Economic Research
its methodology and technique

-by Hermann Max-

translated by D. Ohmans
(c) copyright 2008

Text imprint Bogotá, Fondo de Cultura Económica, 3rd ed. 1971



UPON OFFERING this book to students and Latin American researchers,
I wish to advance the following declarations:
    What has moved me to write it is the lack, which I have frequently
ascertained, of a text in Spanish that treats of the methodology of economic
investigation, and especially of its technique, in an extensive form adapted
to the necessities of teaching of Latin American universities. This lack
cannot be filled in any way by the few existing translations of works by
European or North American authors; and the literature by Latin American
authors reduces to two or three works which, although useful, do not present
the material in a very complete form.
    In the future one should be offered a greater range in the plans of
study and teaching by the schools of economics regarding the methodology
as well as the techniques of investigation. Both have their great importance,
not only for the student who must prepare a senior or Masters thesis, but for
all economists, be they in practice or investigation, because the observance of
these norms signifies for them discipline of thought in accordance with
scientific criteria.
    Therefore I have endeavored to unite in this work teachings and counsel
which, based on my own experience of many years as a practicing economist and
university docent, could be of positive utility to the student or professional
    Also I have endeavored to write in a simple and clear style, that at no
moment offers doubt to the reader as to what the author has wanted to say. The
theme of methodology easily can induce those who treat of it to lose themselves
in dilatory considerations of a dogmatic character, which may be profound and
ingenious, but that little serve those who find themselves confronting a
practical problem for investigation.
    I have conscientiously avoided similar digressions. However, the reader
shall find many passages in which certain deeds, opinions and theories are
submitted to a critical analysis and that seem to depart from the theme. In
reality it is not so, because I consider that for an economist it is of
fundamental importance to know how to think and act with that critical and
independent spirit which does not allow acceptance of what one has said and
others repeated, without having formed one's own judgment on it and having
become truly convinced of its validity. To train the economist in this manner
of proceeding, that is, in a critical focus on facts, problems or theories, is
also contributory to, if not the basis itself of, all teaching of the
methodology of investigation.
    Finally, I must declare that I am convinced of the necessity for the Latin
American universities to give to the teaching of economics a more realistic
orientation. Until now, it has been based almost exclusively on texts written
by foreign authors, whose ideas and theories are not unconditionally adaptable
to the circumstances in which the economies of these countries develop. Also,
since the original intellectual production in the economic and social sciences
is still relatively scarce in the Latin American countries, the teaching, in
general, lacks originality; it does not always trouble to give a correct
interpretation to the problems that are presented, searching for their
explanation in one's own theories abstracted from study and objective analysis
of the circumstances which underlie them; it often pretends, by contrast
nevertheless, to operate at a high level, utilizing the dialectic of a
deductive abstractionism with a vague terminology, obscure, metaphysical,
which can seem to be the maximum expression of scientific reason, yet which
alienates it from all live contact with reality.
    I think that the Latin American schools of economics cannot permit
themselves the luxury of teaching economics as a "pure science" or "science
in itself," that is to say, as a body of doctrines that satisfies only the
speculative spirit of the scientists, without worrying about the little or
nothing that it may bring to service in practice. The true mission of these
schools should be different: to teach economics as above all a human science,
realistic and grounded in inductive thought; to eliminate from the teaching
all that is conventional thought and doctrines or a theoretical focus that is
inadequate for developing in the student her own capacity to see and judge;
and thus to form professionals who can proceed with all success in practical
economic life, who shall be capable of meeting and applying efficient
solutions to the problems which are presented, and called to assume stations
of high responsibility in directing public affairs.
    It is a task of the utmost importance by which the economics schools can
contribute in a decisive form to the orientation and acceleration of economic
progress in their countries and ensure that, little by little, when treating of
economic affairs, political bickering recedes, which still rules in many areas
and not rarely perturbs and retards development: ignorance, dilettantism and
    The content of the present book is essentially influenced by this my mode
of thinking.
    I should express my gratitude to whom for many years was my secretary,
Mrs. Adriana Guerrero de Ábalos, for the help she has given in the revision
of the text and the correction of proofs for this book.

                                   Dr. H. Max
                                   Santiago de Chile, March 1963


THE RELATIVELY rapid dispersal of the first edition of this book has made
necessary the preparation of a second, which is presented, outside of a few
modifications and rectifications of minor importance, with a few additions
that, in part, have been suggested to me by persons interested in the material
and to whom I feel profoundly obligated.
    I would desire that the book continue being a good companion and counselor
for students and professionals who must dedicate themselves to investigation
in the field of economic and social sciences. I express in advance my
gratitude for any suggestion or positive critique which is proposed and that
could serve to complement and perfect the text of eventual future editions.

                                   Dr. H. Max
                                   Santiago de Chile, March 1965


THE THIRD edition of this book retains the same structure as the previous ones
which, apparently, has proved useful towards the ends which the work pursues.
It introduces, to be sure, some modifications in the text and the bibliography
has been expanded by certain works appearing in recent years.
    I hope that this book keeps encountering a good reception among interested
parties and that its explanations and counsels lend them help and positive
    I should especially thank professor Manfred Max-Neef for his valuable
collaboration with the chapter inserted at the end of the text. His "reflections
concerning topics for investigation" touch questions of eminent importance and
actuality, analyzed only briefly, but with a sharp and critical spirit, which
does not shrink from denouncing the undeniable fact--although little
recognized--that the social sciences in their evolution have remained very
backward in comparison with the immense progress made and being made in
the natural sciences. In the ideas contained in this exposition shall be found
the germs of what, perhaps some day, may arrive at being a "Critique of pure
    Although the author does not suggest any concrete topic, he believes,
nevertheless, that his exposition "should serve as an inducement for thought
and an intellectual challenge for future researchers."

                                   Dr. H. Max
                                   Santiago de Chile, April 1971


A. The Intention of this Book

THIS BOOK is aimed, in the first place, at economics students in Latin
American universities with its intention to initiate them in the methodology
and technique of investigation within the field of the science that they
study. Beyond that it is directed also at those who, having graduated from a
school of economics, and now in the exercise of their profession, find
themselves required, in one or another form, to execute works of investigation
or even only to prepare, from time to time, studies of an informative character
for the directors of the entities where they offer their services.
    Some of it, perhaps, could also serve those who are dedicated
professionally to investigation, be they economists in service to public
institutions, national or international, or technicians specialized in one or
another branch of economic activity, or finally professors belonging to
university colleges or centers of investigation who, by obligation, should know
and dominate the methodology and technique of investigation, as much for their
own use as specifically to teach it to their students or demand from their
collaborators the observance of its rules.
    In the body of this book, the author applies a good part of his
experience, acquired throughout a long period of practical activity as an
economist and university professor. He has been induced to write it by the
fact that, if indeed some schools of economics dedicate a certain attention to
the teaching of methodology of science, few or none offer to the students
wherewithal for them to learn and handle the technique of investigation
Yet the one is as important as the other, and no work of investigation can have
value or inspire confidence if it allows suspicion that the author does not
dominate the rules of the art.

B. The Importance of Economic Investigation

Very well. Does this have any practical importance for the student? Evidently
so. As of late, the university student who completes her studies in a college
of economics and who wishes to graduate as "doctor of economics,"
"commercial engineer" or simply as "economics graduate," has to present a
paper or dissertation written upon a theme of free election which, in order to
be accepted, must comply with certain prerequisites. The most important of
these are:
    1) that the student proves that (s)he* knows how to think according to
scientific criteria;
    2) that she comprehends in depth and in all its aspects the material that
she has selected for her thesis; and
    3) that the work signify a valuable addition to science or to the
knowledge of the subject that has been the object of her investigation. In
other words: the paper that is presented by the student should be the result
of true scientific investigation, for which its author's grade of preparation
qualifies her and which, at the same time, serves as its basis--sometimes more
than the oral exam--in the formation of a judgment that might be considered
worthy of the mark or title that the university bestows.
    But the value of a thesis for advancement is not limited to this more or
less utilitarian end. The fact that the student shall have been obliged to
realize a scientific work from her own effort, approved and recognized as
such by the faculty upon which the school depends, deals one a double
satisfaction: first, the certitude that one's understandings have brought a
positive enrichment to the material she has selected for her investigation,
such that upon that subject one could talk and opine at any moment, because
she knows it at root, and that, therefore, in all to which it refers one could
be considered an authority; and secondly, the awareness of having carried
something, be it only a grain of sand, to the treasure of knowledge on which
humanity bases its progress; something that perhaps one herself may not
benefit from practically yet which, nevertheless, is not lost, because another
may take it up as a point of departure or reference in another investigation
that advances further forward.
    This psychological satisfaction that is transmitted to the student by a work
of scientific investigation which she has been capable of realizing gives her
that sensation of self-confidence which is a fundamental factor in establishing
the personality of the future professional.
    It is hardly necessary to underline that economic investigation, in countries
which are plainly undergoing development, is of special importance. So
that that development takes place in an orderly and organic form, a permanent
orientation is needed based on conscientious investigations. The last decades
have demonstrated in innumerable cases the counterproductive and sometimes
gravely harmful effects that can pertain to a purely routine politics which is
lacking of all solid foundation or wide and deep grasp of the conditions
affecting the development of economic life of a country or the nature of the
factors that must be actualized to achieve a desired effect. And this is even
more serious in that, day by day, it is considered one of the most important
tasks of the State to direct and orient economic development in the form most
convenient to the necessities and interests of the people. This task cannot be
achieved by the State without previous planning of all that politics must
pursue, and it is understood that such politics cannot be improvised or
quickly put into practice, without running the danger of committing errors
with irreparable consequences.
    Precisely one of the most valuable lessons bequeathed us by practical
experience in the years following the second World War is the knowledge,
universally recognized today, that to augment "economic development" (or in
European terms of the time, "economic reconstruction") cannot mean simply to
project and realize certain complete programs, whose execution would be
principally in the hands of engineers, architects and contractors. A
meritorious and still more important and decisive intervention belongs to the
economist, who will have to study and establish the general and particular
conditions in which the programs can come about to produce a maximum of
benefits for the community and reduce to an extreme minimum the undesirable
effects that can derive from them.
    The politics of development of the Latin American countries is influenced,
directly or indirectly, consciously or unconsciously, yet in all events in a
decidedly effective manner, by two factors which exercise a permanent and
intense pressure in the sense of a maximum acceleration of material progress:
the rapid growth of the population and the indisputable requirement underlying
the great masses of elevating their living standard. To create opportunities
to work for those who each year in increasing numbers incorporate themselves
into the economic process and to obtain better and increasingly more complete
satisfaction for all orders of the population, are basic objectives of all
political and social economy, but in a very special sense for the Latin
American countries, whose relatively young economies are subject to conditions
of development substantially different from those that apply to the great
capitalist powers.
    For the achievement of these objectives, the cooperation of the economist
is of fundamental importance. Subject, naturally, to the general political
directives established by the State, she must embrace the development
process in her investigations in all its phases and aspects, from the
conception of the plan which politics proposes, to its definitive realization.
she is called to study and establish, in particular, conditions that can
guarantee development in a balanced form, keeping under consideration: the
privilege of determining priorities in the execution of the works; the
relation between demand for and supply of resources; the quota of investments
and their adequate financing; the provisioning of the labor factor employed in
the execution of the plan, without provoking excessive demands for consumer
goods; the coordination of the factors and the optimal use of the property and
means of production; the modernizing and rationalization of already existing
businesses with the object of lowering costs; the equitable and just
distribution of properties and rents; the function which corresponds to
monetary politics and accountancy, be it to support the development programs
or to avoid inflationary pressures that may arise or maintain them within prudent
limits; the repercussions that development will have as much upon the
international economic structure of the country as upon its commercial and
financial relations with the exterior; et cetera, et cetera.
    The problems and the tasks which are presented to the economist are
extraordinarily diverse, and many of them require the intervention of a specialist
in the respective branch. But, in every case, what is required of an economist is
that one have solid and wide knowledge, be it of a general character or within
the specialty to which one is dedicated; that one be capable of carrying
scientific investigations to irreproachable completion; and that one knows how
to treat the matters and problems that one must confront with a practical
and realistic criterion which facilitates their solution.(1)
    For Latin American economists, who have been educated in doctrines and
theories born in other lands and under conditions very different from those
which determine economic development and the rhythm of its fluctuations here,
something else is of special importance, that being: to discriminate clearly and
strictly and with an eminently critical spirit between what they have learned
and what in it is not applicable to the conditions of their own nations'
development or the concrete instances they have to confront.
    Dr. Raúl Prebisch, ex principal director of the United Nations
Commission for Latin America, in a speech in 1951, referred to this same thing
with the following words:

    "Latin American youth, who have passed through the great foreign
universities, return with a very respectable wealth of scientific
understandings which, though they respond well to the reality of the great
countries, do not always prove adequate for interpreting our own reality. To
attempt, for example, to apply here the instruments of Keynesian analysis or
interpret economic development through the theory of Schumpeter, is to risk
theoretical aberrations with very serious consequences for the practice of the

C. The Teaching of Investigation

The perspectives which the Latin American countries open to the economist are
wide ones. The demand for good economists and investigators grows year by
year, yet still cannot be fully satisfied with national elements. Furthermore,
the economists' preparation in the universities and the teaching of
investigation suffer from imperfections, which do not fail to manifest their
consequences, sometimes when the economist is facing practical tasks.
    Of the students who enroll in schools of economics, only a relatively
reduced part later opt for the profession of economist as such, who dedicate
themselves to economic investigation in its most diverse aspects; the greater
part seek a career in the practical life of business, as technical assessors,
organizers and administrators of enterprises, contractors, auditors, et
cetera, or in any other specialty that requires economic preparation and
    The teaching imparted by the schools of economics naturally should not
be different from one to another; the basic scientific preparation should be
the same for all, despite that the students can be offered the possibility of
acquiring a certain mastery in one or another branch of the teaching in upper-
level courses without this comprising specialization as such. Any tendency
towards the latter, which openly contradicts the spirit of academic teaching
in the university, can be problematic and not in correspondence with the
interests of the students. A good economist should know the rules of
accounting, financial arithmetic, the functioning of banks and even should
have experienced business for a time in industry or commerce. And a good
accountant or business administrator should have sufficient familiarity with
economic theory and practice to be able to judge and accurately interpret the
tendencies which appear in the unfolding of business and take advantage of
dispositions suggested by the situation. Often, a student who has prepared to
act within practical business life, later discovers her talent as an
investigator; and the reverse, students distinguished for their interest and
aptitude for investigation, are taken by their destiny in another direction
very foreign to that which in the university was their natural inclination.
    It is not advisable, then, to begin distinguishing between one group or
another in the regular courses of an economics school, between the students
who want to prepare themselves for the profession of economist and those who
shall devote themselves to business. What is going to become of them, in
truth, often is not determined by their will and intention, but instead by the
practical opportunities which are offered them. Therefore it is not possible
either, to limit the teaching of investigation only to one of these groups and
exclude the other from it. To know investigation, that is, to verify and study
a thing to the bottom, is equally important for both and the programs of
instruction in the economics schools should give preferential attention to the
training of all students in this art.
    The teaching of investigation should begin in the first years of studies.
The professor who is charged with the introductory economic science courses,
and who does not limit herself to a simple exposition of the material, shall
have many opportunities to awaken special interest in her students in one
thesis or doctrine or another, to provoke doubts and critiques and so to train
in them, from the beginning on, their faculties of thought and reason, as a
fundamental condition for any investigator. The remaining theoretical and
practical courses, among them especially mathematics, should complete in
adequate fashion the introduction and mental training of the students in the
diverse disciplines that form the set of programs of instruction. It will be
difficult to require certain written projects from students in their second
year of studies that are something more than simple summaries or extracts
from works by various authors. But the third year is doubtless most indicated
for initiating them into the rules and technique of investigation. For that
purpose, the institution of the pre-seminar can be of great utility. The pre-
seminar still has not found the acceptance in the university that it deserves;
and where it exists, its organization and functions are not always those which
truly belong to it. Its objective is not to require the students to execute
complete works of investigation, but to teach them how to proceed to do such a
thing. Thus the pre-seminar course should not be tied to any specific field,
and the themes that the students propose, in order to develop them in the way
of exercises, should be the most varied possible. A systematic exposition of
the material which, in the opinion of the author, should be covered in the
teaching of a pre-seminar course in a school of economics, is what the present
tract offers.
    The pre-seminar is, then, a preparatory institution, in which the students
acquire the methodological familiarity and techniques which will enable them
to perform works of investigation truly their own. Opportunity to take
practical advantage of those understandings will be offered in the following
years in seminar courses, dedicated to the same investigation upon a basis of
concrete themes related to the material from specific disciplines or with
questions or specific problems of special interest.
    The number of seminars should be sufficiently large to respond to the
diverse inclinations of the students. At the least, each of the basic
disciplines should have its complement in a seminar. Furthermore, it is well
to organize seminars for those disciplines treating specialized material, such
as public finance, money and credit, insurance, etc. When the number of
students is very high, it may be useful to subdivide some seminars, with the
goal of not burdening the efficacy of the studies and work with an excessive
enrollment. It would be very difficult for the professor to devote himself to
each student individually when the number participating exceeds 15 or 20. The
studies and the investigations that are carried to completion in the seminars
have as their object to place the student in contact with questions of
economic reality. In some cases, the individual or collective works that are
realized there can be of positive value and merit publication in the journal
or the annals of the faculty. In others, they serve to complete and deepen the
understandings which the students obtain in courses dictated by the
professors. But the shortness of time rarely permits treating an issue in
depth and exhaustively or to tackle a theme of major complexity. For the same
reason--among others--it will not be possible either for the students to
use the seminar to prepare their final thesis. The seminars achieve their goal
if they give the students the opportunity to apply what they have learned
in the pre-seminar to one practical instance of investigation, and thereby
they contribute effectively towards giving them the preparation they need to
work within the subject they choose for their dissertation.

D. The Centers of Economic Investigation

The graduate of a college of economics who decides upon the profession of
economic investigator, shall seek and find a situation in one or another of
the diverse centers of investigation, such as exist in the technical offices
of the Treasury, in the market, in commerce and elsewhere, in the research
departments of the central or important commercial banks, in the secretariats
of the chambers of commerce, within syndicates or industrial associations, in
societies of mining, industrial or agricultural advancement, et cetera. Even
many of the great private enterprises maintain departments of economic studies
which at times include a very numerous and eminently competent personnel.
    Naturally, in the majority of these cases the investigation will adjust to
a viewpoint that corresponds with the interests or the nature of the activities
of the respective entities or enterprises. Without needing to lose, thereby
its character of seriousness and objectivity, the investigations from those
centers will not always be considered free of all influence of those limited
ends. In reality, a faultless scientific investigation of impartial character
can only be offered from independent institutions which do not have to grant
concessions in any direction. These institutions may be the institutes of
economics organized and maintained by the universities, administratively
subject to the faculties of economic science yet with their own independent
direction in research activities.
    In a report presented to the Latin American Conference of Faculties of
Economic Science, convened in Santiago, Chile in December of 1953,(2) the
author has referred to these economics institutes in the following terms:

    "Of fundamental importance for these institutes is their absolute
independence from all types of political or private interests, in order to be
able to offer the widest guarantee as to the objectivity of the conclusions
that are derived from their studies and investigations. It follows that the
financing of their services should be the charge of the universities, inasmuch
as they cannot subsist on the direct remuneration received for their services
on the part of the State or the private economy.
    "The personnel of the economic institutes should be carefully selected
from the point of view of the functions which are entrusted to them. Excellent
grades on the examinations and a thorough understanding of all the branches of
economic science are the basic conditions, although not decisive, that must be
met by the student or professional to enroll in an institute of economics. A
good investigator should be free of all preconceived judgment, should have a
good group feeling, should dominate theoretical thought and know how to think
in realistic terms, have a love for the labor of investigation and, above all,
have an elevated concept of the responsibility and honor with which she
should proceed to inspire confidence that the data and precedents for the
investigation are exact and have been correctly used. The success of the
investigator depends fundamentally upon the fulfillment of these conditions.
    "The labor of investigation itself will be of very diverse kinds, yet
principally it will have to pursue three objectives. In the first place it
will be oriented towards the investigation of economic and social reality in
its most diverse aspects. The results which are obtained in this field can be
of great value as much for science as for politics. In the second place it
must provide practical services, be they to the private sector or public
sector of the economy. Developing this part of the work of an economics
institute is difficult and time-consuming; yet it is of enormous importance
that the conviction can be propagated that the application of scientific
principles, equally in the field of private activity as in public
administration, is indispensable to achieve optimal results and benefits. It
belongs too to this part of the work of an economics institute to serve the
political powers as an advisor on that to which their politics refers. This
task is not always for free, but has its importance insofar as it offers the
institutes the opportunity to have their voice heard and to lend services to
politics whose value does not cease to appreciate over time.
    "Yet it cannot only be the goal of the economics institutes to serve
immediate practical objectives. They should also dedicate themselves to pure
investigation, and though it seems not so at first sight, that may become the
most valuable and fruitful labor which those organizations can perform. The
years of the second World War and the postwar period have demonstrated with
full evidence the lack of a sure footing in the economic, monetary and
financial politics of the Latin American nations and most prejudicial in many
cases has been the application of practical norms based upon theories that are
absolutely inadequate to the conditions of life and development of countries
like the Latin American. More than once the fallacy has had to be seen from
measures recommended by technicians who, for not being familiar with the
very particular conditions of these countries, awaited from those the same
effects they had produced in other nations with entirely different conditions.
Not less frequent have been the instances where, in defense of a specific
politics, arguments were adduced as apparently supported by the opinion of
renowned world authorities, wherein, in reality, an equivocal or outdated
interpretation is given.
    "The economics institutes can contribute much so that these things do not
happen. But beyond that it falls to them to act in a positive sense, analyzing
with a critical spirit and in serious and profound investigations the content
of those theories which have come today to dominate the economic thought of
the capitalist world, this with the object of establishing whether the
political conclusions deriving from them are applicable to the problems of the
Latin American nations. It is very possible that the result of such
investigations will support the reality--still not sufficiently recognized--
that many of the rules and norms of conduct that govern the politics in
countries of advanced development and high capitalization only have validity
for our countries if applied in the inverse sense."

