THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA RIVERSIDE GIFT OF Dr. Gordon Watkins HISTORY OF ECONOMIC THOUGHT THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO SAM FRANCISCO MACMILLAN & CO., LIMITED LONDON BOMBAY CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, LTD. TORONTO HISTORY OF A CRITICAL ACCOUNT OF THE ORIGIN AND DEVELOPMENT OF THE ECONOMIC THEORIES OF THE LEADING THINKERS IN THE LEADING NATIONS BY tvV^ LEWIS H^HANEY, PH.D. ASSOCIATE PROFESSOR AND CHAIRMAN OF THE SCHOOL OF ECONOMICS OF THE UNIVERSITY OF TEXAS AUTHOR OF " A CONGRESSIONAL HISTORY OF RAILWAYS" THE MACMILLAN COMPANY 1913 All rights reserved H675 S COPYRIGHT, 1911, BY THE MACMILLAN COMPANY. Set up and electrotyped. Published June, 19x1. Reprinted April, 1913 ; July, 1913- NorfaooB J. 8. Gushing Co. Berwick Ashley, " Aristotle's Doctrine of Barter," Quarterly Journal of Economics, Novem- ber, 1895 ; Simey, " Economic Theory among the Greeks and Romans," Econ. Rev., 1900; Oncken, Die Staatslehre des Aristoteles, 1870-1875; Marigny, Histoire de V Economic Politique des Anciens Pen pies; Dubois, Prttis de I' Histoire des Doct. Econ., Chap. I, and bibliography there pre- sented. The chief sources are the Politics and Ethics of Aristotle, and Plato's Republic and Laws; and these works are available in the excel- lent translations by Jowett and by Welldon. 39" 40 ECONOMIC THOUGHT one purpose and another for another ; and when these partners and helpers are gathered together in one habitation the body of inhabitants is termed a State . . . And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be for their good." l The origin of the state, then, is traced to the lack of individual self-sufficiency in the satisfaction of wants, and to the advantage of specialization and exchange. Such reasoning indicates an important step toward the development of economic analysis. On this point, Aristotle's doctrine is less purely rational. He assumes that an impulse to political association is innate in all men : " Man is naturally a political animal." The genesis of the state is found in the household, which, in its turn, rests upon the inability of male and female to exist independently, and upon the inequality among men which leads to slavery. The house- hold is " the association naturally formed for the supply of everyday wants." 2 Then came the village, and finally the state : " Lastly, the association composed of several villages in its complete form is the State, in which the goal of full independence may be said to be first attained." The state is formed to make life possible. Division of Labor. Plato's discussion of specialization and exchange clearly suggests the idea of " division of labor." In- deed, the Greek philosophers' concept of division of labor, while crude, is the ultimate father of the later discussions of Hutcheson, Hume, and Adam Smith. When, however, Plato says : ". . . we must infer that all things are produced more plentifully and easily and of a better quality when one man does one thing which is natural to him and does it at the right time, and leaves other things," 3 he does not have in mind the complex modern questions connected with division of labor. The Greek philosophers refer rather to a simple separation of employments, and their treat- ment lacks the significance that comes from the connection of the subject with a system of economics. 1 Republic, Bk. II, pp. 369 ff. Ed. Steph. ; Laws, Bk. Ill, pp. 678 ff. * Politics, Bk. I, Chap. II (Welldon, p. 3). 8 Republic, Bk. II, p. 370. GREEK ECONOMIC THOUGHT 41 Their ideas concerning division of labor rested ultimately upon an analysis of human wants. The three primary wants of man, said they, are for food, clothing, and shelter. Therefore, there are at least husbandmen, weavers and shoemakers, and house builders; while smiths and carpenters come into existence to relieve the husbandmen. Exchange among these makes a mer- chant class necessary. Few places, moreover, are self-sufficient, hence foreign traders and sailors find employment. Meanwhile, another group, consisting of hirelings and slaves, arises. The function of the retail trades is validated on the ground that without them the seller might be compelled to wait or to depart with his goods undisposed of. The Social Viewpoint Taken. In emphasizing the ad- vantage of division of labor, society or the state was thought of primarily rather than the individual, and the conclusion may be drawn that, in general, Athenian thinkers stressed the solidarity of society. They by no means overlooked the interests of the individual, but always the individual was primarily the citizen, a citizen who, on the one hand, depended upon the state for his highest development, and who, on the other hand, by his develop- ment promoted the highest good of the whole. They exalted the state above the man ; civilized man, they reasoned, is not to be thought of outside the state ; without the state one is either more or less than a man. Aristotle's reasoning is in point: " Thus the state is by nature clearly prior to the family and to the individual, since the whole is of necessity prior to the part ; for example, if the whole body be destroyed, there will be no foot or hand, except in an equivocal sense, as we might speak of a stone hand. . . . The proof that the state is a creation of nature and prior to the individual is that the individual, when isolated, is not self-sufficing ; and therefore he is like a part in relation to the whole." l Plato, in accord with his highly idealistic and communistic beliefs, puts the case more forcefully : You are to regard yourself and possessions " not as belonging to yourselves, but as belong- ing to your whole family, both past and future, and yet more do I 1 Politics, Bk. I, ch. ii. 42 ECONOMIC THOUGHT regard both family and possessions as belonging to the state; wherefore ... I will legislate with a view to the whole, consider- ing what is best both for the state and for the family, esteeming as I ought the feelings of an individual at a lower rate. . . ." 1 Indeed, regulations similar to those found among more eastern peoples were not lacking in Athens. For example, there were inspectors of weights and measures, inspectors of goods placed on sale, harbor overseers, etc. The price of salt was regulated ; the exportation of wheat was forbidden ; and the slaughter of sheep and goats during lambing time was not allowed. The state also pensioned those crippled in war, and in some cases gave alms to the destitute. Inheritance. As further evidence of this conception of so- ciety, and as an indication of the static character of the ideal, Plato's plan for regulating inheritance 2 and population 3 is of in- terest. In his ideal state each was to have an inalienable allot- ment of land. Each was to choose a single heir, adopting a son if he had no children, or choosing a husband for his daughter, if male issue were lacking. Other property might be distributed among his remaining children. 4 Clearly one object was to keep the family intact and to preserve its property to it ; and these measures remind one of those adopted by the Hebrew lawgivers. Plato charges ancient legislators with being too good-natured in allowing a man to dispose of his property by will : " . . . they were afraid of the testator's reproaches, and so they passed a law to the effect that a man should be allowed to dispose of his prop- erty in all respects as he liked ; but you and I, if I am not mis- taken, will have something better to say to our departing citi- zens," 8 and he goes on to express his belief that the interest of the state should predominate. All this is surely suggestive as to present-day questions of regulating inheritances. 1 Jowett's Plato, Vol. V, p. 310. 2 Laws, Bk. V, p. 740; Bk. XI, pp. 923, 924. (Ed. Steph.) > 8 Republic, Bk. V, pp. 460, 461. (Ed. Steph.) 4 This was in Plato's second-best state, where communism of wives and children did not obtain. 5 Jowett's Plato, Vol. V, pp. 310, 311. GREEK ECONOMIC THOUGHT 43 Population. But the question arises, what was to become of children other than those who were heirs to the father's lot ? In answer, Plato provided for a careful regulation of popula- tion. This was necessary to preserve the social equilibrium. His state was to consist of a limited number of citizens (5040). If the number began to decrease, prizes might be offered to en- courage a growth of population ; if there were an excess, colonies would be established. In this way that precise regulation of life contemplated by the philosopher might be rendered possible. Thus the thought of the leading Athenian philosophers was hardly individualistic, though they went further than the Orien- tals in analyzing the state (society) into its component parts; for, like their government, the spirit of their philosophy was some- what more democratic, and they saw that the welfare of the state depended upon that of the individual. Communism. Probably the most discussed phase of that part of Greek philosophy which has distinct economic bearing is communism. As this subject has a close relationship to the ques- tion of social solidarity and individualism, it is naturally men- tioned in this connection. Plato and Aristotle differed greatly in their ideas as to the scope to be given communism. Plato desires a complete com- munism, embracing not only property, but also wives and children. He does not give the details of his scheme for communism in prop- erty. He makes it clear, however, that his object was to pro- mote harmony by removing the ground for civil suits and uniting all citizens by common interests. His ideal state is charac- terized by a community of wives and children, partly with the aim of diminishing discord and jealousy, partly with the idea of eugenics and control of population. " The children of the in- ferior, or of the better when they chance to be deformed, will be put away in some mysterious, unknown place, as they should be. ... This must be done if the breed of guardians is to be kept pure." f Aristotle was entirely opposed to Plato's communism of wives, and did not go any great way with him as to property. His arguments against communism are classics. 44 ECONOMIC THOUGHT "Next let us consider what should be our arrangements about property : should the citizens of the perfect state have their possessions in common or not? This question may be discussed separately from the enactments about women and children. Even supposing that the women and children belong to individuals, according to the custom which is at present universal, may there not be an advantage in having and using possessions in common? Three cases are pos- sible: (i) The soil maybe appropriated, but the produce may be thrown for consumption into the common stock ; and this is the practice of some nations. Or (2) the soil may be common, and may be culti- vated in common, but the produce divided among individuals for their private use ; this is a form of common property which is said to exist among certain barbarians. Or (3) the soil and the produce may be alike common. " When the husbandmen are not the owners, the case will be different and easier to deal with; but when they till the ground themselves the question of ownership will give a world of trouble. If they do not share equally in enjoyments and toils, those who labour much and get little will necessarily complain of those who labour little and receive or consume much. There is always a difficulty in men living together and having things in common, but especially in their having common property. The partnerships of fellow-travellers are an example to the point ; for they generally fall out by the way and quarrel about any trifle which turns up. So with servants: we are most liable to take offence at those with whom we most frequently come into contact in daily life. "These are only some of the disadvantages which attend the com- munity of property; the present arrangement, if improved, as it might be by good customs and laws, would be far better, and would have the advantages of both systems. Property should be in a certain sense common, but, as a general rule, private; for, when every one has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business ; and yet among the good, and in respect of use, ' Friends,' as the proverb says, 'will have all things common.' Even now there are traces of such a principle, showing that it is not impracticable, but, in well-ordered states, exists already to a certain extent and may be carried further. For, although every man has his own property, some things he will place at the disposal of his friends, while of others he shares the use with them. The Lacedaemonians, for example, use GREEK ECONOMIC THOUGHT 45 one another's slaves, and horses, and dogs, as if they were their own ; and when they happen to be in the country, they appropriate in the fields whatever provisions they want. It is clearly better that prop- erty should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition. Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own ; for the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured ; this, however, is not the mere love of self, but the love of self in excess, like the miser's love of money ; for all, or almost all, men love money, and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or com- panions, which can only be rendered when a man has private property. The advantage is lost by the excessive unification of the state. Two virtues are annihilated in such a state ; first, temperance towards women (for it is an honourable action to abstain from another's wife for temperance' sake) ; secondly, liberality in the matter of property." * Aristotle, it will be observed, although opposing Plato's ideas, did not rush to the opposite extremes. Some things are to be private; some to be held in common. He desired that more things should be common than there then were, and protested against the excessive individualism of the Greeks. He advo- cated common meals, and especially noteworthy is his wish for a certain community in the use of property along with its private ownership. It must not for a moment be fancied that these ancient phi- losophers thought of communism as implying any general democ- racy. Quite the reverse. There were three classes of men fash- ioned in the bowels of the earth, one of gold, another of silver, the third of iron or copper. These were, respectively, the philoso- phers or guardians, the warriors or auxiliaries, and the artisans and tradesmen. Communism was to be applied to the first two alone. It was an aristocratic communism. Scope and Classification of Aristotle's Economic Thought. The nearest approach made by Greek philosophy to developing a distinct theory of economics came in discussing the elements of household management. Here a distinction was drawn between 1 Politics, Bk. II, chap. V. ECONOMIC THOUGHT economics (oikonomik) and chrematistics (chrematistik) ; the former embraces chiefly wealth consumption in the satisfaction of wants, and the provision of those necessary and useful com- modities which can be stored to meet those wants; the latter deals with wealth-getting, including money-making and exchange. Concerning the latter, Aristotle says, " And there is another ele- ment of a household, the so-called art of money-making (or finance) which, according to some, is identical with household management, according to others, a principal part of it." l There are two kinds of chrematistics : the natu- ral and the unnatural. Thus the first simple bar- ter by which things are given in exchange for what one wants " is not contrary to nature, but is needed for the satisfaction of men's natural wants " ; 2 but " retail trade is not a natural part of the art of money-making." 2 Or, again, husbandry and stock-raising make the " true or proper art of money-making," while the other consists in exchange. 3 , It is the natural or "proper" branch of chrematistics alone which should be included in economics or household management (Wirtschaft). 4 Thus Aristotle's clas- sification might be represented by the above diagram. Closely connected with the preceding analysis is the dis- tinction between the natural or proper and the unnatural or improper uses of a thing. " Of everything which we possess (NATURAL) ECONOMICS (Household Management) (Wealth-Getting} CHREMATISTICS (ARTIFICIAL) 1 Aristotle, Politics, Bk. I, chap. 3. * Ibid., Politics, Bk. I, chap. 9. * Ibid., Bk. I, chap. n. * Ibid., Bk. I, chap. 8. GREEK ECONOMIC THOUGHT 47 there are two uses : both belong to the thing as such, but not in the same manner, for one is the proper, the other the im- proper or secondary use of it. For example, a shoe is used for wear, and is used for exchange ; both are uses of the shoe." 1 This distinction rests upon Aristotle's notion of exchange, which, in its turn, is founded on the idea that there is a certain con- sumption which is sufficient for a proper life ; for, when he says that retail trade is not a " natural " part of money-making, he adds that " had it been so, men would have ceased to exchange when they had enough." In other words, natural chrematistics concerns the satisfaction of natural or proper wants by " natu- ral " or " proper " or " primary" uses. This idea clearly suggests later distinctions between value in use and value in exchange. Its consciously ethical content, however, is absent from much of the later usage. In the same idea, a trace of the notion held by some later economists (the Physiocrats) may be distinguished, namely, the notion that extractive industries are the only ones which are productive. One could easily get the idea from Aristotle that the growing, or digging up, or catching of things which satisfy the more elemental wants in the simplest way, is more productive than the elaboration of these things by artisans or their exchange by merchants, that the latter occupations do not add to the real wealth of the state. Value. The idea of value received little attention, and that little was from the viewpoint of ethics or justice. Plato says that according to law a man " should not attempt to raise the price, but simply ask the value," 2 implying that value is an absolute quality inherent in the thing. This, however, is but a rudi- mentary discussion of the subject. Aristotle goes further. His notion of value is clearly subjective, and is based upon the usefulness of the commodity concerned. 3 All things which are exchanged must be comparable through some standard of measure, and this standard he finds in man's wants : "In the truest and most real sense, this standard lies hi wants, which is the basis of all association among men." An 1 Ibid., Bk. I, chap. 9. Laws, Bk. XI, p. 921 (Ed. Steph.). s See Politics, Bk. I, chap. 9 ; Ethics, V, 8. 48 ECONOMIC THOUGHT exchange is just when each gets exactly as much as he gives the other ; yet this equality does not mean equal costs, but equal wants. If men want the cobbler's product more than the husbandman's, more grain must be given for shoes. Money is the medium which makes wants commensurable. Money and Interest. As regards that particular form of wealth known as money, the teaching of the Greeks has been of signal importance in the history of economic thought. In gen- eral, they saw and explained the necessity for money, and recognized a part of its economic function. Aristotle is especially explicit. He remarks that " as the benefits of com- merce were more widely extended . . ., the use of a currency was an indispensable device. As the necessaries of nature were not all easily portable, people agreed for purposes of barter mutually to give and receive some article, which, while it was itself a commodity, was practically easy to handle in the business of life, some such article as iron or silver, which was at first defined simply by size and weight ; although finally they went further and set a stamp upon every coin to relieve them from the trouble of weighing it. . . ."* And he goes on to dis- tinguish between money and wealth, referring to the fable of King Midas. Xenophon is equally clear in distinguishing between money and wealth. 2 Plato would have had no gold nor silver for the private man, but only domestic coins to be used in payment of hirelings and the like ; 3 but he thought that the state should have a common Hellenic currency for the use of embassies, expeditions, and journeys. With all this, however, the thought of these men was tainted with error. They virtually regarded money as nothing but a medium of exchange, and, as such, they denied the productivity of loans of it. A piece of money cannot beget another piece, was the doctrine of Aristotle, and no economic idea of his had more lasting effects. The obvious conclusion was that interest is 1 Politics, Bk. I, chap. 9 (Welldon). 1 Revenues of Athens. 1 Laws, Bk. V, p. 742 (jowett, The Dialogues of Plato, Vol. V, p. 124). GREEK ECONOMIC THOUGHT 49 unjust. 1 Plato, too, seems to have thought that no interest should be given nor even the principal of a debt be repaid. 2 It must not be supposed, however, that this view of interest which seems so strange to us owed its existence entirely to the inferior insight of the ancients. It is to be explained largely by economic conditions. In Athens the circulation of capital was inconsiderable, and money was not lent for productive purposes as often as for the purpose of relieving distress. If to-day loans were chiefly made to embarrassed friends or neighbors to be used in alleviating distress in matters of consumption, we too would undoubtedly regard interest in a different light. The modern theory of interest is based upon loans for productive investment. 3 Another erroneous monetary idea which was held by Xeno- phon, at least, was that the value of silver is absolutely fixed regardless of supply. Aristotle, however, recognized that money is subject to the same law as other things and that its value is liable to change, although it tends to be more constant. 4 Industry and the Various Occupations. Like the Oriental lawgivers, Athenian philosophers favored some branches of in- dustry and regarded others with disapprobation. Agriculture was considered most highly. " But strictly speaking," writes Aris- totle, ". . . . the means of life must be provided beforehand by nature ; for the business of nature is to furnish food to that which is born, and the food of the offspring always remains over in the parent. Wherefore, the art of making money out of fruits and animals is always natural." Husbandry and stock-raising were the natural or proper arts. Exchange, including commerce, usury, and services for hire, were not natural. Mining and lum- bering lay midway between. 8 Plato thought that the precious metals ought not to be allowed 1 Politics, Bk. I, chap. 10. 2 Laws, Bk. V, p. 742. This may be compared with the Hebrew idea of a loan see above, pp. 25 f. 3 Cf. Schonberg's Handbuch der politischen Oekonomie (Tubingen, 1882), Bd. I, S. 60. 4 Ethics, Bk. V, chap. 8. 5 Aristotle, Politics, Bk. I, chaps. 10 and n. 50 ECONOMIC THOUGHT in his state, " nor much of the vulgar sort of trade which is car. ried on by lending money, or rearing the meaner kinds of live- stock ; but only the produce of agriculture, and only so much of this as will not compel us in pursuing it to neglect that for the sake of which riches exist, I mean, soul and body." l Riches. In their attitude toward riches these Greek think- ers are notable for their poise. Great stores of wealth were de- cried by them ; as was also poverty. Clearly recognizing the use- fulness of an abundance of material things as a means, they yet sought the happy medium. Riches in excess were disfavored on two grounds. As a matter of economy, it was argued that they decreased efficiency in production. In a celebrated bit of dia- logue Plato develops the idea thus : " There seem to be two causes of the deterioration of the arts. " What are they? " Wealth, I said, and poverty. " How do they act? " The process is as follows : When a potter becomes rich, will he, think you, any longer take the same pains with his art ? " Certainly not. " He will grow more and more indolent and careless ? " Very true. " And the result will be that he becomes a worse potter? " Yes ; he greatly deteriorates. " But, on the other hand, if he has no money, and cannot pro- vide himself with tools or instruments, he will not work equally well himself, nor will he teach his sons or apprentices to work equally well." 2 A second reason for opposing extreme riches was ethical. Plato argues that great riches and happiness are incompatible ; for a rich man cannot be a perfectly good man, as part of his wealth must necessarily be acquired and expended unjustly. 3 The reasoning is of much interest in connection with present-day ethics of wealth, and must be quoted to be appreciated. 1 Pkto, taws, Bk. V, 743 (Jowett, The Dialogues of Plato, Vol. V, p. 126). 2 Republic, Bk. IV, p. 421 (Jowett's Plato, Vol. Ill, pp. 109-110, 119-121). * Ibid., Bk. V, 742-744 (Jowett, Vol. V, pp. 125, 126). GREEK ECONOMIC THOUGHT 51 "The citizen must indeed be happy and good, and the legislator will seek to make him so ; but very rich and very good at the same time he cannot be, not, at least, in the sense in which the many speak of riches. For they mean by 'the rich' the few who have the most valuable possessions, although the owner of them may quite well be a rogue. And if this is true, I can never assent to the doctrine that the rich man will be happy he must be good as well as rich. And good in a high degree, and rich in a high degree at the same time, he cannot be. Some one will ask, why not ? And we shall answer Because acquisitions which come from sources which are just and unjust indifferently are more than double those which come from just sources only ; and the sums which are expended neither honourably nor dis- gracefully, are only half as great as those which are expended honour- ably and on honourable purposes. Thus, if the one acquires double and spends half, the other who is in the opposite case and is a good man cannot possibly be wealthier than he. The first I am speaking of the saver and not of the spender is not always bad ; he may indeed in some cases be utterly bad, but, as I was saying, a good man he never is. For he who receives money unjustly as well as justly, and spends neither justly nor unjustly, will be a rich man if he be also thrifty. On the other hand, the utterly bad is in general profligate, and there- fore, very poor ; while he who spends on noble objects, and acquires wealth by just means only, can hardly be remarkable for riches, any more than he can be very poor. Our statement, then, is true, that the very rich are not good, and, if they are not good, they are not happy." Aristotle also opposed extremes, though, quite consistently with his views as to communism, he was not opposed to reason- able inequalities. He dreaded more the encroachments of the rich than those of the people. " Many . . . make a mistake," he says, " not only in giving too much power to the rich, but in attempting to overreach the people. There comes a time when out of a false good there arises a true evil, since the encroach- ments of the rich are more destructive to the State than those of the people." l On the other hand he remarks, " Poverty is the parent of revolution and crime." 2 1 Jowett, The Politics of Aristotle, p. 131 (Politics, Bk. IV, 12, 6). See also ibid., p. 45 (II, 7, 13). Ibid., p. 40 (II, 6, 13). 52 ECONOMIC THOUGHT Ethics Dominant. It is to be emphasized that the ideal of the Greek thinkers was highly ethical. To be happy one must be good, was a dominant note, and the interests of the soul were placed foremost. " For there are in all three things," Plato says, 1 " about which every man has an interest ; and the interest about money, when rightly regarded, is the third and lowest of them : midway comes the interest of the body ; and, first of all, that of the soul ; and the state which we are describing will have been rightly constituted if it ordains honours according to this scale." And Aristotle's dictum is : " But a state exists for the sake of a good life and not for the sake of life only." 2 If one could conceive of Plato making a definition of eco- nomics, one might imagine it would run somewhat as follows : " Economics is the science which deals with the satisfaction of human wants through exchange, seeking so to regulate the indus- tries of the state as to make its citizens good and happy and so promote the highest well-being of the whole." That would make it an applied science, in which ethical aims would play a great part. Contrast with Hebrews and Hindus. As already observed, there are important differences between the economic ideas of the Hebrews, Hindus, and other Oriental peoples, and those of the Athenian philosophers. They were similar in emphasizing the state, and the ethical viewpoint. Neither differentiated economics from politics or morals. Both were conservative and undemocratic. Moreover, with both, agriculture was the only industry in very good repute. But the Greeks were more concerned with the individual, going further in the analysis of the state into its citizens. They were, too, possessed of some small degree of historic method, though it was quite abstract. They analyzed economic wants, and based the oikonomik and chrematistik of their philosophy upon this analysis. The Athenian philosophers were more appreciative of material wealth as an agency in furthering human happiness than were the sacred writers of the Hindus, at least. The well-known 1 Laws, Bk. V, 743 (Jowett, The Dialogues of Plato, Vol. V, p. 126). 1 Politics, Bk. Ill, chap. 9. GREEK ECONOMIC THOUGHT 53 care for the body by the Greeks had its economic signifi- cance. Most important of all, the Greeks were more rational. In- stead of forbidding interest in pursuance of some divine edict, they argued about it and reached the conclusion that it was un- just. Thus the writings of Plato and Aristotle mark a great step in advance in economic method, as well as in scope and depth of analysis. CHAPTER V THE ECONOMIC THOUGHT OF THE ROMANS FROM Greece the scepter passed to Italy, and the glory of Greek thought became merged in the grandeur that was Rome's. No pause need be made to retail the very scanty information we have about early Roman thought, before the stimulus of Greek ideas had been received. Suffice it to say that aside from juris- prudence, the chief writings of the Romans were produced under the influence of Greek thought, and, as in the case of their art, a notable lack of freshness and originality is apparent. The Athenians were thinkers, keen and analytic. The Ro- mans were men of action, warriors and statesmen. The former left a philosophy which profoundly affected the ethics and eco- nomics of later thinkers ; the latter built institutions which as profoundly affected law and politics. The heritage of the former has been a direct and subjective force ; the other, chiefly indirect and objective, conditioning the thought of the individual. As will appear in a moment, however, Roman thought has had more direct influence than its intrinsic depth would account for. Of especial interest is the fact that the decay of Rome was well under way when her chief writers were engaged on their works. This fact colors their writings and conditions their economic ideas. The state of decay is at least half perceived by them, and remedies are pointed out for the evils discerned. The causes and remedies as they presented themselves say in the time of Caesar were only in part economic ; but the economic ideas of the Roman philosophers were largely palliatives for a declin- ing state. Roman economic ideas may be gathered from two main sources : (i) the jurists and writers on legal matters; (2) the philoso- 54 THE ECONOMIC THOUGHT OF THE ROMANS 55 phers. 1 Of less importance are (3) a few writers on agriculture (de re rustica) ; their ideas were either purely technical or fall under the philosophical group. Economic Thought of the Jurists. Among the jurists are found the most original Roman thinkers, and the laws express the best Roman thought. No system of economics is expressed or implied, and ethical or sociological considerations outweigh those economic; but the following brief generalizations are of economic significance. 1. Natural Law. The Roman jurists made a distinction between human law and natural law which had much influence upon medieval and later thought. Thus their jus civile was a national law applicable to Roman citizens. On the other hand, a body of law known SLSJUS gentium was developed for foreigners of whatever nationality. The latter was broader and less guided by arbitrary local customs. It was more rational. Yet, at the same time, being so founded on general principles, it contained within itself the capacity for abstract absolutism in thought. Later it was united with the Greek concept of the natural, and as a jus naturale colored succeeding thought. 2 2. Private Property and Contract. In their ideas about two legal institutions, the jurists have had great effect in an objective way upon the development of economic thought ; these are the institutions of property and of contract. Theirs was a somewhat narrowly individualistic idea of property. Under the stimulus of Stoic philosophy and the ideal of a jus naturale, the jurists moved away from the clan or family as a social unit, and clearly- defined individual rights replaced whatever community of prop- erty there had been. 3 And a corollary of this movement was the development of freedom of contract, including the right of the individual to dispose of his property. The importance of these 1 Others, as religious or theological writers, no doubt influenced economic thought and institutions indirectly. 2 Cf. Maine, Ancient Law, pp. 56, 88; Carlyle (R. W., and A. J.), A His- tory of Medieval Political Theory. 1 The nature and scope of property rights changed at the same time, oi course. 56 ECONOMIC THOUGHT institutions as a basis for all economic processes, and their lia- bility to abuse, are apparent. As a great English economist has said, " to Roman . . . influence we may trace indirectly much of the good and evil of our present economic system ; on the one ^hand much of the untrammelled vigour of the individual in managing his own affairs, and on the other not a little harsh wrong done under the cover of rights, established by a system of law which has held its ground because its main principles are wise and just." l An important characteristic of Roman thought is the separa- tion between the personal and the non-personal that it contains. On the one hand political and juristic doctrines generally ex- cluded personal considerations; while, on the other, religion, Stoicism, etc., emphasized them. This separation was instru- mental in making the scientific development of Roman law pos- sible. But as a result Roman juristic philosophy seems one- sided to us in that, while it was individualistic, in its earlier days, at least, it tended to overlook the personality of man. As a sub- jective element having moral rights, man was hardly considered. This is illustrated by the fact that the individualism of the Ro- mans could be and was limited to certain classes, as was freeddm of contract. With such a basis, humanitarian considerations could only with difficulty be appreciated as a distinct force. 3. Money and Interest. Worthy of mention is the fact that Roman jurists had a good appreciation of money. 2 Besides 1 Marshall, Principles of Economics, p. 23, 4th ed. J The following statement of the origin and use of money by the jurist Paulus has become famous : " Purchase and sale arose from exchanges ; for formerly there was not money as now, nor was one thing called ware and another price, but each according to his necessities used to exchange things lacking utility for those which had it, since it often happens that what one has an abundance of another lacks. But because it does not always nor readily happen that when you have what I desire, I in turn have what you are willing to receive, a material is chosen whose valuation being permanent and fixed by the state (publica ac perpetua aestimatio) should remedy the diffi- culties of exchanges by equality of value in given quantities ; and this ma- terial being struck with a public form (i.e. coined) represents usefulness and effectiveness not so much from intrinsic value as from (value in a given) THE ECONOMIC THOUGHT OF THE ROMANS 57 having a clear idea of its advantages for exchange purposes, they saw that it was, in a sense, merely a commodity of a more or less changeable value, a value which is essential to its function and which cannot be established by law. In the earlier periods of Roman history, the law appears on the whole to have opposed interest-taking. The Laws of the Twelve Tables fixed the interest rate, but condemned usury, thus recog- nizing a distinction between the two. In 357 B.C. the rate was changed to ten per cent ; in 347 it was cut to five per cent ; and five years later interest was forbidden entirely by the Genucian Laws. But with conquest and the growth of wealth things changed. Borrowing and lending were great in amount and widespread, large gains being made by borrowing at from four to eight per cent in Rome and lending in the provinces at such enormous rates as, for example, forty-eight per cent. Finally, the Institutes of Justinian fixed rates of from four to eight per cent, according to the character of the loan. Such legislation, however, seems to have been practically a dead letter, the actual rate varying with market conditions. Economic Thought of the Philosophers. While the jurist said, thou shalt, the philosopher was saying, thou shouldst. Though the genius of the Romans was certainly far less ethical than that of the more speculative Athenians, yet Roman philos- ophers generally let ethical notions take the place of scientific principles; as, for example, Cicero said that the universal opinion ought to be " brought over to the hope that men may learn to expect the attainment of what they desire by right purposes and honest deeds, not by fraud and roguery," l and again, " Let it be settled then, that what is wrong is never expedient." 2 The chief writers of this class were Cicero, Seneca, and Pliny quantity. Both being called wares no longer, but the one called price." Cf. Aristotle's words, above, p. 48. Dig. de contrah. empt. xviii, i ; quoted by Kautz, Geschich. Entwicke- lung d. Nat. Oek., p. 173. See Moyle, Contract of Sale in Civil Law, pp. 3, 221. Kautz's citation seems faulty in grammar and punctuation. 1 De Officiis, Bk. II, chap. 3. * Ibid., Bk. Ill, chap, if 58 ECONOMIC THOUGHT the Elder ; and the younger Pliny, Marcus Aurelius, and Epicte- tus may be mentioned. Of all, it can be said that they decried the luxury and vices of their time, contemning the thirst for riches especially money and preaching moderation. Look- ing back at the good old days, they praised a simpler agricultural economy. temporal O mores! Such was Rome's state that her philosophers dreamed of the simple life and called, " back to nature!" While there is more insistence on a competency of worldly goods than among the idealistic Greeks and the religious He- brews, there is not one of these philosophers but would have echoed the words, " The love of money is the root of evil." The Greek philosophers' view of interest also prevailed, Cicero with all the others opposing it. Cicero tells us that Cato thought usury, i.e. interest, as bad as murder, saying, " Would you take interest? would you kill a man? " Seneca condemned interest- taking on the same ground as Aristotle. 