A Short History of the Rise and Fall of Political Economy 9789534840602, 9788191043907

Citation preview

A Short History of the

Rise and Fall of Political Economy

Soumitra Sharma Emeritus Professor of Economics, University of Pula, Croatia

A Short History of the

Rise and Fall of Political Economy

Edited by

Daniel Tomić

A Short History of the

Rise and Fall of Political Economy © Soumitra Sharma 2020 ISBN 978-953-48406-0-2 (Croatia) ISBN 978-81-910439-0-7 (India)

Reviewers: Mainko Škare Niko Koncul

Published by

Shobhit Institute of Engineering & Technology (A NAAC Accredited, Deemed to be University, approved by u/s 3 of UGC ACT 1956),

NH-58, Modipuram, Meerut-250110 Printed in Croatia by Sveučilišna tiskara, d.o.o, Trg Republike 14, Zagreb

Dedicated to my former students and now my younger collegues and friends at Economics Faculties in Zagreb and Pula (Croatia)

Contents Preface Introduction Chapter 1. Evolution of Political Economy Chapter 2. The Founders Chapter 3. A Gloomy Shadow Chapter 4. Antagonism and Associationism Chapter 5. Liberalism Chapter 6. The Downhill Journey Chapter 7. Dissenssion Chapter 8. State Socialists Chapter 9. Prelude to Marxism Chapter 10. Towards the End of XIXth Century Chapter 11. Dawn of Marxism Chapter 12. Epilogue: The Demise Literature Index

i

1 6 18 48 57 74 81 86 94 103 111 122 135 147

Editor’s Note History, though a bad master, is an excellent teacher. It narrates the events and facts that have occurred in the history of evolution of mankind. History is an account of the rise and fall of nations, their customs and traditions, culture, science and technology. Every major upheaval that had ever taken place in the past, had invariably given rise to a new system, adapting the old ones allowing changes in it, and has affected not only the then prevailing conditions, but has always led to certain future political, socio-economic, philosophical, and scientific transformations. In general, the history of development of economic philosophies and doctrines has the same spirit and approach. It narrates the facts of the past to help us mould the future. This volume on the history of economic thought has a dual purpose. In the first place, it not only intends to remind us of the past events and their impact on our future, but also to caution us, not to repeat the mistakes of the past. Secondly, it has a scholistic ambition. It intends to promote among readers an interest for the development of scientific economic thought. In view of the latter, it should be noted that after the WW II the study of the decipline (History of Economic Doctrines, which used to be a part and parcel of the post graduate teaching world around) particularly, was been marred by the growing orientation for technical microeconomics. The author, in this volume, attempts to recreate an interest in the subject and to rejuvinate the science by reminding us of its history. The period he basically covers is, from 1750 to 1925. The author of this Short History of Rise and Fall of Political Economy, is an internationally reputed teacher of economics for about six decades now. Since, he has a keen interest in philosophy, history, and economics; in most of his writings, he tries to synthesise them. His writings are well recognized for his knack of the topics that define historical changes and socio-economic trends in social phenomena, because these are net product of a historical process and the then prevailing environment. This volume provides us with an insight in the philosophical, socio-economic and political thought of the time that revolved around the concepts of Political Economy. The author offers us here a vision of the real functioning of the world to help us draw conclusions from both, orthodox and heterodox, economic doctrines, such as to develop a more coherent analysis of issues, e.g., free market, the role of the State and state-craft, production and distribution, accumulation of capital, growth and development, crises and many other dominant controversial issues.

ii

The volume, presents s a vivid picture of the state of the science from antiquity, and guides through the inflorescence of economic thoughts in times of Physiocrats 1; through the founders of Classical economic thought2, and the development of socialist and Marxist ideologies3 etc. This all through a critical enrichment of such ideas that were a prelude to the dilution and the demise of political and intellectual pursuit of economists, towards the only goal – to understand the scientific intricacies of Political Economy. It can safely be observed from the typescript, that this compendium of the history of economic thought, consciously traces causal relations between economic and noneconomic factors by introspecting into the theoretical premises of scholarly thoughts with an eclectic vision of rejuvenating the science by reminding us of its roots. While historically analysing the background of the economic ideas that sprouted in a given environment, the author does not suggest us that any of economic doctrine is right or superior, au contraire, to him all of these can be equally right or wrong, such that the reader need to make his/her own mind to conceptualise and comprehend the implication of their impact. It is hard and probably unjustified to attempt to summarize a book of such nature, in a few lines. Moreover, this task should be left to the readers. The Preface of this volume, presents to readers a short review of what one should expect from this History. I am sure that at the end of the reading spree, one would hardly be able to claim an ignorance of the origin, development, and approach of the science to variety of its concepts and myths. The flow of the subject matter is consistent in its approach and runs in a chronological order. Through deduction and induction, the author successfully tries to relate various socio-economic concepts and subjects that appear to be unrelated at the first sight. Overall, in my view, it is a very good exercise of synthesis of economic thought. This volume, definitely, is a positive contribution of the author towards scholastic the scientific literature on the subject, and thereby deserves a critical appreciation of the readers. I strongly feel, that it will be a helpful compendium to the teachers and the students alike. Daniel Tomić Pula, 1 December 2019

The Physiocrats (who called themselves the économistes) are said to have created the first strictly scientific system of economics. 2 The so called Optimists and Pessimists. 3 Socialist thought is fairly an old one. Over the last 300 years its various models, from associtives to State socialist and Marxist, from guild socialist to syndicalist, from Leninist to Maoist, have been put forwarded and partially exiperimented, but, surpringly, none did succeed so far. 1

iii

Preface I take pleasure in presenting to the readers a concise volume on the history of economic doctrines. Since, this volume is primarily deemed as a compendium for the university students, A Short History of the Rise and Fall of Political Economy, is my modest attempt to pesent a synthetic review of the history of economic doctrines in Eurpean theatre during XVIIth to XIXth centuries. The book might be of some interest to all those who are interested to learn of the ultimate fate of the science of political economy. Lest someone indicts me for plagiarsm, at the very outset, I must stress that it is not an original piece of research. What is presented here in the following pages are the views of the great economic thinkers of the time. What I have endevored here is just to gather the details, put them in a sequential oredr, edit, assess and comment them (in sqaure brackets) and present to the readers. The original works of these economists are properly cited. Footnotes are provided along with the sources and some additional relevant information on the subject. For chronological order I have used three major textbooks on the subject: J. A. Schumpeter’s, (1954) History of Economic Analysis, Oxford University Press, London; Charles Gide and Charles Rist’s (1917), History of Economic Doctrines, Oxford University Press, London; Alexander Gray’s (1931) Development of Economic Doctrine – An Introductory survey, Longmans Green & Co., London; and Eric Roll’s (1973) A History of Economic Thought, Faber & Faber, London. Until the WWII, a significant prominence was given to history of the science and it was not surprising that most universities wanted to develop the economic thought. Thus, a subject of study in graduate programmes inescapably was the History of Economic Doctrines in most universities in France, England, US, Canada, Australia, India, and in some African countries. Elsewhere, the premier place was given to the study of facts rather than of these ideas, for extreme partisans of the historical method, especially the advocates of historical materialism, regarded doctrines and systems as nothing better than a pale reflection of facts. However, in the post WWII period, in most universities, talking about the contents of the science had become obsolete. Political Economy has been declared dead, and many university teachers today, are, unfortunately, unaware of the history of the very science they teach. Accordingly, the science has been abandoned completely.

iv

Being an economics teacher at various universities around the world, for over 55 years, towards the end of my life, I have come to realize that for becoming a good economist, students and teachers alike, must have some basic knowledge of the history of economic doctrines. For this very reason I have decided to composed this small volume. An effort has been made to bring forward such doctrines as have contributed to the foundation of ideas generally accepted at the present time, or such as are connected with these in direct line of descent. In a plan of history of this kind, I feel that a chronological order must be maintained. This does not mean that I have classified them according to the date of their earliest appearance, but it simply means that I have taken account of such doctrines as have reached a certain degree of maturity. The outlay of this book is as follows. I begin the history of economic doctrines with its development through ancient times to the Mercantilists. Then I try to cover the post Renaissance period in Europe i.e. the end of XVIIIth and the beginning of XIXth centuries. It deals mainly with the founders of Classical political economy, with the Physiocrats, Adam Smith, J. B. Say, and with David Ricardo and T. R. Malthus, whose gloomy forecasts were to cloud the glory of the natural order. Then is covered the first half of XIXth century when some writers who either challenged or in some way disputed the principles lay down by the founders e.g., S. de Sismondi, C. H. Saint-Simon, the Associative Socialists, Frederich List and P-J. Proudhon. Follows the period of middle of the XIXth century that saw the triumph of the Liberal School that withstood every attack, though not without making some concessions. It so happened that the fundamental doctrines of this school were definitely formulated about the same time, although in very different fashion, as were articulated by John S. Mill and Frederic Bastiat. The second half of the century represents those who dissented from the Liberalism of the predecessors, who are responsible for schisms that began to manifest in different directions. The Historical School advocated the employment of inductive method; State Socialists pressed the claims of a new social policy; Marxism launched an attack upon the scientific basis of the science, and the Christian schools challenged the ethical implications. Last, I try to examine the various schools that flourished towards the end of century: The Hedonists, the Psychological School, the Mathematical school, le Play’s school, Social Catholicism, Social Protestantism, and the Solidaritists. It should be noted that the course of succession is not to be taken to imply that each antecedent doctrine had either been eliminated by some subsequent doctrine or else merged in it. Doctrines and systems have a vitality of their own which is altogether independent of the vagaries of fashion. It was thus to regard their history like all histories of ideas, as a kind of struggle for existence. At one time conflicting doctrines seem to dwell in harmony side by side whereas at another moment rushing at each other with

v

full force. It may happen that some of the doctrines in the battle are lost forever, or reappear in new garb, or give place to entirely new thoughts. Since, I have presented many ideas of others in my own way, I am conscious of the fact that in my effort for objectivity, there may have been errors and omissions, but these are purely mine and are due to my ignorance, for which I do apologize to the readers. Lastly, I will be failing in my duty not to express my gratitude to the reviewers: Marinko Škare and Niko Koncul, for taking pains to go through the typescript and give some useful suggestions. Also, my sincere thanks are due to Daniel Tomić, for editing the book. I hope this volume will help the readers to understand the modern economics a little better!

Soumitra Sharma

Zagreb, 10 November 2019

vi

vii

Introduction It is obviously impossible to regard the history of any science as complete as long as the sicence itself is not definitely constituted. This applies to all the sciences alike, even to more advanced sciences – physics, chemistry, and mathematics, for example all of which are continuously undergoing some modifications, abondoning in course of their progress, certain conceptions that were formerly regarded as useful, but which now appear antiquated, and adopting others which, if not entirely new, are atleast more comprehensive and more fruitful. And not only is this true of individual sciences, but is equally true of the very conception of science itself. Progress in the sciences involves a modification of our ideas. As a researcher, as of the past, we are in the pursuit of truth, put the conception of the scientific truth in the XXIst century is not what it was in the past centuries, and eveything points to still further modifications of that conception in the future. It is scarcely to be expected that Political Economy, which still is relatively young science, will prove itself less mutable than other sciences. All that a historian is permitted to do is to point to the distance already traversed, without pretending to be able to guess the character of the path that still remains to be covered. His object must be to appreciate the nature of the tasks that now await the economist, and for this, his study of the efforts put forwarded in the past should prove of some assistance. A simple analogy will perhaps help us to guage the kind of impression that will be left upon us by a study of economic ideas of the past centuries. The unity with the Physiocrats, and still more with Smith, whose theory of political economy was a doctrine of such simplicity that every human mind could grasp it at a single glance. But as the time went by and the science progressed it was realized that the unity which characterized it at first glance was more apparent than real. The contradictory theories which Smith had seemed able to reconcile gave rise to new currents of thought, which tended to drift farther and farther apart as they assumed a greater degree of independence. Conflicting theories of distribution and of value began to take the place, and quarrels arose over the relative merits of the abstract and historical method, or the claims of society and the rights of individual.

1

With a view of self-defence, each of these schools took its own particular road, which it followed with varied fortune, including many setbacks. Each of them also surrounded itself with a network of observations and inductions, thus bringing into the common fund a wealth of new truths and useful conclusions. This has resulted in the gradual development, around each great body of economic thought, of a layer that grows ever tougher and more extensive, forming as it were a common stock of scientific knowledge, beneath which may still be seen the salient features of the main doctrines. Eventually, there comes a time, when what we see is no longer true. In other words, the sum total of acquired truths is the only legacy left to us by the various systems of the past, and this is what interests us in the present. Hence, one valuable result of so much discussion and polemics has been the discovery of some common ground upon which all economists can get together. This common ground is the domain of study of Political Economy – a science that is concerned with the presentation of what ought to be, but with the expalnation and the thorough understanding of what actually is. The supiriority of a theory is measured solely by its explainatory power. It matters little whether its author is Interventionist or Liberal, Protectionist or Free Trader, Socialist or Individualist – everybody must bow before an exact observation or a scientific explanation. But, while these divergent schools tend to be lost in the unity of a more fully comprehended science, we see the emergence of other divisions, less scientific perhaps, but more fertile so far as the progress of science itself is concerned. It seems to us, as if new kind of arrangements were making a headway and appearance underneath the old. This obviously is the case with regard to method, for example, where the separation between pure and descriptive economics, or between the theoretical systematization and the mere observation of a concrete phenomena, is becoming very pronounced. Both kinds of research are equally needed. Economic science, however, cannot afford to dispense either with theory or observation. The desire to seize hold of the chain of economic phenomena and to unravel its secret connextions is as strong as ever it was. On the other hand, in view of the transformation and the daily modifications that industry everywhre had undergone, it is useless to imagine that we can dispense with the task of observing and describing these. The two methods have been developing paralally. Accordingly, what we find is a segmentation of economic science into a number of distinct sciences, each of which tends to become more or less autonomous. Such separation does not necessarily imply a conflict of opinion, but is simply the oucome of intellectual division of labour. At the outset of its career the whole of political economy was included within the compass of all those facts and theories of which an economist was supposed to have 2

special knowledge and were, according to Say and his disciples, easily grouped under three heads: Production, Consumption, and Distribution. But since than the science has been broken into a number of distinct branches. Today, Political Economy has just become a vague but useful term to denote a number of studies which often differ widely. The theory of prices and theory of distribution have undergone such modifications as entitle them to be separate studies. Social economics has carved out a demand for its own, and is now leading a separate existence. The theory of population has emerged as demography; theory of taxation is now known as science of finance; and economic statistics occupies a border line with these various sciences. Descriptions of the commercial industrial mechanism of banks and exchanges, the classification of the forms of industry and the study of its transformation is deeply related to political economy. Despite the gradual rise of a consensus of scientifc opinion among economists, the divergences concerning the object that should be pursued and the means employed to achieve that end are as pronounced as ever. Each of the major doctrines, which I shall be dealing with in the following pages, has a body of its representatives. Liberals, Communists, Interventionists, State and Christian socialist continue to preach their differeing ideas and to advocate different methods of procedure. On the question of science itself, however, they are all united. The arguments upon which they base their contentions are largely borrowed from sources other than scientific. Moral and religious beliefs, political or social conviction, individual preferences or sentiments, personal experience or interest are the determinants of their interest. The earlier half of XIXth century witnessed the science of political economy making common cause with one particular doctrine, namely Liberalism. The alliance proved most unfortunate. The time when economic doctrines were expected to lend support to some given policy was forever gone by. But the lessons were not lost, and everbody realized that nohing could be more dangerous for the development of science than link the teaching to the tenets of some particular school. At the same time the science might concievably furnish valuable information to the politicians by enabling them to foresee the result of particular meaures; and it is to be hoped that such predictions, all too uncertain as yet, may accordingly, become more precise in the future. The influence exerted by the economic environment, whence even the most abstract economists get material for reflexion and the exercise of his logical acumen, is undisputable. The problems, which the theorist has to solve, are suggested by the rise of certain phenomena, which at one moment cut a very prominent figure and at another disappear altogether. Such problems must vary in different places and different times. The peculiar economic condition in which England found herself at the beginning of XIXth century had a great deal to do in directing Ricardo’s thought to the study of the problem of rent and currency-notes issue. By the advent of machinery, with subsequent rise of increase in industrial activity and the parallel growth of proletarian class, 3

followed by the reoccurrences of economic crises, we may be certain that neither the doctrine of Sismondi nor that of Marx would ever have seen the light of the day. Similarly, the attention that the economists gave to the theory of monopoly was not altogether unconnected to the trust movement But while recognizing all this, it is important that we should remember that facts alone are not sufficient to explain the origin of any doctrines, even those of social politics, and still less those of a purely scientific character. If ideas are determined solely by time and environment how are we to explain the emergence at the same time and in same environment of such different and even contradictory doctrines as Say’s and Sismondi’s, Bastiat’s and Proudhon’s, Schulze-Delitzsch’s and Marx’s and others? With what combination of historical circumstances are we to connect Cournot’s foundation of the Mathematical school in France, or how are we to account for the simultaneous discovery in three or four countries of the theory of final utility? Thus, we shall be omitting references to the history of economic facts and institutions except in so far as such references seem crucial to an understanding of either appearance or disappearance of certain doctrine or to the better appreciation of the special prominence, which a theory may have held at certain moment. Occasionally, the facts are connected with the doctrines, not as cause but as results. Notwithstanding the scepticism of Cournot, who was inclined to declare that the influence exerted by the grammarians upon the development of language, it is impossible not to see the connection between the commercial treaties of 1860, and the teachings of the Manchester School, or between labour legislations and doctrine of State Socialism. To write a short history of economic doctrines is an almost impossible attempt on my part, and I cannot pretend that I have done it successfully. Even a very summary exposition of such doctrines as could not possibly be neglected involved the omission of many others of hardly less importance. In the first place it was possible to pass over the pioneers by taking the latter part of the XVIIIth century as the starting point4. There is absolutely no doubt that the beginnings of political economy as a science lie in distant past, but the great currents of economic thought known as the schools only began with the appearance of those two typical doctrines, individualism and socialism, in the earlier half of XIXth century. Moreover, the omission is easily made good, for it so happens that the earlier periods are those most fully dealt with in such works as have already appeared in writings of many (e.g. Espinas for the period of antiquity unto XVIIIth century).

Deschanips, M. (1900), In Revue de l’Enseignrment primiare, suggests to economic historians “as far as the history of economic science is concerned, there is no need to go farther back than the Physiocrats”. This view has been accepted by most economic historians of the doctrine during the last century. 4

4

Despite the prominence given to France, England and Germany were bound to receive considerable attention. With regard to other countries, except an occasional reference to Italy and US, I will be making just a very casual reference. The criteria for the choice of authors is rather arbitrary, especially in case of a science like economics where the writers, unknown to one another, not infrequently repeat the same ideas, and it becomes a matter of quite difficulty to hit upon the moment at which a certain idea first made appearance. It is, however, comparatively easy to determine when such an idea attracted general attention or took its place in the hierarchy of accepted or scarcely disputed truths. Not only was selection necessary in the case of authors, but also a similar strategy had to be applied to the doctrines. It must be realized, however, that a selection of this character does not warrant the conclusion that the doctrines dealt with are in any way superior to those which are not included, either from the standpoint of moral value, social utility, or of abstract truth, for I am not among those who think along with Say that “the history of error can no useful purpose”, I would rather like to associate myself with Condillac, when he remarks “It is essential that everyone who wishes to make something of mistakes committed by people like himself who thought that they were extending the boundaries of knowledge”. One cannot, moreover, be said to possess knowledge of any doctrine or to understand it until one knows something of its history, and of the pitfalls that lay in the path of those who formulated it.

5

Chapter 1.

Evolution of Political Economy The slow process by which Political Economy (or economics, as we call it now), has risen to its recognized existence, ran its course in the West, during XVIIth and towards the end of the XVIIIth century. The peak success of that epoch was Smith’s Wealth of Nations, (1776). The situation around this time, was such that the merger of two types of work that are sufficiently distinct, to justify separate consideration. There was the stock of factual knowledge and the conceptual apparatus that had slowly grown, during the past centuries in the studies of philosophers, and, semi-independent of this, there was a stock of facts and concepts that had been accumulated by men of practical affairs in the course of their dealings of current political issues. These two sources of nascent economics cannot be separated strictly. On the one hand, there were many intermediate cases that cannot be classified easily. On the other hand, right in the time of Physiocrats, the scholar’s technique was simple, and most of it was within the reach of ordinary common sense and easily rivalled by unlearned practitioners, whose writings, therefore cannot be dismissed as irrelevant, and one could call them scientific. Let us begin our quest of development of science from the beginning. The history of political economic thought suggests that, as a social science, it is as old as some 4500 years. It has its origins in antiquity that goes back to Egypt and Sumer, for they were the first to lay down the principles of state and economic management. It should be noted that while, the history of economic thought starts from the records of national theocracies of the time, whose economies presented phenomena that were not dissimilar to these in our times, and problems which they managed in a spirit that was, not dissimilar either; but the history of economic analysis, begins only with the Greeks.

Ancient Egypt had a kind of planned economy. From historical accounts, it is evident that the ancient Egyptian economy was broadly based on international trade. They traded gold, papyrus, linen, and grain for cedar wood, ebony, copper, iron, ivory, and lapis lazuli. Ancient Egyptians bought goods from merchants. Government and religion 6

were inseparable in ancient Egypt. The pharaoh was the head of the state and the divine representative of the gods on earth. As in all ancient societies, agriculture was the main economic activity. The harvests in Egypt were richer than in most other countries at the time, allowing for a larger percentage of urban dwellers and diverse forms of production. Thus, the cities, temples, the wealth of the state and the ability to toe-quip armies for campaigns against countries producing products were considered vital for the economy. Workers were paid in wheat, barley and, occasionally, in craft products like pottery, clothes etc. imported from countries around the Mediterranean Sea, Aegean Sea and the Red Sea. As far as the Assyrian and Babylonian theocracies are concerned, they had huge military and bureaucratic establishments and legal systems, of which the code of Hammurabi (1754 BC) is the earliest legislative document. They pursued an active foreign policy and developed monetary institutions to a high degree of perfection, and knew credit and banking. The Epic of Gilgamesh too refers to trade with far lands for goods such as wood that were scarce in Mesopotamia. People worked as pottery makers, stonecutters, bricklayers, metal smiths, farmers, fishers, shepherds, weavers, leatherworkers, and sailors. The wheel was invented and iron was smelted about 2500 BC. Seals had been used to stamp a carved insignia on clay before cylindrical seals became widespread for labelling commodities and legal documents. Pictographic writing was used as early as 3400 BC. The Sumerian economy was based on agriculture, which was influenced by major technological advances in Mesopotamian history. Early Sumerian hut houses were built from the bundles of reeds, which went on to be built from sunbaked mud bricks because of the shortage of stone. They traded with far-away locations in Anatolia, northeastern Afghanistan, Dilmun (modern Bahrain), and with India. The Indus Valley scripts too, suggest that their remarkably wide-ranging network of ancient trade centred on the Persian Gulf. More than anywhere else, we might find in China, traces of a highly developed public administration that dealt with the agrarian, commercial and financial problems frequently touched upon, from an ethical standpoint. We find them in fact, in philosophical writings of Confucius5 (The Analects), and the philosophical anecdotes of

Confucius, (551-478 BC), was a Chinese philosopher and politician of the Spring and Autumn period. The philosophy of Confucius, also known as Confucianism, emphasized personal and governmental morality, correctness of social relationships, justice and sincerity. His followers competed successfully with many other schools during the Hundred Schools of Thought era only to be suppressed in favour of the Legalists during the Qin dynasty. Following the victory of Han over Chu after the collapse of Qin, Confucius's thoughts received official sanction and were further developed into a system known in the West as Neo-Confucianism. 5

7

his disciple Meng Tzú (Mencius)6, from which it is possible to compile a comprehensive system of economic policy. Moreover, there were methods of monetary management and of exchange control that seem to propose a certain amount of analysis. The phenomena of recurrent inflations were no doubt observed and discussed. But, no piece of reasoning on strictly economic topics has come down that can be called scientific. Confucius appeared in period of a political decadence and spiritual questioning. He contributed to transmit and reformulate giving centrality to self-cultivation and agency of humans, and the educational power of the self-established individual in loving others. With the decline of Zhou reign, traditional values were abandoned resulting in a period of moral decline. Confucius tried to reinforce values of compassion and tradition into society. Disillusioned with the widespread vulgarization of the rituals to access Tien (heaven), he began to preach an ethical interpretation of traditional Zhou religion. Confucius conceived these qualities as the foundation needed to restore socio-political harmony. He amended and re-codified the classical books, and composed the Spring and Autumn Annals – the earliest surviving Chinese historical text to be arranged in annals form – a fairly rich compendium on political economy. Social harmony, according to Confucius, results in part from every individual knowing his or her place in the natural order, and playing his or her part well. Reciprocity or responsibility extends beyond filial piety and involves the entire network of social relations, even the respect for rulers. Particular duties arise from one’s particular situation in relation to others. The individual stands simultaneously in several different relationships with different people: as a junior in relation to parents and elders, and as a senior in relation to younger siblings, students, and others. While juniors are considered in Confucianism to owe their seniors reverence, seniors also have duties of benevolence and concern toward juniors. Philosophers in the Chinese Warring States period (404-221 BC), both inside the square (focused on state-endorsed ritual) and outside the square (non-aligned to state ritual) built upon Confucius’ legacy, that is compiled in the Analects, and it had formulated the classical metaphysics that became the lash of Confucianism. In accordance with the Master, they identified mental tranquillity as the state of Tien, or the One (Yi), which in each individual is the Heaven-bestowed divine power to rule one’s own life and the world. Going beyond the Master, the disciples theorized the oneness of production and re-absorption into the cosmic source, and the possibility to understand and therefore re-

A book of his conversations with kings of the time is one of the four books that are grouped as the core of orthodox Neo-Confucian thought. In contrast to the sayings of Confucius, which are short and self-contained, the Mencius consists of long dialogues, including arguments, with extensive prose. Mencius – a collection of anecdotes, is believed to be compiled and written by his disciples around 400 BC). 6

8

attain it through meditation. This line of thought would have influenced all Chinese individual and collective-political mystical theories and practices thereafter. Interestingly enough, in the Western world, until the beginning of the last century very little was known about the political economic philosophy that dominated India prior to the expedition of Alexander the Great in 321 BC. It was around this time, that a highly elaborate work on statecraft, authored by a royal advisor, Kautilya7, (The Arthaśāstra), appeared. Some modern-day scholars fancy to compare it with Smith’s Wealth of Nations. Kautilya's work was encapsulated in his book, especially the way of financial management and economic governance. When it deals with politics, the Arthāŝastra describes in detail the art of government in its widest sense; the maintenance of law and order of efficient administrative machinery. According to Kautilya, political economy is a separate science but not independent of other disciplines and particularly of ethics. It implied that the inter‐dependence between economics and other disciplines should be encouraged and vigorously explored. The sacred books of Israel (Torah, Tanakh and Mishna), especially the legislative part of them, also reveal the perfect grasp of practical economic problems of Hebrew state. The obvious inference is of course that there may have been some analytical work in the past. We know that common sense knowledge, relative to scientific knowledge, goes much further in economic analysis, however important, it took much longer in eliciting specifically scientific curiosity than did natural phenomena. Nature harbours secrets into which it is exciting to probe for economic life is the sum total of most common and drabbest experiences. Social problems interest scholars from a philosophical and political standpoint. So far as we can tell, from preliminary economic analysis, it is the inheritance that is left to us by the ancient Greeks. Like their mathematics and geometry, their astronomy,

Kautilya was an ancient Indian teacher, philosopher, economist, and jurist and royal advisor. He is traditionally identified also as Chanakya, who authored the political treatise, the Arthaśāstra - a text dated to roughly around Alexander’s expedition in India. As such, he is considered as the pioneer of political science and economics in India, and his work is considered as an important precursor to classical economics. His Artha has a much wider significance than merely wealth. In his Arthaśāstra – the science of artha – considers it as material well-being of individuals as part of it devoting the concluding section of his book: ‘The source of the livelihood of men is wealth’. He draws a corollary that the wealth of a nation is both the territory of state and its inhabitants who may follow a variety of occupation. The state or government has a crucial role to play in maintaining the material wellbeing of the nation and its people. Therefore, the important part of Arthaśāstra is the science of economics, including the start of productive enterprises, taxation, revenue collection, budget and accounts. Note that the study of economics, the art of government and foreign policy, in India, is indeed very old; the development of science, according to some scholars, may have started around 650 BC. 7

9

mechanics, optics, their economics is fountainhead of all further work. Unlike their performance in these fields, however, their economics failed to attain an independent status or even a distinctive label; their Oeconomicus meant only the practical wisdom of household management. The Aristotelian Chrematistics, referred mainly to the pecuniary aspects of business activity. They merged their pieces of economic reasoning with their general philosophy of state and society and rarely dealt with an economic topic. Classic scholars as well as economists more highly think of their general philosophy and not of technical economics. Such as they were the scientific splinters that are accessible to us today, might be gleaned from the works of Plato, and Aristotle. Greek thought, even where most abstract, always revolved around the practical problems of human life. These problems in turn always centred in the idea of the Hellenic city-state, the polis, which was to the Greek the only possible form of civilized existence. Thus by virtue of unique synthesis of elements, the Greek philosopher was essentially a political scientist. The role of ancient Greek philosophers in the evolution and growth of political economy too is worth commendable. Plato stands with Socrates8 and Aristotle as one who shaped the intellectual tradition of the West. In his Republic, while Plato speaks about the goodness, reality and knowledge, he also addresses the purpose of education and the roles of women and men as guardians of the people. Using allegory, he arrives at a depiction of a state bound by harmony and ruled by philosopher kings. In his Laws, instead of an ideal state ruled directly by moral philosophers, he depicts a society permeated by the rule of law. Immutable laws control most aspects of public and private life, from civil and legal administration to marriage, religion and sport. The rigours of life in Plato’s utopian Republic are not much tempered, but the Laws is a much more practical approach to his ideal. Plato’s aim was not analysis but extra-empirical visions of an ideal polis. The picture he painted of the Perfect State in his Politeia (The Republic) is no more analysis than a painter’s rendering of a Venus, a scientific anatomy. It goes without saying that on this plane what is and what ought to be loses its meaning. Plato's idea of the Perfect State is correlated with the material furnished by the observation of actual states, while reasoning of an analytical nature is more prominent in his later work, Nomoi (Laws). Plato's Perfect State concieved for a small and, so far as Socrates, (469-399 BC), was a classical Athenian philosopher who is credited as one of the founders of Western philosophy. He is supposed to be the first moral philosopher of the Western ethical tradition. As he did not write down any of his teachings, only secondary sources provide some information. While "Socrates dealt with moral matters and took no notice at all of nature in general", in his Dialogues, Plato emphasizes mathematics with metaphysical overtones mirroring that of Pythagoras—the former who would dominate Western thought well into the Renaissance. Aristotle himself was as much of a philosopher as he was a scientist with extensive work in the fields of biology and physics. 8

10

possible, constant number of citizens and stationary in its wealth. All economic and noneconomic activity was strictly regulated – warriors, farmers, artisans, etc. being organized in permannent castes, men and women being treated exactly alike. Government was entrusted to one of these castes of guardians or rulers who were to live together without individual property or family ties. The changes introduced in the Nomoi are simply compromises, but with reality, without touching the principles involved. We need not consider here numerous economic topics that Plato touched upon. Let us only take two examples: His cast system rests upon the perception of the necessity of division of labour (Politeia, II, 370). He elaborates on this eternal commonplace of economics with unusual care. He puts emphasis not upon the increase of efficiency that results from division of labour, per se, but upon allowing everyones specialization according to his ablities. Next, Plato makes remarks to money as a symbol devised for the purpose of exchange. It must, however, be observed that his cannons of monetary policy – his hostility to the use of gold and silver, or his idea of domestic currency that will be useless abroad – do agree with logical consequences of a theory according to which the value of money is on principle independent of the stuff it is made of. Thus, he seems to be the first known sponsor of monetary theories. An analytical intention, in a sense, being absent from Plato's mind, was the prime mover of Aristotle's performance. This is evident from the logical structure of his arguments. It becomes more evident if we observe his method of work: e.g., his political concepts and doctrines were drawn from an extensive collectiion of constitutions of Greek states. Of course, he also looked for the Best State, which was to realize the Good Life, the Summum Bonum, and Justice. He is full of value judgements for which he claimed validity. He also gave normative form to his results. His writings cover a wide field of knowledge from biology and astronomy to rhetoric and literary criticism, from political theory to the most abstract reaches of philosophy. A treatise or textbook on state and society that Politics must be appraised and his Nicomachean Ethics – a comprehensive treatise on human behaviour presented from the normative angel – also deals with political man, with man in city-state, that it should be considered as a companion volume to the Politics. Making up together with the latter the first known systamatic presentation of a unitary Social Science. We know that upto the times of Hobbes, all that went under the name of political science and political philosophy fed upon the Aristotelian stock. In The Nicomachean Ethics, Aristotle’s guiding question is: what is best thing for a human being? His answer is happiness, but he means, not something that we feel, but rather a good kind of life. Happiness is made up of activities in which we use the best human capacities, both ones that contribute to our flourishing as a member of community, and ones that allow us to engage in god-like contemplation. Aristotle, among others, stresses the importance of moral virtues such as 11

courage and justice, responsibility for actions, nature of practical reasoning, and friendship. Contrary to a widespred impression, Aristotle did not accept Plato's idea that developed from the patriarchal family or gens. Neither did he fully accept the idea of Social Contract. However, much, on this point, in Aristotle is strongly suggestive of Sophist9 influence. Yet he consistently argued against them. In second book of the Politics, Aristotle discussed private property, communism, and the family, mainly by criticizing Plato, Phaleas and Hippodamus. Here, he discusses which types of constitutions are best and how they may be maintained. Like Plato, he considered that political philosophy should embrace the whole of human behaviour as well as the relationship of the individual to the state. His criticism seems rather strikingly unfair and, moreover, misconceives completely the nature and meaning of Plato’s creation. But his arguments for private property, family and against communism were all the more successful like the arguments of middle-class liberals of the XIXth century. Aristotle lived in a society in which slavery was essential, but a problem as well. He attempted to solve it by positing a principle that served both as an explanation and as a justification. He thought that it was indubitable fact, the natural inequality of men. He saw the difficulty of identifying this proposition with the quite different one that the former class of men actually furnishes the masters of real life. He eliminated this difficulty by admitting unnatural and unjust cases of slavery such as would arise from indiscriminate enslavement of Hellenic prisoners of war. The elements of Aristotle’s embryonic pure economics are to be found in his Politics (I, 8-11), and in Ethics (v, 5). He was primarily concerned with the natural and the just from the standpoint of his ideal of the good and virtuous life, and the economic facts and the relation in the light of the ideological perceptions to be expected in a man who lived in. Aristotle based his economic analysis squared upon wants and their satisfaction. Starting from the economy of self-sufficient household, he introduces division of labour, barter, money. There is no theory of distribution. As far as value is concerned, Aristotle differentiates value in use and value in exchange, concluding that the latter derives from the former. It has been held that this was due to his preoccupation with ethical problem of justice in pricing. Several passages (Ethics, v) show, as a matter of fact, that he tried to do so, but failed. He considered, however, the case of Monopoly (Politics, I, 11; and Ethics, v, 5), which he defined as the position in a

A sophist was a specific kind of teacher in ancient Greece, in the V th and IVth centuries BC. Many sophists specialized in philosophy and rhetoric, though other sophists taught subjects such as music, athletics, and mathematics. In general, they claimed to teach excellence or virtue, applied to various subjects, predominantly to young states. 9

12

market. He condemned it as unjust. The theory of money that Aristotle sponsored is in conscious opposition to one offered by Plato. Aristotle did not consider the possibility that people might choose more than one medium of exchange. He briefly mentions the fact that some metals are better for this role. Moreover, the requirement of his rule of equivalence in exchange led him to observe that the medium of exchange will also be used as a measure of value. And finally, he recognized, implicitly at least, its use as a store of value, and standard of deferred payments. Aristotle accepted the empirical fact of interest on money loans and saw no problem in it. By differentiating the loan that financed personal consumption from loan that financed the maritime trade, he, in all cases, condemned it as usury, on the ground that there was no justification for, money being simply an instrument of exchange, it to increase in going from hand to hand. But he does not ask why interest is being paid all the same. Let us now consider the contribution of the Romans. Even in the earliest times when Rome was substantially a community of peasants, there were economic problems of great importance that produced violent class struggles. By the time of the first Punic War important commercial interests had developed. Toward the end of Republic, trade, money and finance, colonial administration, the plight of Italian agriculture, the food supply of capital Rome, the growth of latifundia, slave labour, and so on all presented problems, that in an artificial political setup created by military conquest and by all the consequences of incessant warfare, might have fully employed a legion of economists. At the hight of cultural achievement, at the epoch of Hadrian and Antoninus Pius, when many of these problems were temporarily in abeyance and peace and prosperity reigned for a time in the vast realm, its able rulers, generals, and administrators could have made use of a brain trust. Yet there was nothing of the kind, nothing beyond the occasional utterances of groans about the empire's unfavourable balance of trade or about latifundia perdidere Italiam. But this is not difficult to understand. First, in the social structure of Rome, purely intellectual interests had no meaning. There were the paeasants, the urban plebs (including traders and artisans), and the slaves. And above all, there was a society that had its business stratum mainly consisting the aristocracy who never opposed to lead a life of refined leisure, and often threw itself wholehartedly into civil and military public affairs. The res republica was the centre of its existence and activities. With widening horizons and increased refinement, it cultivated an interest in Greek philosophy and art, and developed literature of its own. These things, were however, considered as passtimes. There was little steam left for serious work in scientific field, as Cicero's writings. Second, in order to understand the nature of Roman achievement in the field of law and legal system we must recall a few facts. There was a formalistic civil law (jus civile, jus quiritium), that applied only to the affairs of citizens who until 212 AD formed a part 13

of the free population of the empire. The body of legal rules (jus gentium), emerged from the commercial and other relations between non-citizens, or between citizens and noncitizens. Comprehensive codification was not attempted before the IVth century, though those paretorian edicta were fused, and copied in an enactment, in the reign of Hadrian. Third, the Roman literature on agriculture (De re rustica) is a branch of economic lietrature that seems have been cultivated rather extensively. It dealt with the practical principles of farm and estate management. For instance Cato's advice that the landowner should sell aging slaves before they become useless and that he should show himself as a hard task master as possible when inspecting his estate. This, no doubt, is very revealing in many respects but it does not involve any economic analysis. Some of the writers occassionally made some remarks that suggest later developments, such as that the most profitable use of a piece of land depends upon its distance from the centre of consumption. Among the Roman writers, Marcus T. Cicero10, (Selected Works, 1960), a Roman statesman, deserves a mention. His deeper thoughts on moral and political philosophy, on religion, and on the theory and practice of rhetoric have influenced the subsequent European thought. His attacks on misgovernment, enemies of democracy, and views on the code of behaviour, old age, farming are notable. We should not abondon our review of Graeco-Roman world without turnig to the Christian thought. We might expect that so far as Christianity aimed at social reform, it would have motivated economic analysis. Unfortunately, there is nothing of that kind either in Clement of Alexandira or in Tertullian or in Cyprian to mention a few of those who did concern themselves with the moral aspects of the economic phenomena around them. They preached against wanton luxury and irresponsible wealth, they enjoined charity and restraint in the use of worldly goods, but they did not analyze them. Notable is that neither Lactantius, nor Ambrosius, who might have elaborated a little on his statement that the rich consider their rightful property the “common goods of which they have possessed themselves“ nor Chrysostomus nor St. Augustine, ever went into the analysis of economic problems of the Christian state. As far as the Christian thought is concerned, two philosophers of religion St. Augustine (Confessions, 1992) and St. Aquinas (Selected Philosophical Writings, 1993), and deserves mention. Although, their works contain only a marginal mention of issues

Marcus Tullius Cicero, (100-44 BC), introduced the Romans to the chief schools of Greek philosophy and created a Latin philosophical vocabulary (with neologisms such as evidentia, humanitas, qualitas, quantitas, and essentia) distinguishing himself as a translator and philosopher. During the chaotic latter half of the I st century BC marked by civil wars and the dictatorship of Gaius Julius Caesar, Cicero championed a return to the traditional republican government. His works rank among the most influential in European culture, and today still constitute one of the most important bodies of primary material for the writing and revision of Roman history, especially the last days of the Roman Republic. 10

14

related to political economy, but these do determine the norms of human behaviour in ordinary daily life. St. Augustine11, although a religious philosopher, reflected his views on political and social philosophy constituting an important intellectual bridge between late antiquity and the emerging medieval world. The record of his thoughts on such themes as the nature of human society, justice, the nature and role of the state, the relationship between church and state, just and unjust war, and peace all have played their part in the shaping of Western civilization. St. Thomas Aquinas12, a famous Dominican friar, a great Western European medieval philosopher-theologian, saw religion as part of man’s natural propensity to worship. While drawing a strong distinction between theology and philosophy, St. Aquinas stresses that because of the inadequacies we perceive, and need to subject ourselves to laws. A characteristic feature of St. Aquinas times was the flourishing feudal system of Germanic states. This was a hierarchy based fief-endowed system in which warrior kings, knights, lords were well tied. This warrior class enjoyed unrivalled power and prestige and hence created its own cultural pattern. The economic base of this social system was the peasants and manorial craftsman. The Roman industry, commerce, finances still survived and so did the class of bourgeois character. In many places this class had outgrown the framework of feudal organization and thus, at times, like the victorious towns of Lombardy, organized successful resistance. However, the two classes learned to live together. Another factor of non-feudal origin that the feudal class failed to conquer was the Roman Catholic Church. The Church had an intricate relationship with the feudal class. It allied with them, depended upon them and waged war against them. The next three hundred years of development of scholastic economics was nothing different. All that can be said about later scholars is that they developed, in greater detail with a fuller perception of implications, the ideas that had crystallized in the works of their XIIIth century predecessors. The economics of scholars absorbed all the phenomena of nascent capitalism and, in consequence for the fact that it served well as the basis of the analytic work of their successors, not excluding even Smith. Their political ideas in particular, retained the same method of approach to the concept of state, government and also the same radical spirit. Their economics, particularly their theory of property, St. Augustine of Hippo, (354-430), was an early Christian theologian and philosopher from Numidia whose writings influenced the development of Western Christianity and Western philosophy. Among his most important works are The City of God, De doctrina Christiana, and Confessions. 12 St. Thomas Aquinas, (1225-1274), was the foremost classical proponent of natural theology and the father of Thomism; of which he argued that reason is found in God. His influence on Western thought is considerable, and much of modern philosophy developed or opposed his ideas, particularly in the areas of ethics, natural law, metaphysics, and political theory. Unlike many currents in the Church of the time, Thomas embraced several ideas put forward by Aristotle—whom he called the Philosopher—and attempted to synthesize his philosophy with the principles of Christianity. His best-known works are the Disputed Questions on Truth, (1256–1259), the Summa contra Gentiles, (1259–1265), and the Summa Theologiae, (1265–1274). 11

15

continued to treat temporal institutions as utilitarian devices that were to be justified by consideration of social expedience centring in the concept of the public good. These scholars were not primarily concerned with problems of national states. However, their attention attracted issues of public finance such as incidence of taxation, economic effects of government expenditure, government borrowing (which they mostly condemned), question of relative merits of taxes on wealth and taxes on consumption etc. It was far less than economic analysis. What they were interested was the justice of taxation, and below their normative propositions there was some social analysis of the nature of taxation and the relation between state and the citizen. Nevertheless, their pure economics was their own creation. It is within their system of thought that economics came closest to be called the founders of scientific economics. In theirs' applied economics, in reference to satisfaction of the economic wants of individuals, public good was conceived in a distinctly utilitarian spirit. It can be said that the welfare considerations13 of the Italian economists of the XVIIIth century served as a link to the later welfare economics. Value was also based upon needs and their satisfaction. Of course, the Aristotelian distinction between value in use and value in exchange was deepened and developed into a utility theory of exchange value or price in a manner distant to Aristotle and St. Aquinas. They identified their price with normal competitive price. To them, wherever such price existed, it was just to pay and accept it, whatever the consequences might be for the trading parities, i.e. gains or losses. Their disapproval of price fixing and acceptance of gains arising in times of scarcity are no doubt ethical judgements. But they reveal a perception of organic functions of gains and price fluctuations that marks a step forward in economic analysis. They also analysed commercial and speculative economic activity, but from a different point of view than Aristotle 14. Their generalizations invariably grew out of discussions of factual patterns and were illustrated by examples15. As regards money, these scholars presented strictly a metallic theory of money disapproving, with varying degrees of severity, of debasement and of any gain that accrued from it to the Princes. Some of the scholars, notably Mercado (in Editio princepes, Salamanaca, 1569), elaborated what may be called the quantity theory of money. They also dealt with a number of problems in coinage, foreign exchange, international bullion movement, bi-metalism, and credit.