    Important university institutes of economics exist in Europe and the
United States; in the Latin American universities, whose economics faculties
are relatively new, they still do not occupy the place they deserve, but they
are called upon to play a role of increasing importance in economic
investigation, which is making rapid and notable progress.
    Since the end of the second World War, the economist's field of activity
has extended remarkably. To the problems of a primarily national character--
which have been many and of a diverse nature--have been added the economic
problems of international significance.
    The great crisis in the fourth decade of the century has demonstrated that
no State can isolate itself from the others, and that any measure of political
economy taken by a country in defense of its own interests or to protect a
particular branch of its activities--however justified it may appear from a
national point of view--will have outside repercussions, not always taken
into consideration and which at times can affect the economies of other
countries in a disagreeable manner.
    The experiences gathered from the events and deeds of those years have
served as a basis to enact agreements and found international institutions,
which have as object to submit the commercial, monetary and financial
relations among the various States to certain regulatory tendencies and to
establish and maintain more normal conditions for exchange and thus favor the
development of the world economy.
    The technical department of these institutions, together with those of
others created before, form a set of centers of economic investigation with
great influence in the political decisions of the governments of the different
nations. Distinguished among them as those of major importance: the Department
of Economic and Social Affairs of the United Nations, with headquarters in New
York; the Research and Statistics Department of the International Monetary
Fund and the International Economics Department of the International Bank for
Reconstruction and Development, both with seats in Washington, D. C.; the
Monetary and Economic Department of the Bank for International Settlements
centered in Basel; the technical and economic departments of the International
Labour Office, I.L.O., founded in 1919, with its seat in Geneva; the General
Agreement on Tariffs and Trade, GATT, also headquartered in Geneva, and
the Food and Agricultural Organization, FAO, 1945, with its offices in Rome.
Of special importance for Latin America are the Inter-American Economic
and Social Council of the Pan American Union, based in Washington, D.C.;
the Economic Commission for Latin America, ECLA, founded in 1948, with
its seat in Santiago, Chile; and since 1960, the Inter-American Development
Bank, located in Washington, D.C.  In these international institutions, the
economist has found a new field of action, which requires special preparation
and capacities. The economic investigations which these institutions bring
to completion have acquired great importance and practical politics oriented
by them can register unquestionable successes.

E. The Formation of the Investigator

The young economist recently emerged from school, who feels in herself the
vocation of investigator, still is not one by that achievement alone. She will
have studied with true interest and devotion, will have obtained magnificent
grades, her senior thesis may have been approved with distinction, with
the same being the result of her oral exam; in other words, she may bring
together all the conditions required of a youth who wishes to dedicate herself
to the career of economist-investigator. Nevertheless, to arrive at being an
investigator and having success in her profession, something very essential is
missing. The youth may feel--and surely with reason--very learned and proud,
for displaying a heritage of knowledge much superior to the ordinary and
common, yet what she knows--and that may be a great deal--up to now is only
something "taught"; she has acquired her understandings from her professors
and from her lectures; all this gives her a certain satisfaction which,
nevertheless, will always be incomplete and superficial, if those
understandings are not actually assimilated, to transform them into part
of her true intellectual patrimony. This process of transforming learning
to personal knowledge requires time and is not always effected without
conflicts and disillusionment. The fact that the study of economics is not
enough for becoming an economist should not demoralize the youth who has
chosen that career; on the contrary, she would do well to take very
seriously this truth which will help greatly in avoiding errors and
misunderstandings unfavorable to one's first steps in the field of their
    That which the school has been able to give them is a good--and not rarely,
excellent--preparation in all the scientific disciplines they need for their
profession; yet what it has been unable to provide them is experience,
that indispensable complement of their scientific education which only can be
acquired through direct contact with practical life and through the concrete
tasks that they must solve.
    It will not always be easy for the economist at the beginning of her
career to convince herself that the baggage of theoretical knowledge with
which the university set her toward practical life is not a sort of recipe
applicable to the most diverse cases that can be presented to her. It is
possible that very soon one takes note that certain conclusions drawn from
their studies do not adapt to reality. One finds that theory and reality are
at times two separate things. Some of the theories one has learned during
their studies are revealed as erroneous; others, as the product of a purely
rational speculation which tries to explain what should be, in the opinion
of their authors, yet does not work to explain what is; and others, in
turn, though they pretend to have general validity, have no applicability to
the medium where the economist would employ them, having been conceived
under completely different circumstances and conditions.
    For example: one who studies the modern fiscal theory--and many
contemporary authors have approached this material with greater or less
assurance--could come to the conclusion that the only substantial and
important thing in tax policy is to cause certain effects in the economy, be
this through reduction in consumption in the private sector, or involving
economic development in general or just within determinate branches of
activity. If this person enrolls in the technical department of the financial
administration of the State, she perhaps will see with surprise that there,
taxes are considered in the first place as means to supply the treasury with
income for financing its expenditures. The other may also eventually have some
importance, yet that is a question for politics which, in turn, depends on the
preparation, comprehension and capacity of the rulers--conditions that are
not always results one can count on--or upon the orientation imposed on them
by the dominant parties, factors, ultimately, upon which economists generally
do not have great influence.
    Nor will opportunity be lacking for the young economist to understand
that not everything said or written is the latest possible truth. In economics
there are also slogans, which at times exercise a most powerful suggestive
influence upon the mind of the student. One of those is the "redistribution
of income," by which is understood a specific fiscal policy that pursues
the end of achieving a "more just" distribution of national revenue at the
expense of high income groups and in favor of low income groups. The former
are the "businessmen," considered as "immensely rich" persons who, for reasons
of social justice, ought to be burdened with the highest rates of taxation.
This is clear and also can be considered just. Something else is not as clear,
that is, how such a politics can serve to better the living conditions of the
working masses in an effective and progressive way, when experience
demonstrates that the distribution of the national revenue is a function of
economic progress and that it cannot be influenced in a decisive and lasting
manner by purely mechanical adjustments.
    The economist who can discern between economic theory and political
doctrine shall come to understand that the problem cannot be solved that way,
and that for a true political economy, one not shaped by demagogic measures
designed to impress the masses, the measure should be increments in
productivity, in order thus to get an increase in production per inhabitant
and thereby an increase in the real income of the workers.
    But, admitting that, the economist is immediately presented with a new
difficulty. Increments in productivity: that has something to do with
capitalization. And what they have heard and read innumerable times is that in
the developing countries--and to those belong the majority of Latin American
nations--capitalization is generated very slowly, because the people are not
accustomed to save, or more correctly: because the constant devaluation of the
currency offers no stimulus for saving. And furthermore: the periods of sharp
inflation which from time to time intervene and distort normal and organic
development not only retard capitalization, but also provoke in some sectors
the complete opposite, a distinct decapitalization.
    All that is true. Yet it is also true that those who understand the
accumulation of capital simply as a function of savings, will never understand
the true causes of the formidable effort that has underlaid development and
the unprecedented expansion of the economy of the United States, and shall
not understand either what is fundamentally lacking in the Latin American
economies to accelerate their development and transform them into respectable
and respected factors within world business.
    In reality, no one can affirm that what has made the United States great
has been the habit and enthusiasm of its people for saving. An enterprise like
the Ford Motor Company never would have become what it is today, if its
founder simply had limited himself to accumulating capital gains from saving
in order to reinvest them in his business. It is natural and logical that he
would have done this; yet much more important than saving money for him has
been saving of another kind: the saving of time, of space, of distances and of
human strength. For Ford, much more important than investing money in its
business has been "investing brainpower." The gigantic capital that Ford
represents today had its beginning in the brilliant "idea" of its founder, of
giving production in all its phases and down to the finest process details a
specific organization, based upon meticulous studies of time, space and
movement, which has effected a productivity increase of fantastic proportions.
    The example of Ford has become a lesson to all the capitalist countries.
The "Ford principle," that being the specific production method conceived and
applied on a grand scale by Ford, is one of the bases of what is called
"industrial rationalization," a concept not only technological, but also
expounding an entire philosophy as the expression of a new economic and social
mentality; in an economic sense, because it adds to the three classical
factors of production, land, capital and labor, a fourth factor, reason or the
human intellect, whose specific function consists in reaching, through the
optimal organization and combination of the other three factors, a maximum of
productivity; and in a social sense, because only thus is it possible to
advance in an organic, real and lasting way the involvement of the workers in
the national product and to substantially improve their living standards.(3)
In the Latin American nations little by little the consciousness is affirmed
that, to generate development in their economies, something more is needed
than investments of real capital. In an interesting study entitled "Capital
formation and foreign investment in under-developed areas," constructed upon
the basis of a wide survey, the North American professors Wolf and Sufrin, of
the universities at Berkeley and Syracuse, respectively, highlight the fact as
one of the most significant conclusions that "an incremental dose of
capitalization is a necessary aspect of economic development, but this is
insufficient to explain it or to be its cause." The factor of essential
importance, which may cause an increment in productivity, even without
increasing the real capital, is, according to them, the application of
principles of technology.(4)  Nevertheless, technology in itself is also
insufficient to explain the formidable productive power of an economy like
the North American or the miraculous resurgence of the German economy
after the chaotic years which followed the second World War.
    The great works of economic and social progress are no more than
implantations of the spirit which dominates a people, and the best methods
and techniques are worthless if not received and applied with the firm will
to utilize them as means of overcoming, in the spirit seen at work, in
discipline, order, cleanliness and responsibility, things of the most
fundamental vital necessity. In reality, it is not merely matter which
determines progress. The true capital of a nation is not in the richness of
its lands, nor in the money that it has or which it lends you, nor in the
machinery installed in its factories, however modern or perfect that may be,
but instead in the intellectual forces which it cultivates, in its creative
ideas and in its capacity to realize them.

The examples adduced here have sought to demonstrate that for the economist,
more important than his theoretical lucubrations are the conclusions that may
be taken from the observation of reality.
    Yet it is quite possible that the economist, in the initial time of her
practical activity, finds herself profoundly disoriented by being unable to
reconcile what presents itself as reality with the preconceived opinion of it
she has formed. This can cause a painful conflict and bring about a crisis
that can make one doubt everything and even oneself. But that crisis will
only be transitory and furthermore very healthy. She shall do well to
confront it decisively. To have the valor of "conscientiously forgetting" all
that is recognized as error or as that which has no utility to her; to have the
daring to decompose the validity of what others affirm as truth, but that for
her remains unprovable; and to seek experience in practical life and form
from it one's own criteria: those are the cures which free the thought of the
economist from prejudices and predisposes them to create new and fruitful
    Solid scientific preparation, practical experience and realistic criteria
are the three basic conditions that make a good economist and give value to
their investigations and their activity.
    There is yet a fourth condition which, nevertheless, only a few possess,
because it is not something that can be learned or acquired with studies or
experiences, yet instead is a gift of God, which makes one possessing it a
true master economist.
    According to Keynes, a master economist "must be mathematician, historian,
statesman, philosopher in some degree. He must understand symbols and speak in
words... He must study the present in the light of the past for the purposes
of the future."
    The definition is almost perfect. Yet Keynes forgets one detail. To be a
master, the economist must also have something from the poet: imagination.
Not, of course, to sing of the economy in verses or to invent novels or short
stories that entertain and divert, but instead to have a great and clear
vision that causes one to discover new roads toward new truths.

*. Henceforth, "she" [Translator's note]
1. In connection with this the book by W. A. Jöhr and H. W. Singer can be
recommended: "The Role of the Economist as Official Adviser," translated from
the German by Jane Degras and Stephen Frowein, Boston, Allen & Unwin, 1955.
2. "Instruction and Economic Investigation," published in the Journal of the
Faculty of Economic and Administrative Sciences of the University of the
Republic of Uruguay, June 1954, Montevideo; in "Annals" of the University of
Chile, nums.97-98, 1955, Santiago; and with slight modifications in "The
Economic Trimester," vol.21 num.3, July-Sept. 1954, Fondo de Cultura
Económica, Mexico City.
3. In the movement toward rationalization, the Ford Motor Co. lately has taken
the lead with the installation, in 1947, of so-called "Detroit Automats,"
special machines that handle and automatically transport the parts of an
article for fabrication within a continuous production process. Since then
that principle has found application in many industrial processes and is known
by the name of "mechanization" or "automation."
4. New York, Syracuse University Press, 1955, p.4.

                     FIRST PART
          The Methodology of Investigation

    A. The Basic Conditions of All Science

INVESTIGATION is the mother of all science. The restlessness of his spirit
leads man to inquire. On making contact with the environment, instinct induces
him to determine what it is he sees, what are the things that surround him.
But he is not content with that. his urge to know makes him question the
origin of things, the motives for their existence, their reason for being. And
upon doing this, he realizes that things have not always been as he sees
them; that they have changed and that they change. One discovers in them the
principle of development, of evolution; and it is only natural that the
audacity of one's thought incites one to wonder about what this will be in the
future. Thus man acquires a set of understandings concerning things and their
nature, their causes and essence which, when these subsist for him with the
certainty of truth, become science.
    Yet science does not consist in the simple accumulation of positive
understandings. The essential in it, which creates and conditions this science
as such, is the procedure that is followed to establish or recognize what is
for it the "truth," that is, "the reality of things."

1. The concepts. This is one of three basic elements that must comprise
all science. Ultimately, one should have and establish clear concepts
regarding the things that are the object of their investigation. That means, for
one part, the formation of an authentic vocabulary and, for another, a clear
definition or interpretation of the meaning of the words and terms with which
the science operates. We observe that each science speaks its own language
which, sometimes, only the initiates understand. The engineers speak a
different language from the doctors; the judges express themselves in
different terms from the chemists; astrophysical calculations leave the most
erudite philologist in the dark. Although all speak the same language, they
shall not understand each other if they do not know the technical terms that
are used and if they do not understand the specific meaning given to common
words.  Nevertheless, it would not be easy to give a thing or concept a
definition as precise as occurs for example with the meter, the liter, the
kilogram, an hour, a year, geometrical shapes and figures, et cetera. In the
majority of the instances an exact and unequivocal definition would be
impossible. Try to define what is a "newspaper" or a "luxury good" or the
concept of an "underdeveloped economy," and see the great difficulty of doing
so. What is more, definitions have their perils. In the Digest of Justinian it
is warned: Omnis definitio periculosa est; all defining involves a
danger, be it that it is incomplete and thereby insufficient, of limited
practical applicability, or that, by wishing to cover everything, it is so
complicated and extensive that no one understands it or it is given to
ambiguous or arbitrary interpretations. It is not a sign of scientific
capacity and spirit to perform risky mental gymnastics to offer definitions of
things that do not allow definition; but what should be demanded of the
investigators, whatever be the field of their science, is that, whenever it is
not possible to give an exact and concise definition, she should describe
the things of which she speaks and leave clearly established in what sense
such and such a word should be understood or such and such a concept be

2. The system. The concepts represent the ideas that we have or which
we form of things. We take them from the observation of objects and of their
attributes. Those are the elements of our understanding of the world.
    But isolated and individual insights which we bring from our observation
and experience are yet insufficient to satisfy our scientific urge, which goes
further. We want to know the true nature of things and phenomena, the causes
of their being, the relations that exist within them and the way in which
they are mutually conditioned. For that they must be classified, framed in an
organic grouping, and given a logical, natural and systematic ordering, for
only in that way can we see more clearly, only thus can we come to know and
comprehend their essential significance and draw useful conclusions which
serve our goals.
    All science must base itself upon a system, in which are established
the rules and principles that govern the material which is the object of its
investigations. In a system, our individual and partial insights unite in
an organically ordered whole, which removes their merely empirical
character and facilitates scientific understanding for us.
    We can distinguish within the systems of scientific interest two large
groups: the natural systems, created by nature, and the artificial systems,
made by man. To the former belong the systems of the universe: the
astronomical systems (suns, planets, inter-galaxy, etc.); the biological
systems, physiology, anatomy, et cetera, of the organisms of living creatures
(circulatory, respiratory, digestive, nervous, glandular, bone systems, etc.);
the geological systems; the systems of the physical and chemical elements; the
systems of the atoms, and yet others. With regard to those systems, scientific
investigation directs itself towards the knowledge of its nature and inherent
    The other systems are those established by man with the object of
arranging thereby, in a logical and organic manner, ideas, understandings or
precepts which derive from his investigation or that are important to satisfy
necessities as much of a spiritual as of a practical order. Here belong the
systems of the philosophical sciences; systems of geometry; the diverse
systems of measurement, numbering and accounting; the tonal systems of music;
the systems of the political, social and economic sciences; the systems of
economic organization, money, banking, et cetera; bibliographic systems and
yet others.  All those systems can change and, in reality, always change,
whether they be a part or the totality. Some, because we discover new elements
that complete or modify our understandings of the essence of the objects and
phenomena of nature, and others, because they adapt--a priori or a
posteriori--to the changes that are produced in our modalities of thinking
and living. These changes are the consequence of human progress and of the
ways and means, constantly more refined, that we employ to uncover what we
call "truth."
    We may recall the changes, from Ptolemy through Einstein, experienced by
our concept of the universe. Each one of the great wise men who have come to
shape our knowledge, our idea of the universe, has been the founder of a new
scientific conception which gave a new interpretation to the "system" of the
universe, progressively more logical in itself and conceived in accord with
the means and possibilities of scientific observation and knowledge of the
phenomena of the universe. And although we know the Ptolemaic system was
mistaken, it does not cease thereby to be great science, because it was a
system closed in itself and very advanced, if we take into account the limited
possibilities of scientific understanding that characterized his epoch.
    With regard to the science that interests us most directly here,
economics, we see that, despite its relatively young age, it has suffered
profound systematic changes. We speak of the mercantilist system, of the
physiocratic system, of the system of economic liberalism, of capitalism, of
socialism, of communism and finally of the regulated economy of our day
directed by the State, which some call "State capitalism," others "State
socialism" and others the "planned economy," but that still lacks its own
name because it is a hybrid product based upon elements of capitalism and of
socialism and that has all the appearances of a transitional system from
which, possibly, another of more definite characteristics could be born.
    All the systems of economics and of political economy, products of
specific developmental needs, have substantially influenced the economic
and social thought of their times, just as also, inversely, the great
representative figures for those ideas have influenced the orientation of
politics in a decisive way. Colbert (as a statesman and politician, although
not as a theorist), Quesnay, Smith, Ricardo, List, Marx, Walras and Keynes are
names of distinguished figures who with their activity or their theories have
contributed in an important degree to the development of our science.

    3. The method. So then, for all science it is of fundamental
importance that the facts it establishes and the understandings it provides
have the maximum grade of exactitude that is practically possible for a
science. In that resides the essence of what we call "scientific," and when we
give a fact or an affirmation this attribute, we wish to say that its
effectiveness or truth can be verified by a determinate procedure. This
verification should be the result of a conscientious investigation, carried
out in accordance with specific norms or precepts that assure the fulfillment
of the requirement and which is the "scientific method."
    We have here the third factor which is a basic condition for all science:
the method, that is, the orderly procedure that is followed to establish
the significance of the facts and phenomena towards which scientific interest
is directed, and to discover and teach what in the scientific material is "truth."
    Only an investigation carried out in a methodical way can provide clear
concepts for things, facts and phenomena; it can facilitate for us the
systematization of our insights and ideas and make possible, finally, for us
to discover the laws or regularities to which everything that exists and
evolves is subject. For Aristotle, science is identified with method and vice
versa; and indeed, without method there can be no science.
    It is clear that each science, just like every art, has its own specific
methods and work techniques. A watchmaker cannot work with the tools of a
bricklayer, and an astronomer applies other methods to his studies than an
historian. However, all the sciences, with regard to the norms and general
rules which govern an investigation, have something in common: To perform
any investigation and take concrete and usable conclusions from it, it is
beneficial to answer four questions that present themselves in every instance,
whatever may be the object of the investigation.
    The first question is the what? With what does it deal? What are
the deeds, phenomena or events which we submit to our investigation? What is
it that we want to know? This question is directed to the matter or object of
our study and with which we circumscribe its reach.
    The second question is the how? How are the things in which we are
interested presented to us? How can we individualize them to compare them and
distinguish them from others? Which are its characteristics and how can we
classify them and bring them together into a system for a better understanding?
And if we warn they have not always been as we see them: How have things
developed and what are the tendencies followed in the changes we observe?
The reply to this question requires an historical inquiry into the evolution of
things; but at root, this does not go beyond pure description of the existent,
without being able to say anything about what the third question evokes.
    That third question is the why? It is a proud question which no science
can answer if it is directed toward things "such as they are." Only the infinite
consciousness, which has created and directs all that "is," could do so; yet it
never will reveal its secret to humanity. Nevertheless, the question has its
importance, if we limit it to an inquiry into, Why have things come to be what
they are. Why have they evolved as they did and not another way? Which have
been the factors and conditions that have determined their development and
in what form have its influences been exercised and keep being exercised?
Of what order and nature are the laws that determine their tendencies.
    If we succeed in satisfactorily answering those three questions, the
scientific investigation properly so-called has realized its goal; it has
provided us all that we want to and can know, neither more nor less.
    More precisely, for pure science, the answer to the three previous
questions would be sufficient. But science is not a pastime for the wizards;
science carries its finality not in itself, but instead in the form by which
it contributes to progress and to the perfecting of our knowledge of the world
in which we live. If it has no bearing on the progress of humanity, it is not
worth the effort to cultivate it and practice it. The final goal of all
scientific investigation consists in establishing certain conclusions which
are derived from analysis of facts and observation of laws to which the
evolutionary process of the real is subject; and those conclusions should
serve to orient our conduct versus the things to which we must adapt in our
daily living and to reach the higher ends which we project.
    It follows that all scientific investigation, to be complete and to comply
with its true objective, should answer, directly or implicitly, the fourth and
last question: What lesson can we learn from its result, and how can we better
take advantage of it?
    To facilitate a positive answer to this question is the supreme duty of
all science. Whether men follow its warnings or not is a separate question.
For that science cannot be made responsible.

    B. Object and Objective of Economic Science

Economic science needs no apology to justify its reason for being. It is a
true science like all the others. It has a clearly delimitable field of
investigation: the economic life of man; it has reduced its material for
observation and experience to concepts of significance to itself, although in
many instances in has acquired them borrowed from other sciences; it has
formed its own dogmatic systems as a basis for its theories; and finally, it
has developed methods of investigation and teaching appropriate for meeting
its specific goals.
    It is true that it is a young science; it is only two hundred years old;
in Latin America no more than a generation. It has still not found its
definitive form and character, and the question of its object and objective
gives impetus, from time to time, to interesting controversies rich in
ingenious argumentation, but that rarely elevate the level of the discussion
beyond the purely academic.
    Actually, that question has its practical importance and the method which
is applied to an investigation depends in large part upon the answer that is
given to it. Therefore, before describing the methods worthy of our science,
it is suitable to define the ends it tries to serve.
    Economic science is a fundamentally human science. Its object is
the economic life of people; and by economic we mean the intersection of the
motivation and activities of a humanity destined to ensure its existence and
improve its life-conditions.