1 Indeed it must be said of these writers, as of the Greeks, that they did not fully appre- ciate the nature and functions of money, not to mention capital as a whole. Agriculture the only Honorable Industry. A limitation upon Roman economic thought, one common to Romans and Greeks, was the prevailing idea that the only honorable industry was agriculture. Cicero may be regarded as typical in this respect, and he wrote : " Now as to the trades and modes of getting gain that are to be regarded as respectable, and those that are to be deemed mean and vulgar, the general opinion is as follows: In the first place, those callings are held in disesteem that come into collision with the ill will of men, as that of taxgatherers, as that of usurers. The callings of hired laborers, and of all who are paid for their mere work and not for skill, are ungenteel and vul- gar ; for their wages are given for menial service. Those who buy to sell again as soon as they can are to be accounted as vulgar ; for they can make no profit except by a certain amount of false- hood, and nothing is meaner than falsehood. All mechanics are engaged in vulgar business ; for a workshop can have nothing 1 De Beneficiis, VII, 10 (Kautz, p. 156). THE ECONOMIC THOUGHT OF THE ROMANS 59 respectable about it. Least of all can we speak well of the trades that minister to sensual pleasures, ' Fishmongers, butchers, cooks, poulterers, and fishermen,' as Terence says. Add, if you please, to this list perfumers, ballet-dancers, and the whole tribe of dice-players. The pro- fessions which require greater skill and are of no small benefit to the community, such as medicine, architecture, and the in- struction of youth in liberal studies, are respectable for those whose rank they suit. Commerce, if on a small scale, is to be regarded as vulgar ; but if large and rich, importing much from all quarters, and making extensive sales without fraud, it is not so very discreditable. . . . But of all means of acquiring gain, nothing is better than agriculture, nothing more produc- tive, nothing more pleasant, nothing more worthy of a man of liberal mind." l Quietism. The philosophy of the Stoics was tinged with a quietism which induced in many a sort of economic fatalism resembling that noted in the Orient. 2 For example, Marcus Aurelius meditated in such a strain as the following : "Be satisfied with your business, and learn to love what you were bred to; and as to the remainder of your life, be entirely re- signed, and let the gods do their pleasure with your body and soul." 3 Now Stoicism was widespread among philosophers and jurists, 4 and the attitude indicated was unfavorable to economic interest and investigation. It would tend to remove the sense of ethical responsibility and to beget a sort of inertia. Here, then, was another limitation to Roman economic thought. Though there was this feeling among the upper classes, at least, toward the crafts and small-scale commerce, and the quietism in thought just noted, still the Romans were notably careful in business relations and matters of account. Many 1 De Officiis, Bk. I, 42 (translated by O. P. Peabody). 2 Above, p. 37. 3 Meditations of Marcus Aurelius, IV, 31. 4 Even Cicero, though an adherent of the New Academy, with its Peri- patetic tendencies, wrote his ethical works with a dominant Stoic strain. 60 ECONOMIC THOUGHT instances might be cited of their accurate and cautious manner of recording both public and private transactions. 1 Moreover, there is evidence that credit institutions similar to the check and promissory note were known and used, while Cicero re- quested Curius to honor Tiro's draft for any amount and asked Atticus to ascertain if he could get exchange in Athens. 2 While of little direct significance as to economic thought, these facts would indicate that, although lacking in theoretical analysis, the Romans must have had many concrete ideas about economic relationships, of which but little can be said here. Writers on Agriculture. Chief among the scriptores de re rustica, or writers on agriculture, were Cato, Varro, and Colu- mella. These writers produced semi-technical treatises on rural economy, dealing with the production of wine, oil, etc., the raising of different grain crops, and grazing. Then, in the introduction or some concluding book, general principles of private economy were added. They agree in decrying the lati- fundia, or large estates, absenteeism, and the spread of slavery, and in praising small-scale fanning. This pretty general con- demnation of slavery on economic grounds is especially note- worthy. Varro's statement is typical : " To this whole class of free men [who till fields] the statement is applicable that it pays to use hired help rather than slave labor at all times in disease- laden districts, and even in the healthful regions as well for the more difficult tasks of husbandry like the harvesting of the vintage and the crops." 3 Originally, the Romans were a stern and warlike folk, of simple tastes. As a people, they always dreaded the sea, and were slow to engage in foreign trade. 4 It was only after mili- tary conquest had enriched them with booty, therefore, that 1 See, e.g., Oliver, Roman Economic Conditions to the Close of the Re- public (University of Toronto, 1907), pp. 130-131. 1 Ep. ad Fam., XVI, iv, 2 ; XI, i, 2 ; XII, xxiv, i. 1 De Re Rustica, I, xvii, 2 ; cited by Oliver, Roman Economic Conditions, p. 127. 4 But see Oliver, Roman Economic Conditions (University of Toronto, 1907), pp. 21 ff. THE ECONOMIC THOUGHT OF THE ROMANS 6 1 they acquired luxuries and luxurious tastes which necessitated commerce. At the same time the use of slaves increased to great proportions, while there was a concomitant destruction of the independent yeoman class. Land was cultivated in the form of great estates, latifundia, for absentee landlords, while an increasing mass of free but impoverished citizens was main- tained in the cities at the public expense. This meant a grow- ing separation of classes. It is little wonder then that the writers of the degenerate period turned longing eyes upon the simple rural life of bygone days. The similarity between Rome's later days and the condition of France in the eighteenth century has been noticed by some historians, 1 and it is an interesting reflection that in both cases a declining state caused men to long for a simpler and more "natural" life. Roman Ideas on Value. In accord with the practical, non- speculative genius of the Romans was their thought concerning value. Passing from a regime of customary price, they had, as early as 450 B.C., when the laws of the Twelve Tables were formulated, left the determination of price to the fluctuations of the market. The buyer was given no recourse against the seller except in case of misrepresentation, and Paulus quotes Pedius to the effect that " the prices of things are to be determined neither with reference to affection nor to their utility to single individuals, but prices have a common validity." 2 It was the doctrine of the jurists that each might seek to overreach the other in the matter of price. But as for any analysis of the forces which determined what overreaching was, or any exact definition of it, there was none. As time went on and exchange grew, the concept of a just or real price, verunt pretium, arose. Thus one of the Emperor Diocletian's rescripts allowed the seller a right of recovery in case of a sale for under half the true price (verum pretium). 3 1 E.g. Kautz, above cited, p. 161. J Ad legem aquillam, Dig., Bk. IX, tit. ii, 33 ; Sewall, Theory of Value before Adam Smith, p. 6. 1 See Ashley, English Economic History, Vol. I, p. 208, note 19. 62 ECONOMIC THOUGHT In an edict De pretiis rerum venalium (A.D. 301) the same em- peror attempted to fix a just price on the basis of customary cost of production. 1 Though these rules could not be enforced, they certainly show some tendency toward introducing ethical considerations, 2 and toward a limitation of the freedom of con- tract during Rome's later years. It is to be observed that the importance of wants and utility did not escape recognition, though not as a chief factor. Thus Cicero says, " The only limit to the valuation of such things (bronze statues) is the desire which any one has for them, for it is difficult to set bounds to the price unless you first set bounds to the wish " ; 3 and Seneca remarks that some things are of greater value than the price which we pay for them. Such a recognition could scarcely have failed to obtain where there was a knowledge of Greek philosophy. It seems too much, however, to say that, after the development of commerce and credit, utility became the basis for exchange value, the judgment of utility depending on the wants of the average normal man. 4 Industrial and Commercial Regulations. It is not to be inferred that, because the Roman law stood for private property and freedom of contract, the Roman state did not interfere in economic matters. In times of financial crisis the state estab- lished a public bank to supplement the activities of the pro- fessional bankers of the Forum, 5 and not a few measures for the protection of debtors were passed. Cicero induced certain Greeks and Romans, who had cornered the food supply in Cilicia, to promise stores to the people; and fines were levied on grain merchants who by hoarding had raised prices. An aedile inspected goods placed on sale in Roman markets, con- fiscating those in which fraud was found ; and at various times 1 Mommsen, Der Maximaltarif des Diokletian (Berlin, 1893). 2 Cf. Endemann, W.,Studien in der Romanisch-Kanonistischen Wirtschafts- u. Rechtslehre, II, 30. 3 De Beneficiis, Book IV, Chap. XXV (Sewall, above cited). 4 Rost, Die Wert- und Preistheorie (Leipzig, 1908), takes this view, p. 26, note i. 5 Livy, VII, xxi, 8; XXII, Ix, 4; XXIII, xxi, 6. / THE ECONOMIC THOUGHT OF THE ROMANS 63 the government took measures to prevent foreign competition with Italian producers, to regulate prices of oil, and to prevent the exportation of precious metals. An interesting case, too, is the regulation of traffic in Rome, loaded wagons being forbidden the use of the streets, except during the evening or night, and only those engaged in public building operations could be used between sunrise and the tenth hour. 1 All this was before the close of the Republic, and indicates the recognition in a practical way of the necessity for state participation in indus- trial matters. Influence of Roman Thought. While it must be admitted that, their legal contributions excepted, the Romans added little to the stream of economic thought, their importance as a medium for such thought is great. The mystery of antiquity, the sonorous tongue, the prestige of military and political pre- eminence all combined to spread the writings of Roman orators, essayists, and philosophers ; and with them were disseminated the Stoic philosophy and the ideas of the Greeks. With them, too, went the practical maxims of the people, and incidentally the advice of the father or the meditation of the statesman conveyed ideas of economic significance. These writings were read, nay, studied, by men of a later day, in Germany, France, and England, whose veneration for them gave them a weight which we can hardly realize. More- over, the relative development in economic thought of the early moderns was not great, and their economics and ethics were not untangled. Thus it is that this seeming commonplace of Cicero's or that of Seneca's had much greater influence than was warranted by its intrinsic economic worth, and greater than it could have with ourselves. Though the Romans did not directly develop economic theory, a knowledge of their writings is essential to an understanding of the continuity of the history of economic thought. Division of Labor. To take but a single example, consider the subject of division of labor. Adam Smith first fully de- 1 "Lex Julia Municipalis," Corpus Inscriptiorum Lalinarum, Vol. I, 206; II, 56-61, 66-67; cited by Oliver, Roman Economic Conditions, p. 133. 64 ECONOMIC THOUGHT veloped its economic aspect; but he rested upon Hume and Hutcheson. But Hume's footnotes are full of allusion to Roman writers, and Hutcheson expressly acknowledges his debt to Cicero on this very subject. 1 From this it is not to be in- ferred that but for Cicero and his Greek predecessors there would have been no division-of-labor doctrine, nor that Cicero understood the full significance of such a doctrine. When, however, an idea becomes part of a system of thought, it gains a significance and richness of content that makes a case like the preceding of some interest. In brief summary, it may be remarked that the great service of the Romans to economic thought was the development of jurisprudence as a science, a jurisprudence whose practical spirit supported a great degree of individualism through its doctrines concerning property, contract, interest, and the like. As Ingram says, " Their historic mission was military and political, and the national energies were mainly devoted to the public service at home and in the field. ... As might be 1 System of Moral Philosophy, Vol. I, p. 290. Cicero's words are as follows : " Indeed, the very things that I have called inanimate are produced for the most part by the labor of men, nor could we have them unless handi- craft and skill had given their aid, nor could we utilize them except under the management of men. Nor without the labor of man could there be any care of health, or cultivation of the soil, or harvesting and preservation of grain and other products of the ground. Nor could there be the exporta- tion of our superfluous commodities, nor the importation of those in which we are lacking, unless men performed these offices . . . whence, indeed, could houses . . . have been furnished . . . unless society had learned to seek aid in these things from men? . . . Why should I enumerate the multitude of arts without which life could not have been at all ? How could the sick be cured, what would be the enjoyment of the healthy, what would be our food or our mode of living, did not so many arts give us their minis- tries ? It is by these things that the civilized life of men is so far removed from the subsistence and mode of living of the beasts. Cities, too, could not have been built. . . . These things have been followed by mildness of disposition and by modesty, and the consequence is that human life is better furnished with what it needs, and that by giving, receiving, and interchang- ing commodities and conveniences we may have all our wants supplied." (De Officiis, II, 3-5.) THE ECONOMIC THOUGHT OF THE ROMANS 65 expected from the want of speculative originality among the Romans, there is little evidence of serious theoretic inquiry on economic subjects." * It is essential to emphasize their influence in an objective way through institutions juristic or political, and further to point out that their prestige as classics gives them an adventi- tious importance. APPENDIX TO CHAPTER V QUOTATIONS FROM WRITERS ON AGRICULTURE "After the paterfamilias has come to the villa and performed his devotions to his domestic deity, he ought that same day, if possible, to make a tour of his farm ; if not that day, at least the next. When he has considered how his fields should be cultivated, what tasks should be completed, what not, then on the next day he ought to summon the vilicus, and inquire what work has been accomplished, what still remains; whether the work is far enough advanced for the season, whether what still remains can be completed, what has been done about the wine, corn, and other products. When he has ascertained this, he ought to inspect the account of the various workmen, and of the working days. . . . When there have been storms, consider the work that could have been performed while it rained; jars ought to have been washed and pitched, the villa cleaned, corn carried away, dung removed, dunghills made, seed cleaned, old ropes repaired, new ones made, and the slaves ought to have patched together their rag- garments and caps for themselves. On holy days old trenches could have been cleaned, the highways paved, the brambles cut, the garden dug, the meadow cleared, twigs bound, thorns rooted up, the spelt pounded, everything put in order. When the slaves have been sick, the ordinary supply of provisions ought not to have been given to them. When he is quite satisfied with his examination, he should give orders for the completion of the work that remains. He should then inspect the accounts of the vilicus, money-account and provision- account, the supply of food prepared, the wine-account, the oil-ac- count, what has been sold, what used, what remains, what of this is for sale. Let there be good security for what is owing. As to what 1 A History of Political Economy (New York, 1907 ed.), p. 19. 66 ECONOMIC THOUGHT remains, he should see that it tallies. He should buy what is wanting for the year, have the surpluses sold, let out the necessary contracts. He should give orders concerning the works he would have completed, and the things he is inclined to let, and leave his order in writing. He should carefully inspect his flocks, make his sales, sell the superfluous oil, wine, and corn, if they are giving a good price, sell the old oxen, the refuse of the cattle and sheep, wool, hides, the old carts, old iron tools, and old and diseased slaves. Whatever is superfluous he ought to sell : 'A farmer should sell, not buy.' " (CATO, De Re Rustica, II.) Of the vtticus Cato says: "He should maintain good discipline, attend to the observance of holy days, keep his hands off the property of others, faithfully protect his own, preside over disputes among the slaves, punish with discretion those guilty of a delinquency, provide against ill befalling the household, against sickness, against hunger. If he keeps the slaves busy with work it will be easier for him to keep them out of mischief and out of other people's affairs. ... He must extend loans to none without his master's orders, and must exact pay- ment from his master's debtors. He must lend no one seed for sowing or provisions or spelt or wine or oil. Let him have two or three households from which he may borrow, or to whom he may lend articles let this be the limit. He must often reckon his accounts with his master. He must not use the same labourer, hired servant, or cultivator longer than a day. He must not desire to sell anything without his master's knowledge, or to conceal anything from his master." (CATO, De Re Rustica, V, 1-5.) "As for those articles which can be raised on the farm or manu- factured by the servants none of these should be bought. Of such a nature are nearly all those utensils in the manufacture of which you use osiers and other materials at hand in the country ; for example, baskets, broom-baskets, threshing-sledges, winnowing-vanes, hoes; so too those in the making of which are employed hemp, linen, rushes, palms, bulrushes, as ropes, cords, coverings. But in the case of things which you cannot produce on the farm make your purchases with a view to their usefulness rather than ornament, and then their cost will not eat up their profit. This will be especially the case if you get them where they can be obtained good in quality, close at hand, and cheap in price." (VARRO/Zte Re Rustica, I, XXII, i, 2.) II. MEDIEVAL ECONOMIC THOUGHT CHAPTER VI THE MIDDLE AGES \, The Period Defined. There is a certain rather ill-defined period in the world's history which is commonly known as the Middle Ages. Most writers agree in placing the beginning of this period at the fall of the Roman Empire in 476, but its ending is not so clear. Dr. Ingram l and others would bring it to a close with the year 1300, and it may be agreed that the Middle Ages reached a climax at about that time. But it by no means follows that the years of decline and break-up of medieval institutions which ensued, constituted the beginning of things modern. Ingram himself says that the movements of his first modern phase (1300-1500) " can scarcely be said to find an echo in any contemporary economic litera- ture." It seems more nearly true to regard the years about 1500 as marking the end of medieval times. By 1300 the tran- sition was not complete. Not till toward the close of the fifteenth century did Humanism mark the rise of new tendencies in thought. At the same time the religious world was on the eve of its great Reformation ; while in the mixed field of politics and economics the beginning of modern nation-building may be discerned. More objectively, there were such geographical discoveries as that of America and the water route to India (1498) ; and the extended use of such agents of civilization as the mariners' compass and gunpowder began during the same period. The significance of the influx of silver which followed the discovery of America has often been noted and its impor- tance in bringing about the exchange economy of modern" times commented upon ; but American mines were not opened until the sixteenth century. 1 Following Comte. 69 yo ECONOMIC THOUGHT In a word, the Middle-Age period does not close with Nicolas Oresme, but with Gabriel Biel, his disciple, who is sometimes called " the last of the schoolmen." If further proof were needed, it might be observed that Feu- dalism, a preeminently medieval institution, did not generally begin to lose i^s power until after 1500, the period during which it really represented the political organization of French society, for example, being that lying between the years numbered 1300 and I5OO. 1 It was in the early sixteenth century, too, that the English government gave the death blow to craft gilds, an- other medieval institution. On large lines, and from the viewpoint of systems of thought rather than systems of industry, the Middle Ages may with profit be divided into two periods. From 400 down to 1 200, or shortly thereafter, constitutes the first. During these years Christian theology opposed Roman institutions, and Germanic customs were superposed, until, through action and reaction, all were blended. This was the reconstruction ; it was the " stormy struggle " to found a new ecclesiastical and civil system. From 1200 on to 1500 the world of thought settled to its level. Feudalism and scholasticism, the cornerstones of medievalism, emerged and were dominant. The latter, springing from the fusion of Aris- totle's philosophy with Christian theology, was formulated by Thomas Aquinas, who may be said to mark the turning point between the sub-periods. 2 Germanic Contributions to Economic Thought. Relatively little is to be said about the economic ideas of the early Ger- manic tribes. Their contribution was rather a new point of view, given expression in particular customs. This is not the place to discuss the mark, the three-field system, and all the interesting phenomena of their industrial life. It will suffice to 1 Esmein, Cours El&mentaire d'histoire du droit fran$ais. * The periods suggested correspond rather closely to those in industrial history. Some time during the twelfth or thirteenth centuries in England, and to a less extent in France and Germany, a town economy with division of occupations, inter-municipal trade, and money, largely replaced an inde- pendent domestic economy in which those characteristics were more or less lacking, and land was the chief basis of social and economic life. THE MIDDLE AGES 71 recall the fact that originally the social and economic unit was the village community (Genossenschafi) , a virtually self-suffi- cient group of households, democratic and similar in wealth. The community came before the individual, and within it the idea of brotherhood was strong. It followed that exchange for gain was hardly tolerated within the community, but a com- mon value was placed upon such things as were exchanged, and even exchanges with other groups were regulated. There was no money economy. The ideas and customs of the Germanic tribes sharply dif- ferentiate them from the Romans. The latter based their law upon individual rights ; the former emphasized the community, though a large degree of democracy gave room for a broad individualism. Accordingly, with the Romans there was a sharp distinction between private and public rights, whereas these rights were mutually determining and faded into one another in the case of the Teutons. More specifically, Roman law made property rights rather absolute and rigid, while by Germanic custom these rights were relative and changing. For example, the Genossenschaften had several different kinds of landed property, perhaps these four : dwelling places, gardens, arable lands, waste lands. In the first two, a large degree of private property was recognized; but the fields, with their changing strips, were subject to the plans of the community, and the waste land, or " commons," as its name implies, was the property of no individual. Thus property rights had a different extent according to the nature of the object involved. A noteworthy characteristic was the emphasis put by these peoples upon personal rights. Their laws seem to indicate that they were more concerned about such than about property rights. On the other hand, arid almost paradoxically, personal rights depended largely upon landed property, land being the basis of things in their industrial stage. The Influence of Christianity and the Church. If the Roman factor be taken for granted, Christianity and the Church may be considered next as perhaps the chief factors in deter- mining medieval thought. It is necessary to 'keep these two 72 ECONOMIC THOUGHT ideas separate, for few will deny that Christianity as a religion is quite distinct from the various institutions or churches which profess it. Those principles of Christian doctrine which have any direct economic significance follow. 1. The Church, in accordance with the spirit of Christianity, taught the natural equality of men. The ancients, as already seen, believed that men were different by nature : slavery, like castes, Levites, and "guardians," was natural, and corresponded to some inherent baseness. Christianity taught a brotherhood which extended beyond community or nation, embracing all classes and races. 1 2. Accordingly, slavery was condemned, wholly or in part, the least radical teaching being that the slaves of the laity should be freed when Christianized. 3. And closely connected with the doctrine of equality was the idea of a natural community of property. 2 Originally, and according to the law of nature, men owned all goods in common. 4. One of Christianity's teachings, which was notably at odds with the ideas of antiquity, was that concerning the dig- nity of labor. This it upheld, though not without some ecclesi- astical adulteration, and the ideal became a force working for a greater recognition of those who ate their bread in the sweat of their faces. 3 The various biblical maxims concerning the merit of industry were of no small weight to the men of this credulous time. 5. Charity and almsgiving, too, were among the cardinal virtues. Not only the writings of the Old Testament, but the words and spirit of Christianity, taught the duty of giving aid to the poor. St. Louis advises his son thus : " Dear son, have a tender and pitiful heart for the poor, and for all those whom you believe to be in misery of heart or body, and according to your ability comfort and aid them with some alms." This 1 "And if a poor man have a quarrel with a rich man, sustain the poor rather than the rich, until the truth is made clear, and when you know the truth, do justice to them." (Advice of St. Louis to his son.) 1 See article by H. H. Swain in Bibliotheca Sacra, October, 1897, on this point. 3 Gen. iii, 19. THE MIDDLE AGES 73 quotation, however, suggests two limitations upon the charity of medieval churchmen : their alms were in theory to be given only to those recognized as being in real need, and then were to be in proportion to the donor's means. 6. Finally, Christianity was a force for purifying and per- petuating the family and family life. Thus the Christian religion tended to introduce elements which were deficient in the philosophy of Roman jurisprudence. The personality of man was emphasized. With the increased recognition of human worth came the introduction of moral and humanitarian ideas which added new limitations upon in- dividualism while increasing the rights of many individuals. In fact, one cannot but be impressed with the idea that, on the whole, Christianity and Germanic customs worked hand in hand. Their fidelity, their relative freedom, their greater equality, their emphasis of the personal element, all made the Teutonic folks a ready medium for the leaven of the new religion. As already suggested, the foregoing principles of Christianity were considerably modified or given a special meaning in their practical application by the Church. To mention but an in- stance or two : the " natural law " of equality was admitted to be modified on grounds of expediency so as to permit inequality both in property and in status. Again, charity was too com- monly regarded as an end, as a pious thing, rather than as a means for benefiting society or the poor. So, too, with manual labor: it was regarded rather as a form of discipline for the attainment of salvation than as a means for producing wealth. Pride was not to be taken in the craft, and the main interest was not to be in the product. The general economic develop- ment was not favorable to the complete advancement from slavery, and the Church made room for it on grounds of expe- diency. Serfdom can scarcely have disappeared in towns by the year 1000, while agricultural serfdom lingered on into the nineteenth century. Still there was the tendency toward free- dom. Prior to the thirteenth century the church fathers concerned 74 ECONOMIC THOUGHT themselves but little about economic matters. 1 For one thing a very simple independent domestic economy prevailed; and, on the other hand, purely religious ideas were in control. Con- sequently, one finds little but moral dissertation concerning the evils of luxury, and the like. Among the most noteworthy economic ideas were those concerning the desirability of wealth, value, and the relative merits of different forms of industry. In these there is little new. Agriculture was praised; manu- facture did not displease God ; but trade could not be pleasing to the Deity. Material wealth was dangerous to spiritual wel- fare, though it was permissible to the laity if used for the good of their fellow men. As to value, the recognition of labor was preparing the way for a cost theory based on the labor element. The general notion appears to have been that value is absolute and objective and independent of price. Accordingly, exchanges were looked upon as just or unjust in proportion to the equality of the absolute values ; and usury was forbidden to churchmen on the ground that in the taking of interest a greater value would be exacted than that given, which would result in in- justice to the borrower. But as early as the eleventh century progress began. With the growth of monasteries, towns, handicraft, and commerce, and the increasing use of money, new phenomena were pre- sented ; while in the twelfth century the first Latin translation of Aristotle's Politics found its way into western Europe. The latter fact marks an epoch in medieval thought. Scholasticism and Canon Law. Neither Christianity nor the Church, but part of each, with an admixture of the philosophy of Aristotle, was scholasticism. It was the system of thought which came to dominate ecclesiastics during medieval times; it was the scholarship of the Middle Ages. In it the theological element was dominant, and no advance in knowledge was con- sidered established until the new idea was fitted into its niche in the structure whose foundation was religious. It cannot be called a science, for it did not seek to explain phenomena so much as to apply certain absolute rules of conduct to existing 1 Cf . above, p. 20. THE MIDDLE AGES 75 conditions. The last word was said after a citation from the Bible, one from the church fathers, and now and then one from profane history. It is not improbable that the progress made by medieval scholars in economic thought has often been underestimated, largely, no doubt, because their methods and conclusions were so different from those now dominant. It was Roscher's opinion that the scholastics, and above all Scotus, made more progress than is commonly believed, though only in certain special forms. Most valuable is that part of their work devoted to the sacrament, especially the sacrament of confession. Here were investigated the conditions which must precede the abso- lution of the penitent sinner and how far he must make good his wrong; and that led, in the case of sins which involved economy, to an inquiry into the nature of economic institutions. The conclusions reached will be discussed in a moment. The difficulty was that economics was not made a distinct line of thought. The monks knew little outside of Aristotle's writings, and Aristotle wrote no books on political economy. 1 Thomas Aquinas has been called the prince of scholastics. He it was who with infinite pains and ingenuity strove to weld the teachings of the Bible and of Aristotle into a harmonious body of thought. And, in the uncritical judgment of his con- temporaries, he succeeded. One result of his attempt was the celebrated classification of laws into eternal, natural, human, and divine. The first is the controlling plan of the universe as conceived by God; that part of it which can be grasped by man and which enables him to distinguish good and evil is natural law; while human or customary law consists of the enactments of earthly powers. Divine law is that part of the eternal law revealed in the holy writings. Human law should be based upon natural law. It fell into two parts: civil law 1 This explanation is given by Gasser, Introduction to the Economic, Political and Kameralistic Sciences (Halle, 1729), as a reason why economic subjects had not been taught in the German universities. A work under that title is sometimes attributed to Aristotle, but even if he wrote it, it does not deal with economics proper in any distinct way. 76 ECONOMIC THOUGHT (Roman) and canon law (church). Canon law, or the Corpus Juris Canonici, was coordinated and given a systematic form about the middle of the twelfth century by the monk Gratian of Bologna. It was drawn from a mass of ecclesiastical legis- lation and decisions, thus containing elements of Christian doc- trine, Aristotelian philosophy, and Roman law. It expressed the judgment of orthodox churchmen concerning human rela- tions, and so contained economic ideas. Value and Just Price. Passing over ideas concerning wealth and industry, which were substantially those mentioned above, one reaches the heart of their economic thought in the doctrine of justum pretium. This doctrine rested upon their notion of value. Briefly stated, it was that every commodity had some one true value which was objective and absolute, and was to be determined in the last analysis by the common estimation of the cost of production. The words " was to be determined " are used deliberately, for the doctrines of the scholastics are only to be understood when considered as ethical, as laying down what should be, rather than scientific conclusions as to what is. As formulated by Albertus Magnus (1193-1280) and Thomas Aquinas (1227 or 1225-1274)1^16 theory was that value should equal the expenditure of labor and other costs. * Thus, according to Aquinas, one might lawfully charge more than one had paid " either because he has improved the article in some respect, or because the price of the article has been changed on account of difference of place or time, or on account of the danger to which he exposes himself in transferring the article from place to place, or in causing it to be transferred." 1 This generaliza- tion, however, was qualified to the extent that only those costs which were incurred in producing things which satisfied normal or natural wants were determining, and the labor element was weighted according to the social rank of the laborer. 2 This value was not necessarily expressed in price, and was independent 1 Quaestio Ixxvii, art. iv, Opera, XIX, p. 181. Quoted by Sewall, Theory of Value before Adam Smith, p. 18. * Cf. Aristotle's teaching, above, p. 48. THE MIDDLE AGES 77 of the estimate of buyer or seller. It was a question of justice, 1 and it was the duty of the law to step in and fix the price accord- ing to the above principles. It was quite in harmony with this conception that Charlemagne, at an earlier time, ordained " that no man, whether ecclesiastic or layman, shall, either in time of abundance, or in time of scarcity, sell provisions higher than the price recently fixed per bushel." 2 With the rise of towns and money economy, this notion of value began to be modified, though it dominated the whole period and beyond. Aquinas gave some consideration to utility and to the amount offered for sale, or supply. Buridan (1300- 1358) went farther and stated that the measufe of value is to be found in the satisfaction of wants: the greater the need, the higher the value. And Biel (died 1495), while standing for a necessary equality in value of goods exchanged, bases it upon their utility for human ends. 3 But when all has been said, the conclusion is that it is broadly true that an objective cost con- ception of value prevailed during the Middle Ages. Value of Money ; Usury. How did such an idea of value work when applied to money ? The answer to this question brings up ,the well-known doctrine of usury. The term was used to cover what we designate as interest, and, in a broader sense, to include any price in excess of the justum pretium : qui plus quant dederit accipit, usuras expetit. At first (325 A.D.) usury was forbidden the clergy only, but before the close of the twelfth century the prohibition was extended to the laity. As late as 1311 it was declared absolutely illegal. The broad simple ground for this action was the belief that to take interest for a loan of money was, like charging more than the just price, unjust. A scholastic brief against usury might be drawn as follows: i. The holy writ forbids it: The Mosaic law prohibits usury- 1 "... if either the price exceeds the value, or, conversely, the value exceeds the price of the thing, the balance of justice is destroyed," wrote Thomas Aquinas. 2 Blanqui, History of Political Economy, p. 112. 3 Contzen, Geschichte der volkswirthschaftlichen Literatur im Mitielalter. 78 ECONOMIC THOUGHT taking from a brother; Christ said, " Lend, hoping for nothing again." (Luke vi, 35.) 2. Aristotle says money is barren and cannot breed money, therefore, to demand usury for its use is unjust. 3. It follows from the above point that to pay for money is to pay for time; but time is common property and belongs to God. 4. Money is a Res Fungibilis, or " consumptible " according to the civil law. As such it has no use distinct from itself ; its use cannot be separated from the ownership of it. Therefore, to lend money is to give up ownership of it, and to ask a pay- ment for the use of that which is sold is unjust. 1 As in the case of the general concept of value, the develop- ment of industry and exchange wrought a gradual modification of the doctrine of usury or value of money. Aquinas and his brother scholastics recognized exceptions: for example, where a loss was incurred by a loan (damnum emergens) or a profit was missed (lucrum cessans) a corresponding sum might be demanded of the borrower. Then other openings were made. A buyer on credit was not prohibited from paying more than 1 The reasoning of Aquinas on this point appears in the following quo- tation : "To take usury for a loan of money is in itself unjust ; for it is to sell what does not exist, which is an inequality, and, therefore, an injustice. To understand this it must be known that there are some things whose use consists in the consuming of them, as when we consume wine. ... In ar- ticles of this kind [consumptibles], therefore, the use of the thing must not be reckoned separately from the thing itself ; he who is given the use is thereby given the thing. And accordingly in lending a thing of this kind, all the rights of ownership are handed over. If therefore a man wanted to sell wine and the use of the wine apart from one another, he would be either selling the same thing twice (meaning that the use is the wine), or would be selling what did not exist. Wherefore he would be manifestly committing injustice and sinning. For the same reason, he would commit injustice who lent wine or corn, seeking for himself two rewards, the restitution of an equal amount of the article, and also a payment for its use, called usury." " But money, as Aristotle says, . . . has been devised for the making of exchanges. So the first and chief use of money is its consumption or spend- ing. Wherefore it is in itself wrong to receive (besides the return of the money itself) a price for the use of the money." (Quoted by Ashley, Intro- duction to English Economic History and Theory, Vol. I, p. 153.) THE MIDDLE AGES 79 the cash price; discounts were allowed on bills of exchange; money combined with labor, as in partnerships, was called pro- ductive; Jews and Lombards, being damned anyhow, were permitted to receive usury; and, in the fifteenth century, the mantes pietatis were allowed to receive interest. 