It is a branch of economics that is normative rather than positive, in that it seeks not to describe the effects of economic actions, but to evaluate them in terms of some ethical standard of desirability. 14 e.g. See St. Antonine’s, (1389-1459), Industria. 15 Leonardus Lessius, (1554-1623), describes practice of Antwerp Exchange. Louis Molina interviewed businessmen about their methods. Some of his investigation such as the study of Spanish wool trade amount to a little monograph. 13

16

It should be noted that the scholastic scholars did not construct any theory of production, nor did they offer any theory of distribution. In case of rent and wages they did not pose any question. Rent was, traditionally, considered to be fixed. So far as the wages were concerned, presumably they felt that nobody should be told what wages are paid for. Much more important were their contributions to the theories of income earned from business profits and interest. The risk-effort theory of income and launching of a theory of interest on money is undoubtedly due to them. Though their theory of business profits, in particular, was not sufficiently developed and had even faulty arguments, scholastics must be credited for their successors learned much from their analysis. Their views on interest on money were in line with those of Aristotle. They did, however, sometimes, relate interest to the returns from incomebearing goods, land, mining rights, and the similar that may be bought for money. From the perspective are of great analytical value. The scholastic proposition that a fundamental factor that pushes interest rate above zero is the prevalence of business profits. Their ideas on lucrum cessans and damnum emergens complement their analysis of supply side of money market.

17

Chapter 2.

The Founders Mercantilism16 was the dominant school of economic thought in Europe throughout the late Renaissance and the early-modern period (from the XVth to the XVIIIth centuries). Evidence of mercantilist practices appeared in early-modern Venice, Genoa and Pisa regarding control of the Mediterranean trade in bullion. However, the empiricism of the Renaissance, which first began to quantify large-scale trade, accurately marked mercantilism's birth as a codified school of economic theories. Mercantilism in its simplest form is Bullionism, yet mercantilist writers emphasize the circulation of money and reject hoarding. Their emphasis on the monetary metals, accords with some current ideas regarding the money supply, such as its stimulative effect. Fiat money and floating exchange rates have since rendered people's concerns, irrelevant. In time, industrial policy supplanted the heavy emphasis on money, accompanied by a shift in focus from the capacity to carry on wars to promoting general prosperity.17 England began the first large-scale and integrative approach to mercantilism during the Elizabethan Era (1558–1603). An early statement on national balance of trade appeared in Thomas Smith’s, Discourse of the Common Wealth of this Realm of England, 1549, where he says that, "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them".18 The period featured various but often disjointed efforts by the court of Queen Elizabeth I, to develop a naval and merchant fleet, capable of challenging the Spanish stranglehold on trade and of expanding the growth of bullion at home. The Queen promoted the Trade and Originally the standard English term was mercantile system. The word mercantilism was introduced into English from German in the early XIXth century. This term was initially used solely by critics, such as Marquis de Mirabeau and Adam Smith, but was quickly adopted by historians. 17 Mature neo-mercantile theory recommends selective high tariffs for infant industries or the promotion of the mutual growth of countries through national industrial specialization. 18 Quoted in Braudel, Fernand, (1979), p. 204. 16

18

Navigation Acts in Parliament and issued orders to her navy for the protection and promotion of English shipping. Authors noted most for establishing the English mercantilist system include Malynes and Mun, who first articulated the Elizabethan system (England's Treasure by Foreign Trade or the Balance of Foreign Trade is the Rule of Our Treasure, 1664), which Child then developed further. Numerous French authors helped cement French policy around mercantilism in the XVIIth century. Many nations applied the theory, notably France, which was economically the most important state in Europe at the time. Colbert best articulated this economic policy that was later greatly liberalized under Napoleon. King Louis XIV (1643-1715) followed the guidance of Colbert, his Controller-General of Finances. It was determined that the state should rule in the economic realm as it did in the diplomatic, and that the interests of the state as identified by the king were superior to those of merchants and of everyone else. Mercantilist economic policies aimed to build up the state, especially in an age of incessant warfare, and theorists charged the state with looking for ways to strengthen the economy and to weaken foreign adversaries. Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree. Mercantilism was centred on England and France, and it was in these states that mercantilist policies were most often enacted. In Europe, academic belief in mercantilism began to fade in the lateXVIIIth century, especially in Britain, in light of the arguments of Smith and of the classical economists.19 The British Parliament's repeal of the Corn Laws under Robert Peel in 1846 symbolized the emergence of free trade as an alternative system. Mercantilist literature20 also extended beyond England. Italy and France produced noted writers of mercantilist themes, including Italy's Botero and Serra, and in France, Bodin and Colbert. Such themes had also existed in writers from the German Historical School. From List, onwards among followers of the American system and British freetrade imperialism, these stretched the system into the XIXth century. The Austrian lawyer and scholar Hornigk, one of the pioneers of Cameralism, detailed a nine-point program of what he deemed effective national economy in his Austria Over All, If She Only Will, 1684, that sums up the tenets of mercantilism being such that: every little bit of a country's soil be utilized for agriculture, mining or manufacturing; all raw materials found in the country be used in domestic manufacture, since finished goods have a Humphrey, T. M., (1999), ‘Mercantilists and Classicals: Insights from Doctrinal History’, Federal Reserve Bank of Richmond Economic Quarterly, Vol. 85/2 Spring 20 The European economists who wrote between 1500 and 1750 are today generally considered mercantilists. The bulk of what is commonly called mercantilist literature appeared in the 1620s in Great Britain. Adam Smith saw the English merchant Thomas Mun, (1571–1641), as a major creator of the mercantile system. Perhaps the last major mercantilist work was James Mill’s, (1773-1836), Principles of Political Economy, published in 1767. 19

19

higher value than raw materials; a large, working population be encouraged; all export of gold and silver be prohibited and all domestic money be kept in circulation; all imports of foreign goods be discouraged as much as possible; where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver; as much as possible, imports be confined to raw materials that can be finished in the home country; opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver; and no importation be allowed if such goods as are sufficiently and suitably supplied at home. Other than Hornigk, there were no mercantilist writers presenting an overarching scheme for the ideal economy. Rather, each mercantilist writer tended to focus on a single area of the economy. Only later did non-mercantilist scholars integrate these diverse ideas into what they called mercantilism. Some scholars thus reject the idea of mercantilism completely, arguing that it gives a false unity to disparate events. Smith saw the mercantile system as an enormous conspiracy by manufacturers and merchants against consumers, a view that has led some authors to call mercantilism a rent-seeking society. To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game, in which any gain by one party required a loss by another. Thus, any system of policies that benefited one group would by definition harm the other, and there was no possibility of economics being used to maximize the commonwealth, or common good. Mercantilists' writings were also generally created to rationalize particular practices rather than as investigations into the best policies. Mercantilism, or the system of commerce21, to use Smith's term, was quite different. To begin with, it was essentially policy-oriented, although even here it is necessary to avoid undue generalization. In reality, it was a shifting combination of tendencies which, although directed to a common aim – the increase of national power – seldom possessed a unified system of policy, or even a harmonius set of doctrines. A common view, associated with Schmoller's, The Mercantile System and Its Historical Significance, (1896), is that in its innermost kernel it is nothing but state-making. Coats offers the summary of objectives as the means of attaining the desired end of an increase in national power: the accumulation of treasure; the promotion of national wealth and economic growth; securing a balance of trade; maximization of employment; the protection of industry; the encouragement of population, and State unification.22

The agriculture system of the French economists was a system in Smith's sense. The teaching of the physicrats had a theoretical basis which permitted them to make a series of policy recommendations in the circumstances which faced them. 22 Coats, A. W. (1993) On the History of Economic Thought: British and American Economic Essays, p. 46. 21

20

But it should be noted that if the strategy embraced a single end, the means of attaining it would inevitably vary with circumstances. The validity of choice has to be seen, therefore, against the historical circumstances which occured to prevail at the time. The strategy is consistent with regulation, but also with more liberal policies, depending on the situation confronted. It is therefore that Colbert asserts that: “liberty is the soul of trade and desires that merchants should have complete freedom to do as they wish, that they may be induced to bring thither their foodstuffs and merchandise“. In a letter to Holt (1780), Smith writes, “the very violent attack I made upon the whole commercial system of Great Britain“, of which we find ample evidence in Book IV of Wealth of Nations. For example, Smith drew attention to the key role of merchants in defining policy, refering to arguments “addressed by merchants to Parliaments, and to the Councils of Princes ... by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter“ (WN IV, i.10.; p.10). Elsewhre, Smith consistently drew attention to the pernicious effects of the mercantile interests, to its members' mean rapacity and impertinent jealousy (WN IV, iii.c.9; p.72). The doctrines which Smith associated with the pretended doctors of the system were first, their alleged belief that wealth consisted in money, and second, the associated belief that the purpose of the state could best be served by attaining a positive balance of trade. Smith dismissed the first thesis as ridiculous and the latter as absurd. Elsewhre, he refered to “that most insignificant object of modern policy, the balance of trade“. He concluded: “National prejudice and animosity, prompted always by the private interests of particular traders, are the principles which generally direct our judgement upon all questions concerning it. It was this prejudice and animosity which prevented France and Great Britain from enjoying the mutual benefits of free trade“. In addressing the mercantile preoccupation with the positive balance of trade, Smith concluded that “its two great engines, for enriching the country...were great restraints upon importation, and encourgement of exportaion“ (WN IV, i.35; p.27). Smith then proceeds to discuss each of the instruments which could be used to support these objectives. Mercantilist domestic policy was more fragmented than its trade policy. While Smith portrayed mercantilism as supportive of strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and governmentimposed monopolies; some mercantilists supported these, but others acknowledged the corruption and inefficiency of such systems. Many mercantilists also realized that the inevitable results of quotas and price ceilings were black markets. One notion that mercantilists widely agreed upon was the need for economic oppression of the working population; labourers and farmers were to live at the margins of subsistence. The goal was to maximize production, with no concern for consumption. Extra money, free time, and 21

education for the lower classes were seen that inevitably will lead to vice and laziness, and would result in harm to the economy. Although the science of Political Economy had existed for ages, but the credit of popularising it, and providing it a systematic exposition, in modern sense, certainly goes to the European philosophers, especially to the Physiocrats. An article contributed by Rousseau on Political Economy that appeared in the Grande Encylopedie in 1755, clearly proves that the science has always been chiefly concerned with the business side of the State, especially with the material welfare of the citizens. Smith too did not get beyond this point of view, for he declared, “the object of the political economy of every nation is to increase the riches and the power of that country”.23 However, political economy, as the name of a special science is the invention of Montchretien, who first employed the term about the beginning of the XVII th century24. Not until the middle of the XVIIIth century, however, does the connotation of the word in any way approach to modern usage. The advices given and offered for reaching the desired goal were as diverse as they were uncertain. The mercantile system25 (a term coined by Smith to describe the system of political economy) sought to enrich the country by restraining imports and encouraging exports that dominated the Western European economic thought and policies from the XVIth to the late XVIIIth centuries.26 The school was confronted by other writers, who were socialists in fact, thought that happiness of the nation could only be found in the creation of a new society based on a new social contract. It was at this juncture that a French physician, in his advanced age, Quesnay appeared on the scene, which turned his attention to the study of rural economy – the problem of the land and means of subsistence.27 Boldly declaring that the solution of the problem had always lain ready at hand and those social relations into which people enter are admirably regulated and controlled. He believed that so admirable were these laws

Smith, A., (1723-1790), Wealth of Nations, 1776; (Cannan's Ed.) Vol I, p. 351. The term political economy, as such, first appeared in France in a book authored by Antoine de Montchretien, (1575-1621), Traicté de l'oeconomie politique, 1615. 25 Main exponents of the system were: Antonio Serra, (late XVIth century); Sir Thomas Mun; Sir Josiah Child, (1630-1699)); Philipp von Hornigk, (1638-1712); Johann H. Gottleib von Justi, (1717-1771); and Joachim George Daries, (1714-1791). 26 Alfred Marshall, (1842-1924) criticized Adam Smith's definition of the economy on several points. He argued that man should be equally important as money, services are as important as goods, and that there must be an emphasis on human welfare, instead of just wealth. The invisible hand only works well when both production and consumption operates in free markets, with small producers and consumers allowing supply and demand to fluctuate and equilibrate. In conditions of monopoly and oligopoly, the invisible hand fails. 27 F. Quesnay’s first economic articles written for the Grande Encylopedie, were on Les Grains and Les Fermiers. 23 24

22

in every respect that once they were thoroughly known, they were certain to command allegiance. This marked the beginning of a new science – the science of Political Economy. The age of forerunners had passed. Quesnay and his disciples must, thus, be considered the real founders of the science. The Physiocrats,28 were certainly first to grasp the conception of a unified science of society. They created the way along which and the writers of the next hundred years have all marched. They must also be credited with the foundation of the earliest school of economists. The entrance of this small group of men into the arena of history of economic thought is significant spectacle. So complete was the unanimity of the doctrine among them that their very names are forever enshrouded by the anonymity of a collective name29. Their publications followed each other pretty closely for a period from 1756-1778. An examination of their doctrine must precede a consideration of the system or the proposed application of those principles. (a) The Natural Order: The essence of the Physiocratic system lay in their conception of the natural order. Riviere's book, L'Ordre naturel et essentiel des Sociétes politiques, (1767), and Nemour’s, Physiocratie, ou Constitution es éntiélle du Government le plus avantageux au Genre humain, (1768), define Physiocracy as the science of the natural order. It is hardly necessary to say that the term natural order is meant to stress the contrast between it and the artificial social order voluntarily created upon the basis of social contract.30 According to the Physiocrats, the natural order may be conceived as a state of

Physiocracy has reference to a school of economic thought that flourished in France during the second half of the XVIIIth century. The Physiocrats did not call themselves by this label, but referred to themselves simply as les économistes. The word physiocracy, was coined in 1767 by Nemours, meaning “the rule of nature”, who suggested that economic phenomena are governed by natural laws that operate independently of human will and intention, including the decrees of legislators. Most historians agree with the assessment of Henry Higgs (1864-1940), who wrote at the end of the XIXth century that the Physiocrats were the first scientific school of political thought. This is not to say that they were the first true economists because this appellation can be applied to many of their predecessors. Physiocrats were a loosely organized group of individuals who shared a common theoretical perspective and worked together to bring about economic and political reforms. French intellectuals had used the term Physiocrats frequently, especially, F. Quesnay (See in Daire, Physiocrats, 1846); and A. R. J. Turgot (Reflections on the Formation and the Distribution of Riches, 1898) in XVIIIth century. The group included, Richard Cantillon, (1680-1734); François Quesnay, (1694-1774); Anne Robert Jacques Turgot, (1727-1781); Jean Claude Marie Vincent de Gournay, (1712-1759); Marquis de Mirabeau, (1715-1789); Honoré Gabriel Riqueti de Mirabeau, (1749-1791), Auguste Comte, (1798-1857); Pierre Samuel du Pont de Nemours, (17391817); and Pierre-Paul Lemercier de La Rivière de Saint-Médard, (1719-1801). 29 On the whole, it was a sad and solemn sect and their habit of insisting upon logical consistency was sometimes tiresome. The only literary person among them was Turgot. Soon they became a prey to the caustic sarcasm of Voltaire (especially in the celebrated pamphlet L’Homme aux qurante ecus); but despite all this they enjoyed a great reputation among contemporaries including the royals. 30 J. J. Rousseau, (1712-1778), the author of the Contrat social, (1762), although not a member of the group, was a contemporary of Physiocrats. 28

23

nature in opposition to a civilized state regarded as an artificial creation. To discover what such natural order really was like man must have recourse to his origins. In the second place, the term might be taken to mean that human societies are subject to natural laws such as govern the physical world and are exercised sway over animal or organic life. To Quesnay, social and animal economy appeared in much the same light as branches of physiology. The Physiocrats succeeded in giving prominence to the idea of the interdependence of social classes and upon their dependence upon nature. And this we might say was a change tantamount to a transformation from a moral to a natural science. The natural order, the Physiocrats maintained, is the order, which God has ordained for the happiness of mankind. It is the providential order.31 It was just because of the mentioned fact that it seemed to them to be endowed with all the grandeur of the geometrical order, with its double attributes of universality and immutability. It remained the same for all times, and for all humans. Divine in its origin, it was universal in its scope. It looked as if this dogmatic optimism would dominate the whole Classical School and that natural law would usurp the functions of Providence. How ridiculous it may look today, but it was no small thing to found a new science, to set new aim and a fresh ideal, to lay down the framework which others were to fill in. It was the practical results, however, that revealed the full powers of the natural order. It so happened that the mass of regulations, which continued the old regime, fell to the ground before its onslaughts almost immediately. The knowledge of the natural order was not sufficient. Nothing could be easier than this, for if the order really were the most advantageous, (Baudeau in his, Ephemerdes du citoyen), every man could be trusted to find himself the best way of attaining it without coercion of any kind. This psychological balance which every individual was supposed to carry within himself – the Hedonistic principle, is admirably described by Quesnay, i.e. “To secure the greatest amount of pleasure with least possible outlay should be the aim of all economic effort“. 32 And this was the order aimed at. It is of the very essence that the order and the particular interest of the individual can never be separated from the common interest of all, but this happens only under a free system. This is laissez-faire pure and simple. This, however, did not imply that the Government would not have certain role, especially if it intends to carry out the Physiocratic programme. This will include upholding the rights of private property and individual liberty by removing all artificial barriers, and punishing all those who threaten the

See Mercier de la Riviere’s, L'Ordre naturel et essentiel des Société s politiques (1767), Vol I, p. 390 and Vol. II, p. 638. 32 See his Dialogues sur les Artisans in Oncken’s, Eures économiques et philosophiqes de F. Quesnay (1888), Paris and Frankfurt. 31

24

existence of these rights; while most important duty being: giving instructions in the laws of natural order. (b) The Net Product: Every social fact had a place within the natural order of the Physiocrats. One economic phenomenon, which attracted their attention, was the predominant position of land as an agent of production. Every productive undertaking of necessity implies that some wealth will be destroyed in the production of new wealth, thus an amount that ought to be deducted from the new wealth produced – i.e. the net product. The Physiocrats believed that this net product was confined to agriculture. Here alone, so it seemed to them, the wealth produced was greater the wealth consumed. It was because agricultural production had this unique and marvellous power (that lacks in other domains of production e.g. commerce, manufacture or transport) of yielding that economy was possible and civilization a fact.33 It should be pointed out that gains of industry and commerce were immaterial to Physiocrats because these simply represented wealth transferred from agricultural to industrial arena. The Physiocrats recognized the importance of market and thus considered that price which yields a surplus over the cost of production was a normal effect of the natural order. To them, whenever the price fell to the level of the cost of production it was a sure sign that the order has been destroyed. To no one’s surprise, such view was a challenge to the economic doctrine of the time, especially Mercantilism. The Mercantilists thought that the only way to increase wealth was to exploit neighbours and colonists, but they failed to see that commerce and agriculture afforded equally satisfactory methods. Let us remind that agriculture has never lost the pre-eminence, and that the recent revival of agricultural protection is directly traceable to Physiocratic influence. Further, it should also be mentioned that at some moments agriculture seems inferior because its returns are limited by exigencies of time and place; but more often superior because it can produce the necessaries of life. (c) The Circulation of Wealth: The Physiocrats were the first to attempt a synthesis of distribution. They were anxious to know as to how wealth passed from one class of society to another, why it always followed the same routes, whose meanderings they were successful in unravelling, and how this continual circulation, as Turgot said, “constituted the very life of the body politic, just as the circulation of the blood did of the physical “. Quesnay in a letter to Mirabeau (which accompanied the first addition of Tableau économique) announces, “we must not lose heart for the appalling crisis will come, and it will be necessary to have recours to medical knowledge“. He defines further his position to him in another letter (1758): “I have tried to construct a fundamental Tableau of 33

See Dupont de Nemours, Origine d’une Science nouvelle, p. 346.

25

economic order for the purpose of displaying expenditure and products in a way which is easy to grasp, and for the purpose of forming a clear opinion about the organization and disorganization which the government can bring about“. Thus, he first publishes in 1759 his Tableau économique34 – that laid down the foundations of the Physiocrats’ economic theories. The Table contains the origins of modern ideas on the circulation of wealth and the nature of interrelationships in the economy. The model in question seeks to explore the interrrelationships between output, the generation of income, expenditure and consumption (or in Quesnay's words, ”a general system of expenditure, work, gain and consumption”) which would expose the point that “the whole magic of a well ordered society is that each man works for others, while believing that he is working for himself'“. In this model, Quesnay identified two main sectors of activity, agriculture and manufacture, together with three major socio-economic groups: the farmers, the properitors of the land, and those engaged in manufacture. Quesnay further proceeds to identify the assumptions of the model. These are both qualitative and quantitative. The qualitative assumptions are set out in Tabeleau économique and reappear with further additions in The General Maxims for the Government of an Agricultural Kingdom. Quesnay assumed inter alia, that the whole revenue of the system would enter the cirulation; that there will be a constant level of population,with no movements between the sectors; no barriers to trade in corn or in manufactured goods; a single tax on the agricultural surplus; and lage-scale capital-using farming. The quantitative assumptions include the statement that the annual net product in the agrarian sector is 2 million livres. It is assumed that the total output of the manufacturing sector is 2 million livres and (implicitly) that the money supply is also 2 million livres. Quesnay then proceeded to develop his model in terms of an exercise in period analysis. The magic of a well ordered society is illustrated in a series of steps. First, the farmers transmit rent (the whole supply of money) to the proprietors of of land (2 million), thus giving that class an income which can be used to make purchases of the primary and manufactured products which are necessary to sustain life in the current period. Let us assume that properitors transmit 1 million livres to the farmers in excahnge for food and 1 million livres to the manufacturing sector, thus reducing the stocks of goods which were avilable for sale at the begining of the period. Let us also assume that the farmers also transmit 1 million livres to the manufacturing sector in

The first edition of the Tableau, of which only a few copies were printed, is missing altogether, but a proof of that edition, corrected by François Quesnay himself, was discovered in the Bibliotheque Nationale in Paris and a facsimile was published by British Economic Association in 1894 and is reproduced in Alexander Gray’s Development of Economic Doctrine, 1931. 34

26

excange for commodities, thus eliminating the stocks of goods held by this group. This means that the whole supply of money has moved from the farmers to the properitors and then to the manufacturers. This class is now in position to purchase food (1 million) and raw material (1 million), thus eliminating the stocks of commodities held by the farmers and at the same time returning the whole stock of money to this sector. The properitors thus end the period with no unspent income and no accumulation of commodities. The farmers hold the stock of money, while the agrarian and manufacturing sectors are able to replace the goods used up in the current period by virtue of current productive activity. The following period, on these assumptions, is able to open under conditions identical to those which had obtained at the begining of the current period. The most interesting thing in the Physiocratic scheme of distribution is not the particular demonstration, which they gave of it, but the emphasis that they laid upon the fact of circulation of wealth taking place in accordance with certain laws, and the way in which the revenue of each class was determined by this circulation. The singular position that the proprietors hold in this tripartite division of society is one of the most curious features of the system. One might have expected that the premier position would have been given to the class, which they termed productive, i.e., to the cultivators of the soil, who were mostly farmers and metayers. They had received the land from the proprietors. This latter class takes precedence because God has willed that it should be the first dispenser of all wealth.35 The Physiocrats believed that landed proprietorship was simply the outcome of personal property, or of the right of every man to provide for his own sustenance. This right includes the right of personal estate, which in turn involves the right of landed property. The defence of private property was already well-nigh complete. However, they maintained that proprietor should always be guided by reason and be mannerly in his behaviour, and he should never allow mere authority to become the rule of life. (a) Trade: All exchange, the Physiocrats thought, was unproductive, for by definition it implies a transfer of equal values. In this case there is no wealth produced. However, it may happen that the parties to the exchange are of unequal strength, and one may grow rich at the expense of other. Industry and commerce were considered unproductive. This was a most significant fact, so far as commerce was concerned, because all the theories that held the field under Mercantilism, notably the doctrine that foreign commerce afforded the only possible means of increasing a country's wealth, immediately assumed a dwindling importance. Foreign trade, like domestic, produced no real wealth: the only result was possible gain, and one man's gain is another man's loss. A country must, of course, obtain from abroad 35

See A. Baudeau, Philosophie économique, pp. 691.

27

the goods, which it cannot produce in exchange for those it cannot itself consume. While Riviere thought that foreign trade is a necessary evil, Quesnay refers to it merely as a pis aller. He thought that the only useful exchange is one in which agricultural products pass directly from producers to consumers, and commercial transaction is sheer waste. Evidently, Physiocrats would have condemned both the Mercantile and Colbertian systems as both these aimed at securing a favourable balance of trade – an aim that the Physiocrats considered illusory. Nevertheless, they did not consider all trade bad as they championed Free Trade, which to them meant the total abandonment of all those measures, which found much favour with the Mercantilists. In monetary matters, especially the question of interest, the Physiocrats were willing to recognize an exception to their principle of non-intervention. Mirabeau thought that whatever a real increase of wealth resulted from the use of capital, as in agriculture, the payment of interest was just. It was simply a symbol of net product. But in trade, he thought, that it should be limited and not prohibited altogether. While, Quesnay could not justify it except in those cases where it yielded a net product, Turgot justifies on the ground that the owner of capital may either invest in land or some productive work. (a) The Function of the State: Since, the Physiocrats believed that human society was pervaded by the principle of natural order, it would be logical to argue that there is no need for an authority. Contrary, they wished only to reduce legislative activity to minimum and abolish the useless laws. If any new laws are required they ought to be simply the copies of the unwritten laws of Nature. Their ideal was not democratic selfgovernment, like that in Greek republics, or a parliamentary regime. Both were detested. On the other hand, great respect was shown for the social hierarchy, condemning very doctrine that aimed at attacking the throne or the nobility. What they desired was to have sovereign authority in the guise of hereditary monarchy. Instruction is a duty upon which the Physiocrats lay special stress. Universal education was considered as the first and only social tie. Quesnay was especially anxious for instructions on the natural order, and the means of becoming acquainted with it. Public works are also mentioned and so are a number of duties recognized as belonging to the State. (b) Taxation: The bulk of the Physiocratic system is taken up with the exposition of theory of taxation, which really forms one of the most characteristic portions of their work. It is worth noticing that in the table showing the distribution of the national income, three participators are mentioned, but there is also a fourth – the Physiocratic sovereign, who is none other but the State itself, and who thoroughly deserves a share. In addition to maintaining security and giving instruction, the sovereign must also contribute to towards increasing productivity by providing public works for which, naturally, money is required and thus taxes must be paid liberally. The only available 28

fund is the net product – evidently, the only dispensable fund. A third of the net product, Physiocrats considered, could be used to pay in the taxes.

Source: Alexander Gray (1931) Development of Economic Doctrine – An Introductory survey, Longmans Green & Co. London.

The Physiocrats attached the greatest practical importance to their fiscal system, and were thoroughly convinced that the misery of the people was due to the unequal distribution of the burden of taxation. They thought that it was the true source of economic injustice, in fact a social problem. [Note: Many scholars have dealt at length the concept of Natural Law/Order36, but it is beset with difficulties and an inexhaustible source of misunderstandings37.

cf. Sharma, S. (2010) Reflections on the Philosophical Foundations of Economics, Section “The Economics of Natural Law”, Zagreb: Mikrorad, pp. 121-130. 37 Perhaps the best appraisal of natural-law idea is by O. H. Taylor in his ‘Economics and the Idea of Natural Laws’, Quarterly Journal of Economics, November 1929. 36

29

The scholastic scholars trace their concept of natural law back to Aristotle and Roman jurists, although they made of it something different. Aristotle (Ethics v, 7) speaking of justice distinguished naturally just from the institutionally just. He meant to refer only to the forms of behaviour that are enforced by very general necessities of life that man shares with other animals. But elsewhere he used the term in a much wider sense and associated with just. Romans simply accepted the Aristotelian definition. They accepted it as a source of legal rules that was just as good as, and in fact superior to, any of the sources of positive law, statutory and other. Cicero affixed the term jus naturale to what was called jus gentium, the reason being that the latter, embodying as it did rules of equity (a synonym for justice), seemed somehow more natural than the formalistic civil law. We should note that this sense of natural law that later prevailed is not identical with the view of Aristotle, but with the word Nature and Natural, particularly rei natura. St. Aquinas accepted the Aristotelian definition in the legalistic formulation of the Roman jurists. Actually, his attempt to put logical order into Aristotle’s various uses of it produced something that was neither Aristotelian nor Roman. In the first place, natural law or the naturally just may be the set of rules that nature imposes upon animals, and also may be immutable. But since these rules work out differently in different conditions of time, and since it is possible to add to them and subtract from them, even this historical law became variable in practice (Summa Theologica II, 1). In the second place, there is another meaning where, through examples only, he equates natural laws to the set of rules that conform to social necessities and expedience. In the third place, it is held that human positive law necessarily consists of either in deductions from this natural law or in adjustments of its rules to particular conditions. Molina clearly identified natural law, on the one hand, with the dictates of reason (ratio recta), and with what is socially expedient or necessary (expediens et necessarium). After repeating the Aristotelian definition, he adds an entirely new meaning to it, apparently by way of explaining: “that is to say, the naturally just is that obligates us by virtue of the nature of the case”. He entwined natural law to our rational diagnosis with reference to common good. Aristotle called certain forms of behaviour naturally just. From analytical point of view, he considered these forms of behaviour as necessary condition for the existence of animal life. Similar logic can be applied in the wider sense that covers the necessities of social life in actual historical circumstances of given human society. The generalization that we may draw can be called natural law in the analytic sense: the normative natural law presupposes an explanatory natural law. The former is nothing but a particular kind of value judgement passed upon the facts and the relations between facts discovered by the latter. Natural law in context to sociological rationalism can be viewed in different lights. From philosophical point of view, our mind – natural reason is the source of truths that are antecedents to experience, but also that mind is able to produce results about subjects, such as the existence of God. In this sense, St. Aquinas was

30

a metaphysical rationalist because he believed that existence of God could be logically proved. But he also admitted revelation. Scientific activity is often seen as a standard instance of rational activity in the sense that the researcher allows him to be guided by the rules of logical inference. Again, achievements in science proceed not from observation and orderly logic but vision akin to artistic creation. Still results have to be proved by logical or rational procedure. However, economic rationalism means something else. Just as the Stoics38 saw at the physical universe modelled upon an orderly plan, so we may look upon society that possesses inherent logical consistency. It matters little, whether this order is imposed upon it by divine will or directed towards some definite ends by an invisible hand, or is inherent merely in the sense that the observer discovers in it plan and purpose that are independent of his analytic rationality, because in either case nothing is allowed to enter the rational cosmos but what comes within the grasp of light of reason. Both objective and subjective socio-economic rationalism attributed to scholastic scholars certainly adds additional significance to relation between it and ratio recta. Epistemologically, ratio recta and la raison are continuity. We may infer from our belief in the existence of an economic order that all is for the best in the world – the view that Voltaire ridiculed. But, we need not assume that the rational order of things actually exists in the things as they are. It is sufficient to believe in a rational order that exists only in the realm of reason and that reason itself calls upon us to assert as against a deviating reality. This is the meaning that socioeconomic rationalism carries with people who propose to apply reason to social phenomena. The term social science first appeared in the form of a system of jurisprudence in Grotius and Pufendorf who were primarily lawyers. Thus their contributions were treatises on law. They dealt with legal and political principles that were considered of general validity, thus natural39. Into the conception of human nature, the philosophers of natural law, particularly Hobbes, introduced elements that received due importance. The scholastics had implied that private property owes its origin partly because of the necessity of avoiding a chaotic struggle for goods, and government its origin to the necessity of enforcing peace and order. They did not go as far as to speak Stoicism is a school of Hellenistic philosophy founded by Zeno in Athens in the early III rd century BC. Stoicism is a philosophy of personal ethics informed by its system of logic and its views on the natural world. According to its teachings, as social beings, the path to happiness for humans is found in accepting the moment as it presents itself, by not allowing oneself to be controlled by the desire for pleasure or fear of pain, by using one's mind to understand the world and to do one's part in nature's plan, and by working together and treating others fairly and justly. 39 The philosophers of natural law of the XVIIth century were an important link with the past and with the future XIXth century. Hugo Grotius, (1583-1645); Thomas Hobbes, (1588-1679); John Locke, (1632-1704); and Samuel von Pufendorf, (1632-1694), are some of the representatives of the age. Exactly like the scholastics, philosophers of the natural law aimed at comprehensive social science in which economics was neither an important nor an independent element. 38

31

of a war of all against all or of every one being against everyone. This sort of things did not become general doctrine in the Leviathan (II, chs. 17, 18). Hobbes lets a commonwealth or civitas to be generated by an agreement or covenant, which everyone enters into with everyone else for the purpose of transferring each one’s right to govern him to a man or assembly of men. While, this doctrine, restated in its most influential form by Locke, though did almost command general assent, Hobbesian omnipotence of the government did not. Hobbes simply deduced it from the imaginary covenant by arbitrarily interpreting it in such a way as to imply unconditional surrender of the citizen40. Some seventy years, before the French Revolution, are referred to as the age of Enlightenment. A wave of religious, political and economic criticism swept over the intellectual centres of Europe. The most important fact about philosophical thought is the victorious progress of English empiricism. This, of course, greatly favoured the success of associationist psychology. Hume, Condillac, and Hartley represent the spirit of the age at highest. All three contributed to develop the basis of science of society. They were convinced that both in aim and method – the experimental method, for which they invoked the authority of Francis Bacon – their work meant a new departure, which it was definitely not41. The way in which that fundamental science of man – human nature, human knowledge, and human behaviour produced all sorts of natural laws may be best illustrated in English natural aesthetics and natural ethics of the XVIIIth century. Aesthetical and ethical values were explained in a manner suggestive of that in which Italian and French economists of the XVIIIth and the XIXth century explained economic values. This procedure was called empirical in the sense of Jevons-MengerWalras theory of utility. Different authors have gone to great lengths in subjectivizing aesthetics. Nevertheless, it was this subjectivization that contribution of this school in which its members felt to be the particularly realistic or experimental. The principal English authors worth mentioning are Shaftesbury, Hutcheson, and Hume. So far as the analytical ethics – analysis of conduct is concerned, Hobbes had described by it means of individual and hedonistic egoism. Shaftesbury countered this theory by hypothesis of altruism. He explained that for man who habitually lives in society it is just as natural to develop fellow feelings and hence to value the good of others as it is to develop self-interest and to value his own good. On this he superimposed another hypothesis, also derived from introspection, according to which the virtuous experience, i.e. the pleasure by doing good irrespective of their appreciation of its effects. This is what is known

Perhaps the most important contribution of Thomas Hobbes is what may be called Philosophical Anthropology. He explores the natural law concept, constructs a whole philosophy of the human mind and deals with the psychology and social psychology of thought, imagination, speech, religion and the like. Much of this has Aristotelian and scholastic roots. 41 What is true is that E. B. de Condillac, (1714-1780), David Hume, (1711-1776), and David Hartley, (1705-1757), were more articulate; with a clearer purpose they developed this science of human nature more fully. 40

32

his moral-sense theory. Hutcheson systematically elaborated Shaftesbury’s position. The English moralists of the XVIIIth century were not prepared to do without normative standard of conduct and judgement. We see that Hume modelled moral world to his own image. With delightful naïveté he thoroughly approved of this image and considered schema of his preferences as reasonable. On the other hand, reason had eliminated all super personal values except the good of society. But in view of that philosophy of human values, what else could this good of society consist in but the sum total of all the satisfaction accruing to all individuals from the realization of their hedonic schemes of preferences. The XVIIIth century writers, especially those between Hume and Bentham, only elaborated the fundamental canon of Utilitarian Ethics: every action that promotes social welfare is good and that impairs is bad. Smith’s, The Theory of Moral Sentiments (1759) – a work of particular interest to economists – has a special place in this context42. Around middle of the XVIIIth century the concepts of self-interest, common good, and utilitarianism43 came to assert themselves in the realm of social thought. In particular, they were supposed to be the unifying principles of all the social sciences. The XVIIIth century advocates of the self-interest doctrine had some success in redeeming it. Helvetius compared the role of principle of self-interest in social world to the role of the law of gravitation in the physical world. This individual self-interest was oriented on rational expectations of individual pleasure and pain based on hedonistic views. Common good or social expediency of the scholastics was harnessed into a particular shape. The pleasure and pain of each individual were assumed to be measurable quantities capable of being algebraically added into quantity called individual happiness (felicita), which could further be added up into social total and finally substituted with the common good or welfare of the society, which is thus resolved into individual sensations of pleasure or pain, the only ultimate realities. This yields the normative principle of utilitarianism, namely the greatest happiness of the largest number, associated with the name of Bentham. Utilitarianism was nothing but another form of natural law system. It developed out of the system of philosophers that can be drawn from the history of

Because here Adam Smith, (a) more clearly distinguished between ethics as a theory of behaviour and ethics as a theory of people’s judgement of human behaviour and concentrated on the latter; (b) believed that ethical judgement of our own acts is derived from our principles of judging others; (c) considered that natural is what is psychologically normal and not identified with the ideal rule of reason; (d) analysed influence of utility upon aesthetic and ethical practice of judging; and (e) systematically investigated recognizing customs and fashion as relevant factors. 43 The fundamental thesis of utilitarianism is that one should do whatever maximizes the total or average welfare. The major XIXth century utilitarians, Jermy Bentham, (1806-1873), John S. Mill (1806-1873), and Henry Sidgwick, (1838-1900), took the concept of utility to be a mental state like happiness or pleasure, but few contemporary philosophers agree. They take welfare to be the satisfaction of rational preferences. 42

33

ethics and the common good concept. More significantly, in approach, methodology and nature of its results, it was the natural law system. Its hypotheses were basic to welfare economics heritage in Italian theories of felicita publica that had a significant methodological value only44. The writers of the XVIIIth century have often been blamed for the lack of historical sense. However, if we find a perfectly stupendous absence of interest in history, we also find a rich crop of serious historical work that laid the foundations of the XIXth century developments. Noteworthy is the emergence of sociological theories that used historical material so as to arrive at generalizations and tried to explain historical state and processes. The greater part of this kind of writings, however, disgusted the serious historians for the facts were twisted to suit the conception of la raison. Nevertheless, there were some considerable and path-breaking achievement by intellectuals such as Condorcet45, Montesquieu46, and Vico47. In the XVIIth and XVIIIth centuries, there was an ever-increasing demand for dictionaries and encyclopaedias48. While the philosophy was mainly empiricist, politics reflected the opinions about state, public administration, and policy that was carried far beyond. Quesnay and Forbonnais wrote the articles on various economic themes. The equalitarianism49 of the time suggested the criticisms of inequalities of wealth that we find in Helvetius and other writers. The obvious weakness of

It had a threefold appeal. First, it was a philosophy of life, exhibiting a scheme of ultimate values. Second, it was a normative system with strong legal imperatives. Finally, it was a comprehensive system of social science embodying a uniform method of analysis. However, so far as economics is concerned, it must be said that utilitarian hypotheses are completely valueless, as far as interpretations of history or history of economic questions are concerned. It is also valueless in all problems involving questions of actual schemes of motivation. 45 N. de Condorcet’s Esquisse d’un tableau historique des progrès de l’esprit humain, (1795), presents a definite theory of historical evolution or progress: its goal is equity and its driving force is the ever-increasing knowledge that the human mind keeps on acquiring. 46 Charls Louis de Montesquieu’s, (1743-1794), De l’ Esprit des lois, (1748), envisages historical states of societies and their changes in the light of a number of objective factors, which provide realistic explanations. His was sociology based upon actual observation of individual temporal and local patterns, not merely general properties of human nature. 47 Giambattista Vico’s, (1868-1744), Principii di una scienza nuova, (1730), can be best described through the phrase an evolutionary science of mind and society. 48 The great French encyclopaedia excelled all preceding ventures in this area. It should be noted that all the members of the circle that centred round the editor-in-chief, vowed to the service of la raison in a particular sense in which it meant enmity to Christianity especially to the Roman Catholic Church. The opportunity afforded by the articles on history, philosophy, and religion was exploited for the purpose of propaganda. It drew a number of quality articles on economic subjects as well. 49 In social philosophy it represents a controversial ideal. In Aristotle equality of treatment is contingent upon the subjects of the treatment being equal in relevant respects. The question as to which aspects are relevant that gives a spectrum ranging from extreme egalitarian approach to elitist on Kantian ethics discerns the equal right of all humans to treatment as ends in themselves as a foundation of all morality, but the application of this ideal is controversial. In political theory the question is whether equalities of social, political, and economic situation are 44

34

natural-law philosophers50 about the natural right to property that were either expounded on the lines of Locke or in special form adopted by the Physiocrats, invited criticism.]