    Behind every act, each event, every institution of an economic character
lies man. The economy does not march by itself, but is driven by the desires
and will of the people. Economics without man is nonsensical and what an
economy is, is nothing but a reflection of what the men are who create it.
Nonetheless, we are accustomed to speaking of things of the economy as if
they had independent existence and life. We speak of the "production" which
increases or diminishes; of the "prices" that go up and down; of "interest"
which is produced on capital; of the "bank credit" that expands or contracts;
of the "money" which is devalued; of the influences exerted in economic
development by the "balance of payments"; of the effects produced by
"investments"; of the swings between prosperity and depression to which--in an
inexorable way many think--the "economic cycle" subjects us, etc. And when we
so speak, we frequently completely forget that it is not production, prices,
interest, credit, money, the balance of payments, investment, the economic
cycle, etc. which react in some given way, but it is the reactions of the
people that produce those effects.
    Keynes has introduced to economic theory the consideration of certain
psychological factors which would explain the motivations behind human
conduct. In Book III of the General Theory he speaks of the "propensity
to consume," which according to him depends on three factors: 1) total income;
2) certain objective circumstances; and 3) upon "the subjective necessities
and the psychological inclinations and habits of individuals"(1). In relation
to the first of these factors he thinks he can establish a law he calls "the
fundamental psychological law" and which consists in that "men are disposed,
as a general rule and on the average, to increase their consumption while
their income grows, although not in the same proportion"(2). He enumerates
six different cases which under objective circumstances represent changes in
a given situation. To them he adds eight subjective motivations that impel
individuals to abstain from consumption expenditures and which are: caution,
foresight, calculation, the approach of improvement of the standard of living,
independence, the spirit of enterprise, pride and avarice; and six contrary
motivations that can induce the individuals to increase their consumption:
enjoyment, lack of foresight, generosity, errors in calculation, ostentation
and extravagance. And finally he establishes four motivations, similar to the
previous ones, identified in an inadequate form as "social incentives," which
can influence the expenditures of the central and local governments, of
institutions and of commercial groups: the motivation of enterprise, the
liquidity motive liquidity, the motivation for betterment and the motive of
financial prudence.
    We have here a series of concepts which, in the meaning and application
Keynes gives them, were previously unknown to economic science; nor
however were they known to psychology to which, in truth, they have very
little to do. We deal with a somewhat arbitrary enumeration of subjective
incentives, some of a psychological character, others not, which indeed can
determine individual behavior, but only with difficulty can explain the
reactions produced in a collectivity. It is impossible to believe, for example,
that calculation, pride, avarice, generosity, ostentation, and extravagance
can manifest themselves in so many individuals that they are capable of
provoking, through collective effect, significant changes in consumption
expenditures and therefore the advance of business; yet it is precisely those
effects and their causes which most interest the economist.
    One can call this aspect of Keynes' theory not very scientific, or in the
best case as "pre-scientific"(3), because what he says here still lacks all
methodical systematization; it is scarcely more than an insinuation based upon
subjective empirical impressions; yet it has nevertheless led to attractive
and new investigations which can have interesting and eventually useful
results. Trying to understand the economy in all its manifestations as a human
creation, it seems clear that economic science should benefit from the
results of psychological investigation to achieve deeper understandings of the
nature of the motives that determine human conduct; and the reverse, an
interesting and fecund field of investigation opens to psychology if it
dedicates itself, more than it has so far, to inquiry into the psychological
basis upon which businessmen found the expectations which orient their
    However, the study of people's behavior as individuals and the motives
which they have for their conduct--a task properly speaking for psychology--is
insufficient to constitute a valuable contribution to the progress of economic
science. The studies and investigations of a psychological character should
necessarily be supplemented by others of a sociological character, given that
of more interest to science than the reactions of individuals are those of the
collectivity or of determinate groups of individuals who unite for common
interests. The observations of a French author in an interesting study on
inflation are very pointed:

    "It is a fact that an isolated individual cannot have a significant
effect upon existing monetary relations; only a group of individuals can have
such an influence. Therefore the so-called psychological theories of
inflation, which analyze it only from the point of view of individual
behavior, have arrived, in our judgment, at an impasse... These theories
overestimate the power of individuals, because, to act effectively upon the
network of monetary relations, a mass effect is necessary; nor do they take
into account the fact that each individual belongs to a group and the
distribution of economic power between the groups is unequal"(5).

    Another French author describes political economy as "a synthetic
discipline at the crossroads of the psycho-sociological sciences."

    According to him,

    " would not be a science of human behavior--which is related to
psychology--nor a science of social structures, a chapter of sociology.
Nevertheless, it cannot fail to recognize either one of these disciplines,
whose advances should allow a basis for concrete development and
applicable knowledge"(6).

    The ideas expressed in both citations seem to us symptomatic of the actual
state of political economy as a still not well-formed science. There is no
room for doubt that it has much to gain from a tighter union with psychology
and with sociology. For now, a General theory upon this foundation has not
yet been written.**
    The factors which Keynes mentions have, in relation to his theory of
employment, a principally theoretical importance; it is not easy to prove
their effectiveness in practice. In contrast, there are others that manifest
in a more evident form: they are the characterological factors which
distinguish humans in their actions and reactions, represented by qualities of
character, hereditary or acquired, modifiable on not, which exercise decisive
influence in individual activity, in the formation and development of
enterprises and institutions, in the political resolutions that are taken and
which can give a specific tone to the economic and social life of entire
peoples. Audacity and timidity; initiative and inertia; dynamism and
indecision; discipline and negligence; sense of responsibility and
indifference; spirit of work and laziness; scrupulosity and carelessness are,
among others, concepts representative of human qualities whose determinate
influence, in a positive or negative sense, is felt everywhere in how men
confront given situations or deal with economic and social problems.
    For the practical economist it is of fundamental importance to know how
to duly appreciate those factors and the possibilities and limitations
residing in them, which must be considered, in searching for and proposing
adequate solutions to problems.

Very well, if the object of economic science is human economic life, its
objective can be no other than that we have indicated, that is: to study the
manner of proceeding and acting by people as economic beings, the conditions
that cause them to change their conduct and the effects derived from that. Yet
this implies even something more. We cannot come to terms with the simple
analysis of given situations, or the verification of certain facts, without
drawing from them conclusions of practical utility which should serve, if not
as learning by individuals and the institutions they create, then as
orientation points for the politics of State.
    Economic science only deserves to be considered as such, if from its
investigations and their conclusions one derives human assistance, as much in
individual existence as in collective, toward constantly bettering and further
perfecting the means and methods found worthwhile for achieving satisfaction
of our economic necessities.
    It is fitting to leave this clearly established. Economic science must
serve positive human ends, just as the other sciences do, such as medicine,
jurisprudence, physics, chemistry, mathematics, and even philosophy.
That does not say, of course, that it should passively place itself in the
service of any tendency or political program, or submit itself to the
requirements of dictators or the subjective desires of determinate classes or
interests. Science ceases to be what it is when it loses its independence.
Nor does this mean that for the benefit of the ends one should abandon their
principles or seek utility before truth. What we should ask of economic
science is that it allows us to constantly know and better understand the
reality in which we live and that the results of their investigations,
completed in a realist spirit, shall help orient us and motivate economic
development toward real and true progress. Only this outcome can give
economic investigation sense and value.

    C. The Methods of Economic Investigation

We have already defined above in a general way what is the "scientific
method," that being the orderly procedure followed to discover and share that
which in matters of science is called the "truth."
    Yet the scientific method is not singular; there are different ways to
proceed to obtain scientific results. Every science utilizes its own methods,
adjusted specifically or exclusively to the goals it pursues. There are also
methods which, by their correspondence to basic principles of our sort of
thought and investigation, are common to all the science and which, without
changing their nature, are applicable to the most diverse material. The
analytic and synthetic methods, inductive and deductive, are of fundamental
importance for the construction of the theoretical foundation of all science.
    The science of economics has only since relatively recently begun to
develop its own methods, adapted only to itself; at bottom, the methodology
of theoretical economic thought, just as with investigation that pursues
practical objectives, is based in procedures developed by other sciences, such
as philosophy, medicine, chemistry, physics, mechanics, mathematics, history,
etc. Scientific methods as such are complemented by certain auxiliary
techniques that facilitate the comprehension of the thesis that one wishes to
    The brief explanation which is given here of the methods of economic
science only tries to highlight the most essential; no discrimination is
implied in favor of one or against others; nor does it refer to specific
procedures, which are nothing but derivations from the basic methods; it is a
simple description of the tools with which the economist operates and the uses
she can make of them. Which of the methods is the most adequate in a
particular case of investigation or in what way one with another should be
combined, will have to be decided by the investigator, for it depends entirely
on her temperament, upon the criteria and the proposition one has in mind.

1. Analysis. To understand the essence of a whole, one must know the
nature of its parts.
    The chemist who determines the elements or groups of elements that
comprise a compound; the physicist who investigates the structure and
composition of what the ancients thought the last indivisibility of matter:
the atom; the anatomist who, in dissecting an organic body, studies and
instructs in the formation and functions of its members; the psychologist who
tries to scrutinize a person's past to discover the causes of a state of
mental morbidity; the linguist who studies the etymology of words; the
philologist who studies the structure of a great literary work to penetrate
wholly into the spirit of its author; the historian who scrupulously examines
the authenticity of the sources of information found in libraries or archives
regarding a political event from the past: all pursue the same goal and
all utilize the same method. The goal is: to know the object subjected to
study with exactitude and in all its details and characteristics; and the
method is: analysis.
    We call analytic that method of investigation which consists in the
dismembering of a whole, concrete or abstract, into its components, or which
tries to discover the causes, the nature and the effects of a phenomenon by
decomposing it into its elements. This method is indispensable whenever one
tries to establish the true type of an object, event or phenomenon; and since
the obtaining of positive knowledge is the prerequisite of all science, the
analytic method, which provides those understandings, is of fundamental
    For the science of the economy, the analytic method has acquired, in our
day, a special significance manifested by the fact that the old denomination
of "political economy" has been displaced in the work of some modern authors
by that of "economic analysis." At the same time, "The old fourfold division--
production, consumption, distribution, and exchange--has almost completely
disappeared. Instead we have a twofold division: into the part of the analysis
which can be conducted with the aid of the demand and supply concepts, and the
part that requires the concepts of the marginal analysis"(7).
    However, the difference between both conceptions of our science is more of
form than of foundation. The purpose in both cases is the same: to establish
"economic theory," although the visual angle for the investigation and the
instrumental methodology have experienced notable broadening in the recent
    Now then. How does the analyst proceed?
    The analytical investigation should be systematically conducted over
various stages on a progressively ascendant scale.
    It begins with the observation of a deed or phenomenon which
awakens our scientific interest or that we deliberately choose to submit to
study. From observation we pass to the "description" of what we see or find.
But this act already encloses something else: the critical examination
of the object of our interest. And to be able to truly examine it with
critical eyes, we have to deconstruct it, analyze it in the sense we
have described, in order to know it in all its details and aspects. It is very
possible that the next step will be the enumeration of the parts which
resulted from the previous analysis. Shortly we have to arrange them,
that is: to comprehend one and the other in their function and position. And
upon doing that, an adequate classification is imposed as logical and
    With all that, we have already advanced such that it shall be possible for
us to explain what we have found, by its origin, by the conditions of
its development or existence and by what it signifies or represents. To
complete this part of our investigation, it will occur to us to make
comparisons, to seek analogies or discrepancies with other facts or
phenomena. Thus we manage to establish relationships and coordinate
the object of our investigation with other similar ones. And if we remember
that nothing exists or occurs in an isolated fashion only for itself, it will
be easy for us to understand it also as a product of the environmental
circumstances that surround it, and even more, as part of something greater,
of a universal totality, toward which everything that is and happens converges
to an ultimate and supreme unity. At this height, the investigation already
draws near to its final aim, which is discovering the regularity in the
variability of things, the unity within diversity of phenomena, or in other
words, the laws that determine events.
    Thus analysis takes us from the observation and examination of a
particular fact, to the establishment of a general principle, and in this way
realizes the goal that we had in sight when we initiated the investigation.
    But strictly speaking, this last, the abstraction of a principle or a
truth of general character, is not now the exclusive result of an analytic
operation. To the degree that we advance in our investigation, always
accumulating more detailed and particular understandings of the material that
is the object of our study, we sense the necessity of arriving at something
that is yet beyond simple observation or experience.
    It does not suffice to be aware of things; we also wish to comprehend
them in their true essence. And so, our investigation passes, beginning at
a given moment and sometimes in an imperceptible manner, from the method of
analysis to another, which is that of synthesis.

2. Synthesis. This concept does not interest us here in the sense given it
by post-Kantian philosophy, especially by Hegel, or that is, as a
reconciliation between the two extremes of the thesis and the antithesis, but
instead only as an epigram for a methodological procedure.
    As such, in a strict sense, synthesis would signify the inverse operation
from analysis, or that is: to reunite and compose the parts or the elements of
a whole previously separated and decomposed through analysis.
    Yet evidently those proceedings, as an investigatory method, will be of
little or no use, because they cannot bring anything new to our understanding
of things.
    In fact, for our science, what we should understand by synthesis is not
properly a "method" of investigation, but instead a fundamental spiritual
operation, by which we achieve a complete comprehension of the essence of that
which we have understood in all its aspects through analysis. To achieve that
comprehension, which embraces the object of our scientific interest in its
totality, is the goal properly speaking of our investigation. Therefore,
synthesis is nothing less than the aim and final result of the analysis.
    In this sense one might also interpret the famous "rule of synthesis"
formulated by Descartes in his Discourse on Method: " carry on my
reflections in due order, commencing with objects that were the most simple
and easy to understand, in order to rise little by little, or by degrees, to
knowledge of the most complex"(8). This, expressed in nuce, is the same
as what we tried to present in speaking of the manner in which the analyst
    Both operations, analysis and synthesis are, in practice inseparable.
Analysis without synthesis enables only the knowledge of empirical facts,
without our being able to arrive at their true comprehension. Synthesis
without analysis has no consistency and leads to conclusions sometimes very
distant from reality. Neither the one nor the other is science.
    We may, upon beginning an investigation, make ourselves a conjecture about
the significance of the object of our scientific interest, or in other words:
we can begin with an hypothesis, with a presumption inferred from certain
indicators, from a preconceived idea, from which we try to tentatively
and provisionally give a rational explanation for the object of our study. It
is a mental operation that underlies all the sciences and a perfectly correct
procedure, useful and at times indispensable, which can qualify as a sort of
"synthetic method." Notwithstanding that the hypothesis can be a valuable
guide to us in our investigation, it does not cease being just a supposition
for us still not proven. The verification of its validity should be the work
of the analysis. If the analysis confirms what we have supposed a priori,
we can accept it as definitive truth; if the analysis speaks against the
hypothesis we have to discard it and formulate general conclusions in
accordance with the positive results of our investigation.
    In this sense too synthesis is the logical final operation of analysis,
wherein we systematize and accept the results suggested by the analytical
procedure as a basis for generalization, or in other words: analysis delivers
the materials from which synthesis constructs our edifice of true knowledge
and understanding.
    Synthesis is also of fundamental importance for the way in which
investigation results are presented. Any study that is limited to mere analytic
exposition cannot satisfy us; a good part of its positive value consists in the
synthetic summary which is given to its conclusions.

3. Induction. The scientific method can also be characterized in
another way. When discussing analysis, we have said that all scientific
investigation, which has as object the clarification of given facts or
phenomena, necessarily must commence with observation, as the inquiry's point
of departure that, systematically carried to completion through various
stages, must finally lead, with assistance from synthesis, to the perfect
comprehension of the nature of the deeds or phenomena with which it deals.
This same procedure, elevated to the rank of a methodological principle,
is induction, and the method that corresponds to this principle is the
inductive method which, therefore, is one that establishes propositions
of a general character inferred from observation and the analytical study
of particular facts and phenomena.
    For example, it interests us to know the causes of the variations
experienced in the prices of the products and articles that are offered and
sold in a freely competitive market. Upon studying the conditions of a great
number of products and articles, we observe that prices tend to fall when
greater quantities are offered than corresponds to the demand and tend to rise
when the opposite occurs. If this observation is verified with regularity and
in all cases or, at least, in the majority of them, we can conclude, in a
general way, that prices tend to lower when the supply is greater than the
demand and vice versa, that they tend to rise when demand is greater than
supply. In this way, the observation of a great number of particular instances
induces us to draw a general conclusion, to which we can give, if we wish, the
character of a law that, in this case, will be the "law of supply and demand."
    But the formulation of an economic law is a serious matter and we must be
careful. For a long time this law of supply and demand has been considered one
of the most important formulations of economic science, as an immutable law,
an incontrovertible truth. Today it is granted a more relative importance,
admitting it as an explanation in specific cases and in certain circumstances,
and negating its validity in others.
    In fact, we see many cases that cannot be explained with the law of supply
and demand, instances in which prices rise, without there having been excess
demand, and others wherein prices fall, without there having been excessive
supply. In both events, the causes should be sought in changes brought about
in cost factors. An increase in remuneration for labor beyond the increment in
productivity tends to raise prices; and vice versa, an increase in
productivity, obtained as the result of a process of rationalization, will
allow a lowering of prices.
    It is not always supply and demand which determine prices; it can also be
the opposite, that prices determine the supply and demand.(9) Prices with a
rising tendency can encourage production and supply; and prices with a
tendency to be low can stimulate consumption and demand. Yet even in those
cases one must use discernment to establish the causes. Rises of an
inflationary character, provoked by factors foreign to the normal conditions
of the market, can be unfavorable to production; and low prices produced by
deflationary tendencies can fail to stimulate consumption.
    The influences active in the development of factor prices for financial
and monetary politics, control measures, requirements of the trade
organizations, etc., are sufficiently familiar from the events of the last
decades, and it has been precisely those decades which have given strong
impulse towards the amplification and deepening of analytical and inductive
investigations in the field of our science.

4. Deduction. So then, after having established in this fashion, based
upon observation and the conscientious analysis of many cases or events, that
is a posteriori, if not a truth of a general character or an economic
law, at least the conditions leading in given situations to price variations,
we can "deduce" or conclude a priori that, when the characteristic
conditions for one or another of these situations come together, the prices
will have to rise or fall, as the case may be. This is a conclusion arrived at
by means of deduction, and the method which seeks to establish truths in
this manner is the deductive method.
    Deduction commences, then, from pre-established truths to infer
conclusions from them with regard to particular instances. Yet it is not
helpful for the deductive method to be only the mere inversion of the
inductive method. Deduction, like induction, comprises also a methodological
principle, a specific way to proceed in the investigation. While induction
commences from exact observation of particular phenomena, deduction
begins with the inherent reason in each phenomenon. While induction
arrives at empirical conclusions, taken from experience, deduction
establishes logical conclusions. Whereas the propositions of the inductive
method are exemplifications which establish the how of phenomena, their
causes and their real effects, those of the deductive method are abstractions
which try to establish significance in phenomena according to the
investigator's reason.
    Deductive thought has characterized an entire epoch in the history of our
science. Adam Smith, Ricardo, Malthus, Stuart Mill, and other representatives
of the classical school of economic science founded their theories not always
upon observation and critical analysis of reality, yet instead upon
assumptions that, according to them, underlay the logical consequences. The
personal interest of the individual as the motive for all economic activity,
the intelligence of the individual to know at every moment what most benefits
her; the identity of the individual interests and the general interest; the
equality of forces and conditions which exists for individuals who meet to
conclude a voluntary and free contract, and other similar assertions are of
limited fundamental reality, but they allowed the Classical school to derive
from them a system of natural laws which dominated economic and social
life and that, logically, should have denied to the State every right to interfere
in economic matters, except in cases of absolute necessity or when one dealt
with enterprises in which the private economy could not have been interested.
    To demonstrate what, according to them, were the errors of the Classical
school, the adversaries of liberal individualism, above all the socialists,
chose to found their own ideas on empirical facts; however, they have not been
able to dispense with the reasoning of deductive abstraction either. For all
the authors who have contributed to the formation of the socialist doctrine, a
markedly rationalist thought that has its foundation in the social philosophy
of the 18th century is characteristic. The supposed existence of a "natural"
social order created by God or by nature: that had been displaced by the
"positive" order, artificially and arbitrarily created by men, and so it
should be restored in all its validity, according to some, as "reform,"
according to others, as the class struggle and the "revolution" that leads to
the emancipation of the proletariat and the establishment of their
dictatorship; all those slogans, and others derived from the same ideology,
however powerful may have been the influence of the social movement of the
19th century, base themselves on arguments that do not resist the critical
analysis of induction. A more realistic orientation was only introduced into
economic thought by the historical school, to which we refer below.
    In the present era, and more particularly in consequence of the crises
which followed the first World War, inductive thought based upon observation
and analysis of social and economic facts with the most refined means has more
and more been imposed in economic investigation, which previously our science
did not utilize. Nevertheless, the same facts and deeds that motivated the
objective and realist investigation, also impelled the conception of the
General theory, of Keynes, the purest product of deductive thought,
which even more than a profound evolution has caused a lamentable
confusion in contemporary economic thought.
    Both methods, the inductive and the deductive, do not exclude each other;
on the contrary, they are mutually complementary. It is also true that
deduction by itself can only lead to perfectly positive results, if it always
begins with exact premises and its logical reasoning is correct. Yet it is
also true that logic often conduces to absurdity, and the instances are not
rare whereby a theory or a conclusion, although established by a thinker
considered a maximum authority in our science, deserves some qualification for
being the result of pure mental speculation that did not remain related to
reality. For the science of the economy, which is and should be an eminently
practical science, it is essential that the propositions of deductive thought
be controlled and verified by inductive analysis. If not one runs the risk of
losing themself in abstractions which may be audacious and ingenious, but are
useless practically, for deviating too far from real life, or dangerous
because there are always those who believe that that precisely is the truth.
The way Oppenheimer characterizes the relation between the two methods is
quite correct: "Induction without deduction is like a ship without a compass;
deduction without induction is like a compass without a ship"(10).

The methods which we have described until now are fundamentally disciplines
of theoretic thought: that characterizes the procedure the investigator follows
to penetrate the meaning of reality. The result of an investigation completed
in this form is the establishment of a theory or, at least, the enunciation of
a truth which has validity for the matter that has been the object of the
    The practicing economist generally does not have the intention of
establishing theories, nor does anyone require it. Yet naturally one must
dominate the theory of her science and understand and know how to apply the
principles of theoretic thought. For her, the question of methodology is
something different. She shall have to confront cases of practical life;
problems of politics of the State or problems of the private economy, and in
each case she is to propose adequate solutions. The elements of judgment
needed for this task she shall obtain from her direct contact with reality,
but they will always be the result of a mix between objective perception and
subjective appreciation, two ways of seeing and treating the problems which
might be called methodological procedures and which it seems convenient to
briefly comment upon here because of a certain correspondence they have to
the methods formerly described.