1 Economic Functions of the State. Another group of ideas held by the scholastics concerned the economic functions of the state. In general the independent domestic economy idea was applied to a large group, or, in other words, the state was re- garded as a sort of great private or domainal economy. The position of taxation illustrates the situation. In the twelfth and thirteenth centuries, at least, the office of the ruler seems to have been regarded as private property. His revenues came from his estates and certain prerogatives, 2 and there was no system of taxation in the modern sense, for that represents more modern economic thought. The particular functions proper to government were the maintenance of population and provision for the poor; the establishment of safe and free roads a Roman conception backed by citations from the Bible; a system of weights and measures, and a special coinage. The argument for the main- tenance of weights and measures was that it would decrease quarrels and litigation, and that the Bible says, " God has ordered all things by number, weight and measure." 3 The duty of the medieval ruler to provide an exact and un- changing coinage was constantly emphasized. Virtually with- out exception this right was possessed by him, and laws were passed to prevent counterfeiting and clipping. The exporta- tion of coin, as also the circulation of foreign coins, was fre- 1 Gabriel Biel, Professor of Theology at Tubingen, 1485, held that in deeds of partnership any rate of interest was allowable according to the gains of the capital as invested by the debtor, only the creditor must share any loss. Also, if one partner put in money and another contributed labor, the labor might be evaluated in terms of money, and the profits of the busi- ness be shared pro rata. See Contzen, Geschich. d. volkswirths. Lit. im Mit- telalter, index under Gabriel Biel ; and Roscher, Geschichte der Nat. Oek. in Deutschland , pp. 22 S. 2 See below, p. 126. * Book of Wisdom, ix. 8o ECONOMIC THOUGHT quently forbidden. This regulation of money was a logical concomitant of the doctrine of just price : the supply of money being small, relatively slight changes in its quantity would affect prices, and the difficulties of transportation made read- justments slow. 1 One reason advanced by Aquinas why a prince should provide money was that he could thus get food for his subjects in time of war. Monasteries. Monasteries might be made a distinct factor in the life and thought of the medieval period. They were Christian industrial colonies influencing men in many ways, both by precept and example. 2 Objectively, the manual activi- ties of the monks improved agriculture, disseminated industrial arts, and stimulated commerce. When a surplus was produced or a new supply of raw material was needed, exchange arose, and the principles which should govern the " negotiator ec- f desi& " in economic relations with the outside world were care- fully formulated. Their chief service was to " diffuse a better appreciation of the duty and dignity of labor," though after the tenth century this service waned. The Economic Thought of Medieval Townsmen. 3 Taking it for granted that the reader is familiar with the picturesque phenomena of medieval towns, with their gilds and market places, it remains to point out the bearing of various town and gild regulations upon economic thought. There was always a large element of monopoly present and competition as we know it was unthought of. Foreigners were admitted to the trade of the town, but only under controlling restrictions. Thus they were subjected to tolls, were under surveillance, could not sell at retail save under great restriction, and could not deal with other foreigners unless at fairs or on certain days. In these regulations, also, appears the common hostility to strangers. But this monopoly was a public one and in the interest of the community ; trade was regarded as a public opportunity. The idea of equality and of public benefit appears in such common 1 See Ashley, Eng. Econ. Hist., Vol. I, p. 173. 1 See Cunningham, Western Civilization in its Economic Aspects, pp. 35-40. Especially in England. THE MIDDLE AGES 8l regulations as that sales were not to begin before a certain hour, that unsold goods could not be withdrawn until a certain time, and that raw materials as tallow, for example must not be sold to outsiders. The universal prohibition of forestalling, regrating, and en- grossing illustrate the above point, and are also connected with the idea of a just price. Indeed the price of the town's manu- factures was regulated; and that of the trader's merchandise was fixed within certain limits, though it came to be allowed a maximum and minimum within which it might play. And this suggests the minute regulation of trade and industry, largely through the agency of gilds, a regulation which char- acterized the whole economy, and which, again, was commonly in the interest of the consumer, being notably so in the case of foodstuffs. An interesting feature of town economy was its communal property and undertakings. Thus a common town pasture was frequent; many towns got control of the seignioral mill (and the burghers were required to patronize such mills, the pro- ceeds often going to decrease taxes). Bakeries, ovens, market places, and stalls might be added to the list. Then, too, in times of scarcity it was considered the duty of the town govern- ment to furnish grain. It sometimes made common bargains with foreign merchants for the materials needed by its artisans. Public works were carried on by the compulsory labor of the community. The gilds, which were more or less closely associated with town government, serve to emphasize much the same line of thought. They were associations of merchants or craftsmen for the mutual benefit of their members, having as their ends protection, monopoly of the trade or craft, good workmanship, and fraternal and religious benefits. These associations served to train men in business ethics, to develop personal relation- ships, and to harmonize the interests of producer and consumer. And the craft gilds developed skill, protected the artisan, and increased the dignity and worth of labor. The ideas of just price, of regulation of quality and quantity of output, and of 82 ECONOMIC THOUGHT wages and conditions of employment characterize their dealings. In view of the exaggeration in the old idea concerning the freedom and equality in towns, it remains to be said that this idea is only relatively true. Depending upon the origin of the town, 1 almost from the beginning there were three or four distinct classes which successively dominated. A considerable number of inhabitants did not have the franchise, and the craft gilds, even, were in part monopolies of the masters (aldermen, war- dens, commonalty) against the serving men. As compared with rural life, however, there was a nearer approach to freedom which was quite marked in the earlier times in England. General Significance of the Period. The general signifi- cance of the Middle Ages as a period in the evolution of eco- nomic thought is rather difficult to state by reason of its com- plexity. In a sense, its negative aspect is large. While the chasm left by the downfall of Rome may have been exaggerated, yet civilization, as it had been, was in ruins. As to its positive characteristics, the Middle Ages constitute, first, a period of adjustment and fusing; secondly, one of transitions. During its centuries, Roman institutions, standing for a narrow indi- vidualism and, on the whole, for a materialistic philosophy; Christian religion, teaching the brotherhood of man and ideal- ism; Germanic customs, showing a broad and democratic individualism and leaning toward idealism ; Aristotle's philos- ophy, emphasizing the common good and arguing for some de- gree of common use of property, with a correspondingly limited individualism, 2 all these were to be combined and fused. This was more or less consciously the work of the scholastics. Thus Thomas Aquinas labored to adapt Aristotle while he assailed Rome ; and one Nicholas von Cusa, while deeply versed in the contemporary learning of the Occident, turned his atten- 1 In towns which grew up under the protection of some clerical noble, for example, all the aids, etc., exacted on a manor might be rendered by the townsmen. 2 See above, pp. 43 f. Aristotle's argument against communism in the ownership of property is deservedly a classic, as has already been stated. THE MIDDLE AGES 83 tion to the East: he sought to reunite the Greek and Latin churches, and studied the holy book of the Mohammedans. 1 As a transitional period it was during the Middle Ages that, objectively, national economy replaced independent domestic economy; that commerce and manufactures encroached upon the sole rule of agriculture; and that slavery was gradually abandoned for serfdom and free labor. But it is the world of thought which is of interest here. In it one finds a transition from the materialism of later paganism to the modified idealism of Christianity. At the same time the individualism of the Romans was succeeded by the idea, of a society broader even than the city state of the Greeks, though not so broad as the dream world-empire of the Church. We pass from systems of thought which postulate a natural inequality among men, and slavery, to ideals of brotherhood and freedom. The Church, too, became more dissociated, formally at least, first from politics, then from industry, thus making for the separation of morals from economics achieved in modern times. An economy in which land was regarded as the basis began the great tran- sition to one in which personal relations dominated. In one, industry in manufactures and trading was despised; in the other, it was fostered ; in the one, money was imperfectly under- stood and men generally condemned its accumulation; in the other, it was better understood, and probably came to be over- appreciated. Between these rather opposite views lay the Middle Ages. During this great transition it was well that the idea of pro- tection was strong. It appears in the Church and Christianity, in the towns and gilds ; custom, regulation, monopoly, are met everywhere. The whole economic philosophy of the Middle Ages might be summed up in the doctrine of just price. In a period of turmoil among such great opposing systems of thought, and classes and races of men, before the rise of nations, it was well that the idea of protection was strong. But for further ideas let the reader, if interested, compare the chapter which precedes this with the two which follow next. 1 Stumpf, The Political Ideas of N. v. Cusa (1865), quoted by Contzen, Geschich. d. volkswirths. Lit. im Mittelalter, p. 65. III. THE DAWN OF MODERN ECONOMIC THOUGHT: MERCANTILISM AND KAMERALISM CHAPTER VII MERCANTILISM THAT period which may be called the Middle Ages was suc- ceeded by two or three centuries that looked toward modern systems of industry and thought. The old garments of " natural " economy, feudalism, and scholasticism were not en- tirely cast off ; but great changes were being worked out. The thought of the period now to be considered stands in a different relation to us than the theories of the ancient world and of the Middle Ages, inasmuch as it was the immediate predecessor of a real school of political economy, the Physiocratic system. Through Adam Smith and his immediate predecessors, for ex- ample, it has exercised some influence upon the economic specu- lation and policy of English-speaking peoples down to the present day. Preliminary Definitions of Period and Doctrines. The economic ideas, and the corresponding policies, characteristic of men of this first post-medieval period, have been variously styled Mercantile System, Colbertism, Restrictive System, Commercial System, and Mercantilism. As they do not properly form a system and do not belong to any one man or fall under one central economic idea, Mercantilism is prefer- able. Perhaps the nearest approach to a definition which might be safely attempted here, would be to say that Mercan- tilism comprises the economic views which prevailed among European statesmen from the sixteenth to the latter part of the eighteenth century. As will appear, such views largely concerned commerce and involved much restriction ; but these aspects tell only part of the story. " Political Arithmetic " was a phrase much used by the Mer- cantilists with reference to their attempts at the more exact 87 88 ECONOMIC THOUGHT solution of the economic problems with which they dealt. This kind of arithmetic they denned as " the art of reasoning by figures, upon things relating to the government." l Thus the political aspect is to be given great weight. ^And, on the other hand, the work of these men as statisticians is to be remembered.] It is difficult to tell just when Mercantilism came to be the guiding principle of state policy, or when its sway ended. The truth is that the ideas which are most characteristic of the Mercantilists have always existed to a greater or less extent. Travers Twiss, however, dates the practice of Mercantilism from the accession of Charles V to the throne of Spain in 1516 ; for that monarch at once initiated retaliatory measures against the commercial monopoly of Venice. Be that as it may, the date corresponds well enough with the growth of money economy and the rise of nations, the two phenomena which formed the basis of Mercantilism. v Mercantilism, as a doctrine, was first systematically developed in 1613 by an Italian writer, Serra. In that year his book, A Brief Treatise on the Causes which make Gold and Silver abound in Kingdoms where there are no Mines, was published. It may be said truly that the seventeenth century is the one in which the most numerous and characteristic Mercantilist writings are found. Then, with the Industrial Revolution and the growth of political freedom, governments began to abandon Mercantilist principles in the second half of the eighteenth century. So much for a preliminary definition of Mercantilism and the Mercantilist period. What, then, were the phenomena and the problems that gave rise to them ? What ends did the Mer- cantilists have in view? Beside the more remote causes which led to investigation in the field of political economy, such as the religious and intel- lectual awakening of the times, the more immediate were the break-up of the feudal system, and the development of centrali- zation in the state. These factors were, of course, closely re- 1 Davenant, Use of Political Arithmetic. MERCANTILISM 89 lated. Also related, and working both directly and indirectly, was the importation of gold and silver from America, leading as it did to change in economy and prices and to much economic speculation. Furthermore, royal estates and prerogatives no longer sufficed for increased government expenses, so that taxation became necessary ; l and taxation was made possible by an increase in saving, or capital formation, through greater security and the development of commerce and banking. And with taxa- tion there came a new interest in the economic well-being of the people. In the introductory discussion, the financial difficulties of governments and the dissatisfaction of laboring classes with their condition appeared as two of the most fruitful causes of economic speculation. It is the first of these factors which chiefly stimulated Mercantilistic thought. In the formation of nations and states two great relationships and two sets of prob- lems arose, one external and one internal. Without, there was the struggle with other growing states ; a struggle between the economies of the local units and the central government was taking place within. 2 Though no inconsiderable misunder- standing of Mercantilism has resulted from overlooking its domestic significance, still it is true that foreign relations fur- nished the immediate topic for the most typical Mercantilist doctrines. While it must not be forgotten that the interests of the nation and state constituted the ultimate end, it was in inter- national relations that " those governments which understood how to put the might of their fleets and admiralties, the appa- ratus of customs laws and navigation laws, with rapidity, boldness, and clear purpose, at the service of the economic interests of the nation and state," 3 gained their supremacy. From the economic point of view, the essence of Mercantilism, which is state-making, can be appreciated best through the 1 See below, pp. 89, 126 f. 2 In what follows Schmoller's Mercantile System has been most suggestive. s Schmoller, The Mercantile System (Ashley's Economic Classics series), p. 72. 90 ECONOMIC THOUGHT chief theories and policies which sprang from it and which make up Mercantilism proper. The increased wants of the new states were occasioned chiefly by the growth of standing armies, coupled with rising prices. By the seventeenth century, warfare was vastly changed. For- merly there had been an hasty expedition, a pitched battle, and the issue was settled by courage ; but at the time of which we write, as an eminent Mercantilist states, the whole art of war seemed, in a manner, reduced to money, and that prince who could best find money to feed, clothe, and pay his army, not he who had the most valiant troops, was surest of success and conquest. 1 Thus, " since war is grown so expensive, and trade is become so extended ; and since luxury has so much obtained in the world, no nation can subsist of itself without helps and aid from other places; so that the wealth of a country now is the balance, which arises from the exchange with other places, of its natural or artificial product." 2 To Sir Josiah Child, the most useful and necessary inquiry was, What is to be done to improve the nation's trade " to such a degree as to equalize or overbalance our neighbors in our national profit by our foreign trade? " 3 These things are mentioned, not for the sake of bringing out the balance of trade idea, as such, but to show the importance attached to international relations. The hostility of the Eng- lish toward the Dutch between 1660 and 1675 might also have been mentioned. Robert Clavell published a pamphlet (1665) which was one of several attacking the Hollanders and claiming England's ownership of adjacent seas. After the Dutch were crushed, hostile activity was centered on the French, imports being restricted in 1678, and a contemporary pamphlet pro- claimed that " The French grow too fatt." 4 The Policies and Theories of the Mercantilists. Though it is rather difficult to generalize concerning the theories and policies of Mercantilism, this much may safely be said: one 1 Davenant, An Essay upon Ways and Means (1695), P- J 6- 1 Ibid., p. 13. 3 Discourse of Trade, p. 156. 4 See Hertz, English Public Opinion after the Reformation, pp. 89, 97. MERCANTILISM 91 great purpose dominated it, namely, the desire to make the state strong; the economic basis for strength, wealth, was given great weight; the most important form of wealth was considered to be the precious metals or " treasure " ; foreign trade was generally preferred above other forms of industry, as best furnishing a supply of the desired kind of wealth ; and, in measuring the success of this policy and of foreign trade, great importance was attached to the so-called "balance of trade. " The dominance of a political teleology has been made sufficiently plain in what has gone before, and the emphasis of wealth will need no special comment. It remains, then, to discuss the last three generalizations. i. The Importance of "Treasure" It is no longer held that the Mercantilists believed the precious metals and wealth to be identical, or that they thought money the only form of wealth. There can be no doubt, however, that the typical Mercantilist sometimes confused the two things ; and certainly he considered money the most desirable form of wealth, 1 draw- ing a distinction that we do not make between treasure and other forms of wealth. One or two utterances from Mercantilist writers may serve to let the reader form his own opinion on this point. . In his Essays in Political Arithmetick (1655) Sir William Petty makes the following statement : " The great and ultimate effect of trade is not wealth at large, but particularly abundance of silver, gold, and jewels, which are not perishable, nor so mutable as other commodities, but are wealth at all times, and all places; ... so as the raising of such, and the following of such trade, which does store the country with gold, silver, jewels, etc., is profitable before others." : With a similar idea Mun wrote : " All nations who have no mines of their own, are enriched with gold and silver by one and the same means " : by exporting goods to the value of twenty- ! * E.g. "The genera! measures of the trade of Europe, at present are gold and silver, which, though they are sometimes commodities, yet are the ulti- mate objects of trade ; and the more or less of those metals a nation retains it is denominated rich or poor." William Richardson, Essay on the Causes of the Decline of the Foreign Trade, 1744. 2 p. 113. 92 ECONOMIC THOUGHT two thousand pounds and importing twenty thousand pounds' worth, " we may rest assured that the kingdom shall be en- riched yearly two hundred thousand pounds, which must be brought to us in so much treasure." l Child thought it a general and well-grounded opinion that gold and silver were to be taken " for the measure and standard of riches," and urged that by trade England was able to export goods which brought back " six times the treasure in specie." This emphasis of money as the most desirable form of wealth was a natural and not unreasonable result of conditions. Though Mercantilism is not to be attributed directly to the rise of a money economy, still, the growth of commerce, the changes in methods of warfare, and the introduction of the wages sys- tem gave money a new importance. The reader must remem- ber, too, that it may be that some modern economists have tended to overlook the unique characteristics of money as a form of wealth, its relatively stable value and ready exchange- ability differentiating it to some extent from other valuable goods. Again, there was not the opportunity for investment open to men that exists to-day. Industrial stocks and bonds were vir- tually unknown, and money took their place. So, too, with vari- ous credit agencies. To-day they abound and make an important part of our medium for exchanges as well as form a means of investment. In a word, the relative importance of the precious metals was normally greater then than now. It has been suggested that the character of the foreign trade of those days tended to increase the Mercantilists' emphasis of bullion. When spices, silks, wines, and the like played so im- portant a part in exchanges, it was not so strange that writers " imagined that the chief use of foreign trade to England was to introduce gold and silver rather than nutmeg." 2 1 England's Treasure by F arraign Trade (London), 1669, p. n. But it would be easy to misunderstand Mun by making "treasure" equivalent to our idea of the word "wealth." 1 Cannan, Production and Distribution, p. 3. The force of this observa- tion, however, is weakened by the fact that foreign trade was praised and urged as a means for obtaining these things. MERCANTILISM 93 2. Foreign Trade. As to the means to be adopted for securing the desired treasure, that prince of Mercantilists, Thomas Mun, wrote: "The ordinary means ... to encrease our wealth and treasure is by Forraign Trade. . . . This ought to be encouraged, for upon it hangs the great revenue of the king, the honor of the kingdom, the noble profession of the merchant, the school of our arts, the supply of our poor, the improvement of our lands, the nursery of our mariners, the walls of the kingdom, the means of our treasure, the sinews of our wars, the terror of our enemies." And Mun believed that only the treasure so gained " by the ballance of our forraign Trade " remained in the kingdom. 1 William Petty in a similar strain gave it as his opinion that, " There is much more to be gained by Manufactures, than Husbandry, and by Merchandise than Manufactures." 2 And Sir Josiah Child held that those trades deserve most encourage- ment which employ most shipping ; " for besides the gain accruing by the goods, the freight, which is in such trades often more than the value of the goods, is all profit to the nation." 3 In a similar vein it was argued that the sailor was at once an artisan, a soldier, and a potential merchant; that fleets were valuable for defense; and that only through foreign com- merce could countries having no mines obtain the coveted treasure in gold and silver. Of course, since a nation could not export without producing, commerce necessitated manufactures. Articles of high specific value alone could bear the expense of transportation, therefore manufactures were favored next to trade and above agriculture. That even this cardinal Mercantilist idea did not pass un- challenged, however, appears from the fact that in his Dis- courses upon Trade, Sir Dudley North argued that foreign trade could not subsist without home trade. 4 1 England's Treasure by Forraign Trade (published 1669), p. 49; Eco- nomic Classics Series, pp. 28-29. First edition 1664. 2 Essays in Political Arithmetick (1691), p. 100. 3 Discourse of Trade, Preface (1690). 4 North, Discourses upon Trade (1^-91), p. 16. 94 ECONOMIC THOUGHT 3. The Balance of Trade Idea. But howsoever great a nation's foreign trade might be, it was not sufficient unless there was a proportionate excess in value of exports over im- ports. This was the balance of trade notion. Child states the doctrine as follows : "It is the most general received opinion, and that not ill grounded, that this balance is to be taken by a strict scrutiny of what proportion the value of the commodities exported out of this kingdom bear to those imported ; and if the exports exceed the imports, it is concluded the nation gets by the general course of its trade, it being supposed that the overplus is imported in bullion, and so adds to the treasure of the kingdom ; gold and silver being taken for the measure and standard of riches." 1 Child himself considers the balance of trade to be simply the national gain or loss by foreign commerce, and thinks the best way of ascertaining it to be by observing the general state of trade and shipping. He also mentions the rate of exchange. Like Mun and Davenant, he enlarges on the difficulties of ascer- taining the balance with any degree of accuracy. But without further illustration it may be observed that at least four somewhat different attitudes toward the balance of trade may be found among Mercantilist writers, (i) It was the original or vulgar idea that a favorable balance was a means or instrument by which the stock of precious metals in a given nation might be increased. This notion was apt to be asso- ciated with an over-emphasis of treasure. Furthermore, it tended to confuse the means., with the end : the balance of trade must ultimately depend upon industrial efficiency, and is thus the result rather than the means of securing treasure. (2) Or, a relative conception being added, it might be regarded as an agency for outstripping other nations, thus involving the fallacious notion that what one nation gained another lost. i (3) Some looked upon the balance as being the general " net profit " of the nation on its annual trading, embracing 1 Discourse of Trade, p. 153. MERCANTILISM 95 specie, credit, and commodities. 1 (4) While still others saw in it simply an index to the state of the nation's trade, to be used like the rate of exchange, the amount of shipping, etc. 2 Of these views the third, with its specie or treasure element made by far the most prominent, was the most widely prevalent. Such writers as Barbon (Discourse of Trade, 1690), who attacked the balance of trade idea, can hardly be classed as Mercantilists. To put into execution the foregoing theories and policies involved many contributory or supporting policies, and brought about a host of government regulations, duties, and bounties. An interesting attempt at classifying the various measures calculated to enable a nation to overbalance its neighbors in profits by foreign trade, was presented by one of the writers already mentioned. The classification embraces four general heads : 3 I. Increase the number of hands. This might be accomplished through naturalization laws, religious toleration, freedom to hire as many servants, looms, etc., as desired, poor relief, and education. II. Increase the amount of stock. In addition to some of the above measures, a law for the transference of bills of debt, the enforcement of the navigation acts, various protective measures, and fewer holidays were advocated. III. Make trade easy and necessary. This desirable consum- mation was to be attained by the preceding agencies and by the establishment of a court merchant, abatement of interest, adequate convoys at sea, etc. IV. Make it the interest of other nations to trade with us. By 1 Davenant, who took this view, uses the phrase, "quick stock" (of the people of a nation) as equivalent to the balance of trade. Essay on Ways and Means, p. 13. 2 These different uses of the phrase, " balance of trade," are not coordi- nate except in the broad way of having a bearing directly or indirectly upon the gain of the state by foreign trade. The fourth use of the phrase might be subdivided, it being regarded (a) as an index to trade in general, (b) as an index to trade with some particular nation. 3 Compare Mun, England's Treasure, Chap. Ill ; and Child, Discourse, Chap. I. 96 ECONOMIC THOUGHT gaining their respect through a strong navy and army; by underselling, honest dealing, wise treaties, and restricting im- ports of manufactures, this end might be attained. A scrutiny of the writings of the chief English Mercantilists shows that the government policies advocated, and these make the chief feature of Mercantilism, may all be summed up as concerning population, its size and character ; the develop- ment of natural resources; and various commercial devices. 1 Under the first group of policies would come the advocacy of toleration and freedom of conscience, largely to attract indus- trious foreigners; careful provision for the poor and remedies for unemployment made a prominent point in various programs. Others stressed education, especially in arithmetic and accounts ; while all agreed that " parsimonious " and thrifty living was imperative, as this would reduce the importation of foreign wares and, as in the case of clothes, leave a larger surplus for export. Mercantilists were all convinced that every man oweth to work, to use the language of an old statute, and compellable industry was a common idea. As to natural resources, it was pointed out that by a better utilization of waste lands things then imported might be pro- duced at home; and the development of the fisheries was an important policy. By " corn laws " Mercantilists strove to stimulate and protect agriculture to the end that the nation might be self-sufficient and support an abundant population. There is space to mention but a few of the many plans for facilitating and increasing commerce. For example, there was the public registry of mortgages and sales, the establishment of banks, the greater use of bills of exchange to allow more rapid settlements and turnovers, free importation of raw materials, exportation in British vessels, etc. Opinion was divided as to the efficacy of lowering the interest rate by law ; but not a few deemed such a measure of the utmost importance. 1 These policies were largely drawn from Holland, for whose commercial methods and institutions the seventeenth century Englishman had great respect. For Holland's thought see Laspeyres, Geschichte der volkswirtsch. Anschauungen der Niederlander. MERCANTILISM 97 Perhaps this is the place to refer to the colonial policy com- mon to Mercantilists. Recent discovery and conquest had made colonies of great moment; and, in accordance with the foregoing ideas, the accepted treatment of them was to confine their industry as largely as possible to the production of raw materials, with the idea that the mother country should work these up and sell the finished product to the colonists. The net profit of the nation would thus be increased. The Mercantilist ideas concerning money easily led up to the various land-bank schemes which marked the close of the seventeenth century. Men who believed that an increase in the quantity of the circulating medium would correspondingly increase manufactures and trade, especially if, as was often the case, they also believed that " mony is a value made by a law," readily fell in with propositions to swell the monetary supply. Such men appear to have been Chamberlen, Briscoe, Barbon, and Asgill, in England, and Law, in France. John Law (1671-1729), a Scotchman by birth, about 1716 succeeded in establishing a great land bank in France, but after a pyro- technical career was financially ruined in 1720. His pam- phlet, Money and Trade considered, with a proposal for supplying the nation with money (1705), had a considerable influence. In it, he argued that " wealth depends upon commerce, and commerce depends upon circulation ; " and he advocated a paper currency based upon land. This whole movement, however, is best considered as a by-product or side-issue of Mercantilism : it is not characteristic of the more typical period or representatives of Mercantilism. It will also be observed that its emphasis upon land is not so easily explainable in terms of Mercantilism as are its purely monetary aspects. The Practical Application of Mercantilist Policies. In accordance with such ideas, we find many acts for the encour- agement of tillage, corn laws, navigation laws, and laws creating and regulating the staple, sumptuary laws, assizes of bread and ale. Probably it was in France under Colbert that the re- strictive policy was carried farthest. We are told that " the state exercised over manufacturing industry the most unlimited 98 ECONOMIC THOUGHT and arbitrary jurisdiction. It disposed without scruple of the resources of manufacturers ; it decided who should be allowed to work, what things they should be permitted to make, what materials should be employed, what processes followed. . . . Not the taste of the consumers, but the commands of the law must be attended to. ... Machines were broken, products were burned, when not conformable to the rules. . . . An artisan could neither choose the place in which to establish him- self nor work at all seasons, nor work for all customers. There exists a decree of March 30, 1700, which limits to eighteen towns the number of places where stockings might be woven. A decree of June 1 8, 1723, enjoins the manufacturers at Rouen to suspend their works from the ist of July to the i5th of September, in order to facilitate the harvest. Louis XIV, when he intended to construct the colonnade of the Louvre, forbade all private persons to employ workmen without his permission, under penalty of 10,000 livres, and forbade workmen to work for private persons, on pain for the first offense of imprisonment and for the second of the galleys." 1 In Prussia many measures were adopted to foster industry. These were partly negative, as the abolition of certain gild restrictions; and partly positive, as encouragements to immi- grate and to marry, the establishment of mills and manufac- tories, the maintenance of lists of business opportunities, etc. There were also the usual limitations on exportation and im- portation. The policies seem to have been very wisely applied. 2 Particular Economic Theories. i. Value. Clear evidence of the development which was going on during the sixteenth and seventeenth centuries in industry and philosophy appears in that part of economic thought which was devoted to value. A money and exchange economy of increasing complication, making the application of the relatively simple idea of just price imprac- ticable and unsatisfactory, was joined with a decreased domina- tion of moral and juristic principles. Material things were more 1 Dunoyer, De la LiberM du Travail, quoted by Mill, Political Economy, V, xi, 7. 1 See appendix to this chapter. MERCANTILISM 99 regarded ; and a long step was taken toward the development of economic science by a growing separation of ethical concepts. For to an increasing extent men gave their minds to a concrete study of political or economic evils and the remedies for them. Sig- nificant of the time was the rise of a group of traders and states- men whose empirical writings show this tendency, It should be borne in mind that much of their writing was that of the pamphleteer and lacks the breadth and balance of scientific treatises, just as the fugitive pamphlets of to-day are apt to do. The fruits of a better appreciation of human personality and its worth appear in the works of a group of publicists and juristic philosophers who emphasized human reason, faculties, and desires, basing their law of " nature " upon the so-called nature of man. Thus subjective factors came into new promi- nence : if buyer and seller were satisfied, the price was just. It must be noted, however, that the juristic philosophers were inclined to imply ethical principles, while the traders and states- men generally overlooked the subjective. Passing over a group of Italian writers who sapped the medi- eval idea of just price, 1 the historian must mention the Dutch publicist, Grotius, 2 and Pufendorf. 3 Both make wants and desires an important element in value, implying a distinction between value in exchange and utility, and giving a considerable degree of validity to competitive prices. Pufendorf stresses the " moral estimation " idea, and says, " The foundation of the price or value of any action or thing is, fitness to procure either mediately or immediately, the necessaries, or conveniences, or pleasures of human life." And the effects of scarcity and plenty are given some weight by him. But in the thought of both writers the notion of a basal value resting on cost of production appears. For illustration, Grotius said that " account is commonly taken of the labor and ex- pense of the sellers ; " and Pufendorf held that in regulating 1 E.g. Buoninsegni (1591), Scaccia (1618). 1 Dejure belli et pacis (1623), Bk. II, Chap. XII. See Laspeyres, E., Gesch. d. volksw. Anschauungen der Niederlander, p. 3. * DC jure naturae et gentium, (1672), Bk. V, Chap. I. 100 ECONOMIC THOUGHT " natural price," " regard is to be had to the labor and expense of the merchant " and his risk. The significance of these men in this connection is that they kept alive the importance of the subjective element, and sub- stituted for the just price conception an idea of " natural value " in which the play of competitive forces was recognized. But what of the traders and statesmen, the empiricists? Here one finds the objective notion of value dominant, the idea of value inherent in the object and arising from its char- acteristics. Two representatives of this group will suffice, namely, Petty and Locke. Sir William Petty makes value rest on expenses of production, reducing them to labor and land. " Labour is the father and active principle of Wealth, as Lands are the mother." But he seeks to reduce these two ex- penses to a single unit, " so as to express the value of anything by either alone." 1 Market or " extrinsic " values rose or fell ac- cording to supply and demand. According to Locke, labor is the almost exclusive source of value, for he says, " it is labour indeed that puts the difference of value on everything." 2 " Nay, if we will rightly estimate things as they come to our use, and cast up the several expenses about them, what in them is purely owing to nature, and what to labour, we shall find, that in most of them ninety-nine parts out of a hundred are wholly to be put on the account of labor." These two writers, then, are to be taken as forerunners of the later labor theories of value. They represent the majority of English Mercantilists proper. It remains to touch upon a few notable exceptions. The Italians, Davanatzi, 3 and Montonari, 4 and the Englishman, Nicholas Barbon, 5 will suffice. These men laid the greater emphasis upon utility and held subjective theories of value. Thus Barbon wrote : " The value of all wares arise from their 1 Petty's Economic Writings (Cambridge, 1899), Vol. I, p. 181. See Rost, Wert- u. Preis-Theorie, p. 29 ff. ; Sewall, Theory of Value before A. Smith, p. 70 ff. 2 Essay on Civil Government (1690), London, 1772, p. 210. 3 Lezione della Moneta, 1588. 4 Delia Moneta, 1680 circa. 