The following points highlight the top five economic ideas of Wesley Clair Mitchell. The economic ideas are: 1. Method of Study 2. Institutional Approach 3. Theory of Economic Guidance 4. Economic Welfare and Planning 5. Business Cycle.
Economic Idea # 1. Method of Study:
Mitchell emphasised the quantitative analysis in economic investigations. Through this quantitative method, he was able to give a systematic account of cyclical fluctuations. He was not interested in the old methodological debate that existed between Historical and classical schools. It is to be noted that he expanded the scope of economics beyond the boundaries of equilibrium.
Economic Idea # 2. Institutional Approach:
According to Mitchell each individual has lot of instincts which are different from individual to individual. The behaviour of an individual that resulted from inborn capacities is an unreasoning form of behaviour. According to Mitchell, three institutions—arts, writing, speech and religion provided a standard behaviour, habits of feeling, acting and thinking that are approved by the community and finally embedded in a social institution.
Social institutions are powerful agents to direct human behaviour. They are the embodiments of past achievements of human intelligence. They form the basis for the rational behaviour of the individual. Mitchell advised US not to look inside the individual and assess the pleasant and unpleasant characters. Instead he asked us to look outside the Individual, to the habits of behaviour which had been gradually evolved by the society.
Mitchell analysed the origin and development of institutions and customs and supplemented them with money, banking and labour problems. In his later researches, he emphasised the physical aspect of economic activities. To him, the traditional economic theory was defective because it lacked an institutional approach.
Mitchell was confident that the institutional approach would develop economics into a science of human behaviour and in turn economics would be instrumental in bringing about social change. He felt that the role of money would broaden the scope of economic theory.
Economic Idea # 3. Theory of Economic Guidance:
The nineteenth century economists provided a rather simple theory. They explained that entrepreneurs occupied a key position in the economic system. They brought together the agents of production in the most efficient manner with the result that economic waste was avoided. The economic needs of the community were satisfied.
But Mitchell in his theory of economic guidance put forward the idea that the introduction of corporate enterprise separated ownership and management. As a result, powers were concentrated in the hands of a few directors and executives. Those who control the affairs of a corporation do it in their own interests. In 1913 when he wrote about this theory, he found that the role of the Government in this regard was less.
Economic Idea # 4. Economic Welfare and Planning:
Mitchell thought that when economics became a science of human behaviour, it would emphasise more human welfare and less wealth. So he suggested that in economics two things namely, determinants of welfare and the means to be employed to increase it should be analysed.
To Mitchell, welfare did not simply mean an abundant supply of goods, but also a satisfactory working life, full of interesting activities. The criterion of welfare was to be developed in such a way as it would be appreciable to many lines of efforts, by quantitative methods (Mitchell).
The Depression and the New Deal called for economic planning. Mitchell considered economic planning the most important and difficult task. He believed that planning by business alone would not succeed. Through lectures and talks, he made it clear that planning was essential for an orderly economy but piece meal planning was defective because it ignored the fact that the economic and social processes were interrelated. He was of the view that the work of the national planners was that of an agency for the fulfillment of what the majority desired.
Economic Idea # 5. Business Cycle:
Mitchell’s greatest contribution was the study of business fluctuations. His book entitled “The Rhythm of Business Activity” was the pinnacle of his ideas and findings on the working of trade cycles. He collected huge statistical data and with the help of that he could carry on a deep study of the individual cycles, group of cycles, and parts of the cycle. He has made use of the frequency curves.
Further he has made a comparative study of the different trends of changes in the prices during the period of the cycle. The study begins with a review of the existing theories, followed by a survey of general economic organisation and a detailed statistical analysis of various economic factors like prices, interest rate etc., and in the last comes the analysis of the working of cycles.
Mitchell did not consider the study of trade cycles as a branch of economic theory. According to him, the study of trade cycles was more important and fruitful for gaining knowledge about the working of modern economic system.
He attributed business cycles to the imbalance between production and distribution. When imbalances occur, it results in glut in the market. Men and machines are unemployed. Business cycles recur because there is no proper business planning. Business fluctuations are aggravated by factors such as widening of markets, monopolies, migration of people etc.
According to the self-generation theory given by Mitchell, each phase of a trade cycle would automatically generate the other. He held the view that business crises were but one feature of a recurrent cycle. A crisis was expected to be followed by depression, depression by recovery, recovery by prosperity and prosperity by crisis and so on.
Certain factors like internal political conditions, changes in the monetary and banking systems, war, peace, new industrial methods, international relations etc. were responsible for the slackening or quickening the phases of trade cycle. He pointed out that different industries were affected by the trade cycle in different ways.
Further, Mitchell stated that during the revival period, there would be an increase in the price level, high business expectations, more production, increased demand for goods, and the level of employment would increase. Business optimism, increased investment, heavy orders for machinery would lead to a further increase in the price level.
Later on due to the operation of two factors namely:
(1) Gradual increase in the operative cost and
(2) Tension in the money and investment markets, a crisis or recession occurs.
To him, the present economic order which is characterised by high capital investment, middlemen, flexibility of credit and lack of adjustment, was responsible for trade cycles. Mitchell’s treatment of trade cycles is more elaborate, realistic, and authentic, since it is based on statistical and historical proofs.
Although studies in different aspects of the problem had been made by Malthus, Sismondi, Karl Marx, Jevons etc., it was only Mitchell who provided an analysis of all the phases of trade cycles on the basis of statistical data. To quote Burns, “No other work between Marshall’s “Principles” and Keynes “General Theory” has had as big an influence on economic thought of the western world”.
In-spite of several merits, the theory is not without its criticism. It has been criticised by modern writers on several counts. Firstly, it simply takes other factors behind. Secondly, it treats cyclical movements as the movements of a machine. In the opinion of Homan, it is a static theory in which economic institutions are a relatively constant factor not highly variable.
Critical Estimate of Mitchell’s Economic Ideas:
Mitchell who made a deep study of business cycles, was undoubtedly the leading exponent of institutionalism. His business cycle is considered a masterpiece in economic literature. Mitchell’s use of the statistical method and quantitative analysis has made economists to be more realistic in their studies. He wanted that inductive method should be used in the study of economic problems.
Since collection of facts is more painstaking, tiring and time consuming, he had earned all praise from American economists. He had realised that the modern economic life was quite complicated and its problems could not be handled successfully with the help of traditional analysis. He therefore pleaded for an integrated study of all related disciplines such as history, statistics, sociology etc.