5. Objectivism. In philosophy by objectivism is understood the doctrine of
that school which equates reality with the exterior world. For it, the concept
of the objective is identical with the real, the actually existent, the world in
which we live, the physical, what we perceive with our senses, the practical.
As a methodological principle, objectivism is identified with analysis and
induction, but for the practical economist it comprises something still more:
the attribute of seriousness. Such investigation pursues a practical end, be
it that it treats with description of a given situation, or with analysis of the
results of a political measure or with a critical examination of the conditions
presented for the realization of an idea or a plan. In all these instances, the
economist begins with something concrete and formulates her conclusions or
recommendations in accord with what she honorably considers as real, as
true or as appropriate.
    This mode of proceeding requires of the economist the capacity to
completely disengage herself from all the solely personal which could be
introduced into the investigation or its conclusions, something that for all
too human reasons naturally will not always be possible. Nevertheless, there
exist certain norms whose observation can guarantee to the work of the
economist a character of strict objectivity. These norms are the following:
    a) Always use information from direct and primary sources and resort to
data deriving from indirect or secondary sources only when one has the
security that she can consider them as correct.
    b) Look at and--if it is necessary--analyze supporting data with
critical eyes to assure oneself of its significance, and not seek in it more
than it really contains. This is particularly important when one deals with
averages or with composite data, such as indices, balance of payments or
national income.
    c) When occasion arises to discuss a project or measure or to make
an important resolution, to analyze coldly and dispassionately all the
arguments which can be adduced in favor and all those that speak against
the proposition. The balance of this confrontation will indicate in which
direction one should decide.
    Especially this last is a practice of great utility which substantially
contributes to clarifying the ideas that one has that often, for being
preconceived, cloud the vision and make difficult the formation of clear and
objective criteria.

6. Subjectivism. Nevertheless, however objective the economist wishes
to be, they always begin from somewhere and introduce in their investigations
something of an ultimately personal character. An absolute objectivity would
oblige them to limit themselves to the mere description of given facts; yet
such will not succeed in satisfying our scientific passion. Facts, to be
comprehensible in their true significance, must be analyzed, interpreted and
inter-related, and this is not possible unless the investigator puts into the
matter something of herself and proceeds according to her own manner of being,
thinking and feeling.
    For every investigation, a focus on the material or the problem which is
subjective in a certain sense is inevitable and even indispensable, given that
therein the personal relation that has been established between the
investigator and the object of her scientific interest is expressed, whose
existence is the natural and logical condition for realization of the study.
The mere awakening of our interest in a given matter; the doubt or uncertainty
which assaults us in one case and the sensation of certainty we have in
another; the explanation that we "think" we have found for a phenomenon or the
simple "opinion" we have or we form about the matter; all these are
manifestations of a subjectivism inseparable from the investigator's modes
of thinking and proceeding.
    It is clear that a philosophical subjectivism, taken to an extreme as an
egocentric conception of the world and negation of all extra-mental reality,
cannot interest the economist, neither as doctrine nor as a methodological
basis. Nor can the economist permit the investigation to be influenced by a
vulgar subjectivism manifested in the pursuit of unilateral interests of
particular persons, classes or political parties. It is rare that the
practicing economist can remain strictly apolitical; their education, their
personal experiences and their temperament will carry them in one direction in
the political atmosphere or another, and that will fundamentally influence
their manner of thinking. However, there is nothing censurable in this, as
long as the economist always can give an objective foundation to that which is
subjectively felt.
    There are those who deny to subjectivism all right to figure in the ambit
of science. They are right insofar as they think of the theory by which the
only source of our experience is the mind and the only reality is the
intellectual world. Yet that intransigence loses its force before a
subjectivism which is nothing more than the expression of the investigator's
individuality, particularly when that identifies her as a distinctive
personality. In speaking of personality we think especially of two categories
of people: of all those whom one should recognize as "authorities," uniting in
themselves to a high degree the qualities of knowledge and power, and of the
"genius," on the last rung in the scale of intelligence. This excludes, on one
side, the uneducated and the ignorant and, on the other, the fanatics and the
insane. The investigator who deserves to be called an individual, in a
definite sense, has every right to have her own ideas and to express them to
her liking and in her own way. The intuitive opinion of an authority, free of
uncontrolled passions and impulses and based upon wisdom and experience, can
be much more valuable than the result of a long and meticulous objective
investigation; and the introspective vision of reality held by the genius and
her imaginative power can open new paths to science and bring it closer to the
truth than the demanding research impelling the analytic investigator.

7. The method of historical investigation. Our knowledge of any fact or
economic phenomenon shall always remain incomplete while we look at it as
something existing or given in itself. We can achieve a perfect
"understanding" of what the fact or phenomenon means, the causes it obeys and
the effects it produces; yet we shall not arrive at "comprehension" of its
true nature, the true conditions of its existence, without penetrating into
its past or, in other words, without studying the history of its evolution.
    Historical analysis was introduced into economic science during the second
half of the previous century by a group of German economists (Roscher,
Hildebrand, Knies, Schmoller and others), who comprised the historical or
realist school of economics and which, in contradistinction to the
fundamentally deductive thought of the Classical school, and breaking with all
that was abstraction and a priorism, accentuated the importance of inductive
and historical investigation of reality"(11).
    In the United States this school is represented by those called
"institutionalists" among whom a distinguished place belongs to Thorstein
    E. Whittaker characterizes these schools in summary form as follows:

    "While the Classical economists erect their science upon logical reasoning
that starts from established postulates, the historical and institutionalist
schools employ the realist method of study, examining historical datums and
analyzing statistics. Of course, this material presents the social life
process as a whole and it is not always possible to identify the specifically
economic element. Furthermore, the growth in quantitative data allows
strengthening of the Classical postulates using historical or statistical
information, and the path of the dividing line between the two schools seems
ever less clear"(13).

    This is not the occasion to refer here to the evolution of the historical
school, which has had great influence in the economic thought of its time, as
also in practical political economy. It gave a strong stimulus to historical
studies, and there is no doubt that economic history, as the story of the
development of economies and of their institutions, includes material from
experience and from learning of inestimable value for the economist. Therefore
a good curriculum of economic history, as a complement to a curriculum of the
history of economic doctrines, should not be lacking in the program of any
school of economics.
    The economic investigator interested in economic history will have to
apply the same method that governs historical studies in general, and which
she will utilize throughout the following stages:
    a) Before all else she will subject to study and critical analysis
the facts drawn from the sources of information, such as: libraries and
public and private archives; museums and other places where the
testimonies of the past are found conserved in the form of documents,
inscriptions, useful objects, collections, etc.; diaries, magazines and other
periodical publications; ancient or contemporaneous works of historical
literature, etc. Also the traditions, the customs, the fashions and certain
professional practices can be of special interest for the historian.
Fundamentally important in this first part of the investigator's work and her
scientific labor properly speaking is the rigorous, critical examination of
the informational material, with the object of establishing its authenticity,
at first, and then its value as a proof in the demonstration of interest to
the historian. This part of the historical investigation is called the
    b) The second stage consists in the mental reconstruction of
the deeds of the past upon a basis of adequate selection and logical
interpretation and explanation of the data gathered in the previous process of
investigation (the "hermeneutic"). Not everything the sources of information
offer the investigator can be of interest, but only the historically relevant
and effective, the facts and events that are highlighted, that have left an
impression and deep tracks in the past of a nation or given form and suggested
directions toward the historical transformation of humanity. At the same time,
the interpretation and explanation of deeds and events requires from the
historian a clear philosophical conception of the principal dynamic in all
that occurs, of the "idea" that is revealed in the spirit of the times and
which creates the institutions and incarnates in the personalities of those
who must bring them about.
    c) The third stage, finally, is that of written exposition,
in which the literary talent of the historian comes into play, which, for the
success of her work, is of the same importance as the choice of the persuasive
word by the orator. Exposition can adopt different forms, for example that of
the "monograph," which treats a single theme or matter; that of the
"biography," which is the description of the life of a particular person; or
that of "history" proper, or that is the narration in a systematic form of the
occurrences of the past.
    One of the most sublime forms of historiography from Antiquity has been
the "epic poem," whose true value as a fount of historical information has
only come to be understood in recent decades. Gilgamesh, the oldest epic that
we know (2,000 years B.C.); the Iliad and the Odyssey of Homer;(14)
the Aeneid of Virgil; some books of the Old Testament;(15) the Araucana
by Alonso de Ercilla, belong to that category of poetic works which today
is no longer cultivated. On the other hand, the "historical novel" and the
"historical drama" are of great educational and cultural value for, despite
being works of literati and poets and, therefore, characterized by a highly
subjective conception of their themes, they always are the product of serious
historical studies and are capable of communicating more intimate
impressions and understandings of past times to the reader or spectator than
could the objective exposition of an historical text.
    Historical analysis is of primordial importance for economic investigation.
Nevertheless, the method of historical investigation, which we have just
explained, does not coincide exactly with the historical method of
investigation. The difference between the two methods is the same which
exists between the investigator who studies the past with the intention of
writing history and the investigator who studies the facts and phenomena
of the present and reverts to history, in order to comprehend and be able
to explain them.

8. The historical method of investigation. The idea that underlies this
method was that which gave birth to the formation of the historical school
of economics mentioned previously, and its principle of investigation
consists in attending not simply to the existent, the visible and the tangible
and interpreting it according to what one thinks they see in it, but instead
to inquire into the form and the conditions by which it has evolved to be what
it is, and so to understand facts, events and phenomena of an economic
character in their true significance and in relation to all the other
manifestations of the social life of humanity. "The field of investigation of
the national economy is the economic life of men; to that extent, it comprises
a circle of interests and activity that together embrace the totality of the
lives of the economic subjects"(16).
    What is essential in the method which interests us here, which accentuates
the historical aspect of the investigations and whose importance is the same
for the investigator as for the practicing economist, can be summarized in the
following points:
    a) The economy is only one of many aspects of human social life. It
must be understood not as something independent which can be separated from
all the rest, but instead as part of an organic whole in permanent evolution.
The economy of a people in a given moment is the result of a long process of
development influenced by the most diverse factors: the geographic situation;
the geological and climatic conditions; racial, cultural and political
factors; wars, revolutions and natural catastrophes; customs and traditions,
or, all that gives a nation its specific character and forms its community's
idiosyncrasies. In the same sense one must also understand the organizational
forms created by men: the juridical, political, social, religious,
educational, artistic, scientific, economic, financial, and monetary
institutions and all the remainder that derive from them. Between those
institutions as well there exist tight dependencies; none can be explained
only in itself; in one or another form, directly or indirectly, each one of
them is conditioned by all the others.
    These considerations lead us to two important conclusions:
    For the practical economist, who naturally always must embark from
actuality itself, it is indispensable to know the way in which reality has
evolved. It will always be found to be tied to one economic institution
or another, and to act in it or on it, one must know its history, one must know
how to answer an entire series of questions, for example: How did the
institution originate? What needs were imposed to create it? With what
intention was it created, and what was hoped for? In what way has it fulfilled
the expectations that were concentrated in it? or--if this is the case--how
and why was it left to deviate from its original destiny? Which have been the
forces that have determined its development in practice? Does the institution
actually achieve its mission? And if not: Could it reorganize? Would the
reorganization encounter support or opposition and from what side? Up to what
point shall it be possible to bring innovation to it? etc. It is understood
that knowing how to proceed accurately is the basic condition of the practical
economist's success.
    The other conclusion which is imposed is this: No economic and social
institution, however great the importance attributed to it, can be
transplanted from one country to another, if the conditions rooted in the
historical evolution of the respective economies or the surrounding medium are
not favorable.(17)
    b) The development of an economy and its institutions does not depend
only on internal forces; sometimes much more decisive are the influences
exercised by external factors. It is not always easy to recognize and identify
those influences, but for the economist, whether she be practicing or
investigative, it is indispensable to know that they exist and to understand
the way they produce their effects. The study of general economic history
will be in this respect of inestimable assistance.
    We shall think only of a phenomenon that is the object of deep
preoccupation among many governments, especially in the Latin American
nations: the constant deprecation of the currency. It is not a problem only of
our times; it is already old; its history already spans more than a century.
Yet it is impossible to formulate a clear concept of the causes of this
phenomenon, if one tries to explain it--as is often done in monetary histories
of the Latin American nations--as deriving principally from inflationary
internal politics, without putting it into relation with the factors and
forces that determine the development of the world economy.
    Toward the middle of the 19th century the development of what today we
call the "World Economy" begins. In that era begins the great international
expansion of liberal capitalism. The second half of the century is
characterized by the founding of great industries which in a few decades
attain worldwide importance. From year to year commercial interchange
intensifies, so that between 1850 and 1910 it grows at a cumulative annual
rate of 3 percent. The rapid increase of Merchant Marines is at the same time
effect and cause of the growth of international commerce and of the
intensification of production of all kinds of primary materials on all the
continents. The net of communications is extended; postal relations are
organized into a Universal Postal Union; the telegraph and underwater cables
revolutionize transactions, simultaneously introducing into them a previously
unknown factor: the nervousness, the hypersensitivity with which the
commercial exchanges react to occurrences produced in the furthest parts of
the world. The construction of railroads increases enormously in all
countries, reaching such an importance that Gustav Cassel thought he could see
in the interruptions to these investments the direct causes of the cyclical
depressions that were experienced during the second half of the 19th century
and the beginnings of the 20th. To all this was added the successive adoption,
by the most important nations, of the principles of the gold standard for the
organization of their monetary systems; the international ramification and
amplification of the banking apparatus and, together with this, the ever
greater expansion of international financial capital.
    The transition of the systems of national economy into the world economy,
implemented in the economically and financially most advanced nations of
Europe, in the middle of the 19th century, could not fail to produce
repercussions in the least developed countries of the periphery. Yet it is a
very characteristic fact that, while on the old continent the age of so-called
"civilization" began with the mechanization of production, in the overseas
countries it was introduced through a refinement of consumption. And this
characteristic has been continued in many parts of our continent until
today. Customs of consumption, the fashions and the luxuries of European
life--and today the North American as well--have been articles of import
for the Latin American nations, which always have weighed heavily in the
balance of payments. A good part of the depreciation of their currencies
can be charged to these invisible accounts.
    Another factor that has had decisive influence over the Latin American
currencies has been the international economic crises. Until the middle of
the 19th century, crisis and depressions were matters more or less limited to
the affected countries. Only in the second half of the century does the
cyclical international movement of the day begin to synchronize so that,
after 1870, an almost perfect parallelism among the economic movements
of the principal nations is reached. A crisis in Europe explodes in 1873
which can qualify as the first world crisis. The depression that followed,
characterized by a marked tendency towards a low international price
level, lasted more or less until 1895. The effect of this crisis was felt in
Latin America as a strong pressure against the currency, whose devaluation
in that era was due in large part to this cause.
    The same factor has exercised powerful influences in the same sense on
other occasions; such as, in the years that followed the first World War,
1918 to 1921; and above all in the great world crisis of the years 1930 and
after. In all those periods, the devaluation of Latin American moneys was a
consequence, principally, of the low price level in the exterior. Inversely,
the general and international raising of prices in the last years of the 19th
century and the first of the next; then, during the first World War; and
later, during the boom of the years 1936 and 1937, provoked tendencies
that translated to an effective or intrinsic revaluation of the Latin
American currency.
    Finally, technical progress in the methods of production has also had to
flex its muscles in the overseas countries. The rapid expansion of the world
economy in the second half of the 19th century drags the Latin American
nations in a train of economic development that accelerates little by little,
decade by decade, year after year, and in our times has arrived at maximum
intensity. War and crises have caused those nations to comprehend the
imperious necessity of strengthening their economic structure through a
progressive industrialization. For that they need capital which, in part, they
have received from abroad. National capital never has been abundant and its
backing has not always been legitimate savings; often it has been born from
emissions of paper money, and the tendency to "create" capital in this fashion
subsists until today.
    Added to this is that industrialization generally has not been carried out
in an organic and systematically planned way. Many industries have formed
being favored by certain circumstances of passing duration without having
a natural base. These, like the majority of the others also, cannot exist
without powerful protection of the State; its costs of production are high
and have a tendency to continue rising. And when the direct protection of
the State is now proved insufficient, a recourse to other means is sought.
In not a few cases the devaluation of the currency is imposed as ultima
    This is not the place to deepen the theme. We have referred to the
problem of Latin American money only by way of example. The problem is
complex and presents itself differently in each country, but in the existing
instance it can be seen that, viewing it from the historical point of view,
one should arrive, in many instances, at conclusions substantially distinct
from those that can be drawn from a study which limits itself to analyzing
the problems of the present moment.
    c) The study of economic history should teach us the relativity of time
and space in economic truths. If the economy in which we live is the product
of an historical development and is subject, therefore, to progressive
modifications, one must also admit that economic truths cannot be absolute and
eternal; their validity depends on many factors in permanent change,
influenced by natural, cultural and political circumstances in which nations
live and develop. A normal economy, as the Classical school supposed, is a
theoretic abstraction, but not existent in reality. If this is so, it would not
be possible to construct an economic theory of general validity applicable to
all economies in every age.
    These are ideas that were formulated for the first time and expounded in
systematic form by Roscher more than a hundred years ago (1843) and contain a
truth which, indeed, could qualify as of general and absolute validity.

    Of the Ricardian theory Keynes says:
"The completeness of the Ricardian victory is something of a curiosity and a
mystery. It must have been due to a complex of suitabilities in the doctrine
to the environment into which it was projected"(18). Exactly the same can be
said of the General theory of Keynes. Its concepts of money and of its
functions are derived from his own experience recovered from an extraordinarily
critical period for the English economy and, therefore, cannot be valid in
the same way for other economies and substantially different times.
    Of Karl Marx it is said that, if he lived today, he would give his
Capital a fundamentally different cast. It is very possible that he might
have. Yet, of course, this question is also justified: how would the economic
and social development of the world have looked, if Marx had not written
his Capital?

    d) If economic analysis demonstrates to us the impossibility of
transplanting an economic institution--or in general one of any kind--from one
country to another without it often suffering, in the process of adaptation,
substantial transformations generally not conducive to betterment; if, by the
same road, we arrive at the conclusion that the theories which characterize
economic thought are nothing but products of their times and the special
circumstances which then prevail and, to that extent, cannot be granted
general validity; we then have to recognize that the measures of practical
politics can equally only have a very relative importance. Measures that
in a certain country under certain conditions can be accepted and have obvious
success, applied in another country, even though it is found in a similar
situation, can produce very distinct effects or even, in some cases, be
decidedly rebuffed.
    The monetary authorities of the capitalist countries, to impose their
policies, operate with a very effective series of instruments which for the
less developed countries lack importance or are not applicable in the same
manner. We mention among these the management of the public debt, the interest
rate, and open market policy.
    The manipulation of the public debt as an instrument of monetary
regulation only can be truly understood as a principle born of a long monetary
tradition in the United States, for which practical and political convenience
always have counted for more than theoretical considerations. The same
principle, applied via monetary politics in countries of different economic
structure and different traditions, can give nothing but very problematic
    For a European or North American economist the fact may not be easily
understandable at first sight that the Latin American central banks
generally followed very conservative interest policies and that these
were not utilized, or only a little, to influence the market. The reason is
that so-called currency markets do not exist or exist only in embryonic form,
and that the commercial banks still vary their interest rates more as a
function of their costs than with the object of exerting influence on the
fluctuations of money. Additionally there is for many of these nations the
memory of a totally negative experience implemented through the politics of
interest rates during the great world crisis: the rise in interest rates not
only did not prevent the exodus of gold, but instead, on the contrary, helped
cause the drainage of the monetary reserves to intensify ever more.
    Seen from today, no law of the central bank is considered modern and at
the altitude of the most advanced concepts that are held of monetary politics,
if it does not contain provisions which authorize operations in the "open
market." The majority of Latin American central banks have this facility,
despite the fact that for them these operations acquire in practice a very
distinct sense from what they have, for example, in the United States, where
they derive from a long monetary tradition and are used on a wide scale to
regulate circulation. In countries with currency markets and sufficiently
developed capital, the purchase and sale of public bonds by the central banks
can, in reality, serve the ends of monetary regulation in an effective manner.
Where such conditions do not exist, operations on the open market will always
be of a most unilateral character: it will be easy to expand the circulating
medium through the purchase of fiscal assets, and the issuance will rarely
lack convincing motives; yet it will be difficult, and the majority of times
impossible, to implement in another situation the inverse operation, without
the offer of those bonds by the central banks causing disturbances in the
market due to lack of capacity for absorption. It is in this way that these
operations sometimes result in marked inflationary effects.
    In September of 1931 England surprised the entire world with the
suspension of the gold standard and the consequent devaluation of the pound
sterling. Only shortly thereafter one could see that these measures, far from
having the disastrous consequences that many forecast, had meant the
definitive end for England of the deflationary crisis and the starting point
for a new resurgence of her internal economy and exterior commerce.
Nevertheless, the most interesting effect, in open contradiction to all which
up to then was thought to be theoretically and practically expected from this
measure, was the fact that the suspension of the gold standard had not given
origin to a runaway inflation. On the contrary, during the following three
years the level of internal prices in England showed, in their general
bearing, a stability rarely recorded in the history of that nation.
    On the European continent, Germany and France could have drawn very
important conclusions from the case of England for their own political
situation, given that the economic and monetary conditions created by the
crisis of that epoch were the same for all. Nevertheless, both nations found
it convenient not to imitate the example of England and followed their own
politics. It was thus that Germany did not officially devalue its currency,
yet created, instead, a complete series of "exchange marks" for its relations
with the exterior, whose exchange value was effectively equivalent to a
devaluation, and to a considerably greater extent than what would have
corresponded to a free and natural devaluation. France, for its part,
tenaciously clung to the parity of its money with gold, as if salvation
depended on it. In reality, this attitude meant it would see its economy in
almost complete ruin. France--with a heroism worthy of a better cause--was the
only one which persisted in the havoc of the crisis unto the end. However, its
sacrifice was in vain; France could not avoid devaluation either; she had to
accept it in 1937, when international economic conditions had already totally
    The cases of Germany and France are highly significant due to the fact
that even common sense political measures, which had demonstrated their
efficacy, are impossible to adopt in a country whose people are accustomed to
thinking in another fashion. In Germany, the memory of the inflation
catastrophe of 1923 and the fright, systematically propagated by Schacht, that
such a thing was going to recur; and in France, the traditional fear of all
that could mean touching the value of the franc and thereby the savings of the
bourgeois, were the decisive factors which determined the politics of
those nations in these years. To act any other way would have been, as much
for the Germans as for the French, totally contrary to their national
character and their historical experience.
    The attitude of men, at all times and in any situation, is fundamentally
conditioned by the past, and sometimes only from that point of view can it be
understood - although not always justified.
    e) A variant, in a certain sense, on the method we discuss here, is
that called the Method of historical comparison (a name proposed by
the professor Jacob Viner), which has special importance for the economist
dedicated to planning, be it for the public sector or for particular
institutions and organizations whose work involves investigations related to
economic forecasts for the short or long term. In speaking of forecasts, we
refer to that action through which one tries to obtain, based upon certain
indices or precedents, a judgment about what could or will transpire in a
future either more or less proximate or distant. Patrick Henry(19) has said:
I know of no way of judging the future but by the past; and in truth,
there is no better or more sure road for arriving at a judgment about the
future than the study of the past. Economic prognosticators do not depend--
much as in medicine--only on a diagnostic ascertained from the situation at a
given moment; to find out the course which a process of development should
follow--or in medicine a disease--it is essential to know the evolution it has
had in the past and the nature of the factors that have contributed to its
    There has formed in the course of the 20th century an entire science of
the problems of forecasting in the given sense: the science of conjunction or
of the economic cycles, which has developed its own methods and techniques
of statistical and mathematical analysis and whose object is the study of the
causes and the character of the fluctuations that are observed in economic
activity. These studies pursue a double goal: first, to draw concrete conclusions
with regard to their possible or probable behavior in the future from the way
in which fluctuations in certain important economic variables is produced,
and second, to indicate the measures that practical politics can validate to
control these fluctuations and assure the economy of a certain degree of
    The methods and techniques used for this science consist fundamentally in
historical comparison which is applied in various ways:
    i) Upon observation of a cyclical movement that extends itself
over a greater interval, it tries to discover and establish a periodic
regularity in the fluctuations, from which the presumption that the
movement will also keep repeating itself in the same way in the future is
deduced. It has been effectively possible to establish a marked regularity in
the rhythm of variations in a great number of statistical series, yet the
predictions based on such observations in many cases have been erroneous. Very
possibly the reason is the fact that most of the observational material that
has been analyzed for these ends covers the second half of the 19th century
and the first decades of the 20th, that is, a period characterized by the
predominance of principles of economic liberalism. The transitional
development of an economy is such circumstances is substantially different
from that undergone with a regime of all kinds of state interventions and
controls characteristic of our times.
    ii) One tries to determine, also upon a basis of statistical
material that spans a long duration, an average line or a trend which
is taken as the normal line for the development of the respective series or
various combined series. The picture so obtained is utilized for two classes
of predictions. First: From the deviations the empirical series shows from
the so-called "normal line" one tries to draw conclusions regarding the
probability of future changes in one or the other direction. Predictions of
this nature can be very vague and do not permit apprehending in advance the
possible amplitude of a future deviation. Second: From the trending direction
of a curve is deduced the tendency for the future, which is a methodological
error that more than once has led to false conclusions. The "trend" of a curve
indicates its effective tendency only within the limits of the available data;
each extension of the curve, whether towards the past or forward with the
addition of additional information, can change the trend and sometimes changes
it considerably, which naturally must also affect all valuations respecting
the future based upon this procedure.
    iii) The construction of economic barometers is another procedure to
obtain some opinion about possible future developments. In this case as well
historical investigation of the behavior of certain key indicators is important,
along with the way the activity of one of them precedes or follows that of
another. One of the most famous barometers of this class was The Harvard
Index of General Business Conditions, which consisted of three curves
representative of "speculation" (bank debits of New York's commercial
banks and an index of the quotes on industrial actions), of "business"
(bank debits of the commercial banks outside of New York and an index of
the prices for the majority) and of "money" (discount rates on letters of
commercial exchange). The three curves showed, within their cyclical
movement, a surprising regularity in their phasing, so that an ascendant or
descendant motion of the first of these curves always preceded by a time
a reaction of the same type in the second curve, and that the motions of this,
in turn, preceded those of the third. In 1929, the Harvard barometer already
covered period of more than a quarter of a century; the crisis of the following
years, whose onset the technicians had not been able to predict from the
behavior of that barometer, signified for it a complete disaster; later attempts
to revise it seem not to have given satisfactory results.
    iv) The same principle on which the Harvard barometer was based--
interpretation of curves which demonstrate coordination among themselves--
has allowed the Institute for Business Cycle Research of Berlin (today the
German Institute for Economic Research) to construct, not just one, but a
complete system of barometers, whose results, happily combined,
should give a more solid foundation to the predictions.
    In a similar manner, but with more refined techniques, investigations of
the cyclical movement of economic activities has been accomplished by the
National Bureau of Economic Research in the United States. The forecasts
of this "Bureau" are based upon observation of the variations in 21 important
statistical series, divided into three groups, according to whether the
variations precede a change in the general tendency, coincide with it or
follow it. The observational material analyzed already covers various decades.
Among the diverse methods of economic prediction based on comparative
historical analysis, that applied by this Bureau seems to be the relatively
most perfected.(20)
    Other than the methods described here, others are used which it is not the
place to mention here, since they operate with different techniques, although
none of them can totally do without historical analysis of the data that
serves to establish economic prognostications.

