Anderson's Economics and the Public Welfare

Mises Daily: by Henry Hazlitt

[First printed in Benjamin M. Anderson Jr.'s Economics and the Public Welfare.]

Benjamin M. Anderson Jr., who died on January 19, 1949, was born on May 1, 1886, in Columbia, Missouri. At the University of Missouri, from which he took his A.B. degree in 1906, his interests were predominantly intellectual and logical.

He was active in the Athenian debating society and soon earned a reputation there for his ability to pounce upon a logical or factual weakness in an opponent's position. He was one of the four presidents of the society for the year 1905–06.

He also developed at this time a passion for chess, which he retained throughout his life. He became so good at the game in these early days, indeed, that he seriously thought of making a career of it. Out of this interest came a warm friendship with José Capablanca, the world chess champion from 1921 to 1927, at whose suggestion he contributed a brilliant 25-page preface to "Capa's" book, A Primer of Chess, published in 1935.

Anderson took his master's degree at the University of Illinois in 1910, and his PhD in economics, philosophy, and sociology at Columbia in 1911. The wide range of knowledge and intellectual interests that he had developed at this time is indicated not only by the three subjects in which he took his doctorate but by a glance at his teaching career.

He became professor of history at the State Normal School at Cape Girardeau, Missouri, in 1905. He was professor of English literature as well as economics at the Missouri Valley College at Marshall, Missouri, in 1906. He was head professor both of history and economics at the State Teachers College in Springfield, Missouri, between 1907 and 1911.

In the study in his home, when I first knew him, I remember two pictures — one of John C. Calhoun, and the other of John Bates Clark. He had been deeply influenced in his political thinking, he told me, by the states' rights and other basic doctrines of "the master logician of South Carolina," while he owed his greatest debt in economic thought to John Bates Clark, under whom he had studied, and whom he considered the greatest economic theorist that this country had ever produced.

The first of his economics teachers to make a deep impression on Benjamin Anderson was Professor Jesse E. Pope, in whose seminar, in 1904 and 1905, he began his investigations in the "quantity theory" of money. His Social Value was begun in Dean Kinley's seminar at the University of Illinois in the term 1909–10. In its first form this monograph won a $400 prize offered by Hart, Schaffner, and Marx. (The judges were J. Laurence Laughlin, John Bates Clark, Henry C. Adams, Horace White, and Edwin F. Gay.)

This study was elaborated and completed as a book at Columbia University in 1910–11, and Anderson submitted it to the Faculty of Political Science as his doctor's dissertation. His chief obligations at Columbia University in that study, he declared in a preface, were to Professors Seligman, Seager, John Dewey, and Giddings.

It would be impossible to make even an adequate list of the writers who influenced Anderson's thought more indirectly. In his early books there are frequent references to Böhm-Bawerk and Wieser, Urban and Tarde, Jevons and Pareto, Wicksteed and H. J.Davenport, Wesley C. Mitchell and the sociologist C.H. Cooley. And among the practical men of the banking world with whom he later came in contact he always expressed a particular admiration for A. Barton Hepburn.

"He that wrestles with us," wrote Burke, "sharpens our skill. Our antagonist is our helper." The two writers whose work chiefly played this role for Anderson, by stimulating his criticism, were Irving Fisher and John Maynard Keynes.

It was mainly against the quantity theory of money as formulated by Professor Fisher that Anderson's own exposition of The Value of Money was directed.

The Value of Money, in brief, is one of the classics of American economic writing.

And his criticism of Fisher, vigorous as it was, involved a sort of admiration. He deliberately chose Irving Fisher's Purchasing Power of Money as the chief target for his criticisms because it was "the most uncompromising and rigorous statement of the quantity theory to be found in modern economic literature"; because it followed "the logic of the quantity theory more consistently than any other work," and because it had received such enthusiastic recognition "as to justify one in treating it as the 'official' exposition of the quantity theory."

In later years it was the influence of John Maynard Keynes that most provoked Anderson's critical opposition. He never, unfortunately, wrote an entire book analyzing the Keynesian, theories. But he replied brilliantly to one central Keynesian tenet in an eight-page appendix embodied in the symposium Financing American Prosperity (1945) entitled: "A Refutation of Keynes' Attack on the Doctrine that Aggregate Supply Creates Aggregate Demand."

He once told me an amusing story of a conversation with Keynes. In connection with the latter's theory of stimulating consumption to cure a slump, Anderson asked him, "Why wouldn't it be a good idea to raise white elephants in a period of depression"? And the British economist, quite unabashed, replied "That would be just the thing."

Anderson's contribution to economic theory is summed up in his two books: Social Value and The Value of Money.