6 A Discourse of Trade, 1690, Chap. III. MERCANTILISM IOI use ; things of no use, have no value, as the English phrase is, they are good for nothing" And again, " for the value of things depending on the use of them, the over-pluss .... become worth nothing ; so that plenty, in respect of the occasion, makes things cheap ; and scarcity, dear." 2. Interest. No unanimity exists among Mercantilist writers on the subject of usury or interest. Thomas Mun, about the middle of the seventeenth century, argued in favor of interest taking on the ground that money-lending enabled poor young merchants to rise and made possible the advanta- geous employment in trade of the funds of widows, orphans, and gentlemen. As to the nature of interest, his conclusion was " contrary to those who affirm that trade decreaseth as money increaseth, for they rise and fall together," 1 that is, he considered the interest rate as a result rather than a cause of industrial conditions. About 1668, a controversy over usury laws sprang up. In conflict with Mun's views, Sir Thomas Culpepper had written two tracts in favor of establishing lower interest rates ; 2 and his son published a " Discourse " attacking usury. But per- haps the most eminent sponsor for this notion was Sir Josiah Child. He maintained that a low interest rate was the natural mother of frugality and industry, that it would attract traders by making capital cheap, and compel frugality by making smaller " profits " necessary ! A high rate of interest made money scarce because every man as soon as he had saved a little, sent it to the goldsmith. The whole burden of such arguments was, " We shall never stand on even ground with the Dutch in trade till interest be the same with us as with them." 3 Likewise, Davenant took a fling at those who received interest : 1 England's Treasure by Forraign Trade, p. 127 ; Economic Classics Series PP 77-8i. 1 A Tract against the high rate of Usurie, 1621 ; ibid., 1640. In the first he favored reduction from 10 to 8 per cent ; in the latter this reduction having been made he desired a 6 per cent legal rate. 3 Discourse of Trade, pp. 27, 29, 167, and Preface; for the situation in Holland see Laspeyres, Anschauungen der Niederla'nder, p. 256. r: pi 1 ,! 102 ECONOMIC THOUGHT " The usurers, who are the true drones of a commonwealth, living upon the honey without the labor," should be taxed. 1 Most of these men thought that a law reducing the interest rate would be effective and make money cheap. Evidently they got the cart before the horse and made the effect the cause, all of which indicates a lack of understanding of the functions of capital and money. 2 On the other hand, there were some who took Mun's side in the usury controversy. One, Thomas Manly, explained that " as it is the scarcity of money (and many borrowers) that maketh the high rates of interest, ... so the plenty of money and few borrowers will make the rates low." John Locke, too, while not understanding the causes of the value of money, argued that low interest rates were the result of a plentiful supply of money. And Sir Dudley North upheld this end of the controversy, explaining that an abundant " stock " and security made rates low in Holland. Of the preceding writers, excepting North, it may be said that if they had any conception of the relation between the productivity of capital and interest it was but a faint one. Their notion of " profits " was naive and unanalyzed ; " usury " was simple payment for the use of money. Nicolas Barbon, however, while arguing for a decreased rate of interest, saw this relation ; for he wrote : " Interest is commonly reckoned for mony ; . . . but this is a mistake ; for the interest is paid for stock. . . . No man takes up mony at interest, to lay it by him, and lose the interest of it." 3 And North in his Discourses upon Trade (1691) is perhaps another exception. 4 1 Essay on Ways and Means. 1 Cossa, in his Introduction to the Study of Political Economy, certainly speaks too strongly in calling Child remarkable for his sound understand- ing of money without noting this limitation. By Child's time money was largely invested in profitable ways. * Discourse of Trade, pp. 31, 32. 4 " But as the Landed Man letts his land, so these still lett their stock ; this latter is call'd Interest, but is only Rent for Stock, as the other is for land." "... if there be more Lenders than Borrowers, Interest will also fall; wherefore it is not low Interest makes Trade, but Trade increasing, the Stock of the Nation makes Interest low." (p. 4.) MERCANTILISM 103 3. Population; Wages; Rent. It would be wrong to make the desire for a dense population, as such, one of the cardinal features of Mercantilism; but, partly for purpose of war and partly for increase in production, Mercantilists desired a numerous people. By employing many people the king's revenue would be increased. Cheap and abundant labor was necessary to enable home products to compete successfully with those of foreign countries ; hence the laws and regulations encouraging matrimony and parenthood. Samuel Fortrey announces that " People and plenty are commonly the begetters the one of the other, if rightly ordered " ; * Davenant says, " People are the real strength of a country"; 2 and Child, that "it is in multitudes of People, and good Laws, such as cause an Encrease of People, which principally Enrich any Country." 3 The Mercantilists appear to have had no theory of wages or rent. As already suggested, they were more or less unsystematic pamphleteers ; and their ends concerned production rather than distribution. It is true that Petty saw that the value of labor is derived from its product, that Child stated that wage regu- lation is unwise, etc. ; and the latter writer observed that rent had fallen in England as the result of improvement in Ireland and high land taxes. 4 But these ideas were not developed. 4. Factors of Production. Of more significance are their utterances concerning the factors of production : these have interest in connection with their probable influence upon both Physiocrats and Adam Smith. For example, Petty's fa- mous dictum " Labour is the father and active principle of Wealth, as Lands are the mother," is most significant in both relations. Child refers to " the inseparable affinity that is in all nations and at all times between land and trade, which are twins, and ever will wax and wane together." Davenant keeps the foreign trade idea to the front, remarking that " the price of land, value 1 England's Interest and Improvement (1663), p. 4. J Essay on Ways and Means. A dense population makes invention, frugal- ity and industry necessary, which bring a nation riches. 3 Discourse of Trade, Preface. (See also Petty, Political Arilhmetick, pp. 107, 123; Barbon, Discourse of Trade, p. 39.) 4 Ibid., p. n. 104 ECONOMIC THOUGHT of rents . . . rise and fall, as it goes well or ill with " commerce ; but delivers himself of the following generalization: "The wealth of all nations arises from the labour and industry of the people," 1 a statement which reminds one of Adam Smith. Barbon, who was hardly a Mercantilist, said that " land is the fund that must support and preserve the government," and was himself interested in a land bank. 5. Productivity of Different Occupations. In general, as al- ready remarked, Mercantilists believed that the merchant was "the best and most profitable member of the commonwealth," and that after him came the artisan. One of their number makes a summary statement which covers the whole matter of produc- tive and unproductive labor. He writes : " It is (I think) agreed on by all that Merchants, Artificers, Farmers of Land 2 and such as depend on them . . . are the three sorts of people which by their study and labour do principally, if not only, bring in wealth to a nation from abroad ; other kinds of people, viz. Nobility, Gentry, Lawyers, Physicians, scholars of all sorts, and shop- keepers, do only hand it from one to another at home." 3 These ideas are of significance in the history of economic thought in two ways: they indicate a great change from the times, medieval and ancient, in which agriculture was placed first ; and they are to be associated with the notions of Adam Smith and the Physiocrats concerning the non-productivity of certain classes. It is of no little interest, and importance, too, to observe how economists have denied productivity now to this class, now to the other. The belief that certain occupations are not so productive as others, all things considered, has been a long-continued one. The intermingling of ethical ideas makes it difficult to compare these beliefs; but it may be said that they are determined largely by the dominant class. Thus, in the Middle Ages, agri- cultural interests dominated ; by the seventeenth century, com- merce was in the ascendency ; in the middle of the eighteenth 1 " Of the Use of Political Arithmetic," Works, Vol. I, p. 139. (Lon- don, 1771.) 1 Note the order. * Child, Discourse of Trade, p. 25. MERCANTILISM 105 century, as will appear later, there was a renewal of interest in agriculture ; while the Industrial Revolution put manufacturing interests to the front. Accordingly, the Mercantilists thought that as gentry, professional men, and retailers had little connec- tion with bringing in treasure, they were in that sense non-pro- ductive; while in 1776 Adam Smith considered that similar classes were not productive in the sense that they did not put vendible goods on the market. 6. Taxation. Worthy of notice, also, is the thought of the Mercantilists on taxation. In general their idea was that men should be taxed according to the benefits received from the state. 1 This idea was in accord wjtk-the prevalent notion of a "social contract." According toiHpbbe^, the test for benefit should be expenditure. The man who saves should not be penal- ized ; " when the impositions are laid upon those things which men consume, every man payeth equally for what he useth, nor is the commonwealth defrauded by the luxurious waste of pri- vate men." 2 Grotius and Pufendorf held that burdens must correspond to benefits received in the shape of protection. Sir Wm. Petty has been called the first English scientific writer on taxation. His words are : " It is generally allowed by all that men should contribute to the Publick charge, but according to the share and interest they have in the Public Place ; that is accord- ing to their Estate and Riches." 3 He favored the expense index, that is, taxation in proportion to expenditure. Other Mercantilist empiricists dealt with this important sub- ject at some length, and formulated several practical doctrines. In general, low customs and an increased use of excise taxes were favored. Equality in taxation was urged, and to this end a tax on money at interest, while the impracticability of taxes on easily concealed wealth was seen. 4 James Steuart : the last of the " Mercantilists." Sir James 1 See Seligman, Progressive Taxation in Theory and Practice, pp. 158, 162. (Publications of the American Economic Association, 1908.) 2 Leviathan, p. 271. (Reprint of 1881.) 3 A Treatise of Taxes and Contributions (1677), p. 68. 4 See Davenant's Essay on Ways and Means. 106 ECONOMIC THOUGHT Steuart l (1712-1780) was the chief English Mercantilist writer of the eighteenth century. Indeed he has been called the last of the Mercantilists. Following the Stuarts into exile in 1745, he lived in France, Germany, Holland, and Italy; and his book (1767) is largely a collection of observations made during this time. Its title is An Inquiryinto the Principles of Political Econ- omy, being an essay on the Science of Domestic Policy in Free Nations, in -which are particularly considered Population, Agri- culture, Trade, Industry, Money, Coin, Interest, Circulation, Banks, Exchange, Public Credit and Taxes. This seems to be the first use of the term Political Economy in an English book. His idea of the science has Mercantilistic earmarks : " (Economy in general is the art of providing for all the wants of a family with prudency and frugality. What ceconomy is in a family, political oeconomy is in a state. . . . The principal object of this science is to secure a certain fund of subsistence for all the inhabitants " and to render it secure, etc. Economics is an art. Mercantilist ideas concerning population also appear. Money and banking are treated at considerable length. Steuart justifies interest, but has no clear understanding of capi- tal as was commonly the case before the Industrial Revolution. Also, like Child, he feels that a low rate of interest would be bene- ficial, only governmental measures to secure it should be gradual. He has some sound ideas on price, regarding it as determined by demand and supply, and distinguishing "effectual " demand ; and Adam Smith has been criticized not unjustly for not refer- ring to Steuart on this point, as Steuart's work was well known to him. It is interesting to observe the influence of French thought upon Steuart. In France the Physiocratic doctrines, to be described shortly, were taking shape. Accordingly we find stress laid upon the agricultural surplus as conditioning the growth of population and industry, and his model state was pervaded with a characteristic unity and harmony. 1 Feilbogen, " James Steuart u. A. Smith," in Zeitschr. f. d. ges. Staats- wissenschaft (1889); Hasbach, Untersuchungen iiber A. Smith, pp. 81 ff. (1891). MERCANTILISM 107 The book is diffuse and woefully lacking in clear definition and accurate statement. This fact, together with the changes wrought by the Industrial Revolution and the appearance of Smith's Wealth of Nations, deprived Steuart's work of any con- siderable recognition or effect, though it appears to have had some influence in Germany. Critical Estimate and Summary. It must not be thought for a moment that the preceding statements will apply to all writ- ers who may properly be called Mercantilists, nor that they will apply in their entirety to any one of them. In some cases they are generalizations or analyses, which the men of the seventeenth century do not appear to have made expressly. In other cases there were exceptions, some of which have been pointed out. But it is believed that a congress of Mercantilists would have agreed by a large majority vote to any of the above propositions which have been made in a general way. The conclusions to be drawn from the foregoing discussion seem to be that the Mercantilists were inclined to lay too much weight on the advantage of gold and silver as compared with that of other commodities ; that they overestimated the value of commerce, or, perhaps it would be better to say, underestimated the relative importance of agriculture and other branches of human industry ; and that they erred in supposing that a favor- able balance of trade necessitated a benefit in the long run. They were in error, too, in being too much inclined to regard what one nation gained as necessarily the loss of another. A harmony of interests, it is true, does not always obtain as between differ- ent countries. A good part of what England gained by the Navi- gation Act, Holland lost ; American competition is to-day injuring very sensibly the interests of important classes in England and on the Continent. Nevertheless a more scientific examination into the theory and practice of international trade was ere long to show economists that both parties generally gain. Industrial developments led the Mercantilists to abandon the doctrine of just price, though traces of the idea may be found, and they were forced to give more consideration than their pred- ecessors to subjective elements in " extrinsic " or market values. 108 ECONOMIC THOUGHT A cost theory of value with the labor element emphasized was held or implied by some of the most prominent writers. On the whole, interest was defended and a few had some inkling of the reasons for it. Many, however, thought it was something to be determined by the state, and thus showed imperfect ideas about capital. Criticism of the Mercantilists' ideas has been carried too far in not a few cases. They contained errors unquestionably, and the germs of an unhealthy development ; but they are far from a mass of absurdities when considered, as they must be, with re- gard to time, place, and, above all, to the spirit of the people. It is nonsense to think of exports exceeding imports in all countries. But the Mercantilists never claimed this belief. They did not generalize. They were laying down the principles of a national political economy, not a cosmopolitan one. War was the normal thing, and a large degree of self-sufficiency a practical necessity. Some explanation of their ideas concerning treasure has already been given. Now let it be forgotten for the moment that gold and silver are money, and let them be considered merely as other commodities. Then let the question be put : how is a people which has not the commodity, gold, or the commodity, sil- ver, but has other commodities, to obtain the former peacefully ? The reply is simple : by exchanging commodities. One can con- ceive of no other way. Now that is one thing which the Mer- cantilists of England, France, and Germany wished to do. They wished to trade off some of their wares for gold and silver, and they actually accomplished their purpose. Spain lost gold and silver, and they obtained it. As a temporary expedient under existing conditions, the balance of trade theory was justifiable. The Mercantilists erred chiefly in so far as they regarded it as a proper permanent national policy. But is the error not natural ? Most men hold the same notion to this day, and that without the reasons which existed over two hundred years ago ! To apply a practical test, it may be said that Mercantilism was for a time fairly successful. The French free trader, Blan- qui, acknowledged freely the benefits France derived at one time from a governmental supervision of trade and commerce. MERCANTILISM 109 Even Adam Smith admits that Cromwell's famous Navigation Acts, which prohibited foreigners from bringing into England any goods that were not the product of their own country, was of advantage to England, and approves of them. As to German Mer- cantilism, Mirabeau wrote of Silicia, a region which received particular attention from Frederick the Great, "There reigns there a population, a culture, and an industry truly immense." And other contemporaries confirm this, explaining the want of prosperity in other German states by a lack of proper initiative on the part of the governments. Under the conditions of the time there was a lack of energy and go-ahead on the part of private individuals, so that when the government did not lead, stagnation in industry was the rule. Coupled with this idea is the fact that Mercantilistic philoso- phy was based upon a belief that private and social interests are not necessarily in harmony. The reader of the Mercantilist pamphlet was to distinguish warily between the profit of the merchant and the gain of the kingdom, for " frequently they run counter one to the other." 1 This concept by no means had the content of the similarly worded one common to-day, nor did it lead to all the conclusions now drawn ; but then, as now, regu- lation of industry by the state was the logical outcome. The essence of Mercantilism proper was the application of the independent-domestic-economy idea of self-sufficiency to na- tions, an old system of thought to a new group of phenomena. One sees it in the attitude of the state toward trade and industry ; it appears in the balance of trade idea ; it lies back of the over- estimation of precious metals. This was more or less conscious with the Mercantilists. Mun wrote concerning the balance of trade : "... it cometh to pass in the stock of a kingdom, as in the estate of a private man." Child puts it as follows : there is " a great similitude between the affairs of a private person, and of a nation, the former being but a little family, and the latter a great family." 2 It is, then, simply the idea that has always dominated the trader and which is prevalent among merchants to this day: 1 Child, Discourse of Trade, preface. * Discourse of Trade, p. 164. HO ECONOMIC THOUGHT patronize home industry; so conduct your business that the profit and loss account of the year's trading shows a balance in your favor ; etc. " Whatever nation," says Davenant, " is at a greater expense than this balance admits of, will as surely be ruined in time, as a private person must be, who every year spends more than the income of his estate." Thus we arrive at a body of government regulation of com- merce and industry directed toward securing a large net profit for the state as a trader, in the shape of treasure. This is Mercan- tilism proper. APPENDIX TO CHAPTER VTI Through Professor Gustav Schmoller's admirable little work on German Trades in the Nineteenth Century l we can trace in detail the operations of Mercantilism in Germany. From 1650 to 1800 Prussian industry was directly under the guidance of the state authori- ties. It is true that in some respects the monarchs of Prussia exer- cised their power to increase industrial liberty ; but only in so far as it seemed good to them, and they never let the reins slip out of their hands. The Great Elector, Frederick William, issued edicts in 1667, 1669, and 1683 to encourage the cultivation of places that had been laid waste by the Thirty Years' War. One measure attempted to draw people to the cities by removing the tax (den Schoss-scot) resting on houses and substituting an excise (Accise) in the cities, with the expectation that this would cheapen houses and reduce the cost of living. This was not a financial but a political measure, it must be noted, and was an act of state interference. It had the desired effect. A large demand for houses manifested itself in the Prussian cities, and many merchants and tradesmen immigrated. Edicts were issued in 1686 and 1688 to improve the whole organization of the trades. Many restrictions which the gilds had kept in force, limiting the number of masters, journeymen, and apprentices, were removed. All immigrants received free of charge the rights of a master tradesman and those of a citizen. The linen industry in Ravensberg in West- phalia was assisted by an institution of state for measuring the length and breadth and determining the quality of linen and stamping it 1 Die Deutschen Kleingewerbe im ipten Jahrhundert (Halle, 1870). MERCANTILISM III accordingly. The effect of this was to give purchasers confidence in the products of the manufacturers. Frederick I, who reigned as king from 1701 to 1713, continued the policy of the Great Elector. Immigration was artificially encouraged. Magdeburg was rebuilt by settlers out of the Palatinate. Up to 1690, forty- three new kinds of trades had been established in the Mark, the province in which Berlin is situated, by the French and the Wal- loons. Frederick William I ("der sparsame kluge hausvaterliche Tyrann"), who reigned from 1713 to 1740, went still farther in the direction in which his predecessors had gone. He forbade the exportation of raw material, especially of wool. The importation of foreign manufac- tured articles was either entirely forbidden or rendered difficult by the imposition of heavy duties. The government established fullers' mills, dyeing establishments, presses, and wool magazines. To en- courage certain classes of foreign artisans to marry, privileges were granted them for three years after marriage, among others, full exemp- tion from taxes or exceptionally low taxes and freedom from military service. Several times, as in 1718 and 1721, lists of tradesmen and artisans who had failed in different cities or had quit business were published, so that the vacancies might attract attention and call in others to take their places. Frederick the Great (1740-1786) continued his father's policy. He granted religious and intellectual toleration, and administered justice with impartiality, not merely for the sake of these good things themselves, but also to increase population by making Prussia the goal of emigrants fleeing from persecution. His efforts brought at least 30,000 immigrants into Silesia alone. Important industrial activity was the result of this application of the principles of the Mercantilists. Schmoller enumerates the follow- ing industries which owe their origin to the policy of Frederick the Great : the mines in Silesia ; an iron manufactory in Eberswalde (Neustadt-Eberswalde until 1876) ; the Berlin iron foundry, in which the entire Berlin industry in manufacturing machines had its origin ; the manufactory of silk in Crefold ; the weaving industry in Elberfeld and Barmen ; and the linen industry in Billefeld. Dutch bleaching establishments were founded. A court was established which exercised jurisdiction over matters of commerce and bleaching ; and to crown the whole, state diplomacy was used to assist the manufacturers in selling their products. Spin- 112 ECONOMIC THOUGHT ning and weaving were controlled by minute regulations. It was forbidden to export yarn. Spinning was encouraged in every way ; the soldiers were ordered to spin; the spinners of cotton were paid annual premiums, and received privileges such as exemption from taxation. Edicts were issued and regulations framed for the purpose of assisting artificially the small tradesmen to obtain credit and the means of procuring raw material. CHAPTER VIII EARLIER GERMAN MERCANTILISTS AND KAMERALISTS * Teutschland hat zu seinem schaden, O der grossen raserey ! Fremde kauf-leut eingeladen, Das es ja bald geldarm sey. Fremde waaren, welche leyder ! Bringen nichts als fremde kleider, Machen unser teutsche welt Reich an hoffart, arm an geld. VON HORNIG. 1. Resume of the Nature, Scope, and Development of Kameralism. For some three hundred years or more the economic thought of the German states and Austria was largely embedded in that body of learning known as Kameralism or Kameralwissenschaft, This was the German Mercantilism, a Mercantilism which deserves separate study because of its peculiar problems, its relatively full and consistent formulation, and its close relation to more recent German Economics. In the Middle Ages the word Camera (German Rammer) de- signated the place in which the royal income was stored. By the Prankish kings the royal treasure chamber was called Kammer, and the term soon came to apply to the royal property. Thus Kameral affairs concerned the economy of the prince, 1 For a more complete statement of Kameralism, see Small, The Camer- alists; Chicago, 1909. The present chapter was prepared some months before the appearance of Professor Small's book, and, its conclusions having thus been independent, the substantial unanimity of the two is of interest. The writer has had access to a copy of Hornig's Oesterreich iiber alles, which important work Dr. Small unfortunately could not obtain. The writer would, perhaps, lay more emphasis on the economic element in Kameralism than does Professor Small, while he realizes the large proportion of politics and technics embraced. I 113 ECONOMIC THOUGHT and Kameralism was the art which maintained, increased, and administered the royal income. After the erection of the Hofkammer by the Emperor Maximilian, at Innsbruck and at Vienna (1493 and 1501), a knowledge of the principles and duties involved in its administration became necessary, and chairs for instruction in such knowledge were later founded in various universities. At the outset, Kameralism was a combination of ideas, politi- cal, juristic, technical, and economic ; but toward the close of the Middle Ages it became largely separated from jurisprudence, while it was extended to include, besides the original idea of do- mainal and regalian administration, 1 broader matters of economic policy. Then, during the eighteenth century, technical subjects were more and more dealt with, until in the early nineteenth cen- tury there was a reaction, and economics was severed from tech- nics. This was, no doubt, partly effected by the evolution of political economy in France and England. Schmalz, writing in 1819 (Encyclopedia of Kameralistic Sciences), made Kameralism include all matters pertaining to the property and income of the people, their acquirement and increase, and taxation. Two distinct branches were technology and political economy. And Rau ( Ueber die Kameralwissenschaft, 1825) distinguished private and technical economy from the public and political. Throughout its entire development Finance figured promi- nently in Kameralistic thought. To understand this thought one must remember that the great stimulus to the thinking of the early Kameralists lay in the rela- tively backward industrial condition of the German states. From the reign of Charles V to the close of the Thirty Years' War, Germany was split up into a political chaos of struggling princely and burgher economies. In vain (1522-1523) was the project of a national tariff wall raised ; and Copernicus proposed a uniform currency to no avail. The political struggle concern- ing coinage (" Der Miinzpolitische Streit ") of 1530 was typical. 1 Domains included royal estates, crown lands, etc., regarded as sources of revenue for the rulers. Regalia included many rights and prerogatives, for which see below, p. 126. KAMERALISM 115 During the continuous warfare prior to the peace of West- phalia (1648) cities and country districts were depopulated, while heavy loads of debt were accumulated by sovereigns. Torn by internal dissension, overrun by Turk and Frenchman, outstripped in trade by the vigorous activity of Holland, France, and Eng- land, there was need of action. The need of remedies was especially felt after the Thirty Years' War. Kameralism became a study or discipline for training officials, largely for the work of remedying the economic evils which afflicted the German states in the sixteenth and seventeenth centuries. In this situation, coupled with an undeveloped system of tax- ation, lay the roots of the German Mercantilism. Beginning about the middle of the sixteenth century the rise of ideas characteristic of German Mercantilism or Kameralism may be traced in the thought of Luther and of Ossa (1506-1556). But George Obrecht, who was made professor of law at Strass- burg in 1575, appears to be the first real Kameralist, with Besold also a law professor following. Bornitz and Klock (1583- 1655) came shortly after, and are more important. These writers generally emphasized the importance of money and a dense population, and placed great confidence in government regulation; while differing on such points as the advisability of depending on domainal revenue to support the government, the nature and scope of regalian rights, and a reduction of the legal interest rate. Chapters on such technological sub- jects as fishing, agriculture, the silk industry, etc., were often presented. Better known and more influential than any of the preceding was Seckendorf (1626-1692), the author of Der Teutsche Fiir- stenstaat (1655). He may almost be called the father of Kamer- alism. Like his fellows, he favored a dense population and re- striction of exports; but he opposed gild monopolies and was more moderate in his views on government restriction. His tendency to separate economic considerations from those of a political or merely fiscal and administrative character is note- worthy. Il6 ECONOMIC THOUGHT To be associated with Seckendorf are Bechers (1635-1682), Hornig (or Hornigk), and Schroeder (1640-1688) ; while with Gasser, Danes, Dithmar, Zincke (1692-1768) and Justi (d. 1771), Kameralism became a university study and was more systematically developed. 2. The Economic Thought of Some Typical Kameralists. (a) Beckers 1 ''Political Discourse": 1667, In the fore part of his Political Discourse l (1667) Dr. Johann Joachim Bechers gives us a statement of the rules which should regulate the various orders of society in Mainz, the upper classes as well as merchants, artificers, the poor, Jews, and beggars. The quality and price of goods were to be regulated, forestalling pro- hibited, and, in general, the late-medieval market and handicraft regulations enforced. The authority of the gilds, however, must be decreased, and if a workman were skillful, he might work at his craft whether fulfilling gild requirements or not (pp. 71-83). He recommends that the three productive classes, merchants, handicraftsmen, and peasants, should be guided by one head official to the end that they might cooperate, and so cause the community to grow by advancing its business. " But, because . . . this consists in negotiation and sale, it is easily to be understood that of everything which hinders it or the business and population which arise from it, and on that account weakens the community and its business and all the utilities which result, nothing is so obstructive as to burden mer- chandise and merchants with high tolls and imposts ; for thereby will the tradesman be impelled to furnish his wares dearly in order to cover such imposts " (p. 99). As a result, either foreigners would get the trade, or the consumption would be decreased and trade weakened. So with handicrafts : heavy taxes on the means of subsistence make artisans charge more for their work, and purchases are made abroad, while these results cause the agriculturist to lose his market. 1 Polilischer Discurs, von den eigentlichen Ursachen des Auf- und Abnehmens der Stadt, Lander, und Republicken, in Specie, wie ein Land volkreich und nahrhaft zu machen. 3d ed., Frankfurt, 1688; ist ed., 1667; 6th ed., 1 759- KAMERALISM 117 Consumption or sale 1 is most necessary to hold the three groups together and bring prosperity. When the market is good the merchant sells, the manufacturer works day and night mak- ing things for the merchant to dispose of, and the agricultural worker produces raw materials. But the merchant is the key- stone. Upon him and his sales rest the nourishment and increase of the people. " Those are proper traders who through their stock bring it to pass that raw stuffs remain in the land and are worked up by the subjects thereof, . . . that instead of foreign manufactures coming into the land and money going out to pay for them, not only does such money remain in the land, but the exports draw in trade (or wealth) : These, say I, are useful members of the community" (103). Markets are of two kinds : domestic and foreign. The former is a privatum privilegium, is certain, and to be kept for home traders. The foreign market, if the foreigners are clever, is not to be hoped for as a privilegium, and one can draw away the foreigners' money only by the cheapness and goodness of one's wares. To this end, cheap living through low import duties on food, etc., is desirable ; also, encouragement to good artificers, and good masters and materials. Bechers makes much of three great evils: monopolium,poly- polium, and propolium. These tend to destroy the state. The first, or monopoly, destroys population by restricting access to trade, as do the gilds with their many requirements. On the other hand, Holland, by abolishing all restrictions, has brought on a " polypoly " which exists when there are more peasants than land, more handicraftsmen than work, more merchants than market. This destroys subsistence. The idea of a " propoly " seems less distinct, Bechers himself stating that it tends to mo- nopoly. The East India Company was a " propoly." To fore- stall or to take advantage of a cheap year to buy up for the pur- pose of selling dear at a later time also fell under this head and tended to destroy the community. 1 Consumption, debit, oder Verschleiss. Il8 ECONOMIC THOUGHT To Bechers the institutions of greatest advantage to a state were a well-established currency, a free market house (Kauf- haus), a well-manned workhouse (Werkhaus), and a rich bank (267). The first three would maintain the supply of money; the last would bring in more from abroad. He seems to have had some understanding of the principle now called Gresham's Law, and discusses the measures tried by Sweden, Holland, and England for retaining their good coin. As no ware is dearer or more necessary to a country, he lays it down as a general rule that by every means money should be kept at home, and to this end advocates a five per cent impost on specie exports. Coins should be of pure metal, but might be advantageously decreased in weight. By the establishment of exchange banks on the borders of the country, the flow of prec- ious metals in and out of the country might be controlled, only domestic coins to pass current within. Bechers wrote much concerning foreign commerce, and fa- vored developing it through the agency of regulated companies. On the whole, though he did not overlook the importance of agriculture, nor desire an overdense population, he was de- cidedly a Mercantilist. 1 (b) Hornig; Rules for making a nation self-sufficient: 1684. Oesterreich iiber alles, wann es nur will * is the title of von Hor- nig's (or Hornigk) book. It was one of the best known of the Kameralistic writings, though now quite rare. The title strikes its keynote, Austria above all if only she will. By systemati- cally exploiting her resources, developing thrift, excluding cer- tain foreign manufactures, etc., she might surpass her neighbors in power and wealth. Hornig makes " the might and excellence of the land consist in its overplus of gold and silver and all other things requisite or convenient for its subsistence, and indeed all such as, in so far as is possible, come from its own resources, and at the same time their proper (rechtmassig) care, use, and application " (p. 33). 1 Bechers seems to have given up some of his Mercantilist doctrines and to have displayed communistic leanings. 