Facts discussed above about the XVIIIth century thought show that the natural law approach to sociology and economics held its own to a considerable extent. The facts teach us a lesson of continuity in development. Nevertheless, the natural-law system though disintegrated, but underwent a transformation especially in Germany and Scotland into a new system of thought called Moral Philosophy – the science of mind and society (analogous to natural philosophy denoting physical sciences plus mathematics). Hutcheson, teacher of Smith, was a professor of moral philosophy in this sense, and so was Smith as his successor. Thus the old universal social science survived in the new form, but not for very long. This was due to the same reason that broke the natural law system. It is highly significant that Smith found it impossible to do what Hutcheson had done as a matter of course, i.e. to produce a system of moral philosophy or social science at one stroke. As long as this absorption was not consummated (that happened ultimately during 1776-1848), the little body of scientific economic knowledge retained independent and distinctive character of its own. Owing to greater intellectual refinement of the men who created it, and to their detachment from the immediate practical issues of economic policy, their economic analysis was much different from that of others. Irrespective for the fact of originality and vigour displayed by the Physiocrates in their natural law/order, they can only be regarded as the heralds of a new science. It is now universally agreed that Adam Smith is its true founder. The appearance of his possible, and whether the attempt to create such equalities infringes other values such as liberty, or even undermines too many of the economic and cultural conditions for a stable society. 50 According to the natural law philosophers and Physiocrats, the term natural law or natural order is meant to emphasise the contrast between it and the artificial social order voluntarily created upon the basis of social contract. To Mirabeau the natural order and social contract (of J. J. Rousseau) seems incompatible, for the natural and spontaneous can never be subject of contract. Dupont, (Vol. I, p. 341), states that in the first place, this natural order may be conceived as a state of nature in opposition to a civilized state regarded as an artificial creation”. There is a natural society whose existence is prior to every other human association… These self-evident principles, which might form the foundation of a perfect constitution, are also self-revealing”. Some Physiocrats even seem inclined to the believe that this natural order “has actually existed in the past and that men lost it through their own remissness”. It must rather be “identified with the Golden Age of the ancients or the Eden of Holy Scripture. It is a lost Paradise which we must seek again”. ‘Property, security and liberty constitute the whole of the social order.’ (Mercier de la Riveire, Vol. II, p. 615). In second place, the term might be taken to mean that human societies are subject to natural laws such as that govern the physical world. They maintained that the natural order is the order, which God has ordained for the happiness of mankind. It is the providential order: “Its laws are irrevocable, pertaining as they do to the essence of matter and soul of humanity. They are just the expression of the will of God… All our interests, all our wishes, are focussed at one point, making for harmony and universal happiness” (Mercier de la Riveire, Vol. I, p. 390 and Vol. II, p. 638).

35

monumental work, An Inqiry into the Causes of Wealth of Nations, in 1776, instantly eclipsed the tentative efforts of his predecessors. [A Guide to Smith's, An Inquiry into the Nature and Causes of the Wealth of Nations, (Vols. 1, and 2, 1776): In introduction to book iv, Smith writes that Political Economy proposes to enrich both the people and the sovereign, and it is in this definition which expresses both what Smith wanted above all and what interested his readers more than anything else. It makes economics a collection of recipes for the statesman. There are five Books. The Book V is the longest and is nealy a self contained treatise on Public Finance and was to become and to remain the basis of all the XIXth century treatises on the subject until, mainly in Germany, social viewpoint – taxation as an instrument of reform – asserted itself. The book contains mass of material of historical nature, on public expenditure, revenue and debts etc. The Book IV, contains the indictment of the mercentile system – the patronizingly benevolent criticism of physiocratic doctrine – from whch rises Smith's own political system. Book III may be described as prelude to Book IV, filled with general considerations of historical character on the natural progress of opulance. Book I and II, present the essentials of his analytic schema. The first three chapters of Book I deal with Division of Labour. Division of labour itself is attributed to an inborn propensity to truck and its development to the gradual expansion of markets. It thus appears and grow as an entirely impersonal force, and since it is the great motor of progress, this progress too is depersonalized. In chapter 4, Smith completes the sequence: division of labourbarter-money, exchange-value and use-value. In chapter 5, whch starts with Cantillon's definition of the richesse, he undertakes to find a measure of the former that is more reliable than is price expressed in terms of money. Equating value in exchange to price and observing that price in money fluctuates in response to purely monetary changes, Smith replaces nominal price of each commodity by a real price. In chapter 6, he explains commodity prices by cost of production which he divides into wages, profit and rent – the original sources of all revenue as well as exchangable value. The rudimentary equilibrium theory of Chapter 7, is by far the best piece of economic theory tuned out by Smith. In fact, it points towards Say and Walras. The purely theoretical developments of the XIXth century consist to a considerable degree in improvements upon it. Market price, defined in terms of short-run demand and supply, is treated as fluctuating around – Mill's necessary price. Marsahall's – which is the price that is sufficient and not more than sufficient to cover the whole value of rent, wages and profit, which must be paid in order to bring to market that quantity of every commodity which will supply the effectual demand. There is no theory of monopoly price beyond the meaningless sentence that the 'price of monopoly is upon every occasion the highest which can be got', whereas the 'the price of free competition ... is the lowest which can be taken' in the long run. Chapters 8-11, complete the self-contained argument of the first

36

book. These chapters, summing up and co-ordinating, handed down the theory of distribution of the XVIIIth century to the economists of XIXth century, who found it all the more easier to start from it because of the very looseness of Smith's doctrine invited development on many different lines. Chapter 8 on wages, contains not only the rudiments of both: the wage fund and the subsistence wage theoies, which seems to have been derived from Turgot and the Physiocrates. In treatment of differences in Chapter 10, 'Of Wages and Profits in the different Employment of Labour and Stock', Smith, is revelling in facts and arguments of a smoewhat trite sort, improved upon Cantillon. Chapter 11, 'Of the Rent of Land', Smith and his followers confined the concept of rent to land and mines. The II Book presents the theory of capital, saving, and investment that, however, much transformed by development and criticism, remained the basis of practically all later work until, and partly beyond Böhm-Bawerk. In spite of the the weak attempt made in the introduction to link it to the I Book by means of another and quite unconvincing appeal to division of labour, there is no reason to believe that any essential part of it was either written or planned before Smith's stay in France. Specifically physiocrat's influence is much more definitely recognizable here than any other part of the first book. Chapter 1 of the II book distinguishes that part of man's and society's stock of goods that is to be called capital from the rest; introduces the concepts of fixed and circulating capital; and classifies that are to come under both headings, including in circulating capital money but not the means of subsistence of productive labourers . Chapter 2, one of the most important of the work, contains the bulk of Smith's theory of money. Chapter 3, with tremendous emphasis on the propensity to save as the true creator of physical capital marks the victory of a pro-saving theory yet to come. Chapter IV, tackles the problem of interst.]

Today the Physiocratic doctrines scarcely do more than arouse historical curosity, while Smith’s work has been the guide for successive generations of economists. Even today, despite many changes in the fundametal principles of the science, no economist can afford to neglect Smith without unduely narrowing his scientific horizon. Several reasons account for the commanding position of his book – a position which no subsequent treatise, in the next two and quarter century, has ever successfully rivalled. It is above all an interesting book, bristeling with facts and burning questions of the hour, such as the problems presented by the colonial regime, the trading companies, the mercentile system, the monetary question, and taxation. The facts are intermixed with reasoning and his illustrations with arguments. He is instructive and persuasive. Thanks to rare qualities, we can still feel the freshness and charm of this old book. Furthermore, Smith has been successful in borrowing from his predecessors, without impairing his orginality, all their important ideas and welding them into a general 37

mould. In the first place is definitely Hutcheson’s Moral Philosophy, 1755, laying supreme importance on division of labour, and his views on questions such as origin and variations in the value of money and the possibility of corn or labour affording a more stable standard of value closely identical those of the Wealth of Nations. Hume, a close friend, is second. Hume has already been contributing on economic questions of money, foreign trade, rate of interest etc. These, along with several other writings were published in his Political Discourses, 1752. Hume’s examination displays his original penetrative thought. No doubt the essays left a great impression upon Smith, and he owed his conversion to liberal faith to Hume. In addition to the two mentioned, one other writer desserves a mention. Mandeville whom Smith criticized in his Theory of Moral Sentiments, 1759, by reproaching him for refering to tastes and desires as vices, though in themselves they were nowise blameworthy. But despite his criticism, Mandeville’s idea bore fruit in Smith’s mind. He was in turn to reiterate the belief that it was the personal interest that led societies in the paths of well-being and prosperity. Smith owed much to Physiocrats. He had a brief encounter with them in 1765, and there is little doubt about their influence upon his thought. 51 It should, however, be noted that while the Physiocrats were impressed by the importance of agriculture, but since they scanned the field through a narrow opening in their vision, was consequently limited. Smith, on the other hand, took the whole field of economic activity as his province, and surveyed the ground from an eminence where the view was clearest and most extensive. For properly understanding Smith’s views, it will be worth if we group his thoughts arround: (I) Division of Labour; (II) The Natural Organization of the Economic World; and (III) Liberalism. (I) It was Quesnay who propounded the theory that agriculture was the source of all wealth, both the State’s and individuls. Smith seized upon the phrase and sought to disprove it in his opening sentence by giving to wealth its true origin in the general activity of society. He stated, “The annual labour of every nation is the fund which originally supplies it with all the necessities and conviniences of life which it annually consumes, and which consist always either in the immediate produce of the labour or in what is purchased with that produce from other nations”. When Smith propounded his theory that labour is the source of wealth, he had no intention to undermine the importance of natural resources or depreciate the part that capital plays in production. No one, except perhaps Say, has been more persistent in It is improbable that Adam Smith had read their works, but frequent personal converse with both A. R. J. Turgot and F. Quesnay had helped him in acquiring precise first-hand knoledge of their views. We can easily guess which ideas would attract him most. While it appears that he borrowed the important idea concerning the distribution of annual revenue between various classes, the Tableau économique and net product attracted his attention, and the ardent faith of the Physiocrates must have definitely strengthened his views on economic liberalism. 51

38

emphasizing the importance of capital, and to the land, he attributed a special degree of productivity. It must be noted that from the very beginning Smith was anxious to emphasize the distinction between his and Physiocrat’s doctrines. He is not slow to draw inferences from this doctrine. Work, and not nature, is the parent of wealth – not the work of a single class but all the classes. Nation’s annual income owes something to everyone who toils. Thus there is no longer a need for the distinction between the sterile and productive classes, for only the idle are sterile. A nation is just a vast workplace, where the labour of each, however diverse in character, contributes to wealth of all. Division of labour is simply his spontaneous observation of a particular form of social oragnization. This division of labour effects an easy and natural combination of economic efforts for the creation of the national dividend. Men produce commodites to exchange them for others more immediately desired. Hence, there results for the community an enormous increase of wealth; and division of labour, by establishing the cooperation of all for the satisfaction of the desires of each, becomes the true source of progress and of well-being. In order to illustrate the growth in total production as the outcome of division of labour, Smith gives an example of its effect in a particular industry (pin industry). In a subsequent analysis Smith ascribes the gain resulting from the division of labour to three main causes: (i) the greater dexterity acquired by each worker when confined to one particular task; (ii) the economy of time achieved in avoiding constant change of occupation; and (iii) the number of inventions and improvements which suggest themselves to person absorbed in one kind of work. Smith also indicates two limits of division of labour: the extent of market, and the quantity of capital available. Such is an outline of Smith’s theory of division of labour. Juxtaposed with the Physiocratic theory, it is not very difficult to realize its superiority. But it is very strange that Smith failed to make the best possible use of his theory. Its full significance was lost upon him. The theory of division of labour alone was sufficient to dispose of the whole Physiocratic system. Nevertheless, in the last chapter of the Book IV, we find him still valiantly struggling to disprove the conclusions of the Physiocrates, by the aid of arguments not always very convincing. Forgetting his principle of division of labour, he even adopts a part of their thesis and finds himself entangled by the invalid distinctions which they had drawn between productive and unproductive workers. Further, by restricting the term productive to material objects only, Smith gave rise to a controversy that was first taken up by Say and revived by Mill, but which to-day seems to have been decided against Smith. Notwithstanding his recantation, Smith was never quite rid of Physiocratic influence. Writing of the Physiocratic system, he described it as perhaps “the nearest 39

approximation to the truth that has yet been published”. 52 So incredible was the impression which the Physiocrats left upon him that both they and their doctrines, even when the latter are directly opposed to his own, are always spoken with the greatest respect. Nothing can be more incorrect, though it is frequently done, than to regard Smith as the prophet of industrialism and to contrast him with the physiocrats, the champions of agriculture. When the Wealth of Nations appeared in 1776 the economic transformation known as Industrial Revolution had just begun, and thus it is difficult to establish an exact connection between the the transformation and the book. Far from writing a manifesto of the new age, Smith’s work reveals a thorough abhorrence of traders and manufactures. All his sarcasm is reserved for them, all his criticism levelled at them. When it comes to choosing between capitalists and workers, Smith’s sympathy, definitely, lies with the workmen as several passages could be cited to this effect. Suffice it is to recall very sympathetic way in which he speaks of the high wages of workmen and contrast it with his discussion of profit.53 (I) In addition to the conception of the economic world as a great natural community created by division of labour, we can distinguish in Smith’s work two fundamental ideas, around which his more characteristic theories group togather. First is the idea of spontaneous origin of economic institutions, and secondly their beneficent character – or, more briefly, Smith’s naturalism and optimism. The two ideas, though frequently intermingled and sometimes even confused in Smith’s work, must be carefully distinguished by the readers. The conception of spontaneity is the one to which Smith refers most frequently. Here at any rate he and the Physioctrats were entirely at one. There is no need for organization, no call for the intervention of any general will, however, far-seeing or reasonable, and no need for any preliminary understanding between men. Such are the reflections that the study of the economic world are suggested. The present aspect of the economic world is the result of the spontaneous action of millions of individuals, each of whom follows his own will, taking no heed of others, but never doubting the ultimate result. This idea of spontaneous constitution of the economic world is in some respects analogous to the conception of an economic law of a later period. Smith insists less upon the constancy and more on spontaneity, their instinctive and natural character. The idea of the spontaneity of economic institutions finds its most interesting illustration in the theory of demand and supply. In a society based upon the division of labour, where every one produces for a market without previous arrangement with his fellow producers and without any external direction. However, the great difficulty lies 52 53

op. cit., Bk IV, chapter ix; E. Cannan edn., Vol. II, p. 176. op. cit., Bk I, chapter viii; E. Cannan edn., Vol. I, p. 80, 100.

40

in adapting the amount of goods supplied to the amount demanded. How are these producers to know at any particular time what they ought to produce and in what quantities. Smith was careful to point out that they are not concerned with the satisfaction of all human needs. Their duty lies towards effectual not the absolute demand. By effectual demand we are to understand the demand of those who are capable of offering not merely something in exchange for the product which they desire, but of offering at least enough to cover the expenses of raising those products. 54 To understand this, one needs to understand Smith’s theory of prices. Smith begins his treatment by emphasizing the fundamental difference between value in use and value in exchange. By former he meant utility or subjective value, desirability, or ophelimity. It was the exchange value that was of any interest to Smith. He was led to the study of prices because he wished to know something of their constant oscillation. To him, the actual or market price is unstable because of the unstable relationship between demand and supply. Smith makes the true value of any commodity depend upon the amount of labour which it has taken to produce. “Labour, therefore, is the real measure of the exchange value of all commodities”. “The real price of every thing, what every thing really costs to man who wants to acquire it, is the toil and trouble of acquiring it”. 55 A critical examination of Smith’s work suggests that this first attempt to find a firmer foundation for exchange value than that afforded by the shifting sands of demand and supply was scarcely made before Smith, who became aware of certain difficulties in this path such as: how can this work and the value dependent upon it to be measured; work by itself can not produce anything for something must be contributed both by land and capital; and the similar. So, it follows that labour is not the only source of value, nor is its sole measure. Smith, having discarded labour, finds a new determinant of value in cost of production. Evidently, he never had the courage to chose between the two hypotheses, as both remain juxtaposed in his Wealth of Nations. Further, for if the cost of production is the regulator of price, it is important that an analysis of cost of production and study of the causes that determine the rates of wages, profits and rent is made. Smith’s analysis, however, is one of the least satisfactory portion of the work. Finally, it is hard to agree with Say that Smith’s theory of distribution is one of his best claims to fame. His treatment of this problem, which afterwards became the kernel of Ricardian economics, is altogather infirior to his handling of production. This, perhaps, is the least original part of his work.

54 55

op. cit., Bk I, chapter vii, E. Cannan edn., Vol I, p. 38. op. cit., Bk I, chapter v, E. Cannan edn., Vol I, p. 32.

41

Smith contends that “the quantity of every commodity brought to market naturally suits itself to the effectual demand”.56 And this is simply the outcome of personal interest. So in majority of cases this natural and spontneous mechanism secures a constant balancing of supply and demand. The circumstances under which such a result does not follow, Smith does not deny that sometimes that do exist. Whenever (in exceptional cases) such conditions prevail, i.e. market price remains for a considerable time above the natural price, it is due to capitalist’s artificial monopoly. The fundamental rule of continuous adaptation prevails. Interestingly, Smith makes use of his this theory to illustrate his stand on population and money. As far as, “The number of people” concerned, he says “depends upon the demand of society”, and “…if this demand is continually increasing, the reward of labour must necessarily encourage in such a manner that the marriage and multiplication of labourers may enable them to supply that continually increasing demand by continually increasing population”.57 The second case relates to demand for money and its supply. Smith, elaborates as to how the quantity in circulation is to be regulated to meet the requirements of exchange. Finally, it should be mentioned that Smith takes pain to qualify his optimism. It is slightly more than a reflection of the XVIIIth century in the bounty of nature, and an expression of profound conviction rather than the conclusion of a logical argument. Absolute his optimism was not, neither was it universal. In fact, it appears that he never intended it to be applied to anything other than production. It can be observed that his optimism deserts him when he reaches to the problem of distribution. (III) The practical conclusion to which naturalism leads and to which optimism points is economic liberty. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital in competition with those of any other men. As to the government, or sovereign, as Smith calls it, “is completely discharged from a duty …; the duty of suprintending the industry of private people, and of directing it towards the employments most suitable to the interests of society”. He is not satisfied with proving the inefficieny of those institutions, which are spontaneously created by society itself, but he attempts to show that State, by its very nature , is unfit for economic functions. He remarks, “No two characters seem more inconsistent than those of trader and sovereign”.58 Governments are “always, and without any exception, the greatest spendthrifts in the society”.59 Moreover, the government is too far removed from the

ibid, p. 81-82. op. cit., Bk I, chapter vii, E. Cannan edn., Vol I, p. 59. 58 op. cit., Bk V, chapter ix, E. Cannan edn., Vol II, p. 184. 59 op. cit., Bk II, chapter iii, E. Cannan edn., Vol I, p. 328. 56 57

42

centres of particular industries to give them that minute attention which they deserve if they are going to prosper. The state is an inefficient administrator because its agents are negligent and thriftless, not being directly interested in administration, but paid out of public funds. State administration is a pis aller, and intervention ought to be strictly limited to those cases in which individual action is impossible. Smith recognizes three functions which the State can perform – namely the administration of justice, defence, and public works. In order that a private enterprise my be useful for the community, Adam Smith mentions two necessary conditions: the entrepreneur must be actuated by personal interest and his actions by means of competition be kept within the limits of justice. Thus, non-intervention for Smith was a general principle, and not an absolute rule. In the struggle for Free Trade, Adam Smith was forestalled by the Physiocrats. Protection, to him, consequently, not merely useless; but it proves even injurious. 60 He arguments the absurdity of manufacturing a commodity in country at a great expense when a similar commodity might be supplied by a foreign country at less cost. According to Smith, there exists a natural distribution of products among countries, resulting an advantage to all of them. It is Protection that hinders the sharing of the advantage. Foreign trade also affords a means of disposing of a country’s surplus products, and this extension of market, he argued, would lead to further division of labour and increased productivity. Notable is the fact that England of the XIX th century succeeded in realizing this free exchange – almost to perfection. The XVIIIth century was essentially a century of levelling down. In Smith’s conception of of the economic world we have an excellent example of this. Its charm lies in the simplicity of its outlines and this, undoubtedly, accounted for his influence among his contemporaries. Even if his ideas seem to be untenable, his book will remain as a permanent monument of one of the most important epochs in economic thought. [Note: From about 1790 on, Smith became the teacher not of the beginner or the public out of the professionals, especially of professors. The thought of most of them, including Ricardo, started from him and most of them again never got beyond him. For half a century or more, roughly until Mill's Principles of political Economy, (1848) started on its career, Smith supplied the bulk of the idaes of the average economist. In England, Ricardo's Principles (1817) meant a serious check. But outside England, most economists were not quite upto Ricardo, and Smith continued to hold sway. It was then that he was invested with the lebel founder, and that earlier economists moved into the role of precursors in whom it was wonderful to discover what nevertheless remained Smith's idea.

60

op. cit., Bk IV, chapter ii, E. Cannan edn., Vol I, p. 419.

43

The task of reaching some conclusions with regard to Smith's sources helps to focus our attention on the critical importance of his early writings, such as lectures on Jurisprudence, and the early draft of Wealth of Nations. Edwin Cannan noted their discovery, “enables us to follow the gradual construction of the work almost from its very foundation, and to distinguish positively between what the original genius of the author created out of British materials on the one hand and and French materials on the other“.61 That Smith benefited from his own examination of the physiocratic system may be seen not so much in the account offered in Wealth of Nations, (Book IV, Chapter IX) as in the analytical appatus of Book I and II. For example, though the theory of price and allocation, relies on distinction alraedy established in his Lectures, supply price is now defined in terms of ordinary or average rates for rent, profits and wages – a division that had struck Smith forcibly, and which still possessed some novelty as may be seen in the way he warns his readers against confusion among them (WN, I. iv). In this way Smith allowence for the existence of three factors of production, gave his analysis an explicitly static aspect by treating the rates of return as given and the factors as stocks rather than flows, at least in the short run. At the same time, the earlier analysis of allocation is transformed by the eternal role given to profit, exposed the real significance behind Smith's earlier, intutive, preoccupation with the 'natural balance of industry'. The throry of distribution was not a feature of Smith's Lectures. Thus, Cannan concludes that 'Smith required the idea of the necessity of a scheme of distribution from the physiocrats'.62 In examining the functioning of the economy from a macro point of view, Smith produced an argument which gives a great deal of importance to the different employments of capital and to the distinction between fixed and circulating capital. But it is perhaps in the treatment of the division of stock seen from the standpoint of society at large, (WN, II.ii.), rather than from that of the individual entrepreneur, the physiocratic influence is to be seen at its strongest. For it is here that Smith divides the stock of society into fixed and circulating capital, where the latter included goods in process and those ready for sale during a particular period, but which remains at the outset in the hands of manufacturers, farmers and merchants who constitute the system. In this way, Smith presented the functioning of the economy in terms of a process of withdrawl from the circulating capital of society, which was matched by the replacement of goods thus used up, by virtue of current productive system which shows how clearly Smith grasped the significance of what the physiocrats were trying to do.]

Interestingly enough, the task of discrediting the first French school of economists and of facilitating the expansion of English political economy fell, into the hands of a 61 62

Canan, E. (1896) (ed.) Adam Smith's Lectures on Jurisprudence, Police, and Arms, p. xxxi. ibid.

44

Frenchman – J. B. Say. To-day, even although the Wealth of Nations may no longer appear to us as a truly scientific treatise on political economy, certain of its fundamental ideas remain incontestable. The theory of money, the importance of division of labour, the fundamental chracter of spontaneous economic institutions, the costant operation of personal interests in economic life, liberty as the basis of ratioal political economy – all appear to us as definite acquisitions to the science. The rapid spread of his ideas throughout Europe and their incontestable supremacy remains one of the most curious phenomena in the history of ideas. Smith persuaded his own generation and governed the next. However, it should be noted that a great deal must be set to the circumstances that prevailed, e.g. American Civil War, and other causes, that Say mentions: (i) the urgent need for markets felt by English merchants at the close of Napoleonic Wars; (ii) the growing belief that a high price of corn as the result of agricultural production increased the cost of labour; and they create a desire for a general lowering of the custom duties. Subsequesnt events have justified Smith’s attitude on the question of foreign trade. Few works have enjoyed such complete and universal success as Smith’s. But despite admiration the ideas did not spread rapidly. A complete truimph, so far as the Continent at least, was concerned, had to be the work of an interpreter. Say procured a copy of the book. The impression it made him write, “When we read this work, we feel that previous to Smith there was no such thing as political economy”. In 1803 he published a successful book, his Le Traite d’economie politique. The treatise was translated into several languages. With Say’s authority and European reputation, the ideas of Smith, clarified and logically arranged in the form of general principles from which conclusions could be easily deduced, gradually captivated the more enlightened section of public opinion. In this process following should be observed: In the the first place, Say succeeded in overthrowing the work of the Physiocrats. His decisive argument against Physiocracy was that production of material objects does not imply their creation, as man can never create, but must be content with mere transformation of matter. Production is merely a creation of utilities, a furthering of that capacity of responding to our needs and of satisfying our wants which is possessed by commodities; and all work is productive which achieved this result, whether it be industry, commerce or agriculture.63 Second, Say carried forward Smith’s ideas, although at the same time superseding them. He subjects the whole conception of political economy and the role of economist to a most through examination. Political economy in his hands became a purely theoretical and descriptive science; and the economists are not supposed to give advice, but simply to observe, to analyze and to describe. In this way Say broke with the long tradition which, stretching 63

Say, J. B., Traite, Bk I, chapter ii.

45

from the days of the Canonists and the Cameralists to those of the Mercanttilists and the Physiocrats, had treated political economy as a practical art and guide for statesman and administrators. Smith had tried to approach economic phenomena as a scientist, but there was always something of the reformer in his attitude. Say innugurates the true scientific method and loves to compare it with physics rather than natural history. Third, during the gap between the publication of Wealth of Nations and his Traite (1776 and 1803), the Industrial Revolution had taken place. This is a fact of considerable importance. Like everybody else, Say too, was convinced that an indefinite future of wealth, work and well-being is ahead. So much so that he delivered the first official course of lectures on Industrial Economy. Furthermore, as manager of his own factory, he has experienced the adoption of machinery, which convinced him that any interfrence by government with the inventor’s property is undesirable. At the beginning of the XIXth century the principal agent of economic progress was the industrious, active, well-informed individual, either an ingenious inventor, a progressive agriculturist, or an experienced businessman; Say was convinced of the role of an individual as an important personage (entrepreneur) of the ecomic world. Say’s classic exposition of the mechanism of distribution is based upon the following conception: Men, capital, and labour furnish productive services. These services, when brought to market, are given in exchange for wages, interest or rent. It is the entrepreneur who combines them with a view to satisfying the consumer’s demand. In this fashion the law of demand and supply determine the price of services, average rate of interest, and rent. Finally, Say should be given due credit to the exposition of his theory of markets, i.e. “products are given in exchange for products”, where money is just intermediary. “The theory of markets will change the whole policy of the world”. He thought that the greater part of the doctrine of Free Trade could be based upon this principle. Thus to conlude, Say plays a by no means negligible part in the history of doctrines. Foreign economists have not always recognized him. Notwithstanding this, he was faithful in transmission of ideas of Smith in France. Happily his knowledge of the works of Turgot and Condillac enabled him to rectify some of the contestable opinion of Smith, avoiding many errors of his successors. He definitely left mark upon the French political economy.

46

Chapter 3.

A Gloomy Shadow Henceforth, we are to witness the enunciation of new doctrines, which cast a deepening gloomy shadow across the radiant dawn of political economy, giving it that strangely sinister aspect which led Carlyle to dub it the dismal science. Since, their theories were more close to reality than that of the Optimists, discussed so far, the new point of view of the two economists paints a pessimistic picture of the world. While nominally subscribing to their predecessors’ doctrines concerning the identity of individual and general interests, the cogent reasons that they have adduced against such belief, warrant such a branding. The antagonism existing between proprietors and capitalists, between capitalist and workman, is a discovery of theirs. Instead of natural or providential laws that were to secure the establishment of the order provided they were thoroughly understood and obeyed, they discovered the existence of other laws, such as that of rent, which guaranteed a revenue for a minority of idle proprietors – a revenue that was destined to grow as the direct result of the people’s growing need; or the law of diminishing returns, which sets a definite limit to the production of the necessities of life. That asserted limit was already being approached, and mankind had no prospect of bettering its lot save by the voluntary limitation of its numbers. There was also the tendency of profits to fall to the minimum – until it seemed as if the stagnant waters of the stationary state, sooner or later, would swallow the whole of human history. Since they had no faith in progress, and did not believe that any legislative action can change the course, they deserve to be classified as the Pessimists. The best-known representatives of the school are Malthus and Ricardo. To these two writers fell the task of criticising economic institutions and doctrine, a task that has been taken up by other writers in the course of the century, but which seems as far from completion as ever.

Thomas Robert Malthus is best known for his law of population. That he was a great economist, even apart from his study of that question, might easily be proved by 47

reference to his treatise on political economy 64, or by perusal of the many articles he wrote on various economic questions. Twenty years had passed since the publication of Smith’s work, without economic science making any advance. The appearance of a small anonymous volume, known to be the work of an unmarried clergyman living in a small county parish, caused a great sensation. Even after the lapse of two centuries the echo of the controversy did not pass altogether. At first glance, one might be led to think of it as a book that touch the fringes of economics as it is basically a statistical study of population – demography. But, it is noteworthy that the influence of the book upon all future economic theories, both production and distribution, was immense. Thus, it may even be considered a reply to Smith’s.65 The attempt to explain the persistence of certain economic phenomena by connecting them with the presence of a new factor, biological in its character and differing in its origin (from mere desire for profit and self-interest) considerably expand the horizon.66 The dangers that might result from indefinite growth of population had engaged the attention of earlier writers67 but not like Malthus. To the statement that there are no limits to the progress of mankind either in wealth or happiness (Mirabeau, Godwin, and Condorcet), and that fear of over population is illusory, Malthus replied that we have in population an almost insurmountable obstacle, not merely looming in the distant future, but pressing and insistent. Nature has planted an instinct in man, which, left to itself, must result in starvation and death, or vice. This is the one fact that affords a clue to human suffering and a key to history of nations and their untold woes. The memorable formula by which Malthus endeavoured to show the contrast between the frightful rapidity with which population grows when it is allowed to take its own course and the relative slowness in the growth of means of subsistence. In every twenty-five years, the first grows by a geometrical, and second by an arithmetical progression. This thesis, although true to a great extent, had been subjected to criticism. Malthus proceeded to show how insufficient nourishment always brings a thousand evils in its train, not merely hunger and death, but also epidemics, practices as cannibalism,

Along with his famous, first in 1798 anonymously published Essay on the Principle of Population as it affects the Future Improvement of Society that made him famous, we must also cite, his The Principles of Political Economy considered with a View to their practical Application, (1820); A Series of Short Study dealing with the Corn Laws, (181415); On Rent, (1815); and Definitions of Political Economy, (1827). 65 James Bonar wittily remarks that Malthus might have easily titled his book as An Essay on the Poverty of Nations. 66 Charles Darwin, (1809-1882), acknowledged his indebtedness to Thomas Robert Malthus (1766-1832) for originating the conception of the struggle for existence and survival of the fittest as one of the mainsprings of progress. 67 In France, Buffon and Montesquieu had already shown some concern in the matter. 64

48

infanticide and slaughter of old and sick, as well as war robbing people of their land and food – the positive or repressive checks. To this, it could be argued that in civilized societies, equilibrium can be attained through human methods such as reduced birth rates and checks on abnormal death rate. It was in the second edition of his book that Malthus expanded his treatment of the preventive checks, thus softening the somewhat harsher aspect of his stand in the first edition. By preventive checks he primarily thought of moral restraints, basically abstention from all sexual intercourse outside the bonds of marriage68, and postponement of marriage until such time as the man can take upon himself the responsibility of bringing up a family. When telling the poor that they themselves were the authors of their misery, because of their improvident habits, their early marriage, and their large families, and that no written law, no institution, and no effort of charity could in any way remedy it, Malthus failed to realize that he was furnishing the propertied classes with a good pretext from disassociating themselves from the fate of working class. And during the century that has passed since he wrote, the way to every comprehensive scheme of socialistic or communistic organization has been barred and every projected reform which claimed to ameliorate the condition of the effectively thwarted, by the argument that the only result would be to increase the number of participators as well as the amount to be distributed, and that consequently no one would be any better off. However, whatever opposition Malthus’s doctrines may have aroused, his teaching had long since become a part and parcel of economic science. Occasionally, it has thwarted legitimate claims, while at others it has been used to support some well-known classical doctrine, such as the law of rent and the wage fund theory. Irrespective of the researches in demography, however useful these may be, there still left is the unsolved mystery of forces that determine at any given moment the rapid increase, the stagnation and even the decline of a population. These forces have deep roots in the natural instincts of human beings, where it is hardly permissible for the sociologists or the economists to reach and analyse them. [Note: Right from the publication of his Essay on the Principle of Population, (1803), he was subject to vitriolic wrath. He was the man whose work stirred people's minds, as to elicit passionate and contradictory appraisals. While Marx was Paradoxical as it may seem, the sexual instinct plays quite a secondary role in the procreation of human species. Nature doubtless has united the two instincts by giving them the same organs, and those who believe in final cause can admire the ruse, which Nature has adopted for securing the preservation of the species by coupling generation with sexual attraction. But humans have displayed ingenuity even greater than Nature’s by separating the two functions. Thus, T. R. Malthus’s condemnation of such practice was of little avail and the Neo Malthusians, have considered his teaching immoral and contrary to the laws of physiology, and infected with ideas of Christian asceticism, and altogether worse than evil it seeks to remedy. 68

49

highly scornful, Keynes was most sympathetic. Although, Malthus is best known for his theory of population, but his contribution to monetary analysis, his theory of general glut have altogether been ignored. However, as the author of a system of economic theory that recoined the the theory of Wealth of Nations in a manner that is an alternative to Ricardo's recoinage. Malthus's work as presented in his Principles of Political Economy, (1820), except his theory of savings and investment being exclusively his own, all the elements of analytical apparatus of that work, and even the terminological arrangements, point to the First Book of the Wealth of Nations. Only, whereas Ricardo recoined the doctrine of the Wealth of Nations by means of labourquantity theory value, Malthus reformulated it by means of the theory that Smith used, namely, the theory of supply and demand, also following Smith's example in choosing labour as a unit of value. Thus, Malthus adopted the line that won out ultimately and pointed much more directly to the Marshallian system.]

Next to Smith, David Ricardo is perhaps the greatest name in classical economics. While Smith founded no school, his wisdom and moderation saved him from controversy. But Ricardo was no dweller in ethereal regions. He was thickest in the fight – the butt of every shaft. In discussions on methodology the attack is always directed against Ricardo, who is charged with being the first to lead the political economy into the fruitless paths of abstraction. His theory of rent affords a target for every Marxian in general attack on private property. His theory of value is the starting point of modern socialism – a kinship that he could never have disowned, however little to his taste. The same thing is true of controversies concerning banks of issue and international trade. He seems to occupy ever with the vanguard. His thoughts are penetrating, but his exposition is frequently obscure (his principal work is devoid of a plan, chapters mere fragments in juxtapositions, and constant appeal to imaginary conditions). But this obscurity of his style in presentation has not clouded his fame. Generally speaking, Ricardo’s main concern is with the distribution of wealth – the rent of land, the profits of capital and the wages of labour. Ricardo wanted to determine the way in which this division took place and what laws regulated the proportion that each claimant got. We shall follow him in his exposition of these laws, especially rent, for according to him the share given to land determines the proportions, which the other factors receive. (I) Out of all Ricardian theories that of rent is the most celebrated69. So well-known is it that Mill spoke of it as the economic pons asinorum, and it has always been one of the favourites of examiners.

The problem of rent dominated English political economy during the first half of XIX th century, and a later period has witnessed a revival of it in the land nationalization policy of Henry George. In France there was a 69

50

By breaking connection with Smith and Physiocrats, Ricardo enters on an entirely new track, and brushes aside with contempt, all the suggestions of cooperation on the part of Nature. Businessman and property owner as he was, he had no doubts concerning nature, whose role he contemplated without much feeling of reverence. The proof that the earth’s fertility, taken by it, can never be the cause of rent is easily seen in the case of a newly founded colony. Rent only appears, “when the progress of population calls into cultivation of land of an inferior quality or less advantageously situated”. This is the very kernel of Ricardo’s theory. Instead of being an indication of nature’s generosity, rent is the result of the grievous necessity of having recourse to relatively poor land, under the pressure of population and want.70 “Rent is a creation of value, not of wealth”, says Ricardo – a profound saying, and that has illuminated many a mystery attaching to the theory of rent. In short, the cause and the measure of the rent are determined by the quantity of labour force necessary to produce under the most unfavourable circumstances (i.e. “most unfavourable under which the quantity of produce required renders it necessary to carry on production”). Ricardo assumed that first-class lands yield a bushel of corn, say, as the result of ten hrs. of work, the corn selling at ten shillings a bushel. In order to supply a population that is increasing in accordance with the Malthusian formula, land of the second class has to be cultivated, when the production of a bushel requires fifteen hrs. of work. The value of corn will rise proportionately to fifteen shillings, and landed proprietors of first class land will draw a surplus value of five shilling per bushel. So rent emerges. As the time of cultivating lands of third class will approach, when twenty hrs. of labour will be necessary for the production of a bushel. The price of corn will go up to twenty shillings, and proprietors of the first-class will see their gift increased or their rent rose from five to ten shillings per bushel, while the owners of the second-class land obtain a bonus of five shillings per bushel. This marks the advent of a new class of rent-receivers, who modestly take their place a little below the first-class. The third-class of landowner will receive a rent whenever the cultivation of fourth–class land becomes necessary.71 The law of diminishing returns is indispensable to an understanding of the Ricardian theory. It is implied in Malthus’s theory of population. Malthus says that as the cultivation extends, the annual addition made to the average product must continually diminish. Ricardo witnessed the operation of the law under his very eyes, and he

feeble echo of the controversy, for France even long before the Revolution, had been a country of small proprietors. Landlordism was less common there. 70 Ricardo, D. (1773-1842), The Principles of Political Economy, 1817 (ed. Gonner, p. 53, note). 71 ibid, (ed. Gonner, p. 49).

