be a permanent decrease of production or the abandonment of all attempt by the world at large to escape from a depreciated paper basis, the error of the economists of 1914 will prove to be in the time required for fundamental economic forces to work out their result and not in the ultimate result itself. The influences which retard the fall in prices are the same influences which retard the rise of interest rates. When these influences are exhausted and the fall in prices occurs, it may also be found that what we might term the real interest rates, the burden imposed upon the borrower, the per cent on value actually received which he has contracted to repay, have risen more rapidly than nominal rates.

In the face of what I have said concerning the danger of prophecy, and of what seems to be the tendency of events at the moment, I will venture one more prediction strictly in accord with the current theory of economics. As a result of the war the United States has changed from a debtor to a creditor nation and bids fair to again take its place in the ocean carrying trade. For nearly fifty years we have had a so-called favorable balance of trade which has been tremendously increased by the war.

The permanent as distinguished from the temporary influences set in operation by the war are working, however, towards an increase of imports relatively to exports. We cannot expect permanently to maintain the great excess of exports over imports which has characterized our commerce since 1873. This readjustment of our trade balance may be temporarily modified and postponed by continued grants of foreign credits, by investments in foreign securities, and large expenditures by American travellers abroad. It is bound to come in the end. I make no predictions as to the time involved.

But if the war has made clear that economic science has not yet reached a stage of completeness which affords a secure basis for prophecy, so far at least as the time required for its fulfilment is concerned, it has without question confirmed the truth of certain fundamental facts and principles which lie at the basis of the current teaching of economics. Nothing could have brought out more clearly than did the war the truth, taught in every class in elementary economics, that the fundamental economic facts and processes are the same under our highly organized industrial system as in the most primitive community, that the measure of man's economic power is his ability to produce the goods which he needs,

and that the elaborate system of exchange and finance which has been built up is but a piece of mechanism for the furtherance of this end.

On the basis of our war experience it is easy to make clear that our power of production is limited; that if we would increase the production of certain goods, we must economize our consumption of others; that economy in consumption, saving, is the essential condition of the creation of capital; that war finance is the placing of the labor and capital of the country at the disposal of the government; that financial operations are not an independent means, but merely the mechanism for accomplishing this purpose; and that the slogan, "business as usual," in the face of a great national emergency which diminishes our labor force and requires the diversion of labor into new lines of industry is an evident fallacy.

On the whole, economists need not be discouraged by results of the test to which generally accepted principles of economics have been subjected by the war.

It is certain that we have much to learn concerning the influences which govern human action, but there seems no reason to believe that we have erred in assuming that laborers prefer the job that yields the highest pay; that sellers desire to sell in the dearest and buyers to buy in the cheapest market; that the organizers of business seek the industries which promise the largest returns over expenses of production; that men desire to escape, if possible, the competition of others supplying or consuming like goods and services; that the utilization of limited natural resources is subject to the law of diminishing returns; or that goods or services are valued on the basis of their marginal utilities.

So long as these assumptions remain true, and men are allowed free choice of occupations and left to determine their relations to each other by mutual agreement among themselves, the outline of the theory of exchange and distribution will remain what it is although additional knowledge will enable us to fill in the outline more completely than is now possible.

Our social institutions are subject to change and these changes bring changes in the structure and working of our economic system. It is of great importance to understand the course and effects of such changes, but it is equally important to understand the working of the economic system under the institutions that exist. Except for considerations of stability and uniformity in our economic nomenclature it does not seem to be of vital impor

tance whether we designate as economic theory one or the other body of knowledge or the two combined.

There remain many tasks for the student of economic theory, but I doubt whether as a result of the experience of the war, or of the progress which has been made in other branches of knowledge, he is called upon to tear down the structure which has been gradually built up during the last one hundred and fifty years and begin anew. The great problem which faces us today is not the problem of reconstructing economic theory, but the problem of adequately developing the art of economics or of what may perhaps be termed economic engineering.

It is a familiar fact that the economic system which grew out of the Industrial Revolution contains elements of great strength combined with elements of serious weakness. No one can deny that under this system remarkable results have been achieved in extending the industrial area utilized by people of European origin, in supplying the world with efficient instruments of production, and thereby enormously increasing productive power in the aggregate.