1 Ed. of 1707 quoted; ist ed. in 1684. KAMERALISM 119 This passage brings out the chief point in Hornig's thought : self-sufficiency. He accordingly proceeds to examine Austria's balance (bilancia), considering first her deficit, so to say, in gold, silver, and other things, and then her surplus ; conclud- ing that her great natural resources in salt, bread, fish, wine, etc., made it possible for her to increase production and secure a favor- able balance (chaps, xi, xii, xiii). His idea of wealth and of favorable balance is not a narrow one. A land having only gold and silver is indeed rich (reich), but is far from the goal of self-sufficiency; for its people can neither eat nor wear those metals (27-28). On the other hand, one having all but gold and silver, while it could stand alone longer, is also dependent ; for, we are told, gold and silver seem indispensable to most men, and such a land would depend upon the foreigner's goodwill for the exchange of its goods for gold and silver. In making a common comparison between the bases for the industrial success of Holland and England, Hornig uses a strik- ing figure : Holland's gold magnet is stronger in attracting, Eng- land's in retaining, the precious metals (30). Thus the question with Hornig is always one of foreign com- parison. He specifically states that power and wealth have become relative terms, depending not on the absolute quantities of power and wealth possessed, but on their relations to those of neighboring lands. " The analysis of economic categories is interesting. All mat- ters useful for human subsistence are of two sorts : first there is the thing itself ; and secondly there is the proper (or legal ?) care and application, especially suitable arrangements for domestic and foreign industry and trade (27, 31). The former depends upon nature alone ; the latter partly on nature, partly on human wishes. In the last analysis all the things themselves fall into two classes: (i) gold and silver, (2) all other things for nourish- ment, clothes, shelter, etc. Gold and silver are equal to all other things in value and use (Werth und Nutzen), and are of quite an- other sort on account of their " civil use." But to return to Hornig's thesis. He lays down nine " fun- 120 ECONOMIC THOUGHT damental rules for a general national-economics." These rules were quoted by other writers, and exerted much influence. They are fairly typical of the dominant mixture of Kameralism proper and Mercantilism. I. The earth and all on and in it should be examined most ac- curately to learn how everything may be made most useful to the nation ; and in all things which concern gold and silver no pains or costs should be spared. II. " All the goods which occur in a country and which are not used in their raw state should be worked up in that country as far as possible." III. For the execution of these rules people should produce raw materials as well as work them up. Thus it is important to regard population, and to keep men from foolish occupations ; and by all devices to instruct and encourage artisans and handi- craftsmen, taking instructors from abroad if necessary. IV. Gold and silver once in the country should if possible be kept there ; but they must not be stored up, but kept in con- stant circulation. Nor must they be invested in unprofitable works. V. The inhabitants of a state should seek, in so far as is possible, to satisfy themselves with domestic goods and forego foreign products. VI. " Should the importation of foreign goods be necessary, they should not be paid for with gold or silver, but with exchange of domestic goods." VII. " Such foreign goods must be imported in the raw state and be worked up in the country." VIII. In all industry it must be considered how surplus goods can be exported in finished form for gold and silver, and with this object try to drive trade even to the ends of the earth. DC It is not as a rule permissible that goods of which the state has a surplus be imported, even if possible to buy the foreign goods for less than the domestic. Horm'g thought the exclusion of imports easy and simple (125). By this means a market would be guaranteed to the domestic producer : " When money no longer goes to foreigners KAMERALISM 121 at least ten millions annually will remain in the land and turn to business capital (Verlagscapitalien) ; and the assurance of the market, with the accompanying certainty of profits, will encourage capitalists to loose their cash. The foreign artificers will be compelled through lack of work and bread to come to the father-land to seek both." The restrictions of the gilds received considerable criticism, but he does justice to the good order enforced by them. Von Hornig's contemporary, von Schroeder, entered public service in Austria in 1673 to conduct a factory (Manufakturhaus) according to Bechers' plans, and was later court financial coun- cilor in Hungary. He is notable for his attack upon gild monopoly, and his advocacy of tolls, public loans, and the balance-of- trade idea. 1 (c) Daries' First Principles: 1756. Passing over the several writers mentioned above, the work of Joachim Georg Daries must be considered. His First Principles of Kameral Sciences, published in Jena, 1756, about ninety years later than Bechers' book. Shortly before this time Frederick William I had be- come interested in this subject, and in 1727 had founded chairs of Economic and Kameralistic Sciences at Halle and Frankfurt- on-the-Oder. 2 This had given an impulse to further study, in which it is noteworthy that technology was emphasized. In his preface Daries expresses indebtedness to Schroeder and Seckendorf, and refers to Dithmar, the latter being the incum- bent of the chair established by Frederick William in Frank- furt. He proceeds to recite the objections then being made to the study of Kameralism : it was said to concern things which 1 Notwendigcr Unlerricht vom Goldmachen (1648) ; De M inistrissimo (1663) ; Fiirstliche Sch&z- u. Rentkammer (1686) ; Disquisitio politico, vom absoluten Fursten (1713). Schroeder spent considerable time in England, and was much influenced by English thought. On Schroeder see Erbik, Wilhelm von Schroder. (A " Separate " from the reports of the Royal Academy of Sciences in Vienna. Vienna, 1910.) 2 These are often said to be the first professorships of political economy, but if they are so to be called the term " political economy " must not be given the full meaning it now possesses. Gasser was the incumbent of the chair at Halle. 122 ECONOMIC THOUGHT experience alone could teach, its subject matter was too complex for generalization, and some thought that only burghers or peasants should busy themselves about such matters. After disposing of these prejudices, he proceeds to consider the sources of annual income, which are of two sorts : one fixed and calculable, the other the result of chance (p. n). The former alone can be dealt with scientifically. It consists of (i) aptness in application of human powers, (2) acquired goods which can be of annual use. These goods form what he calls a Fund (Fond) or Capital ( !). They make a surer source of income than skill. His definition of the term " Capital " is suggestive : " We take it in the common sense to designate that earned property which we accept as enduring so that it proves effective annually for our uses " (p. 15). Now, a prince may be regarded either as a man, or as a royal personage or sovereign receiving a royal income. From the latter viewpoint, " the capital or fund of the princely income is the wealth of the State and the subjects." But to obtain this income, the capital of the subjects must not be encroached upon. It is constantly stated that the well-being of sovereign and subject are inseparable. Daries' division of Kameralism is, interesting. First comes Agricultural or Rural Economy, dealing with the forces of nature and their adaptation. Here tillage and cattle-raising are the chief subjects. Next he places Urban Economy, study- ing the ways in which art aids nature in workshops and factories. Then comes Police Science or Polity (Policei). Here such matters as population, education, care of the poor, and stimu- lation of industry are treated, in short, all arrangements of the state for increasing the annual income of the citizens. Fi- nally there is Royal Economy, which concerns the income of the prince and is Kameralism proper. Polity or police power (Policei} is clearly distinguished from religion and law. It deals with wealth. In so far as justice and religion aim at preventing poverty or increasing wealth, they belong with polity. The laws of polity must not contradict KAMERALISM 123 moral laws ; they must only determine how morally-permissible things can be directed to increase the wealth of the state. By nature, men are free to do anything in accord with reason; but polity may restrict and limit this liberty. " A regular polity makes good, and consequently rich, subjects, good and rich subjects make rich and powerful Princes" (394). In his chapter on town economy Daries makes an analysis of costs which is most interesting. The producer should investigate these carefully and see that allowance is made for (i) raw materials, (2) interest on the value of such materials till the finished good is sold, (3) the price of tools, and (4) their interest and depreciation, (5) labor, (6) interest on wages, (7) interest on buildings used, and (8) expenses of marketing, accounting, etc. When these items are established as a capital and the price received for the product replaces this capital with interest, the business is carried on with profit (233). On the whole, he subscribes to the doctrines of Hornig, but is much more liberal. He does not believe that gold and silver should never be exported, his rule being the following : " The export of gold and silver is only to be obstructed to the extent that it does not work to the good of the state. It is, on the contrary, an evidence of political shrewdness to give foreigners gold and silver if it is possible by this to further the well-being of the State" (531). And he opposes restriction of trade; for it would be better to seek how to direct the production of the nation into the most profitable industries. As to the desirability of always exchanging goods for precious metals, he remarks that circumstances exist under which the mere exchange of goods for goods is more advantageous. One country has especial advantage for one industry, another for a different one. By exchange of their respective products both profit (536). On the point of population he was an orthodox Mercantilist. " All industries which provide means for nourishing more subjects in a country are useful to it." A dense population is all but made the source of the wealth of the state. It is not to be feared. // order prevails, the food supply and trade and the income of the prince are increased ; and it is important for defense. 124 ECONOMIC THOUGHT The foregoing is all drawn from Danes' chapters on Agricul- tural, Town, and Police Economics, the greater part of which is given to semi-technological topics, such as beer-brewing, linen manufactures, tillage, and cattle-raising. He concludes with a book on the real or proper Kameral affairs, in which he discusses the income and expenditures of the prince, laying down rules for administering them. Chapters on Domains and Regalia, or regal rights, are included. 3. Justi's Political Economy. The work of Justi, entitled Political Economy, or A Systematic Treatise on all Economic and Kameral Sciences 1 (1755), maybe regarded as the climax of pure Kameralism. In it the great mass of Kameralistic doctrines was summed up and organized. There is little that is new, however, save the analysis and classifications. In the first place some further idea may be gained from Justi concerning the classification of the subject matter. Economic science, he states, deals with the maintenance and increase of thi means of private persons; Kameral science does the same for governments. But Kameralism proper is administrative in nature; for the business of the ruler is twofold, embracing besides polity and economy which maintain or increase the means of the state Kameralism, which seeks to administer these means so as to promote the general well being. The latter, in a word, deals with the prince's revenue, its disburse- ment, and the organization and administration of his political business. One great branch of study is Oekonomie, which might be interpreted as administrative economics. Under it fall (i) Management (or private economics), (2) Police, dealing with the conduct and sustenance of the people, and (3) Kameralism and finance, which take up the methods and materials of com- merce, and measures for promoting it. The three great essentials to a flourishing state are freedom, safety of property rights, and a prosperous industry. For in- creasing the wealth of a state, these means exist: increasing population, foreign trade, and mining. Justi says that with 1 Staatswirthschaft, oder systematische Abhandlung oiler Oekonomischen und Cameral-Wissenschaften, die zur Regierung eines Landes erfordert warden. KAMERALISM 125 good government and prosperous industry no limit should be placed to the increase of population, a statement which, in its assumption, begs the question as later raised by Malthus. Though he lays great emphasis upon commerce and his balance of trade idea is pretty narrowly Mercantilistic, he does not overlook the importance of agriculture. 1 This was, in part, however, with the idea of procuring cheap food and low wages for laborers. Justi is extremely inconsistent in dealing with the nature and increase of wealth, some juster ideas being mingled with the old errors. 2 Thus, at one point, he says that a land might be rich even if it had no gold and silver, and defines wealth as the supply of the comforts and necessaries of life. But again we are told that gold and silver are necessary for exchange, and so a land is not rich without them. And, finally, he steps over into state- ments that wealth equals the supply of money. It is clearly pointed out that the interests of the merchant are to be distinguished from those of the government, their gain not always coinciding with the public welfare, though it may do so. One of the most notable points in Justi's book is his body of rules for levying taxes. Briefly they are as follows : 3 (1) Taxes should be so levied that they will be paid willingly. (2) They must not restrict industry and commerce by inter- fering with freedom of conduct, credit, etc. (3) They must be levied with relative equality. (4) They should be sure and true, falling upon such objects as enable a certain and honest collection. (5) They should be levied on such objects as will permit the least number of collectors' offices, and officials. (6) They should be so levied as to amount and time of pay- ment as to be most convenient for the subject. Justi, in the third rule, considers both the benefit received 1 It is interesting to note that he refers to Vauban in another connection Vauban, a French writer, thought agricultural labor most important. See below, p. 136. * Staatswirthschaft, I, pp. 152-155 (2d ed.). * Ibid., II, 309 ff. 126 ECONOMIC THOUGHT from the government and the ability of the subject to pay. In this classification he anticipates to no small degree the famous canons of taxation laid down by Adam Smith. 1 4. Regalian Rights. In order to understand the foregoing references to regalian and domainal rights, and, indeed, a con- siderable part of Kameralistic writing, it is essential to grasp the significance of regalian or regal rights in connection with the evolution of economic thought. To the Kameralists such rights meant no legal theory, nor a merely political struggle between sovereign and pope or vassal, but the source of revenue. The regalian question, which reached its height in Germany in the seventeenth century, owed its significance largely to the backwardness of taxation and the taxation idea at a time when states needed more revenue. Dependence on the income from royal domains was no longer possible. Some middle source of revenue must be found. Hence there was a tendency to expand fiscal policies by extending the number and scope of royal privileges. Roscher distinguishes four groups. 2 First, the various feudal aids and duties were exploited. Thus knight service might be escaped by a payment ; large amounts were demanded when land was sold; and when traveling the king lived upon his people through rights of purveyance and preemption. Secondly, there was a group analogous to domainal rights. For example, all property without an owner might revert to the king ; buried treasure and the property of deceased aliens were his; etc. Then another source of revenue lay in the political activity of the sovereign : he shared in war booty, sold offices and protec- tion, and received fines and confiscated property. Lastly, the state conducted directly or indirectly certain industrial enter- prises, especially new trades, and industries in new lands. So it was with the post, lotteries, mining of precious metals, and certain branches of foreign trade. In this last case, and in the 1 Below, p. 178. 1 Geschickte der National-Oekonomik in DeutscUand, p. 159. These are not of fundamental importance, but are useful as giving a summary idea of the scope of regalian rights. KAMERALISM 127 third, too, political objects may also have been in mind. Al- together as many as four hundred regalian rights were some- times distinguished. 1 Now this mass of sovereign rights was rather chaotic and ill- defined. In keeping with the Kameralist's confusion of politi- cal, financial, and general economic matters, regalian rights appear to have been regarded as sort of middle ground between domainal revenue on the one hand, and taxation proper on the other, and came to include an unanalyzed mass of tolls, duties, aids, and taxes which did not seem to them to fall under either of the other heads. It has been suggested that this is a normal stage between what from a fiscal viewpoint may be called domainal and tax econo- mies. 2 On the political side this stage corresponds to a transi- tion period between feudalism and absolutism, its later phases being characterized by an extension of the prerogatives of the crown and the decay of the old nobility, while systems of taxa- tion authorized by class or mass had not yet been established. It remains to be noted that some of the later Kameralists took steps toward an analysis and delimitation of regalian rights. Justi classified them under four heads, as concerning highways, water, forests, and sub-surface wealth; while Sonnenfels went further and cut down the extent of these rights considered as fiscal devices by placing mine, salt, and tobacco regalia under taxation, and classing others as aids to Polizei or police power. Rau, however, clung to the old classification. This tendency, though the source of considerable contention 1 In England Blackstone divided regalian rights into two groups : majora regalia, which embrace the prerogatives that concern the political character, the dignity, and regal power of the sovereign ; and minora regalia, which concern the regal revenue. He tells us that the English kings had been shorn of much of their revenues, having granted them away to subjects; yet he distinguishes eighteen varieties, such as the revenue from bishoprics, rights of purveyance, rights of royal fish (whale and sturgeon), forfeiture and escheat, etc. These are the "proper patrimony of the crown," though English kings were largely dependent upon extraordinary revenue. (Black- stone's Commentaries, Bk. I, Chaps. 7 and 8.) 2 Roscher, Gcsch. d. Nat. Oek., p. 158. 128 ECONOMIC THOUGHT in its details, is in general logically necessary. The regalian rights lost their significance with the limitation of royal pre- rogatives and the growth of taxation. All that was left fell logically either under taxation, or under tolls and duties imposed for the control of consumption and the like. 5. Kameralism and Mercantilism ; Summary. Kameral- ism might be defined as German Mercantilism. 1 Like Mercantil- ism, it is difficult to define comprehensively as a body of thought. This much must be stressed : it was more than English Mer- cantilism. The representatives of both groups made much of government regulation, placing a naive confidence in the effi- cacy of laws. Tariffs and taxes figured prominently. Both regarded the precious metals as the most desirable form of wealth, emphasizing their distinctness. Both were animated by inter- national rivalry, and both preached dense population, frugality, and self-sufficiency. But there the main points of similarity begin to cease. A notable difference in the form and scope of the writings which contain the views of the two groups strikes one at a glance. The English Mercantilists were pamphleteers, writers of short tracts, not very comprehensive. The German writers set forth their doctrines in bulky volumes, dealing with all phases of their topic as they conceived it, and with much show of logical sub- division and arrangement. They were professors of law, finance councillors, and the like. The German works, too, form part of a more connected body of thought. With their roots in medieval treatises and Roman jurisprudence, 2 the fruit of more modern German economics is in part theirs; for Kameralism, unlike Mercantilism, existed as such into the nineteenth century. The Kameralists, with a few exceptions, were relatively less concerned with foreign relations, commerce, and the balance of 1 Remembering that Mercantilism must not be too narrowly confined to certain ideas concerning balance of trade and estimation of money. 2 Bornitz, for example, constantly cites the Corpus Juris. Seckendorff 's Der teutsche Furstenslaat appears to be the first book (1655) on political economy written in German, the other Kameralists using Latin. KAMERALISM I2Q trade idea than their more maritime neighbors in England and France. They made more of internal or domestic industry, 1 and to this end incorporated in their writings books or chapters dealing with the technics of agriculture, grazing, mines, and forests, and the various branches of manufacture. These sub- jects received little attention from the English Mercantilists. This last difference is to a considerable extent the expression of different origins and objects. Kameralism began with the desire for efficient administration of the domains and regalian rights of the sovereign ; and it retained the stamp of its beginning to the end. Kameralism embraced many things, but its proper part was ever the maintenance, increase, and expenditure of the prince's income, by which was meant the revenue of the state. As in the case of English Mercantilism, the interests of state and individual were not assumed to be in harmony. The German state, however, was somewhat different from the English state in the absolute nature of its prince's rule, so that politi- cally Kameralism is more like Colbertism than English Mercan- tilism. Moreover, the wasting and depopulation of town and country caused an unusual emphasis to be placed upon population ; while the exhaustion of treasuries meant an equal attention to fiscal devices. There is some difference of opinion as to the merits of the Kameralistic ideas about population. While the needs of their country were such as to make a problem different from that which later confronted Malthus, and while their qualification that order and good government must prevail should be remembered, yet it must be concluded that they often stated the benefits to be expected from an increase in population too absolutely. At points there seems to be a kind of optimism in their thinking. They were prone to assume that the other factors would develop in proportion. Sometimes, too, population was thought of al- most as an end, no\v for military purposes, row ?s an economic benefit. The chief criticism, after all, is that they did not go 1 Even of Hornig, Oncken says, " One sees that this German Mercan- tilism has its climax not in foreign trade but in domestic." K 130 ECONOMIC THOUGHT far enough in their thought, the result being a short-time policy rather than a general theory. Here, as elsewhere, we may judge leniently, but remembering that this is done not so much because these early thinkers had the truth as because they were early thinkers, and so our standard itself may be modified. 1 The importance of a knowledge of Kameralism to an under- standing of German economics remains to be observed. With- out its peculiar background of Kameralwissenschaft German theory would probably have been other than it is. One of the most obvious effects of Kameralism appears in the division of the science into general and special economics, and finance; and in the emphasis on the technical and financial aspects. Again, the early prevalence of a distinction between public and private interests, and the general recognition of the im- portance of legal advantages, special privileges, business arrange- ments, etc., and also of credit, may be traced to Kameralism. One cannot but be struck, too, with the similarity between the ideas of the Kameralist Daries and the economist Hermann concerning capital. In these and other ways German economics was affected by its peculiar heritage. 1 I would agree with Professor Small when he says that the Kameralistic ideas have been misrepresented. Also in his statement that " they did not qualify their statements about population quite as carefully as men must who have in mind the Malthusian chapter in economic theory." But it does not seem to me correct to say as he does that "the came rali sis knew as well as modern economists do that there was a limit beyond which more mouths could not be fed. . . . Substantially . . . they held tenable views of the subject as far as they went." The Cameralists, p. 15. C. THE EVOLUTION OF ECONOMICS AS A SCIENCE I. THE FOUNDERS To one who turns from reading a modern treatise on eco- nomics, whether it be Mill's Principles of Political Economy or the works of Wagner or Marshall, and takes up the various writings which have been dealt with in the foregoing pages, a great development is evident. Heretofore, economic thoughts have been gleaned mostly from books on religion, politics, or jurisprudence. At most, they have been rather sporadic pam- phlets or essays, or treatises upon political and technical matters. Yet it would be misleading to say that these thoughts were unclassified or unsystematic. The writings of Aristotle, for illustration, were truly scientific. In the works of the Roman jurists and medieval scholastics, economic ideas were fitted into organized bodies of thought. The point is that they were not distinct. They formed no separate science, but lay inchoate within other bodies of doctrine, ethics, jurisprudence, and the like. To found the science of economics, then, it was necessary to sever these scattered economic ideas and bring them together in a separate system of thought. For this step the way has been somewhat prepared, especially by the Mercantilists and Kameralists who made considerable progress in giving economic ideas separate attention. It was not until the middle of the eighteenth century, however, that Economics was really founded as a science. To recount the circumstances under which this development was achieved and sketch the main features of the new science is the object of the two following chapters, which deal with The Founders. 132 CHAPTER IX ABOUT the middle of the eighteenth century a group of French thinkers evolved a system of economic thought which forms one of the important roots of the modern science. One of their number styled that system " Physiocratic," and ever since these men have been known as the Physiocrats. The Greek words v1 n*t product) J100.000.000 $150000.000 Expenditures of proprietors and productive classes for manufacture* and service*. The conclusion is that the manufacturing and trading class is dependent upon the replacement of agricultural capital ; and if increased luxury leads to a diversion of part of the normal flow to class i away from it to class 3, agricultural capital will be impaired and the succeeding produit net suffer. 5. Wages and Interest. As to wages, the Physiocrats, like other economic thinkers of precapitalistic days, made little contribution. 1 The laborer was supposed to get just enough to live on, and the question as to what constitutes enough to live on was not analyzed. Turgot argues that inasmuch as the em- ployer will pay as little as possible and has his choice among many laborers, wages are in effect limited to what is necessary for the subsistence of the laborer. 2 There is no theory of popu- lation, nor any discussion of the relation of capital to wages. The assumption of a subsistence wage was in accord with the facts in France, and it was made /the " natural " wage. The 1 Cf. Picard, "fetude sur quelques Th6ories du Salaire au XVTII e SiScle," Rev. d'Hist. des Doct. Econ., 1910, pp. 153 f. 2 Reflexions, 56. 148 ECONOMIC THOUGHT question of ethical responsibility was thus removed, and labor's " share " formed no problem. It will be observed that this idea of wages made the produit net a more definite and simple thing to the Physiocrats than it could have been, had a problem of wage determination existed in their minds; their surplus rested upon a subsistence basis. Furthermore, though they worked out no theory of population, one can read between the lines that they thought the produit net would raise up consumers for itself, and thus insure its own value, so to speak. 1 In the matter of capital and interest, more important contribu- tions were made. The distinction between money and capital was drawn ; the origin of the latter in saving was recognized ; and the necessity for constant advances, consumption, and reproduction was stated. 2 Evidences are to be found of some realization of the productivity of capital and its significance. 3 In the case of agricultural capital, one writer points out that there must be a net profit or it would be otherwise employed. 4 It was also held that interest is possible because land yields its produit net ; and the higher the price of grain and the greater the produit net, the higher the interest rate. 5 Indeed, Quesnay, rejecting " supply and demand " and " risk " theories, argued that the rate of interest is subject to a natural law as is the revenue from land ; as the income to be gained by its purchase is the law to the buyer and seller of land, the same law ought to govern the rate of interest. 6 Turgot, who was not formally a Physi- ocrat, suggested a productivity theory according to which interest is paid because the capitalist has the alternative of investing in land, but he did not develop the idea. But, after all, it must again be recalled that the Physiocrats were chiefly 1 Cf. e.g. Turgot, Septieme lettre sur le commerce des grains (1770) (ed. Guillamin), pp. 214 ff. Turgot comes near to a theory of population. . 1 E.g. Turgot, Reflexions sur la formation et la distribution des richesses, Ibid. 57-63. * Merder de la RiviSre, L'ordre naturel (Daire's ed.), p. 459. 6 Onckerf, "Quesnay," in Conrad's Handworterbuch. Quesnay, "Observations upon L 'Interest de V argent (1776)," Oncken's (Euvres de Quesnay, p. 401. THE PHYSIOCRATS 149 interested in production and exchange. Hence, interest was dominantly regarded not so much as a share in distribution as an expense of production as an avarice from the revenues of agriculture. As such, competition made it just enough to cover costs ; its " natural " rate was as low as possible. The founder of the school appears to have generally regarded interest as a mere replacement fund, not as a net income. 1 6. The Single Tax. In strict consistency with their doctrine that only extractive industries produce a surplus or produit net, and in harmony with their desire to relieve the cultivator or farmer, as distinct from the landowner, the Physiocrats upheld a single tax on the.net income from land. This was their impot unique. Wages and profits being reduced to a minimum by competition, while land furnishes the only return above costs, they argued, as Locke and others before them, that all taxes must fall on land ultimately. Thus it seemed better, as a matter of economy, to collect directly from those who must pay in the end. Every time a tax is transferred, said they, it increases. If the tea in a merchant's store is taxed, he not only adds the amount of the tax to the price of his tea, but also enough more to pay interest for the money advanced in taxes, and to compen- sate for the annoyance and trouble involved. The one who buys the tea then transfers the tax to another with an addition, and so, continually increasing, it works on, down to the owners of the soil. Though the single-tax idea was based upon an erroneous no- tion of productivity, and violates important principles of fiscal expediency, it rendered a great service. 2 Under the advocacy of it, the cumbersome, wasteful mass of taxes which prevailed was criticised ; and the discussions to which it gave rise led to a better understanding of the principles of taxation. IV. The Chief Physiocrats and their Writings. Though they were mostly differences of emphasis, rather than anything 1 Analyse du Tableau Economique (Daire's ed.), p. 62. * The modern single-tax idea of Henry George and agrarian socialists is, of course, quite different from the Physiocratic plan. The latter recog- nized the rights of the landowner and would have guaranteed property in land. Nor did they aim to seize an " unearned " income. 150 ECONOMIC THOUGHT more fundamental, 1 some differences of opinion existed among the Physiocrats, the theory of interest and the degree of government interference being debated points. Just a word, then, to individualize the more important of them. The chief representatives of the school were Francois Quesnay (1694- 1774), Jean Vincent de Gournay (1712-1759), and Anne Robert Jacques Turgot (1727-1781). There are others, like Mirabeau, Dupont de Nemours, Mercier de la Riviere, Baudeau, and Le Trosne, who are important ; but the three first named are the more original. Few, if any, ideas of fundamental importance were added by the others. It may be truly said that from the viewpoint of economic theory Quesnay is the chief figure. He was the unquestioned leader of those "Economistes " who formed the school or sect. His chief writings were the following: an article on " Fermiers" (1756), oneon " Grains" (1757) both published in Diderot and D'Alembert's Encyclopedic; the Tableau Economigue 2 (1753- J 75^) j " Maximes generates du gouvernement economique d'un royaume agricole," published in Mirabeau's Philosophic Rurale ( J 763) ; and his Droit Naturel (1768). In the first two articles the basis for his system will be found. His ideas as to the dis- tribution of wealth are stated and illustrated by tables in the famous Tableau Economique. Quesnay led in his emphasis of agriculture, demanding that it be brought to the highest per- fection. The maxim " poor peasant, poor kingdom ; poor kingdom, poor king " is generally attributed to him. He favored freedom of trade and industry to give agriculture the greatest chance to expand. Gournay was not, like Quesnay, the son of a farm-owner. He spent fifteen years engaged in trade at Cadiz, then traveled in England, Holland, and Germany, and finally settled down in 1751 as an intendant of commerce. He translated certain works of Sir Josiah Child and of Culpepper; but wrote little himself. 1 These differences are emphasized by Oncken in his introduction to the (Euvrcs de Quesnay. 2 See above, p. 147. This work was reproduced in facsimile for the British Economic Association, London, 1894. THE PHYSIOCRATS 151 His chief work was administrative and advisory to others. He lived in Turgot, whose Eloge upon the death of Gournay is the chief source for the latter's ideas. These were, in brief, that gov- ernment should be confined to restoring liberty to all branches of commerce and to encouraging competition, thus protecting pro- duction and lowering prices. He believed that manufacture and trade were productive. To Gournay is commonly attributed the famous saying laissez fair e, laissez passer, and, whether or not he originated the whole maxim, he seems to have made it his own. Turgot, while keeping himself formally distinct from the sect of the Physiocrats, was in essential agreement with their main doctrines. He claimed Gournay for his master, and, while emphasizing their non-productivity, he leaned toward a greater recognition of the service of the non-" productive " classes. But he differed from both Quesnay and Gournay in some points. 1 It was his fortune first as intendant, then as finance minister to Louis XVI to put in practice some Physiocratic principles. His best known writings are: Reflexions sur la formation et distribution des richesses (1766, published 1769) ; a memorial Sur les prets d' argent (1769) ; letters on la liberte d^l commerce des grains (1770). His letter to the Abbe Cice (1749) on the subject of paper money and coin was an early blow at Law's system, and shows a good understanding of the relation of money to price. Turgot's Reflexions consists of a hundred paragraphs, the first seven of which attempt to prove that agriculture alone increases the wealth of the nation and that manufactures and trade depend upon it. In the last few paragraphs he concludes that land revenues are the only proper source for taxes. The re- mainder deals largely with money and capital. There has been some difference of opinion as to the historic significance of these Reflexions. Cossa declares that the book deserves to be entered in red-letter, as the first scientific treatise on social economics. 2 On the other hand, Jevons and Higgs 3 1 See Oncken, Gesch. d. National Okonomie, pp. 459 ff. 1 Introduction to Political Economy, p. 264. 3 The Physiocrats, p. 94. 152 ECONOMIC THOUGHT would rather emphasize Cantillon's work in this connection. There can be little doubt as to the superiority of Turgot's work. But when we reflect that he had the shoulders of Cantillon, Hume, Gournay, and Quesnay to stand on, there may be some doubt as to which did the greater work, relatively. It may simply be suggested that, while Cantillon wrote a scientific essay, Turgot wrote a bigger and better one, just as, ten years later, Adam Smith surpassed Turgot. All three are now read as milestones in the history of economic thought. The question is to be decided in the light of obstacles overcome or of the amount of new truth given. For the best concise statements of the Physiocratic doctrine one must turn to L'ordre naturel et essentid des societes politiques (Paris, 1767) by Mercier de la Riviere; Abbe N. Baudeau's Premiere introduction a la philosophic economigue (Paris, 1771) ; and Le Trosne's De I'ordre social (1777). The work of Mira- beau's called Philosophic rurale ou Economic generate et politigue de V agriculture (1763) is also to be mentioned in this connection. Dupont de Nemours also wrote a brief but comprehensive work, Physiocratie ou constitution naturelle du gouvernement le plus avantageux au genre humain (1767). It was from this title that the school received its name. V. English Followers. 1 Contrary to the common opin- ion, the Physiocrats were not without some following in English thought, though it was a weak one. In America Benjamin Franklin was acquainted with the Physiocrats and had some notions concerning productivity similar to theirs. And in England, in 1797, " some false doctrines of Dr. Adam Smith and others " were attacked on Physio- cratic grounds by an anonymous writer. Prosperity was made by this writer to depend upon high rents, the " net product " of the Economistes. Another anonymous work, Sketches on Political Economy . . . with an Exposition of some of the leading 1 See Seligman, " Some Neglected British Economists," Econ. Jr., XIII, 336 ff. (1903) ; Higgs, The Physiocrats, p. 137. For the influence of Physiocratic thought in other countries see Cossa, Introduction to Political Economy, p. 272. THE PHYSIOCRATS 153 Tenets of the Economists (1809), argued that capital cannot repro- duce with an increase, that, being itself a result, it cannot cause that from which it results. This land alone could do. The little book by Brydges on Population and Riches (1819) also reminds one of the Physiocrats, as he states that the basis of all riches is the produce of nature, that a man's labor in agri- culture can produce a surplus above his subsistence, which sur- plus is distributed, first among manufacturers, secondly among non-producers. He carries the ideas of Smith and the Physio- crats on non-productive classes to the extreme. The animus of the work appears to be a defense of the landed interests in England. 1 William Spence may also be mentioned here as one who up- held Pbysiocratic theories. 2 The Industrial Revolution, how- ever, had made such views as to the relative position of land and capital pretty clearly untenable in England. VI. Opponents. Among the opponents of the Physiocrats, Galiani and Condillac may be especially mentioned. 3 The Italian, Galiani, published a book on money in 1750, and his better known Dialogues sur le commerce des bles in 1770. He was an opportunist, opposing the idea of the natural order. In his work on Le commerce et le gouvernement (1776), Condillac re- futed the idea that manufactures are sterile, and contributed to the theory of value. 4 VII. The Practical Influence of Physiocracy. The sys- tem of the Physiocrats found admirers among sovereigns of various states. Those who are known to have been believers in it to a greater or less extent are Catherine II of Russia, Joseph II of Austria, his brother Leopold, Archduke of Tus- cany, and Carl Friedrich, Margrave of Baden. Joseph II and 1 It is interesting to note that he drew largely upon Sismondi. 2 See, e.g., his Tracts on Political Economy, 1822. 8 The Italians, Beccaria and Verri ; the Germans, Moser, Busch, and Justi ; and the Frenchmen, Forbonnais, Necker, and Herrenschwand, may also be classed as opponents. For others see Reseller's Geschichte der Nat.- Oek. in Deutschland. 4 See below, p. 448. 154 ECONOMIC THOUGHT Leopold do not appear to have been, very earnest followers of the Physiocrats. They made some attempts, however, to carry out their principles, except in so far as they related to free trade. Carl Friedrich, the Margrave of Baden, was, on the con- trary, a whole-souled believer in the Physiocratic system. He even wrote a work advocating it, entitled Abrigi des principes d'Economie politique (A Compendium of the Principles of Political Economy), published in 1775. He made an attempt to introduce the system practically in three villages in Baden ; namely Dietlingen, Theningen, and Balingen. It was impos- sible to carry out the attempt. It must necessarily have failed, even supposing the teachings of the Physiocrats substantially correct. An instantaneous change from one system of public economy to another and quite different one can hardly be ac- complished without serious harm. Again, the matter was made worse by endeavoring to maintain both systems side by side in the same land. Besides all this, the plan was badly executed. The experiment was given up in two of the villages, Theningen and Balingen, in 1776; in Dietlingen it was continued until 1792. 