51

frequently hinted at the decreasing returns yielded by capital successively applied to the same land. The Ricardian theory is in reality based upon certain postulates. In the first place, there is the assumption of lands unequally fertile and representing unequal amounts of labour will always sell at the same price. However, one must note that goods offered on the same market are so much alike that it is a matter of indifference to the buyer whether he takes one or other, price being the same. In the second place, it is implied that this exchange value, uniform for all identical products, is determined by the maximum amount of labour required for its production. This brings us to the Ricardian theory of value. He confesses that the relative value of commodities is determined by (a) the relative quantity of labour needed for its production; and (b) the relative length of time required to bring the commodity to market. Most contemporary economists, while denying that value is solely the product of labour and preferring to regard it as a reflection of human preferences, would willingly recognize the element of truth contained in the Ricardian view. But it must be understood in the sense that competition, although tending to reduce price to the level of cost of production, cannot reduce it below the maximum cost of production, or the price necessary to repay the expenses of producing the most expensive portion of the total amount demanded by the market. In this sense, it is true not only of agricultural but also of all other products. Finally, Ricardo only recognized the existence of differential rents and dismisses the other cases mentioned by Malthus. It seems as if Malthus’ observations were in this instance more correct than Ricardo’s. Such a theory of rent, in the first place led to the overthrow of the majesty of the natural order by him, depicting some of its gloomier aspects. In the second place, it endangered the reputation of landowners by showing that their income is not the product of their labour, and consequently anti-social. Finally, it seems to provide colour to certain theories that predict an extremely dark future for the human race. (II) Let us now examine the laws of wages and profits as presented by Malthus and Ricardo, and ask what effect they are likely to have upon the condition of the worker and the amount of his wages. The answer is not very encouraging. On the one hand there is an indefinite increase in the number of proletariat – because of unchecked procreation, for the moral restraint can hardly be said to have an influence. The inevitable result is the degradation of human labour resulting in low wages. On the other hand, the law of diminishing returns that causes a continuous rise in the prices of necessaries. Between the two the worker feels himself crushed. Ricardo emphatically declares, “The natural price of labour is that which is necessary to enable the labourers one with another to subsist and to perpetuate their race without

52

either increase or diminution”.72 This, however, does not mean that nominal wages measured in terms of money cannot increase. Indeed, it is absolutely necessary that they should increase in response to an increase in price of commodities. But the fate of labourer will be the same. An exit from this circle is only possible by recalling the fact that the market wage incessantly oscillates around the natural wage according to the exigencies of demand and supply. If this accidental rise could be prolonged a little, it might become permanent and modify the workman’s standard of life.73 We will not fail to note that in the Ricardian theory there is not what we may call antagonism between the landed proprietor and the proletarian. To the latter it is a matter of indifference whether rents are high or low, for his money wages move in sympathy with the price of commodities, but his real wages never change. The proprietor too, is indifferent for the wages never affect his receipts. The struggle is between the capitalist and worker. Once the value of product has been determined by the cost of its production on least-favoured land, the proprietor seizes whatever is over and above this, saying to both worker and capitalist, “divide the rest between you two”. There can hardly be an objection to Ricardo’s method of stating the law, as the whole thing is so evident that it is almost truism. Admitting that the proportion which one of the two factors receives can be increased only if other is lessened, the problem is to discover which of the two, capital or labour. To Ricardo it seems labour as he speaks of another law of profits, namely, “the tendency of profits to a minimum”. (III) Some other doctrines besides that are regarded, as contributions to the science, are fairly important and more definite, and have significantly contributed to Ricardo’s fame74. Here at any rate there is no note of pessimism and no suggestion of conflicting interests. On the contrary, Ricardo was able to point out that “under a system of perfect commerce the pursuit of individual advantage is admirably connected with the universal good of the whole”. This argument, which is of considerable importance even today, is based upon the advantages that accrue from the territorial division of labour. It may be worth that his contemporary, Malthus remained more or less of a Protectionists. Note that Ricardo’s principal contribution to the science was his discovery of the laws governing the movements of commodities and the counter-

Ricardo, D., op. cit., (ed. Gonner, p. 79). ibid, (ed. Gonner, p. 95). 74 David Ricardo’s disciples are almost a legion, and among them is every economist of repute of the earlier XIX century. The well-known three economists among these are who immediately follow him in chronological order: James Mill (Elements of Political Economy, 1821), his friend J. R. McCulloch, (1789-1864), (Principles of Political Economy, 1825), and Nassau Senior, (1790-1864), (Political Economy, 1836). The first two named contented themselves by vigorously defending the master’s views without contributing anything new. Senior deserves some credit for systematizing the Classical doctrines. 72 73

53

movements of money from one place to other, and the admirable demonstration, which he provided to us of this remarkable ebb and flow. As soon as the balance of commerce becomes unfavourable to the country, money is exported to pay for excessive imports. Money becomes scarce, its value rises and prices fall. A fall in price will check imports and will encourage exports. Money will not be sent abroad and the current will begin to run the other way, until the money sent abroad is returned again. Moreover, money sent abroad would cause a movement in the opposite direction – oversupply and depreciation in the value of money, high prices, a premium on imports and a check upon export. Accordingly, economic forces on both sides will conspire to bring back the balance of trade to equilibrium. However, it should be noted that this mechanism can only operate slowly and that considerable time will elapse before the prices of goods begin to respond to the changes in the quantity of money, and the rates of foreign exchange. Thus, silver and gold in international trade do little more than oil the wheels of commerce.75 This theory of automatic regulation of balance of trade by variations in the value of money, although already hinted by Hume and Smith, is none the less discovery of the first order that has done service as a working hypothesis for more than around two centuries now. (IV) The enunciation of the principles that should govern the conduct of monetary authority (Bank of Issue) is another debt we owe to the genius of Ricardo. He was a witness on Feb. 27, 1797, when the monetary crisis hit the Bank of England and the currency suffered a depreciation of over ten per cent. Ricardo tried to unravel the causes of this depreciation in his pamphlet entitled The High Price of Bullion, 1809. Here, he demonstrated how depreciation in the value of currency necessarily resulted in the exportation of gold, although most of his contemporaries, on the contrary, believed that the export of gold was the cause of all the trouble, and thus be checked by legislature. [Note: Ricardo's thought was inspired by Smith's Wealth of Nations. The arguments of the Principles of Political Economy and Taxation, (1817), starts with a criticism of Smith, which runs through the whole book. His Principles, though unsystematic in form, is a systematic performance of the first order in substance. Though he owed much to Smith, he owed very little to other authors. His subjective originality was of a high order. Ricardo's fame does not rest only on his theoretical structure alone. On the one hand, there were his contributions to the theory of money and monetary policy and the theory of international trade; on the other hand, certain individual elements of that structure proved more durable than did the whole. The most important is his theory of rent.

75

See for details, David Ricardo's Works, McCulloch edition.

54

The core of the followers of Ricardian thought consisted only four men besides Ricardo himself; they were James Mill, McCulloch, and De Quincey. None of the three added anything substantial. Marx and Rodbertus did much to keep Ricardian thought alive. Partly by the virtue of their influence, and partly because of the weakness of domestic competition, and later on, also because of dislike for the Austrian theory, Ricardo remained up to the end of the XIXth century the great theorist for most of those German economists who had any theoretical ambitions: the names of Wagner, Dietzel, and Diehl are illustrative examples. In Italy, there were strong traces of Ricardo's influence in the writings of Ferrara and Rossi. France resisted the Ricardian influence. In the US McCulloch's textbook conquered a large ground.]

55

Chapter 4.

Antagonism and Associationism With the completion of work of Say, Malthus, and Ricardo it seemed as if the science of political economy was definitely constituted. However, it would be illusory to imagine that there was any unanimity of opinion. There were several points that still remained obscure, and more than one theory that was open to discussion. Hardly, indeed, was their task completed before the new doctrine found itself objected to a most formidable attack, which was simultaneously directed against it from all points. First comes, Sismondi, with a haunting catalogue of sufferings and miseries resulting from free competition. Spirits still more daring will essay the discovery of new principles of social organization. The Saint-Simonians will demand the suppression of private property, the extinction of inheritance, and centralized control of industry by the arm of an omniscient government. The voluntary socialists – Owen, Fourier, and Blanc – will claim the substitution of voluntary co-operation for personal interest. Proudhon will dream of the reconciliation of liberty and justice in a perfect system of exchange from which money will be excluded. Finally, the broad cosmopolitanism of the classical writers is to find a considerable antagonism in List, and a new Protectionism, based on the sentiment of nationality, is to re-build the old Mercantilism, which seemed so hopelessly battered under the blows of Smith and the Physiocrats. These very diverse doctrines, along with much that is fanciful and erroneous, contain many just ideas and original conceptions. They never succeeded in supplanting the doctrine of the founders; but they demonstrated that the science, apparently complete, was in reality far from perfection. Let us now attempt to realize the importance of the part they played in promoting the cause of science. The first thirty years of the XIXth century witnessed profound transformations in the structure of economic world. By close of the XVIIIth century in France, and in England nothing remained of the old order, which could possibly check the advent of laissez-faire. Antagonism towards the Classical school saw an upsurge. Under this transformation 56

process, the new manufacturing industry, born of many inventions was wonderfully developed. Many places became the chosen centres of large-scale production. But were also born two new phenomena: the concentration in the great centres of wealth of a new (characterized by the over-production of commodities) and a miserable class (the workers). Along with malpractices in employment and exploitation of workers, economic crises became too common. Thus poverty and economic crises attracted great public attention in those countries where economic liberty had secured earlier triumph. In many minds gradually engendered a want of confidence in the doctrines of Smith. Some Christian writers provoked sentimental indignation and aroused the vehement protest of humanity against an implacable industrialism. The socialists pushed the criticism to the extent of examination of institution of private property itself, demanding complete overthrow of society. All critics rejected the idea of a spontaneous harmony between private and public interests as being incompatible with dominating circumstances. Among such writers was Jean C. L. de Sismondi. All his interest in political economy, so far as theory was concerned, was summed up in the explanation of crises and in the amelioration of the condition of the workers. He is thus the chief of a line of economists whose woks never ceased to exercise influence throughout the XIXth century, and who without being a socialist on the one hand or totally blind to the vices of laissez-faire, on the other, sought the correction of the abuses of liberty while retaining the principle. Sismondi began his career as an ardent supporter of economic Liberalism. In 1803 he published an exposition of the ideas of Smith: De La Richesse commerciale. For next fifteen years he worked on historical, literary, or political subjects. He returned to the study of political economy in 1818 and was asked to write an article for Edinburgh Encyclopedia. Upon re-examination of his ideas he found that in the light of new facts, his conclusions differed entirely from those of Smith. From this work sprang his new treatise, Nouveaux Principes d’ économie politique, 1819, and made him a celebrated economist. Sismondi’s disagreement was not upon theoretical principles of political economy. So far as these were concerned he declared himself a disciple of Smith. He merely disagreed with the methods, the aim and conclusions of the Classical School. As regards the method, he draws an important distinction between Smith and his followers. He thought that political economy was best treated as a moral science where all facts are interwoven and where a false step is taken whenever one single fact is isolated. His criticism was levelled not only against Ricardo and McCulloch, but Say as well, for Say had treated political economy as an exposition of few general principles. Sismondi, himself a historian and publicist interested in immediate reforms, could not

57

fail to see quite clearly the effects that social institutions and political organizations were bound to have on economic prosperity.76 Sismondi’s conception of economic method is inconsistent just so long as the economist confines himself to the discussion of practical problems or attempts to gauge the probable effects of a particular legislative reform or is unravelling the causes of a particular event. But should the economist wish to picture to himself the general aspect of economic world, he cannot afford to neglect the abstract method. Sismondi himself was forced to have recourse to do it. It is not only on the question of method, but still more on the question of aim that he finds himself in opposition to the Classical school. To them, political economy was a science of wealth. But the real object of the science should be humans and their well-being. To consider wealth by itself and to forget human kind was a sure way of making false start.77 This is why he gave so much prominence to a theory of distribution alongside of the theory of production, which had attracted the exclusive attention of Classical writers. The Classical school, it is true, gave first place to production because the multiplication of products was a sine qua non of all progress in distribution. But Sismondi regarded it otherwise. In his own treatment of distribution, he devoted a special section to the poor who live by their labour. They form the bulk of our population, and changes wrought in their way of life by the invention of machinery, the freedom of competition and the regime of private property was that interested him most. What really interested Sismondi was the economie social or Sozialpolitik. Mistaken in its conception of the nature of the object to be kept in view, it is not surprising that Plato’s Chrematistic School should have gone astray in its practical conclusions. The teachings of the school of thought gave an undoubted incentive to unlimited production, for it was loud in its praise of free competition. It preached the doctrine of harmony of interests, and considered that the best form of government is no government at all. These were the three essential points to which Sismondi took exception. His moderate enthusiasm for production was based upon that economists should have more attention to man rather to the supply of commodities, role of producers and the machines. Sismondi was the first writer to give expression to the belief that industrial society tends to separate into two absolutely distinct classes – those who work and those who possess. Free competition hastens this process of separation, causing the disappearance of the intermediate ranks and leaving only the proletariat and the capitalist. The law of concentration of capital which is central in Marxian system, Sismondi shows how it

76 77

See his, Études sur l' Économie politique, preface, p. v. See his, Nouvaux Prinipes, Vol I, p. 9.

58

wrought its ravages in agriculture, in industry, and in commerce at the same time leading to economic crises. The principal interest of Sismondi’s work does not lie in his attempt to give a scientific explanation of the facts that occupied his attention. His merit rather lies in having placed in strong belief in certain facts that were consistently neglected by the dominant school of economists. Taken as a whole, his doctrine must be regarded as pessimistic. He contended that it is no longer possible to speak of the spontaneous harmony of interests, or to forget the misery and suffering which lie beneath an appearance of economic progress. Crises cannot be slipped over and treated as transient phenomena of no great moment. No longer is it possible to forget the important effects of an unequal division of property and revenues, which frequently in putting the contracting parties in a position of fundamental inequality that annuls freedom of bargaining. In short, it is no longer possible to forget the social consequences of economic transformations, and herein lays the sphere of social politics. The new point of view occupied by Sismondi enables him to see that the free play of private interests often involves injury to the general interest, and that laissez faire doctrine has no longer any raison d’etre. On the contrary there is room for the intervention of society (government), which should set a limit to individual action and correct its abuses. Sismondi, thus, becomes the first of the interventionists. State action, in the first place, ought to be employed in curbing production and in putting a drag upon the too rapid growth of inventions. Sismondi dreams of progress accomplished by easy stages, injuring no one, limiting no income, and not even lowering the rate of interest.78 It appears that Sismondi never realized that any restriction placed upon production with a view to alleviate sufferings might hinder the over-all progress and well-being of the very classes that interest him most. Sismondi never suspected the relative poverty of industrial society. It must be mentioned that his reform projects, like his criticism of economists, reveal a certain degree of hesitation, due to the perpetual conflict of reason and sentiment. Too keen not to see the benefits of the new industrial regime, and too sensitive not to be moved by some of its more painful consequences, too conservative and too wise to hope for a general upheaval of society, he is content to remain an astonished but grieved spectator of the helplessness of mankind in the face of this evil. Sismondi, by supplementing the study of political economy by a study of social economics, had much enlarged the area traced for the science by its founders. But while giving distribution the position of honour in his discussion, he never dared carry his criticism as far as an examination of the fundamental institution of modern society – private property. Property, at least, he thought legitimate and necessary. Every English and 78

ibid, Vol I, p. 393.

59

French economist had always treated as a thing apart – a fact so indisputable and inevitable that it formed the very basis of all his or her speculations. It is a striking fact that most of the important social ideas in the XIXth century can be traced back to Sismondi’s writings. By his appeal to sentiment and his sympathy for the working classes, by his criticism of the industrial regime of machines and competition, by his refusal to recognize personal interest as the only economic motive, he foreshadows the violent reaction of humanitarianism against the stern implacability of economic orthodoxy. Finally, by his plea for State intervention he inaugurated a reaction against liberal absolutism, a reaction that deepened in intensity and covered a wider area as the century wore on, and which found its final expression in State socialism. Many present-day socialists, perhaps without knowing it, love to repeat the arguments, which Sismondi was the first to employ, to stir up his indifferent contemporaries. Suddenly, we come upon a number of writers who, definitely, reject all complicity with the earlier communists and admitting neither equality of needs nor of faculties, but tending to an agreement with the economists in claiming the maximum of production as the only aim of economic organizations, dare lay their hands upon the sacred ark and attack the institution of property with whole hearted vigour. Venturing upon what had hitherto been holy ground they displayed so much skill and courage that every idea and every formula, which became the commonplace of the socialistic literature of later XIX th century that finds a place in their system. Having definite ideas as to the end, which they had in view, they challenged the institution of private property because of its effects upon the distribution and production of wealth. They cast doubt upon the theories concerning its historical evolution, and conclude that its abolition would help the perfection of the scientific and industrial organization of modern society. The problem of private property was at least faced, and recurrence of the discussion was henceforth to become a feature of economic science. Not that it had hitherto been neglected. Utopian communists from Plato and More up to Mably, Morelly, Godwin, and Babeuf and other XVIII th century writers, all do rest their case upon criticism of property. But hitherto the question has been treated from the point of view of ethics rather than economics. 79 The originality of the Saint-Simonian

Not to speak of celebrated Utopians like Plato, Thomas More (1477-1535), and Tommaso Campanella, (15681639), a number of writers who have been minutely studied by André Lichtenburger (1870-1940), undertook to supply such criticism in the XVIII th century. Etienne Morelly, (1717-1778), Gabriel Bonnot de Mably, (1709-1785), Jacques Pierre Brissot, (1754-1793), and Jan Meslier, (1664-1729) in France, and William Godwin (1756-1836) in England, attacked the institution of property with becoming vigour. The Saint-Simonians, however, seem to have remained in ignorance of the socialist theories of their contemporaries, the French Charles Fourier, English philosopher William Thompson, (1775-1833), and Robert Owen, (1770-1857). It appears that Henri Saint-Simon, (1760-1825); and Bazard Carbonaro, (1791-1832), have never read Charles Fourier. 79

60

treatment is that it is the direct outcome of the economic and political revolution, which took the whole of Europe towards the end of XVIIIth and beginning of XIXth centuries. The Socialism of C. Henri Saint-Simon is not a vague aspiration for some pristine equality, which was largely a creation of the imagination. It is rather the naïve expression of juvenile enthusiasm in the presence of the new industrial regime begotten of mechanical invention and scientific discovery. It sought to interpret the aspirations of the new bourgeois class, freed through instrumentality of the Revolution from the tutelage of baron and priest, and to show how the reactionary policy of the Restoration threatened its triumph. Not content with confining itself to the intellectual orbit of the bourgeoisie, it also sought to define the sphere of the workers in future society and to lay down regulations for their benefit. But its appeal was chiefly to more cultured classes – engineers, bankers, artists, and savants. It was to these people that Saint-Simonians preached collectivism and suppression of inheritance as the easiest way of founding a new society upon the basis of science and industry. We must, in fact, distinguish between two currents: one representing the doctrine preached by Henri himself and of his disciples. Saint-Simon’s creed can best be described as individualism plus a slight admixture of socialism, and it thus naturally links with economic liberalism. Saint-Simon’s earlier work was an attempt to establish a scientific synthesis, which might furnish mankind with a system of positive morality to take place of the religious dogmas. He provides a full account of his system, which is as deceptive as it is simple, and which shows us his serious limitations as a philosopher whose ambition far outran his knowledge. Sismondi’s works were scarcely ever read. His influence was rather personal. The task of spreading a knowledge of his ideas devolved upon a number of talented disciples whom he had succeeded in gathering around him: Thierry, Comte, Rodrigues, Enfantin, and Carbonaro. All of them were persuaded that master’s ideas furnished the basis of a really modern faith, which would at once supplant both decadent Catholicism, and political Liberalism, the latter of which, in their opinion, was a purely negative doctrine. Auguste Comte, one of his disciples, attempted a similar task in his Cours de Philosophie positive, (4 vols. 1851-54). His economics can be summed up as an apotheosis of industry. His leading ideas, contained within the compass of a few striking pages, known as Saint-Simons’s Parable80. To him, the official Government is mere a façade. Its actions are wholly superficial. Society might exist without it and life would be bone, and less happy. But the disappearance of savants, industrial leaders, bankers, and merchants

These pages are republished by Olinde Rodrigues, (1795-1851), in 1832 under the title of Une Parabole politque, in a volume of miscellaneous writings by Saint-Simon. 80

61

would have the community crippled. The very source of wealth could dry up, for their activities are really fruitful and necessary. Such was the parable. His envisioned new regime will do away with all class distinctions. There will be only two categories of people the bees and the drones. The government in the ordinary sense of terms will become unnecessary. The nation needs to be organized on the model of a vast workshop. The function of the government in industrial society must be limited to “defending workers from unproductive sluggard and maintaining security and freedom of the producer”. 81 The doctrine of the Saint-Simonians consists of a curious mixture of realism and Utopianism. Their socialism, which made its appeal to the cultured class rather than to the masses, is inspired, not by knowledge of working-class life, but by close observation and remarkable intuition concerning the great economic currents of their time. The Associative Socialists or the Associationists were all those writers who believed that all the social questions should be resolved on the basis of voluntary association, according to some preconceived plan. Unfortunately, these plans vary considerably according to the particular system chosen. They differ from the Saint-Simonians, who sought the solution in socialization rather than association, and thus became the founders of collectivism. The advocates of socialization always thought of Society, and of all the members of the nation as included in one collective association. By means of associations they claim to be able to create a new social milieu. They are as anxious as the Liberals for the free exercise of individual initiative, but they believe that under existing conditions, except in the case of new-privileged individuals, this very initiative is being smothered. They believed that liberty and individuality can never expand unless transplanted into a new environment, but this environment must be created and nurtured. It is this conception of an artificial society set up in the midst of the then existing social conditions, bound by strict limitations, which to some extent isolate it from its surroundings that have won for the system its name of Utopian Socialism. Had the Associationists only declared that the social environment can and ought to be modified, they would have enunciated an important truth that would have forestalled all those who are today seeking a solution of social question in syndicalism, in cooperation, and in the garden-city ideal. On the other hand, had they succeeded in carrying out their plans on an excessive scale, it seems probable that the new kind of liberty would have proved less welcome than the liberty that is enjoyed under the existing constitution of the society. They would have been very indignant, if someone had charged them with desiring to create an artificial society. Their claim was that they do not want to create a new, but to discover a more natural one, since existing social

81

See his, (1865), Le Systeme industriel reprinted in Oeuvers de Saint-Simon, Brussels: Lemonnier, pp. 35-36.

62

environment is artificial. At the bottom of such view was the desire for natural harmony – a concept close to that of the Physiocrats. The two best-known representatives of this school are Owen and Fourier. Although both were contemporaries, there seems a reciprocal ignorance of each other’s thought, although both proceeded to create small autonomous associations, the microcosms that were to serve as models for the future society. Other writers of this school were Cabet, Blanc, and Leroux. Robert Owen, of all associative socialists, was original and unique – a captain of industry of his time, compassionate and a kind hearted employer, a socialist. His passion for Utopias did not prevent him from initiating a number of reforms and establishing several institutions of a thoroughly practical character. Beginning with the establishment of model workshops in his factory at New Lanark, there is hardly any suggestion incorporated in exposition of socialism, which was not attempted and even successfully applied in the course of his experiments there. Among them are included such important developments as worker’s dwellings, refectories, appointment of officials to look after the social and moral welfare of the workers, etc. His effected reforms embraced: the reduced hours of work from 17 to 10 per diem; no children under 10 years of age to be employed, but free education provided to them in schools built for the purpose; abolition of all fines in workshops; etc. Seeing that neither his experiments nor his prestige has won any following, he turned to the legislature, which too proved not very helpful, he then turned his attention to forming association. Since, the creation of social milieu was his passion, he has some claim to be regarded as the father of aetiology. His theory concerning the possibility of transforming the organism by influencing its surroundings occupies the same position in economics as Lamarck’s in biology. He contended that by nature man is neither good nor bad, but simply what nature made him. Owen’s interest was in the social environment, the product of education and legislation, or of deliberate individual action. He claimed: “change the environment and the individual would be changed”. From a moral point of view this deterministic conception resulted in an absolute denial of individual responsibility. This is why religious influences should be excluded. From economic standpoint, remuneration according to work rather than capacity was to result in absolute equality. For why should higher intelligence, greater vigour, or capacity for taking pains entitle a man to greater reward if it is all a question of environment? Hence Owen’s associations were to be communal. The first necessity, if environment is ever to be changed, according to Owen, was to get rid of profit. Its very definition conveyed an implication of injustice. Products must be sold at the level of cost of production. Net price is the just price. Economic crises

63

emerging either due to over-production or under-consumption can be traced back to an unhealthy desire for profits. Since, the instrument of profit are gold or money coins, these should be replaced by labour notes that will supply the community with a measure of value altogether superior to money. Such condemnation of money was not new, but what was original was the discovery that labour vouchers in proportion to the number of hours of work. It implied payment according to the capacity of each. The cooperative associations (functioning without any profit accruing to its members, but simply cancelling of insurance against common risks) will ever remain, as Owen’s most remarkable work, and his fame will forever be linked with the growth of that movement. However, not only was Owen unwilling to assume any responsibility for the cooperative society, but he expressly refused to consider it as at all representative of his system. Owen has not founded any school, unless of course we consider that the co-operators deserve to the title. There are few disciples like Thompson 82, who tried to apply his theories. Owen’s practical influence has been much greater than Charles Fourier’s, for most of the important socialist movements can be traced back to Owen. But Fourier’s intellectual work, though more Utopian and less restrained in character than Owen’s, has a considerably wider outlook, and combines the keenest appreciation of the evils of civilization with an almost uncanny power of driving the future. To some writers Fourier is simply a madman, and it is difficult not to acquiesce in the description when we recall the many extravagances that disfigures his work, which even his most faithful disciples can only explain by giving them symbolic meaning, of which we may be certain, Fourier would have never thought. The term bourgeois socialist seems to us to describe him fairly accurately. He speaks of Owen’s communistic schemes as being pitiable; shudders to think of the “Saint-Simonians and of all their monstrosities, especially their declamations against property and hereditary rights”; who in his scheme of distribution scarcely drew any distinction between labour, capital and business ability; and so on.83 Fourier presents to us, a closely resembling to Owen’s New Harmony, his conception of Phalanstere project, very much like that of a modern grand hotel with 1500 persons. He describes his project to the minutest details. In his Phalanstere, there will be ‘living a number of people under the same roof and eating at the same table’. He argues that while economically, such life can offer to the consumer the maximum of comfort at

His principal work, An Inquiry into the Principles of the Distribution of Wealth, (1824), reveals a greater depth of thoughts, and perhaps he ought to be given a premier place as the founder of socialism. 83 See Nouveau Monde industriel, p. 473. 82

64

minimum cost, socially a common life of this kind would teach individuals to appreciate one another, sympathy would take place of antipathy, and even occasional intrigues would enliven this little world making the life more interesting. His Phalange, a small self-sufficing world, a microcosm producing everything to be consumed, reflect upon the internal arrangements of the Phalanstere showing that it was a kind of co-operative hotel, belonging to an association and accommodating its members only. Around the hotel was to be an area of 400 acres, with farm buildings and industrial establishments that were to supply the needs of inmates. He envisages his Phalange as a joint-stock company.84 Not content with giving us an outline of a productive cooperative society, Fourier considers that the “first problem for economists to solve is to discover some way of transforming the wage-earner to a co-operative owner”.85 In his writings, Fourier had often used the phrase: back to the land, but in a double sense. In the first place he thought that there must be dispersion of the big cities and their inhabitants should move in Phalansteres – i.e. moderate sized villages with some 400 families. In second sense, he meant a reduction of industrial work of every description – to be reduced to the indispensable minimum, thus showing his contempt for industrialism. The attractiveness of labour was made the pivot of Fourier’s system. His ambition was to see people work for the mere love of work, hastening to their task as they do to a gala. Why should not labour become a play, and why should not the same degree of enthusiasm be shown for work as is shown by youth in the pursuit of sport, thought he. Fourier thought that this would be possible only if everyone is certain that he would get a minimum of subsistence by his work. Thus, labour would lose all its coercive features, and would be regarded simply as an opportunity for exercising certain faculties, provided sufficient freedom were given to everyone to choose that kind of work which suited him best, and provided that the work was sufficiently diversified in character to stimulate imagination, and carried-out in an atmosphere of joy and beauty (such as in the Phalansteres). Louis Blanc provides us a convenient exposition of such socialistic ideas as the public had become accustomed to since Restoration. There is no evidence of exceptional originality in his writings, for the sources of inspiration have been sought in the writings of Saint-Simon, of Fourier, of Sismondi, and of Buonarotti, and in the democratic doctrines of 1793.

Associations like as Phalanges were actually established in Paris, and to some extent, at any rate these had met the ideal as outlined by Charles Fourier. The profits were divided according to the Fourier formula: labour 50 per cent, capital 27 per cent, and administration 12 per cent. 85 Association Domestique, Vol I. p. 466. 84

65

Nevertheless, no sooner was the Organisation du Travail, published in 1841, it was widely read and several editions followed. By 1848, and during the February Revolution, Blanc came to be regarded the best-qualified exponent of the views of the proletariat. Even for a long time after 1848 his work as considered to be the most characteristic specimen of French socialistic writings. Its success was in a measure due to the circumstances of the period. The brevity of the book and the directness of the exposition made the discussion of the theme a comparatively easy matter. The book was something more than a mere passing interest. In no other work is the opposition between competition and association so trenchantly stated. Every economic evil, according to Blanc, is the outcome of competition. Competition affords an explanation of poverty and of moral degradation, of growth of crime and the prevalence of prostitution, of industrial cities and international feuds. Thus the only conclusion that follows is, as Blanc puts it, “If you want to get rid of the terrible effects of competition you must remove it root and branch and begin to build anew with association as the foundation of your social life”. Blanc sees his association model differently than that of his predecessors. His proposal is a social workshop, which simply means a co-operative producers’ society. By no means self-contained, it merely undertakes the production of some economic good, which other people are expected to buy in the ordinary daily life. Evidently, the idea is borrowed from Saint-Simonians. The remarkable feature of the whole scheme is that hardly anything new is needed to implement this challenge through additional pressure on the part of government, some capital to set up the workshops, and a few additional regulations to guide it in its operation. Blanc is one of the first socialists to take care of the burden of reform upon the shoulders of the State. Such appeal of his is beautifully naïve. While on the one hand it invites for the adherence of government to the proposal that is frankly revolutionary, in which case it is asked to compass its own destruction; and on the other hand the project seems harmless enough, and the support, which the government is asked to extend, further emphasizes the modest nature of the undertaking86. In the writings of Blanc may be found the earliest faint outline of the doctrine of State socialism. The events of 1848 gave him an opportunity of partly realizing his ideas that became quite popular with a certain sections of French workers then. Though inferior to both Fourier and Owen, Blanc gave considerable impetus to the Associative movement, and quite deserves his place among the Associative socialists. Beside Blanc it may be worth to refer to two other writers, Cabet, and Leroux, who took part in the same movement right up to the revolution of 1848. Karl Rodbertus, (1805-1875), and Ferdinand Lassalle, (1825-1864), make an exactly analogous appeal to the State, and thus deserve a place among the pioneers of State Socialism. 86

66

Étienne Cabet was a French philosopher and utopian socialist who founded the Icarian movement. Cabet became one of the most popular socialist advocates of his day, with a special appeal to artisans who were being undercut by factories, and his communitarian ideals later influenced Marx and others. During his exile in Britain, he was greatly influenced by the works of Owen, More and Fourier. Cabet published his, Voyage en Icarie, 1839, in which he proposed the replacing of the capitalist production with workers' cooperatives. It depicted the utopia in which a democratically elected governing body controlled all economic activity and closely supervised social life. The book's success prompted him to take steps to realize his Utopia. In 1839, Cabet returned to France to advocate a communitarian social movement, for which he invented the term communisme. His notion of a communal society influenced other socialist writers and philosophers, notably Marx and Engels. However, some of these other writers ignored his Christian influences, as described in his book Le vrai christianisme suivant Jésus Christ (in five volumes, 1846). In 1848, he migrated to the US, where he founded utopian communities in Texas and Illinois, but was again undercut, by recurring feuds with his followers. Gaston Louis Alfred Leroux87 was an essayist. He was first to contrast the word socialism with its antithesis individualism. The invention of these two terms saved his name from oblivion. He writes, “I was first to employ the term socialism. It was a neologism then but a very necessary term. I invented the word as an antithesis to individualism”. As a matter of fact, as far back as 1834, he had contributed an article entitled De l’Individualisme et du Socialisme to the Encyclopédie nouvelle ou Dictionnaire philosophique. (See his complete works, Vol. I, pp. 121, 161, 378). He did write on various social themes, and was present at/and reported at length, the 1905 Russian Revolution, and covered the investigation of the former Paris Opera basement (that contained a cell that held prisoners of the Paris Commune). Later he became a celebrated novel writer. By the middle of XIXth century the doctrine of Smith had conquered the whole continent of Europe. Former theories were forgotten and no rival had appeared to challenge its supremacy. But during this victory march it had undergone many changes and been subjected to much criticism. Even followers like Say, Malthus and Ricardo especially, had contributed many important additions and effected much improvement. Through the influence of Sismondi and the socialists, new points of view had been gained, involving a departure from the narrow outlook of newer and broader horizons. Of the principles of the Classical School the Free Trade theory was the only one, which still remained intact. The economists of every country accepted freedom of international trade as a sacred doctrine. Socialists, at first, neglected this topic, and when 87

A French Journalist and an international correspondent for the Paris newspaper Le Matin.

67

they did mention, it was to express their complete approval of the orthodox view.88 However, there arose in Germany a new doctrine for which the peculiar economic conditions89 at the beginning of the XIXth century afforded a favourable environment. Friedrich List, in his, Das Nationale System der Politischen Okonomie, (1841), introduced the theory of new Protection. The question of origin of List’s Protectionist ideas has been frequently raised. The works of Dupin and Chaptal gave him some material for reflection, but he was confirmed in his opposition to laissez faire by the American statesman Hamilton, who advocated the establishment of Protection for the encouragement of struggling industries of America. Far from being injurious to the economic development of the US, Hamilton argued, and List fully recognized the argument, that it bears a striking similarity to the thesis of the Nationale System and it seemed as if protection had really helped it. List’s work, though not directly connected with any known American system, is the first treatise, which gives a clear indication of influence upon the European thought. From his point of view Protectionism seems closely connected with the most modern economic units, a still closer tie links him to the Mercantilism of the old. Nor did he ever dissemble his love for the Mercantilists, especially for Colbert, he accused Smith and Say of having misunderstood them, and he declared that they themselves more justly deserved the title of Mercantilists because of their attempt to apply to all nations a very simple conception, which they have merely copied from a merchant’s notebook. List’s Protection, according to his own opinion, was merely a means of leading nations towards the possibility of a union on equal footing. It was a mere transitory system, a policy dictated by the circumstances. Towards in end of 1879 a vague kind of Protectionism made its appearance in Europe. Tariff walls were raised, but they never seemed to be high enough. Profound changes in the international economic situation during the XIX th and XXth centuries fail to supply a serious justification for the protectionist policies of major commercial nations, and the essential trait of this new regime differs completely from the outlines supplied by List. To speak the truth, tariffs are never of the nature of an application of economic doctrines. They are the result of a compromise among powerful interests, but are determined by purely political, financial or some other considerations.

J. C. L. de Sismondi, (1773-1842), in his Nouvaux Principes, Book IV, chapter xi attacked Protection. The SaintSimonians never touched the subject. Fourier suggested a complete liberty in the circulation of goods among the Phalansteres all the world over. 89 The Germany of the XIXth century presents a unique spectacle. Her population was at first essentially agricultural, and the various states politically and economically isolated. Her industry was fettered by the corporate regime, and agriculture was still in feudal hands. Freed from these impediments, and having established first her economic and then her political unity, she took her place among the foremost of industrial powers during the last three decades of the century. 88

68

Hence, it is futile to hope for a trace of List’s doctrines in the protective tariffs actually in operation. He, in fact, left no marked traces of influence either upon practical policies or upon the Protectionist doctrines. List’s method is essentially that of the pioneer. He was the first to make systematic use of historical comparison as a means of demonstration in political economy. Although he can lay no claim to be the founder of the method, still the brilliant use, which he made of it, justifies him to be claimed as the equal to those who were attempting the creation of the Historical School. List also introduced new and useful points of view in economics. The doctrine of free exchange as formulated by the Classical writers, was rather too absolute and abstract for the ordinary politician. If, as List justly remarks, the practice of commercial nations has so long remained contrary to a doctrine that all economists regard as admirable is not without some just cause. It is not enough for him to know that the interchange of products will in some degree increase wealth.90 He wants to be sure that Free Trade will not result in too sudden displacement of population or industry, as the social and political results will be harmful. Further, he rightly treats the nations not merely political associations created by history, but also as economic associations. The governments, while charged with maintaining the political unity of the country, ought also to retain its economic unity by subordinating all local interests to general interest, by preserving intact the liberty of international trade. With great enthusiasm he defended the suppression of inter-state duties and the establishment of protective rights. He also extended the political horizon of the Classical School and substituted dynamics for their purely static conception of national development. His work retains a lasting value for he tried to adopt a purely national standpoint as a positive objective of national economic policy. He should be treated as the forerunner of all those who seek to determine, and improve the future that science alone cannot accomplish and politics cannot neglect.91 Pierre-Joseph Proudhon’s, place in history of economic doctrines cannot be defined easily. Like all socialists, he begins with a criticism of the property rights. Proudhon regarded these rights as the very basis of the present social system and the real cause of every injustice. Accordingly, he starts with a criticism of property in opposition to the economists who defended it. Public opinion was already satiated with schemes of reform. Owen, Saint-Simon, Fourier, and Blanc had each in turn proposed a remedy. Proudhon was well acquainted with all these efforts, and had come to conclusion that they were all useless. Hence, he turns out to be a critic of socialists as well as of the economists. Proudhon attempts the correction of the vices of private property without 90 91

See, M. Pareto’s Economia Politica, 1906, Milan, chapter ix, para. 45. Hayek, F. A., (1944), The Road to Serfdom, London: Routledge, p. 23.

69

becoming a party to what he calls the crass stupidity of socialism. Every Utopian scheme is instinctively rejected. He cares nothing for those who view society as they do machinery and think that an ingenious trick is all that is needed to correct all anomalies and to reset the machine in motion. To him social life meant perpetual progress. 92 He knows that time is required for the conciliation of conflicting social forces warring against one another. He was engrossed with his attempt to find a solution when the Revolution of 184893 broke out, and Proudhon, suddenly threw himself into action. Naturally, he found himself forced to express his ideas in a concrete form. He believed that the solution of the problem lies in improved circulation of production and distribution systems. The work that Proudhon’s name brought to public notice was his, Qu’est-ce que la Properiete? 1840. Throughout this treatise, periodically flashes one telling phrase that sums up his whole argument: “Property is theft”. He attacks property because it gives the proprietor a right to an income for which he has not worked. It is not property as such, but the right of escheat that forms the butt of his attack. Like every socialist Proudhon considered that labour alone was productive 94, and land and capital without labour are useless, and thus the demand of the proprietor for a share of the produce is false. His attack upon the socialists95 roughly amounts to a charge of failure to realize that the destruction of the present regime would involve taking a course in the opposite See his, Philosophie du Progrés, Euvres, Vol XX, p.19. The year of 1848 was the Year of Revolution, of a series of political upheavals throughout Europe. The revolutions were essentially bourgeois, democratic and liberal in nature, with the aim of removing the old monarchial structures and creating independent nation-states. The revolutions spread across Europe after an initial revolution that began in France. Some 50 countries were affected, but with no significant coordination or cooperation among their respective revolutionaries. Some of the major contributing factors were widespread dissatisfaction with political leadership, demands for more participation in government and democracy. The uprisings were led by ad hoc coalitions of reformers, the middle classes and workers, which did not hold together for long. Many of the revolutions were quickly suppressed; tens of thousands of people were killed, and many more were forced into exile. Significant lasting reforms included the abolition of serfdom in Austria and Hungary, the end of monarchy in Denmark, and the introduction of democracy in the Netherlands. The revolutions were most important in France, the Netherlands, the states of the German Confederation that would make up the German Empire in the late XIXth and early XXth century, Italy and Austria. The spectre of communism was haunting Europe in 1848. All the powers of old Europe have entered into a holy alliance to exorcise this spectre: Pope and Tsar, Metternich and Guizot, French Radicals and German policespies. The uprising was spontaneous, disorganized and aimless. In France, Louis Phillippe abdicated, red flags flied all over the Hotel de Ville, and some 10.000 people died; in Belgium the King offered to resign, but allowed to stay; in Berlin, bullets fled all around and Frederic Wilhelm IV succeeded; in Italy mobs rioted; and Prague and Vienna were seized but crowds condoned. The revolution of 1848 was over and a small group of working class leaders organized the Communist League 94 See his, Misére de la Philosophie, in Euvres completes, (1867-70). 95 No one has ever referred socialists in harsher terms. To them he says: “Hence, communists! Your presence is a stench in my nostrils and the sight of you disgusts me”. Elsewhere he says, “Socialism is mere nothing. It has never been and never will be anything (Systeme des Contradictions économiques, Vol II, p. 285 and 297). 92 93

70

direction. The difficult problem, which he sets out to solve, was not merely the suppression of existing economic forces, but also their equilibration. He never contemplated “the extinction of such economic forces as division of labour, collective effort, competition, credit, property, or even economic liberty”.96 The Revolution of 1848, did not take Proudhon quite unaware, although he considered it was sudden and premature. He was convinced that the real problem was economic rather than political and the education of masses was too backward to permit a peaceful solution. Revolution having once begun, Proudhon, did not feel him justified in being in backyards. He became a journalist and threw himself wholeheartedly into the struggle. Hitherto he had been content with vague suggestions as to where the evil lay, and was anxious to make the reform practicable and fill in the details of his scheme of Bank of Exchange. According to Proudhon, his Bank of Exchange is to be composed of men engaged in productive labour, who, feeling the abuses attached to the fiction which makes gold and silver the basis of the circulation, associate themselves together to restore the real basis, namely, consumable products; and feeling the evils which result from the monopoly of credit in the hands of the non-producing class, they determine to abolish the same. Let us suppose a community in which men are pursuing all branches of useful industry (and by the word useful we mean to include the fine arts with the trades producing articles of luxury and elegance – whatever beautifies as well as what supports life), farmers, mechanics, manufacturers, housekeepers, schoolmasters, artists, and others. They form an institution of mutual credit, or Bank of Exchange; it issues its notes, loaning them to A, B, and C as they are wanted and as security is given. Every man in the community belongs to the bank, and is bound to receive the notes in exchange for whatever he has to dispose of. They are, in fact, payable at the farm or the workshop of every one of the members, not in gold and silver, but in consumable products; and indeed they are not bank-notes, but bills of exchange, drawn, so to say, on every member of the bank, and bearing the signatures of every other. They are true representatives, since they stand directly for the articles of use. The whole community, not for the especial advantage of any individual or class, forms the bank but for the mutual benefit of all, of course, no interest is exacted on loans, except enough to cover risks and expenses. Thus, while every man is left free to follow his own productive business in his own way, the principle of individual liberty suffers no diminution, there is a complete reciprocity established throughout. The point where a true reform of society must commence is the function of exchanges, for that is the point where economic relations converge. By introducing mutualism into exchanges and credit everywhere, labour will assume a new aspect and 96

See his, Idée génerale de la Revolution au XIXe Siecle, p. 95.

