The Ultimate Foundation of Economic Science

The authors who think that they have substituted, in the analysis of the market economy, a holistic or social or universalistic or institutional or macroeconomic approach for what they disdain as the spurious individualistic approach delude themselves and their public. For all reasoning concerning action must deal with valuation and with the striving after definite ends, as there is no action not oriented by final causes. It is possible to analyze conditions that would prevail within a socialist system in which only the supreme tsar determines all activities and all the other individuals efface their own personality and virtually convert themselves into mere tools in the hands of the tsar’s actions. For the theory of integral socialism it may seem sufficient to consider the valuations and actions of the supreme tsar only. But if one deals with a system in which more than one man’s striving after definite ends directs or affects actions, one cannot avoid tracing back the effects produced by action to the point beyond which no analysis of actions can proceed, i.e., to the value judgments of the individuals and the ends they are aiming at.

The macroeconomic approach looks upon an arbitrarily selected segment of the market economy (as a rule: upon one nation) as if it were an integrated unit. All that happens in this segment is actions of individuals and groups of individuals acting in concert. But macroeconomics proceeds as if all these individual actions were in fact the outcome of the mutual operation of one macroeconomic magnitude upon another such magnitude.

The distinction between macroeconomics and microeconomics is, as far as terminology is concerned, borrowed from modern physics’ distinction between microscopic physics, which deals with systems on an atomic scale, and molar physics, which deals with systems on a scale appreciable to man’s gross senses. It implies that ideally the microscopic laws alone are sufficient to cover the whole field of physics, the molar laws being merely a convenient adaptation of them to a special, but frequently occurring problem. Molar law appears as a condensed and bowdlerised version of microscopic law.3  Thus the evolution that led from macroscopic physics to microscopic physics is seen as a progress from a less satisfactory to a more satisfactory method of dealing with the phenomena of reality.

What the authors who introduced the distinction between macroeconomics and microeconomics into the terminology dealing with economic problems have in mind is precisely the opposite. Their doctrine implies that microeconomics is an unsatisfactory way of studying the problems involved and that the substitution of macroeconomics for microeconomics amounts to the elimination of an unsatisfactory method by the adoption of a more satisfactory method.

The macroeconomist deceives himself if in his reasoning he employs money prices determined on the market by individual buyers and sellers. A consistent macroeconomic approach would have to shun any reference to prices and to money. The market economy is a social system in which individuals are acting. The valuations of individuals as manifested in the market prices determine the course of all production activities. If one wants to oppose to the reality of the market economy the image of a holistic system, one must abstain from any use of prices.

Let us exemplify one aspect of the fallacies of the macroeconomic method by an analysis of one of its most popular schemes, the so-called national income approach.

Income is a concept of the accounting methods of profit-seeking business. The businessman serves the consumers in order to make profit. He keeps accounts to find out whether or not this goal has been attained. He (and likewise also capitalists, investors, who are not themselves active in business, and, of course, also farmers and owners of all kinds of real estate) compares the money equivalent of all the goods dedicated to the enterprise at two different instants of time and thus learns what the result of his transactions in the period between these two instants was. Out of such a calculation emerge the concepts of profit or loss as contrasted with that of capital. If the owner of the outfit to which this accounting refers calls the profit made “income,” what he means is: If I consume the whole of it, I do not reduce the capital invested in the enterprise.

The modern tax laws call “income” not only what the accountant considers as the profit made by a definite business unit and what the owner of this unit considers as the income derived from the operations of this unit, but also the net earnings of professional people and the salaries and wages of employees. Adding together for the whole of a nation what is income in the sense of accountancy and what is income merely in the sense of the tax laws, one gets the figure called “national income.”

The illusiveness of this concept of national income is to be seen not only in its dependence on changes in the purchasing power of the monetary unit. The more inflation progresses, the higher rises the national income. Within an economic system in which there is no increase in the supply of money and fiduciary media, progressive accumulation of capital and the improvement of technological methods of production that it engenders would result in a progressive drop in prices or, what is the same, a rise in the purchasing power of the monetary unit. The amount of goods available for consumption would increase and the average standard of living would improve, but these changes would not be made visible in the figures of the national income statistics.

The concept of national income entirely obliterates the real conditions of production within a market economy. It implies the idea that it is not activities of individuals that bring about the improvement (or impairment) in the quantity of goods available, but something that is above and outside these activities. This mysterious something produces a quantity called “national income,” and then a second process “distributes” this quantity among the various individuals. The political meaning of this method is obvious. One criticizes the “inequality” prevailing in the “distribution” of national income. One taboos the question what makes the national income rise or drop and implies that there is no inequality in the contributions and achievements of the individuals that are generating the total quantity of national income.

If one raises the question what factors make the national income rise, one has only one answer: the improvement in equipment, the tools and machines employed in production, on the one hand, and the improvement in the utilization of the available equipment for the best possible satisfaction of human wants, on the other hand. The former is the effect of saving and the accumulation of capital, the latter of technological skill and of entrepreneurial activities. If one calls an increase in national income (not produced by inflation) economic progress, one cannot avoid establishing the fact that economic progress is the fruit of the endeavors of the savers, of the inventors, and of the entrepreneurs. What an unbiased analysis of the national income would have to show is first of all the patent inequality in the contribution of various individuals to the emergence of the magnitude called national income. It would furthermore have to show how the increase in the per-head quota of capital employed and the perfection of technological and entrepreneurial activities benefit—by raising the marginal productivity of labor and thereby wage rates and by raising the prices paid for the utilization of natural resources—also those classes of individuals who themselves did not contribute to the improvement of conditions and the rise in “national income.”

The “national income” approach is an abortive attempt to provide a justification for the Marxian idea that under capitalism goods are “socially” (gesellschaftlich) produced and then “appropriated” by individuals. It puts things upside down. In reality, the production processes are activities of individuals cooperating with one another. Each individual collaborator receives what his fellow men—competing with one another as buyers on the market—are prepared to pay for his contribution. For the sake of argument one may admit that, adding up the prices paid for every individual’s contribution, one may call the resulting total national income. But it is a gratuitous pastime to conclude that this total has been produced by the “nation” and to bemoan—neglecting the inequality of the various individuals’ contributions—the inequality in its alleged distribution.

There is no nonpolitical reason whatever to proceed with such a summing up of all incomes within a “nation” and not within a broader or a narrower collective. Why national income of the United States and not rather “state income” of the State of New York or “county income” of Westchester County or “municipal income” of the municipality of White Plains? All the arguments that can be advanced in favor of preferring the concept of “national income” of the United States against the income of any of these smaller territorial units can also be advanced in favor of preferring the continental income of all the parts of the American continent or even the “world income” as against the national income of the United States. It is merely political tendencies that make plausible the choice of the United States as the unit. Those responsible for this choice are critical of what they consider as the inequality of individual incomes within the United States—or within the territory of another sovereign nation—and aim at more equality of the incomes of the citizens of their own nation. They are neither in favor of a world-wide equalization of incomes nor of an equalization within the various states that form the United States or their administrative subdivisions. One may agree or disagree with their political aims. But one must not deny that the macroeconomic concept of national income is a mere political slogan devoid of any cognitive value.

• 3A. Eddington, The Philosophy of Physical Science (New York and Cambridge, 1939), pp. 28 ff.