1 In France their chief influence was through Turgot. As intendant of Limoges (1761-1774) he was active and successful in tax reforms, the abolition of feudal restrictions, and education. During his few years' service as minister of finance, he attempted to follow the same principles of freedom and equality, but with less complete success. Trade in wine and grain between the different divisions of the state was freed from restrictions. Foreign commerce, particularly with the French colonies, was encouraged. In all Turgot removed twenty-three different burdens which oppressed people, commerce, manufactures, and agriculture. With what unjust implication, then, does Kautz say that " he was able to introduce only a few improvements 1 Further information about this experiment will be found in Roscher's Geschichte der Nat.-Oek. in DeutsMand, no; and in an essay by A. Emminghaus, published in the Jahrbucher fur National Okonomie und Sta- tistik, Vol. XIX. (1872). The title is " The Physiocratic Experiments and Connections of Carl Friedrich of Baden." THE PHYSIOCRATS 155 but to go no further." 1 He struggled valiantly against the inter- ested hostility of clergy and nobility, and accomplished much, but was overcome before the fruits of his reforms were realized. VIII. Critical Estimation and Summary. Perhaps the most notable single characteristic of the Physiocratic eco- nomics is its negativism. As already remarked, Physioc- racy might be denned, with some measure of truth, as the re- volt of the French against Mercantilism. Its weakness and its strength are alike the results of reaction. Thus wealth in the form of money was emphasized by the Mercantilists, while the Physiocrats placed marked emphasis upon "real" wealth in the shape of raw produce. A large foreign trade with a favor- able balance was the summum bonum of the Mercantilist ; the typical Physiocrat, Turgot being rather an exception, re- garded foreign trade with indifference or as a necessary evil, and assailed the balance-of-trade idea. And so the one favored imports of raw material ; the other of manufactures. Whereas the statesman of the Mercantilist school sought to secure these ends by continual regulation, freedom of trade and industry was the great desideratum of Physiocracy. In a word, the Physio- crats were in revolt against art, artificial wealth, and political artifices for wealth-getting; hence their ideas of nature and natural wealth and natural liberty. On all these points the Physiocrats carried their reaction, to a greater or less extent, too far. Commerce and manufactures are and were important, and are equally productive, in the true sense of the word, with agriculture. Absolute freedom of indus- try and trade is as unattainable in theory as inexpedient in practice. In short, there is one fundamental error in their eco- nomics, emphasized by two more errors in their philosophy. Their economics was vitiated by the absence of a correct notion of production : they lacked the idea of production as utility creation. This led them, for example, to deny " productivity " to manufacture, although it creates form utility. Then, their individualistic philosophy, with its negative basis, overlooked 1 Die geschichtliche Enlwickelung der Nai.-Oek. (Wien, 1860), p. 357. 156 ECONOMIC THOUGHT the necessity for social action. And finally, their nature philos- ophy made them absolutists attempting to apply their ideas regardless of time or place. But the important contributions they rendered must not be forgotten. For one thing, they did a valuable work by destruc- tion. They exposed old fallacies and departed from the errors of their predecessors. The world makes progress through the realm of thought like a ship which tacks to the windward, swing- ing now to one side, then to the other, of the straight course, a series of actions and reactions. The Physiocrats threw the tiller over and sailed away on a new tack, and one necessary to progress. Their more positive contributions may be summed up as follows: I. They put economics on a scientific basis by separating it from other sciences, notably jurisprudence, and applying scien- tific methods. II. They made important contributions to the theory of taxation. III. Their analysis of capital (Turgot), though rudimentary, pointed toward the true nature of that factor. IV. Their emptiasis of the surplus or net product was notable, especially in connection with the later development of the rent concept. V. Their emphasis of land was influential, for weal or woe, in bringing about the later threefold classification of the factors of production. The Physiocratic system may be viewed as having a mission to perform in the development of the economic thought of the world, and, so viewed, it must be confessed that its very errors adapted it so much the better to perform its mission. The bold declaration that the only office of government is to protect life, liberty, and property, and the easily repeated formula, laissez faire, laissez passer, were destined to accomplish much. Any man could appreciate the doctrine that his private business was no concern of government. It was natural that the crisp, sweeping exaggerations of the Physiocratic system should be very effective. THE PHYSIOCRATS 157 It was well, too, that the importance of agriculture, while it is not the sole source of wealth, should be emphasized. Nor is it so surprising as it might at first appear that the Physiocrats regarded the rent of land as the only true produit net. At the time when Quesnay wrote, it was the chief source whence additions were made to the national resources. It is only within a comparatively short time that the profits of capital have taken the most prominent position in the formation of new capital. " During the greater part of the world's history the rent of land has been the chief source of saving. A good deal is saved from rent in England now, and in the rest of the world probably more is saved from it than from profits on capital." l There is, moreover, an actual difference between an income derived from land rents and one derived from any other species of property a difference upon which Ricardo founded his theory of rent, and Mill his doctrine of land taxation. But reflection showed that it was quite misleading to designate those classes not in some way connected with agriculture as barren (sterile) or non-productive. It came to be perceived that there is a produit net, a surplus, wherever there is a saving, and that, if they save a part of their income, merchants and artisans add as truly to the wealth of the country as the agricultural laborer ; for they must have rendered an equivalent for their income, that is to say, have produced it. A system was needed which should include and elucidate manufacturers and commerce. The one-sidedness of the Physiocrats had to give way to make room for the broader and more catholic politi- cal economy of Adam Smith. 1 The Economics of Industry, Alfred Marshall and Mary Paley Marshall (London, 1879), P- 39- CHAPTER X ADAM SMITH WITH HIS IMMEDIATE PREDECESSORS AND THE REVOLUTION IN INDUSTRY THE Scotchman, Adam Smith, born in the year 1723 at the village of Kirkcaldy, published in 1776 the book commonly known as The Wealth of Nations. 1 By this book he won a fame greater than that of any other writer on political economy or allied subjects. Abundantly criticized and with its originality not unassailed, his work still stands as truly epoch-making in the evolution of economic thought, while its maker is called the Father of Political Economy. Immediate Predecessors of Adam Smith. Though so truly epoch-making, Adam Smith, as is generally the case, built upon the work of his predecessors. Nor can one overlook the fore- runners in a study of the master's achievement. Adam Smith was acquainted with the writings of the Mercantilists, the phi- losophers of the seventeenth and eighteenth centuries, and the Physiocrats ; and he stood upon their shoulders. The names of Petty, North, Child, and Steuart, and those of Locke, Berkeley, Mandeville, Hutcheson, Hume, Tucker, and Ferguson, must ever 1 On Adam Smith, his life and work, see: Cannan (editor), Smith's Lectures on Justice, Police, Revenue, and Arms, 1896; Feilbogen, Smith und Turgot; Hasbach, Die allgemeinen philosophischen Grundlagen der von F. Quesnay und Adam Smith begrundeten politischen Oekonomie, 1890, and Has- bach, Untersuchen iiber Adam Smith, 1891 ; Oncken, Adam Smith und Im. Kant; Rae, Life of Adam Smith; Zeyss, Adam Smith und der Eigenutz. The chapters or essays on Smith in Cannan's Theories of Production and Distribution, Leslie's Essays in Moral and Political Philosophy, Bagehot's Biographical Studies, and Bonar's Philosophy and Political Economy are valuable. , 158 ADAM SMITH 159 be remembered in this connection. Smith also refers to Can- tillon ; and a work by Harris, a follower of Cantillon, was known to him. Dating from the eighteenth century, too, there are many books and pamphlets, often anonymous, which relate to economic subjects ; but inasmuch as there is no evidence that they exerted any influence on the course of economic thought, it does not seem expedient to discuss them here. While remem- bering Smith's great debt to the Physiocrats, and theirs to the Scotch and English writers, the continuity in England's economic thought should be emphasized ; and Hutcheson, Hume, Tucker, and Ferguson may be named as the chief of his imme- diate predecessors. These men come near to forming one school with Smith as their master. It is highly probable that Smith's emphasis of self-interest and accompanying tendencies were stimulated, if not originated, by the spirit of Mandeville's celebrated Fable of the Bees. Though he at first expressed himself enigmatically, it appears to have been Mandeville's idea that on the multiplicity of wants " de- pended all those mutual services which the individual members of a society pay to each other : and that consequently, the greater variety there was of wants, the larger number of individuals might find their private interest in laboring for the good of others, and united together, compose one body." 1 Mandeville, too, clearly expressed the idea of division of labor, using the production of watches and clocks as an illustration, and he ^was perhaps the first to use the words " divided " and " divi- sion " in this connection. 2 But Hutcheson exerted a deeper and more comprehensive influence over Smith. Hutcheson was a teacher of Smith at Glasgow (1737-1740) and Smith expressed indebtedness to him. His System of Moral Philosophy shows that, while he had some Mercantilistic ideas concerning balance of trade, government regulation, and population, he foreshadowed his pupil's work at 1 Edition of 1724, p. 465. First edition about 1705; second, enlarged, in 1714. 2 Edition of 1729, part ii, p. 335. See Cannan's introduction to his edi- tion of Adam Smith and note on page 5 of Vol. I. 160 ECONOMIC THOUGHT several points. For one thing he handed down to Smith many views of Pufendorf, Grotius, and Locke ; gave him, or at least strengthened, his optimistic nature philosophy ; and it has even been argued that the arrangement of the Wealth of Nations was affected by Hutcheson's lectures. 1 Furthermore Smith may well have gotten from him certain purely economic ideas, notably on division of labor, value, money, and taxation. Thus Hutcheson distinguished utility and value, saying that " the natural ground of all value or price is some sort of use," that wealth is differen- tiated from utility by labor, and that limitation of supply makes a scarcity value. 2 Hutcheson justified interest on the ground that money might be invested in things " naturally productive." Doubtless Hume exercised the greatest influence on the general philosophy of Smith, as well as on his economic opinions. Dur- ing his stay at Glasgow, Smith made an abstract of Hume's Treatise of Human Nature which pleased the older man and was the beginning of a lasting friendship. Hume was an essay- ist, writing in a philosophical spirit, but working out no complete economic system. If he had written a systematic treatise in 1752, when his essays appeared, the Wealth of Nations in all probability would not have occupied the unique position it now holds. The chief characteristics of Hume's economic thought are the prominence given to labor, the attention given to changes or transitions, evidences of historical spirit, and the inter- relation of economic and other social facts and forces. Though he shows traces of Mercantilism he had a good understanding of foreign trade. " Not only as a man but as a British subject I pray for the flourishing commerce of Germany, Spain, Italy and even France itself." Everything that is useful to man springs from the ground; but artisans are necessary to work up most things and in " the stock of labor . . . consists all real power and riches." 3 Hume holds that everything in the world is purchased by labor, and that our passions are the only cause of labor. 4 Money is nothing but the representative of labor and commodities and for any one country its greater or less abun- 1 See W. R. Scott's Francis Hutcheson. 3 Of Money. 2 System, Vol. II, pp. 53 ff. 4 Of Commerce. ADAM SMITH l6l dance is immaterial ; but the increase in the supply of money may benefit industry during the interval between acquisition and resulting rise in prices. Interest depends on the profits of industry and the demand and supply of loans. 1 Josiah Tucker (1712-1799) 2 was dean of Gloucester. Be- tween 1750 and 1776 he wrote several essays on commerce and taxation, 3 and one of his writings was translated by Turgot. 4 He too laid emphasis on the 'significance of labor. He believed in the advantages of a large population and favored a tax on celi- bacy, and has been called the true forerunner of the Manchester School." 6 Tucker's free trade policy was based on the idea of a harmony of interests. Self-interest was made by him the chief motive, and this, he thought, if given free play, would coincide with public interest in most cases. It may be said that Hume and Tucker inaugurated cosmo- politanism in commercial policy. Adam Ferguson (1723-1818) did not separate economics from politics, but in his lectures and writings 6 dealt with economic topics, and, as a contemporary and friend of Smith's, he must have had some influence. His maxims of taxation, though not the same, may have influenced Smith's famous canons. His treatment was ethical. He had some idea of the principle of relativity. On the point of the theory of value and utility, Harris in his work On Coins (1757) was influential in shaping Smith's thought ; for he wrote : " Things in general are valued not according to their real uses in supplying the necessities of men ; but rather in 1 Of Interest. 2 See W. E. Clark, Josiah Tucker, Columbia University Studies XIX, No. i. 3 Brief Essay on the Advantages and Disadvantages which respectively attend France and England with regard to Trade (1748); Elements of Commerce (1752); and others. 4 The Expediency of a Law for the Naturalization of Foreign Protestants, translated as Questions importantes sur le Commerce, 1755. 5 For Manchester School, see below, p. 185. 6 Essay on the History of Civil Society (1767); Institutes of Moral Phi- losophy (1769). 1 62 ECONOMIC THOUGHT proportion to the land, labor, and skill that are requisite to pro- duce them ; " and he contrasted water and diamonds to illus- trate the point (p. 5). These men, then, broke the way for the development of politi- cal economy as a science, and more or less markedly taught that labor is the source of wealth and advocated industrial or " natural " liberty. Smith's Life and Relations with the Physiocrats. 1 At the age of fourteen Smith went to Glasgow, where, as already indi- cated, the philosopher Hutcheson profoundly affected him. Hutcheson was lecturing systematically on economic subjects under the branch of his philosophy which he called " Natural Jurisprudence." Smith then went to Oxford on a scholarship, where he studied the classics. Between 1748 and 1751 he lectured on rhetoric and belles-lettres at Edinburgh; after which he became professor at Glasgow, first of logic, then of moral philosophy. " In the last of these lectures he examined those political regulations which are founded, not upon the principle of justice, but that of expediency, and which are cal- culated to increase the riches, the power, and the property of a state. Under this view he considered the political institutions relating to commerce, to finances, to ecclesiastical and military establishments." 2 We know that in 1754 while at Glasgow he discussed the effects of a bounty on the export of corn, talking much with merchants and convincing many of the advantage of free trade. In 1759 his Theory of Moral Sentiments appeared. Five years later we find Smith traveling in Switzerland and France. He met Diderot, D'Alembert, Quesnay, Turgot, and others. Conversing often with Turgot on economic topics, it is natural that both men were influenced. Turgot was engaged on his Reflexions and Smith on his Wealth of Nations. Say's opin- ion that Turgot owes much of his philosophy, Smith much of his economics, to this intercourse, seems reasonable. 3 It seems 1 Rae, Life of Adam Smith. * Words of Millar, a student of Smith's, in Stewart's Works, Vol. X, p. 12. * Leon Say, Turgot, p. 33. ADAM SMITH 163 more reasonable, however, to minimize the contributions made by these men to each other's development and to consider them both as affected by common environmental forces. " The three same fundamental conceptions," saysCliffe Leslie, 1 " derived from the three same sources from Graeco-Roman speculation, from Christian theology, and from the revolt of the age against arbitrary interference with private industry and un- eqtial imposts on the fruits of labor formed the groundwork of the political economy of Adam Smith and the Physiocrats." These " fundamental conceptions " were, respectively, that of natural rights, that of a beneficent Providence, and lastly the idea of laisser faire derived from the reaction against govern- ment interference. None of them can be said to be the inven- tion or the property of any man or school. In any case all of them can be found in the writings of Hutcheson, Hume, and Tucker. From among these fundamentals of Leslie's, a fourth might be distinguished, namely, the principle of self-interest as the funda- mental force in society. In this connection the appearance of Helvetius' work de VEsprit (1758) deserves comment. 2 His teaching that self-love is life and power ; unselfish benevolence, nothing, produced a wonderful sensation in France and else- where. It may have been instrumental in causing Smith to shift from sympathy to self-interest as the chief motive in life. 3 His predecessor in England, however, and especially Mandeville, may be regarded as probably having the most immediate in- fluence here. With the continental ferment of a sensualistic nature philos- ophy working upon the similar ideas of his own and his prede- cessors, Adam Smith returned to England in 1766, and ten years later published his book The Wealth of Nations. Never was time riper for a comprehensive book ! Everywhere 1 " The Political Economy of Adam Smith," Fortnightly Review, 1870. Republished in his Essays. * Cf. Kuno Fischer, Francis Bacon u. Seine Nachfolger, p. 687. 1 Knies, Die politische Okonomie vom Standpunkt der geschichtliche Me- thode, p. 150. 164 ECONOMIC THOUGHT the old order was shaken; everywhere new ground had been broken ; but nowhere had the fruit appeared. Tracts and essays had appeared in England and tableaux and tomes in France ; but all lacked either system or comprehensiveness, or were marred by Mercantilistic taints or reactionary errors. Revolutions in industry, in philosophy, in politics, were in the air. What wonder that men hailed with extravagant praise an analysis and explanation of the new order! " An Inquiry into the Nature and Causes of the Wealth of Na- tions " was the full title of the book ; and this title was considered by Smith to be an adequate definition of the scope of political economy. 1 So far as the book has a plan it appears to be as follows : beginning with the importance of labor as the source of the annual wealth of a nation, Smith discusses division of labor as the means for increasing the productiveness of labor and hence the nation's wealth. Division of labor necessitates exchange, and this is the next topic. This leads up to money as the medium of exchange, and to value. The discussion of price follows, and then the components of__price : wages, profits, and rent according to Smith. Finally the criticism of Mer- cantilism and Physiocracy follows ; and the last book deals with public finance. In his conception of the " annual wealth " and " annual labor " of a nation Smith was undoubtedly influenced by the Physiocrats. The Importance of Labor and Division of Labor. The Phys- iocrats had made land or the bounty of nature the center of their system. In the sense in which they used the word, land alone was ''productive." Certain ones among the Mercantilists, 2 however, spoke of labor as the active principle or father of wealth, though attaching most importance to mercantile and maritime pursuits. Adam Smith makes much of labor. The first words in his book are, " The annual labor of every nation is the fund which originally supplies it with all the necessaries and con- veniences of life ; " and, as will be seen later, he makes labor both cause and measure of value. 1 See Introduction to Bk. IV (Carman's ed., p. 395). * Above, p. 103. ADAM SMITH 165 It must not be inferred that Smith means all human exertion which adds utility ; he limits his emphasis on labor to " pro- ductive labor." This reminds one of Physiocratic distinctions. But there is this difference : the Physiocrats made productivity equal the creation of a surplus over costs ; * by Smith productiv- ity was extended to include any addition to exchange value, the produce of labor being " the value which it adds to the ma- terials upon which it is bestowed." 2 But exchange value he confined to vendible commodities. Thus Smith regarded me- nial servants, public officials, and professional men as unpro- ductive; their work perished on the instant of production. 3 This is very like Child's opinion. 4 Smith's treatment of the advantages of division of labor has long been deemed a classic. He did not originate the idea, for traces of it have been found from the Greeks on ; but he so en- riched it that ever since the appearance of the Wealth of Nations it has had a new importance in economics. Smith makes an innate " propensity to truck and barter " the cause of division of labor among men. This is hardly rational enough for the pres- ent day ; but a more satisfactory explanation is suggested in its " advantage " coming from an " increase of the productive powers of labor," special adaptations among men giving rise to this advantage. The occasion for such a division is, of course, the power of exchange. Division of labor, he points out, is limited by the extent of the market. As to its advantages, Smith says : " The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour." 5 Pin making, for example, is a peculiar trade which is " divided into a number of branches of which the greater part are likewise peculiar trades." As a result each man produces at least 240 times as many pins as if he 1 And the Physiocrats did not logically impute "productivity" to labor, but to land. Wealth of Nations, Bk. I, Chap. VIII (Cannan's ed., p. 67). Ibid. Bk. II, Chap. Ill (Cannan's ed., p. 313). Above, p. 104. B Bk. I, Chap. I (Cannan's ed., p. 5). 1 66 ECONOMIC THOUGHT worked alone. The advantages are analyzed as being due to three circumstances : the increase of dexterity in the individual workman ; the saving of time otherwise lost in passing from one process to another ; and " to the invention of a great number of machines which facilitate and abridge labour." Value. Smith begins his discussion of value by distinguish- ing value in use from value in exchange : the former is similar to the utility l of recent economic analysis, such as is possessed by water and air ; the latter is the power of purchasing goods, of which diamonds afford an illustration. " The things which have the greatest value in use have frequently little or no value in exchange ; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use." In this distinction Smith is in accord with the idea of valeur usuelle and valeur venale as held by Quesnay and the Physiocrats. It will be noted that this treatment limits "use" in a sense not now observed by economists, involving as it does an ethical idea. John Stuart Mill later called Smith to account for denying utility to anything which satisfies human wants, as diamonds undoubtedly do. Smith and his followers have also been criticised with some justice for failing to distinguish the con- cept of utility from " value in use." 2 Doubtless the coupling of "value" with "use" in a single term tended to conceal the significance of bare utility and to prevent the separation of the objective value in use from the subjective. Smith, however, is concerned with exchange value alone, which he defines as the " power of purchasing other goods " which a commodity possesses. His conception of value, then, is entirely objective. He keeps value in use and value in exchange unrelated and apart. " The real price of everything," he says, " what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." 3 Accordingly a cost theory is the 1 Not marginal utility, but general capacity to satisfy wants regardless of supply, total utility. 1 E.g. Brentano, Die Entwickdung der Werthlehre, 1908, pp. 42-43. 8 Bk. I, Chap. V (Caiman's ed., p. 32). ADAM SMITH 167 one which prevails. As suggested in the preceding quotations, cost is thought of as labor expenditure, the cost of toil and trouble. " Labour was the first price, the original purchase money that was paid for all things. It was ... by labour, that all the wealth of the world was originally purchased." Next it is to be observed that Smith distinguishes between the causes of value in early society and those in force after capi- tal becomes important. In early society " the proportion be- tween the quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another." l But after the " ac- cumulation of stock " an element of profits must be allowed for : " Neither is the quantity of labour commonly employed in acquir- ing or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase. ... An additional quantity, it is evident, must be due for the profits of the stock." 2 Originally, then, labor cost regulated value ; but when capital came to be used, profits must needs be allowed for. At other points Smith resolves price into wages, profits, and rent. In civilized countries land and capital con- tribute to the "exchangeable value" of commodities, conse- quently the total value of the nation's products will command much more labor than entered into its production. 3 But while pursuing this thread of thought the reader of the Wealth of Nations is struck with another use of the labor element in regard to value. For example, it is stated that the value in exchange of any commodity "is equal to the quantity of labour which it enables him [the owner] to purchase or command. Labour, therefore, is the real measure of the exchangeable value )f all commodities." 4 Here the idea obviously is that labor is the measure of value : what a thing is worth may be learned by finding out how much labor it will " command." At several points the two ideas, labor as cause or determinant 1 Bk. I, Chap. VI (Cannan's ed., p. 49). 1 Ibid. "Of the Component Parts of the Price of Commodities." 1 Bk. I, Chap. VI (Cannan's ed., p. 56). 4 Bk. I, Chap. V (Cannan's ed., p. 32). 1 68 ECONOMIC THOUGHT vs. labor as measure, are brought into juxtaposition. At the very outset the twofold aspect is suggested in the statement that the fund of national wealth consists " either in [i] the im- mediate produce of that labor, or in [2] what is purchased with that produce from other nations." l Then the distinction ap- pears clearly in the following sentence : "... [i] the quantity of labour commonly employed in acquiring or producing any commodity, is the only circumstance which can regulate [2] the quantity of labour which it ought commonly to purchase, com- mand, or exchange for." ; In short, in order to understand Smith's theory of value it seems absolutely necessary to keep in mind the distinction be- tween cause and determinant, on the one hand, and measure, on the other. On the one hand, labor is spoken of as an amount of toil or trouble of acquirement, as a quantity employed in pro- duction, " what it really costs the person who brings it to market," etc. These things " regulate " value, while the quantity of labor a thing exchanges for is " the real measure " of exchange value. To what extent this distinction was con- sciously made by Adam Smith cannot be said, but it seems more than mere chance that the usage is so consistent on the lines suggested. It is perhaps worthy of note that the concept of labor as the measure of value becomes more and more prominent as Smith develops his idea of an advanced state of society in which labor is not the whole purchase price of goods. Of the two ways of looking at the problem, the labor-cost- determinant is the more fundamental. It is the amount of the force which so limits its supply as to give to a commodity its purchasing power. This being so, how are we to express the amount of purchasing power or value in the commodity? As labor ceases to be the sole cost this question becomes of increased significance. Money and corn so vary in this power to com- mand other commodities that they are hardly suitable, so Smith resorts to labor again, this time as a measure. Under ordinary 1 Introduction (Cannan's ed., p. i). 1 Bk. I, Chap. VI (Cannan's ed., pp. 49-50). ADAM SMITH 169 conditions the laborer " must always lay down the same portion of his ease, his liberty, and his happiness." He may receive more or less goods, but the price he pays in labor is the same : their value varies, not that of the labor which purchases them. 1 But, that he had it in mind that what determined the amount of labor a thing would command was the amount of labor (and capital, after the accumulation of stock) it contained, is quite clear. Before the accumulation of stock, etc., if division of labor had been carried out, goods " would have been produced by a smaller quantity of labour; and as the commodities produced by equal quantities of labour would naturally in this state of things be exchanged for one another, they would have been purchased likewise with the produce of a smaller quantity." 2 Or, speaking of precious metals, he remarks, "As it costs less [i] labour to bring those metals from the mine to the market, so when they were brought thither they could [2] purchase or command less labour." 3 Such being the basis for his cost theory of objective exchange value, the question as to its application and serviceableness arises. Smith himself states that values are not adjusted by any accurate measure, but according to a rough approximation to equality, through the higgling of the market. His idea is that the average labor cost may be used. Taking the laborer of ordinary or average skill, strength, and health, a day's work will always involve the same amount of disutility, the same sacri- fice of ease, liberty, and happiness. In Chapter VI he makes allowance for the difference in hardship, skill, etc., characteristic of different occupations ; and, while steering perilously near to introducing a discordant utility element, he concludes that fre- quently a compensation for skill is equivalent to one for time and labor spent in acquiring skill. Smith did not have the idea of marginal costs to fall back upon. Instead he uses the device of an average man under average cir- cumstances. If this use of the average man is considered, and it 1 Bk. I, Chap. V (Cannan's ed., p. 35). 1 Bk. I, Chap. VIII (Cannan's ed., p. 66). 5 Bk. I, Chap. V (Cannan's ed., p. 34). 1 70 ECONOMIC THOUGHT is remembered, furthermore, that Smith seeks to determine value only indirectly and through cost, his reasoning does not seem to be open to criticism on the ground of a lack of homogeneity in environmental conditions, or in quality of labor, in so far as a given occupation is concerned. 1 The conception of an average labor cost under average conditions for an average workman of a given grade does not appear illogical. Nor is he inconsistent in his use of corn, money, and labor as measures; for he takes up the two former as merely the more expedient, basing their validity upon their ability to command labor. Holding the idea he did of value as an objective exchange re- ; lation, however, his quest of a long-time or absolute standard is inconsistent. It remains to be noted that Smith made the distinction be- tween natural price and market price. When the price just covered the ordinary rate of rent, wages, and profits expended in preparing and marketing the commodity, it sold at its " natu- ral price." The market price might be above or below this, depending upon the supply actually on the market and the " effec- tual demand " the demand of those who were willing to pay the natural price. 2 " The natural price itself varies with the natural rate of each of its component parts, of wages, profit, and rent ; and in every society this rate varies according to their circumstances, according to their riches or poverty, their ad- vancing, stationary, or declining condition." 3 Smith also sug- gests the importance of demand as determining supply. The Classes of Society and their Interests. According to Smith there are three great original constituent orders of civi- lized society : they consist of those who live by rent, those who live by wages, and those who live by profit. Others derive their revenue from these. The interests of these classes may diverge one from the other, and from the general interest of society. 1 But cf. Davenport, Value and Distribution, p. 9. See below, p. 387, where Marx takes up this same problem. 2 Bk. I, Chap. VII (Caiman's ed., p. 58). * Ibid. (Cannan's ed., p. 65). ADAM SMITH 171 That of the rent-takers, however, is connected inseparably with the social interest, and might safely be taken as a guide for legis- lation. 1 But as their revenue requires neither labor nor care they are indolent, unsuited for public office. Likewise the in- terests of the wage earners are strictly connected with those of society, but so ignorant are they that they cannot understand their own or society's needs, and their voice has small weight. The third order of men, those who live by profit, have interests quite at variance with those of society. They necessarily desire to narrow competition. They are acute, but selfish, and com- mercial legislation proposed by them should be regarded with suspicion. 2 The determination of the shares of these orders, then, begin- ning with wages, is the problem to be considered next. Wages. As in many other instances, so in his statements on wages, Smith is not clear-cut. In the Wealth of Nations may be found traces of virtually every wage theory ever developed. In general, however, his doctrine was that wages depend on labor supply and demand. On the one hand the supply is limited and a minimum set by the price of the necessaries and conveniences of life, or, as he puts it in another place, by the " ordinary or aver- age price of provisions." 3 On the other hand is the demand for labor, which depends on the surplus stock of the nation or the national wealth. The increase in this stock is the important thing. If there be an advancing state of society, the demand is great and wages are high. 4 If there is a relative increase in any trade, there is a rise of wages in it. 6 By " necessaries " Smith understood " whatever the custom of 1 This was not consciously so with the landlord. "It is to no purpose that the proud and unfeeling landlord views his extensive fields, and, without a thought for the wants of his brethren, in imagination consumes, himself, the whole harvest that grows upon them." (Theory of Moral Sentiments, pp. 348 ff., ist ed.) * Wealth of Nations, Bk. I, Chap. XI, conclusion (Cannan's ed., p. 249). 3 Bk. V, Chap. II, art. Hi (Cannan's ed., p. 348). 4 Bk. I, Chap. VIII (Cannan's ed., p. 71, et passim). * Bk. I, Chap. X, part ii, 3d argument (Cannan's ed., p. 136). 172 ECONOMIC THOUGHT the country renders it indecent for creditable people, even of the lowest order, to be without." l While he argued that in Great Britain wages were consider- ably above the subsistence level, yet he held that in the sta- tionary state of society laborers would " naturally multiply be- yond their employment," and wages soon be reduced to the lowest level " consistent with common humanity." 2 Indeed, forebodings of Malthusianism appear more than once. 3 Moreover certain passages plainly suggest the wages- fund idea. " The demand for those who live by wages, it is evi- dent, cannot increase but in proportion to the increase of the A* funds which are destined for the payment of wages," these funds being the employers' revenue surplus over their own subsistence and any " stock " not necessary for their own employment. 4 And again he speaks of " the funds destined for the payment of wages." There can be no doubt that Adam Smith was very well dis- posed toward labor. As forming the greater part of society, what benefited it could hardly harm the whole. No society could be truly flourishing and happy with its laboring classes poor and miserable. " It is but equity, besides, that they who feed, cloath, and lodge the whole body of the people, should / have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged." 5 As one turns the pages of the Wealth of Nations and observes its lack of system, it is easy to see how the Socialists have drawn 1 Bk. V, Chap. II, Pt. ii, Art. 4 (Cannan's ed., p. 354). 2 The pessimistic effect of such passages is evidenced by the following quotation from Weyland's Population and Production, 1816. "... it fol- lows that it is also our duty to use every exertion for the purpose of pre- venting a country from resting in the stationary condition, which Dr. Smith designates as 'hard' and 'dull,' or from sinking into the declining state, which is described as 'miserable' and ' melancholy'" (p. 5). '"Every species of animals naturally multiplies in proportion to the means of their subsistence, and no species can ever multiply beyond it." Bk. I, Chap. VIII (Cannan's ed., p. 81). 4 Ibid. (Cannan's ed., pp. 70-71). * Ibid. (Cannan's ed., p. 80). ADAM SMITH 173 inspiration from its words. To begin with, there is a deductive, na'ive account of early society. In this stage, or " originally," as Smith generally says, everything is bought with labor, and everything belongs to the laborer. Then comes appropriation of land, and we are reminded that the landowner loves to reap where he has not sown. And, thirdly, accumulation of stock follows. At points his words suggest that these agencies take a part of what labor really produces. The last quotation, for example, does so. But it is only a superficial reading that allows such a conclusion. For Smith clearly states that capital is necessary to manufacturers, and trade to the convenience of society, implying its productivity. 1 And no one can well read the introduction to Book II and say that Smith denied either productivity or importance to capital, or that he desired a return to his original state. Profits and Interest. " The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich mer- chants are turned into the same trade, their mutual competi- tion naturally tends to lower its profit ; . . ." 2 These are the words with which Adam Smith explains the forces which de- termine profits. " They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock, "he says in another place. 3 The competition of capital keeps profits down, 4 and in an advancing state where wealth increases they are lowest, thus moving or- dinarily in the opposite direction from wages. The idea of a minimum rate is not clearly worked out. One may imply that if, from the lowest competitive price at which the dealer is likely to sell his goods for any considerable time, wages and rent are deducted, the remainder is profit. 5 " Unless they yield him this profit, . . . they do not repay him what they may very Bk. II, Chap. V (Cannan's ed., pp. 340-341). Bk. I, Chap. IX (Cannan's ed., p. 89). Bk. I, Chap. VI (Cannan's ed., p. 50). See Bk. II, Chap. IV (Cannan's ed., p. 335). Bk. I, Chap. VII. But profits may rise so high as to encroach on rent (Bk. I, Chap. IX, Cannan's ed., p. 98). 174 ECONOMIC THOUGHT properly be said to have really cost him." More specifically he says that the lowest ordinary rate of profit must be some- thing more than what is sufficient to compensate the occasional losses to which the employment of stock is exposed. 