71

become truly democratic. Thus, the problems of the time will be solved, and the republic of wealth shall appear, completing the circle of the Revolution. The Bank of Exchange, naturally, implies, then, the combination of the whole producing community for the purpose of mutual credit and the establishment of a sound medium of exchange, or, of circulation. The project was never successfully put into practice.

72

Chapter 5.

Liberalism Now that the combat had grown fierce among critics, we must glance at what the Classical school did to repel the onslaughts of the rivals. One must not be misled by the fact that although the great works of Classists – Ricardo, Malthus, and Say – were produced early in the century, it cannot be said that economic literature after that period, especially in England had remained at a standstill. But, unfortunately no work worthy of comparison with the masters, had appeared. Although defender of the same cause, the Classical school broke up into two camps – the English and the French. They both are twin champions of Liberalism and Individualism. But while the first with John Stuart Mill as its leader, lent a sympathetic ear to vigorous criticism then rampant everywhere, which claimed that the older theories ought to yield place to the new, the French school, on the other hand, with Bastiat, as its chief, struggled all innovations, and reaffirmed its faith in the natural order and laissez-faire. It should be noted that this divergence belongs to the origin of the science. Traces of it may be discovered if we compare the Physiocrats with Smith, or Say with Ricardo; but it was not accentuated. We can notice from our preceding description the unsettled state of economic science. It has also been indicated how science was turned from its original course by reverses suffered at the hands of criticism, socialism and interventionism, which were now vigorous everywhere. The time had come for attempts to bring economic science back into the track. This was the task more keenly taken up by the French economists. French economists found themselves confronted by both socialism and protectionism. The French school had thus to meet two adversaries disguised as one; for Protection was but a counterfeit of socialism, and all the more hateful because it claimed to increase the happiness of proprietors and manufacturers – of the wealthy, while the socialists aimed at increasing the happiness of the workers – of the poor. Protection was more injurious, for being in operation its ravages could be felt whereas the other was still at the Utopian stage. But in hitting both, the French school discovered that it was serving the interest of a particular class, and could confidently reply that it was fighting for common good. 73

It is necessary that we understand the line of argument adopted by the French in defending the optimistic doctrines, which they easily mistook for the science itself. They argued that pessimism is a source of evil and that their prophecies have destroyed the belief in natural laws and in spontaneous organization of society, and people have been forced to seek better fortune in artificial organizations. Thus, the science should be made free of the so-called, laws of Malthus and Ricardo. The establishment of optimism can only refute the pessimism. Optimism, strengthened and intensified, deepened French economists’ distrust of every kind of social reforms undertaken with a view to protecting the weak, whether by the captains of industry or the State. Liberty, so they thought, would finally remedy the evils, which it seemed to create, while State intervention merely aggravated the evils it sought to correct.97 Bastiat at home and abroad, has always been regarded as the very incarnation of bourgeois political economy. Proudhon, Lassalle, Cairnes, Sidgwick, Marshall and Böhm-Bawerk all thought of him as the advocate of the existing order. Nonetheless, he deserves a proper estimate. Frederic Bastiat was the author of many works on economics and political economy98, generally characterized by their clear organization, forceful argumentation and acerbic wit. He was a truly “scintillating advocate of an unrestricted free market". Among his better-known works is Economic Sophisms, a series of essays (originally published in the Journal des économistes), which contain a defence of free trade, and many strongly worded attacks on statist policies. Bastiat's most famous work is The Law, 1850, originally published as a pamphlet. It defines a just system of laws and then demonstrates how such law facilitates a free society. In The Law, Bastiat wrote that everyone has a right to protect "his person, his liberty, and his property". The state should only be a "substitution of a common force for individual forces" to defend this right. According to Bastiat, justice has precise limits, but if government power extends further into philanthropic activities, then government becomes so limitless that it can grow endlessly. The resulting statism is "based on this triple hypothesis: the total inertness of mankind, the omnipotence of the law, and the infallibility of the legislator". The public then becomes socially engineered by the legislator and must bend to the legislators' will "like the clay to the potter". Bastiat posits that the law becomes perverted when it punishes one's right to selfdefence (of his life, liberty and property) in favour of another's right to legalized plunder in which he includes the tax support of "protective tariffs, subsidies, guaranteed profits,

Bastiat, F. (1801-1850), See in, Harmonies, chapter xvii, p. 545. Important being, Propritété loi, 1848; Justice et fraternité, 1849; L’État, Maudit argent; and Incomtabilité parlemetaires, published by Guillaumin et Cie). 97 98

74

guaranteed jobs, relief and welfare schemes, public education, progressive taxation, free credit, and public works". He states, “Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain. I do not dispute their right to invent social combinations, to advertise them, to advocate them, and to try them upon themselves, at their own expense and risk. But, I do dispute their right to impose these plans upon us by law – by force – and to compel us to pay for them with our taxes.”

In his 1850 essay, Ce qu'on voit et ce qu'on ne voit pas, Bastiat introduced through the parable of the broken window the concept of opportunity cost in all but name. Wieser did not coin this term until over sixty years after his death in 1914. Bastiat also got famously engaged in a debate between 1849 and 1850 with Proudhon about the legitimacy of interest. As Leroux argued, Bastiat had the conviction that Proudhon's antiinterest doctrine "was the complete antithesis of any serious approach". Bastiat asserted that the sole purpose of government is to protect the right of an individual to life, liberty and property, then why it is dangerous and morally wrong for government to interfere with an individual's other personal matters. From this, Bastiat concluded that the law cannot defend life, liberty and property if it promotes legal or legalized plunder, which he defined as using government force and laws, to take something from one individual and give it to others (as opposed to a transfer of property via mutually-agreed contracts without using fraud or violent threats against the other party which Bastiat considered a legitimate transfer of property). In The Law, Bastiat explains that if the privileged classes or socialists use the government for legalized plunder, this will encourage the other socioeconomic class to use also the legal plunder and that the correct response to both the socialists and the corporatists is to cease all legal plunder. Bastiat also explains in The Law, why his opinion is that the law cannot defend life, liberty and property if it promotes socialist policies. When used to obtain legalized plunder for any group, he says that the law is perverted against the only things it is supposed to defend. Bastiat was a strong supporter of free trade inspired by Cobden and the English AntiCorn Law League and worked with free-trade associations in France. Because of his stress on the role of consumer demand in initiating economic progress (a form of demand-side economics), In his Economic Harmonies, Bastiat states: “We cannot doubt that self-interest 75

is the mainspring of human nature. It must be clearly understood that this word is used here to designate a universal, incontestable fact, resulting from the nature of man, and not an adverse judgement, as would be the word selfishness”. One of Bastiat's most important contributions to economics was his admonition to the effect that good economic decisions can be made only by taking into account the full picture. That is, observing the immediate consequences—that is, benefits or liabilities— of an economic decision, but also by examining the long-term consequences, one should arrive at economic truths. Additionally, one must also examine the decision's effect not only on a single group of people or a single industry, but also on all the people and all industries in the society as a whole. As Bastiat famously put it, an economist must take into account both "What is Seen and What is Not Seen". A famous section of Economic Sophisms concerns the way that tariffs are inherently counter-productive. Bastiat posits a theoretical railway between Spain and France that is built in order to reduce the costs of trade between the two countries. This is achieved by making goods move to and from the two nations faster and more easily. Bastiat demonstrates that this situation benefits both countries' consumers because it reduces the cost of shipping goods and therefore reduces the price at market for those goods. However, each country's producers begin to criticize their governments because the other country's producers can now provide certain goods to the domestic market at reduced price. Domestic producers of these goods are afraid of being outcompeted by the newly viable industry from the other country; therefore, these domestic producers demand that tariffs be enacted to artificially raise the cost of the foreign goods back to their pre-railroad levels so that they can continue to compete. Thus, Bastiat makes two significant statements here: First, even if the producers in a society are benefited by these tariffs (which they are not, according to Bastiat), the consumers in that society are clearly hurt by the tariffs as they are now unable to secure the goods they want at the low price at which they should be able to secure them; and that the tariffs completely negate any gains made by the railroad and therefore make it essentially pointless; and Second, to further demonstrate his statements, Bastiat suggests—in a classic reductio ad absurdum—that rather than enacting tariffs, the government should simply destroy the railroad anywhere that foreign goods can outcompete local goods. Since this would be just about everywhere, he goes on to suggest that the government should simply build a broken or negative, railroad right from the start and not waste time with tariffs and rail building. While the French economists alarmed at the consequences involved in the theories of Malthus and Ricardo, strove to transmute the brazen laws into golden ones, the English economists pursued their wonted tasks, never thinking that they were possibly forging a weapon for their destruction at the hands of socialists. 76

An Oxford University professor of Political Economy in 1825, Nassau Senior, was perhaps the best representative of the Classical school, showing its bad and good points better than any other writer of the time. Accordingly, he deserves a mention in our history of economic thought. He removed from political economy every trace of a system, every suggestion of social reform, every link with moral and conscious order, reducing it to a small number of essential, unchangeable principles. Only four propositions seemed to him sufficient and these being: (i) the Hedonistic Principle; (ii) the Principle of Population; (iii) the Law of Increasing Returns in industry; (iv) the Law of Dimnishing Returns in agriculture. All corollaries being deducible from one or other of these. His ambition was to make political economy an exact science. He is responsible for the introduction into political economy of a new, so far neglected element, namely an analysis of abstinence or saving. Senior remarks, that abstinence does not create wealth, but it constitutes a title to it, because it involves sacrifice and pain just as labour does. Hitherto the income of the capital had been the least defensible of all revenues, for Ricardo had only discussed it incidentally, and had represented it as a surplus left over after paying wages. The claim of capital was believed to be as evident as that of land or labour, and there was no need for any further inquiry. While, on the one hand, Senior succeeded in establishing the claim of interest, on the other, he invalidates the claim of other capital revenues. Senior shows that rent is quite a normal phenomenon. This kind of revenue, which is wanting in title is extremely important, and absorbs a great share of total wealth. It was Senior, who laid stress upon the element of scarcity as the basis for economic value. But to possess a thing of value, it must not merely be rare but must have some want. It must be a rare utility.

The period of 1873-1898 was one of the rapid economic developments. It was then that Germany and the US acquired the status of front-rank industrial nations. Elsewhere, for instance in Austria, Italy, Japan and Russia, industrialization was rapid that was not less remarkable. Until almost upto the end of century expansion in physical out put was accompanied by falling prices, widespread unemployment of labour, and business losses. The spells of prosperity were shorter and weaker then were the depressions. This paradox of poverty in plenty can be accounted for by the impact of the products pouring forth from a productive apparatus that had greatly expanded, as a result of the technical and commercial progress on one hand; and on the other, sea and land transportation brought greatly, cheap quantities of agricultural products to Europe, leading to severe depression in agriculture. This explains much of the zest for social and industrial reforms, of increasing government initiatives, of the dissatisfaction with the results of free trade, and even of renescent militarism. 77

On the whole, business class still had its way throughout the period. But its serene confidence in the virtues of laissez-fare was gone. Hostile forces were slowly gathering with which it had to compromise. Economic liberalism thus became riddled with qualifications that sometimes implied surrender of its principles. Political liberalism, lost its hold upon electorates, particularly in Germany and Austria, where genuinely liberal parties met with open defeat at the polls. In England, the strength of the existing parties was such as to make it possible for them to win victories on radicalized programmes. In the US, it was reflected in hostility towards Big Businesses – by curbing monopoly. First, the period saw the rise of Marxist parties in almost all countries. The nonMarxist socialist parties, which shaded off into non-socialist labour groups and which felt no qualms about political co-operation with bourgeois parties did get near or into political office here and there. Second, the growth of bourgeois radical groups had a practical importance. They varied greatly in types and programs – from liberal groups of old faith that had taken aboard more or less important items of social reform. To groups of intellectuals that descended from the philosophical radicals (like the British Fabians), because their support was needed by the governments. Bourgeois radicalism might be considered as a by-product of the growth of socialism. And the latter was without doubt the product of a laissez-faire society. But there were others – European peasantry, English and Irish farmers, independent artisans, landlords – that did not fit into the schema of capitalist evolution, they clamoured for protective legislation – that was bound to violate the creed of economic liberalism – and lend support to anticapitalist though not socialist parties. Third, in countries, where bureaucracy was a powerful factor, as in Germany, it had sponsored economic liberalism in preceding period, a significant change occurred. The bureaucracy now began to look upon the business class that needs to be controlled and managed rather than to be left alone, much the same way as American bureaucracy does today. The minority that embraced economic or political liberalism was not much greater, so they got diluted among socialists. Finally, individuals and subgroups of all classes broke loose from economic and political liberalism, all having one thing in common: the central controlling position that they have allocated to the State and the Nation, i.e. the National State. Accordingly, these tendencies are referred as neo-mercantilist or imperialist. Different from this in nature, but equally hostile to economic and political liberalism was the Christian Socialism. Their concern for labour condition, although was nothing new and thus adapted an old tradition to the problems of epoch (e.g. Rerum Novarum, 1891). What was new was the definite scheme of social organization, that making use of the existing elements of group-wise cooperation, visualized in a society and a state operating through self-governing vocational associations within a framework of ethical precepts. As far as the economists were concerned, most English stood with the liberals, the Germans were the pillars of Sozialpolitik and averse to Smithianism and 78

Manchesterism99. On the whole, the economic professions of all countries were politically supportive of the tendencies to liberalism. In this sense, we can say that the alliance between economics and liberalism, and with exceptions between economics and utilitarianism, was broken. Liberalism was definitely defeated.

Manchester Liberalism (also called the Manchester School, Manchester Capitalism and Manchesterism) comprises the political, economic and social movements of the 19th century that originated in Manchester, England. Led by Richard Cobden and John Bright, it won a wide hearing for its argument that free trade would lead to a more equitable society, making essential products available to all. Its most famous activity was the AntiCorn Law League that called for repeal of the Corn Laws that kept food prices high. It expounded the social and economic implications of free trade and laissez-faire capitalism. The Manchester School took the theories of economic liberalism advocated by the classical economists such as Adam Smith and made them the basis for government policy. 99

79

Chapter 6.

The Downhill Journey According to the Benthamite utilitarian old radicalism, political and economic institutions should be designed so that predominantly self-interested persons, strongly motivated to acquire power and wealth, have adequate external incentives to act so as to maximise the general happiness understood as the sum of individual happiness. Jermy Bentham believed that the general happiness is, in principle, calculable in any situation because different individual happiness is quantifiable and comparable. Nevertheless, he offered no procedure of measurement; rather claimed that general happiness is made of certain concrete components (including security, subsistence, abundance, and equality) whose joint attainment should guide the design of social institutions. A belief in natural laws was always an article of faith with the Classical School. Without some such postulate it seemed to them that no collection of truths, however well attested, could ever lay claim to the title of science. But these natural laws had none of that providential, finalistic, and normative character so frequently dwelt upon by the Physiocrats and the Optimists. They are simply natural laws like those of the physical order, and clearly non-moral. They may prove useful or harmful, but people must adapt themselves to them as best as they can. The Classical doctrines were taught during the first half of the XIXth century, not in England alone, but in every country of the world. The thirty years that separate the publication of Ricardo’s Principles of Political Economy, (1817), from Mill’s, (1848), admirable book bearing the same title, were occupied by many British economists of the second rank. With John Stuart Mill, Classical economics may be said in some way to have attained its perfection, and with him begins its decay. The middle of the XIXth century marks the crest of the wave. What makes him so attractive to all of us is his dramatic appearance on the scene and the consciousness that he stood between two schools. 80

The one he was linked by the paternal ties which bound him to the Utilitarian school; the other beckoned towards the new horizons that were already outlined by Saint-Simon and Comte. Mill’s book exhibits the Classical doctrines in their final crystalline form, but already they were showing signs of dissolving in their own currents. Mill, it was said, was simply a gifted popular writer. But this is to underestimate his ability. It is true that unlike Ricardo, Malthus, or Say, his name is not associated with any economic law, but he opened a wider prospect for the science which will secure him a reputation long after the demise of these laws. Mill, son of an economics professor, an extraordinarily educated young man of 23, who published his first essay on political economy, was essentially a philosopher by mental aptitude, training and education. [Note: Mill’s Principles was not only the most successful treatise of the time, but also the period’s best classic scientific work; and Mill, was one of the chief intellectual figure of the XIXth century. Of his major works, A System of Logic Ratiocinative and Inductive, (1843), Principles of Political Economy with Some of their Applications to Social Philosophy, (1848), On Liberty, (1859), Utilitarianism, (1861), Considerations on Representative Government, (1861), An Examination of Sir William Hamilton’s Philosophy, (1865), Auguste Comte and Positivism, (1865), The Subjection of Women, (1869), James Mill’s Analysis of the Phenomena of the Human Mind, (1889), Three Essays on Religion, (1874); and his Principles and Essays on Some Unsettled Questions of Political Economy (1844), concerns us most. In preface of his Principles, (1848), he states that he would aim at the “sufficiently useful achievement” of writing “a work similar in its object and general conception to that of Smith, but adapted to the more extended knowledge and improved ideas of the present age” which is “the kind of contribution which political economy at present requires”. Exactly, this was the kind of book he produced. The success of Mill’s Principles was sweeping and much more general, also much more evenly distributed over all countries in which economics received attention than was Ricardo’s. This was primarily due to a happy combination of scientific level and accessibility: Mill did present analysis that satisfied competent judges, yet barring very few points that proved stumbling blocks, every economist could understand him.]

Before going into details of his conceptions of political economy, it would be worth to briefly go through his philosophy100 which was a superior version of utilitarian radicalism in which the basic tenets of the old school are retained yet integrated with a broader perspective on human nature, a perspective that goes beyond self-interest (enlightened or otherwise) and takes account of the possibility that many individuals

100

cf. Sharma, S. (2010) Reflections on the Philosophical Foundations of Economics, Zagreb: Mikrorad, pp. 144-156.

81

might develop higher moral and aesthetic sentiments. The new radicalism is more cognizant of human capacities of imagination (among sympathy for others) and of mutual co-operation, more open to the possibility that individuals might form noble characters that reflect repeated acts of imagination and co-operation, and consequently less committed to institution that presuppose the predominantly selfish type of characters hitherto observed. What impact did his new radicalism have on his political economy? One important point is that Mill never abandoned his Ricardian approach to the abstract science. He let stand through all editions of his Principles of Political Economy (1848; VII ed. 1871) the judgement that Ricardo was Britain’s greatest political economist. Thus, His pure theory remained essentially Ricardian. Despite his retention of Ricardo’s scientific principles, however, Mill’s mental crisis led him to distance himself from Ricardo’s Benthamic philosophy with its narrow focus on competitive capitalist institutions and its fixation on the predominantly selfish type of character moulded under such institutions. He looked to Smith rather than to Ricardo when it came to practical application of the science in service of an adequate utilitarian art of life. (Principles, pp. xci-xcii.) His aim in the Principles was to rework Smith’s practical approach by applying Ricardo. He advanced scientific principles in the light of suitably enlarged utilitarian philosophy that would go beyond narrow Benthamism to make room for a more complex psychology (admitting the possibilities of higher kinds of pleasure and characters) and improved the idea as of social co-operation and equal justice. In particular, he wished to make clear that contemporary ideas and institutions of private property and the highly inegalitarian distribution of wealth associated with them were a matter of human choice and need not be accepted as natural. His new radical approach to three grand economic issues, namely: growth versus the stationary state, capitalism versus socialism, and the scope of government intervention in the competitive market reflects this. These laws are universal and permanent, for the elementary needs of mankind are always and everywhere the same. Economics is an inquest of such permanent laws. It is only by seeking the moral, general and consequently the more nearly universal laws that economics can apprehend truth and claim to become a science. It must study the homo oeconomicus and his self-interest. The Classical School claimed that following are the natural laws that govern the society: (1) The Law of Self-interest: This is a simple psychological law. Could anything be more universal or permanent than this law, which is simply the most natural and most rational statement of the law of self-preservation? In virtue of this law Classical School is frequently known as the Individualistic School. But individualism needs to imply neither egoism nor egotism. This confusion, repeatedly used to discredit the Classical 82

writers, is simply futile. No one has displayed greater vigour in protesting against this method of treating individualism than Mill. To say that a person is seeking his own good is not to imply that he desires the failure of others. Individualism does not exclude sympathy, and a normal individual interest’s conflict, where it is necessary that one interest should be sacrificed to another, Mill, far from denying the existence of these conflicts, has taken special pains to emphasize them. The Classical writers, together with the Optimists reply that such contradictions are apparent only, and that beneath these appearances there is harmony; or they point out that these antinomies are due to the fact that both individualism and liberty are only imperfectly realized, and as yet not even completely understood, but that as soon as they are securely established the evils which they have momentarily created will be finally healed.101 (2) The Law of Free Competition: In the opinion of Classical writers, free competition was the sovereign natural law. It was sufficient for all things. It secured cheapness for the consumer, and stimulated progress generally because of the rivalry, which it aroused among producers. Justice was assumed for all, and equally attained, for the constant pursuit profits merely resulted in reducing them to the level of cost of production. Mill, in conclusive terms states that “every restriction of competition is an evil”, but that “every extension of it is always an ultimate good”. On this point he was a stern opponent of socialists, although in other respects it had many attractions for him. “I utterly dissent” says he, “from the most conspicuous and vehement part of their teaching, their declamations against competition”.102 Notable is that the Classical school, despite its glorification of free competition, never had any intention of justifying it. On the contrary, the Classics complain of the imperfect character of competition. (3) The Law of Population: The Law holds an honourable place among Classical doctrines. And of all economists Mill seems to be most obsessed by it. 103 In his dread of its dire consequences he even surpasses Malthus, and he reveals a far greater regard for moral considerations than was ever shown by the latter. Mill was already a NeoMalthusian in this respect, which he felt for the rights and liberty of women, which are rarely consulted when maternity is forced upon them. 104 Time and again, he declares that the working class can hope for no amelioration of their lot unless they check the Like Adam Smith (in his Theory of Moral Sentiments, see Bk. 1, ch. ii) John Stuart Mill writes, “in the golden rule of Jesus of Nazareth we read the complete spirit of ethics of utility. To do as you would be done by and to love your neighbour as yourself constitute the ideal perfection of utilitarian morality”. Mill, further writes, “It is only in a very imperfect state of world’s arrangements that anyone can best serve the happiness of others by the absolute sacrifice of his own”., Utilitarianism, ch. ii. 102 Principles, bk. IV, ch. vii. 103 “It is in vain to say that all mouths which the increase of mankind calls into existence brings with them hands. The new mouths require as much food as the old ones and the hands do not produce as much”., Principles, bk.1, ch. xi. 104 Principles, bk. II, ch. xiii. 101

83

growth of population. To tackle the problem, he was prepared to support a law to prohibit the marriage of indigents.105 (4) The Law of Demand and Supply: The law that determines the value of products and of productive services is usually states in following terms: Price varies directly with demand, inversely with supply. One of the most important contributions that Mill made to the science was to show that this apparently mathematically precise formula was merely a vicious circle. Mill corrects the dictum by saying that price is fixed at a margin where the quantity offered is equal to the quantity demanded. All price variations move about this point, just as the beam of a balance oscillates about a point of equilibrium.106 He thus gave to this law not only a scientific precision but also a new principle of causal relationship into economics. Although the law explains the variations of value, it fails to illuminate the conception of value itself. A more fundamental cause must be sought, which can be found in cost of production. A temporary, unstable value dependent upon the variations of demand and supply, a permanent, natural, or normal value regulated by cost of production, such was the Classical law of value. Mill was entirely satisfied with it. He writes, “Happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete”. 107 (5) The Law of Wages: A similar law determines the price of labour. Temporary wages depend upon demand and supply – understanding by supply the quantity of capital available for the upkeep of the workers, the wages fund, and by demand the number of workers in search of employment. Natural or subsistence wage, in the long run, is determined by the cost of production of labour. The oscillations of temporary wages always tend to a position of equilibrium about this point. According to Lassalle, this brazen law depends upon causes extraneous to the worker, and bears no relation either to his need or to the character of his work or his willingness to perform it. Mill, who formulated the law with great vigour than any of his predecessors, found himself alarmed at the consequences. Mill and the economists of the Liberal school were persistent in their demand for the removal of Combination and Corn Laws. Mill recanted the law in the pages of the Fortnightly. It was termed almost as an offence against the sacred traditions of the Classical School. However, his conversion was not complete as the last edition of the Principles still contains the same passages as the earlier ones. (6) The Law of Rent: The law of competition tends to reduce the selling price of a commodity until it is equal to its cost of production. Suppose, there are two costs of Liberty, ch. v. ‘The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which in that market gives a demand just sufficient to carry off the existing or expected supply’ (Principles, bk. III, ch. iii). 107 ibid, bk. III, ch. iii. 105 106

84

production, as Ricardo showed in case of agricultural products and some manufactured products, the higher will be the determinant of the price, leaving a margin for the goods with lower costs. Mill included personal ability, and though the concept of rent was thus considerably extended, it had not the scope, which it enjoyed with Senior. (7) The Law of International Exchange: According to Ricardo, international trade is subject to laws regulating individual exchange, and the result in the two cases is almost identical, namely, a saving of labour to both parties. Its measure is the excess of the imported value over the exported value. Each party gains by the transaction. It could be pointed out that under the regime of free competition all values will be reduced to the level of cost of production and products will be exchanged in such a fashion that a given quantity embodied in one commodity would always exchange for an equal quantity embodied in any other. But in such a case where would be the advantage of exchanging? Ricardo had already anticipated the objection and had shown that if the rule of equal quantity in exchange were true of exchange between individuals, it did not hold of exchange in different countries because of the difficulty of moving labour and capital from one to another. A comparison should be made, not of the respective costs of the same products in the two countries, but of the respective costs of imported and exported products in the same country.108 Mill goes a step further. He abandons the comparison of costs of production preferring to measure the value of imported goods by the value of goods that must be given in exchange for it. Mill’s theory constitutes a real advance as compared with Ricardo’s, for it affords a means of gauging the strength of the foreign demand, and of judging of the circumstances favourable to a good bargain. Mill was of the opinion that a poor country stood to benefit most by the transaction. A rich country will have to pay more of its goods than a poor one. However, Mill is sympathetic to Protectionists. His theory provides them at least one excellent argument. Seeing that the advantages of international trade depend upon demand and supply, a country may make it operate to its own advantage merely by pursuing a different policy. Besides, Mill makes an important concession to them, when he shows that import duties are not always paid by the consumer in the higher prices, but may in certain cases paid by the foreigner, notably when imported product enjoys a monopoly price.109 Though Mill remained faithful to the doctrine of free trade, he resembles List in accepting Protection for infant industries, imposed “in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country”. But he makes one reservation, that “the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a 108 109

See David Ricardo, Collected Works, p. 75. ibid, bk. V, ch. iv.

85

time be able to dispense with it”. That, he says is “the only case in which, on mere principles of political economy, protecting duties can be defensible”. The Free Trade doctrine has not remained where it was any more than the other special doctrines of the Classical School. Such were the doctrines taught by the Classical School about the middle of XIX th century. The ideas of writers in question are admirably interwoven and present an attractive appearance. But it must be confessed that the prospects, which they held out for anyone not a member of landowning class, are far from being attractive. For the labourer there is promise for daily toil and bare existence, and at best wage determined by the quantity of capital or the numbers of the population. The possession of land is a passport to the enjoyment of monopolistic privileges. Rent, reserved for those who need it least, monopolizes a growing proportion of the national revenue. Intervention for the benefit of workers by the state or by some other body is pushed aside as being unworthy of the dignity of labour and harmful to its true interests. The search for truth was the dominant interest of the school, and these doctrines were preached, not for the pleasure they yielded, but as the dicta of exact science. It was Mill who so powerfully helped to consolidate and complete the science of economics. His Principles have been referred as the best resume, the fullest, most complete and most exact exposition of the doctrines of Classical school that we have.110 It was also Mill who, in successive editions of his book, and in his other writings, pointed out the new vistas opening before science, freed the doctrine from many errors to which it was attached, and set its feet on the path of Liberal Socialism. As far as Mills’ economic philosophy is concerned, Hausman (1981) believes that in a nutshell it is contained in three basic stands: that economics is an (i) inexact, (ii) separate science that (iii) employs a deductive method. He believes that Mill’s reflections on the nature of economic theory and on the manner in which it is to be justified have not received the attention they deserve.111 Mill offers philosophical interpretations of the nature and justification of economic theory in three main places: in Book VI. of, A System of Logic, (1843), in his earlier essay on the subject and, much less explicitly in scattered passages of his Principles. After discussing the difficulties concerning social science in his Logic (6. 3. 1) he distinguishes between exact and inexact science. To him economics is not an exact science because its laws are in some way not fully adequate. According to Mill, economics is not only distinct from the other social sciences but it is also a separate science (VI. 9. 3). His vision of economics as a separate science consists of at least two assertions: 110 111

Cossa, L., (1922) Histoire des Doctrines economique, Paris: Leon Tenin, p. 338. Hausman, D. (1992) Essays on Philosophy and Economic Methodology, Cambridge: University Press.

86

(1) that a single set of causal factors are immediately determining for one large class of social phenomena, he believes that economics is a unified science (It would, however, be foolish to assert that a single theory serves all the explanatory and predictive purposes that economists have. Rather, Mill means that a single theory accounts for all the major economic phenomena and that much of economic theorizing consists in adding further auxiliary hypotheses to that theory.), and (2) that economics as a science is complete within its domain. In Book VI, Chapter 3, Section 1., Mill also expresses his methodological views and actual theorizing. This compounding is for Mill, largely a matter of deducing; and he argues that economics does and must follow deductive method. Mill’s deductive method, however, implies establishing certain laws by induction, deduction of fundamental laws and specifications of the relevant circumstances, as well as the verification of deductive results. Mill’s evolution was largely influenced by French ideas. Influence of Comte, SaintSimonians and Sismondi is fairly evident. However, it would be hardly true that Mill became a convert to socialist ideas, although he showed himself anxious to defend socialism against every undeserved attack. The first blow that he dealt at the Classical School was to challenge its belief in the universality and permanence of natural law.112 He never took up the position of Marxian and Historical School. He draws a distinction between the laws which obtain in the realm of production and that regulate distribution. “Only in one case we speak of natural laws; in the other they are artificial – created by men – and capable of being changed, should men desire it”.113 Contrary to the opinion of the Classical School, he tries to show that immutable laws against which the will of men can never prevail do not determine wage, profits, and rent. The door was thus open for social reform, which was no small triumph. Mill, not content with merely opening the door to reform deliberately enters in, and, in striking contrast, to the economists of the older school, outlines a comprehensive programme of social policy which he formulates thus: “How to unite the greatest individual liberty of action, with a common ownership in the raw material of the globe, and equal participation of all in the benefits of combined labour”. 114 [Note: Mill might well have been given a place among the Pessimists, especially as he inherited their tendency to see the darker side of things. Not only did the law of population fill him with terror but also, the law of diminishing returns

113 Principles, Bk II, ch. I. 114 See his, Autobiography, p. 133.

87

seemed to him the most important proposition in whole economic science; and all his works abound with melancholy reflections upon the futility of progress. In his vision of the future of society he prophesies that the river of human life will eventually be lost in the sea of stagnation. With Mill the older doctrines found new expression in language scientific in precision and Classical in beauty. It really seemed as if political economy had reached its final stage and that there could be no further excuse for prolonging the economic enquiry.]

88

Chapter 7.

Dissenssion When Liberalism just seemed to be most triumphant and the principles of the science appeared definitely settled, there sprang up a feeling of general dissatisfaction. Criticisms, which suffered a temporary check in 1848, now reasserted their claims, and with determination not to tolerate any further interruption in their task. The reaction showed itself most prominently in Germany where the Historical School refused to recognize the boundaries of the science as laid down by the English and French economists. The atmosphere of abstraction and generalizations to which they have confined it was altogether too stifling. It demanded new contact with life. It was weary of the empty framework of general terms. It was a thirst for facts and exercise of powers of observation. With all the ardour of youth it was ready to challenge all the traditional conclusions and to reformulate the science from its base. The advance of Liberalism and Socialism between 1850 and 1875 meant the decline of the Classical School. Public interest gravitated away from the teachings of the founders. But in the absence of a new and definite creed, what we find is a kind of general dispersion of economic thought, accompanied by a feeling of doubt as to the validity of theory in general and of theory of political economy in particular. Instead of the comparative unanimity of the early days we have a complete diversity of opinions, amid which the science sets out on a new career. With Bastiat, economic Liberalism, threatened by socialism, sought refuge in optimism. With Mill, the old doctrines found new expression in language scientific in precision, classical in elegance. It really looked like that political economy has reached its final stage of maturity. The reaction appeared most intense in Germany, where the New Historical School refused to accept the frontiers of the science as determined by the English and French economists. The climate of abstraction and generalization to which they had confined was altogather stiffling. It demandd new contact with the life of the past as well as that of the present. It was weary of of the hollow framework of general terms. It was a thirst 89

for facts and the exercise of the powers of observation. Furthermore, another objectionable thing was the Liberal policy with which the science has been implicated. It had to be corrected. Socialism, which many believed dead after 1848, revived in its turn. Marx’s, Das Kapital was published in 1867. It was the most powerful and impressive exposition of socialism. It was not anymore a pious aspiration, but a new scientific doctrine ready to face the Classical School. The advance of a the new school meant the decline of Classical doctrine and wanting of Liberalism. Not only that public interest drifted away from the teachings of its founders, general dispersion and serious doubts in the validity of theory in general and theoretical political economy in particular swept over. The successors of Say and Ricardo gave a new impetus to the abstract tendency of science by reducing its tenets to a small number of theoretical propositions. The problems of international exchange, of rate of profit, of wages and rent, were treated simply as a number of such propositions, expressed with almost mathematical precision.115 The new system of political economy thus consisted of a small number of quite obvious truths having only the utmost connection to life. In other words, as Schmoller puts it, “after the days of Smith political economy seems to have suffered from the attack of anaemia”.116 The divergence between theory and reality can be narrowed in one of two ways, i.e. a more harmonious and more comprehensive theory might be formulated, a task which Menger, Jevons and Walras attempted around 1870; and alternatively, to get rid of all abstract theory and to confine the science to a simple description of economic phenomena, the method followed by the Historical School. The honour of founding the Historical School undoubtedly belongs to Wilhelm Roscher, who published a book, Grundriss zu Vorlesungen uber die Staatswirtschaft nach geschichtlicher Metode, 1843. In its preface, he mentions some of the leading ideas which inspired him to undertake the work, System der Volkswirthschaft, 1854. He makes no pretense to anything beyond a study of economc history. “Our aim”, says he, ”is simply to describe what people have wished for and felt in matters economic, to describe the aims that they have followed and the successes they achieved – as well as to give the reasons why such aims were chosen and such triumphs won. Such research can only be

McCulloch, Nassau Senior, Heinrich Storch (1766-1835), Karl H. Rau (1792-1870), Jean P. Garnier (1813-1881), the immediate successors to David Ricardo and J. B. Say (1767-1832), in England and France respectively, repeated the old formulae without making any important additions to them. 116 G. Schmoller, (1838-1917), Zur Liitteraturgeschichte der staat- und Sozialwissenschaften, Leipzig, 1888. The expression is found in his study of Roscher. 115

90

accomplished if we keep in close touch with the other sciences of national life, with legal and political history, as well as the history of civilizaton”.117 Almost in the same breath, he justifies an attack upon the Ricardian thought hoping that it will lead into fruitful quests, which once undertaken will never be abondoned. What Roscher intended to do was to try to complete the current theory by adding a study of contemporry facts and opinion in the series of volumes which constitute the System. Roscher refered to his experiment as an attempt to apply the historical method which Savigny had been instrumental in introducing in the study of jurisprudence. Schmoller thinks that Roscher’s work might justly be regarded as an attempt to connect the teaching of politcal economy with the Cameralist tradition of XVIIth and XVIIIth century Germany.118 Bruno Hildebrand, put forwarded a much elaborate and ambitious programme, and his Die Nationalokonomie der Gegenwart und Zukunft, 1848, shows a much more fundamental opposition to the Classical school. History, he thought, would not merely vitalize and perfect the science, but even help to recreate it completely. Henceforth, economics was to become the science of national development.119 In prospectus of the Jahrbucher fur Nationaloknomie und Statistik, founded by him in 1863, he goes a step further and challenges the teachings of the Classical economists, particularly on issue of national economic laws, and even blames Rosher because he had ventured to recognize their existence. He did not even seem to realize that a denial of that kind involved the undoing of all economic science and the complete overthrow of those laws of development which he believed were henceforth to be the basis of the science. But Hildebrand’s absolutism had no more influence than Rocher’s eclecticism, unless we make an exception of his generalizations concerning the phases of economic development, i.e. the period of natuaral economy, that of money economy and that of credit. A bulky treatise titled, Die Politische Oekonomie vom Standpunkte der geschichtlichen Metode, was published by Karl Knies in 1853. His work, unfortunately, went almost unnoticed, ignored by the historians and economists alike, until the younger Historical School called attention to it. Knies, not only questions the existence of natural laws, but even doubts whether there are any laws of development at all. He does not share the belief of either Hildebrand or Roscher, nor does he hold with the classical school. He thinks that political economy is simply a history of ideas concerning the economic development of a nation at different periods of its growth. Grundrisse, preface. These Cameralists were engaged in teaching the principles of administration and finance to the students, who were to spend their lives in administrative work and thereby they naturally took good care to keep as close as possible to facts. 119 See, Introduction, in the volume p. V. 117 118

91

Three wll-known academics (Roscher, Hildebrand and Knies) devoted a great deal of time to a criticism of the Classical method, but failed to agree as to the aim and scope of science and left to others the task of applying their principles. This task was attempted by the newer Historical School that sprang up around Schmoller towards the end of 1870. This new school had two distinctive characteristics. First, they considered controversy concerning economic laws that Hildebrand and Knies had raised as utterly useless. The school did not deny the existence of natural social laws, and their search was considered as main objective. In fact they are thought as economic determinants; and second, the school did not seem contented merely advocating the use of Historical method. Since 1860, these German economists were keen to devote their energy to practical problems, sociological studies and historical or realistic research. Although the Historical School has done an enormous amount of work. Historical monographs were printed before their time, and that certain socialistic treatises, such as Marx’s Das Kapital, are really admirable attempts at historical synthesis. The special merit of the school consists in the impulse it gave to a systematic study of this description. The result was a renewed interest in history and the development of economic institutions.120 By the end of 1870 practical Liberalsim had spent up its force. New problems, such as the labour’s question, were emerging. The Classical economists had no solutions to offer, and the new study of economic institutions of social organization, and the life of the masses seemed to be the only hopeful method of gaining light on the questions. 121 The positive contribution of the Historical School is that it provided a clue to an entirely different point of view of economic doctrines. It should be noted that the study of economic phenomena may be approached from two opposite standpoints – mechanical and organic. The one is the ventage-ground of those thinkers who love generalizations, and who seek to reduce the complexity of the economic world; the other is of those writers who are attracted by the constant change that the concrete realities present.

The names of Gustav Schmoller, Lujo Brentano, (1844-1931), Karl W. Bucher, (1847-1930), and Werner Sombart, (1863-1941), became known all over. Marshall, on more than one occasion had paid them a glowing tribute (See his Principles, Appendix A). 120 Even in England, the influence of the school became quite plain after 1870. The study of economic institutions and classes occupied a permanent position in writings, such as W. Cunningham’s Growth of English Industry and Commerce, 1890; William Ashley’s Economic History and Theory, 1888; Mr. and Mrs. Sydney Webbs’, Industrial Democracy, 1902; and Charles Booth’s, Life and Labour of the People, (Vol.1, 1889; Vol. 2, 1891), all bear witness to the profound influence exerted by the new idea. In France, the success of the movement has not been quite so pronounced. 120

92

The earlier econmists for the most part belonged to the former class. Amid all the wealth and variety of economic phenomena they confined their attention to those aspects only that could be explained on simple mechanical basis. Such were the problems of price fluctuations, the rate of interest, wages and rent. Production adapting itself to meet variation in demand, with no guide except self-interest, looked for all the world like the intermolecular action of free human beings in competition with one another. But such a conception of economic life is rather extremely narrow. The whole lot of economic phenomena of great significance lie entirely outside. The phenomena of the economic world are, in fact, extremely varied and subject to change. There are innumerable institutions and organizations (banks, exchanges, labour unions, guilds, cooperative societies etc) that run the eonomic world. There is contant struggle between small and big merchants, between the pessant, properitor and landowner, between classes and individuals, between the public and private interests, between towns and cities, regions and provinces, etc. The country rises to prosperity again to fall to ruin. Thus, there are constant conflicts and changes that the nations face all the time. Of all this mechanical conception tells us nothing, thus is inadequte. The weakness of such conception arises out of the fact that it isolates human economic activity, but neglects the environment. Human economic actions influence his sorroundings. The character of such action and the effects that follow differ according to the physical and social, political and religious surroundings. A country’s geographical situation, its natural resources, the scientific and artistic knowledge of its inhabitants, their moral and intellectual character, their system of government, must determine the nature of its economic and social development. Wealth is produced, distributed, and exchanged in some fashion according to every stage of development. Each human society forms an organic unit, in which these functions are carried out in a particular way, giving accordingly, to that society a distinctive character entirely its own.122 This was the fundamental ground of their thesis, upon which were founded the logical conclusions of the Historical School. The Historians maintained that the earlier economists, by paying attention to those broader conclusions which had something of the generality of physical laws had kept the science within narrow limits. They further believed that there is a need for further study akin to biology, namely, a detailed description and historical explaination of the constitution of economic life of each nation. Such is the positive contribution of the school to the study of political economy, and it fairly represents the attitude of some modern economists towards history. Finally, the ideas of a distinguished philosopher, Comte, irrespective of the fact that his was no influence upon political economy, must also be mentioned. Strangely enough, 122

See Rocher's Principles; as well as Hildbrand's Die national ökonomie der Gegenwart und Zukunft, p. 29.

