F.— ECONOMIC SCIENCE AND STATISTICS 151 



The method of procedure is to take certain elements in the situation as 

 given — namely, the preference lists of individuals for goods and services, 

 the terms on which they are willing to contribute their assistance in pro- 

 duction and the current state of technology ; and to take other elements 

 as unknowns — namely, the prices of all commodities and of factors of pro- 

 duction, the amounts of commodities which will be produced and of 

 factors which will be employed, and the precise methods of production 

 among the variety of these technically possible which will be used. If 

 the elements taken as known were in fact known, it would be possible to 

 write down a number of equations expressing some of the unknowns as 

 functions of the others. The object of this procedure would be to provide 

 means of showing how changes in the fundamental data, desires, etc., 

 will govern the course of events. 



I regard the most notable intellectual achievement in this department 

 to be the classification of factors of production required as preliminary to 

 the formulation of the equations. (This classification has also proved of 

 great service in elaborating the analytical map already considered.) 

 There is the analysis of the contribution of capital to production as con- 

 sisting essentially of waiting. There is all the work concerning the rela- 

 tion between direct and overhead costs. The so-called law of rent has 

 given rise to a number of dichotomies of great interest. The concept of 

 profit as a reward for skill and judgment has been rendered fairly precise. 

 Prof. Knight has shed a penetrating light upon the relation of profit 

 to uncertainty-bearing, but some puzzles here remain. Meanwhile 

 Mr. Keynes has produced another concept, liquidity-sacrifice, which bids 

 fair to find a place as an independent factor ; it needs further elaboration, 

 and its relation to the general concept of uncertainty-bearing requires 

 precise definition. 



These concepts are then applied and their values are expressed as 

 unknown quantities in a number of forms of functional equations. These 

 relate to the demands for commodities considered as functions of the 

 prices of commodities, the quantities of factors used to produce commodi- 

 ties considered as functions of the prices of factors, and the quantities of 

 factors on offer considered as functions of their prices. Satisfaction is 

 expressed if there are as many forms of equations as there are unknown 

 quantities. 



But we run at once into this difiiculty that the matters taken as known 

 for the sake of argument are in fact not known. We may write down 

 that the quantity of a commodity demanded depends on its price and on 

 the prices of other commodities. But this does not take us far unless 

 we know the precise law of dependence. We can only say that there 

 should be an equation here, and if it could be written out along with a 

 number of other equations, we should be able to determine the value of 

 the unknowns and the effect of any specified change upon them. But in 

 fact we have not got these equations, but only a number of blank forms, 

 which are nothing more than aspirations to have such equations ! 



If this were the end of the matter, this department of theory would 

 yield no causal laws and no power to predict whatever. The situation 

 is not quite so bad. It is at this point that the Law of Demand is brought 