The somewhat more thorough exposition we have made of that called the
historical method of investigation, has had as object to demonstrate the
importance to the economist of awareness of the historical conditionality of
all that exists and occurs. The knowledge of the past will help her to better
understand the present and opens perspectives on the future. To analyze an
economic or social problem with historical criteria is an indispensable
condition if one wishes to produce a realistic solution. Knowing how to
think and act with this criterion will assure the economist a large part of
her success; improvisation and speed are her worst enemies.

We should still mention two classes of investigatory methods which are
characteristic of distinct positions that can be adopted regarding economic
events and facts. They are the static and dynamic methods, for one part, and
the microeconomic and macroeconomic, for another. The importance of these
methods resides above all in their application to theoretic analysis; yet to
the degree that that contributes to elucidating economic reality, one should
also attribute importance to them in practice.

9. The static method. The concept of stasis belongs to mechanics. Applied to
economics it includes, the same as in the theory of mechanics, the notion of
equilibrium between antagonistic forces. Indeed, for the static method, the
central idea, from which all deductions derive, is the supposed existence of
a state of equilibrium, in which the economic forces are found
perfectly balanced internally.
    An approach of this sort immediately reveals what is problematic in the
hypothesis, namely that an economic equilibrium in the sense mentioned has no
real existence except in a single case: when it deals with an economy in which
there is no movement, in which there is no development, in which all persons
settle for what they have and receive, in which all desire for overcoming or
progress remains totally annulled; in other words: in the case of an economy
in plain stagnation.
    It is evident that such an economy--an economy without problems--cannot
offer any incentive for investigation. Yet this does not mean the supposition
of a static economic state has no validity for theoretic thought. Often, to
arrive at realistic conclusions, it is necessary to begin from hypothetical
conditions overall, conceived in the form of a theoretical abstraction under
the assumption of ceteris paribus or, that is, a state wherein the variable
that one wishes to study remains isolated from all the others, which are
considered not operant. It deals with a methodological procedure which
permits the investigator to penetrate into the nature of the case, based upon
the mental construction of a simple model, to which can be successively
aggregated other variables that enter into play, until the most complete and
realistic picture of the object of scientific interest is obtained.
    A classic example of a theoretical abstraction in this sense is the
"Isolated State" of Johann Heinrich von Thünen (1826). With the aim of
studying and demonstrating the influence exercised in the different branches
of agricultural production by distances to market, he imagines a city isolated
from the rest of the world situated in a completely generic country. Around
this city the diverse zones of production locate, in concentric rings, which
feed the center. In immediate proximity is found the zone of gardening and
horticulture; following it is the zone of forest production; the third ring is
dedicated to the cultivation of grains; and the last to meadows for livestock.
According to von Thünen, the location of the production zones depends
fundamentally on transport costs that the diverse products may involve.
    If we begin from this fact, we can introduce another factor into von
Thünen's model, for example, a train that crosses the agricultural zones
(in von Thünen's time trains did not exist), to see thereby what
consequences this new mode of transport brings with it for the configuration
of the productive zones. Many other interesting conclusions can be derived
from this theoretical conception.
    Another example that may interest us in connection with our discussion is
the following:
    We posit a small State of three million inhabitants, of whom a million
represent the economically active population. Of these 900 thousand devote
themselves to production of the material goods and services the entire
population needs for its consumption, and the remaining 100 thousand are put
to production and conservation of the capital goods the community produces
that it needs. At the given level of prices in this economy there exists a
perfect balance between consumption and production.
    Now the danger of a war arises for our State, threatened by the
neighboring State. The government sees the necessity of rapidly increasing war
production and devotes 100 thousand men to this end from the active part of
the population now producing items for consumption.
    With this a fundamental disequilibrium is immediately generated. The 100
thousand men cease producing what they made before, to devote themselves now
to producing arms, ammunition, etc.; they receive the same pay as before (in
practice, surely more) and also want to spend it in the same way to which they
were accustomed. Nevertheless, they cannot do it, because they lack that part
which they had produced before and now have left off producing.
    The problem has only two possibilities of solution, without causing other
complications: Either the population voluntarily renounces a part of their
accustomed consumption corresponding to what previously was the production of
the men who work now in the war industry; or the 800 thousand men, who
continue producing consumption goods and services, increase their
productivity and with it their production, so to compensate for the gap left
by the 100 thousand men who have been subtracted from this production. It
is very probable that the first will not happen and the other only occurs in
an insufficient form. Then there results, as something inevitable, a pressure on
prices which reduces the purchasing power of the entire population.
    Yet this hike in prices is not limited to reestablishing an equilibrium
between production and consumption at a lower real level, but instead, by the
cumulative effects that it produces, a generalized inflation can be the
    This example serves to explain, at least in one of its important aspects,
the problem of inflation which, in lesser or greater degree, has affected all
the nations of the world in the years following the second World War. Account
is not taken in this of other factors, such as taxes, social security, changes
in remuneration, general financing of production and more, that also play an
important role in inflation. But in truth, inflation does not always originate
with financial or monetary factors, but also in disequilibria created between
production and consumption power for other reasons. In our example, war
production is an unproductive activity par excellence; but the same effect
can result from an increase in persons working unproductively in the
bureaucracy; and even more, an excessive expansion of new investments can
cause--and for the same reasons explained in our example--strong inflationary
pressures, while works are in progress and have not begun to increment
production of consumption goods. The actuality of this experience is known not
solely by the nations which, following the second World War, have had to make
huge investments to reconstruct their devastated economies, but also by the
less developed countries, among them the Latin American especially, who
intensified their investments, as much national as foreign capital, with the
object of expanding and diversifying their productive capacity.
    A good example of diverse situations of "static equilibrium" is
represented by the well-known "equation of exchange" of Irving Fisher. The
supposition upon which it is based is that, during any period, the product of
the quantity of money in circulation (M) and the coefficient of its
circulating velocity (V) is the same as the product of the volume of the
goods that are the object of the transaction (T) and of the prices agreed for
them. Both sides of the equation would thus depict, with different elements,
the same concept: the total of completed transactions.(21)
    Via this equation you can establish and study the most diverse states of
equilibrium, beginning from a determinate initial position. Upon equating each
of the four factors of the equation with 100, as the point of departure for a
simple index, the student may entertain herself and exercise her imagination,
demonstrating the way that the remaining factors must vary, when an autonomous
variation is exerted in one of them. As those exercises possess a certain
degree of practical probability, they can serve to make clear the mutual
relations existing between money, goods and prices.
    We can suppose, for instance, that the factor M experiences a rise of say
ten percent. The equilibrium, temporarily perturbed, reestablishes itself--
ceteris paribus--with a rise also of ten percent in P. In other words: an
increase in the effective quantity of money in circulation corresponds, under
the assumed conditions (or that is, that V and T remain unchanged) to a
proportional increase of the price level. It is a possible case, yet in
practice not very probable. Something more realistic is the inverse case, or
that is, an increase in P owing, for example, to a rise of prices in the
exterior, which ceteris paribus only could be paid from the interior,
if M increases in equal proportion.
    It is clear that each one of the new positions that is obtained, causing
one or another factor to vary or all together, represents a new state of
static equilibrium; but while theoretical investigation confines itself to
studying the characteristics of each one of these positions, the changing
equilibria also permit making comparisons among the different levels, whose
results can be of interest.
    The assumption of ceteris paribus, which we have introduced in the
previous example has great applicability in theoretical analysis, and is often
indispensable for demonstrating the existence of certain relationships. But it
is wise to keep in mind that it only functions as an expedient of theoretical
abstraction, of the method of isolation. Before the immense diversity of
aspects that the economy offers us in its actual existence, "the
ceteris--as L. V. Birk has said--is never paribus."
    It is mentioned in passing that ceteris paribus can have a certain practical
application in statistics. For instance, the scenario can be presented with
interest of determining in what degree the price variation in a specific
article or product has contributed to the variation in a partial or general
price index. The answer to that question is obtained by calculating the
respective index according to the same prices of the previous period which
are taken as if they had not undergone any variation, and introducing as a
changed price, for the next period, only the article or product under

The examples that we have exhibited demonstrate the substantially deductive
character of the static method, because of the high degree of abstraction with
which it operates. Yet this procedure is justified in some instances, for it
permits the investigator to obtain a clearer vision of the complicated
relations that exist between the diverse economic factors, when they are
studied in an isolated fashion. The static method is not limited to the simple
description of a supposed "state of equilibrium." Zeuthen(22) characterizes it
very well as follows.

    "Static description is comparable to a map without indications of
elevation. If one is dealing with a plain, such a map will be satisfactory for
almost all practical propositions. If, on the other hand, we wish to know
something of the Alps or the Himalayas, the practical value of the map shall
be very limited. But also in this case it could be used as a point of
departure, because in it are found all the points and the connections between
them. It could be clearly applicable to the calculation of distances,
estimation of climatic conditions and much else, if the missing elevation
indicators are added."

    The theoretical abstraction that validates this method does not carry,
then, its completion in itself, but instead is only a beginning point for a
deeper investigation which, through the progressive complementing of the
primitive model with the introduction of other elements, shows the manner in
which the existing relations vary and so permits the formulation of concrete
and important conclusions concerning reality. With this introduction, however,
of other elements which come to modify the supposed "equilibrium state," the
method now ceases to be of a merely static character and becomes dynamic.

10. The dynamic method. The concept of the "dynamic" also belongs to
mechanics. By dynamic is meant that part of the science which treats of forces
and the movement they produce. However, in economics this concept acquires
another meaning, different from that of the theory of mechanics: it signifies
development, evolution. In this sense, then, dynamic economics is the exact
contrary of static economics. If we define static economics as "the conditions
under which economic life does have continuity, but not growth, while
production and consumption develop in a uniform manner, without great changes
in their character"(23), we have to understand by a dynamic economy an economy
full of active and propulsive energies, an economy in full process of
evolution, "in which the availability of productive forces increases, in which
technology and business organization improve, in which consumer demand expands
and rises to ever higher levels"(24).
    The difference between both concepts of economics also determines the
investigative methodology. We have already seen that for the static method the
central idea is the supposed existence of a "state" of equilibrium, a state
that it is only possible to imagine in its purest form as a market where no
transactions are enacted. The moment, however, that we give movement and life
to this market, animating it with the live strengths of the people who supply
and demand, we enter into the realm of the dynamic. Then we are not as
interested to study the conditions of an "equilibrium in repose," but the
way in which the competing forces appear and adjust or, speaking in more
general terms: the process that guides economic movement towards an
equilibrium or deviates from it.
    The static method presumes the constancy of determinate existing
conditions in the given theoretic moment and, starting from this premise,
tries to deduce conclusions with respect to the way all the different factors
should be grouped to maintain a perfect equilibrium. For the dynamic method
fixed conditions do not exist, but instead constantly changing conditions, and
its method is to study the causes that generate the changes and the way in
which the adjustments that those changes require are produced in economic
    The dynamic method introduces movement, then, into the investigation and
economic thought, as much in time as in space or, what is the same, the
concepts of development and of expansion. It is not interested so much in
what things are, as in how they came to be what they are and--up to a certain
point--in how they are going to continue developing in the future. This method,
despite the name that has been given it, has nothing in common with mechanics,
for which concepts like "history" and "viewpoints" do not exist. Knight is correct
when he says that, what in the literature is presented as economic dynamics,
should more properly be called "evolutionary or historical economics."
    Very well. What are the basic dynamic elements that determine the
development and the expansion of an economy? Fundamentally two, which we have
already mentioned previously. The growth of the population and the human urge
to improve their living conditions. Both elements cause certain events and
reactions, whose effects in conjunction give economic development its specific
    The first of these elements is, without room for doubt, the most forceful,
especially in the underdeveloped nations. The rate of population growth in
these countries is relatively high, due, in part, to the diminution of
mortality--which is a universal phenomenon--and, for another, to a relative
constancy in the birthrate. To that is added the influence derived from
immigration, which has been especially great in the last 100 years in
countries such as the United States, Brazil and Argentina. The pressure
exerted by population growth obliges the polity of the States and private
initiative to always seek new and wider means of production, in order to give
work to all those who annually join the economically active population. This
is not always achieved in a satisfactory fashion; then tendencies for
emigration arise, which are characteristic of various overpopulated nations of
Europe and Asia. Yet it cannot be a desideratum that production increases
pari passu with the growth of the population either. In that case,
we can well speak of development, but not of progress. Only when the rate of
growth of the national income, in real terms, is greater than the rate of
growth of the population can we say that development has ceased being merely
"vegetative" and results in material progress; and to the extent that the per
capita rate of national income increases, a bettering of the living standard
of the population can also be supposed, at least as an overall average, which
still does not permit extracting conclusions regarding the way this betterment
extends to all the diverse layers of the population.
    Regarding Latin America, studies conducted by the U.N.'s ECLAC demonstrate
that, in the 25 years between 1931 and 1956, the level of the gross national
product, i.e. of production in general, has been more than that of the growth
in population; but whereas population increases in a quite even and constant
path, the same does not occur with production, which, in its general trend,
develops with marked discontinuities. Periods of five or six years of intense
expansion alternate with others of apparent saturation, and in the latter the
rate of production growth approaches closely to that of population increase,
and in a large number of countries even can become less. Howard S. Ellis,
professor at the University of California, has noticed the same and thinks he
can affirm "that the salient characteristic in the major part of the less
developed zones of the world consists in that the pressure exerted by the
population threatens to absorb the gains achieved through economic
    Notwithstanding, it is undeniable that Latin American economies progress;
yet the progress is slow, too slow, due principally to an insufficient
capitalization, to the application, ordinarily, of antiquated production
methods and the still widespread unfamiliarity with the principles of a
rational organization of business. All this is in open contrast with
consumption habits, which tend to adapt to those of other more advanced
nations with much more rapidity than what corresponds to their internal
economic development. This other dynamic element, whose efficacy is seen in
the hope and requirement for the economy to satisfy the urge of large masses
of the population to improve living conditions and to obtain thereby a more
comfortable life, decisively influences the social and economic policies of
governments, yet creates, at the same time, conditions that favor the
formation of permanent and fundamental disequilibria.
    The politics of social utopia, to which governments seem impelled, almost
never goes coupled with material progress. The ends that it pursues tend to
create new demands and needs, without always succeeding in simultaneously
creating in sufficient fashion the means of satisfying them. In turn, all
politics of social uplift contains in itself, for natural reasons, the urge
toward quick realization, without always keeping practical possibilities in
mind circumscribed by the limited existence of necessary resources. The
tensions born from this conflict between desires and aspirations, on one
hand, and reality, on the other, engender inflationary tendencies which, if
not restrained in time can, by cumulative effect, lead at length, to
dangerous extremes.
    Considerations like these shed a very different light on inflation than
that which generally serves the observers or technicians for explaining this
phenomenon. There are two different ways to focus upon it: Of course, it can
be analyzed in its most immediate and actual aspects. Thus one will be able to
establish what are its direct causes and which are its effects that one wishes
to combat. The outcome of an analysis in this sense can be the conclusion that
it is well to take certain measures, such as, for example: to reduce public
expenditures and increase receipts to end the deficit situation in the
exchequer; to exercise a strict control over prices; to submit external trade
to control; to increase interest rates; to restrict or at least limit bank credit;
not to accede to demands for wage and salary increases and to concede
adjustments only within certain limits; to combat "speculation"; to recommend
to the citizens an austere life and sobriety in their expenditures; and above
all, to "increase productivity."
     These and other measures are well-known, which were recommended and
applied in practically every country during the years of acute inflationary
crisis following the second World War, and that continue being an important
part of the political arsenal of governments. The philosophy upon which they
are based is none other than that of static thought. Its objective is: to
reestablish and maintain an "equilibrium," to which in some places the name
"monetary stability" is given, in others "economic stability." What is
accomplished with these measures, in every case, is to moderate the
fundamental disequilibrium, yet not to eliminate its causes.
    Upon analyzing from a different angle the phenomenon we call inflation,
from the historical and evolutionary point of view, and taking into
consideration the way in which demographic, sociological, psychological and
political elements enter in, or in other words, applying the method of dynamic
thought to the analysis, the conclusions we arrive at will be substantially
    We shall have to recognize that that which we call "equilibrium" and
"stability" are nothing but theoretic concepts, that as such have their
unquestionable value for science, which must work with abstractions and
idealizations; but practice does not know states of equilibrium and of
stability, and what we believe we can label as such, in truth, has only a
transitory and sometimes very fictitious existence. In economic life,
equilibrium and stability are never the rule; they are only an exception.
    Although an assertion like this may be in frank opposition to what usually
serves as the objective of all sane economic and monetary politics, historical
experience and practice cannot belie it. Economic and monetary politics in all
nations--not alone those called underdeveloped--is found in constant struggle
against disequilibria which are only temporarily dominated, to re-appear
shortly. One of the most common is a deficit in the exchequer, which is not
always the consequence of passing circumstances or the product of a deliberate
policy of deficit spending. It is something inherent in the nature of spending
that it tends to grow in greater proportion than income. Without
opportune success in correcting this tendency, the deficit can become a
chronic ill with cumulative effects that make it a most dangerous and
difficult to eliminate disequilibrium. The balance of payments can never be
perfectly equilibrated. In the majority of Latin American nations the
intrinsic tendency is passivity. With control measures and artificial
regulations they could influence their development, but only to soften the
effects, not to neutralize them. Frequently these disequilibria are due to the
fact that the relations in value between the national and foreign currency do
not correspond to the natural conditions of exchange. Even in a regime where
parities are in principle flexible, the national currencies generally are
overvalued, rarely undervalued (the D-mark of W. Germany in 1957 and the years
following); the secular tendency of all the currencies is toward devaluation.
The causes of this process, in the majority of instances, reside in internal
disequilibria which, in turn, have their origin in an excessive creation of
money. An economy in full development cannot accept that the creation of money
is limited to being a function of the natural and organic necessities of
circulation born in realized acts of exchange. But even for the most advanced
economies, the question of how to adjust the circulation of money to the
legitimate needs of the market is the eternal problem of their monetary
politics, that never will find a satisfactory solution. For Keynes the
currency is an instrument with which politics should directly and deliberately
influence economic development. Experience teaches that money can serve this
function, but only at the cost of its value. Since Keynes the thesis has been
generalized that there exists an equality between savings and investments.
Practice does not support this assertion. In reality, it is not savings which
determine investment, yet better instead the reverse: it is investments which
create savings. If all investments had been made or were made with the
legitimate product of savings, possibly we would have more stable currencies,
yet also less developed economies. In large part, the devaluation of money is
the price the nations pay for their material progress; also their social
progress. A real and lasting improvement in living standards of the great
masses is only possible in the measure that the productivity of the economies
increases. Nevertheless, even for the most highly industrialized economies it
is a big problem to maintain the income of the rents for work within the
limits of the rise in productivity. If the least developed nations had always
wanted to stick rigorously to this principle, the living standard of their
people would still be desperately low. To achieve what their social politics
has achieved, particularly in the field of prediction and prevention, they
have had to sacrifice a good part of the value of their coins. And finally we
shall think of the amazing profusion of discoveries and inventions that
characterize the technical progress of our times. A half century has sufficed
to make of the automobile, of airplanes, of electricity in all its
applications, of the radio, of film, of television, the most elemental
necessities of life, which no civilized people can renounce. And new and
immense perspectives open with the employment of electronic instruments and of
nuclear energy. The admirable advances of technology, accompanied by others
not less important in physics, in chemistry, in medicine, in astronomy and
other sciences, stamp economic development with a rhythm of acceleration that
makes it difficult to advance in a balanced manner. In the world of today, in
which the modern means of transport, of communication and information come
increasingly closer to the people, it is natural and comprehensible that
progress made in one region should awaken the desires for benefit also in
other regions. Human aspirations know no limits and always grow more rapidly
that the material means needed to satisfy them. Yet they require their
satisfaction, and also obtain it. The price which must be paid is charged to
the value of the currency.
    Non-equilibrium is the characteristic note of the times that we live in,
and in that is manifested the dynamism of the forces which impel progress.
    From that position we can comprehend the true significance of the dynamic
method of economic investigation. The basic fact with which the investigation
has to deal is the permanent tendency towards the formation of disequilibria.
From an overall theoretic point of view it can be interesting to analyze and
indicate the conditions that must be imposed to correct that tendency and see
that the active forces in economic development maintain themselves in
equilibrium; yet it will be difficult for such an analysis to serve to
establish goals for practical politics that were not chimerical and that would
not cause every effort to attain them to fail. The historical, realist and
decidedly inductive criterion of this method allows understanding
disequilibria as something that by nature is inseparable from economic
development. All economic development, whether natural or induced, carries in
itself the tendency towards a disequilibrium, and the most clearly perceptible
way that the disequilibrium is manifested is the effect it produces in or
through the currency. The practical task incumbent upon the investigator is to
analyze and clarify in each instance the character of the disequilibria which
appear, their immediate causes and their deeper roots, with the goal of being
able to establish objective and realistic conclusions which may serve the
polity in the selection of the most appropriate means to control
disequilibria, to prevent them from becoming excessive and to counteract
damaging effects, without all this becoming an obstruction to development
or even just an obstacle to the normal functioning of the economic factors in