93

the earliest representatives of the School ignored him altogather. Just like Mill’s, his, Cours de Philosophie positive, 1842, remained fairly unknown to them. Comte’s ideas are so very similar to those of Knies and Hildebrand. Three fundamental conceptions, which formed the basis of Historical School, are clearly formulated by Comte. First is the stress on the importance of studying economic phenomena in relation to other social facts, because any “analysis of the industrial or economic life of society can never be carried on in a positive spirit by simply making an abstraction of its intellectual, political, or moral life, whether of the past or of the present”. The second is the employment of history as the organon of social science. “Social research must thus be based upon a positive analysis of the all-round development of mankind”. And third, the historical method will foster scientific prediction as basis for positive politics.123

123

Comte, A., Cours, Vol IV, p. 198.

94

Chapter 8.

State Socialists XIXth century opened with a feeling of contempt for government of every kind, and with an unbound confidence in the virtues of liberty and individual initiative. However, it closed with the clamour for State intervention in all matters affecting economic or social organization. In every country, the number of public servants and economists who favoured an extension of the economic function of government has continually kept on growing. Truly speaking this not an economic question, but a matter of practical politics at a time. The problem of defining the limits of governmental action in the matter of producing and distributing wealth is one of the most important subject in the realm of political economy. The issue had been and continues to be a subject of debate. It seems logical to conclude that solution must depend not merely upon economic factors, but also on social and political considerations. The issue is always alive, and fresh solutions are needed to meet the changed circumstances, whenever a new kind of society is created or a new government is established. This question has assumed extravagant proportions at certain periods of our history. Had the issue been confined to the limits set down by Smith, it is probable that such controversies would have been avoided? Smith’s arguments in favour of laissez-faire were basically economic. Gradually, under the increasing influence of individual and political liberty, a kind of contempt for all State action took place. The method of looking at the problem is characteristic of Bastiat. One feature of government that interested him was not the fact that it represented the general interest of the citizens, but that whenever it took any action it had to employ force.124 He states, “The distinctive character of the State merely consists in this necessity to have recourse to force, which also helps to indicate the extent and the proper limits of its action. Government is only possible

124

Harmonies, 10th ed., pp. 552-553.

95

through the intervention of force, and its action is legitimate when the intervention of force can be shown to be justifiable”. Smith’s point of view was altogether different. In addition to protecting the citizens from foreign invasion and from interference with their individual rights, Smith adds that the sovereign should undertake: “The duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society”.125

Naturally, there is wide scope open. If we turn to Bastiat, on the other hand, the government has only two functions to perform, namely, “to guard public security and to administer the common land”. Viewed in this light, the problem of government intervention becomes a question of determining the nature, aims, and functions of the State, and individual attitude and social traditions play a much more important part than either the operation of economic phenomena or any amount of economic reasoning. It is not surprising that some writers thought that one of the functions was to defend the liberty and the rights of the individual. Such views were bound to beget a reaction. However, the reaction took the form not so much of the creation of a new doctrine as of a fusion of two currents. It was reflected in the concept of State Socialism that surpasses the one in its faith in the wisdom of governments, and is distinguished from the other by its greater attachment to the rights of private property. State Socialism is not merely an economic doctrine. It has a social and moral basis, and is built upon a certain ideal of justice and a particular conception of the function of the state. This ideal and this conception is not the legacy from the economists, but from the Socialists, especially Rodbertus and Lassalle. These two writers were keen to have a kind of compromise between the society of the present and that of future, using the powers of the State. Karl Rodbertus, a theoretical writer of considerable vigour and eloquence, person of suggestive thought, had an impact on German State Socialism. He formed the centre of the group of people who were responsible for its popularization. In a history of doctrines, Rodbertus has a place for he forms, as it were, a channel through which the ideas first preached by Sismondi and the Saint-Simonians were transmitted to writers those who followed. The German economists of the end of XIXth century were greatly influenced by him. Although he borrowed ideas from the French socialists, but his clear logic and systematic method, coupled with his knowledge of

125

Wealth of Nations, Bk. IV, chapter ix, (E. Cannan’s ed. Vol. II, p. 185.)

96

economics, which was in every way superior to that of his predecessors, gives to these ideas a degree of permanence, which they have never enjoyed before. This David Ricardo of Socialism, as Wagner calls him, did for his predecessors’ doctrines what Ricardo had succeeded in doing for those of Malthus and Smith. He magnified the good results of their work and emphasized their fundamental postulates. Rodbertus’s political faith, as a liberal landowner who was on the Left Centre of Prussian Parliament, was determined by two elements i.e., constitutional government and national unity. The success of Bismarck’s policies, towards the end of his life, drew Karl nearer the monarchy. Moreover, his ideal was a socialist party renouncing all political action and confining its attention solely to social issues. The economic theory of Rodbertus rests upon the conception of a society created by the division of labour. According to him, as soon as an individual becomes a part of economic society, his wellbeing no longer depends upon himself and the use he makes of natural medium to which he applies himself, but upon the activity of his fellowproducers. The execution of certain social functions, which he enumerates, henceforth, become the determining factors: (i) The adaptation of production to meet the demand, (ii) the maintenance of production at least up to the standard of the existing resources, and (iii) the just distribution of the common produce among the producers. Should society be allowed to work out these projects spontaneously or should it endeavour to carry out a preconceived plan? To Rodbertus this was the problem that society needs to tackle. He emphasizes that, “No State is lucky or unfortunate enough to have the natural needs of the community satisfied by natural law without any conscious effort of anyone. The State is a historical organism, and the particular kind of organization, which it possesses, must be determined for it by the members of the State itself. Each State must pass its own laws and develop its own organization. The organs of the State do not grow up spontaneously. They must be fostered, strengthened, and controlled by the State”.126 Hence, after 1837, we find Rodbertus proposing the substitution of a system of State Socialism for the system of natural liberty. He defines his system such that: Firstly, only those people, who already possess something, can have their wants satisfied. Those who have nothing to offer except their labour, have no share in the social product. On the other hand, the individual who draws an income, even though he did any work for it, is able to make effective his demand for the objects of his desire. The result is that many of the more necessitous person’s needs go unsatisfied, while others wallow in luxury. His remedy consisted of a proposal to set up production for social need as a substitute for production for demand; secondly, the ‘production is entirely at the option of the capitalist proprietors’; and thirdly, the most important function is the 126

See chapter on Physiocracy in his Briefe u. Sozialpolitishe Aufsatze, p. 519.

97

distribution of the social product for a just system which should secure to everyone the product of his labour. The theory upon which Rodbertus laid so much of emphasis had already been outlined in his Foderungen, (1837), and further a fuller elaboration of it is provided in his Soziale Briefe, (1850), where he explicitly states it to be the fundamental point of the whole system, all else being mere scaffolding. His one ambition all lifelong was to be able to provide a statistical proof of it, but its importance is not nearly as great as he imagined it to be. Doubts as to validity of the brazen or the iron law of wages, upon which his entire theory rests, were expressed not only by economists but socialists also. And even if it were true, his proofs were still inconclusive, for the workers’ share of the total product depends, not upon one fact alone, but upon two – the rate of wages and the number of workers. Nonetheless, certain practical conclusions can be drawn from his elaboration, including the necessity of suppression of private property and of individual production. The community should be the sole owner of the means of production. Unearned incomes must go. Everyone should contribute something to the social product and each should share it in proportion to his labour. The value of all commodities will depend upon the amount of time spent on them and effort put into them; and since the supply will always adapt itself to the needs of the society the measure will be constant and exact, and equal distribution will be assured. But, Rodbertus recoils from his own solution, and the ardent socialist becomes a simple State Socialist. What frightens him is not the terrible tyranny of a system under which the production and even the consumption would be regulated. He had a perfect horror of any revolutionary change, and he stood aghast at the lack of education and awakening displayed by the masses. Thus, under existing circumstances, the State Socialists set out to transform the Rodbertian compromise into a self-sufficing system, and instead of regarding their doctrine as a diluted form of socialism they were rather inclined to treat it as a development of their theory. Although, Frederic Lassalle, not an original thinker, but was an ambitious agitator and a propagandist, and a friend of Bismarck, who had left a lasting impression upon Germany’s, labour movement. Rodbertus’s efforts to establish a doctrine of State Socialism upon the firm foundation of a new social theory had already met with a certain measure of success, but it was reserved for Lassalle to infuse vitality into these new ideas. Theoretically, Lassalle’s socialism is hardly distinguishable from Marx’s. Social evolution is summed up in a stricter limitation of the rights of private property, which in the course of a century or two, according to him, must result in its total disappearance. Being a practical man, he wanted to form a political party of his own with a set 98

programme. He concentrated his thoughts over two fundamental demands, the one political the other economic – universal suffrage on the one hand and the establishment of producers’ associations supported by the State on the other. In order to win the followers, he invoked the brazen law of wages, (a convenient title through which he chose to designate the Ricardian law of wages). What was new in Lassalle’s scheme, (as against that of Blanc, Rodbertus and other associationists), was the appeal for State intervention. It was his energetic protest against eternal laissez-faire that impressed public opinion. He harks back to this basic idea in all his principal writings. His thoughts and arguments were very much tainted with Fichte127 and Hegel128. Through the influence of Lassalle, the theories of the German idealist came into conflict with the economists’, and his eloquence contributed little to the rising tide of indignation. The years that elapsed between the death of Lassalle and the Congress of Eisenach (1872) proved to be decisive period in the formation of German State Socialism. Bismarck’s appearance on the political scene had done much to discredit the political reputation of the leaders of the Liberal party, who had shown themselves less than a match for the Chancellor’s political insight. This reacted to some extent upon economic Liberalism. The idea of a rejuvenated empire incarnated in Bismarck, added fresh lustre to the whole conception of the State. The Jahrbucher fur Nationalokonomie, issued by the Historical School in 1863, had by this time become, the accepted treatise of the university economists, and had done a great deal to accustom men’s minds to the relative character of the principles of political economy and to prepare their thoughts for entirely new point of view. Labour questions suddenly assumed an importance. The 1848 German revolution was presumably, political in character: the great capitalist industry had not yet reached the stage of development as in England and France. Two great German socialists, Rodbertus and Marx, had to go abroad to get their illustrations. But since 1848, German industry had made great strides. A new working-class community had come into existence, and Lassalle had further emphasized this transformation by seeking to found a party exclusively upon this new social stratum. Another agitation, largely inspired by Marxian ideas had begun. In this way the labour questions suddenly attracted attention.

Published in Berlin in 1800, J. G. Fichte’s, (1762-1814), Der geschlssene Handelsstaaat, highlight some ideas with many points of resemblance to those of State Socialism. In order to do this “everyone should be given the necessary means of livelihood, for the one aim all human activity is to live, and everyone here has an equal right to live” (pp. 402) – a declaration of the right of existence. “Until all are so provided for no luxuries should be allowed. No one should decorate his house until he feels certain that everyone has a house, and everyone should be comfortably and warmly clad before anyone is elegantly dressed” (pp. 400). 128 See, for G. W. F. Hegel’s, (1770-1831), contribution, the chapter entitled Hegel et la Theorie de l’ État, in LevyBruhl’s L’ Allemagne depuis Leibnitz, Paris 1890, p. 398. 127

99

It had urged upon the educated class the importance of abandoning the doctrine of absolute laissez-faire and of claiming the support of Government in the struggle with poverty, so in Germany, an increasing number of authors persuaded themselves that a purely passive attitude in face of the serious nature of the social problems which confronted them was impossible, and that the establishment of some sort of compact between the warring forces of capital and labour should not prove too much of an undertaking for the rejuvenation and vitality of a new empire. The new tendencies revealed themselves in an unmistakable fashion at Eisenach. A conference, which was largely composed of intellectuals – professors and economists, of administrators and jurists, decided upon the publication of a manifesto in which they declared war upon the Manchester School. The manifesto spoke of the state as “a great moral institution for the education of humanity”, and claimed that it should be “animated by a high moral idea”, which would “enable an increasing number of people to participate in the highest benefits of civilization”.129 At the same time the members of the congress determined upon the creation of the association, Verein fur Sozialpolitik, charged with the task of procuring the necessary scientific material for this new political development. This was the beginning of State Socialism. It should be noted that it was the first and foremost reaction, not so much against the ideas of English Classical School but against the exaggeration of the disciples of Bastiat, known as the Optimists and Manchestrians in Germany. Further, the State Socialists believed that the State is the organ of moral solidarity and thus has no right to remain indifferent to the material poverty of the nation. In this way State Socialism becomes reconciled to the philosophic standpoint that Lassalle had chosen for it. Lassalle’s insistence upon the mission of Governments and the importance of their historic role has been incorporated into its system, and the attention that is paid to national considerations reminds us of the teachings of List. In virtue of this conception there is a demand for the extension of the State’s functions, which is justified on the ground of its capacity for furthering the wellbeing and civilization of the community. The influence of Rodbertus’s thought is quite unmistakable in this context. The practical application of these ideas would affect both the production and distribution of wealth. On this question Socialism has done little more than to seize hold of ideas that were current before its day. In the matter of distribution, it takes exactly the same position as Sismondi. There is no condemnation either of profits or interest as a matter of principle, such as is the case with the Socialists, nor is there any suggestion to do away with private property as the fundamental institution of the society, but there is

129

A copy of the text translated into French appeared in the Revue d' économie politique, 1892.

100

a desire for a more precise correspondence between income and effort, 130 and for such a limitation of profits as the economic conjuncture will allow, and, on the other hand, for such an increase of wages as will permit of a more human existence. Such are the essential features of State Socialism, which bases its appeal, not on any precise criticism of private property or of unearned income, but entirely upon moral and national considerations. A just distribution of wealth and a higher wellbeing for the working classes appear to be the only methods of maintaining national unity of which the State is sole representative.

cf., for example, Schmoller's open letter to von Treitschke, (1874), translated in his Politique sociale et économie politique, Paris, 1902. 130

101

Chapter 9.

Prelude to Marxism The value of principles of State Socialism was due much less than the peculiar nature of political and economic evolution towards the end of XIXth century. Its most conspicuous representative in Germany was Prince Bismarck who was totally indifferent to any theory of socialism, and who preferred to justify his policy by an appeal to the principles of Christianity or Prussian Landrecht. One of his great ambitions was to consolidate and cement the national unity. A system of national insurance financed and controlled by the state appealed to him as the best way of weaning the working classes from revolutionary socialism. In a somewhat similar fashion the French peasants became attached to the Revolution through the sale of national property. The German Chancellor himself was less favourably inclined in the labour laws, but the personal predilection of the Emperor William II, as expressed in his famous decree of Feb. 4, 1890, was needed to give the Empire a new impetus in this direction. Accordingly, it was the intelligent conservatism of a government almost absolute in its power, but possessed no definite social creed, that set about realizing a part of the programme of State Socialism. In England and France and in other countries where political liberty was an established fact, similar measures have been carried out at the express wish of an awakening democracy. The working classes were beginning to find as to how to utilize for their own gain the larger share of government. Progressive taxation, insurance, protective measures for workers, more frequent intervention of government with a view to determining the conditions of labour, were just the expression of a tendency that operated independently of any preconceived plan. The regulation of the relationship between employers and workers gave to State Socialism a legislative bias. Government not content with that, have long since extended their intervention to the domain of production, the new character of social life being again the determining motive. Public works, such as canals, roads, railways, sea transport, and electric power have multiplied enormously. The demand for public services such as lighting and heating has increased because of increased concentration 102

of population. Communal life kept encroaching upon what was formerly an isolated, dispersive existence, and community of interest extended its sway in the nations at large. Industry too was being gradually linked together, and the scope of free competition was, perforce, becoming narrower. In the labour market, as well as in product and money markets, concentration had taken place. Monopolies were everywhere. The public opinion too was gradually getting reconciled to the idea of seeing the State becoming in its turn industrial. Under such conditions, it was impossible that the doctrine of Socialism should not influence public opinion. State Socialism has the peculiar merit of being able to translate the confused aspirations of a new epoch in the history of politics and economics, into practical maxims without arousing the suspicions of the public to the extent that socialism generally does. Legislators and public men have generally been supplied with the needed arguments to defend the inauguration of that new policy upon which they had secretly set their hearts and mind. A common ground of action was found for parties that are generally opposed to each other and for temperaments that are usually incompatible. That is the outstanding merit of a doctrine that seemed eminently suitable for the attainment of tangible results. And so, by a curious inversion of functions, by no means exceptional in the history of thought, State Socialism, found itself playing, the part of its great adversary, the Liberal Optimism. One of the outstanding merits of that Liberalism was the preparation it afforded for a policy of enfranchisement or liberty, which was absolutely necessary for the development of industrial regime. In pursuance of this task, all traces of its scientific origin disappeared, the elaboration of economic theory was neglected, and habit of close reasoning so essential to systematic thinking was abandoned. In a somewhat similar fashion State Socialism became the creed of all those who desired to put an end to the abuses of economic liberty in its extremer aspects, or such as were generally concerned about the miserable condition of an increasing number of the working people. It continued to spread thence until it has gradually swallowed the whole economic system without resistance from a public opinion that was less and less sympathetic towards liberalism. Of course, there was a time when it could be asked if this very multiplicity of government interventions would not arouse in consumers, entrepreneurs, workers, and a growing mistrust of the economic competence of the State. The illusion was short-lived and only served to show up more clearly the universal triumph of socialism over all forms of liberalism, including syndicalist liberalism.131 Another characteristic reaction was that whereas during the greater part of XIX th century the attacks of socialism were directed against Liberalism and economic orthodoxy, Neo-Marxian syndicalism was concentrating its attention almost exclusively upon State Socialism. Syndicalist working people have on more than one occasion shown their contempt for the State by refusing to avail themselves of measures passed on their behalf. This attitude was perhaps due to the influence of the anarchists upon the leaders of French syndicalism. 131

103

The combined effect of Neo-Marxian and the Anarchists in turning the French working classes away from State Socialism in the years immediately preceding to the WW I is an interesting and widely recognized fact. In England at the same time a current of ideas called Guild Socialism, akin to this movement in many ways, was tending to replace the earlier State Socialism of Mr and Mrs Webb, and to supersede trade unionism. It put in the forefront of programme, not the defence of the specific interests of labour but the general organization of production. The State, however, in the opinion of some writers, should retain the function of control and arbitration in respect to the guilds, as the representatives of the consumers. 132 But when an attempt was made after the WW I to translate these ideas into reality, there arose a corporative doctrine, which combined, in a confused manner, not only trade unionist aspirations but also the paternal tendencies of Social Catholicism and the desire of employers for the federation of industries. The influence of State Socialism on the minds of people was once more visible. For it was to the State that the direction of the new corporations was entrusted, when in various countries, especially Italy, they obtained the sanction of the law. The term controlled economy, that had become increasingly popular in past centuries, is perhaps the best modern label for State Socialism, which has been applied through the interventionism of 1848, to the old etatisme of the preceding centuries. Past two world wars have proven that the term had become merely another name for a war economy. War, which not only affects the participating nations, but almost every social class in each nation, in which distinction between soldiers and civilians virtually disappears, means the seizure of everything by the State. All productive activity is geared up for the purpose of defence. Every industry abandons production for peace and concentrates on armaments. Agriculture is deprived of its manpower, sees its products scarce. Exports are reduced and efforts are made to maintain imports. Abundances are swallowed by scarcities. In these circumstances the State undertakes the tasks that are usually left to individual initiatives. Not only production is controlled, but the distribution of the existing products too becomes one of its essential functions. Normal functions of commerce are entrusted to the government, and it determines the prices. In other words, the economic system becomes solely the business of the government. Everyone knows that under the given circumstances, as elaborated above, the spell was cast for the Socialism of XXth century by the doctrines of Karl Marx133 and the contempt with which

The principal writers in this movement were G. D. H. Cole, (1889-1959), and S. G. Hobson, (1870-1940). A good summary of their ideas is to be found in an article by Laskine in the Revue d’Economie poltique, 1920, p. 405. 133 Born 1818, in a respected Jewish family few would have predicted for him the career of a militant socialist. In 1843 he fled to Paris, and thence to Brussels. Returning to Germany during the Revolution of 1848, in which he 132

104

this newer, scientific socialism, similar to the earlier or Utopian kind. The more striking thing was the success of Marxian Socialism and its wants of sympathy with the heretical doctrines of its predecessors – the Communists and the Fourierists, and the pride it takes in regarding itself as a mere development or rehabilitation of the great Classical tradition. Political economy of Karl Marx can best be studied, if we make a review of his fundamental theoretical principles of organization of society – the capitalist society that was growingly becoming a class society. Accordingly, we shall be analysing his treatment of the following: (1) (2) (3)

Surplus Labour and Surplus Value; Law of Automatic Appropriation The Socialist Society, i.e. Marxism

(1) The fundamental objective Marx was to show as to how the propertied class had always lived on the labour of the non-propertied class. This was by no means a new idea, as we have already seen in the writings of Sismondi, Saint-Simon, Proudhon, and Rodbertus. But the essence of the criticism of these writers always was social rather than economic -- the limitation of private property and its injustice being the chief object of attack. Marx, on the other hand, deliberately directed the gravamen of the charge against economic science itself, especially against the conception of exchange. He endeavoured to prove that what we call exploitation must always exist, that it is an inevitable outcome of exchange – an economic necessity to which both the employer and employee must submit. Marx lays down the doctrine that labour is not merely the measure and cause of value, but that it also is its substance. Notable is the fact that Ricardo was somewhat favourable to this view. Marx, of course does not deny that utility is a necessary condition of value and that it is the only consideration in the case of value in use. But utility is not enough to explain the value in exchange for every act of exchange implies

took active part, he was expelled second time, and this time took refuge in London (1849), where he spent the rest of his life until death in 1883. Although Karl Marx, (1818-1883), was one of the founders and directors of the International, which was the terror of European Governments, between 1863 and 1872, he was not a mere revolutionary like his rival Bakunin, nor was he a famous tribune like Frederic Lassalle, (1825-1864). He was a man of great intellectual culture. His best-known work is his Das Kapital, which is frequently quoted but seldom read by a few. Its first volume appeared in his lifetime in 1867, while the other two, through the efforts of his friend F. Engels, (1820-1895), were issued after his death in 1885 and 1894. This book exercised a great influence upon the XIX th century thought, and probably no other work has given rise to controversies. Marx’s other writings, though much less quoted, are also exceedingly important, especially, La Miśere de la Philosophie, (1847); Zur Kritik der politischen Oekonomie, (1859); and the Communist Manifesto, (1848).

105

some common element. This identity is certainly not the result of utility, because the degree of utility is different in every commodity, and this difference is the raison d’etere of exchange. The common element is the quantity of labour that is contained in them. The value of every commodity is simply the amount of crystalized human labour contained in it, and commodities differ in the value according to the different quantities of labour, which are “socially necessary to produce them” (Das Kapital, p. 5 and 29). The value of the commodities necessary for the upkeep of labour is never equal to the value of produce of that labour. Human labour under normal conditions always produces more value of the goods consumed. This is the crux of problem. The mystery surrounding the capitalist production is at last solved. The value produced by the labourer passes into the hands of capitalist, one who disposes it and gives back the labourer enough to pay for the food consumed by him during the time he was producing the commodity. The difference goes to the pocket the capitalist. Marx speaks of this as surplus value – the Mehrwerth. Naturally the capitalist’s interest is to augment this surplus value, which goes to sell his profits. This can be done in a number of ways, and an analysis of some of these processes is one of the most characteristic features of Marxian doctrine. Marx’s demonstration’s originality lies in the fact that it does not consist of commonplace recriminations concerning the exploitation of workers and the greed of exploiters, but shows how the worker is robbed even when he gets all that he is entitled to (Das Kapital, p. 145). Marx distinguishes two kind of capital. The first serves for the upkeep of the working class population, either in form wages or direct subsistence. Marx calls it variable capital. The other kind of capital, which directly assists the productive activity of labour by supplying it with machinery, tools etc., he calls constant capital. This latter does not result in the production of surplus value. This is the crystallized product of labour, and its value is determined solely by the number of hours of labour it has taken to produce. This value, whether it includes the cost of producing the raw material or merely the cost of labour employed in elaborating it, should be re-discoverable in the finished product. But there is nothing more, no surplus. Economists usually refer to it as depreciation. It is quite obvious that it is to the interest of capitalist to employ the variable capital, or at least that it will pay him to reduce the amount of constant capital used to the irreducible minimum. This logic drives us to the fact that those industries that have large amount of variable capital – e.g. agriculture, find themselves with just average rate of return, but draw much less in the way of surplus value than they had expected, and so Marx refers to them as undertakings of an inferior character. On the contrary, those industries, which possess a large amount of constant capital, draw more than their capital had led them to hope for; Marx refers them as industries of a superior character. 106

Hence those industries, which employ a considerable amount of machinery, expand at the expense of the others. (2) The law of concentration of capital, which can only be interpreted in the light of economic history, is an attempt to show that the regime of private property and personal gain under which we live is about to give place to an era of social enterprise and collective property. According to socialists, until XVIth century there existed neither capital nor capitalist. Capital in the economic sense of a mere instrument of production must have existed even before this time, but socialists are of opinion that it had quite a different significance then. Their use of the word made sense only as anything that yields a rent as a result of the toil of others, and not its owner. But under the guild system that preceded this condition the majority of workers possessed most of the instruments of production themselves. Then follows a description of a series of changes that forms a singularly dramatic chapter in the writings of Marx. New means of communication are established and new markets opened as a result of maritime discoveries coupled with the consolidation of the great modern States, the rise of banks and trading companies, and the formation of public debts. All these resulted in concentration of capital in the hand of few and the expropriation of the small proprietor. But this was only the beginning. If capital in this newer sense of an instrument for making profit out of the labour of others was ever to come into its own and develop, if the surplus labour and surplus value were really to contribute to the growth and upkeep of this capital, it was necessary that the capital should be able to buy that unique merchandise which possesses such wonderful qualities in open market. But labour-force can never be bought unless it has been previously detached from the instruments of production and removed from its surroundings. Every link with the property must be severed; every trace of feudalism and of guild system must be removed. Labour must be free, i.e. saleable, or “it must be forced to sell itself because labourer has nothing else to sell”. For a long time, the artisan was selling his goods to public without intermediary, but a day came when, he was no longer able to sell his products, he was reduced to selling himself (Das Kapital, p. 155). The creation of this new kind of property based upon labour of others meant the extinction of that earlier form of property founded upon personal labour and the substitution for it of the modern proletariat. This was the task to which the bourgeoisie resolutely set it, for about three centuries, and its proclamation of the liberty of the labourer and the rights of man is just its paean (song) of victory. Its task is accomplished. In reality this end was partially accomplished even in the most capitalistic countries, but in view of the following considerations, the trend is: that the expansion of production on a massive scale meant a corresponding growth in the numbers of the proletariat, and 107

capitalism, that by increasing the number of wage earners helps to swell the ranks of its own enemies (Manifesto, para. 1). Over production is another fruitful method. A contraction of the market results in a superabundance of workers whose services are always available. They form a kind of industrial reserve army upon which the capitalist may draw at his pleasure; and the concentration of rural population in towns and cities is another contributing factor. According to Marx, in reality, capitalism is the outcome of class struggle that will someday spell the ruin of the whole regime, when expropriators will themselves be expropriated. Marx provides no details as to how this will be accomplished. His only object, it seems, was to show how those very laws that led to establishment of the regime would someday encompass its ruins.134 3) Socialism is an ancient idea of organization of socio-economic life of the people based on equality, justice and social harmony. The thought as a systematic philosophy had existed since the ancient days.135 Socialism as a thought, like most philosophical ideas, had been a subject of debate among intellectuals, since then. Although Marx and Engels wrote very little on socialism and neglected to provide any details on how it might be organized, numerous social scientists and neoclassical economists have used Marx's theory as a basis for developing their own models of socialist economic systems. Note that Plato and Aristotle, both, had arrived at more or less similar views, which made politics anti-egalitarian and confined market forces to a less visible role. We can thus see in Marx, a peculiar understanding of human nature, which led to such conclusions. The starting premise of socialist socio-economic system had always been that individuals do not live and work in isolation but in cooperation with one another. The fruits of their labour are in some sense a social product, and those who contributed towards it are entitled to a share it. Society as a whole should, therefore, manage and control the means of production for the benefit of all. Thus, the original conception of socialism born was that it is an economic system whereby production was organized in a way to directly produce goods and services for their utility (or use-value), and not for See the Manifesto for an eloquent statement of this. Sumerian cuneiforms of Ur dynasty, (2150-2000 BC), of the Sumerian civilization – the first human civilization in recorded history – report that societies cannot function without a respect for life and property and shared values, thus require basic laws for maintaining order in the city states. Indian Vedas and Upanisadas also broad line the ideals of socialism. The Vedic society (around 1500 BC) was organized on such ideas. The only model of state managed socialism had functioned (although not very well), during the times of Ptolemais, (332-30 BC). The then existing corrupt bureaucratic practices, unsustainable military expenses, exploitation of slave labour, frequent draughts and political unrest plagued the system that led the system to its collapse. Early Christianity and Talmudic Judaism too claim the existence of such a system. However, it is only during the XIX th and XXth centuries, that various experiments in socialism were made (e.g. Paris Commune, Utopians, Owen's, liberal socialism in Britain, and that of the USSR). None survived and worked successfully. 134 135

108

financial calculations such as rent, interest, profit and money – the known capitalistic economic categories. It was thought that in a fully developed socialist economy, production and balancing factor inputs with outputs become only a technical process. Management and control over the economic and social activities would be based on selfgovernance. There are many varieties of socialism and there is no single definition encapsulating all of them, though social ownership is the common element shared by its various forms.

109

Chapter 10.

Towards the end of XIXth Century Forty years of almost uninterrupted peace in Europe after the Franco German War were marked in the history of economic doctrines by a great reconstruction. In the realm of economic theory there was a veritable revolution in methods and conceptions. At the very moment when the historians and State Socialists were proclaiming their contempt for all abstract speculations, a brilliant attempt was being made in France, in England, and in Austria to establish economic theory on a new footing. Three great names stand out pre-eminently: Walras in France, Menger in Austria and Jevons in England. By concentrating on the concept of utility, too much neglected since the days of Condillac, and following Cournot in further use of mathematics, these writers replaced the elementary simplifications of the Classical School by the concepts of economic equilibrium and mutual dependence of prices. These ideas, developed later in Italy, Austria, the US, and England by economists like Pareto, Marshall, Edgeworth, Böhm-Bawerk, and Fisher, gradually won their way to recognition, though not without somewhat prolonged resistance in Germany and France. They led to original research in all directions, and ended by dominating economic thought and teaching in the principal countries of the world. Those who initiated them became the real classics for later generations of economists, and their prestige definitely eclipsed that of Ricardo and James Mill. At the same time there was taking place a reconstruction of social doctrines. Throughout this period, the number of adherents of State Socialism and Marxism continued to increase, but a reaction showed itself in several directions against the two fundamental currents that inspired both these doctrines: the class war in the one case and etatisme in the other. While they both sought a solution of the problems raised by the claims of the working classes, some doctrines were proclaimed, in opposition to the Marxian class conflict, the principle of class union, while others demanded a measure of freedom from State restrictions even more radical than that demanded by the liberals. 110

In the first place Christianity, long absent from the arena of social discussions, made a brilliant return to it through the champions of the two faiths, the Catholic and the Protestant. Nothing is more opposed to the idea of the class conflict than the teaching of Christianity, based upon the idea of charity. A Christian social doctrine would obviously be a doctrine of union, supported by aspirations common to workers and employers alike. It would find the solution of social problems in the fervour of a revived Christian sentiment and the rapprochement that result from it. The belated flowering of such doctrines in all their glory did not come till the end of XIXth century when Pope Leo XIII bestowed on them his authoritative consecration. All the Churches were more or less inspired by them. The idea of a union of classes instead of their deep-rooted antagonism was to find an echo in other quarters besides the consciences of Christian men. Among the great body of indifferent, or of thinkers aloof from the traditional religious faiths but permeated by the individualist ideas of the French Revolution, there were some who felt the need of a principle that would reconcile these ideas with the admitted necessity of social reform. From these considerations emerged the doctrine of Solidarism, which led increasingly in democratic countries to legislation similar to that which State Socialism has put into effect in authoritarian States. Another effort to reconcile liberalism with socialism is seen in the attempts made to draw from Ricardo’s theory of rent, conclusions favourable to a more equitable distribution of the social product. Reply to the question was given in systems of land nationalization and those still wider plans, which aim at confiscating all incomes analogous to rent. The doctrine that opposed these attempts at reconciliation was entirely different. In opposition to the authoritarian trend of socialism it carried to their extreme limits the liberal tendencies that emerged from the French Revolution, and gave expression to the old revolutionary and individualistic spirit that was always active in Latin American countries. A strange rebirth of liberalism was apparent at this time among the working classes, but it was undoubtedly quite a different kind of liberalism from that of its founders. It was harsher in its mode of expression, and Smith and Bastiat would certainly have repudiated it. So to escape any confusion it was called, Libertarianism. But for all that it is none the less genuine: it is anarchism. This tendency, already perceptible in Marx’s International, that eventually obtained an ever-clearer ascendancy over the working classes and left its mark on the syndicalist movement in France and Italy. At the same time a kind of philosophical and moral anarchism appeared in middle-class writers, which rather seemed as a pre-stage of the rebirth of individualism. Such, then, are the principle doctrinal currents, which under the influence of the prolonged peace that followed the Franco-German War, showing the trends of thought of writers interested in social reform. It was not until after the WW I that man returned 111

with new ardour to the great problems of production and exchange that had engrossed the attention of the founders. From the point of history of political economic doctrines, since nothing spectacular happened during the last quarter of the XIXth century, thus there is not much to write about. Nevertheless, a couple of the so-called schools and movements did emerge, that these deserve a brief mention. These were: 1. The Hedonists 2. The Psychological School 3. The Mathematical School 4. le Play’s School 5. Social Catholicism 6. Social Protestantism; and the 7. Solidaritists (1) If we are to give this new doctrine of the Hedonists its true setting, we must look back to the Historical School. Criticism of that school was mainly directed against the method of the Classical writers. The faith their predecessors had placed in the permanence and universality of natural law was formally rejected, and possibility of ever founding a science upon a chain of general propositions was emphatically denied. Political economy, so it was declared, was henceforth to be concerned merely with the classification of objective facts. It would not have been difficult to foretell that the swing of the pendulum would cause of reversion to the abstract method. This is exactly what happened just at the moment when Historical study seemed to be triumphant, several eminent economists in Austria, England, Switzerland, and the US suddenly and simultaneously made their appearance with emphatic demand that political economy should be regarded as an independent science. They brought forward the claims of what they called pure economics. Naturally enough there ensued the keenest controversy between the champions of two schools, notably between Schmoller and Menger. The new school had one distinctive characteristic. In its search for a basis upon which to build the new theory it hit upon the general principle that humans always seek pleasure and avoid sufferings. A fact of such great importance and one that was not confined to economic activities, but seemed present everywhere throughout nature in the guise of the principle of least resistance, could scarcely have escaped the notice of Classical theorists. They had referred to it simply as personal interest, but today we speak of it as Hedonism (from the Greek word meaning pleasure or agreeableness). The elimination of all motives affecting human action except one does not imply any desire on the part of these writers to deny the existence others. They simply lay claims 112

to the right of abstraction without which no exact science could ever be constituted. The homo economicus of the Classicals had been replaced on its pedestal. Men are again to be treated as forces and represented by curves or figures as in treatises on mechanics. Thus, the objective of the study is to determine the interaction of men among themselves and their reaction upon the external world. The new schools too, surprisingly, arrive at an almost identical conclusion that absolutely free competition gives the maximum of satisfaction to everybody. Just a revival of the great Classical tradition! No wonder, then, that we find a good deal of sympathy shown for the old Classical School. This does not mean that the Classical doctrine is treated as being wholly beyond reproach, although it does not mean that the new school could scarcely accuse it of being in error, seeing that it comes to a similar conclusion itself. But what it does lay to the charge of the older writers was a failure to prove what they assumed to be true and a tendency to be satisfied with a process of reasoning which too often meant wandering round in a hopeless circle. Especially was this the case with their study of causal relations, forgetting that, as often as not cause was effect and effect cause. The attempt to determine which are cause and which effect is clearly futile, and the science must rest content with the discovery of uniformities either of sequence or of coexistence. This applies especially to the three great laws that form the work of economic science, namely the law of demand and supply, the law of cost of production, and the law of distribution, none of which is independent of the others. The new school refused to pay honour to this ancient trinity any longer. It is impossible to each factor separately because of the intimate relationship between them, and their productive work, as the Hedonists point out, must necessarily be complementary. In any case, before one can determine the relative shares of each we must be certain that our unknown (x) is not reckoned among the known. This naturally leads them on to the realm of mathematical formulae and equations. However, all the Hedonists do not employ mathematics. (2) The Austrian Psychological School particularly, seem to think that little can be gained from a mathematical approach. Some of the Mathematical economists, on the other hand, are equally critical of the futility of psychology, especially of the famous principle of final utility, which is the corner stone of Austrian theory. 136 The prime characteristic of the Psychological school was its faithfulness to the doctrine of final

“The theory of economic equilibrium is quite distinct from the theory of final utility, although the public are apt to confuse them and to think that they are both the same“, Vilfredo Pareto, L'Economie pure, 1902. 136

113

utility.137 The older economists had a similar notion when they spoke of value in use, but instead of preserving it they dismissed it, and it was left to the Psychological School to revive it in its present form. The terms connote the ability to satisfy some human want (i.e. what Pareto calls the ophelimity or in Gide’s words it is desirability). However, it is not the utility of things in general, rather the utility of a particular unit of some specific commodity. It is the simple observation of certain facts, be these worthless or insignificant in character, enabled the Psychological School to propound a number of general theories such as the law of substitution and the doctrine of complementary goods that shed new light upon a great number of economic questions. The utility concept has been gainfully applied to the theory of production, distribution, exchange, and consumption. It has also served as the basis for explaining the laws of wages, rent, and interest. (3) The Mathematical School138 is distinguished for its attachment to the study of exchange, from which it deduces the whole of political economy. Its method is based upon the fact that every exchange may be represented as an equation, A = B, which expresses the relation between the exchanges quantities. However true this may be, the application of the method must necessarily be very limited if it is always being confined to exchange. It is, however, a mistake to suppose that this really is the case. It is an ingenious and fruitful contributions made by this school, for it has proved that this circle can be enlarged so as to cover the whole economic science. It is not impossible, then to discover among economic facts certain relations, which are expressible algebraically or even reducible to figures. The art of the Mathematical economists consists in the discovery of such relations and putting them forth in the form of equations.

