The Essay defined economics as the science that studies human behavior in allocating scarce means among competing ends, a definition that has become standard. We get a glimpse at this definition’s influence when we realize that it was adopted by Gary Becker, the standard bearer of mathematical and empirical economics, which is the polar opposite of the Austrian school.
For this review I will use the 1935 edition, which is considered the definitive version. It is viewed by some, such as Auburn University economist and Ludwig von Mises Institute academic vice president Joseph Salerno, as less Austrian than the first edition. On the other hand, University of Toronto economist and Robbins biographer Susan Howson claims that the second edition “took further account of Austrian views.” Robbins argued at the time that his opinions had not really changed from the first edition and that the modifications were meant to elucidate his original position. At any event, reviewing the definitive edition might give us better insights into the book’s lasting influence.
Scarcity and value / According to the Essay, the fundamental economic fact is that the means to satisfy human desires are relatively scarce. The individual does not and cannot have the means to obtain everything he wants and do all he would like to do. Means include all resources, including time, necessary to satisfy the individual’s ends, which are defined by his preferences or values. Given scarcity, choices must be made as to which ends will be satisfied and to what degree. Scarcity implies the necessity of choice, which is a corollary of Robbins’s definition. This is, he argued, what economists actually study.
Consider the simple case of the market for a particular good, where the ends or preferences of an individual are reflected in the demand he brings on the market. His means are his income, which can also serve to buy other things on other markets. He must choose how much of the good to acquire according to his scale of preferences. If the latter change, for whatever reasons (which are of no concern to the economist), his demand will change.
The ends can be material goods (say, beer) or non-material goods (a seat at the theater) or non-market activities (spending time with one’s child). “Our economic subjects,” Robbins writes, “can be pure egoists, pure altruists, pure ascetics, pure sensualists or — what is much more likely — mixed bundles of all these impulses.”
The subjective desirability of a good is what gives it value. The fact that individuals attach different values to different things is “the fundamental concept of economics.” But “why the human animal attaches particular values to particular things,” Robbins writes, “is a question which we do not discuss. That is quite properly a question for psychologists.” Economists take “the things which psychology studies as data of their own deductions.” As Hayek would do a few years later (in “Scientism and the Study of Society,” a series of three articles in Economica, 1942–1944), Robbins criticizes the false scientistic approach that refuses, in the field of social science, to start from the subjective preferences that motivate individual choices.
Markets and aggregates / It follows that, contrary to what Adam Smith and many older economists believed, all activities that produce goods or services desired by somebody are productive in the sense that they yield what is valued by individuals.
“As every first-year student knows,” Robbins writes, “prices and costs are the reflection of relative valuations.” Costs and supply, and not only demand, reflect the valuations of all individuals — an important point to grasp. Whoever has inputs to sell, whether his labor services or some materials, will decide to sell more or less depending on the wages or prices he gets for them. The value of an input sold on the market will also reflect its productive contribution to all goods or services demanded on markets. If the productivity (calculated in money value) of an input is higher when used in the production of good B than good A, the market will reallocate it to B until, through Law of Diminishing Returns, productivity has been equalized between the two goods.
Robbins defended the Austrian idea that aggregate statistics of production or income mean nothing as “expressions of order of preferences.” For example, we cannot say that a higher level of national income is preferred to a lower one, because its distribution is unlikely to be the same. Statements about broad economic aggregates (like in macroeconomics) are value judgements that cannot be proven right or wrong. Although this idea may appear radical, it is close to what later welfare economists ended up arguing.
Economic laws / What are economic laws, or “generalizations” as Robbins calls them? They cannot be simply inductions from observed facts because without theory we don’t know which facts are relevant. Theory must come before the observation of external facts. “Any attempt to reverse the relationship must lead inevitably to the nirvana of purposeless observation and record,” he writes.
According to Robbins, economic laws are logical deductions from general postulates that reflect “very elementary facts of general experience,” including introspection about how humans make choices. “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow.” From that point, economic laws function just like other scientific laws. This apriorism looks typically Austrian but Robbins (like Hayek) was not allergic to quantitative methods, contrary to most members of that school. (On this and other aspects of Robbins’s overall contribution to economics, see Howson’s excellent 2011 biography, Lionel Robbins.)
Interpersonal comparisons of utility / An external observer cannot get into an individual’s head to observe his preferences. But we can still say something about them. Robbins insisted that individual preferences cannot be viewed as a cardinal scale of satisfaction — that is, a scale on which arithmetical operations can be done. This economic idea was already firmly established. Although the author still invoked the concept of marginal utility, the second edition of the Essay cited the seminal 1934 Economica article of John Hicks (another future Nobel prizewinner) and R.G.D. Allen, who noted that “if total utility is not quantitatively definable, neither is marginal utility.” Instead, indifference curves were becoming a standard analytical tool of economics. The only assumption that economists need to make, Robbins correctly explained, is that each individual ranks his preferences in the order of their (ordinal) intensity.
