an.d incapable of action because they do not find the way to raise themselves to social action by le,ader ship and mass following.

In every nation there are historically determined classes of leaders from which the personal leaders emerge. In the world there are historically de termined leading nations. The leading classes and nations have a reversion in dominion in so far as society does not find in itself the power to oppose decisive obstacles through new leadership and mass following. At this point we close our sociological introduction. Later we shall concern ourselves with the problem of domination. At present so far as may be possible we shall neglect the influence of power in order to show to what extent the economic acquisitive and exchange process develops in the spiri.t of the economy.