It appears that the first suggestion of final utility in the sense it is employed in the psychological school is a gift of a French engineer named Dupuit. He put forwarded the suggestion in two memoirs entitled, La Mesure de l’utilité des travaux publics, (1844), and, L’Utilité des vois de communicacton, (1849), but their importance was not realized until late. In its present form, it was first expounded by Stanley Jevons, (1835-1882), in his, A General Mathematical Theory of Political Economy (1862), and Carl Menger in his, Gründsatze der Volkswirtschaftslehre, (1871). Walras’s conception of scarcity, which is just a parallel idea, was made public about the same time (in 1874). Finally, J. B. Clark, in his, Philosophy of Value, (1881), seems to have arrived at a similar conclusion by an entirely different method. Despite its international origin, the school is generally spoken of as the Austrian School, because most of its eminent representatives were Austrians. Among these may be mentioned Carl Manger, Emil Sax, (1845-1927), (Wesen und die Aufgabe der Nationalökonomie, 1884), Frederich Wieser, (1851-1926), (Der naturlishe Werth, 1889), and Böhm-Bawerk, (Grundzuge der Theorie des wirtscfatlichen Guterwerths in the Jahrbucher fur National ökonomie, 1886). Since 1900 the theory of marginal utility has found its most brilliant exponents in the US: John B. Clark, George Patten, Irving Fisher, James Carver, F. A. Fetter and others. 138 It is generally accepted that the school dates back from the appearence of Augustine Cournot's (1801-1877), Reserches sur les Principes mathmatiques de la theorie des richesses, (1838); and Leon Walras in his, Elements d'Economie politique pure, Part 1, (1874). provides a full exposition of Mathematical economics. 137

114

Mathematical political economy, not content only with seeking relations of mutual dependence between isolated facts, claims to be able to embrace the whole field within its comprehensive formulae. Everything seems to be in state of equilibrium, and any attempt to upset it is immediately corrected by a tendency to re-establish it. To determine the conditions of equilibrium is one of the most important objects of pure economics. Leon Walras, who endeavoured to bring every aspect of economic world with his equations, made the most remarkable attempt at systematization of this kind. 139 (4) Frederic le Play, closely related to the representatives of the Classical Liberal School, a mining engineer, published a few monographs140 that best reflect his antipathy to both socialism and state intervention. The School he founded adopted the same title as his book.141 He considered that Man was ignorant of what his own wellbeing involved. In the realm of social science, no fact seemed to him more persistent or more patent than error. Every individual appeared to be born with a natural tendency to evil, and he picturesquely remarks that, “every new generation is just an invasion of young barbarians that must be educated and trained. Whenever such training by any chance neglected, decadence becomes imminent”. Among the errors more particularly denounced by le Play were the special idols of French bourgeois – the false dogmas of ‘89. It seemed to him that no society could ever hope to exist longer and content with the natural laws, which merely meant being ruled by the untamed instincts of the brute. Some kind of authority is clearly indispensable. The old paterfamilias order seems to him to be more efficacious than any other, for it is founded in nature and not on contract or decree, and springs from love rather than coercion. Thus the system needs to be restored. But since parental control cannot always be relied upon there is a positive need of some kind of social authority (probably the nobility). State intervention is indispensable only when all other authorities have failed. Thus, family is the kernel of his system. He supports the life, and family groups, for these seem to hold on balance between antagonistic forces that are indispensable for the welfare of the society, namely, the spirit of conservatism and the spirit of innovation. The School of social science – the name given to its review by the followers, claimed that it was faithful to the method of the master. However, they condemned le Play for In this context it is worth quoting Alfred Marshall's comment that apperaed in one of his articles: ”The most useful application of mathematics to economics are those which are short and simple and which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities”, 'Distribution and Exchange', Econnomic Journal, March 1898. 140 In 1855 le Play published his collection of monographs dealing with working class families under the title, Les Ouvriers europeens, and in 1864 he published an exposition of his social creed in a book La Reforme sociale. 141 In 1856, P. G. F. le Play, (1806-1882), founded the La Société d' Économie Sociale. 139

115

his failure to establish a positive science by means of it. The school, accordingly, rearranged its facts according to natural relations and attempted to link the study of social science to the study of geographical environment. The school, to give but a single instance, attempted to show how the configuration of Norwegian fjords, the complete absence of arable land, and the consequent recourse to fishing as a means of livelihood, even the very dimensions of their sea-craft, helped to fix the type of family and even the political and economic framework prevalent among the Anglo-Saxon race. In a similar fashion, the vast steppes in central Asia had begotten a civilization of their own. Evidently, it was the Historical materialism of the Marxian school reappearing in the more picturesque and suggestive guise of geographical determinism. (5) The term Catholic Socialism, which is occasionally employed as an alternative to the above title, objected to be the majority of Catholics as being excessively restrictive. Frenchman Huet in his book entitled, Le Regime Social Du Christianisme, published in 1853, first employed it. But two authors, namely Buchez, in his, Essai d’un Trait complet de philosophie au point de vue du catholicisme et du progres (1838-40), and the fiery Lamnnais in La Qestin du tavail, (1848), can lay considerable claims to priority in the matter. Buchez was the founder of Co-operative Association of Producers (1832), and Lammennaise outlined a scheme of co-operative banks almost similar to those afterwards in Germany by Raiffeisen. Present-day Catholicism, however show no great desire to honour them. The one ambition of these three republicans was to effect a union between the Church and the Revolution, the two having identical aims. The social Catholics of today would be well satisfied if there could be established some kind of understanding between the Church and democracy. Such at least was the programme of Sangnier, the founder of Silon. About the same time, we find Monseigneur Ketteler, Bishop of Mayence, preaching a doctrine drawing its inspiration from the institutional life of the middle ages, from the guilds and other cooperative associations. Some such institutional activity was again to form the corner stone of Social Catholicism. During the period of Second Empire most of the Social Catholics seem to have been silent, but were aroused by the disaster in 1870. Marquis du Pin and Count Mun proved the inspirers this time that led to the formation of union of Catholic working men that was instrumental in giving the movement a vigorous start. The same period witnessed the appearance of L’ Association catholique, a review, which took as its programme the study of economic facts in a Catholic spirit. Organization in the form of corporations was given the first place in the Social Catholic programme. What the Social Catholics wanted was to build up the new social structure upon the basis of the modern trade unionism, or upon syndicalism. They looked forward not merely to the development of a new society but to the rise of new ethics. Early in the 116

history of the movement they tried to organize a kind of mixed syndicate, both of masters and workingmen, because this seemed to them to offer the best guarantee for social peace. But results proved disappointing, and they were soon forced to relinquish the idea and to content themselves with a separate organization of masters and men cooperating only in matters of regulation of work or settling the disputes. 142 All questions affecting the interests of a trade, the hours of labour, Sunday observance, apprenticeship, the sanitary conditions of workshops, the labour of women and children, rate of wages paid were to be settled by the union, and the rules were supposed to cover all the members of the trade or profession. Everybody would be free to join. “Free association within an organized profession”, was the formula. It should be noted that in the first place, it would have to be a society professing the Catholic faith founded upon brotherhood and fatherhood of God, and not upon any socialistic concept of equality. Such a society would be a pure hierarchy.143 State intervention might be considered a necessity at first to establish the cooperative regime. But once founded, it would naturally monopolize all the legislative and police power which affects labour in any way, especially in fixing the wages, arranging pensions, etc. The legislature would still find enough scope for its activities, its powers outside the mere professional interests, especially in regulating the rights of property, prohibiting usury, protecting agriculture, etc. Social Catholicism has sometimes shown very advanced tendencies, bringing it very near to socialism in the strict sense. But these tendencies have been confined to individual cases and have been condemned by Rome, and those responsible for them have generally deferred to her authority. (6) Social Protestantism is a belief in the essentially individualistic nature of Protestantism, which is fairly widespread. Its emphasis has always been upon the personal nature of salvation and its denial of any mediator between God and man. Protestantism is the religion of self-help, and naturally its social teaching is coloured by its theological preconceptions. Social Protestantism, (or Christian Socialism as known in England) was founded in 1850 in England as a society for promoting working men’s associations. Its best-known representatives were two Cambridge professors, Kingsley and Maurice. A small number of lawyers also joined the society. What the Christian Socialists had in mind was the establishment of working men’s associations. The trade unions were just then struggling through the convulsion of their

See for details Dechesne's Syndicats Ouvriers belges, p. 76, 1906. The German Christische Gewerkvereine, which got most of its members took an important part in German political life and played a signicant role to counterbalance the Reds, or the revolutionary socialists. 142 143

117

early infancy. Moreover, they were exclusively concerned with professional matters, with the struggle for employment and the question of wages, and altogether did not seem very well fitted to develop the spirit of sacrifice and love, which was indispensable for the realization of their ideal. Neither did the cooperative associations of consumers seem very attractive. True, they had attained some degree of success at Rochdale, but they were inspired by the teachings of Owen, which was definitely anti-Christian. So the Christian Socialists turned their attention to producer’s association. The reawakened interest in the possibilities of association, which exercised such a fascination over Mill in 1848, had touched their imagination. In France, Ludlow, being one of them and a resident of Paris, saw this glorious revival. Such associations seemed to be just the economic instruments needed if a transformation was ever to be effected. But the process of disillusion proved as rapid as it was complete. Contrary to the case in France, it cannot be said that they were ever really attempted in England. But the work of Association had not been altogether in vain as the Industrial and Provident Societies Acts of 1852-62 were passed, which conferred legal personality upon co-operative associations, with consequent benefit to themselves and to other workingmen’s associations. The Christian Socialist thought that the methods by which their ideals may be attained are of secondary importance. What they strove for was a moral reform. Christian socialism in England, though it survived its founders, has been obliged to change its programme. It abandoned the idea of producer’s union but still advocated other forms of co-operation. Its main demand has been a reorganization of private property. In the US, Christian Socialism was fairly aggressive in its attacks on capitalism. The first such society was founded at Boston in 1889, and since then these have multiplied. Later, the movement had spread to Germany, Switzerland, and France. (7) There is no such thing as a Solidarity School in the sense that we speak of Historical, a Liberal, or a Marxist school. Solidarity is a banner borne aloft by more than one school, and a philosophy that serves to justify the aims that are occasionally divergent, it has been suggested that the social legislations of the XX th century, e.g. the regulation governing the conditions of labour, factory and general hygiene, insurance against accidents and old age, State aid for the aged and disabled, the establishment of societies for mutual credit, rural banks and cheap dwellings, and school clinics, all of which are the direct outcome of preaching solidarity, as well as the grants in aid of these objects which are paid out of the progressive taxation levied upon inherited wealth or extraordinary incomes of such as have plucked the fruit from the tree of civilization to the deprivation of those who caused that fruit to grow, should be known as the laws of social solidarity. The word solidarity has been employed to designate a doctrine, which has aroused a great deal of enthusiasm – at least in France. The fundamental idea beneath the doctrine 118

is that human race, taken collectively, forms one single body, of which individuals are the members. St. Paul, Marcus Aurelius and Menenius Agrippa, names of antiquity gave expression to this very idea in terms almost identical with those used by the Solidarity school. The doctrine of solidarity had the good fortune to reappear just when people were becoming suspicious of individualist Liberalism, though unwilling to commit themselves either to collective or to State Socialism. In France, a new political party in process of formation was in search of a via media between economic Liberalism and socialism. It wanted to repudiate laissez-faire with the socialization of individual property; uphold the doctrine of the rights of man and the claims of individual while recognizing the wisdom of imposing restrictions upon the exercise of those rights in the interests of the community. The Party called itself as Radical-Socialist Party. German State socialism was expounded about the same time and was closely akin to it. But in Germany, State was considered something entirely above the party. It is interesting to note that the word solidarity has an imposing scientific appearance without a trace of ideology. Henceforth, every sacrifice which is demanded in the interests of others, whether grants to friendly societies or workmen’s associations, cheap dwellings, pensions, or even parish allowances, is claimed not in the interest of charity, but of solidarity. The doctrine connotes something more than sheer application or extension of the idea of natural solidarity to social or moral order. It is an attempt to remove some of the anomalies of natural solidarity, or at least a conviction that things are so adjusted that some individuals obtain advantages which they by no means desire while others are burdened with disadvantages, which are none of their seeking. There is a demand for intervention in order that those who have benefitted by accidents of natural solidarity should divide the spoils with those who have been less fortunate. Natural solidarity tells us that as a result of the division of labour, of the influence of heredity, and many other causes, every man indebted either to his forbearers or his contemporaries the best part of what he has, and even of what he himself is. Now the existence of a debt implies that someone must pay it, and then the further question that who someone ought to be. Obviously it can only be those who have benefitted by the existence of natural solidarity. Such individuals have already drawn more than their share and have a balance to make up on the debit side. This debt should certainly be paid. It is all the better if it is done voluntarily, as an act of liberality arising out of goodness of heart. But this is hardly probable. Most people will pay just when they are obliged to; but such people have no right to consider themselves free, and no claim to the free disposal of their goods until they have acquitted themselves honourably.

119

Individual property will be respected and free when every social debt, which it involves, has been adequately discharged.144

144

M. Bourgeois, Philosophie de la Solidarité, p. 45.

120

Chapter 11.

Dawn of Marxism After the summary exposition of the principal ideas of Karl Marx as in Chapter 9., of our history, we must now try to elaborate the socialist system 145 as envisaged by him for it bears his name, i.e. Marxism. In Marxist theory, socialism (also called the socialist mode of production) refers to a specific historical phase of economic development and its corresponding set of social relations that supersede capitalism in the schema of historical materialism. The Marxist definition of socialism is a mode of production where the sole criterion for production is use value and therefore the law of value no longer directs economic activity. Marxist production for use is coordinated through conscious economic planning, while distribution of economic output is based on the principle of to each according to his contribution. The social relations of socialism are characterized by the working class effectively owning the means of production and the means of their livelihood. By the late XIXth century, after the writings of Marx and Engels, socialism had come to signify an opposition to capitalism and advocacy for a post-capitalist system that would be based on some form of social ownership of the means of production. By the 1920s, social democracy and communism had become the two dominant political tendencies within the international socialist movement. By this time, socialism emerged as "the most influential secular movement of the XXth century, worldwide. It became a political ideology (or world view), a wide and divided political movement" 146, and while the emergence of the Soviet Union as the world's first nominally socialist state led to socialism's widespread association with the Soviet economic model, many economists and intellectuals argued that, in practice, the model functioned as a form of state capitalism or a non-planned administrative or command economy147. Socialist parties and ideas remain a political force with varying degrees of power and influence on all cf. Sharma, S. and M. Mikić, (2019) The Lost Cause: Socialism Lost in Oblivion, Zagreb, pp. 5-16. Kurian, G. T., (ed), (2011), The Encyclopaedia of Political Science, CQ Press, Washington DC. p. 1554. 147 Howard, M. C. and J. E. King, (1989), ‘State Capitalism in the Soviet Union’, in M. C. Howard. 145 146

121

continents, heading national governments in many countries around the world. Today, some socialists have also adopted the causes of other social movements, such as environmentalism, feminism and liberalism. The word ‘socialism’ finds its root in the Latin sociare, which means to combine or to share. The related, more technical term in Roman, and then in medieval law was societas. This latter word could mean companionship and fellowship as well as the more legalistic idea of a consensual contract between freemen148. It is widely accepted that the term socialism was created by Saint-Simon, one of the founders of what would later be labelled as utopian socialism. He coined the term as a contrast to the liberal doctrine of individualism, which stressed that people act or should act as if they are in isolation from one another. The Utopists condemned the liberal individualism for its failings to address social concerns during the industrial revolution, including poverty, social oppression and gross inequalities in wealth, thus viewing liberal individualism as degenerating society into supporting selfish egoism that harmed community life through promoting a society based on competition. They presented socialism as an alternative to liberal individualism based on the shared ownership of resources, although their proposals for socialism differed significantly. Saint-Simon proposed economic planning, scientific administration and the application of modern scientific advancements to the organization of society. By contrast, Owen proposed the organization of production and ownership in cooperatives. The term socialism is also attributed to Leroux149 and to Rebaud in France; and in Britain to Owen in 1827, father of the cooperative movement. Socialist models and ideas espousing common or public ownership have existed since antiquity. It has been claimed—though controversially—that there were elements of socialist thought in the politics of classical Greek philosophers Plato 150, and Aristotle151. Mazdak, a Persian communal proto-socialist152, (died c. 524 or 528 CE), instituted communal possessions and advocated the public good. Abu al-Ghifari, a companion of Prophet Mohammed, is credited by many as a principal antecedent of Islamic Socialism153. Similarly, the teachings of Jesus Christ are frequently highlighted as socialist in nature. Christian socialism was one of the founding threads of the UK Labour Party and is said to be a tradition going back 600 years to the uprising of Tyler

Vincent, A., (2010), Modern Political Ideologies, Wiley-Blackwell Publishing, p. 83. To Leroux, P. Socialism is "the doctrine which would not give up any of the principles of Liberty”. 150 Taylor, A. E., (2001): Plato: The Man and His Work, Dover, p. 276-77. 151 Ross, W. D., Aristotle, VI. Ed. p. 257. 152 (1974), A Short History of the World, Progress Publishers, Moscow. 153 (1995), Oxford Encyclopaedia of the Modern Islamic World, New York: Oxford, p. 19. 148 149

122

and Ball. In the period right after the French Revolution, activists and theorists influenced the early French labour and socialist movements154. The first self-conscious socialist movements developed in the 1820s and 1830s. The Owenites, Saint-Simonians and Fourierists provided a series of coherent analyses and interpretations of society. They also, especially in the case of the Owenites, overlapped with a number of other working-class movements. A later important socialist thinker in France was Proudhon, who proposed his philosophy of mutualism in which "everyone had an equal claim, either alone or as part of a small cooperative, to possess and use land and other resources as needed to make a living". There were also currents inspired by dissident Christianity of Christian socialism "often in Britain and then usually coming out of left liberal politics and a romantic anti-industrialism", which produced theorists such as Bellamy, Denison and Kingsley. The first advocates of socialism favoured social levelling in order to create a meritocratic or technocratic society based on individual talent. Saint-Simon was fascinated by the enormous potential of science and technology and advocated a socialist society that would eliminate the disorderly aspects of capitalism and would be based on equal opportunities. He advocated the creation of a society in which each person was ranked according to his or her capacities and rewarded according to his or her work. The key focus of Saint-Simon's socialism was on administrative efficiency and industrialism and a belief that science was the key to progress155. This was accompanied by a desire to implement a rationally organised economy based on planning and geared towards large-scale scientific and material progress, thus embodied a desire for a more directed or planned economy. Other early socialist thinkers based their ideas on Ricardo's economic theories. They reasoned that the equilibrium value of commodities approximated prices charged by the producer when those commodities were in elastic supply and that these producer prices corresponded to the embodied labour—the cost of the labour (essentially the wages paid) that was required to produce the commodities. The Ricardian socialists viewed profit, interest and rent as deductions from this exchangevalue. West European social critics, including Owen, Fourier, Proudhon, Blanc, Hall and Saint-Simon were the first who criticised the excessive poverty and inequality of the Industrial Revolution. They advocated reforms. Owen advocated transformation of society to small communities without private property. His contribution to modern socialism was his understanding that the social environment they were raised in and exposed to, largely determined actions and characteristics of individuals. On the other hand, Fourier advocated phalansteres, which were communities that respected individual 154 155

Kurian, G. T., op. cit., p. 1555. Newman, M. op. cit.

123

desires (including sexual preferences), affinities and creativity, and saw that work has to be made enjoyable for people156. The Paris Commune was a government that briefly ruled Paris157. Despite internal differences, the council began to organize the public services essential for a city of two million residents. It also reached a consensus on certain policies that tended towards a progressive, secular and highly democratic social democracy. Because the Commune was only able to meet on fewer than 60 days in all, only a few decrees were actually implemented. These included the separation of church and state; the remission of rents owed for the entire period of the siege; the abolition of night work in Paris bakeries; the granting of pensions to the unmarried companions and children of National Guards killed on active service; and the free return, by the city pawnshops, of all workmen's tools and household items valued up to 20 francs, pledged during the siege. The International Workingmen Association held a preliminary conference in 1865 and had its first congress at Geneva in 1866. Due to the wide variety of philosophies present in the First International, there was conflict from the start. The first objections to Marx came from the mutualists who opposed communism and statehood. However, shortly after Bakunin and his followers (called collectivists while in the International) joined in 1868, the First International became polarised into two camps headed by Marx and Bakunin respectively158. The clearest differences between the groups emerged over their proposed strategies for achieving their visions of socialism. The First International became the first major international forum for the promulgation of socialist ideas. The followers of Bakunin were called collectivist anarchists and sought to collectivise ownership of the means of production while retaining payment proportional to the amount and kind of labour of each individual. Like Proudhonists, they asserted the right of each individual to the product of his labour and to be remunerated for their particular In Fourier's system of Harmony, “all creative activity including industry, craft, agriculture, etc. will arise from liberated passion – this is the famous theory of attractive labour. Fourier sexualises work itself – the life of the Phalanstery is a continual orgy of intense feeling, intellection, & activity, a society of lovers & wild enthusiasts.... The Harmonian does not live with some 1600 people under one roof because of compulsion or altruism, but because of the sheer pleasure of all the social, sexual, economic, gastroscopic, cultural, and creative relations this association allows and encourages". 157 It functioned from 18 March, more formally from 28 March, to 28 May 1871. The Commune was the result of an uprising in Paris after France was defeated in the Franco-Prussian War. The Commune elections held on 26 March elected a Commune council of 92 members, one member for each 20,000 residents. See for details, Rougerie, J., (2009), La Commune de Paris, Paris: Presses Universitaires de France. 158 "It is unnecessary to repeat the accounts of the Geneva and Hague Congresses of the International in which the issues between Marx and Bakunin were fought out and the organisation itself split apart into the dying Marxist rump centred around the New York General Council and the anti-authoritarian majority centred around the Bakuninist Jura Federation. But it is desirable to consider some of the factors underlying the final emergence of a predominantly anarchist International in 1872". – Woodcock, G., (1962), Anarchism: A History of Libertarian Ideas and Movements, p. 243. 156

124

contribution to production. By contrast, the anarcho-communists sought collective ownership of both the means and the products of labour. Syndicalism emerged in France inspired in part by the ideas of Proudhon. It developed at the end of the XIXth century out of the French trade-union movement. It became a significant force in Italy and Spain in the early XXth century, until it was crushed by the fascist regimes in those countries. In the US, syndicalism appeared in 1905. As the ideas of Marx and Engels took on flesh, particularly in central Europe, socialists sought to unite in an international organisation. In 1889 (the centennial of the French Revolution of 1789), the Second International was founded, and termed as the Socialist International and Engels was elected honorary president at the III Congress in 1893. Anarchists were ejected and not allowed in, mainly due to pressure from the Marxists. The modern definition and usage of socialism settled by the 1860s, becoming the predominant term among the group of words co-operative, mutualist and associationist, which had previously been used as synonyms. The term communism also fell out of use during this period, despite earlier distinctions between socialism and communism from the 1840s159. An early distinction between socialism and communism was that the former aimed to only socialise production while the latter aimed to socialize both production and consumption (in the form of free access to final goods) 160. However, by 1888, Marxists employed the term socialism in place of communism, which had come to be considered an old-fashion synonym for socialism. It was not until 1917 after the Russian October Revolution that socialism came to refer to a distinct stage between capitalism and communism, introduced by Lenin as a means to defend the Bolshevik seizure of power against traditional Marxist criticisms that Russia's productive forces were not sufficiently developed for socialist revolution 161. Raymond, W., (1983), Socialism - Keywords: A Vocabulary of Culture and Society, Revised Edition. Oxford University Press, p. 288. He states that 159

“Modern usage began to settle from the 1860s, and in spite of the earlier variations and distinctions it was socialist and socialism which came through as the predominant words ... Communist, in spite of the distinction that had been made in the 1840s, was very much less used, and parties in the Marxist tradition took some variant of social and socialist as titles”. See, Steele, D., (1992), From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation, Open Court Publishing Company. p. 43. “One widespread distinction was that socialism socialised production only while communism socialised production and consumption.” 161 See, Steele, D. (1992), op. cit., pp. 44–45. He writes: 160

“By 1888, the term socialism was in general use among Marxists, who had dropped communism, now considered an old fashioned term meaning the same as socialism ... At the turn of the century, Marxists called themselves socialists ... The definition of socialism

125

The criticism of capitalism by the socialists was based on argument that the accumulation of capital generates waste through externalities that require costly corrective regulatory measures. They also point out that this process generates wasteful industries and practices that exist only to generate sufficient demand for products to be sold at a profit (such as high-pressure advertisement), thereby creating rather than satisfying economic demand. Socialists argue that capitalism consists of irrational activity, such as the purchasing of commodities only to sell at a later time when their price appreciates, rather than for consumption, even if the commodity cannot be sold at a profit to individuals in need and therefore a crucial criticism often made by socialists is that making money, or accumulation of capital, does not correspond to the satisfaction of demand (the production of use values). The fundamental criterion for economic activity in capitalism is the accumulation of capital for reinvestment in production, but this spurs the development of new, non-productive industries that do not produce use value and only exist to keep the accumulation process afloat (otherwise the system goes into crisis), such as the spread of the financial industry contributing to the formation of economic bubbles. Further, socialists view private property relations as limiting the potential of productive force in the economy. According to them, private property becomes obsolete when it concentrates into centralised, socialised institutions based on private appropriation of revenue—but based on cooperative work and internal planning in allocation of inputs—until the role of the capitalist becomes redundant162. With no need for capital accumulation and a class of owners, private property in the means of production is perceived as being an out-dated form of economic organization that should be replaced by a free association of individuals based on public or common ownership of these socialised assets163. Private ownership imposes constraints on planning, leading to uncoordinated economic decisions that result in business fluctuations, unemployment and a tremendous waste of material resources during crisis of overproduction. Furthermore, it is contended that excessive disparities in income distribution lead to social instability and require costly corrective measures in the form of redistributive taxation, which incurs heavy administrative costs while weakening the incentive to work, inviting dishonesty and increasing the likelihood of tax evasion while (the and communism as successive stages was introduced into Marxist theory by Lenin in 1917 ... the new distinction was helpful to Lenin in defending his party against the traditional Marxist criticism that Russia was too backward for a socialist revolution”. "The bourgeoisie demonstrated to be a superfluous class. All its social functions are now performed by salaried employees", in his, Socialism: Utopian and Scientific. 163 Horvat, B., (1983), The Political Economy of Socialism, Routledge, pp. 15–20. 25 ibid, pp. 197. 162

126

corrective measures) reduce the overall efficiency of the market economy 164. These corrective policies limit the incentive system of the market by providing things such as minimum wages, unemployment insurance, taxing profits and reducing the reserve army of labour, resulting in reduced incentives for capitalists to invest in more production. In essence, social welfare policies cripple capitalism and its incentive system and are thus unsustainable in the long run. Marxists argue that the establishment of a socialist mode of production is the only way to overcome these deficiencies. Socialists and specifically Marxian socialists argue that the inherent conflict of interests between the working class and capital prevent optimal use of available human resources and leads to contradictory interest groups (labour and business) striving to influence the state to intervene in the economy in their favour at the expense of overall economic efficiency. Scholars have argued that at a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure. The writings of Karl Marx and Engels provided the basis for the development of Marxist political theory and economics. They argued that socialism would emerge from historical necessity as capitalism rendered itself obsolete and unsustainable from increasing internal contradictions emerging from the development of the productive forces and technology. It was these advances in the productive forces combined with the old social relations of production of capitalism that would generate contradictions, leading to working-class consciousness165. Marx and Engels, both held the view that the consciousness of those who earn a wage or salary (the working class in the broadest Marxist sense) would be moulded by their conditions of wage slavery, leading to a tendency to seek their freedom by overthrowing ownership of the means of production by capitalists and consequently, overthrowing the state that upheld this economic order. For Marx and Engels, conditions determine consciousness and ending the role of the capitalist class leads eventually to a classless society in which the state would wither away. The Marxist conception of socialism is that of a specific historical phase that would displace capitalism and precede communism. The major characteristics of socialism are that the proletariat would control the means of production through a worker's state erected by the workers in their interests. Economic activity would still be organized through the use of incentive 164 165

ibid, pp 197. Gregory, P. and R. Stuart, (2003), Comparing Economic Systems in the Twenty-First Century, p. 62.

127

systems and social classes would still exist, but to a lesser and diminishing extent than under capitalism. For orthodox Marxists, socialism is the lower stage of communism based on the principle of “from each according to his ability, and to each according to his contribution". The upper stage i.e. communism, to them, is based on the principle of “from each according to his ability, and to each according to his need”. This becoming possible only after the socialist stage further develops its economic efficiency and the automation of production leads to an abundance of goods and services166. Marx argued that the material productive forces (in industry and commerce) brought into existence by capitalism predicated a cooperative society since production had become a mass social, collective activity of the working class to create commodities but with private ownership (the relations of production or property relations). This conflict between collective effort in large factories and private ownership would bring about a conscious desire in the working class to establish collective ownership commensurate with the collective efforts their daily experience167. Socialists have taken different perspectives on the state and the role it should play in revolutionary struggles, in constructing socialism and within an established socialist economy. In the XIXth century, the German political philosopher Lassalle first explicitly expounded the philosophy of state socialism. In contrast to Marx's perspective of the state, Lassalle rejected the concept of the state as a class-based power structure whose main function was to preserve existing class structures. Thus Lassalle also rejected the Marxist view that the state was destined to wither away. Lassalle considered the state to be an entity independent of class allegiances and an instrument of justice that would therefore be essential for achieving socialism. Preceding the Bolshevik-led revolution in Russia, many socialists criticized the idea of using the state to conduct central planning and own the means of production as a way to establish socialism. Following the victory of Leninism in Russia, the idea of state socialism spread rapidly throughout the socialist movement and eventually states socialism came to be identified with the Soviet economic model 168.

Walicki, A., (1995), Marxism and the Leap to the Kingdom of Freedom: The Rise and Fall of the Communist Utopia, Stanford University Press. p. 95. 167 Marx, K., (1859), Preface to ‘A Contribution to the Critique of Political Economy’, Moscow. 168 Screpanti and Zamagni in, (2005), An Outline on the History of Economic Thought (2nd ed.), Oxford University Press, writes: 166

“It should not be forgotten, however, that in the period of the Second International, some of the reformist currents of Marxism, as well as some of the extreme left-wing ones, not to speak of the anarchist groups, had already criticized the view that State ownership and central planning is the best road to socialism. But with the victory of Leninism in Russia, all dissent

128

Schumpeter rejects the association of socialism (and social ownership) with state ownership over the means of production because the state, as it exists in its current form, is a product of capitalist society and cannot be transplanted to a different institutional framework. Schumpeter argues that there would be different institutions within socialism than those that exist within modern capitalism, just as feudalism had its own distinct and unique institutional forms. The state, along with concepts like property and taxation, were concepts exclusive to commercial society (capitalism) and attempting to place them within the context of a future socialist society would amount to a distortion of these concepts by using them out of context 169. As far as the classical Marxism is concerned, it denotes the collection of socio-ecopolitical theories expounded by Marx and Engels. "Marxism", as Mandel remarked, "is always open, always critical, always self-critical". As such, classical Marxism distinguishes between Marxism as broadly perceived and what Marx believed, thus in 1883, Marx wrote to, the French labour leader Guesde and to his own son-in-law Lafargue, — both of whom claimed to represent Marxist principles — accusing them of revolutionary phrase-mongering and of denying the value of reformist struggle. Criticisms of Marxism have come from various political ideologies and academic disciplines. These include general criticisms about lack of internal consistency, criticisms related to historical materialism, that it is a type of historical determinism, the necessity of suppression of individual rights, issues with the implementation of communism and economic issues such as the distortion or absence of price signals and reduced incentives. In addition, empirical and epistemological problems are frequently identified. Some Marxists have criticized the academic institutionalisation of Marxism for being too shallow and detached from political action. For instance, Zimbabwean Trotskyist Callinicos, himself a professional academic, stated: "Its practitioners remind one of Narcissus, who in the Greek legend fell in love with his own reflection ... Sometimes it is necessary to devote time to clarifying and developing the concepts that we use, but

was silenced, and socialism became identified with democratic centralism, central planning, and State ownership of the means of production”. 169

Schumpeter, J. A., (2008), Capitalism, Socialism and Democracy, Harper Perennial, p. 169. He writes: “But there are still others (concepts and institutions) which by virtue of their nature cannot stand transplantation and always carry the flavour of a particular institutional framework. It is extremely dangerous, in fact it amounts to a distortion of historical description, to use them beyond the social world or culture whose denizens they are. Now ownership or property – also, so I believe, taxation – are such denizens of the world of commercial society, exactly as knights and fiefs are denizens of the feudal world. But so is the state (a denizen of commercial society)”.

129

indeed for Western Marxists this has become an end in itself. The result is a body of writings incomprehensible to all but a tiny minority of highly qualified scholars". Additionally, there are intellectual critiques of Marxism that contest certain assumptions prevalent in Marx's thought and Marxism after him, without exactly rejecting Marxist politics. Other contemporary supporters of Marxism argue that many aspects of Marxist thought are viable, but that the corpus is incomplete or outdated in regards to certain aspects of economic, political or social theory. They may, therefore, combine some Marxist concepts with the ideas of other theorists such as Weber — the Frankfurt School is one example. Some of these can be highlighted as under (i) Philosopher and historian of ideas, Kołakowski pointed out that "Marx's theory is incomplete or ambiguous in many places, and could be applied in many contradictory ways without manifestly infringing its principles". Specifically, he considers "the laws of dialectics" as fundamentally erroneous, stating that some are "truisms with no specific Marxist content", others "philosophical dogmas that cannot be proved by scientific means" and some just "nonsense". He believes that some Marxist laws can be interpreted differently, but that these interpretations still in general fall into one of the two categories of error. Okishio's theorem shows that if capitalists use cost-cutting techniques and real wages do not increase, the rate of profit must rise, which casts doubt on Marx's view that the rate of profit would tend to fall. Further, the allegations of inconsistency have been a large part of Marxian economics and the debates around it since the 1970s. It is argued that this undermines Marx's critiques and the correction of the alleged inconsistencies, because internally inconsistent theories cannot be right by definition. (ii) Epistemological and empirical critiques suggest that Marx's predictions have been criticized because they have allegedly failed, with some pointing towards the GDP per capita increasing generally in capitalist economies compared to less market oriented economics, the capitalist economies not suffering worsening economic crises leading to the overthrow of the capitalist system and communist revolutions not occurring in the most advanced capitalist nations, but instead in undeveloped regions. Popper In his books The Poverty of Historicism and Conjectures and Refutations, has criticized the explanatory power and validity of historical materialism. He believes that Marxism had been initially scientific, in that Marx had postulated a genuinely predictive theory. When these predictions were not in fact borne out, he argues that the theory avoided falsification by the addition of ad hoc hypotheses that made it compatible with the facts. Because of this, Popper asserted, a theory that was initially genuinely scientific degenerated into pseudoscientific dogma170. (iii) Democratic socialists and social democrats reject the idea that socialism can be accomplished only through extra-legal class conflict and a proletarian revolution. The 170

Popper, Sir Karl (2002). Conjectures and Refutations: The Growth of Scientific Knowledge. Routledge. p. 449.

130

relationship between Marx and other socialist thinkers and organizations—rooted in Marxism's scientific and anti-utopian socialism, among other factors—has divided Marxists from other socialists since Marx's life. After Marx's death and with the emergence of Marxism, there have also been dissensions within Marxism itself—a notable example is the splitting of the Russian Social Democratic Labour Party into Bolsheviks and Mensheviks. Orthodox Marxists became opposed to a less dogmatic, more innovative, or even revisionist Marxism. (iv) Anarchism has had a strained relationship with Marxism since Marx's life. Anarchists and many non-Marxist libertarian socialists reject the need for a transitory state phase, claiming that socialism can only be established through decentralized, noncoercive organization. Bakunin has thus criticized Marx for his authoritarian bent. The phrases barracks socialism or barracks communism became a shorthand for this critique, evoking the image of citizens' lives being as regimented as the lives of conscripts in a barracks. Chomsky is also very critical of Marxism's dogmatic strains and the idea of Marxism itself, but still appreciates Marx's contributions to political thought. Unlike some anarchists, Chomsky does not consider Bolshevism Marxism in practice, but he does recognize that Marx was a complicated figure who had conflicting ideas, while he also acknowledges the latent authoritarianism in Marx he also points to the libertarian strains that developed into the council communism of Rosa Luxemburg and Pannekoek. However, his commitment to libertarian socialism has led him to characterize himself as an anarchist with radical Marxist leanings. Libertarian Marxism refers to a broad scope of economic and political philosophies that emphasize the anti-authoritarian aspects of Marxism. Early currents of libertarian Marxism, known as left communism, emerged in opposition to Marxism–Leninism and its derivatives such as Stalinism and Maoism. Libertarian Marxism is also often critical of reformist positions, such as those held by social democrats. Libertarian Marxist currents often draw from Marx and Engels' later works, specifically the Grundrisse and The Civil War in France, emphasizing the Marxist belief in the ability of the working class to forge its own destiny without the need for a revolutionary party or state to mediate or aid its liberation. Along with anarchism, libertarian Marxism is one of the main currents of libertarian socialism. (v) Other criticizms come from an economic standpoint (e.g. Dmitriev’s writing in 1898, Bortkiewicz’s writing in 1906/1907), such that some subsequent critics have alleged that Marx's value theory and law of the tendency of the rate of profit to fall are internally inconsistent. In other words, the critics allege that Marx drew conclusions that actually do not follow from his theoretical premises. Once these alleged errors are corrected, his conclusion that aggregate price and profit are determined by and equal to aggregate value and surplus value no longer holds true. This result calls into question his theory that the exploitation of workers is the sole source of profit. 131

Thus both Socialism and Marxism and have received considerable critical analysis from multiple generations of Austrian economists in terms of scientific methodology, economic theory and political implications. Non-Marxist economists have regarded his criticism as definitive, with Haberler arguing that Böhm-Bawerk's critique of Marx's economics was so thorough and devastating that as of the 1960s no Marxian scholar had conclusively refuted it. Third-generation Austrians, particularly Mises have rekindled debate about the economic calculation problem by identifying that without price signals in capital goods, all other aspects of the market economy are irrational. This led them to declare that "rational economic activity is impossible in a socialist commonwealth". Similarly, some argue that Marx's economic theory was fundamentally flawed because it attempted to simplify the economy into a few general laws that ignored the impact of institutions on the economy. [Note: In February 1917, revolution exploded in Russia. Workers, soldiers and peasants established soviets (councils), the monarchy fell and a provisional government invoked pending the election of a constituent assembly. In April of that year, Lenin, leader of the Bolshevik faction of socialists in Russia came out of exile in Switzerland. Lenin had published essays on his analysis of imperialism, the monopoly and globalization phase of capitalism as predicted by Marx, as well as analyses on the social conditions of his contemporary time. He observed that as capitalism had further developed in Europe and America, the workers remained unable to gain class-consciousness so long as they were too busy working and concerning with how to make ends meet. He, therefore, proposed that the social revolution would require the leadership of a vanguard party of class-conscious revolutionaries from the educated and politically active part of the population. Upon arriving in Petrograd, Lenin declared that the revolution in Russia was not over, but had only begun and that the next step was for the workers' soviets to take full state authority. He issued a thesis outlining the Bolshevik's party programme, including rejection of any legitimacy in the provisional government and advocacy for state power to be given to the peasant and working class through the soviets. The Bolsheviks became the most influential force in the soviets and on 7 November Bolshevik Red Guards stormed the provisional government in what afterwards known as the October Revolution. The rule of the provisional government was ended and the world's first constitutionally socialist state—was established. On 25 January 1918, Lenin declared and proposed an immediate armistice on all fronts and transferred the land of the landed proprietors, the crown and the monasteries to the peasant committees without compensation171. The day after assuming executive power on 25 January,

Lenin, V. I., To Workers Soldiers and Peasants, Collected Works, Vol 26, p. 247, cited in Lawrence and Wishart, (1964). 171

132

Lenin wrote Draft Regulations on Workers' Control, which granted workers control of businesses with more than five workers and office employees and access to all books, documents and stocks and whose decisions were to be binding upon the owners of enterprises172. Governing through the elected soviets, the Bolshevik government began nationalizing banks and industry; and disavowed the national debts of the deposed royal regime. The Bolshevik Russian Revolution of January 1918 engendered communist parties worldwide and their concomitant revolutions of 1917-23. Few communists doubted that the Russian success of socialism depended on successful, working-class socialist revolutions in developed capitalist countries. In 1919, Lenin and Trotsky organized the world's communist parties into a new international association of workers — the Comintern, also called the Third International. By 1920, the Red Army under the command of Trotsky had largely defeated the royalist White Armies. In 1921, War Communism was ended and under the New Economic Policy (NEP), private ownership was allowed for small and medium peasant enterprises. While industry remained largely state-controlled, Lenin acknowledged that the NEP was a necessary measure for a country unripe for socialism. Profiteering returned in the form of NEP men and rich peasants (kulaks) gained power in the countryside. Nevertheless, other socialists, including ex Trotskyists, have questioned the role of Trotsky in this episode. Soviet Russia played a decisive role in the allied victory in WW II. After the war, the country became a recognised superpower - USSR. The Soviet era saw some of the most significant technological achievements of the 20th century. Its economy became the modern world's first centrally planned economy. It was based on a system of state ownership of industry managed through central Planning Commission, the State Bank and the State Commission for Materials and Equipment Supply. Economic planning was conducted through a series of Five Year Plans. The emphasis was on fast development of heavy industry and the nation became one of the world's top manufacturers of a large number of basic and heavy industrial products, but it lagged in light industrial production and consumer durables.]

172

ibid, pp. 264–65.

133

Chapter 12.