This theoretical idea has monumental consequences. Because each individual has his own subjective ordering, there is no scientific way to compare orderings between different individuals. You and I may both prefer oranges to apples, and I may appear to like oranges more than you do, but it makes no sense to say, for example, that I prefer them two times as much as you do. Two times as much of what? Not of so many dollars, because we are talking of subjective preferences before prices and incomes combine with them to motivate choices. As economists say, interpersonal comparisons of utility are impossible.
One important implication emphasized by Robbins is that economics cannot justify the redistribution of income on the claim that the marginal utility of money is larger for a poor individual than for a rich one. The intuition that $100 taken from a rich woman and given to a poor man produces an increase in total utility is just that: an intuition, with perhaps some moral underpinnings. Perhaps the rich woman would have used the $100 to buy a ticket for a Mozart concert, while the poor man will buy beer and chips for two weeks? “There is no way of comparing the satisfactions of different people,” Robbins explains. People do make judgments about that sort of thing, but they are never unanimous and their judgments cannot be scientifically proven.
Economics and ethics / That leads us to ethics. Robbins emphasized that “economics is entirely neutral between ends. … The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited” by scarcity. Ends are the data from which economic analysis starts; their evaluation belongs to the field of ethics. In this sense, economics is value-free.
Robbins is consistent, as economic reasoning generally impels us to be. Although he was a lifelong defender of free trade, he argues that the economist qua economist cannot say that it constitutes a good public policy because some individuals might be harmed by foreign competition. More generally, that certain conditions can be economically proven to lead to a better satisfaction of demand or more individual freedom does not by itself prove that they are desirable. A moral judgment is necessary to jump to a policy conclusion, which depends on how the ends of individual freedom and the satisfaction of individual preferences are ethically valued.
For Robbins, the significance of economics lies in its capacity to explore the consequences of pursuing different ends. It helps “us” to choose efficient means to attain chosen ends. It can also help find out if the ends are consistent with each other. For example, if the end chosen is general prosperity, obstacles to trade are counterproductive. But if the end is national security in time of war, barriers could be justifiable. Even choosing “between alternative systems of society” requires the economic analysis of their consequences. In brief, economics helps to make better public choices.
Robbins also believed that the significance of economics depends on an ultimate value: that “rationality and ability to choose with knowledge is desirable.” He espoused that value.
Buchanan’s challenge / As noted by George Mason University economist Peter Boettke in his Living Economics (Independent Institute, 2012), a major challenge to Robbins’s conception of economics was raised by Nobel economics laureate James Buchanan. Buchanan argued that choice is more intimately linked to trade and thus to markets than to the ends–means allocation problem. Thus, trade or exchange should be the focus of economics. His approach does allow the economist to pronounce on free trade:
If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.
The configuration of society emerges from exchange, not from maximization decisions and equilibrium positions.
In a limited sense, Buchanan was more accepting of homo economicus than Robbins. Methodological reasons account for that stance. If an individual is only assumed to maximize his ends and since these subjective ends can only be inferred from what he does, what we are really saying is that, obviously and uninterestingly, the individual does what he does. There is no room for empirical testing in a pure logic of choice. By restricting individual preferences to what is expressed in trade and markets, the homo economicus device allows empirical testing. Buchanan was as pure a subjectivist as Robbins, but he welcomed economics as a behavioral science instead of a pure logic of choice. (See “Not the Average Economist,” Fall 2019.)
Buchanan’s focus on trade opened the way to considering politics as a market, an idea that was at the source of public choice economics and “constitutional economics.” This approach emphasizes that the choosers are always individuals even in public choices. In Robbins’s conception of economics, Buchanan argues, “society” often seems to creep into the choices.
Politics and legacy / This is not to say that Robbins had no good intuitions about politics. “Scratch a would-be planner,” he wrote, “and you usually find a would-be dictator.” As Hayek was later to explain, economic planning means overwriting individual preferences and choices. (See “Where Are We on the Road to Serfdom?” Fall 2021.)
But Robbins did not go as far as Hayek, neither in the Essay nor after. In her biography, Howson summarizes Robbins’s political philosophy as follows:
He remained an old-fashioned liberal. He was never a libertarian and he never followed his friend Hayek in that direction. … He had longstanding reservations about the way Hayek’s political views were developing after 1940. He thought the welfare state in Britain had been a benefit and did not agree with the inevitability thesis of The Road to Serfdom; he also differed from Hayek over utilitarianism. He was himself a utilitarian in his political philosophy and was always willing to consider government intervention if it could bring about things not well done by individuals left to their own devices.
The reader may be forgiven for thinking that this pragmatism bears a bit too much resemblance to the intelligentsia’s muddled philosophy that ultimately engendered today’s progressive generation. There is no doubt, though, that Robbins would not have accepted the wokes’ intellectual sloppiness and rejection of liberal values.
Disregarding politics and focusing on economic methodology and Robbins’s scholarship, we may say that the Essay represents what was the best in both Austrian economics and neoclassical economics. Robbins emphasized subjectivism but did not shy away from the advances of neoclassical economics. And he raised questions and proposed answers that are still inspiring.