He originally thought of his "social value" concept as a rival of or substitute for the individualistic marginal-utility theory as developed by the Austrian school. It seems to me that it is, rather, an exposition of the social presuppositions necessary to the marginal theory. It is an explanation of the essentially social conditions which go to form both the individual's own marginal valuations and prices in the market. His analysis, in other words, supplements rather than supersedes the Austrian.

Anderson was clearly right in rejecting the notion of the isolated "individual monad"; in emphasizing the intimate interrelation of the minds of individuals to each other, their inextricable interaction and interdependence. The thought process even within the "individual mind," as he pointed out, is a social process. "We think in words, and, indeed, in conversations." He was right in emphasizing with Cooley that through the social apparatus of language, literature, music, custom, tradition, conversation, "every thought we have is linked with the thought of our ancestors and associates, and through them with that of society at large."

But the question may be raised whether, in going on to the conclusion that "there is a mind of society, a psychical organism, a social mind" he was not perhaps hypostatizing a metaphor, taking a heuristic simile too literally. However that may be, he made it clear that a purely individualistic concept of marginal utility was inadequate, and that it was above all not an adequate tool of thought when it came to the explanation of the value of money. And he was also explicit in emphasizing that the unity of the "social mind," as he conceived it, was "primarily a unity of function."

Certainly this is an essential key to the understanding of many economic problems. Even a relatively simple assembly job like an automobile cannot be understood merely by studying its parts individually. The human body cannot be understood merely as an assemblage of its individual organs or cells. Both the automobile and the human body function as a unit.

A great society, with its institutions, mores, values, and elaborately interdependent division of labor, also to a large extent functions like a single organism and cannot be understood merely as a collection of the individuals who compose it. It is true, of course, that we cannot solve many economic problems unless we make it our business to study the needs, preferences, and actions of these individuals; but in addition we must understand their functional interrelationships.

Anderson's great contributions to monetary theory in The Value of Money have been admirably summarized in Professor Beckhart's foreword to the 1936 edition. Anderson helped to bring about a much needed unification of monetary theory with general value theory. He explained, in a clearer way than any previous writer had done, the role of the quality as well as the quantity of money and credit in determining the value of the monetary unit.

"Anderson's analysis supplements rather than supersedes the Austrian."

He emphasized the basically psychological nature of the value of money, with all the subtleties and complexities that this implies. He showed that particular prices as well as the so-called "general price level" must always be explained from the side of the value of goods as well as from the side of the value of money.

Its simplicity and alluring mathematical precision have still kept the rigid mechanistic form of the quantity theory alive, but Anderson subjected its gross oversimplifications to so searching and devastating a criticism that it has never reconquered the prestige and almost undisputed sway that it held before he wrote.

The Value of Money, in brief, is one of the classics of American economic writing. I can think of few works in the field that are as consistently brilliant, rigorous, lucid, and engrossing. As a contribution to the theory of money it stands easily among the foremost half-dozen works ever produced on this continent.

The present work is destined to take a similar rank among American economic and financial histories. It is already the outstanding economic and financial history for the period it covers.

An economic history that does not correctly interpret the events it describes is usually worse than worthless. A writer who does not know how to interpret economic causation does not even know what facts to select and present. Anderson knew which facts to select and which to emphasize. Few economic histories have ever interlaced theory and interpretation so completely and successfully with the record of the facts.

The following pages are like a rich fabric in which the events constitute the warp and the theoretical interpretation the woof, the first supporting the second, and the second illuminating the first.

Its sense of drama, its unfailing lucidity, its emphasis on basic economic principles, its recognition of the crucial roles played by outstanding individuals, its realistic and detailed description of the disastrous consequences of flouting moral principles or of trying to prevent the forces of the market from operating combine to give this book a sustained readability seldom found in serious economic writing, in spite of the admirable early model set by Adam Smith.

Here is the economic history of the United States in the fateful period from 1914 to 1946. This history is quite properly seen not in isolation but as an integral part of world economic history; for the true, economic liberal, like Anderson, is never an economic isolationist or nationalist.

Throughout most of the period of which he writes he was the economist of the Chase National Bank. He made several trips to Europe, and was one of the American group that negotiated the standstill agreements with the banks of Germany.

This history, therefore, is written by a man uniquely qualified for the task. He combined a rare grasp of economic theory with an intimate knowledge of the events of these years gained as a close and privileged observer, and sometimes as an important adviser and participant.

It is a pity that he did not live to see the publication of this volume. But those of us who wish to understand the economic events of the great period that it covers can count ourselves fortunate that he lived to complete the composition of it.