1 Elsewhere he so writes that it may be inferred that profits must cover the costs incurred by the employing capitalist in advancing wages to his laborers ; when the capitalist does not himself em- ploy his capital, part of the profits naturally belongs to the borrower, who runs the risk and takes the trouble of employing the capital. 2 The other part in this case is interest, and Smith thinks its minimum " must be something more than sufficient to compensate the occasional losses to which lending, even with tolerable prudence, is exposed." 3 Smith is fairly consistent in using " profits " to indicate the return upon capital what " can be made by the use of a cap- ital," while " interest " is a part of profits and refers to the price which can be paid by a borrower for the use of capital. His use of the terms " gross profit " and " neat or clear profit " is not very definite, it being left for his followers, Senior and Mill, to develop the analysis. He differs from them markedly in his distinction between wages of superintendence (" inspection and direction ") and profits, 4 for he appears to exclude such wages from the latter return. Two exceptions are made to the statement that wages and profits move in diverse directions : in new colonies both wages and profits may be high ; and in the " stationary state " both wages and profits may be low. 8 Profits so vary from day to day by reason of change in prices and fortune that it is impossible to determine their average rate ; but some notion may be formed of their course from the interest of money, which they closely follow. 1 Bk. I, Chap. IX (Cannan's ed., p. 97). * Bk. I, Chap. VI (e.g. Cannan's ed., p. 54). * Bk. I, Chap. IX (Cannan's ed., p. 98) ; author's italics. *Bk. I, Chap. VI, paragraphs 5 and 6 (Cannan's ed., p. 50). Ibid. In the latter case Smith must mean real wages, as the high prices of subsistence in the stationary state would cause high money wages. ADAM SMITH 175 Rent. In the Wealth of Nations the treatment of land and rent begins with the well-known dictum that when the land of a nation has all been appropriated, the owners demand a rent even for its natural produce. The laborer then has to pay the landowner for the license to gather the fruits of the earth, giv- ing the latter part of what his labor collects or produces, that is, rent. 1 This rent is the highest price which a tenant can pay his landlord. Its natural rate will leave him only wages and profits. If the price of his produce yields him more than this, the landlord can and will exact it. " The rent of land, therefore, considered as the price paid for the use of land, is naturally a monopoly price." 2 This rent varies with the fertility and the situation of the land. If distant from the market, a greater amount of labor is required and the surplus remaining for the landlord is diminished. Hence, good roads, canals, and rivers equalize rents. ; Except for calling the landowner a monopolist and his rent a monopoly return, the main outlines of Smith's treatment of rent as the income of the landowner agree with more recent thought. -It is in the discussion of the relation of rent to price that he is inconsistent. In the foregoing account of his theory of value it was remarked that he included rent as a cost. Yet in his chapter on rent he makes its amount depend upon price rather than enter into the determination of price. This con- tradictory treatment seems inexcusable, for we know that Smith's attention was called to the error of making rent a price-determining cost along with wages and profits. 3 The explanation appears to be that, lacking the concept of the margin, in the first instance he confused the causes of higher prices for agricultural produce with rising rents. And it seems likely that there was a further confusion between the idea of entrepreneur's expenses and general costs. Between the two he became confused. In some cases, as, for example, in saying that the natural price of a commodity is the one just sufficient 1 Bk. I, Chap. VI. Compare Hume's essay, Of Interest. 2 Bk. I, Chap. XI. In correspondence with Hume. 176 ECONOMIC THOUGHT to pay rent, profits, and wages, he undoubtedly takes the mer- chant's point of view. Again, when he says that the total produce of a nation, or its price, is divided into three parts, he merely has in mind the obvious fact that rent and wages and profits must all be paid from this total produce. But at other points he speaks as though rent were a deduction from wages and took the place of a part of the original labor cost of things, entering value in lieu of labor as it were. In any case, his ideas were not well formed, and he shifts his viewpoint. In this matter of the relation of rent to price the philosopher-economist was working into new fields. Public Finance. Smith points out two sources of public revenue : the funds, land, and capital of the state ; and taxes. He favors the use of the latter alone. Then come the four celebrated canons of taxation : (i) taxes should be levied accord- ing to the ability of those who pay them; (2) their amount should be certain and known; (3) their levy should be in the manner most convenient for those taxed ; (4) and they should be so contrived as to be most economically collected. Whether or not these canons of taxation were all original with Smith, 1 his formulation attracted great attention, and their in- fluence, through his writing, has been notable. Of course, all taxes must be drawn ultimately from rent, profits, or wages ; and these sources are reviewed for the purpose of ascertaining the best, the conclusion being that capital and wages should not be taxed, directly, at least, and that rent forms the best basis. Assuming that profits are equalized by competition, a tax on this order of revenue would be borne by the consumer. In any case it would be very difficult to assess and collect. In this connection, too, Smith argues against taxing transfers of property by sale or inheritance. As to wages, the tax would, in the long run, fall on the consumer, in fact, prices would be raised by an amount greater than that of the tax. Thus rent remains as the most desirable source, and in the last analysis Smith's position is similar to that of the Physio- 1 See above, pp. 125, 161. ADAM SMITH 177 crats. But he differs from the impdt unique idea in advocating taxes on luxuries. In this way the capitalists and landowners might be reached as consumers. In discussing the land tax Smith allows several departures from the let-alone policy, although he does not seem to suspect that he is disturbing the harmony of his system. It requires little reflection to show that levying taxes in such a way as to encourage one method of production and discourage another is going very far in the way of governmental interference in private economic affairs. Thus when Smith favors taxing at a lower rate those landlords who cultivate their own lands, or levying a specially high rate on those who restrict the freedom of their tenants to cultivate as they see fit, he thereby advocates a virtual departure from laisser faire. Government Interference : Laisser Faire. In passing to Book V, " The Revenue of the Sovereign or Commonwealth," Smith takes occasion to make a formal statement of the impor- tant duties of the sovereign according to the " system of natural liberty." These duties or functions are as follows : (i) " the duty of protecting society from the violence and invasion of other independent societies ; (2) the duty of protecting, as far as possible, every member of society from the injustice or oppres- sion of every other member of it, or the duty of establishing an exact administration of justice; and (3) the duty of erecting and maintaining certain public works and certain public insti- tutions, which it can never be for the interest of any individual, cr small number of individuals, to erect and maintain, . . . though it may frequently do much more than repay it to a great society." 1 The three duties are, therefore, briefly : (i) protection against foreign states ; (2) the administration of law and justice ; (3) the establishment and maintenance of certain public works and institutions. Number (3) is divided into (a) the institutions and public works in favor of trade and commerce, as streets, canals, harbors, embassies, fortifications in countries belonging to barbarous peoples; (b) the education of the youth, i.e. the school ; (c) the education of the entire people, i.e. the Church. 1 Bk. IV, Chap. IX (Cannan's ed., p. 185). N 178 ECONOMIC THOUGHT The nation ought to be protected by a paid army subject to the authority of the king. Government in civilized states should make it the interest of a part of the people to become good sol- diers. This matter may not be left to itself. Self-interest of private individuals is here an insufficient motive power. The last two classes of duties should be performed as far as possible by the people acting under the impulse of self-interest ; but the state must see that they are performed. Even judges, according to Smith, should compete with each other like mer- chants. Each one should strive to draw to himself the largest possible number of cases and earn his living by court fees and stamp duties. The one who did most business should receive the most pay. Fees should be withheld from the judge until the process was determined, in order to incite the court to dili- gence and to expedite business. Streets should be kept in order by tolls ; harbors by port duties. He holds that Church and state should be independent of each other. The Church, the school, streets, harbors, and similar public works are, however, beneficial to the entire society, and it would really be no injustice if society were required to defray the expense of their establishment and maintenance; but as they benefit especially those who use them immediately, it is to be recommended that they pay for them. That Smith is able to take both views of the matter and allow that both may be per- fectly right, shows how little inclined he was to be a mere doc- trinaire. Outside of these general social and economic functions, how- ever, no inconsiderable dispute has existed over the extent to which Adam Smith favored government interference. Some have maintained that he held that the unrestrained action of selfishness leads to the highest attainable prosperity of the com- monwealth; others, that he recognized the necessity of a con- siderable activity on the part of other forces for the attainment of the highest degree of prosperity. The truth appears to be that in all ordinary cases, according to Smith's idea, the " natural " action of private self-interest leads to the most perfect organization of social and economic re- ADAM SMITH 179 lations and to the highest welfare of all. Thus he argues that " the patrimony of a poor man lies in the strength and dexterity of his hands ; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor, is a plain violation of this most sacred prop- erty. . . . The affected anxiety of the lawgiver is evidently impertinent as it is oppressive." And again he states that " every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage indeed and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is more advantageous to the society." These excerpts seem to make Smith's position clear enough. But two modifications are to be noted: he states that class interests may run counter to those of society; and he admits several particular exceptions to the general principle of laisser faire. As to the former, it is a modification, not a contradic- tion, of the let-alone principle. That Smith did not believe in an entire harmony of class interests is true ; but it does not fol- low that he should have called in the aid of the state authority, nor did he. The idea limits his optimistic conclusions rather than conflicts with his laisser-faire doctrine. The exceptional cases in which the government might prop- erly interfere, were concretely : i. In foreign commerce. Taxes on imports were justifiable in order to make a nation self-sufficient in such things as salt- peter, and in shipping (Navigation Acts) ; and also, if goods produced at home were taxed, imports of these goods should bear a similar tax. If English products were taxed in foreign countries, it would then be " a matter of deliberation " whether foreign taxation could not be abolished by retaliatory duties. A duty on exports of wool was to be favored under certain cir- cumstances. 1 1 Bk. IV, Chap. VIII (Cannan's ed., p. 152), several of these excep- tions not allowed until 3d ed., 1784. l8o ECONOMIC THOUGHT 2. In banking. Where the liberty of a few endangers the liberty of the whole society, it ought to be restrained by law. 1 3. Interest rates. Smith thought that the rate of interest should be legally fixed, though with due regard to the market rate. 4. Education. In the case of those who could not afford an education, the government might profitably provide for free schooling. Besides these, and the interference suggested in the taxation of rents, 2 there are certain places in which Smith expresses approval of interference by the state ; as, for example, where he speaks of measures intended to regulate the relations between laborers and employers, in framing which the government takes advice of the latter only. He says of this case : " When the regulation, therefore, is in favor of the workman, it is always just and equitable. . . ." 3 Philosophy and Method. Some of the particular aspects of Adam Smith's philosophy have already been pointed out, its assumption of the " natural," its self-interest basis, its let- alone policy. When, however, it conies to placing him in one or the other of the two great groups, Idealists and Material- ists, the matter is not so simple. A well-known German econo- mist, for instance, declares Adam Smith and Kant to be at one. 4 In which case he might be rated as an idealist. On the other hand, a great majority would consider the Wealth of Nations as predominated by materialistic tendencies. In so far as his belief about the natural tendencies of men in their industrial relations is concerned the latter view appears sound. The fruits of its influence show it at a glance. Yet just as his free trade teaching was not unqualified, so the philosophy displayed in the Wealth of Nations is far from sim- plicity and uniformity. Smith the practical man, drawing conclusions from the business world, Smith the thorough-going individualist, Smith narrowly limiting productivity to vendible 1 Bk. II, Chap. II (Cannan's ed., p. 307). 2 Above, p. 177. 3 Bk. I, Chap. X, Pt. ii (Cannan's ed., p. 143). 4 Oncken, Die Ethik Smith's u. Kants. ADAM SMITH 181 commodities and speaking of men as " other commodities," l Smith of utilitarian tendencies, tended to emphasize material things; and this was the dominant Smith. To this Smith a man's career is determined by environment ; 2 division of labor dominates character, rather than vice versa; 3 and men are the pawns in a great machine-like game of nature. 4 On the other hand, and half concealed in the Wealth of Nations at least, there was another Smith who somewhat limited his optimistic individualism, who tacitly deduced conclusions from ideal pos- tulates, who emphasized the social point of view, and who op- posed duty and moral considerations to the " natural." This was the Smith who wrote the Theory of Moral Sentiments, and he shows clear traces of an idealistic tendency. The difficulty in classifying Smith's underlying philosophy is undoubtedly due in part to the nature of the subject as he conceived it. To him economics concerned the wealth of na- tions, economic activity lay in the pursuit of wealth and chiefly material wealth, and the mainspring of economic activity was self-interest. Thus he abstracted it from other human activi- ties and motives. As Bonar has admirably observed, his " sys- tem of natural liberty would not lead to perfect economy unless men are, for the sake of the argument, supposed to be infallible in judging their interests and single-minded in pursuing them." 6 It is, perhaps, true to say that Adam Smith's materialism lies more in his economic man than in himself and that any obloquy on this score harks back to his abstraction. But Adam Smith can hardly be called a utilitarian in philos- 1 Bk. I, viii (Cannan's ed., p. 82). "It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men. . . ." 2 Smith thought men were born with equal capacities. 1 Bk. I, ii (Cannan's ed., pp. 7-8). 4 See Theory of Moral Sentiments, pp. 290-292 (ist ed.). According to Bonar, Adam Smith thought of industrial progress as nature's doing, not man's : " It was according to law, but not a law of man's making ; indeed man could not try deliberately to make it without spoiling the work of nature." (Philos. and Pol. Econ., p. 174.) * Philosophy and Political Economy, p 178. 1 82 ECONOMIC THOUGHT ophy, though he gives the idea of utility much greater play than did the Physiocrats. Like them he had a metaphysical idea of a natural order; though as a hard-headed Scotchman he could not go the full length they were willing to go in subordi- nating everything to this order. In any conflict between the natural on the one hand and the expedient or practical on the other, the latter won in Smith's mind. He tended to find justi- fication for what was useful. It might be said that his kind of nature philosophy was ultimately based on utility. But immediately and consciously he was no utilitarian in the sense that Bentham, Ricardo, and Mill were: he was not so thor- oughly rational in his thought, nor did he have the pleasure- and-pain calculus worked out by Bentham and Mill. His use of utility was veiled, as it were, by his nature philosophy. In his Theory of Moral Sentiments, moreover, he makes virtue for its own sake a primary consideration. 1 Though, together with the Physiocrats, Smith was instrumental in bringing about a formal separation of Political Economy from so-called Moral Philosophy and Jurisprudence, and this is one of his services, his philosophy and that of his successors has an ethical element. 2 The assumed naturalness of perfect competition was the criterion. As a general proposition, if freedom to com- 1 pete were encroached upon, the encroachment would be wrong. Their philosophy was in this regard, then, not dissimilar to the just-price idea, " natural law " being substituted for the law of clergy and state. On the score of method the same duality appears, and one writer is found stating that Smith established " a deductive and demonstrative science," while another holds that the Wealth of Nations consists simply of practical and common-sense sugges- tions. As long ago as 1870, Cliff e Leslie expressed the following analysis of Smith's reasoning which seems to be essentially sound : "An 1 E.g. p. 203 (ist ed.). 2 Indeed it is not free from theological premises. Cf. Leslie's Essay on the " Political Economy of Adam Smith," Fortnightly Review, Nov. i, 1870; republished in Essays in Political Economy and Moral Philosophy. ADAM SMITH 183 examination of Adam Smith's philosophy enables us to trace to its foundation the theory upon which the school in question has built its whole superstructure. The original foundation is in fact no other than that theory of nature which, descending through Roman jural philosophy from the speculations of Greece, taught that there is a simple Code of Nature which human institutions have disturbed, though its principles are distinctly visible through them, and a beneficial and harmonious natural order of things which appears wherever nature is left to itself. In the last century [the eighteenth] this theory assumed a variety of forms and disguises, all of them, however, involving one funda- mental fallacy of reasoning, a priori from assumptions obtained, not by the interrogation, but by the anticipation of nature ; what is assumed as nature being at bottom a mere conjecture respect- ing its constitution and arrangements. The political philosophy flowing from this ideal source presents to us sometimes an as- sumed state of nature or of society in its natural simplicity; sometimes an assumed natural tendency or order of events, and sometimes a law or principle of human nature ; and these differ- ent aspects greatly thicken the confusion perpetually arising between the real and the ideal, between that which by the as- sumption ought to be, and that which actually is. The philos- ophy of Adam Smith, though combining an inductive investiga- tion of the real order of things, is pervaded throughout by this theory of nature, in a form given to it by theology, by political history and by the cast of his own mind." Thus he assumes a priori the existence of an " original state " which is the " natural order." Moreover certain instincts are derived by the same method, and their working in the original state is deduced. For example, men are assumed to have a natural propensity to " truck and barter," from which division of labor results. And, again, a desire to better his condition, and to live as much at his ease as possible is taken for granted as characterizing every man. 1 The conclusion is that Smith's underlying philosophy was indi- vidualistic with a strongly materialistic tendency; but that it 1 Bk. II, Chap. Ill (Carman's ed., p. 323). 1 84 ECONOMIC THOUGHT was hardly utilitarian, though containing the germs of utilitarian- ism and tending in that direction. His method was a combina- tion of induction and deduction, the latter predominating in his broadest and most fundamental reasonings. Practical Influence. There can be no doubt that the political economy of Adam Smith has had a tremendous practical effect. The Wealth of Nations has been translated into the languages of all civilized peoples. It has almost everywhere directly or in- directly influenced legislation in a marked manner. In some countries the influence of the principles it taught has even been too great to be conducive to a sound growth of institutions. In England it passed through five editions while Smith still lived. In 1876 the centennial of its appearance was celebrated, and it is one of the very few books to which has been awarded the honor of a centenary commemoration. The statesman, Pitt the younger, was a careful student and professed follower of Smith, modifying his policy to a certain ex- tent so as to make it accord more clearly with the principles of the Wealth of Nations. Had circumstances permitted, he would gladly have gone farther in the direction pointed out in that work, but his plans were crossed by the French Revolution, as well as by the prejudice and ignorance of conservative England. " His power rested above all on the trading classes, and these were still persuaded that wealth meant gold and silver, and that commerce was best furthered by jealous monopolies. ' ' * Neverthe- less, he effected a considerable number of important economic reforms. Holding with Adam Smith that in the arithmetic of taxation two and two instead of making four, sometimes make only one, he removed numerous customs duties and reduced others. He was thus able to diminish smuggling, and increase the revenues. Adam Smith had made special mention of the injustice of prohibiting the importation of Irish cattle into Eng- land to protect the English farmer, and this prohibition Pitt de- sired to abolish, as well as the heavy duties on imported Irish manufactures. One of his first measures as minister was an attempt to conciliate the Irish by removing the barriers which 1 J. R. Green's History of the English People, Vol. IV, Chap. III. ADAM SMITH 185 restricted their commerce with England. In 1800, after some early failures, he accomplished his purpose by the union of England and Ireland which provided for the ultimate freedom of commerce between the two islands. The Manchester School. This work of enfranchisement was carried on and consummated by the " Manchester School " ; for when, in 1819, Parliament provided for a retention of some duties between England and Ireland, it was the Manchester Chamber of Commerce which so protested as to cause a retraction of that backward step. Although it involves a glance ahead into the nineteenth century, just a word concerning the school should be presented here. The name " Manchester School " applies to a group of men who were active in advocating free trade and who believed that a heavy burden of proof rested upon those who would do away with laisser faire in any field. These men were most active be- tween 1820 and 1850 ; their work centered largely in the propa- ganda of the Anti-Corn Law League ; and, consisting largely of prominent Manchester merchants and manufacturers, the An- nual Reports of the Manchester Chamber of Commerce express their ideas. Richard Cobden and John Bright were their leaders. They stood for a revolt against regulation and for a practical application of Adam Smith's ideas. Freedom, they reasoned, is the natural condition of the individual, and protec- tion is a harmful restraint upon unprotected industries. It is incorrect, however, to think that as a whole they overlooked humanitarian interests in opposing factory legislation. The leaders of the group certainly favored regulation to protect chil- dren, while believing that adults should be free to contract. Through Bastiat, as will be seen, the school exerted considerable influence in France. 1 In this manner was Smith's influence per- petuated. Buckle, who appears to have looked into the matter, said that 1 On the Manchester School see Rogers, Cobden and Political Opinion, 1873 Prentice, History of the Anti-Corn Law League, 1853 ; Cobden's Speeches, edited by Bright and Rogers, 1870; B right's Speeches, edited by Rogers, 1868. 1 86 ECONOMIC THOUGHT the first notice of the Wealth of Nations in Parliament, so far as he knew, was in 1783, and that it was mentioned several times there between that date and the close of the century. After some intervening remarks he adds : " Well may it be said of Adam Smith, and that too without fear of contradiction, that this solitary Scotchman has, by the publication of one single work, contributed more towards the happiness of man than has been effected by the united abilities of all the statesmen and legislators of whom history has presented an authentic account." Even Bagehot says : " The life of almost every one in England perhaps of every one is different and better in consequence of it. No other form of political philosophy has ever had one thousandth part of the influence on us." Englishmen delight to call Adam Smith the Father of Political Economy. While it is possible that this title belongs rather to Turgot than to him, there is no doubt that the Wealth of Nations has become the corner stone of economic science. Those who went before, prepared the way for him ; those who came after, carried on his work. Critical Estimate of Smith's Wealth of Nations. An emi- nent follower of Adam Smith, N. W. Senior, summed up his work in the following terms : " The inquiry which Quesnay originated was pursued, and with still greater success, by Adam Smith. Smith was superior to Quesnay, and perhaps to every writer since the times of Aristotle, in the extent and accuracy of his I knowledge. He was, on the whole, as original a thinker as Ques- nay, without being equally subject to the common defect of original thinkers, a tendency to push his favorite theories to ex- tremes ; and in the far greater freedom then allowed to industry in Great Britain than in France, and in the greater publicity with us of the government receipt and expenditure, he possessed far greater advantages as an observer . . . assisted by a style un- equalled in its attractiveness, he has almost completely super- seded the labours of his predecessors." * Though Smith's thought is justly praised for its moderation, 1 Lectures on Political Economy, 1852, p. 5. ADAM SMITH 187 and his style for its attractiveness, the careful reader notices not a few careless, ill-expressed utterances and many inconsistencies. Universal rules are given absolutely, only to be followed by im- portant deviations ; now a factor is cause, now effect, etc. In spite of his moderation, relatively to both predecessors and fol- lowers, too, an undue absolutism somewhat mars his reasoning. To this extent Senior's estimate must be modified. But on the whole it is eminently just. With more specific reference to Smith's contribution to the material of economic thought, another well-known follower of his has said : " In adopting the discoveries of others, he has made them his own ; he has demonstrated the truth of principles on which his predecessors had, in most cases, stumbled by chance ; has separated them from the errors by which they were previously encumbered ; has traced their remote consequences, and pointed out their limitations ; has shown their practical importance and real value their mutual dependence and relation ; and has re- duced them into a consistent, harmonious, and beautiful system." l To part of this statement of the case decided exception is to be taken, while much more is to be said. In some instances, as in the theory of value and rent, Smith does not trace remote consequences, nor does he show their dependence and relation. Certainly there is much lacking on the score of harmony and consistency. Of the host of adverse criticisms of Smith's reasoning the fol- lowing seem to be the most fundamentally important : I. His philosophy was over-individualistic. Its tendency was so to restrict the sphere of government activity in spite of the particular exceptions he made as to be the basis for harmful conclusions. This was in part the fruit of a negativism, which, though much less marked than that of the Physiocrats, was deep seated. II. He was at bottom an essentially materialistic thinker. As Ingram says, " He does not keep in view the moral destination of our race, nor regard wealth as a means to the higher ends of life, 1 M'Culloch, Discourse on the Science of Political Economy, Edinburgh, 1825, p. 56. 1 88 ECONOMIC THOUGHT and thus incurs, not altogether unjustly, the charge of material- ism." III. These traits were made more harmful by his absolutism of theory. In spite of bits of historical treatment, he lacked the concept of relativity, and was led to state his doctrines too nar- rowly and in too sweeping a fashion. To be noted as particular evidence of concrete error, is his \ treatment of the productivity of different kinds of labor, and of Ithe relation of rent to price. / Smith's chief services are mostly suggested in the above quota- tions. His breadth of view and catholicity were notable. Tak- ing in most of what was best in English and French thought, he gave Political Economy a definition and distinct content that it had lacked. He brought labor and capital into prominence along with the land factor emphasized by the Physiocrats. And, imperfect as it was, his discussion of value was a marked advance ever that of any predecessor. / Before Smith, economic investigation was taken up with the producer of wealth. The producer was the starting point. While dealing largely with production, Smith started from the standpoint of the consumer : " Consumption is the sole end ,0 O ICO This conclusion rests upon his theory of value and his optimism : labor increases in productiveness, less labor is re- quired to produce things, and so less labor will be given for products past or present. Accordingly the value of man rises as compared with capital. The whole scheme is graphically represented thus: Slavery LABO R Freedom Profits Interest Rent Small amount; high rate Large amount; low rate LAND Land high in value Land valueless With progress, " societary circulation" becomes more rapid ; capitalists can demand only lower rates, but receive larger aggregate amounts; wages increase absolutely and relatively; and industrial classes tend toward equality ; so runs the har- monious order of events ! Rent. The three principal points in Carey's system to be considered further, are his theories concerning Rent, Population, and Protection. Protection will be treated of in discussing the opponents of Adam Smith, for Carey may be considered as ranking among them in that regard. Carey's doctrines of Rent and Population are aimed at Ricardo and Malthus. It may seem strange that Carey should be considered a follower of CAREY AND THE "AMERICAN SCHOOL" 243 Adam Smith, since he contends against Ricardo and Malthus, also followers of Smith. But the existence of contradictions be- tween different statements made by Adam Smith has been pointed out, and it was possible for two opposing schools to trace their origin to him. Carey, accordingly, holds Smith in considerable estimation, while condemning his later English followers in strong terms. In his Principles of Political Economy, Carey assented to Ri- cardo's opinion that the best lands are cultivated first. He did not, however, even then acknowledge that Ricardo's theory of rent was correct ; since he held that the value of commodities depends upon the cost of reproduction, and that the cost of producing agricultural commodities, or food and raw material, decreases with general progress. He felt, however, that his theory was still incomplete. In the preface to his Principles of Social Science he says of the earlier work : "He had already satisfied himself that the theory presented for consideration by Mr. Ricardo not being universally true had no claim to be so considered ; but it was not until ten years later that he was led to remark the fact that it was universally false. The real law, as he then saw, was directly the reverse of that propounded by that gentleman, the work of cultivation having, and that invariably, been commenced on the poorer soils, and having passed to the richer ones as wealth had grown and population had increased. Here was the great fundamental truth of which he before had thought, and the one, too, that was needed for the perfect demonstration of the truth of those he previously had published. Here, too, was further proof of the universality of natural laws, the course of man in reference to the earth itself being thus found to have been the same that we see it to have been, in reference to all the instruments into which he fashions the several parts of the great machine. Always commencing with the poorest axes, he proceeds onward to those of steel ; always commencing with the poorer soils, he proceeds onward to those richer ones which yield the largest return to labor, the increase of numbers being thus proved to be essential to the increase in the supply of food. Here was a harmony of interests directly opposed to the discords taught by Mr. Malthus." 244 ECONOMIC THOUGHT This great law, as Carey calls it, was first announced to the world in 1848 in The Past, the Present, and the Future. Carey maintains that experience shows that at first men take up poor soils, because they are light and sandy and easier to cultivate. Men begin to cultivate the hills, and when the poorest land is exhausted and numbers and knowledge have increased, they work down toward the rivers and make use of the rich valleys. The last settlers, therefore, receive the best land. Labor becomes continually more productive, wealth in- creases, and man progresses. The earth is only the material of a machine which the agricul- turist makes and calls a farm. He can obtain for it at most only what it has cost him, for plenty of this material remains, and others will construct machines for themselves rather than pay more. In fact, the farmer cannot, as a rule, obtain so much for his machine as it cost him, because the material remaining is better and man learns how to work with less cost. He is able to obtain only what it would cost to reproduce it. It is the same as with an ax which may have been manufactured ten years before. The owner cannot obtain what it cost him, but only what it would cost to make another one at the present time. There is no essen- tial difference between the farmer and any other capitalist. The farm simply represents so much capital. Carey seeks the aid of history in the development of his theories, but his knowledge appears to have been as weak as his critical faculty. It is true that, in many places, people have first settled on high land, but some of the causes which have led them to do so have not been at all of an agricultural nature, as for example the desire for defense or to secure freedom from disease. 1 As was easy under the circumstances, he overestimated his discoveries and gave them a universality which does not belong to them. It is going too far to intimate that the poorer lands are always first cultivated, however the quality is estimated. Can any one imagine that a farmer who has the choice would deliberately 1 See Hibbard, History of Agriculture in Dane County, Bui. of the University of Wisconsin. CAREY AND THE "AMERICAN SCHOOL" 245 pick out that land for cultivation which yielded the least return to his labor and capital? As Lange says: "Even unfruitful heaths and hillsides are gradually brought into a state of culti- vation. This is what I see every day in my home on the lower Rhine and in Westphalia, where agriculture and manufactures flourish together, and is therefore a fact which no Carey can convince me to be untrue." Again, Carey clearly does not understand Ricardo's theory, or at least does not represent it fairly. The fruitfulness of land is a relative conception. If a certain amount of capital and labor will yield more when applied to a light than to a heavy soil, the light soil is, in the sense of Ricardo's theory of rent, the more fruitful, although it may be possible to produce more on the heavier soil by applying a greater amount of labor. It may be that Ricardo himself did not bring this out with sufficient clearness. In fact, it is owing to Carey's opposition that Ricardo's followers have been led to explain so precisely as they have what is to be understood by good, better, and best land. Carey attacked Ricardo with so much force and ability that it compelled political economists to go over again the whole ground of the theory of rent. The result has been a correction and amplification. This is Carey's service. Theory of Population. Carey held Malthus to be wrong, first because he maintained the Malthusian theory was contrary to God's attributes. He begins the chapter (xxxviii) on popu- lation thus : " ' Be fruitful and multiply,' said the Lord, ' and replenish the earth and subdue it ' " ; and after describing briefly Malthusianism, as he understands it, adds ; " Can such things be ? Can it be that the Creator has been thus inconsistent with Him- self ? Can it be, that after having instituted throughout the ma- terial world a system, the harmony of whose parts is absolutely perfect," He has of design, subjected man, the master of all, to laws which must produce universal discord? Can it be, that after having given to man all the faculties required for assuming the mastery of nature, it has been a part of His design to subject 1 Angebliche UmwSlzung der Socialurissenschaft durch Carey. 