11. Microeconomics and macroeconomics. Someone has called Keynes "the
father of macroeconomics." From this one could reason that everything before
Keynes must have been microeconomics. Neither the former nor the latter is
completely exact. It is certain that in the last five or six five-year
periods, and under the predominant influence of Keynes, economic thought has
experienced a change, whose significance it was attempted to capture with the
introduction into the language of those new terms, without allowing us to say
that the distinction is sufficiently clear and convincing so as not to leave
room for doubt with respect to their utility.
    It is not known as certain science who first used those words and in what
sense. In any event, they sound good, economists have liked them and they have
found, even outside those circles, almost general acceptance, the more so
since they present an excellent impression, in discussion of economic
questions, of scientific culture, undistorted by being given the most diverse
interpretations. In fact, there still exists no absolutely clear delineation
of the conceptual content of those words. "Technicians and laypersons,
initiates and the uncultivated, politicians and men of science, in general
feel obliged to employ the famous terms with quick self-assurance and with the
greatest frequency possible, as if only continuous use of the words would
clarify their true acceptance and their transcendent meaning"(27).
    Etymologically, the words have been formed by analogy with "microcosm,"
the small world, and "macrocosm," the big world, the universe. And just as in
philosophy the concept of microcosm has been generally applied to humans,
considering their physical and spiritual existence as a synthesis or faithful
reflection of the idea of the universe, so also for the thinking called
microeconomics, the center of gravity is man and his behavior as an economic
individual, in contradistinction to which macroeconomics is more interested in
studying the formations and reactions of economic and social groups.
Microeconomic thought is essentially analytic; for it a meticulous and exact
familiarity with all the elements that integrate the economy is of fundamental
importance. By contrast, macroeconomic thought tends to obtain a synthetic
vision of the economy as an ensemble, as a whole enclosed in itself, and
therefore does not linger in observation of details, but instead puts a
special accent on study of the variations in global values and quantities,
behind which the activities of persons sometimes completely disappear.
    We are confronted, then, with two different ways of focusing on and
studying the problems of the economy. The first is characteristic of
traditional thought, for which the individual and her behavior versus the
concerns of practical life are the factors that determine economic phenomena;
the other characterizes modern thought as fundamentally a product of the great
crisis of the fourth decade, which brought profound changes with it not only
in the concepts hitherto in use regarding political economy and the duties of
the State within the economy, but also concerning the procedures and methods
applied to the analysis of economic phenomena, orienting the standpoint for
the investigator of individual behaviors and quantities towards global
behaviors and quantities; from the manifestations of economics on a small
scale towards its manifestations on a large scale; or, what is ultimately the
same: from the "micro"-economic toward the "macro"-economic.
    Nevertheless, an interpretation of the terms microeconomics and
macroeconomics in this sense already allows us to see that, if indeed both
words are of recent creation, the distinction expressed by them is not
something absolutely new. We already find it in the political thought of the
Mercantilists, for whom the advancement of the economic individual was nothing
but the most effective manner for augmenting the wealth and power of a nation.
    François Quesney, the most distinguished theoretic thinker of the
Physiocrats, with his Tableau Économique, which tries to explain
the circulation of goods in a national economy, is the precursor of modern
techniques of calculating monetary fluctuations and the national account.
According to Adam Smith: "The capital in a society or a nation is the same as
that of its members or inhabitants," a conception classifiable as of a wholly
macroeconomic character. The same thing underlies the theory of Malthus, by
which one should admit that global human demand for nourishing goods may
someday not be satisfied due as its cause to a non-proportional growth in the
production of subsistence.
    Of the same character is Ricardo's theory of comparative costs; the law
of markets of Jean-Baptiste Say, the theory of the "wage fund"; the
quantitative monetary theory; the national economy theory of bank credit and
others like them.
    All these examples are meaningful due to the fact that, even beneath the
predominance of the ideology of liberal individualism, economic investigation
has never exhausted itself in the atomistic analysis of facts, processes or
phenomena; or that is, that investigation never has had an exclusively
microeconomic character. Any other way, it would never have been able to
formulate laws or establish theories; for all law or theory, to have validity,
presuppose a general or universal conception of the nature of the things they
try to explain.
    An attempt to obtain and represent a synthetic vision of the system of the
capitalist economy as such and a conception that may be called macroeconomic
of its problems, we find in the work of Karl Marx.(28) Yet only through the
work of Keynes did it become fashionable to think in global terms (global
demand, global expenditure, global investment, etc.) which is generally
considered as what is truly original in the method of this author.
Nevertheless, nowhere does Keynes claim to be what mainly his adherents have
made of him, that is: the founder of a new school, that of macroeconomic
thought. In fact, that work of Keynes, in this respect, has not a defined
character; it is, on the contrary, an indiscriminate mix of microeconomic and
macroeconomic concepts and expositions.
    If it results then, in part, that one cannot consider macroeconomic
thought as something fundamentally new, as something exclusively
characteristic of a modern investigatory methodology, in another respect,
neither is it possible to clearly delimit it as against what is seen as
microeconomic thought.
    The authors who concern themselves with this question, in general are in
agreement that the domain of microeconomics pertains to the study of the
person as an elemental economic unity, be it in her character as a producer,
consumer, manager, worker, employee, owner, capitalist, etc. Also the firm is
included in this category, through which man conducts his economic activity.
    By contrast, the collective economic unities formed by great businesses or
associations of businesses (anonymous societies, industrial cartels, "trusts,"
communities of interests, etc.) and the social groups created from types of
interests or common aspirations (the syndicates of workers, of employees, of
professionals, the producers as a group, consumers as a group and other social
sectors) are, with regard to their behavior and the influences they may exert,
objects of macroeconomic study.
    The question, then, can be raised: When does an economic entity in one or
another sense cease being an element of microeconomics to enter the domain of
macroeconomics and vice versa? Is this a question of size, of the available
capital, of the economic or political power that can be exerted, or what else
determines the criterion? In the same way: What class of social groups should
be included in one or the other category of economics? A labor union of any
industrial manufacturer who acts only on a very small scale: can its
importance be equated to the labor union in a large industry, e.g. the steel
or coal industries in the United States? And also it should be asked, if in
reality, global concepts, such as the class of producers, the class of
consumers, the class of wage workers, etc. are sufficiently clear and concrete
to be utilized to positive advantage in an investigation.
    These are not the only questions suggested by the distinction to which we
refer. Evidently, the definitions that it encloses leave much room for doubt.
    To the macroeconomic domain also belongs, according to some authors, the
formation of averages, the numerical indices and other analogous means of
observation provided by the modern technique of statistics, which enables
getting a macroscopic vision of situations or tendencies, e.g. of global
production, of the general price level, of salaries, of the total employment
in the economy, etc. Microeconomics, on the other hand, would be the study of
individual quantities and values, e.g. the production of certain articles or
materials, the prices of individual products, salaries and employment in
different industries, et cetera.
    For a certain class of economic studies, related for example to the
cyclical movement of the economy and forecasts of possible future tendencies,
or with the general political economy of a government oriented towards the
achievement of particular results, the instruments of observation and
mediation offered via the technique mentioned of statistics are very useful
and even indispensable. The question which arises is whether the economic
investigation, to arrive at proven conclusions, can conform to the
macroeconomic study supported by those means, without concerning itself with
examining the detailed and individual data which comprises the microeconomic
analysis. Averages and general levels always reflect only a fraction, at times
minimal, of reality, and do not exclude errors of estimation which, in turn,
can have unforeseen consequences.(29)
    Renowned progress has been made during the last decades in a field of
work in statistics which belongs as much with microeconomics as with
macroeconomics, or that is: in social accounting. The study of income, of
spending, of saving, of investment, etc., done within individual dimensions,
is of a microeconomic character; upon expressing its results in global
quantities, it becomes macroeconomics.
    However, the technique applied in this last case is not uniform and its
results vary in their meaning. When it deals, e.g. with determining the
quantity of means of production available in an economy, or the global
quantity of unsold merchandise (the stocks or inventories), or the total of
the workforce employed or the economically active population or other
elements of this kind, the results are obtained on the basis of a simple sum
of the individual entities.
    In other instances, however, this procedure does not suffice. The global
data which forms the balance of payments is, in part, the result of
complicated operations of purification and correction applied to the
individual data provided by the statistical services or obtained from other
sources. The national product is not the sum of the brute production of the
persons, businesses and institutions active in an economy, but instead the
global commercial value of the final material goods and services formed by the
conjunction of the values "aggregated" in each one of the stages of their
transformation and commercialization. The capitalization of an economy cannot
be measured simply as the combination of the new means of production
installed, subtracting those that replace the used or obsolete means of
production, but instead by the degree to which the new investments increase
productive capacity. National rent is not identical to the sum of all the
individual rents; in the strict sense of this concept, one should eliminate--
which the internationally accepted schemes of calculation do not do--all those
rents that are "derived" from the original revenues and those which, in turn,
are the product of the creation of new value.
    In all these cases and others like them, in which the global results are
not gotten through the procedure of simple arithmetical addition, it seems
appropriate to speak of "aggregation," even though for many authors this term
means the same as the other and is not known to them as something which
justifies qualification as specifically characteristic of the macroeconomic
    Nevertheless, between sum and aggregation there exists a difference. The
sum is the result of the action of uniting various quantities in a total, and
aggregation--according to the definition of the Royal Spanish Academy--is "a
collection of homogeneous entities that are considered to form a unity." In
the first instance it would be easy to decompose the sum into the individual
quantities that have formed it; to try to do the same in the other case would
mean to destroy the "unity" through a disarticulation of its members.
    It is precisely though this definition of the term, aggregation that the
concept of macroeconomics could acquire a certain concrete meaning, when it is
used to comprehend global quantities or collective behavior irreducible to
quantities or individual behavior. This would mean affirming that certain
global quantities take on other characteristics than the individual quantities
that are buried in them, and that the manner of proceeding and reacting of
social conglomerates, which habitually or occasionally are seen to unite
because of the same interests or the pursuit of identical ends, is different
from the behavior of the individuals whom, as such, form the set.
    However, even this question is debatable. The North American economist
Boulding agrees that "the principle justification for macroeconomics is that
the character and the behavior of aggregates of populations or things cannot
be obtained from a simple generalization of the character and behavior of the
individual components." In what follows he adduces an example to clarify his
thought. "A forest, considered as an object of research, even though it is
only an aggregation of trees, does not display the characteristics and the
behavior of the individual trees. A tree buds, grows, dies, and falls. A
forest in equilibrium can continue indefinitely and with exactly the same
composition with regard to the age and the character of the trees which
comprise it: to the extent that the individual trees grow, arrive at maturity
and perish, others surge forth to replace them and the forest remains
identical. It is almost impossible that a single tree be burned; instead, the
forests are exposed to fires. A single tree does not affect the climate in
which it lives; a forest can do so"(30).
    René Courtin, a French author who submits the micro-macro-economics
distinction to an extensive and acute critique, denies the possibility of
"assuming a discontinuity between individual phenomena and global behavior."
According to him, the micro-macro-economic terminology, by being ambiguous and
only conducive to confusion, should be totally abandoned and replaced with the
simple distinction between a "partial economy and a global economy"(31).
    The discussion moves between both extremes, without allowing sight of the
possibility of an acceptable synthesis. The opinions of the authors differ
considerably. Some never fail to leave the impression that, once the terms
micro- and macro-economics are created and enthusiastically accepted, without
there being for them a real a priori intellectual or practical
necessity, they try to inject them a posteriori with definite meaning
and to seek justification for them; others roundly denounce this new
terminology, seeing in it a tendency for economic thought to display a
regressive evolution.
    Without adhering either to one or the other, it suffices to ask now
whether the micro-macro-economics distinction, from the point of view of
investigatory methodology, can be of use and in what sense.
    According to Émile James, "macroeconomics consists in studying global
phenomena directly, without concerning oneself with the behavior of the
diverse economic entities that comprise them"(32).
    Well then, if studies of this type deliver us more profound
understandings of the functioning of the economic organism, if they facilitate
better comprehension of the causes of its failures and help us to resolve its
problems in practice, their utility will be indisputable. Yet there always
remains the doubt as to whether, for such effects, it is enough to study the
global phenomena "directly" and pass over the manner by which they are
generated and the nature of their components.
    Boulding's example of the forest, previously cited, is not very
convincing. To answer the question that we have formulated, perhaps another
comparison will be helpful.
    If we fly over a territory in an airplane, in seeing it from above and
from a sufficient altitude, we can obtain a global picture of its situation
and its configuration. We can see the different formations shown by the
mountains and the hills; the extent of the forests, the thickets and the arid
lands; the contours of the lakes, the courses of the rivers, the arroyos and
estuaries; the valleys and the plains and within them the multicolor and
multiform distribution of cultivated lands; we see the hamlets, the villages
and the capricious patterns in which cities expand; the paths that criss-cross
the fields and the roads unifying the populaces; and much else which we would
never see and that only the flight of the airplane can produce in such a
marvelously clear and exact image.
    The observations that we can make in this way do not lack practical
utility. Cartography, supported by aerial photographic techniques, has
attained a high grade of perfection. For some works of construction, such as
roads, canals, dams and so on, a wide vision acquired from the aerial
perspective can greatly assist the tracing of the respective planes.
Furthermore it is possible to gather from observation of the agricultural
structure of the territory certain conclusions regarding taking actual or
eventual advantage of the land for cultivation.
    But as interesting as the aspects presented to our vision on an airplane
flight can be, all that we see and observe in this way allows us only a
superficial understanding. We can ascertain nothing about the nature of the
things we see, their qualities and the relations that exist between them. To
be able to do this, we have to descend from the plane and cross the region by
car, on horseback or on foot; we have to stop at some points to perform
measurements of distances and altitudes, to study the vegetation and the fauna
we find, inquire into the existence of mineral or metallic deposits, analyze
the qualities of the ground and its suitability for agricultural cultivation,
and above all to enter into contact with the people and to see how they work
and what they produce, how property is distributed and how their incomes are
generated, what their aspirations are and how they manage to satisfy them,
etc. Only thus can we acquire a familiarity with the true characteristics of
the territory which interests us and of the conditions under which the people
who inhabit it live. She who travels by airplane and makes her observations
from the altitude of the flight is comparable to the "macroeconomist"; she
who descends to the ground to perform her investigations on the earth itself
is a "microeconomist."
    It is clear that the investigatory methods of both have their value, yet
not in isolation. The macroeconomic focus--given that it does not degenerate
into fruitless speculation--can reveal interesting perspectives and serve to
orient a politics of broad views and long-term projects; but it cannot skip
over the immediate realities with which politics must engage to achieve its
proposals. The microeconomic focus, directed directly towards the given
immediate reality, lets us know the true essence of the deeds and phenomena of
economic life; yet its objective cannot be limited to the accumulation of
isolated and detailed insights, but instead must consist in the creation of a
firm basis for a broad and universal comprehension--one more human--of the
conditions under which the economy develops and adopts goals to promote
greater welfare and ever more complete satisfaction of human desires.
    We believe that, in this way, the terms micro- and macroeconomics can
cease being descriptions of different means of focusing upon and approaching
economic problems, and come to mean, through a complementary integration of
both methods, real and effective progress for economic investigation.

    D. Auxiliary Methods

Let us append some consideration of auxiliary methods for economic
investigation, namely mathematics, statistics and accounting. Modern economics
instruction includes these materials in its lesson plans, such that the
students receive in each of them good and sometimes very complete training.
What is not always distinguished with sufficient clarity is that each of these
auxiliary methods has its specific but limited utility, which never can free
the investigator from interpreting with realistic criteria the results or
conclusions that, with their help, she has been able to obtain. The
observations which follow should be understood in that sense.

1. Mathematics. Keynes once said: He who does not recognize the accuracy
of the equation of exchange (of Newcomb and Irving Fisher), negates the
possibility of economics becoming an exact science.
    Very well, the equation of exchange is exact and it is not; everything
depends on the way it is interpreted. It can be considered as exact--solely
for theoretical deductions--in its simplest formulation: MV = TP, in which M
represents the totality of money that has entered into acts of exchange
during a given period; V a coefficient representing the number of times
that that same quantity of money has changed hands; T the "volume" of
goods (both material and immaterial such as securities) that have been the
object of transactions and P the general level of the prices at which
said goods have been negotiated. Upon the basis of these definitions one
can study the most diverse equilibrium positions that must result from the
variations experienced by the factors comprising the equation.(33)
    Nevertheless, as soon as we try to give a practical meaning to the
equation, we see it is based on suppositions not corresponding to reality and
that, therefore, it cannot be considered as exact. Its problematic consists
not so much in the impossibility of quantifying the factor T and of
calculating an index P truly representative of the general level of prices,
but instead is revealed especially in its left-hand member, which represents
the monetary aspect of transactions and that generally is considered
susceptible to being expressed in numeric terms. According to Fisher, this
side of the equation is formed by the sum of two products: MV = the money in
free circulation in the form of bills, coins, certificates and other tokens,
multiplied by a coefficient which is considered adjusted to the velocity of
its circulation; and M'V' = money in the form of bank deposits which is
mobilized through the circuit of checks, or that is, the circulating currency
(including still not used authorizations for overdrafts), multiplied, in turn,
by a velocity coefficient that is obtained by dividing the total of drafts
drawn in a given period by the average level of the deposits in current
accounts for the same period.
    The existence is assumed of two independent monetary areas, one of M and
the other of M', each with its respective velocity coefficient, such that
global values could be determined: one which corresponds to the value of
transactions effected with the money in free circulation and another that
represents the value of the transactions effected with the use of virtual
    This supposition is erroneous in a double sense.
    First: The division into two independent monetary areas does not exist. On
the contrary, transfers from one to the other are permanently taking place, be
it that portions of the currency in the form of bills, et cetera, are
converted into virtual accounts (through deposits) or, the reverse, that parts
of the virtual accounts changes to money in free circulation (through the
cashing of checks). Due solely to these transfers, the monetary value of the
left side of the equation can suffer variations not corresponding to identical
variations in the value of the transactions.
    Second: Outside of the transfers mentioned, a great number of others are
effected as well which do not correspond to payments for transactions, yet
which substantially influence the values that for the latter are determined by
the monetary side of the equation. Among these transfers must be mentioned
those that stem from inheritance, donations and fines; the granting and
cancellation of loans between parties; the cancellation of bank credit; the
award of loans by non-banking institutions, as likewise their receipt on the
part of the beneficiaries; the transfers from a current bank account to
another; the payment of interest, amortizations and dividends and, especially,
all manner of direct taxes.
    In all these instances, with very few circumstantial exceptions, the
transfers or payments are effected through drafts against current bank accounts,
those that, in their turn, increment the value of M'V' considerably more than
what in reality represents the value of material, immaterial or securities
transactions, executed in each case at their respective prices. Furthermore,
there are also transfers which signify payment for commercial transactions
that do not enter into the areas dealt with by the equation of exchange. These
are the varieties of production goods, the payments made through the exchange
of real values (stocks, bonds) or through the endorsement of letters of
exchange or promissory notes or other similar documents.
    These considerations make it seem that the equation of exchange is little
applicable to reality, only apt for theoretic ends, now that the supposed
equality between MV and TP does not exist in practice. The value that,
nevertheless, can be derived, depends on the meaning that is given to it. Only
an interpretation of its symbols strictly circumscribed by the above-mentioned
concepts, can make it useful for purposes of explication.
    One of the most debated and most debatable deductions, to which Keynes has
given mathematical expression and that has profoundly affected the majority of
economists, is the famous identity which he establishes, in chapter six of his
General theory, between savings and investment. If we define "income" as
equal to the "value of production" and this as equal to "consumption plus
investment"; and, secondly, "savings" as equal to "income minus consumption,"
there results by rigorous logic that all savings is investment or the reverse,
that all investment is savings. Expressing the same in symbols, we have
the following:

    E = C + I      and
    S = E - C;     therefore
    S = I          or
    I = S,

all of which--according to Keynes--is in agreement with common sense as well
as with customary tradition of the great majority of economists.
    The second part of this assertion may be correct; the first is more
    Evidently, not all savings is investment in the sense of the definition
Keynes gives to the concept as "current addition to the value of the
productive plant that has resulted from the productive activity during the
period under consideration." The money that one keeps at home, in the
strongbox or under the mattress--something that, customarily, still exists in
some places, yet that sometimes can also have special reasons--can well be
considered as savings, but not investment. The funds that are deposited in
banks, whether it be in savings accounts per se or in term deposit accounts
(which generally are also included under savings) can be dedicated by the
banks to the financing of investment, yet often serves, like the remaining
deposits, to finance current operations of mercantile credit. The money that
one allocates to the acquisition of shares with the object of creating
holdings abroad, has its origin in an act of saving, but is not investment in
the meaning of Keynes' definition. That same definition also includes as
savings all those funds utilized to acquire houses or securities or bonds
(always that they not be for an initial offering) or works of art, antiquities
or other things in style. From the individual point of view, all these
acquisitions are "investments" accomplished through savings, yet none
contribute to augment the means of production and the national income.
    No less problematic is the assertion that investment is equal to savings,
which is generally interpreted to mean that each investment depends on
corresponding savings. If the financing of the productive investments always
had been limited to the possibilities offered by previously created savings,
then people would live today in economic and social conditions of two or three
hundred years ago.
    It is evident that each investment that does not have its origin in a
donation or a tribute has to be paid for "sometime" with funds specifically
designated for that purpose and which, therefore, can qualify as savings. But
Keynes' formula does not take into account the investments in productive
equipment that can be financed with bank credit, which more than "transfer" of
purchasing power (or that is: of savings) signifies "creation" of new
purchasing power, without that this must necessarily produce inflationary
pressures in every case; it does not consider the importance that can accrue
for large-scale investments, both the private and the public, from modern
techniques of "pre-financing"; and finally it excludes all that is investment
by means of loans or foreign debentures, that is, the form of financing that
is of particular importance for the capitalization of the underdeveloped
nations. Characteristic in all these cases is that investment precedes
savings, or in other words: that the rational utilization of credit for
productive purposes creates the savings with which, later and sometimes
with terms that extend over a long period, the investment is paid.(35)

In the formula we just discussed the terms savings and investment were
defined--following Keynes' own words--"in such a way that they necessarily
must be equal" and so "for the community as a whole, they are merely
different aspects of the same thing." Nevertheless, he admits having also
given "special definitions of these terms according to which they are not
necessarily equal." Keynes did this in his Treatise on Money, in
formulating his "fundamental equations" which later were disowned,
despite their seeming more realistic to us than the others.
    In that work, Keynes defines savings in terms of monetary entities as the
sum of the differences between the money incomes of individuals and their
monetary expenses for current consumption; and investment in terms of units of
goods. From the differences which can be seen, according to these definitions,
between savings and investment, Keynes explains the genesis and course of
development of economic cycles.
    In the following equation--the second of the fundamental equations of a
more general character--
          E    I - S
    pi = -- + -----
          O     O
Pi is the general price level of all manufactured goods, and E/O the unitary
value of those goods. The factor (I - S)/O can be positive, equal to zero or
negative. The equality between I (investment) and S (savings) represents a
normal or neutral position. When I is greater than S, the price level
experiences increases; and when S is greater than I, the price level declines.
The first of these possibilities is characteristic of the ascendant cycle and
of inflationary tendencies and the other, of the descending cycle and of
deflationary tendencies.
    The equation corroborates an undeniable fact, that is, that the
relationships between savings and investment can change; yet it does not say
nor can it say anything about the causes of these variations or the motives
held by businessmen to act in one way or the other. To interpret the equation
in a strictly mathematical sense can lead to conclusions that are false and
foreign to reality--yet precisely like those which Keynes had in mind--such
as that the true cause of cyclical fluctuations lies in variations in savings;
that, in one instance, saving more would be a virtue, in the other, a vice;
and that, in both cases, the imbalance between investment and savings
could be corrected through an adequate monetary politics.
    A conclusion drawn from economic and more realistic criteria would be
different. If indeed it is possible to discourage the businessmen from their
exaggerated expectations of future gains, which induces them to excess in
their investments, with a restrictive monetary politics applied in an
opportune manner, energetic and capable of putting an end to an inflationary
process, it is difficult, elsewhere, and little less than impossible to
achieve success with an inversely mechanistic therapeutic, which tries to halt
a descent in full march or to lift the economy from the stagnation of a deep
depression. The monetary authority could in this case develop a policy of
"cheap and abundant currency," but it is difficult for this to succeed in
inducing businessmen to look to the future with greater optimism, so they stop
accumulating idle money in their bank accounts and resolve to make new
investments, before being certain that the depression has definitely reached
its end.(36)
    Even admitting that this kind of monetary policy, effectively seconded by
a well-oriented fiscal policy, would be capable of stopping a downward
tendency in the economic cycle or of attenuating, at least, its intensity in a
nation which, by its economic and financial context, constitutes a "cyclical
center"--something still not sufficiently demonstrated--the same policy
applied in a nation of the periphery, that cannot engender its own economic
cycle and whose development conditions depend fundamentally on external
factors, will be condemned in advance to failure. The experience of Chile in
the years 1931 and 1932 is in this respect eloquent confirmation.(37)

    The objective of the preceding explanations has not been so much to offer
a critical and exhaustive analysis of the meaning of those three mathematical
formulations which have elicited the most interest among economists and even
in practical politics, but instead to draw some important conclusions from the
viewpoint of the methodology of investigation.
    Those conclusions are the following:
    1) That the way in which the conceptual content of the symbols used
is defined fundamentally determines the outcome of a mathematical deduction;
    2) That for this same reason, it is possible that an equation,
formulated to explain a specific economic phenomenon, "mathematically" proves
the existence of relationships that are not found in practice;
    3) That, even building on exact premises or assumptions, all
mathematical deduction demonstrates only facts, which in themselves do not
offer any sort of explanation as to their causal relations;
    4) That, for the same reason, the result of a mathematical deduction
should be interpreted with economic criteria, since its interpretation in a
merely logical-formal sense can lead to conclusions that do not accord with
reality; and
    5) Finally, that economics is very far from being converted to an "exact
science." Fortunately, for if that did happen, it would mean the total loss of
its character as a social science due to the complete elimination of the human
    With all that we say nothing against the use of mathematics, yet it cannot
be anything more than an auxiliary method for investigation. As such,
its utility  is amply approved and the economist who can use it in that capacity
will discover therein valuable help in simplifying, clarifying and verifying her
reasoning or construct models that can take her to interesting conclusions.
Yet it is good to remember that it is not the mathematics which makes the
economist, and whatever may be the conclusion determined by a mathematical
deduction, it should be controlled and tested for its validity by realistic
criteria informed by observation and critical analysis of the facts.
    In a posthumous study by Ragnar Frisch, dedicated to Joseph Schumpeter,
referring to the position of that genius on econometrics--the science
comprising a combination of economic theory, statistics and mathematics--we
find these phrases:

    "Mathematics--even the most refined form of mathematics--is a
necessary tool, but no more than a tool. No sort of mathematical
technique, however refined it may be, will ever replace intuition, that
inexplicable function that takes place in the brain of a great intellect who,
at the same time, understands mathematics and economic theory in a more
orthodox fashion and who has lived long enough (or better, with sufficient
intensity) to accumulate human experience and a feeling for facts."

    And further on, in relation to the applicability and interpretation of
mathematical models, the author adds:

    "I well remember how Schumpeter returned time and again to the question of
how we could test the applicability of a model. From the adequate
interpretation of mathematical tests one can, of course, deduce relevant
aspects of the question; nevertheless, none of such tests can do anything more
than move the final question a step. The last and highest level of proof will
never be expressed in mathematical terms"(38).

2. Statistics. It would be "taking wood to the mountain" to try to indicate
the importance of statistics for the economist, even though there are those
who seem completely unaware of its existence, and governments which
consider those services as providable by any improvised personnel with no
technical preparation. If in this last regard a manifest change is being
produced in the Latin American nations, it is largely due to the labor of the
Inter-American Statistical Institute and, above all, to the successes achieved
by CIEF, the Inter-American Center for the Teaching of Economics and Financial
Statistics.(39) with its seat in Santiago, Chile. As for the rest, there still
exist or are invented theories conceived in a vacuum, which find adepts among
politicians and practical men, but which sadly implode at the first attempt to
apply a statistical "test" to them.
    If mathematics is a tool for excellence in deductive investigation,
statistics are the basis and point of departure for inductive investigation.
Economic theory has as its object to explain the sense and the essence of the
reality in which we live, and no theory can have validity if it is not the
result of observation of facts that can be statistically verified.
    We do not attempt here to explain the methods authorized by statistical
science to reach its objectives; and further since this book is directed,
above all, to students and economists who at each moment discover the
necessity of using statistics without them being technicians of this material,
it is well worthwhile to establish some of the limitations of the statistical
method of investigation and the errors that can take place, if one does not
know how to duly analyze and interpret the empirical material placed at the
disposition of the investigator.
    We have seen before, that any statistical datum represents, as a general
rule, an approximation of the reality it wishes to reflect. The result of
statistical information is always only more or less probable; the instances
are rare when we can have the certainty of absolute exactness. This is not due
to inherent deficiencies of statistical technique, but instead to the
impossibility existing in the majority of cases of covering a phenomenon in
its totality and of giving it a numeric or quantitative expression which
corresponds exactly with what it is.
    Some Latin American nations offer the advantage of presenting very
complete monetary and banking statistics, that is, statistics generally
accumulated by a central fiscal organism (e.g. a superintendence of banks),
which covers all the banking institutions and which, therefore, duly examined
and purged of duplicates, allows study of the functioning of the national
banking system in a much clearer and more perfect form than in the other
countries where such complete statistics are not available. In these cases,
then, statistics can acquire a high degree of exactitude. On the other hand it
would be very risky to attribute to the data obtained from the calculation of
the national income or the current account something more than a purely
illustrative value for certain relations or tendencies, whose effect
furthermore, only can be tested on the basis of information that extends over
a longer space of time. Even in countries where the discipline of statistics
has reached high levels of perfection, those calculations suffer from
appreciable margins of error.
    The degree of probability of a statistical estimate does not depend,
however, only on the extent of the information upon which it is based, but
also on the criterion used to prepare it. The criterion can be ultimately
subjective, proving what not a few times has been asserted: that with
statistics one can prove whatever they want; yet it also can be a special way
of giving a meaning, in an objective sense, to the data being manipulated.
Universally accepted or acceptable norms do not exist to determine, e.g. what
is the active population within a nation; or what should be understood by
such classes as managers and salaried workers; by circulating currency; by the
real value of a property, of capital, of wages and salaries, or of one
currency in relation to others; by the general level of production or of
prices, etc. The investigator who would use these and other similar
statistics, be it for studies related to a specific economy or for comparative
purposes, does well to ascertain what the data really comprise or mean. In
general, well-presented statistical facts and particularly when they are the
result of precisely executed calculations even expressed in fractional
percentages, exert a powerful suggestive force that invites indiscriminate
utilization, yet which, naturally, contributes nothing to prove or improve
their exactness.
    The foregoing particularly governs the information obtained by means of
the "sample." This method consists of selecting a certain number of elements
to be considered representative of a group, to which a census method cannot be
applied. Upon the basis of the sample inquiries can be made. In this manner,
e.g., one proceeds--when other more direct statistics do not exists--to form
an idea as to whether the labor force in a given sector or in the economy in
general has grown or diminished; to determine the proportion of employees who,
to maintain a desired standard of living, depend on additional income earned
through secondary occupations; or to perform studies on the average height of
the adult male inhabitants of a nation in relation to the customs of
nutrition, et cetera.
    The results of an analysis of a sample are nothing but approximations;
their degree of probability will be greater when the sample becomes larger,
and will come closer to reality if the poll could be repeated two or three
times at brief intervals, each time selecting different elements of the same
group. The high cost that is always involved in a large-scale poll naturally
makes this procedure impossible in the majority of cases. Nevertheless, the
information the sampling method delivers has its value, residing not so much
in the figures themselves that are the result of the analysis, as in the way
they are used for interpretation and the establishment of diagnostics. If
between one poll and another taken sometime later there is found an increase
in workforce unemployment of say 1.6 percent, this does not necessarily
signify anything important; the actual increase may be a little more or a
little less. But if the next polls and the following also register increases,
even of slight intensity, one can already speak of a "trend," whose cause must
be sought in the general conditions of the development of the economy.
However, if a poll among the employees yields as a result that 80 percent of
them, to maintain a living standard adequate to their position, need
additional income, the datum is highly significant for the evidently abnormal
life-conditions of that sector of the population and needs no further
confirmation by other surveys, because it can be supposed with sufficient
certainty that, even though the outcome could be somewhat different, nothing
substantial would change in the fact itself. And to refer to the third sample
mentioned above: If the polls based on various samples give as a result that
the average height of the males in a country varies between 5'3" and 5'5" this
datum in itself can have no importance, because stature may be a racial
characteristic, that cannot be modified by changes in diet, as occurred, for
instance, in central Europe, where the lack of adequate and sufficient
nutrition in the last years of the first and the second World War deeply
affected the generations of youth who in those years experienced plain
physical deterioration.(40)
    There are certain sins of interpretation, against which sometimes not even
the most expert economist is immune. Among them, one of the slightest, yet not
therefore less important, consists in not taking into account the locational
factors which can cause marked effects in the variations of a statistical
series. The data in such a series are not unconditionally comparable among
themselves, and the conclusions drawn from their variation, without
considering the influences exercised by the factors mentioned, can be quite
    To facilitate these comparisons, statistical technique offers the
auxiliary means of an "index of locational variations," which can serve to
purify statistical series through normalization. The residual datums that
remain after this operation will then represent only the variations due to
causes different from those of a locational character. The procedure may be
useful, but does not cease to be problematic. It is indubitably useful to know
in what form a statistical series is displayed in its variations with
locational influences, e.g. a cost of living index normally shows increases
during certain months of the year and decreases in other months. Against this
effect, an index of situational variations can be very handy; but its
usefulness for purposes of normalization is limited. The magnitude of the
variations of an index of this type correctly reflects the strength with which
the locational factors have entered into the movement of a series of empirical
data, only during the period for which the index has been calculated. Its
applicability to other periods depends fundamentally on whether the general
conditions have continued at least approximately the same. This can be the
case when we deal with a series representing quantitative data of relatively
little elasticity in its general tendency, referring, e.g., to the production
or transport of certain articles, yet it becomes difficult and even
impossible, when the series represents prices or values, particularly in times
of acute inflation. Nevertheless, even in these instances locational
influences do not cease exerting their effects, sometimes appearing as a
steeply ascending curve due only to slight deviations from the predominant
    The practice of normalization is used principally to reduce "monetary"
values to their corresponding "real" values. The procedure has many
applications and can generate instructive data concerning the economic and
social reality of a nation. Especially in periods of inflation it is important
to be able to appreciate how currency values are influenced by the rise in
    To form a judgment about whether the purchasing power of wages and
salaries has remained stable during a certain period or whether it has
increased or diminished, one should normalize the respective data using an
index of the prices consumers pay. The same procedure is applied to obtain
series of real values in the calculation of the national income or of the
current accounts. When we speak of the monetary values in the production of
certain articles or groups of articles, the normalized series indicate the
variations in the "physical" volume of the output. At other times one speaks
of "real" volume when they deal with normalized series of commercial
transactions or of the gross national product. In both cases valuable
indicators of the development of business or economic activities in general
are obtained. To allow determining the increment in the real value of a root
good, with the objective, e.g., of applying a surtax to the added value, of
fundamental importance is an adequate normalization of the commercial sale
price of the property.
    These are only some examples, among many others, in which normalization
represents a useful procedure for obtaining realistic information which from
the empirical data, in direct form, could not have been deduced. Nevertheless,
the correction in the procedure depends to a high degree upon the criterion
that is applied. Generally it is the indices of prices which are the
instruments utilized to this effect, but it is indispensable to have clear
judgment as to which type of index it is wise to apply in each specific case.
In some instances the retail price index or that of living cost will be the
most indicated; in others, the index of wholesale prices. In given cases it
may be well to operate with a combination, adequately conceived, of both
indices. In not a few cases it would be advisable to use only partial indices,
as much for consumer prices as for wholesale prices.
    Normalization of a set of values, wherein one has monthly data, logically
will be accomplished with corresponding monthly figures for the indices chosen
for this operation. When we deal only with annual data, as with national
income, national product or with the diverse national accounts, one should
perform normalization with the averages of the indices of the respective
periods. It would be a grave methodological error in these instances to apply
indices corresponding to specific months. In times of relative stability, the
differences between one and the other result will not be large, but these can
be very appreciable in periods of inflation with a strong and sustained
tendency for prices to rise.
    Finally it is worthwhile to add some brief observations on the meaning of
normalization. A normalized series is always the result of an arithmetic
operation with two variables, of which at least one--the index being used--or
more often both, only represent approximations more or less possible in
reality. Therefore, no individual datum of a normalized series can be
sufficiently exact to attribute to it an absolute value, and any
exaggeration which is made in this sense, saying, e.g., that the real income
per inhabitant during a determined period had been of such and such a
magnitude, must be taken with due reserve.
    The value properly speaking of a normalized series is in the tendency
that it suggests and which can be a very useful indicator for analytic
studies of the development of an economy. This tendency reflects
variations in "real values" or "quantitative magnitudes," that is, variations
in a series of empirical data from which has been purged the influence
exerted by price fluctuations. The respective curve indicates, as is said,
a movement toward "constant prices," or that is: it behaves "as if" the
prices had not experienced any variation.
    However, in this "as if" is expressed a fiction which the conscientious
investigator should not ignore: The normalization of a statistical series is a
mechanical procedure which cannot produce a result other than that expected.
Therefore, that result cannot be interpreted in the sense like it would
have been in the case where effective prices had been held constant. In
the majority of cases it is more than probable that prices will not only
determine the level of nominal values, yet also will exert influences on what,
as the residual product of a normalization, are called "real" values or
magnitudes. The degree to which this happens cannot be determined by means of
mechanical procedures; it only can be appreciated through the experience and
perspicacity of the investigator.
    Occasionally, the economist encounters curves that call attention to the
marked parallelisms shown in their tendencies and their variations, and she
raises the question of how to interpret this. Such congruences can be seen,
e.g., between the curves of the deposits and of the allotments of a commercial
banking network; between an index of stock market values and the price of
given currencies in the free market; between the general price level in an
economy and the exchange rates of important foreign currencies, and in other
    Before establishing any hypothesis based upon a preconceived idea, it is
wise to inquire in a direct manner and with objective criteria whether or not
there exists a relation of cause and effect between parallel curves and, if
so, how this is manifested in practice. In keeping with the conventional
criterion and from the point of view of a single bank, it seems evident that
the growth in allotments depends on the growth of the deposits the bank
receives. But private-economy criteria are not unconditionally applicable to
phenomena of a national-economy character. Analyzing the problem regarding
this aspect, it may occur that allotments do not vary as a function of
deposits, but the reverse, that the deposits vary as a function of the
allotments. It may be that no direct relation exists between the variations
of a index of stock market values and the pricing of certain currencies, yet
it is very possible that the similarity of their trajectories is due to common
causes lying in the general economic situation of the market. The reciprocal
relations between the movement of the general price level and the exchange
rates of foreign currencies are sufficiently known. What is interesting in
each case is to establish which of the two elements is the determining factor
for the variation, the prices or the exchange rates or both simultaneously,
and to what extent does each one exert its influence.
    It would be a grave methodological error to conclude a priori, from
the parallelism of the two curves, that the variation of one of them is cause
of the variation in the other. Also a conclusion a posteriori can be
erroneous, if the investigation has been performed under the influence of a
particular prejudice. No one less than Gustav Cassel found himself in an error
of this sort upon trying to explain the secular fluctuations of the
international price level by changes in the international value of gold.(41)
Setting off from this idea as an hypothesis, Cassel managed to establish a
close correlation between the long-term fluctuations of the wholesale price
index in England between the years 1850 and 1910 and the variations in the
intensity of the annual increment to the world reserves of monetary gold,
variations which in turn were the consequence of the fact that periods of
strong growth in world production of that metal alternated with others of low
or stationary production. With the surprising result of that investigation,
Cassel saw his hypothesis converted to proven fact and the theory he
established on this basis has influenced monetary thought until the fourth
decade of the 20th century. However, the events of the world crisis and of the
previous years caused one to see that, actually, the relationship between
prices and gold was different; that it was not gold which influenced prices,
but rather the reverse, that the low general level of prices signified an
increase in the value of gold and that this, in conjunction with the
consequent monetary devaluations, stimulated the production of gold and made
the exploitation profitable of even the marginal deposits which, in the
previous conditions, had never awakened interest.
    This is also to say that the error upon which Cassel based his theory
takes away none of the prestige that still remains of his being one of the
most notable economists that the Swedish school has generated. The
investigation that unfolded to test his hypothesis is one of the most
interesting examples of inductive analysis, and merits much admiration,
inasmuch as the graphical and statistical method which he used to demonstrate
that which interested him, he himself had to invent, since the modern
statistical-mathematical methods on which the economist can rely today to
establish correlations were still not very much in use in that era.