The population of Europe in the middle of the eighteenth century is estimated at 130 millions. At the outbreak of the war the same region supported over 450 millions in a condition of individual well-being superior to that of the earlier period, while over 125 millions had been added to people of European descent living in other portions of the globe. In large measure this achievement must be attributed to the progress of physical science, but we can easily pick out elements in our social and political institutions to which credit is also due.

The principle of individual responsibility of each man for the support of himself and his family has exerted a force of tremendous power, compelling to work and tending to preserve a balance between earning power and the growth of population. The system of free choice of occupation, combined with freedom of contract and private property, including the right of inheritance and bequest, while it has doubtless been accompanied by great waste, and produced great inequalities in the distribution of wealth, has also offered tremendous inducements, not to those confined, by their lack of initiative or the limitation of their opportunities, to manual labor, but to those who could succeed in the organization and management of industry. These are strong points in an economic system and are not to be lightly discarded.

There are equally evident weaknesses; the waste involved in competition; the inequality of opportunity and bargaining power, due to the unequal distribution of wealth, which tends to the formation of economic classes and leaves potential capacity undeveloped; the conflict over the distribution of the product of industry and the consequent sense of opposition of interests between those upon whose hearty coöperation the efficiency of industry depends; the opportunity to gain wealth through the suppression of competition and the establishing of monopoly rather than by economic service; the more or less haphazard character of our industrial adjustments, involving waste and giving rise to alternating periods of prosperity and depression; the lack of motive in the present generation for safeguarding the interests of future generations; this is but a partial list of weaknesses long recognized.

That much has been done to eliminate these weaknesses and mitigate their evil results I have no thought of denying, but, unfortunately or not, neither individuals nor nations are inclined to face the serious problems of life until they are forced upon them; and it may be truly said that those who have had a controlling voice in our industrial affairs and have prospered most under the existing system have been content to let matters drift so far as the most serious problems of industrial organization are concerned.

There is nothing new in the fact that great masses of men in all countries are dissatisfied with the structure and working of the existing economic system; what is new, what the experience of the war has made clear, is that with the extension of the suffrage, education, and organization, these masses have acquired a definiteness of purpose and a power which compels a thoroughgoing consideration and possible reconstruction of our industrial system, if its stability is to be preserved.

Amid the flood of radical proposals which abound in a period of world disorganization such as the present it is doubtless easy to exaggerate the strength of the tendency to fundamental changes in our social system. Those who are agitating for change are articulate and insistent, but it is difficult to estimate the power by which they are backed in comparison with the inertia of the less articulate masses of the population. It would be foolish, however, to close our eyes to the possibility of radical changes in our industrial structure. Our economic system is exempt from change

no more than our political system. The political structure of the western world has undergone radical changes during the last hundred years and it is clear that democracy carries with it the possibility of radical changes in industrial structure, brought about through legal procedure. We are equally blind if we fail to see that the hundred years which have placed political power in the hands of the masses of the population have also changed in their favor the balance of industrial power. These changes clearly foreshadow changes in the structure of our industrial system. The question is as to the lines which such changes must follow if they are to be constructive rather than destructive and accomplish their purpose of improving the economic condition of the masses of the people.

Time is lacking, even had I the ability, to outline in detail the course which we should follow in our industrial readjustments. My purpose is simply to call attention to certain facts which must be recognized if we are to realize the true nature of our problem and thus avoid the mistakes and disappointment which will follow attempts to solve it by methods foredoomed to failure.

There has been a general inclination, evident even in the case of some economists and sociologists, to assume that the problem of the production of wealth has been solved by the introduction of power machinery and that the only problem which remains is the problem of distribution. This is due I believe to an exaggerated estimate of the increase of productive power based on a superficial examination of the facts and to a failure to recognize that the enormous increase in aggregate productive power, which has undoubtedly taken place, has to a considerable extent been absorbed in the support of a population increasing far more rapidly than at any other period of the world's history, far more rapidly in fact than under any conceivable condition it can continue to increase.

The tendency to overestimate the increase in per capita productive power during the last hundred and fifty years results from concentrating our attention on the more obvious and overlooking the less obvious facts in the changes which have taken place.

We compare the quantity of cloth turned out in a modern cotton mill with the quantity which could be turned out by the same number of laborers using the spinning wheel and the hand loom, forgetting the labor which has gone into the construction of the mill and its equipment and the fact that a large part of the labor