Epilogue: The Demise History, as such, is an excellent teacher. Through facts, it teaches us lessons learned by our ancestors during the past millennium. Whether, we learn from the past or just ignore the experiences mostly depends upon the current generations. History of human civilization has taught human to survive against all the odds. Sometimes, new generations have made good use of these experiences and at others completely ignored them. Of course as the civilizations had progressed, new knowledge, innovations, technological advances have motivated human to make new experiments – failed or successful – to add to the economic progress of mankind. History of thoughts is full of examples. Political Economy, as a social science is no exception to it. From our preceding analysis it is evident that great minds have evolved ideas on various economic concepts such as on value, prices, factors, systems and the functioning of economic laws. This has contributed to our understanding of the intricacies of modern economics. Moreover, we must acknowledge the fact that as the circumstances change, economic philosophy and doctrines. In these developments the historian of economic doctrines sees not the birth of any new one, but the reinstatement of old ones, adapted to new economic realities and the use of technical power infinitely superior to that of the past ages. Therefore, an economic scientist cannot regard them as original intellectual creations of economic and social life. In this short history of doctrines, I have tried my best to analyse the historical evolution of such ideas by pointing out some of the facts of time, and the development of certain economic ideas that were codified by philosophers, economists, and practical minds – of the time. It follows that political economy, as a science, has a long history. It has defined the moral, ethical, social norms and the religious rites in societies. Political economy is a science, art, and the philosophy of production, trade, income distribution, exchange and statecraft. It had existed in some form of code or the other since the dawn of human civilizations. As a systematized scientific knowledge it has existed since the VIth century 134

BC. We know, that it was first elaborated in the writings of Confucius in China. Kautilya in India further developed it and it did reach its zenith of evolution in writings of Marx. Unfortunately, over the last two and half centuries, it had suffered at the hand of scholars receiving some serious blows to its contents and forms. Though its slow demise started in 1871, it continues till this date. Three great minds – Menger, Marshall and Keynes – on one hand, deserve praise for their contributions, on the other they have played a decisive role in its death. This process was rather intensive during the XXth century such that the science in its original form is non-traceable now. The political and economic consequences of the Great Depression, and of the WW II have too greatly contributed to its fate. For some 50 years now, most scholars and universities around the world have practically abandoned it’s teaching even. Most university economics curriculums of the day have any place for the study of history of economic doctrines. However, lately, the good news is that scholars have once again started the process of rejuvenation of the science. The history of the demise of political economy begins with an unfortunate event and it was that in XVIIIth century, Greek word Ökonomie came into circulation. It was broadly accepted and used by the intellectuals of the time. Accordingly, the term and contents of traditional political economy were lost in oblivion, primarily due to the emerging marginal revolution In fact, in all sincerity, we strongly believe that the Austrian School (a heterodox school of economic thought based on the concept that social phenomena result from the motivations and actions of individuals) sowed the seeds of demise of political economy. An Austrian professor of political economy, Menger in 1871, founded the school. His work173 initiated the onslaught that continued from the late-XIXth to early- XXth century174. It must be stressed here that Menger and his fellow marginalists 175, had their fair share of guilt in this episode as their works filled-up the gaps that followed in the Marshallian microeconomics. Austrian economists, during the late-XIXth century, were

Carl Menger’s 1871 book Principles of Economics was one of the first modern treatises to advance the theory of marginal utility and was one of three founding currents of the marginalist revolution. Wieser and others closely followed those of Menger and Eugen von Böhm-Bawerk’s contributions to economic theory. Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics 174 Its major representatives i.e. Carl Menger, Ludwig von Mises, Friedrich von Wieser, Eugen Böhm-Bawerk, and Friedrich Hayek dominated Austrian economic thought. 175 Marginalism is a theory that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. Although the central concept of marginalism is that of marginal utility. Marginalists, following the lead of Alfred Marshall, drew upon the idea of marginal physical productivity in explanation of costs. A great variety of economists concluded that there was some sort of inter-relationship between utility and rarity that effected economic decisions, and in turn informed the determination of prices. 173

135

bitterly engaged in Methodenstreit (methodology struggle), in which they defended the role of theory of economics as distinct from the study or compilation of historical circumstance. The school firmly believed that the subjective choices of individuals including the individual knowledge, time, expectation and other subjective factors cause all economic phenomena. Austrians scholars sought to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism. It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis and societal groups rather than individuals. The German Historical School176 had strongly opposed such views. Just like the founders, they argued that economic science is incapable of generating universal principles and that scientific research should thus be focused on detailed historical examination. The school members were of the opinion that the English classical economists were mistaken in believing in economic laws that transcended time and national boundaries. Economics was an approach to academic economics and to public administration that emerged in the XIXth century in Germany, and held sway there until well into the XXth century. The professors involved, compiled massive economic histories of Germany and Europe. Some theoretical economists such as Schmoller, and Weber, and some prominent politicians, had been fairly critical in their approach. The school held that history was the key source of knowledge about human actions and economic matters, since economics was culture-specific subject, and hence not generalizable over space and time. The school rejected the universal validity of economic theorems. They saw economics as resulting from careful empirical and historical analysis instead from logic and mathematics. The school also preferred reality, historical, political, and social, as well as economic, to mathematical modelling. Most members of the school were also Sozialpolitiker (social policy advocates), i.e. concerned with social reform and improved conditions for the common man during a period of heavy industrialization. Professor Marshall, an academic giant, at times called — The Soaring Eagle, sitting at St. Johns, Cambridge, until his death in 1924, controlled the landscape of Economics. Marshall is considered to be one of the most influential economists of his time, largely

The representatives of this school were Wilhelm Roscher, (1817-1894), Bruno Hildebrand, (1812-1878), Gustav von Schmoller, Etienne Laspeyres, (1834-1913), Karl Bücher, Adolph Wagner, (1835-1937), Georg Friedrich Knapp, (1842-1926), Werner Sombart (1863-1941), and Max Weber (1864-1920). 176

136

shaping the neo-classical economics177, and the Cambridge School178 and was Guru to a number of known world scholars. His economics was advertised as extensions and refinements of the work of Smith, Ricardo, Malthus and Mill. Alas! Marshall shunted economics away from its classical focus on the market economy and instead popularized it as a study of human behaviour. He downplayed the contributions of certain other economists to his work, such as Walras, Pareto, and Dupuit, and only grudgingly acknowledged the influence of Jevons himself. Marshall was one of those who used utility analysis, but not as a theory of value. He used it as a part of the theory to explain demand curves and the principle of substitution. Marshall's scissors analysis, which combined demand and supply, that is, utility and cost of production, as if in the two blades of a pair of scissors – effectively removed the theory of value from the centre of analysis and replaced it with the theory of price. While the term value continued to be used, for most people it was a synonym for price. Prices no longer were thought to gravitate toward some ultimate and absolute basis of price; prices were existential, between the relationship of demand and supply. Marshall's positive influence on codifying economic thought is difficult to deny. He popularized the use of demand and supply functions as tools of price determination (previously discovered independently by Cournot); modern economists owe the linkage between price shifts and curve shifts to Marshall. Marshall was an important part of the marginalist revolution. Marshall's brief references to the social and cultural relations in the industrial districts of England were used as a starting point for late XXth century work in economic geography, and institutional economics. Definitely credit goes to him for defining: the laws of economics; inductive and deductive methods of study in economics; wants and their satisfaction; utility and demand; consumer’s surplus; elasticity of demand; supply and cost; factors of production (population, division of labour and laws of returns); internal and external economy; theory of value and time element; representative firm; theory of factor pricing; quasi-rent; and contributions to modern monetary economics. Indeed, an impressive Neoclassical economics is an approach to economics that relates supply and demand to an individual's rationality and his ability to maximize utility or profit. Neoclassical economics also uses mathematical equations to study various aspects of the economy. This approach was developed in the XIXth century, based on books by William Stanley Jevons, Carl Menger and Léon Walras, and became popular in the early XX th century. 178 Cambridge School refers to the approach to economics prevailing in Cambridge (UK) throughout the period spanning from the early days of the twentieth century to the 1970s, when it enjoyed international prestige as one of the leading centres of scientific investigation in economics Cambridge School of thought, came to limelight when Marshall first introduced the tripos degree in economics in 1903 and created a community of disciples that kept his teachings alive well after his death. They spread the ideas of the master as presented in his Principles of Economics. He shared the mission he set for economics and were perceived and perceived themselves as a group of scholars with a well-defined identity. 177

137

contribution to modern economics that paved the way to the fateful days of demise of political economy. Throughout the XXth century his microeconomics had dominated the study of Economics world-over. Together with the Keynesian economics 179 he helped forms the neo-classical synthesis,180 which today, dominates the mainstream economics.181 Although neoclassical economics has gained widespread acceptance by contemporary economists, there have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory. Such an approach towards the study of economics in post-Marshallian era had, primarily, been focussed on the determination of commodities, output, and income distribution in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory. Thus, social dimension of the economic development and economic policy had altogether been neglected. Marshall’s influence though widespread in academia around the world, but rather forceful on both sides of Atlantic. His teaching of microeconomics, particularly in the UK and US, with variations and additions, took deep roots. With increased use of mathematics and geometry economics in appearance became closer to other sciences. English and American professors, rejecting the traditional political economy, developed their own theoretical versions of economic phenomena. There is rather a long list of names. No doubt their contribution to advance economic theory is immense and thereby cannot be ignored. By now, for their original contribution to economic science, some 80 people have won (with many other honours and prizes) the Nobel Prize in Economics. I will be failing in my duty not to mention some (of course the choice being subjective) of these famous economists of the XXth century and briefly point out their contributions. Their contributions are indispensable to economic science

Keynesian economics is a compound set of macroeconomic theories about how in the short run – and especially during recessions – output is influenced by aggregate demand. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation. 180 The neoclassical synthesis was a post WW II academic movement in economics that worked towards absorbing the macroeconomic thought of Keynes into neoclassical economics. 181 Mainstream economics may be used to describe the body of knowledge, theories, and models of economics, as taught across universities. It can be contrasted to heterodox economics, which encompasses various schools or approaches that are accepted by their proponents. The economics profession has generally been associated with neoclassical economics and with the neoclassical synthesis, and over time the profession has included Keynesian approach to macroeconomics. 179

138

As far as the British economists are concerned following need to be apostrophized: F. Y. Edgeworth, in his most famous and original book, Mathematical Psychics (1881), criticized Jevons's theory of barter, and provided the marginal productivity theory, and the Edgeworth's limit theorem. But in economics he is best known by his Monopoly Pricing (1897), where he introduced into economics the generalized utility function, drew the first indifference curve, He is credited with Edgeworth's conjecture (as the number of agents in an economy increases, the degree of indeterminacy is reduced). Collection of his works in economics is available in 3 volumes of his, Papers relating to political economy, (1925). Roy F. Harrod is best known for writing, The Life of John Maynard Keynes, (1951), and for his contributions to the growth theory with his own model. He is also considered as the first Post-Keynesian economist to provide a detailed institutional exposition of the theory of endogenous money. Among many of his works he is well known for his two books Towards a Dynamic Economics, (1948); Towards a Dynamic Economics, (1948). Sir John Hicks was initially a labour economist known for his The Theory of Wages, (1932, 2nd ed. 1963). His magnum opus is his, Value and Capital, (1939). The book built on ordinal utility and mainstreamed the distinction between the substitution and income effects for an individual in demand theory. Hicks's most familiar contribution in macroeconomics was the Hicks-Hansen IS-LM Model that he later (in 1980) dismissed as a ‘classroom gadget’. James E. Meade provided his growth theory that is neo-classical in nature. It is simple and attractive as it promises a state of steady economic growth. The Theory of International Economic Policy – The Balance of Payments, (1951); The Theory of International Economic Policy – Trade and Welfare, (1955); and Principles of Political Economy, (1965–76). Arthur C. Pigou, as a teacher and builder of the School of Economics at Cambridge, trained and influenced many Cambridge economists. His work covered various fields of economics, particularly welfare economics, business cycle theory, unemployment, public finance and measurement of national output. Joan Mrs. Robinson, as a Cambridge economist of repute is known for her contributions: An Essay on Marxian Economics, (1942); The Accumulation of Capital, (1956); and Essays in the Theory of Economic Growth, (1962). Between 1962 and 1980 she wrote many economics books for the general public. On the other side of the Atlantic Ocean, we have a similar list of economists among whom I would love to mention the following: Milton Friedman is known for reviving an interest in the money supply as a determinant of the nominal value of output, i.e. the quantity theory of money. Friedman's research supported the conclusion that the shortrun effect of a change of the money supply was primarily on output but that the longerrun effect was primarily on the price level. He thus contended, “inflation is always and everywhere a monetary phenomenon” (1963). Accordingly, he rejected the use of fiscal policy as a tool of demand management. His essay, The methodology of Positive Economics, 139

(1953) provided the epistemological pattern for his own research by arguing that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism but by its simplicity and fruitfulness as an engine of prediction. Frederich von Hayek was a major social theorist and political philosopher of the XXth century who is best known for his defence of classical liberalism. He is acclaimed for his "pioneering work in the theory of money and economic fluctuations and for penetrating analysis of the interdependence of economic, social and institutional phenomena". His most valuable contribution is his book, Road to Serfdom, (1944). Wassily W. Leontief is credited with developing and introducing to economics the input-output analysis and its associated theory; the Leontief paradox (in international trade); and the composite commodity theorem. He was a strong proponent of the use of quantitative data in the study of economics. Joseph A Schumpeter was most influential among various heterodox economists, especially European, who were interested in industrial organization, evolution theory, and economic development, and who tended to be on the other end of the political spectrum from Schumpeter and were also often influenced by Keynes, Karl Marx, and others. His landmark contributions are Capitalism Socialism and Democracy, (1942) and History of Economic Analysis, (1954). Robert M. Solow is best known for his growth model, often known as the Solow-Swan neo-classical growth model. It allows the determinants of economic growth to be separated into increases in inputs and technical progress. Solow also was the first to develop a growth model with different vintages of capital. Paul A. Samuelson, more than any other contemporary economist, has helped to raise the general analytical and methodological level in economic science. He has simply rewritten considerable parts of economic theory. He has also shown the fundamental unity of both the problems and analytical techniques in economics, partly by a systematic application of the methodology of maximization for a broad set of problems. However, their contributions are important for economics, they all (except Gunnar Myrdal) have their due share in determining the fate of political economy. In their quest for making the science more precise they stand accused for depending too much on technical aspects thereby neglecting the broad aims and methods of analysis of economic phenomena of our times; and irrespective of the above fact, “IF”, a mock trial of the demise of political economy is to be staged, and one has to act as a prosecutor, one would definitely, along with Professor Marshall put them in the dock. Evidently, and without doubt, his Principles had marked a decisive transition from the comprehensive vision of political economy to professionalization and specialisation. Under his shadow, the narrowing of economics took many forms. Both in the UK and the USA, academic work shifted away from policy design toward a combination of formal mathematical theorems and rigorous empirical analysis. Even in areas of economics such as public economics 140

and mechanism design, attention was mostly focused on the questions of policy and mishmash of concerns relevant to most practical policy. Thus, the Soaring Eagle had watchfully controlled the skies of economic doctrines, and thus stand accused of connivance in the demise of political economy. Note that Marshall considered, “reasoning; perception; and observation and possession of a scientific imagination”, as three basic requirements of study of economics. What, alas! emerged is an exceeding reliance on the use of mathematics. While some British economists of the pre-WW II era had expressed their reservations regarding the over-use of mathematics in economics182 and both Marshall and Keynes were themselves were fairly sceptical about the use of mathematics (mind that the latter was well trained in it), but could not stop the crest of the wave that swept the wide field of political economy, dividing it into macro and microeconomics. Side by side with Marshall, Keynes, who not only was trained by him as his favourite star student, who despite his flirtations with the probability theory and philosophy, had succeeded in transforming economic policies of the post WWII era. Nevertheless, Keynes, being a sharp mind, observing the prevailing conditions around the world, soon became aware of the significance of macroeconomic management for the depressed and war-torn economies. He produced his epic treatise The General Theory of Employment, Interest, and Money, (1936), which affirmed his position as a great scholar. Keynes’s along with Schumpeter, whose Capitalism, Socialism, and Democracy, and Hayek’s The Road to Serfdom, were definitely major influential economists of the XXth century, who by reflecting upon the science of political economy in a broad sense, knitted together the web of inter-connected issues of politics, culture, institutions, and economic theory. Ideas on these issues, in the minds of these influential economists, were the result a long

Let us remind that even Marshall and Keynes, both were sceptical of its overuse. In a letter to A. R. Bowley, Marshall writes: 182

‘I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I want more and mire on the rules – (1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them until you are done. (3) Translate into English. (4) Then illustrate by examples what are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4) burn (3). This last I did often’, (Quoted in Pigou, A. C. (1966) Memorials to Alfred Marshall, London: Kelly, p. 427). Similarly, J. M. Keynes adds that ‘…symbolic pseudo-mathematical methods of formalising a system of economic analysis…allows the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols’, (Keynes, J. M. (1936) General Theory, London: Macmillan, pp 297-298).

141

gestation period. In a sense, these ideas contained, their considered reflections on the world crisis, through which they had been living. The political economy of Keynesianism—never received detailed attention either from Keynes or from the influential economists who worked out the implications of his theory in the post-war era. Quite the reverse, The General Theory, as its ideas worked their way through the economics profession, had the effect of excising politics and political institutions from the analysis of market economies. Keynesian bold vision (as drawn (in his Essays in Persuasion, 1931; and later in General Theory, 1936) cemented the overall position of economists as professionals and technocrats good for government, for they required specialised people drained out of economics. Post WWII, legacy of Keynesianism was the rapid spread of the Cambridge (UK) and Chicago School’s doctrines forcing mathematization of economics concentrating on macro and micro themes. Furthermore, some US East coast economists were also complacent. The question is, why was this increased dominance of mathematics in economics? Hahn blames Friedman’s ‘as if’ doctrine and the romantic desire to pass as a scientist. It has been argued that at the end of the XIXth century, with the so-called marginal revolution, launched by Walras, Cournot, Jevons, Pigou, Edgeworth and some others intending to make the Science more precise like physics, and raise its status increasingly used mathematics in Economics. The social and political environment, real problems and events attracted only minor attention of the economists. Public policy matters came to dominate the scene. Thus, particularly after 1950s, specific issues dominated the study of economics. Now, just an epilogue. In our story, in context to the study of economic doctrines, in new millennium, I very much hope that: (a) as a result of the first major economic and financial crisis and the depression that followed in the 21st century (2007-2017), the macroeconomists split into purists and pragmatists – drawing opposite messages from the episode. The purists blamed the stagflation on restless central banks trying too hard and the pragmatists that markets malfunction, wages fail to adjust and prices are sticky. (b) the recession of the XXIst century also placed economic science in a delicate situation. Two central parts of the discipline – macroeconomics and financial economics – were put to serious re-examination. The attack was, however, three pronged: (i) that macro and financial macroeconomics helped cause the crisis, (ii) that it failed to foresee and stop it, and (iii) that economists have no idea how to fix it. (c) with the long lasting crises, the fragile consensus of monetary/fiscal policies was blown apart. With their compromise tools became useless, both sides have retreated to their roots. Keynesians have become uncritical of fiscal stimulus; and even with zero short-term interest rates and banking crisis on hand the monetary policy worked less 142

well. Naturally, there is a clear case for reinvention. Just as the Great Depression spawned Keynesianism, stagflation of 1970s fuelled monetarism. So would perhaps the latest crisis, as, we believe, creative destruction is underway. The past crisis could still be good for economics. (d) the post-WW II Economics being rigorously dependent on mathematics, lost touch with reality. Many of us would agree that mathematics is a language of expression. Therefore, hardly there can be an objection to its use wherever appropriate. The only concern could be that the users of it should know its limitations as well as its scope. From its beginnings economics has been couched in formal arguments over the issue. It is often claimed that the virtue of mathematics is that assumptions, deductions and conclusion are spelt out precisely, whereas descriptive economics permits fuzziness. We feel strongly feel that fuzziness enters into mathematical economics when a, b, or c is identified with individuals, firms, and equipment. The identification of the precise symbol with often-fuzzy reality creates lack of precision and blurs the concept 183. Although, economics of Smith as a social science has indeed come a long way, but what remains at a loss is that the trained economists have lost touch with the reality of daily economic life and the institutions. To the surprise of many not even a sound technical knowledge of methods is of any great help to solve the real problems of economic growth, employment, inflation, recession etc.; and (e) the question of specialised economics education too came to dominate the science. In intellectual circles, it is said that the specialist ‘knows more and more about less and less until he knows everything about nothing’. The real question is should a well-trained economist deal with few areas or spread his investigation widely? We feel that it should be left to individual choice. A widely held criticism of modern American education of economics is that it has, unfortunately, become too narrow and too far from reality. The economics departments in universities all over are awarding degrees to generations of ‘idiots’ savants, brilliant at esoteric mathematics yet innocent of actual economic life’. British and European education of economists with the growing popularity of business studies is slowly moving on a similar path. In this respect, one would rather agree with Streeten and favour ‘being a broad-gauged economist and vaguely right to being precisely wrong’. Let us not forget the Economics is not a science in which controlled experiments can be conducted and no economic theory has ever been falsified by an experiment. With increased specialization (and professionalization) within universities, interdisciplinary work has become increasingly uncommon. Indeed, during the XX th Let us also not forget that in the post-war years many distinguished mathematical economists have won Nobel Prizes in Economics. However, most of them including from Jan Tinbergen, (1903-1994), and Ragnar Frisch, (18951973), to Simon Kuznets (1901-1985)), Kenneth Arrow, (1921-2017), M. Debreu (1921-2004), Lawrence Klein, (19202013), Edmund Phelps (1933-), and Wassily Leontief, (1906-1999), have all been critical of the abuse and excessive use of mathematics. 183

143

century, the process of disciplinary specialization reduced the intersection between economics, philosophy and politics and impoverished our understanding of society. Modern economics in particular, largely, ignores the role of institutions and the contribution of moral philosophy and politics. New Thinking in Political Economy, should/will, surely stimulate new work that will combine technical knowledge provided by the dismal science and the wisdom gleaned from the serious study of the worldly philosophy. This will reinvigorate our understanding of the social world by encouraging a multidisciplinary approach to the challenges confronting society in the next century. As can be noticed, we had started our analysis with a note of pessimism, but we do look forward with optimism. Although, so far, in the academic circles, the term political economy is still in use but it refers only to a narrow study of the economy such that other socio-political considerations are absent. It is being used to refer to Marxian economics, public choice, or to economic policy advice given by the economists to the government. A more recent focus has been on modelling economic policy and political institutions as to interactions between agents and economic and political institutions, including the seeming discrepancy of economic policy and economist's recommendations. From the mid-1990s, a short-lived revival was on the horizon, such that the field started to cover hypotheses on comparative economic systems and institutions, the break-up of nations, change of political institutions in relation to economic growth, development, financial markets and regulation, the role of culture, ethnicity and gender, etc. Beginning of the new century, however, for some reasons, has put an end to it. Definitely, recent developments in the new political economy (which treats economic ideologies as the phenomenon to explain the traditions of Marxian political economy) and the International Political Economy (an interdisciplinary field comprising approaches to the actions of various actors) are commendable. Furthermore, the use of a political economy approach by anthropologists, sociologists, historians, and geographers as an instrument of reference to the regimes of politics or economic values those emerge primarily at the level of states or regional governance, but also within smaller social groups and social networks. Just to conclude, high hopes are with us that a developing new thinking is aimed to encourage scholarship in the domain of politics, philosophy and economics with the objective of understanding socio-economic changes of the society.

144

Recommended Literature Aquinas, St. T. (1993) Selected Philosophical Writings, New York: Oxford University Press, (Edited by T. McDermott). ____ (1932), Summa Theologica, Turin: Libraria Marietti. Aristotle (1962) The Politics, Harmondsworth: Penguin Books; (Tr. by T. A. Sinclair). Arrow, K. (1951) Social Choice and Individual Values, New York: Wiley. Arrow, K. and F. Hahn (1971) General Competitive Analysis, San Francisco: Holden Day. Ashraf N., Camerer C. F., and Loewenstein, G. (2005) ‘Adam Smith, Behavioural Economist’, Journal of Economic Perspectives, Vol. 19, No. 3. Augustine, St. (1992) Confessions, New York: Oxford University Press; (Tr. by H. Chadwick). Barber, W. J. (1967) A History of Economic Thought, London: Penguin Books. Blaug, M. (1985) Economic Theory in Retrospect, New York: Cambridge University Press. Böhm-Bawerk, E. V., (1932), Capital and Interest: A Critical History of Economical Theory, Reprint, New York. Bonar, J. (1927) Philosophy and Political Economy, London: McMillan. Braudel, F. (1993) A History of Civilisations, New York: Penguin Books. Buchnan, J. (1995) ‘The Poverty of Economics’, in Prospect Magazine, Issue 3, Dec. Caesar, J. (1967) The Civil War, Harmonsworth: Penguin. Cairnes, J. E. (1874) Some Leading Principles of Political Economy Newly Expounded, London. Cantillon, R. (1755) Essai sur la natur du commerce en general, Reprinted for Harvard University, Boston, 1892. Chinard, G. (1931) The Correspondence of Jefferson and Du Pont de Nemours. With an Introduction on Jefferson and the Physiocrats. Baltimore: Johns Hopkins University Press. Cicero (1960) Selected Works, London: Penguin Books; (Tr. by M. Grant). Confucius (1996), The Analects, Ware: Wordsworth Classics; (Tr. by A. Waley). Copleston, F. (1993) A History of Philosophy, Vol.1 and II, New York: Doubleday. Cournot, A. (1838) Researches into the Mathematical Principles of the Theory of Wealth, (tr. 1897), New York (1927). Eatwell, J., Milgate M., and P. Newman (1989) The ‘invisible hand’, London: Macmillan. Elster, J. and J. Roemer (eds.) (1986) Foundations of Social Choice Theory, New York: Cambridge University Press. Etzioni, A. (1988) The Moral Dimension: Toward a New Economics, New York: Macmillan. Friedman, M (1953) Essays in Positive Economics, Chicago: University Press. ____ (1962) Capitalism and Freedom, Chicago: University Press. Gaffney, M. and Harrison, F. (1994) The Corruption of Economics, Shepheard-Walwyn, London. Galbraith, J. K. (1974) Economics and Public Purpose, Andrew Deutsch, London. Gide, C. and C. Rist (1915) A History of Economic Doctrines, London: Oxford University Press; (Tr. by R. Richards). Gordon, S. (1991) The History and Philosophy of Social Science. New York: Routledge. Gray, A. (1931) Development of Economic Doctrine – An Introductory survey, Longmans Green & Co. London.

145

Hausman, D. (1992) Essays on Philosophy and Economic Methodology, Cambridge: University Press. Hausman, D and M McPherson (1996) Economic Analysis and Moral Philosophy, Cambridge: University Press. Herodotus (1998) The Histories (Tr. Waterfield, R.), Oxford: University Press. Higgs, H. (1897) The Physiocrats: Six Lectures on the French Economists of the 18th Century. New York: Macmillan. Hirsch, F. (1977) Social Limits to Growth, Routledge & Kegan Paul, London. Horvat, B. (1983), The Political Economy of Socialism: A Marxist Social Theory, London: Routledge. Hume, D. (1996) Selected Essays, New York: Oxford University Press. Humphrey, T. M., (1999), ‘Mercantilists and Classicals: Insights from Doctrinal History’, Federal Reserve Bank of Richmond Economic Quarterly, Vol. 85/2 Spring Jevons, S. (1884) The Theory of Political Economy, II ed., London. Keynes J. M. (1931) Essays in Persuasion, (1931), New York: Norton, 1963. _____ (1936) A General Theory of Employment, Interest and Money, London: Macmillan. Keynes, J. N. (1891) The Scope and Method of Political Economy, London: Macmillan. Koopmans, T. (1957) Three Essays on the State of Economic Science, New York: McGraw Hill. Marshall, A. (1890) Principles of Economics, 9th edn. (1961), London: Macmillan. Marx, K. (1876) Das Kapital, vol. I, Engl. Ed. 1976, Harmondsworth: Penguin. Meng Tzu (1895) The Works of Mancius, in the Four Books, Shanghai: Chinese Book Co. Menger, K. (1871) Principles of Economics, Berlin: L. von Mises Institute, 2011. ____ (1933) Untersuchungen über die Methode der Socialwissenschaften, und der Politischen Oekonomie insbesondere, Leipzig: Verlag Duncker und Humbolt. Mill, James S. (1821) Elements of Political Economy, London: Henry G. Bohn. Mill, John S. (1848) Principles of Political Economy, London: Routledge. ____ (1965) The Collected Works of John Stuart Mill, vols. i-iii, (ed. J. M. Robson), Toronto and London. Mirabeau, Marquis de (1973) François Quesnay: The Economic Tables (Tableau économique), New York: Gordon Press. Mishan, E. J. (1967) The Costs of Economic Growth, Praegar, New York. Montchrestien, A. (1615) Traicté de l'oeconomie politique, F. Billacois, ed., 1999, Critical Edition. Morrow, G (1923) The Ethical and Economic Theories of Adam Smith, New York. Myrdal, G. (1957) Economic Theory and Underdeveloped Regions, Methuen, London. ____ (1968) Asian Drama: An Inquiry into the Poverty of Nations, Pantheon, New York. Nemours, Pierre Samuel. “On the Origin and Progress of a New Science.” Commerce, Culture, and Liberty: Readings in Capitalism before Adam Smith. Henry C. Clarke, ed. Indianapolis, IN: Liberty Fund, 2003. Pareto, V. (1896-7) Cours d'economie politique, Lausanne. Pigou, A. C. (1928) The Economics of Welfare, Cambridge: Cambridge University Press. Plato (1955) The Republic, London: Penguin. _____ (1970) The Laws (Tr. Saunders, J.), Aylesbury, Bucks: Penguin. _____ (1980) The Nicomachean Ethics, New York: Oxford University Press. _____ (1992) The Trial and Death of Socrates, New York: Dover Publications Inc. Quesnay, F. (1758) ‘Tableau économique’, Journal da l'agriculture, du commerce - & des finances, 1766:11-41.

146

Ricardo, D. (1817) The Principles of Political Economy, (ed. Gonner, 1891), Cambridge University Press. Robbins, L (1935) An Essay on the Nature and Significance of Economic Science, London: McMillan. Roll, E. (1973) History of Economic Thought, London: Faber & Faber. Roscher, W. (1878) Principles of Political Economy, New York: W. Holt. Say, J. B. (1803) A Treatise on Political Economy; or The Production, Distribution and Consumption of Wealth, (tr. 1821), Boston. Schumpeter, J. (1954) History of Economic Analysis, New York: Oxford University Press. Senior, N. (1836) An Outline of the Science of Political Economy, Library of Economics, London. Sharma, S. (1998) John Maynard Keynes: Keynesianism into the Twenty-First Century, London: Edward Elgar. ____ (2002) Economics Does Matter: About Economics and Economists, Zagreb: Mikrorad. ____ (2010) Reflections on the Philosophical Foundations of Economics, Zagreb: Mikrorad. ____ (2015) Economics in an Awkward Corner, Collected Works (Ed. by Škare, M., and Tomić, D.), FET ‘Dr. Mijo Mirković), University of Pula. ____ (2019) The Lost Cause: Socialism Drifted to Oblivion, Zagreb: S. Sharma & M. Mikić. Smith, A (1981) An Inquiry into the Causes of the Wealth of Nations, Vol. 1 & 2, (Eds. Campbell, Skinner and Todd) Indianapolis: Liberty Foundation. ___ (1976) The Theory of Moral Sentiments (Eds. Raphael and Macfie), Oxford: University Press. Stilwell, F. (2013) Political Economy: The Contest of Economic Ideas, Oxford University Press. _____ (2019) ‘From Economics to Political Economy: Contradictions, Challenge and Change’, American Journal of Economics and Sociology, 47:1, pp. 35-62. Streeten, P. (1990) ‘American Economics Education’, mimeo. Thornson, T. (2017) From Economics to Political Economy: The Problems, Promises and Solutions of Pluralist Economics, Routledge, Abingdon. Trevelyan, G. M. (1959) A Shortened History of England, Harmondsworth: Pelican Books. Turgot, R. J. (1769) 'Reflexions sur la formation et la distribution des richesses', Ephemerides du citoyen, (Republished in Oeuvres ed. by Dupont de Nemours, Vol. V, Paris 1808). Varoufakis, Y., Halavi, J. and N. J. Theodorkis, (2011) Modern Political Economy: Making Sense of the Post-2008 World, Routledge, Abingdon. Voegelin, E. (1957) The World of the Polis, Baton Rouge. Walras, L. (1874) Elements d'economie politique pure, Paris., 4th edn. (1954), translated by William Jaffe, Homewood: Irwin Publishers. Wells, H. G. (1936) A Short History of the World, Harmondsworth: Pelican Books. White, M. J. (2003) Political Philosophy: A Historical Introduction, Oxford: Oneworld. Whitehead, A. N. (1987) Science and Philosophy, London: Ashgate. Yu-lan, F. (1952) A History of Chinese Philosophy, (Tr. Bodde, D.), Prnceton: University Press.

147

Index of Some Cited Scholars (in footnotes) Aristotle’s, (384-322 BC) Banot, de Gabriel (1709-1785) Bastiat, F. (1801-1850) Becker, Gary (1930–2014) Bentham, Jermy (1806-1873) Böhm-Bawerk, E. (1851-1914) Brentano, Lujo (1844-1931) Brissot, Jacques Pierre (1754-1793) Bücher, Karl (1847-1930) Campanella, Tommaso (1568-1639) Cantillon, Richard (1680-1734) Carbonaro, Bazard (1791-1832) Chamberlin, Edward (1899-1967) Child, Josiah Sir, (1630-1699) Cicero, Marcus Tullius (100-44 BC) Coase, Ronald (1910–2013) Cole, G. D. H. (1889-1959) Comte, Auguste (1798-1857) Condillac, E. B. de (1714-1780) Condorcet, N. de (1743—1794) Confucius, (551-478 BC) Cournot, Augustine (1801-1877) Daries, Joachim George (1714-1791) Darwin, Charles (1809-1882) Dobb, M. H. (1900-1976) Edgeworth, F. Y., (1845-1926) Engels, Frederich (1820-1895) Fama, Eugene (b. 1939) Fichte, J. G. (1762-1814) Fogel, Robert (1926–2013) Fourier, Charles (1772-1837) Friedman, Milton (1912–2006) Gale Johnson, D. (1916-2003) Gambattista, Vico (1744-1868) Garnier, J. P (1813-1881) Godwin, William (1756-1836) Gournay, J. C. M. Vincent de (1712-1759)

Grotius, Hugo (1583-1645) Guillebaud, C. W. (1890-1971) Hansen, Lars Peter (born 1952) Harrod, Roy F. (1900-1978) Hartley, David (1705-1757) Hayek, Friedrich A. von (1899–1992) Hegel, G. W. F. (1770-1831) Henderson, Hubert Douglas (1890-1952) Hicks, Sir John, (1904-1989) Higgs, Henry (1864-1940) Hildebrand, Bruno (1812-1878), Hobbes, Thomas (1588-1679) Hobson, S. G. (1870-1940) Hornigk, Philipp von (1638-1712) Hume, David (1711-1776) Jevons, Stanley (1835-1882) Justi, Johann H. Gottleib von (1717-1771) Kahn, R. F. (1905-1989) Kaldor, Nicholas (1908-1986) Kalecki, M. (1899-1970) Kautilya, (around 350 BC) Keynes, J. M. (1883-1946) Knapp, Georg Friedrich (1842-1926) Knight, Frank (1885–1972) Laspeyres, Etienne (1834-1913) Lassalle, Ferdinand (1825-1864) Lavington, F. (1881-1927) Le Play (806-1882) Leontief Wassily W., (1906-1999) Leroux, Gaston (1868-1927) Lessius, Leonardus (1554-1623) Locke, John (1632-1704) Lucas, Robert (born 1937) Mably, Gabriel (1709-1785) Malthus, Thomas Robert (1766-1832) Marshall, Alfred (1842-1924) Marx, Karl (1818-1883)

i

McCulloch, J. R. (1789-1864) Meade, J. E. (1907-1995) Meslier, Jan (1664-1729) Mill, James S. (1773-1836) Mill, John S. (1806-1873) Mirabeau, Marquis de (1715-1789) Montchretien, Antoine de (1575-1621) Montesquieu, Charls Louis (1743-1794) More, Thomas (1568-1639) Morelly, Etinne (1717-1778) Mun, Thomas Sir (1571-1641) Nemours, Pierre S. (1739-1817) Owen, Robert (1770-1857) Pigou, Arthur Cecil, (1877-1959) Posner, Richard (born 1939) Pufendorf, Samuel von (1632-1694) Quesnay, François (1694-1774) Rau, Karl H. (1792-1870) Ricardo, David (1773-1842) Riqueti, Gabriel (1749-1791) Robertson, D. H. (1890-1963) Robinson, Austin E. G. (1897-1993) Robinson, Joan (1903-1983) Rodbertus, Karl (1805-1875) Rodrigues, Olinde (1795-1851) Roscher, Wilhelm (1817-1894) Rousseau, J. J. (1712-1778) Saint-Médard, de Rivere (1719-1801) Saint-Simon, Henri (1760-1825) Samuelson, Paul, (1915-2009) Sax, Emil (1845-1927) Say, J. B. (1767-1832) Schmoller, Gustav (1838-1917) Schultz, Theodore (1902-1998) Schumpeter, Joseph A., (1883-1950) Sidgwick, (Henry 1838-1900) Senior, Nassau (1790-1864) Serra, Antonio (late XVIth century) Shove, Gerald F. (1887-1947) Sismondi, Jean C. L. de (1773-1842) Smith, Adam ((1723-1790) Socrates (469-399 BC) Solow, Robert M., (1924-)

Sombart, Werner (1863-1941) Sraffa, Piero (1898-1983) St. Antonine, (1389-1459) St. Augustine of Hippo, (354-430) St. Thomas, Aquinas (1225-1274) Stigler, George (1911–1991) Stone, Richard N. (1913-1991) Storch, Heinrich (1766-1835) Thompson, William (1775-1833) Turgot, Anne Robert Jacques (1727-1781) Vico, Giambattista (1668-1744) Wagner, Adolph (1835-1937) Walras, Leon (1834-1910) Weber, Max (1864-1920) Wieser, Frederich (1851-1926)

ii

Index Aristotle, 9-16, 30, 35, 106, 118 Bastiat, 3, 74-77, 88, 93-98, 108 Blanc, 57, 64-70, 97, 119 Bodin, 19 Böhm-Bawerk, 37, 75, 107, 111, 127, 131 Botero, 19 Bucher, 91 Buchez, 113 Cabet, 64, 67 Cairnes, 75 Carlyle, 48 Cicero, 13, 14, 30 Classical School, 24, 58, 68, 70, 80-89, 107, 110 Colbert, 19, 20, 69 Comte, 23, 62, 80, 81, 87, 92, 93 Condillac, 5, 32, 47, 107 Condorcet, 34, 49 Confucius, 7, 8, 130 cost of production, 25, 37, 42, 53, 64, 83-85, 110, 133 Cournot, 3, 4, 107, 111, 133, 138 Distribution, 1, 2, 12, 16, 25-29, 37, 39, 42-49, 51, 59, 60, 61, 65, 71, 82, 87, 95-102, 108122, 130, 134 Division of labour, 2, 10, 12, 36, 37-45, 54, 72, 95, 116, 133 Equalitarianism, 35 Equilibrium, 37, 49, 55, 84, 107-111, 119, 132 feudal class, 15 Forbonnais, 35 Fourier, 57-70, 119 Free trade, 19, 21, 75, 76, 78, 79, 85 Godwin, 49, 61 Hedonists, 109, 110 Hildebrand, 90-93, 132 Historical School, 19, 70, 87-93, 97, 109, 132 Hobbes, 11, 31, 32 Humanitarianism, 61 Hume, 32, 33, 38, 55

Hutcheson, 32, 35, 38 Interst, 38 Carl Menger, 69, 111,130-133 Kautilya, 8, 9, 130 Keynes, 50, 130-137 Knies, 90, 91, 93 laissez-faire, 24, 57, 58, 74, 79, 93-98, 115 Lassalle, 67, 75, 84, 94, 96, 97, 98, 102, 124 le Play, 109, 112 Lenin, 121, 128, 129 Leroux, 64, 67, 68, 76, 118 Liberalism, 3, 39, 58, 62, 74, 79, 80, 88, 89, 97, 101, 115 List, 19, 57, 69, 70, 85, 98 Mably, 61 Malthus, 48-54, 57, 68, 74, 75, 77, 81, 83, 95, 133 Manchester School, 4, 79, 98 Marshall, 22, 75, 91, 107, 112, 130-137 Marx, 3, 50, 56, 67, 89, 91, 96, 97, 102-108, 117, 120-130, 136 Menger, 32, 89, 107, 109, 110, 131, 132 Mercantilism, 18, 19, 20, 25, 28, 57, 69 Mill, 19, 33, 37, 40, 44, 51-55, 74, 80-88, 93, 107, 115, 133 Mirabeau, 18, 23, 25, 28, 35, 49 Montesquieu, 34, 49 Morelly, 61 Natural law, 15, 24, 30-36, 83, 87, 95, 109 Net product, 25-29, 39 Owen, 57, 61-67, 70, 106, 114, 118, 119 Physiocrats, 1, 4, 6, 21, 23-29, 35, 38, 40, 43, 46, 52, 57, 63, 74, 80 Plato, 9-12, 59, 61, 106, 118 Profit, 37, 40-44, 48-51, 64-66, 89, 75, 83, 87, 98, 104-106, 119, 122, 126, 127, 132, 134 Protectionism, 57, 69 Proudhon, 3, 57, 70-, 71-76, 103, 119, 121 Psychological School, 109, 110

iii

Quesnay, 22-29, 35, 38, 39 Rent, 3, 16, 20, 26, 37, 42-46, 48-55, 78, 85-92, 105, 106, 108, 111, 119, 133 Revolution of 1848, 71, 72, 102 Ricardo, 3, 44, 48, 51-58, 68, 74-85, 89, 95, 103, 107, 108, 119, 133 Rodbertus, 56, 67, 94-98, 103 Roscher, 89, 90, 91, 132 Saint-Simon, 61-66, 70, 80, 103, 118, 119 Say, 2-4, 37-47, 57, 58, 68, 69, 74, 81, 89 Schmoller, 20, 89-99, 109, 132 Self-interest, 33, 49, 76, 81, 82, 92 Senior, 54, 77, 78, 85, 89 Serra, 19, 22 Shaftesbury, 32 Sidgwick, 75 Sismondi, 3, 57-62, 66, 68, 87, 94, 98, 103 Smith, 1, 6, 9, 15-22, 33-48, 51, 52, 55-58, 68, 69, 74, 79-89, 93-95, 108, 133, 139

Social Catholicism, 102, 109, 113, 114 Social Protestantism, 109, 114 Socialism, 4, 51, 61-70, 74, 79, 82, 87-89, 96, 100-108, 112-129 St. Aquinas, 14, 16, 30 St. Augustine, 14 Tabeleau économique, 26 The Mathematical School, 109, 111 Theory of money, 12, 16, 38, 45, 55, 135 Turgot, 23, 25, 29, 37, 38, 47 Use value, 117, 122 Value in exchange, 12, 16, 36, 41, 103 Vico, 34 Wages, 16, 37-46, 51-54, 78, 84, 89, 92-99, 104, 111-122, 126, 138 Walras, 32, 37, 89, 107, 110-112, 132, 133, 138 Wealth, 35 Weber, 125, 132

iv

Images of the Famous Scholars (Note: All images have been copied from Wikipedia)

Confucius (551-478 BC)

Plato (429-347 BC)

Arstotle (384-322 BC)

F. Quesnay (1694-1774)

Adam Smith (1723-1790)

David Ricardo 1773-1842)

T. R. Malthus (1766-1832)

John S. Mill (1806-1873)

Karl Marx (1818-1883)

Karl Rodbertus (1805-1875)

Leon Walras (1834-1910)

F. Y. Edgeworth (1845-1926)

J. B. Say (1767-1832)

E. B. Condillac (1714-1780)

H. Saint-Simon (1760-1825)

Louis Blanc (1811-1882)

v

N. De Condorcet (1743-1794)

A.R.J. Turgot (1727-1781)

J. C. L. Sismondi (1773-1842)

Frederich List (1789-1846)

Carl Menger (1840-1921)

Alfred Marshall (1842-1924)

A.C. Pigou (1842-1924)

J. M. Keynes (1883-1946)

F. A. Hayek (1899-1992)

Mrs. J. Robinson (1903-1983)

Nicholas Kaldor (1908-1986)

J. R. Hicks (1904-1989)

vi

vii