In this brief discussion of statistics, we have only wanted to highlight some
of the limitations of its use as an auxiliary means of economic investigation
and the errors that can take root in an improper interpretation of its data.
    We can summarize what was said as follows:

    1) With limited exceptions, the statistical data are only
approximations of the reality which they reflect. The degree of their
precision varies according to the material that they treat; it can be
relatively high when they cover a phenomenon in its totality, and it will be
less when sampling is involved. This fact in no way diminishes the value of
statistical information, yet the investigator should keep it in mind to give a
complete account in each instance of the meaning and true content of the
    2) A statistical magnitude in itself and as an individual and
absolute datum can have no signifying value; yet it acquires importance as a
member of a series whose movement reflects a determinate tendency. This
applies particularly to the data which cover social accounting, whose real
value is always debatable due to statistical discrepancies in the sources of
information or to omissions and errors of calculation.
    3) Statistics only can establish numeric relationships, which can
be convergent or divergent; it cannot pronounce upon relations of causality,
quality or functionality. To discover the existence of those relations is the
task of the investigator, who must interpret and explain them with a critical
and objective spirit.
    4) Statistics does not establish laws; it only verifies, but not
explains. According to Wagemann, it is "the numerical expression of empirical
concepts... The statistical material numerically reflects the empirical
concept, but does not create it"(42). Therefore, nor can statistics formulate
independent judgments. Next it may seem justified to plant the question of
whether it is a science in itself or only an auxiliary technique. It is not
called for to discuss this question here, yet we do want to leave it clearly
established that no economic investigation can claim for itself the attributes
of seriousness and objectivity, if it does not begin from a concrete basis
constructed through statistics. The economist, without her being a
statistician herself, should know the applicability and the limitations of
statistical methods, and should conscientiously develop the pictures which
will serve as the bases for her investigation.(43)

3. Accounting. The inclusion of accounting among the auxiliary methods
of economic investigation is justified by the fact that knowledge of the
principles of this technique and the application of bookkeeping procedures
are, in many cases, indispensable to achieve a clearer vision of economic
    The flux of deposits of a central bank and its effects on the money which
circulates in the market, in bank credit and the creation of virtual money,
can be studied and clearly explained through simple accounting models, in
which are represented only the most important entries from a bank balance.
Thus it can be demonstrated, for example, that a re-discount credit from a
central bank, if it indeed signifies an increase in the volume of its
debentures issued, does not increase (at least not in a direct way) the
circulating money; and the inverse, that their cancellation, if it really
signifies a diminution of the obligations of the central bank, does not reduce
the circulating currency. Similarly, it is easy to demonstrate that a sale of
public or other assets by the central bank performed directly with the bank
institutions, affects their liquidity, yet does not reduce circulating money.
On the other hand, upon performing this operation with the public or non-
banking institutions, circulating money contracts, especially in the form of
credit, and simultaneously the reserve stocks of the banks are reduced. It is
understood that comprehension of these relations is of elemental importance
for monetary politics. In many other instances of monetary analysis as well,
the accounting models can lend valuable assistance.
    In the calculation of the balance of payments, accounting is joined with
statistics in order to present one picture in which the credits and debits
of a country in its commercial and financial relations with the exterior are
registered. A comparison of the values assigned to the active and passive
sides of the balance permits drawing valuable conclusions regarding the
capacity of a nation to import and to comply with its external financial
obligations. For the interpretation of the balance of payments, with the
object of establishing whether in a given period development has been
"favorable" or "unfavorable," the "clearing accounts" are of particular
importance, which in the accounting of a business corresponds to the gains and
losses. In the schemas for balances of payments published by the International
Monetary Fund unfortunately the clearing accounts are not listed in a form
adequate to facilitate interpretation.
    In the studies of the national accounts, accounting principles are applied
to determine and present the total, the fluctuations and the distribution of
the national income. Statistical discrepancies inevitably make it difficult to
display a perfectly balanced equilibrium between income and its use. The
amounts corresponding to the term, "Clearing" are sometimes of appreciable
    The economist is presented with a bookkeeping problem, not always
resolvable in satisfactory fashion, when she tries to determine real values
for capital. One is confronted with the problem of executing, for example, a
census of capital invested in certain activities (agriculture, industry,
mining, transport, etc.) or in a national global economy. For the Latin
American economies it is especially important to know the total of foreign
capital invested in them. The question is, how to determine its real value.
    The task is relatively simple in times of stability that, however, are
never of long duration. But even in periods of instability it is possible to
calculate the real value of capital which has been invested over the course of
several years before the date of the census. Increase of the length between
both dates adds to the difficulty. Evidently, the figures found in the
companies' balances, which reflect only the historical value of the assets,
and depreciation reserves almost always insufficient, can never serve to
increment real values on the basis of actual adjusted prices. In such cases,
the investigation must rest more on economic criteria than accounting
criteria, to arrive at conclusions even approximating reality.
    An interesting publication(44) of the Institute of Organization and
Administration of the University of Chile (INSORA) refers to this same
problem from other viewpoints. Critics and recommendations have not been
lacking to remedy the defects of an accounting which, based upon traditional
principles, does not permit giving a real meaning to a company's balances in
periods of inflation. Nevertheless, authors and commissions of experts, who
have concerned themselves with this question, have only examined "the
consequences of inflation upon accounting." The study by INSORA takes a
further step in the sense of "considering the possible effects of accounting
uponinflation." What is shown in this study is that accounting is not limited
to being an informative techniques descriptive of economic facts, but instead
can "have an active influence on economic situations, inflation as much as
    The conclusions that this study reaches (summarized below only in an
unadorned manner) do not fail to be convincing. The almost always insufficient
depreciation reserves means, in times of inflation, decapitalization of
businesses and diminution of their productive capacity. But not solely this.
The fact that the companies do not retain an adequate quantity of their gains
to avoid that decapitalization, but instead distribute it and place it in
circulation, and that a great part of it is spent on consumption goods,
themselves scarce, constitutes a factor which contributes to the process of
inflation. Although it is not possible to determine the part of these profits
destined for consumption, in any event they represent funds which,
alternatively, should have been dedicated to new investment and that, not
having done this, comprises "a definitive and unrecoverable loss." If the
firms, due to their decapitalization, replace obsolete machinery with others
less efficient, more hands at work will be needed, whose remuneration
increases costs and favors a rise in prices. And if the firms obtain financial
resources to remedy their decapitalization, those resources evidently will not
be going to new investments which would serve to augment production. The
same practice of calculating depreciation according to the historical cost of
capital, which is lower, instead of upon replacement value, which is higher,
induces businesses to show great money gains, in large part fictitious, that
sometimes are incapable of being distributed except through the device of bank
loans. The purchasing power so created, first by fictitious accounting
profits, and then by the awarding of absolutely unproductive credit, cannot
but aggravate the phenomenon of inflation. And finally, the study refers to a
well-known experience of one of the perhaps most dangerous effects of
antiquated accounting principles which necessarily should be submitted to
revision. "The financial results of a firm are measured by the percentage of
gain over capital, whereby profits expressed in an inflationary currency seem
disproportionately high, if compared with the capital before the inflation.
Therefore, Labor feels entitled to greater compensation and it is not easy to
reject their petitions, because the best argument the companies can use in
these instances is to ask of Labor, distrustful in these matters, not to
believe in the numbers nor in the states of losses and gains made up by this
same enterprise. If the firms accept the entreaties of Labor, these increases
in pay favor inflation, because they increase purchasing power and because the
businesses will be drawn to increase prices. If they deny them, it is
improbable that Labor will be convinced and remain satisfied. Thus, though it
does not produce strikes, dissatisfaction reduces productivity, also favoring
    Evidently, all this admits of only one conclusion: "It is an absurdity
that the same accounting principles, on one hand, cause firms to decapitalize
by inducing them to calculate excessively low costs and that, on the other
hand, with profits apparently overly high, induce Labor to feel entitled to a
greater remuneration."
    It has seemed interesting to make reference to this study, because it
touches on questions of equal importance for the business administrator as for
the economist. Its direct objective is to demonstrate that "accounting
information is one of the principal tools for good, rational administration,"
but on the condition that the figures it is based upon have real meaning and
do not represent fictive values. At the same time it makes one see the
importance for the economist of being able to form an exact judgment about the
content and significance of the information provided by the accounting data.
For her one of the most valuable instruments of economic analysis are the
national accounts, a set of tables with statistical data extracted in large
part from the accounting by the firms. A correct utilization of the available
information sources requires the economist to proceed with much discernment,
with the object of being able to appreciate whether the profit and capital
accounts are overvalued or undervalued in each case. The practical usefulness
of the national accounts for orienting the political economy essentially
depends on the accuracy with which the economist manages to approximate
them to reality.

    E. How to Choose the Method

There is no norm of general validity with respect to the method or methods
which should be employed in an economic investigation. In each case, the way
to proceed depends as much on the problem posited by the investigator as on
the manner in which she thinks of attacking it. Her experience, her
temperament and her personal inclinations will always play an important role
in this, and given that one does not depart from a strictly scientific route,
the investigation will be unobjectionable whatever may be the method or
combination of methods which have been convenient to use to arrive at one's
    The basis and point of departure for all investigations will always be the
"analysis" of the facts, phenomena or events which attract observation. The
knowledge we acquire through our inquiry into the character and true essence
of things is expressed in a "synthesis." Analysis and synthesis mutually
affect and complement each other. Analysis--assuming it is not exhausted in
purely imaginary models--will always be "inductive"; the critical observation
of parts of reality lead us to formulate a theory or a conclusion of a general
character. The inverse procedure is "deduction," by which logical conclusions
prevail over empirical conclusions. Nevertheless, in an economic investigation
one does not exclude the other; deductive thought as well can lead the
investigator to valuable conclusions, given that its logic is not sapped by
the facts of reality. Of all economic investigation it is required that it
have a high degree of "objectivity." In reality, no investigative work
deserves confidence in its seriousness if it does not fulfill this condition.
Yet this does not mean that the economist, upon performing an investigation,
should be able to free herself from all that is ultimately individual and
"subjective" in her personality. If she tries to do so, her work will remain
reduced to an insipid thing, boring and of no interest. It is precisely the
personal note of one's thought, scientifically grounded, that gives
originality and value to the work.
    Not infrequently the investigator, to understand and explain the present,
will have to revisit the past. Economics is not a science of "how much"; its
purpose is the study of human behavior, individual as well as in their social
grouping. Inasmuch as society cannot enter a test tube and be subjected to all
kinds of laboratory experiments to see how it reacts, the experience which the
investigator cannot obtain in this way, can only be recovered from history.
Historical studies are of transcendental importance for the economic
investigator. An unforgivable error is committed by those who view
history with disdain and it denies all value to these studies. No valid
judgment can be generated on any aspect of the present, even still less to
risk oneself in any prediction about the future--such an important thing for
the practicing economist--without knowing how things originated in the past
and what the determining factors in its development are. The economist who
interests herself in historical investigation, whatever may be her personal
orientation towards one or another political direction, will always bring
something positive by familiarity with the conditions under which the world
evolves. For the economist who finds herself confronted with actual problems,
historical knowledge would help her not to err in her diagnostics and gives a
serious and practical character to her propositions.
    The static and dynamic methods and the distinction between microeconomics
and macroeconomics have their specific importance for theoretic thought,
without thereby lacking in practical value to the extent that they facilitate
a better understanding of reality. Their combination with mathematics brings
economics closer to the category of "pure science." There are those who see in
this an ideal whose realization would mean that the science would attain the
most elevated level of its development. Nevertheless, the question is arguable.
We have maintained in another part of this tract that "the science of economics
is a fundamentally human science"; that "it must serve positive human goals,
the same as other sciences do"; and that "only this purpose can give sense and
value to economic investigation." The developments seen in mathematical
economics during the last decades suggest that these simple truths have fallen
into oblivion. A growing aristocratization of the science is seen which
reduces it to a field only accessible to scientists and among them
particularly the mathematicians. What in practice is gained from the enormous
quantity of publications that every year increase the economic literature and
of which many seem more works of mathematics than of economics, is very
little. Mathematics, beyond a doubt, is an important auxiliary science
for the economic investigator, but it mistakes its purpose if the results
arrived at are not translated from the language of symbols to intelligible
words for those who may benefit from them, or if they are used to demonstrate
the precision of deductions that cannot support a realistic criterion, or
simply if they are presented to satisfy the urges of fruitless intellectual
    No scientific investigation can renounce the help of statistics. It is
understood by this only that statistics is the basis for all inductive
analysis. It should also be such--which is not always realized--for theoretic
thought. No theory conceived in abstracto and without being derived
from observation of reality in the mirror of statistics, can claim for itself
the attribute of seriousness. (Nevertheless, sometimes it is precisely these
deductions which find most acceptance.) To be a statistician is an important
profession which comes with great responsibility. The economist, whose task
consists in using the statistics and interpreting them, need not be a
technician in that science, yet she should know her methods and be able to
appreciate their reach and limitations.(46)
    And finally one must also recognize the role of accounting as it acts as
an auxiliary method for economic investigation. The application of its
techniques in many cases can help in obtaining a clearer and more correct
vision of the facts, especially in the analysis of monetary problems; and the
familiarity with its principles and with their application in practice is
indispensable for the economist dedicated to studies related to the national
income and its distribution, be it whether she herself performs the
necessary calculations or whether she limits herself to interpreting their
results. In any event, these understandings place the economist in certain
contact with business practices, which cannot fail to exert an influence on
her capacity to think in realistic terms.
    But let us leave one thing clear: It is not wise to overestimate the
importance of knowledge of accounting techniques for the economist nor to
underestimate the importance of understanding economists for the accountant. A
good company administrator, if she wishes to be more than a functionary "who
has as employment, office and profession to maintain the rows and columns of
the coming and going of wealth"(47), should know much more economics than
what the economist, to find success in her activity, needs to know of

*. Henceforth, "she" [Translator's note]
1. Cited in Teoria general de la ocupacion, el interés y el dinero
(The General Theory of Employment, Interest and Money), Fondo de Cultura
Económica, 5th ed., Mexico City, 1958, p.99.
2. Ibid.
3. As does Schroders in his study "John Maynard Keynes als Psychologe" in the
book appearing under the same title in collaboration on the same theme with
Schmoelders and Seidenfus, Ed. Dunker & Humboldt, Berlin, 1956.
4. Interesting essays in this direction are: G. Katona, Psychological
Analysis of Economic Behaviour, New York, 1951; and Albert Lauterbach,
Man, Motives, and Money, Cornell University Press, Ithaca NY, 1954.
5. Henri Aujac, "Un hypotèse de travail:L'Inflation conséquence monétaire du
comportement des groupes sociaux," in Économie Appliquée, Apr.-Jun. of 1950.
English translation beneath the title: "Inflation as a monetary consequence
of the behaviour of social groups-A working hypothesis,"
in International Economic Papers, no.4, 1954, Macmillan & Co., London.
6. Granger, Gílles, Méthodologie Économique, Presses Universitaíres
de France, Paris, 1955, p.6.
**. In connection with this point, a professor, docent at various Latin
American and United States universities, makes the following observation:
If indeed it is true that a General Theory that would be a synthesis of
economics, sociology and psychology, has not yet been written, it is not less
certain that all the works of Marx and the pertinent works of Max Weber
(Economy and Society, University of California Press, 1978; and The
Protestant Ethic and the Spirit of Capitalism) have had an enormous impact
precisely because they treat problems with a spirit of synthesis. One should
not forget that until today there exists absolutely no theory of social change
which has replaced that of Marx in a satisfactory manner. The importance of
Marx and Weber is, in this sense, the integral focus they give to their
conceptualizations. The two are in many regards opposites; nevertheless
immortals in the extraordinary synthetic capacity surrounding their approach
and their studies. If Marx had written strictly as an economist, he would not
have outlived his demise. His greatness is that he was a social scientist in
the widest sense of the word.
7. Kenneth E. Boulding, Economic Analysis, 4th ed. vol.1: Microeconomics,
New York, Harper & Row, 1966, p.20. The concepts of marginalism were
introduced with the Neoclassical theory by Marshall, forming from then on
an integral part of economic theory.
8. Quoted in The Early Origins of the Social Sciences, by Lynn McDonald,
9. Until the outbreak of the great world crisis, Henry Ford put a lower price
on his cars almost every year, thereby creating for them an ever increasing
10. Theorie der reinen und politischen Oekonomie, Berlin, 1910.
11. The long and impassioned controversy that in the second half of the
previous century was revived between the partisans of the Classical
methodology and the more realist ones from the German historical school, as
remembered in history under the name of "method struggle."
12. His most well-known work, The Theory of the Leisure Class, carries
as subtitle: "An Economic Study of Institutions" (there is a Spanish
translation from the Fondo de Cultura Económica, Mexico City, 1963). A
full exposition of the philosophical and socio-psychological principles of
institutionalism is found in Ellan B. Gruchy, Modern Economic Thought, the
American contribution, New York, Prentice-Hall, 1948.
13. Edmund Whittaker, History of Economic Ideas, New York, Longmans
Green, 1940, (p.729).
14. We should remember that the discovery of Troy accomplished by H.
Schliemann was possible basing himself exclusively on the description given in
the Iliad.
15. An interesting work on the Bible as an historical source is the book by
Werner Keller, The Bible as history, New York, 1955, 1995.
16. Karl Knies, Die Politische Oekonomie vom Geschichtlichen Standpunkt,
(Political Economy from the Standpoint of the historical Method) 2d ed.
1883, (p.27).
17. It seems that considerations of this nature were those which motivated
the North American financial mission, presided over by professor Edwin W.
Kemmerer, to give the central banks, which were established in various Latin
American countries in the third decade of the century, not an organization
in the style of the transmitting banks of the United States, but instead one
more in accord with the basic characteristics of the continental European
central banks, whose organization and functioning were better suited to the
specific conditions of those countries. However, all those banks very soon
underwent fundamental changes in their functioning.
18. Keynes, op.cit, 1936, p.32.
19. Famous North American orator and statesman of the 18th century.
20. The literature in all languages concerning the questions treated here is
enormous. We mention only the following works: Carl Snyder, Business Cycles
and Business Measurements, New York, 1927; C. O. Hardy and G. V. Cox,
Forecasting Business Conditions, New York, 1927; Ernst Wagemann,
Konjunkturlehre, Berlin, 1928; J. A. Schumpeter, Business Cycles, New York,
1939; E. R. Dewey & E. F. Dakin, Cycles, The Science of Predictions, New
York, 1952; G. Haberler, Prosperity and Depression, League of Nations
Publications, 1939; Earl C. Hald, Business Cycles, New York, 1954.
21. The exactness of this equation depends exclusively on the interpretation
which is given to its symbols. We refer to this below.
22. F. Zeuthen, Economic Theory and Method, 1955, p.143.
23. Frank H. Knight, On the history and Method of Economics, 1956, p.189.
24. Ibid. p.194.
25. There is another element, not assimilable to those of a social or
economic character, yet which is the most powerful for the progress of
humanity: the eternal spiritual restlessness of mankind that does not allow
him to settle for the material comforts of his existence; their yearning to
investigate and know all that surrounds them; that constant curiosity which
incites them to scale the highest peaks of the mountains and explore the
unknown depths of the seas; that has managed to dominate and put at its
service--for destruction or for progress--the incredible forces contained in
the atom, which causes them to construct powerful telescopes so that the eye
hopes to reach the limits of the universe and that already prepares them for
the conquest of sidereal space.
26. "Is a Theory of Development Possible?" in Investigación Económica,
vol.15, no.2, 1955, Mexico City.
27. Citation--with apologies to the author--lightly modified from a study of
the "Macroeconomy" by Fernando Zamora Milán in Investigación Económica,
no.68, 1957, Mexico City.
28. Jean Marchal, Deux Essais sur le Marxisme, Librairie de Médicis,
Paris, 1955. The author declares as the objective of these essays "to bring
into full light the macroeconomic aspect of the Marxist construction."
29. The index of the cost of living in Chile, which serves as basis for
adjustments of wages and salaries, in 1957 suffered violent fluctuations
upward and downward due exclusively to variations in the price of onions,
that resulted in having an excessively high weighting within the index. A
corrected index asserted for the same year an average level more than
20 percent less than the original index.
30. Kenneth E. Boulding, A reconstruction of Economics, 1950, pp.172-3.
31. "De l'ambigüité des critères de distinction à la
prétendue opposition de la micro et de la macro-économie", in Revue
d'Économie Politique, Paris, Jan-Feb of 1957.
32. Émile James, Historia del pensamiento económico en el siglo xx, Fondo
de Cultural Económica, Mexico City, 1957, p.306.
33. See the explanations above.
34. If we write the formula as follows:
    I = E - C
    S = E - C
    I = S     or   S = I
we see that it is a perfect example of a syllogistic combination.
    A syllogism is an argument that consists of three propositions, the last
of which is necessarily deduced from the other two (Dictionary of the Royal
Spanish Academy). In the present instance, the difference between income
and consumption, is at one time called "investment" and another time
"savings." Therefore, by force both terms have to be equal. It is the same as
if we said the following:
    The rhinoceros is an animal with four feet
    The cat is an animal with four feet
    Thus: The cat is a rhinoceros and vice versa.
This can also be proved mathematically via the well-known axiom: If two
magnitudes (the cat and the rhinoceros or I and S) are equal to a third
(animal with four feet or E - C), they are also equal to each other.
    May the student excuse the absurdity of this deduction, but just as absurd
and foreign to reality as well is the formula we consider.
35. The author treats this theme in a more extensive form in his book, El
valor de la moneda, Editorial ORBE, Santiago Chile and Editorial ANDINA,
Buenos Aires, 1970.
36. Various authors express the same sentiment. William Fellner says in
"Keynesian Economics after Twenty Years - What is surviving?": "If we limit
ourselves to a conventional policy of easy money, it will be impossible to
foresee how much of the new money is destined for additional investment and
how much is converted into idle deposits. It is most probable that in a period
of strong depressive tendencies the greater part of this money becomes idle
deposits." The American Economic Review, Papers and Proceedings of the
sixty-ninth Annual Meeting, vol.XLVII, no.2, May 1957. An extensive
critique of the relations between "Income, Savings and Investment" in Keynes'
theory is found in chapter viii. of The Failure of the New Economics,
by Henry Hazlitt, D. van Nostrand Co., Princeton, New Jersey, 1959, p.68.
37. See the study of the author "Diez años de Politica Monetaria en
Chile", Anexo del Boletín Mensual del Banco Central de Chile, no.94,
December 1935.
38. Ragnar Frisch, "Some personal reminiscences on a great man",
Econometrica, vol.XIX, no.2, April 1951.
39. Since 1962: Inter-American Center for the Teaching of Statistics (CIENES).
40. The journal Estadística, from the Inter-American Statistical
Institute, has published in its issues 55 (June 1957), 59-60 (June 1958)
and 65 (December 1959) a great number of studies, by various authors,
on sampling. The Institute has also published its "Breve Manual de Muestreo",
vol.I, Washington D.C., 1962.
41. G. Cassel: The Theory of Social Economy, 2d ed., Madrid, 1941.
42. Ernst Wagemann: "Narrenspiegel der Statistik", Hanseatische
Verlagsanstalt, Hamburg, 1935, p.215.
43. On the question of statistical error, we recommend consulting the
following works: Oscar Morgenstern, On the Accuracy of Economic
Observations, Princeton, N.J., 1950; and Oscar Anderson, Probleme der
statistischen Methodenlehre, Physics-Verlag, Würzburg, 1954.
44. Dr. Emmerico Paternost G., "An unsuspected factor in inflation".
45. See also: Traité d'Économie Politique, published under the
direction of Louis Baudin, Paris, 1955, 1st volume, pp.86-94. "The
synthesis of methods for the construction of models."
46. In this connection, we refer to the notable work of the Russian
sociologist, Pitirim A. Sorokin: Fads and Foibles in Modern Sociology and
Related Sciences, (Aguilar, Madrid, 1957) In chapters vii and viii,
titled: "Quantofrenia," the author attacks the mathematical method, or more
aptly, pseudo-mathematics, and provides statistics and a penetrating critique,
demonstrating the absurd applications of formulas and mathematical models
and indiscriminate statistics to the economic and psychosocial sciences.
47. Definition of "accountant" in the Dictionary of the Royal Spanish

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