246 ECONOMIC THOUGHT him to laws in virtue of which he must become nature's slave ? It hardly seems necessary to criticize this position. A second argument is deduced from the harmonious laws of nature. As the earth is cultivated, the lower races of animals die out and the supply of carbonic acid tends to diminish, since animals generate it and plants consume it. It is therefore neces- sary that the numbers of the human race should increase in order to furnish the vegetable world with the necessary amount of car- bonic acid. It is doubtful if Carey's dilettanteism in natural science ever led him to a rasher hypothesis. In the first place, aside from any question as to where the carbonic acid comes from, it may be fairly doubted whether the amount generated by man or the lower animals has any appreciable effect on vege- tation. In the second place, it might with equal propriety be argued that the number of mankind ought to decrease, since the great amount of coal now consumed as fuel is increasing the sup- ply of carbonic acid gas so rapidly as soon to upset all natural and harmonious arrangements. A third argument used by Carey is that the increase of num- bers denotes increase of wealth. The more hands, the more pro- ducers of wealth. The greater the number of inhabitants, the greater the combination and division of labor. To a certain extent this is true. It must simply be remembered that labor is only one element of production, while increase of wealth depends upon the harmonious development of the three elements, land, labor, and capital. Carey next argues that it is absurd to suppose that man alone increases in geometrical ratio. The lower animals which furnish him with food increase as rapidly and even more rapidly. A single grain of corn produces hundreds of grains, and these if planted will increase in like number. That is geometrical pro- gression. " The progeny of a single pair of carp," says Carey, " would in three years amount to thousands of billions ; that of a pair of rabbits would in twenty years count by millions; whereas that of a pair of elephants would not number dozens. When, however, we reach the highest form, we hear of a new law, in virtue of which man increases in a geometrical ratio, while in- CAREY AND THE "AMERICAN SCHOOL" 247 crease of the commodities required for his use is limited to the arithmetical one." l J. S. Mill's reply is to the point. " Mr. Carey," he says, " expatiates on the absurdity of supposing that matter tends to assume the highest form of organization, the human, at a more rapid rate than it assumes the lower forms which compose human food ; that human beings multiply faster than turnips and cab- bages. But the limit to the increase of mankind, according to the doctrine of Mr. Malthus, does not depend on the power of increase of turnips and cabbages, but on the limited quantity of the land on which they can be grown. When Mr. Carey can show, . . . not that turnips and cabbages, but that the soil itself, or the nutritive elements contained in it, tend naturally to multiply, and that too, at a rate exceeding the most rapid possible increase of mankind, he will have said something to the purpose. Till then, this part, at least, of his argument may be considered as non-existent." 2 A further argument used by Carey is the same as that advo- cated by Herbert Spencer in his Biology. It is only one of a number of striking resemblances between them, and Carey's works were published first. The position taken by Carey is that there is an antagonism between the intellectual and generative functions, and that the growth of population tends to decrease in rate as man becomes more highly developed, so that the supply of men is equal to the demand by a self-acting law. Carey is able to give no proof for this position, however, for statistics such as he cites may be found on both sides. This very plausible idea remains a mere hypothesis to this day. Philosophy and Method. Carey's philosophy is, after all, rather simple and easily understood. It is highly charged with that sort of idealism which has animated the growing American nation. He believed in the conquest of nature by man : association spreads ; mental power supercedes mus- cular; man's control over nature grows. With similar sig- nificance the power of the state is confidently invoked to give 1 Social Science, p. 57. 1 Principles of Political Economy, Bk. I, Chap. X, 3. 248 ECONOMIC THOUGHT America industrial independence. And there is manifest an allied tendency to take the subjective viewpoint. Carey's method may be considered as a curiosity. It is truly unique. It is a mixture of all methods. He says in one and the same breath that the English were wrong in using too exclu- sively the deductive method, and that the mathematical method is the correct one. He accuses others of neglecting facts for hypotheses, and himself immediately makes the most astound- ing suppositions. He complains that political economy has not advanced beyond the metaphysical stage of knowledge, and at the same time represents inspiration and intuition as the high- est branches of the tree of knowledge, since they are the sources of other sciences. But intuition is the source of the metaphysi- cal method and inspiration of the theological. Carey's fundamental supposition, the one which would per- haps logically come first, is that the laws of physical science are those of social science, since one uniform and harmonious law governs mind and matter. The laws " instituted for the government of matter in the form of clay and sand " are " the same by which that matter was governed when it took the form of man, or of communities of men." It follows that one and the same method is to be pursued in the investigation of all sciences, a conclusion which at present it would be im- possible to prove. To do him justice, Carey himself does not make any attempt to do so. As in his opinion the same laws govern matter and mind, society and the material universe, it is not surprising to find him employing the technical terms of physical sciences and making use of forced analogies between social phenomena and those of external nature. He speaks of man, for example, as the mole- cule of society, and describes his gregarious disposition as the law of molecular gravitation. Because large cities attract more people to them than small cities, and attract more people from their immediate neighborhood than from a great distance, he feels warranted in asserting that " gravitation is here, as everywhere, in the direct ratio of the mass and the inverse one of the distance." l 1 McKean's edition of Social Science, p. 38. CAREY AND THE "AMERICAN SCHOOL" 249 A little reflection shows that such a statement is extremely misleading and even absurd. Inconsistency. Carey possessed much originality, but lacked a scientific training. His work is unsystematic and not without glaring inconsistencies. Thus he holds that better and better lands are taken under cultivation and lower prices result ; while elsewhere we are told that the growth of industry makes the price of subsistence higher. While admitting that in market centers the means of life are dearest, he asserts that a dense popu- lation through the power of association makes things cheaper. Carey's Followers of the Early American School. In so far as an American School of political economy is ever spoken of, Carey and his adherents are meant. This is perfectly proper. America has had no other body of political economists who could by any possibility be considered as forming a school. Carey found warm admirers on this side of the Atlantic as well as on the other. Many were ready to accept his system as proved beyond the possibility of doubt. The following may be considered as among the more noteworthy of his American followers. First, E. Peshine Smith, who wrote a Manual of Political Economy, which was published in Philadelphia in 1853. It con- tains an exposition of Carey's system in the form of a textbook. Peshine Smith acknowledges frankly that Carey is his master, and declares his unbounded faith in him. In his preface he says : " Mr. Carey, by showing that the fact is directly the re- verse of the hypothesis of Ricardo, and by establishing the con- sequences which flow from it, restored harmony to what was before a mass of discordances, and rendered it possible for the first time to construct a science out of what was a mere collec- tion of empirical rules." Smith explains that the object of his manual is to provide us with a truly American system of political economy. Another author, who, though possessed of more ability and in- dependence, was influenced by Carey and may be classed as a member of the Early American School, attempted to do the same. This was Francis Bowen (1811-1890), formerly professor of po- 250 ECONOMIC THOUGHT litical economy in Harvard, and author of the American Political Economy, published in 1870. In his Politics for Young Americans, in many respects an ex- cellent little work, Charles Nordhoff expresses strong admira- tion for Carey, and shows himself an undoubting disciple. Horace Greeley wrote a work on political economy, published in Boston in 1870, the full title of which indicates its scope: Essays designed to elucidate the Science of Political Economy, while serving to explain and defend the Policy of Protection to Home Industry as a System of National Cooperation for the Ele- vation of Labor. The book is well worth reading. 1 Neither Bowen nor Greeley was dependent upon Carey to the extent that Nordhoff was, but it seems that both should be considered as be- longing to the " American School." Others who might be mentioned are Stephen Colwell, The Relative Position in our Industry of Foreign Commerce, Domes- tic Production and Internal Trade (1850), The Ways and Means of Commercial Payment (1858), The Claims of Labour and their Precedence to Claims of the Trade (1861) ; William Elder, Con- versations on Political Economy (1882) ; and Robert Ellis Thomp- son, Social Science and National Economy (1875), Elements of Political Economy (1882), and Protection to Home Industry (1886). In more recent times, very clear traces of Carey's influence appear in the thought of Professor S. N. Patten. There has been no small amount of discussion over the rela- tive originality of Carey and the French economist, Bastiat, concerning which more will be said in the following chapter. 1 For some further comment on Greeley's thought see article by Com- mons (J. R.), in Pol. Sci. Quarterly, XXIV, pp. 468-488. CHAPTER XIV BASTIAT AND THE FRENCH OPTIMISTS Bastiat's Life and Writings. Frederic Bastiat * was born in 1801, in Bayonne, France. It was planned that he should become a merchant, but inheriting an estate at the age of twenty- five, he first tried agriculture with small success, and then devoted the remainder of his life to study. After pursuing various branches his attention was attracted by the writings of some of the French economists, the most prominent of whom was J. B. Say, and political economy became thereafter his favorite study. He became successively a justice of the peace (1831), mem- ber of the general council of his department, and, unsuccessfully, a candidate for the Chamber of Deputies. The articles written then, and a little pamphlet written to sup- port his candidature for another office, were the first published expressions of his demand for non-interference of government in matters of trade and manufactures. But Bastiat's first im- portant literary attempt appeared in 1844. It was an article in the Journal des Economistes, " Concerning the Influence of English and French Tariffs on the Future of Both Peoples." He had been led to write the essay by a journey he had made through Spain and England. In the latter country he had become ac- quainted with the leaders of the Anti-Corn Law League, and determined to do for France what they had done and were doing for England. In 1845 he published Cobden and the League (Cob- den et la Ligue) to glorify " the grand movement " as he called it. 1 Cf. Bluntschli u. Brater, Staatsworierbuch, art." Bastiat" (Mangoldt) ; Von Leesen, Frederic Bastiat (Miinchen, 1904) ; Bohm-Bawerk, Geschichte und Kritik der Zinstheorien (1884). 251 252 ECONOMIC THOUGHT And at about this time he began a series of articles in the Journal des Economistes, which appeared soon after as a book, with the title Sophismes Economiques. An English translation, called Sophisms of Protection, was published in 1877. This is Bastiat's chief destructive or negative work. In 1845 Bastiat removed to Paris and became secretary of the Free Trade Association there, and also took charge of a news- paper called Free Trade. After the Revolution of February, 1848, Bastiat became a member first of the Constituent and after- wards of the Legislative Assembly, in which he devoted his ener- gies chiefly to fighting the communists and Socialists. Besides numerous newspaper articles, Bastiat continued to bring out at intervals essays designed to popularize his ideas, such as those on Property and Law, Justice and Fraternity, aimed against the Socialists, and Peace and Liberty. A number of these have been translated and published with the title Essays on Political Economy. 1 All are written in a pleasing and luminous siyle, but have comparatively little scientific value. f" A good illustration of Bastiat's method appears in his ironical " Petition of the Manufacturers of Candles, Wax-lights, Lamps, Candlesticks, Street Lamps, Snuffers, Extinguishers, and of the Producers of Oil, Tallow, Rosin, Alcohol, and, generally, of every- thing connected with Lighting." 2 These lesser luminaries are represented as suffering from intolerable foreign competition, namely, that of the sun ; and the Chamber of Deputies is be- sought to carry out their policy of protection to home industry by stopping all openings by which sunlight had been allowed to enter houses. The imaginary petitioners go on to argue that if it were objected that sunlight is gratuitous, the point would be inconsistent; for protection had been favored on the ground that foreign products approximate more nearly than home prod- i ucts to the character of gratuitous gifts ! Thus, brilliantly, with fable and irony, the masses were ap- pealed to ; but all too often the criticism, that the opponent's argument is not fairly stated, applies. 1 New York, 1880. ! Economic Sophisms, First Series, Chap. VII. BASTIAT AND THE FRENCH OPTIMISTS 253 His most ambitious work and his attempt at a more positive and constructive contribution was the Harmonies Economiques. The first volume alone was completed, appearing in the year of the author's death, 1850. Economic Harmony. i. Value. Bastiat devotes no chap- ter to Production : to him economy lies in exchange and Econom- ics is the study of exchanges. Wants, efforts, satisfactions, this is the round. But men commonly obtain satisfaction by giving something in exchange for what is desired. This involves the question of value, and, as with Carey, value is Bastiat's starting point. He founded his theory upon his definition of this term. Bastiat criticizes various theories of value which had pre- ceded him: utility, scarcity, labor, difficulty of acquirement, estimation, or judgment are all one-sided, though not totally wrong, as bases for determining value. Both the utility theory of Say and the labor theory of Ricardo err in placing value in the material of things. There are two kinds of utility : gratuitous and onerous. The former consists of the materials and forces which are the gift of nature, and nothing can be exacted in ex- change for it. Onerous utility lies in a service of man to man, and demands a service in return. Now to place value in matter would lead to the conclusion that the gratuitous utilities of na- ture may confer value. This would mean that landowners would have property in the gratuities of nature, something which Bas- tiat in his desire to defend the present order against the Socialists will not admit. It would be "as little justifiable as compre- hensible." The same error, too, would deny productivity to services which do not result in material things. Wants and satisfactions are not sufficiently commensurable to serve as determinants of value, but he grants that utility is the basis of value if only we do not make it an intrinsic property of things. Ricardo's necessity for excepting goods whose supply is abso- lutely limited shows that a general law based on labor cost is impossible. Moreover, how are fluctuations in the value of things to be accounted for if their value is determined by the labor expended upon them? 254 ECONOMIC THOUGHT Bastiat would not destroy the labor and utility theories, but would correct one-sidedness by uniting them. He comes very near to the labor-cost theory when he holds that value lies in " effort," but he would make effort a broader term than labor, though it is not very clear just what it includes. In exchanging services or goods only effort or onerous utility is considered, as natural forces are gratuitous. The difficulty arising from fluctu- ation in the value of stored-up labor he meets by substituting for effort expended the effort saved to the recipient or purchaser, an idea apparently suggested by Adam Smith's shift from the labor-cost to the labor-exchange point of view. 1 But to him this means a service. Hence Bastiat's formula : " Value is the rela- tion of two services exchanged." The effort saved, or service, is the product of one man ; the want and its satisfaction are felt by another ; the service, then, commands a compensation in the shape of some counter service. 2. The Interests of Labor and Capital; Land Value, Al- though it is not material, value may pass into material. It is then capable of accumulation, that is to say, of becoming capital. But it is to be noticed that " where value has passed from the service to the product, it undergoes in the product all the risks and chances to which it is subject in the service itself." It may rise or it may sink until it departs altogether, as might have hap- pened to the service. The tendency, however, of value fixed in a commodity, that is to say in capital, is to sink. " The man who makes a cup to-day," says Bastiat, " for the purpose of selling it a year hence, confers value on it, and that value is determined by that of the service not the value which the service pos- sesses at the present moment, but that which it will possess at the end of the year." Now owing to constant industrial improve- ments the probability is that the cup can be produced cheaper at the end of the year than now. Thus, according to Bastiat, capi- tal, which is only accumulated services, stands at a disadvantage compared with labor, that is, present services. As society pro- gresses, and Bastiat thinks of it as always progressing, capital continues to occupy a more and more disadvantageous 1 See above, pp. 167 f. BASTIAT AND THE FRENCH OPTIMISTS 255 position with regard to labor. Labor has then no reason to be dissatisfied. The rent of land, too, is only a return for past services. The original and indestructible powers of the soil are not, as Ricardo would have us believe, the source of rent. No remuneration can be demanded for these, because they are the gift of nature. Land value represents previous services, such as the clearing away of forests, drainage, building of fences, fertilizing the soil, etc. But formerly, on account of the greater imperfection of labor's methods and appliances, it required more labor than would now be necessary to render such services. The landlord receives a return only for the present value of his improvements. Sooner than give him more, people will take up new land and improve that. " This shows how empty," says Bastiat, " are the decla- mations which we hear continually directed against the value of landed property. That value differs from other values in noth- ing neither in its origin nor its nature, nor in the general law of its slow depreciation, as compared with the labor which it originally cost." l Wage-earners have every reason to be satisfied with their lot. Production ever becomes easier and more abundant, and the share they receive is continually augmented. From this " ameli- oration of the laborer's lot found in wages themselves and in the natural laws by which wages are regulated," Bastiat draws two conclusions and one corollary. " i st. The laborer tends to rise to the rank of a capitalist and employer. " ad. Wages tend to rise. " Corollary The transition from the state of a paid workman to that of an employer becomes constantly less desirable and more easy." 2 According to Bastiat, the postponement of consumption is a service rendered by the capitalist for which he deserves payment or interest. 3 It might be supposed, then, that capitab'sts would 1 Harmonies Economiques, I, p. 150. 2 Ibid., II, p. 73. 3 For Bastiat's theory of interest and a criticism see Bohm-Bawerk, Capital and Interest, Bk. IV, Chap. III. 256 ECONOMIC THOUGHT have ground for complaint, but this is not so. Harmony of in- terests is complete. Capitalists receive a smaller relative share of the produce, but a greater one absolutely on account of the growth of capital. Bastiat illustrates this by letting the figures 1000, 2000, 3000, and 4000 represent the total production of society at different epochs. The division between laborer and capitalist would then, he maintains, take place in somewhat the following manner : TOTAL PRODUCE SHAKE OF CAPITAL SHAKE or LABOR First period IOOO t;oo "JOO Second period Third period 2OOO 3OOO 800 10^0 I2OO in CQ Fourth period 4000 I2OO 2800 The share of the capitalist, it is seen, descends from 50 per cent to 40, 35, and 30 per cent, while that of the laborer rises from 50 per cent to 60, 65, and 70 per cent. The proof that the relative share of capital decreases Bastiat finds in the fact that the rate of interest continues to grow lower as society advances. On the other hand, the absolute share of capital must increase, because capitalists would destroy or con- sume a part of their capital if they could obtain more for a part than for the whole. It does not appear to occur to Bastiat that the profits of capital may decrease because the aggregate product of labor and capital is less. Let the supposition be made that a given amount of capital and labor produce at one period 1000 and at a later one only 800. Let the share of capital in the first period be 500 and in the second 450. The absolute share of capital would then have decreased, while its share relatively to labor would have increased. This supposition is quite as possible as that of Bastiat. It might be said that in the beginning of a society the most pro- ductive employments of capital and labor were sought out, and that afterwards capital and labor were obliged to perform work BASTIAT AND THE FRENCH OPTIMISTS 257 which would formerly have been regarded as unprofitable. Bas- tiat makes no such supposition as this, nor will he allow the thought of it to enter his mind, because it would interfere with his presupposed harmony and divine order of affairs. How marked the contrast between Bastiat's general scheme and Ricardo's ! The latter believed that prices of raw materials and subsistence rise, and with them rents, this rise being, in a sense, at the expense of the other shares in distribution. But Bastiat, like Carey, maintained that the shares of both labor and capital (including land) increase, there being a more rapid increase in wages. 3. Population. On the subject of population Bastiat is de- cidedly confused and inconsistent. Thus in the first part of his Harmonies he sets out to deprive the Malthusian principle of all pessimistic aspects, arguing that the augmentation of population increases the number and effectiveness of exchanges, and hence results in a larger share in the gratuitous gifts of nature. But in the second part, in his chapter on Population, he takes the more common view. Like Malthus, he hopes that the standard of liv- ing of the laboring classes may rise, so that their numbers will increase less rapidly. And he maintains that all sensible people follow the Malthusian idea, in postponing marriage until a com- petency has been acquired. 4. Government Intervention. As everything in the field of value and distribution tends to work out harmoniously if left alone, Bastiat considered that the science of government is ex- ceedingly simple. Government performs its functions by the exercise of force, and there is only one place where it has in his opinion a moral right to exercise force. That is in establishing justice. The action of government is " essentially limited to the maintenance of order, security, and justice. All action of government beyond this limit is a usurpation upon conscience, upon intelligence, upon industry ; in a word upon human lib- erty." l This, of course, begs the question as to the justice of present arrangements, and assumes the state of natural harmony of which he conceived to exist in fact. 1 Op. dt., I, p. 4. s 258 ECONOMIC THOUGHT Bastiat and Carey. To a great extent Bastiat stood on the shoulders of Say, Dunoyer, and the American, Carey. List, too, might be mentioned in this connection. There has been some considerable dispute between the friends of Carey and those of Bastiat l as to which of the two originated their system of harmony. Bastiat has been accused repeatedly of literary theft. Their doctrines and even their language are undoubtedly often strikingly similar. The reader will remember Bastiat's theory that the share of labor increases both relatively and abso- lutely, while that of the capitalist increases absolutely but de- creases relatively; and how he illustrated it mathematically. This maybe compared with the following paragraph, taken from Carey's Social Science : "In the early period of society, when land is abundant and people are few in number, labor is unproductive, and of the small product, the land-owner or other capitalist takes a large proportion, leaving to the laborer a small one. The large proportion yields, however, but a small amount, and both laborer and capitalist are poor the former so poor that he is everywhere seen to have been a slave to the latter. Population and wealth, however, increasing, and labor becoming more productive, the land-owner's share diminishes in its proportion, but increases in its amount. The laborer's share increases not only in its amount, but also in its proportion, and the more rapid the increase in the productiveness of his labor, the greater is the proportion of the augmented quantity retained by him ; and thus, while the interests of both are in perfect harmony with each other, there is a constant tendency towards the establishment of an equality of condition." 2 Bastiat and Carey also have essentially the same ideas as regards value and utility ; and there is a close parallelism in their theories of the origin of land value. Carey criticizes Bastiat's definition of value, it is true, but he is able to do it only because Bastiat did not express himself with sufficient accuracy. They both mean the same. 1 Diihring and Lange. In the Journal des Economises for 1851 Carey and Bastiat themselves crossed swords on the matter. 9 McKean's ed., p. 31. BASTIAT AND THE FRENCH OPTIMISTS 259 Though some have argued that both writers were quite original in reaching the same conclusions, it seems improbable that this is the case. It is the general consensus of the best opinion that Bastiat was more deeply indebted to Carey than he would admit, and that he erred in not giving Carey credit in connection with his statement of the law of distribution and his discussion of land value. On the general theory of value, however, Bastiat's main ideas seem to have been formed independently of Carey. 1 Carey impresses the reader as decidedly the more original, and on the whole his work antedated Bastiat's. It will be remembered that his Principles of Political Economy and Past, Present, and Future, containing the essentials of his doctrine, appeared in 1837 and 1848 ; while Bastiat's constructive work came in 1850. Criticism. In general criticism of Bastiat's work it is to be observed that he was greatly influenced by the controversial atmosphere in which he lived. His doctrines appear unduly warped by his propaganda against protectionism and Socialism, while underlying all his argument is the unsound idea that the organization of society under competition is the most perfect that can be effected or even conceived of. His reasoning on land value is quite erroneous. To hold that the value of land equals the expenses of rendering it accessible, clearing, fencing, etc., is untenable in the light of facts. For example, much land is now worth far less than such expenditures. His view overlooks the fact that such outlays are made with the idea that they will pay for themselves, and something more that long ago they have been replaced and ceased to operate. The value of a good Illinois farm or a New York lot is far greater than such expenses. It is vain to argue that even the gifts of nature cannot be appropriated and be made the basis of a pay- ment to the owner. That is not the way to meet Socialistic attacks. In his Sophisms Bastiat cries: You protectionists cannot apply your theory as a general one. As between individuals, families, communities, and provinces you accept free trade. But you say the political economy of individuals is not that of 1 See Von Leesen, Fr6d6ric Bastiat, pp. 15,5 f. 260 ECONOMIC THOUGHT peoples! And just here appears his absolutism. He does not regard national lines. He follows to the extreme the cosmopoli- tanism of the Classical School, many of the other doctrines of which he attempts to rectify. Bastiat's limitations are well exhibited in his theory of value. The words " efforts " and " services " he uses almost as fetishes, but they explain nothing. If service means more than labor, how much more? What determines the value of the service? Bastiat gives us no adequate answer. Moreover, by confining himself narrowly to exchange value he leaves out of consideration the important phenomena of value in use, or utility. On account of its shallowness and manifest disregard of certain facts of social life, Bastiat's writing has had little influence on the leaders of economic thought. Its popular influence has, how- ever, been remarkable, and it is this which has justified the de- votion of so much space to it. It owed its existence to a great extent to the extreme free trade party in England, called on the Continent generally the Manchester Party, from the city where it has its stronghold. But Bastiat's system has also re- acted upon this party, leading it to greater extremes in doctrine. In Germany a party was also formed between the years 1840 and 1850, opposing all interference of government, and accept- ing Bastiat without reserve. Prominent members of this party were Prince-Smith, an Englishman by birth, Fancher, Victor Bohmert, and Max Wirth. Bastiat did not deny that the poor and unhappy existed, though he found the ground for their condition in a mere lack of freedom, and bade the laborer be content and grateful to the capitalist. His followers hi Germany went still further. In their admiration of our present social organization, they denied the existence of a social problem. The world looked so happy to them that they could find no poor man in it. It became at one time quite the thing to speak of the so-called poor man. Cliffe Leslie says : " Political writers and speakers of this school have long enjoyed the double satisfaction of beholding in themselves the masters of a difficult study, and of pleasing the powers that be, by lending the sanction of science to all established institu- BASTIAT AND THE FRENCH OPTIMISTS 261 tions and customs, unless, indeed, customs of the poor. Instead of a science of wealth, they give us a science for wealth" l The optimistic side of Adam Smith's political economy is, to the cursory reader, at least, the most striking. Of such a nature is his doctrine that the unrestrained action of individual self-interest leads of itself to a happy and harmonious social order. If this and similar ideas of Adam Smith are separated from those parts of his work which modify and limit them, we have indeed a happy optimism. Formerly man had been taught that this life was a struggle into which peace and good will could be brought only by sacri- fice and generous self-denial ; and he had been instructed to look forward to a future state as one which would harmonize adverse interests and render duty uniformly agreeable. But thinkers like Carey and Bastiat maintained or implied that the reign of happiness had not appeared on earth largely because man had perversely restrained himself and had not systematically and scientifically pursued the policy of selfishness. 1 See his article in the Fortnightly Review, for Sept. i, 1873, on " Politi- cal Economy in Germany." 3. OTHER EXPOSITORS Thus far the discussion of the followers of Adam Smith has served to emphasize the development of two divergent lines of thought with regard to the working out of economic forces. One has brought out the existence of conflict, and the harsher possibilities ; the other has seen ultimate harmony and benefi- cence in all. As already stated, the pessimistic tone of some has been due rather to the mode of their statement than to the logic of their thought, and the classification into optimists and pessimists does not have the deepest and most clear-cut signifi- cance in economic theory. Without attempting to push it further, then, other followers of the Smithian Economics may be considered without regard to the hopefulness of their view- point. Indeed, it would be difficult to classify a number of them on that basis. And first a thinker in the direct line of evolution of the Eng- lish Classical School deserves attention, one who wrought inde- pendently, but on the whole within the framework of Smith's doctrines as developed by Ricardo. 262 a. IN ENGLAND CHAPTER XV SENIOR AND THE ABSTINENCE THEORY NASSAU WILLIAM SENIOR (1790-1864) by exact and acute rea- soning made such additions to economic theory that a chapter must be devoted to him. During the greater part of his life he was outside academic circles, and he did not write a complete treatise; but he brought so keen and rigid an analysis to bear that his limited application was unusually fruitful. He was for a time professor at Oxford, and was a member of the Royal Com- mission of 1832, established to examine the operation of the poor laws and report remedies. His principal work 1 was An Outline of Political Economy (1836) which appeared in the Encyclopedia Metropolitana, but was also published separately. To this outline attention will be largely confined; and no attempt will be made to make a complete statement of Senior's views, but chiefly those in which he made distinct contributions. The Scope of Political Economy. First is to be noted his 1 Other writings of importance are : An Introductory Lecture on Political Economy, 1827. Three Lectures on the Transmission of the Precious Metals and the Mer- cantile Theory of Wealth, 1828. Two Lectures on Population, 1831. Three Lectures on the Cost of Obtaining Money, and of Some Effects of Private atid Government Paper Money, 1830. Three Lectures on the Rate of Wages, 1831. Four Introductory Lectures, 1852. Summary of the Ambiguities in the terms of Political Economy, ap- pended to Whately's Logic. 263 264 ECONOMIC THOUGHT idea of Economics as a science. In his own words : " The sub- ject treated by the Political Economist ... is not Happiness, but Wealth ; his premises consist of a very few general propo- sitions, the result of observation, or consciousness, and scarcely requiring proof, or even formal statement; . . . and his infer- ences are nearly as general, and, if he has reasoned correctly, as certain as his premises." l Senior went very far in narrowing the scope of the science and in making it an abstract and deduc- tive one, and in this his influence on later writers was consider- able, e.g. J. S. Mill and Jevons. He would have had the econo- mist refrain from a single word of advice and keep clear of morals and political science. Then, within his proper field, he must confine himself to deductions from a few postulates. Senior allowed Political Economy four postulates: (i) a universal desire to obtain more wealth with the least sacrifice ; (2) the Malthusian principle of population ; (3) " that the powers of Labour, and of the other instruments which produce Wealth, may be indefinitely increased by using their Products as the means of further Production " ; (4) the law of diminish- ing returns from land. 2 In his subdivision of the field of the science it seems clear that he foreshadows Mill's distinction between the laws of produc- tion and distribution. 3 Senior's emphasis of the need for accurate definitions and his criticisms of predecessors on this score are noteworthy. Value. Some of his best work lies in the field of value, and especially in the analysis of cost of production. Value he defines as " that quality in anything which fits it to be given and received in exchange." The forces which determine it fall into two sets : the demand and supply of the one good, and the de- mand and supply of that for which it is exchanged. Supply, however, is somewhat unsatisfactorily defined as equaling the obstacles which limit quantity. Senior is here filled with the idea that it is merely limitation of supply, as such, that functions 1 Political Economy (reprint, 6th ed., 1872), p. 2. See also Four In- troductory Lectures for his views. 2 Ibid., p. 26. Ibid., p. 3. SENIOR AND THE ABSTINENCE THEORY 265 in value, and justly criticizes Ricardo's classification 1 for omit- ting this idea in the case of reproduceable commodities. Abstinence and Capital Formation. Just here comes Senior's great contribution, the concept of abstinence as a cost of production. With equal competition goods sell for their cost of production, which cost equals labor plus the abstinence of the capitalist. 2 Abstinence is " a term by which we express the conduct of a person who either abstains from the unproductive use of what he can command, or designedly prefers the produc- tion of remote to that of immediate results." 3 In the forma- tion of capital " some delay of enjoyment must in general have reserved it from unproductive use." This cost, then, as well as the sacrifice of labor, is an obstacle limiting production, and so, through supply, entering value. 4 The significance of this new factor is apparent. Ricardo, with some misgivings, had in his formal writings left labor as the determinant of exchange value, profits being a sort of residual claimant. His followers, James Mill and M'Culloch, took the bull by the horns and expressly reduced all to labor, including even the growing value of wine or trees. Lauderdale had attacked the notion, making capital an independent factor which replaces labor rather than supports it; and Malthus made profits an independent cost along with wages. But there had been no analysis which would make capital coordi- nate with labor as a cost factor in production, and the labor theory was for the time dominant. Senior may have caught the idea of abstinence from G. P. Scrope, who wrote three years prior to his article. Scrope states 1 Above, p. 215. 2 Political Economy, p. 24. Senior, however, confuses value of labor (wages) with labor pain, the latter being Ricardo's idea. 3 Ibid., p. 58. 4 Bohm-Bawerk in his Capital and Interest (p. 285 of Smart's translation) accuses Senior of making his interest theory part of a theory of value in which he explains the value of goods by their costs ; and concludes that as some goods are not reproduceable, it is but a partial theory. He overlooks Senior's express insistence on limitation of supply as distinguished from cost of production. 266 ECONOMIC THOUGHT that the profit of the owner of capital is " a compensation to him for abstaining for a time from the consumption of that portion of his property on his personal gratification." 1 However that may be, the development and application of it are his own, and one of his chief claims to lasting fame rests on this basis which he laid for the independent determination of interest. Cost vs. Expense ; Past vs. Present Labor. Such being the cost of production, according to Senior it must be noted that he distinguishes "cost" from "expense," the former referring to " conduct," " exertion " and " sacrifice," the latter to reward for such conduct in the shape of wages and profits. Finally, Senior emphasized a point generally thought of in connection with Jevons, namely, the fact that it is not past labor which enters into the determination of value ; but that it is the amount of sacrifice that production would require at the time of exchange. 2 Ricardo and James Mill are criticized here. Utility and Demand. But Senior did not leave the demand side without adding something. Demand, he shows, rests on utility, or the " degree " in which a thing is desired. And he comes near to stating a law of diminishing utility. " Not only are there limits to the pleasures which commodities of any given class can afford, but the pleasure diminishes in a rapidly increas- ing ratio long before those limits are reached. Two articles of the same kind will seldom afford twice the pleasure of one, and still less will ten give five times the pleasure of two." 3 Limitation of supply, however, remained with Senior the chief factor in value; and in stating the interrelation of demand and supply he says that the utility or demand of a thing " is principally dependent on the obstacles which limit its supply." Monopoly Theory. Closely connected with the theory of value is that of monopoly, and Senior's treatment of monopoly 1 Principles of Political Economy deduced from the Natural Laws of Social Welfare and applied to the Present State of Britain, p. 146. (London, 1833.) Scrope lays great emphasis upon time. 2 Pol. Econ., p. 98. His statement is better than Jevons', as the latter writer confines himself to the negative part of it. * Ibid., p. 12. SENIOR AND THE ABSTINENCE THEORY 267 is notable. 1 He opposes the idea of monopoly strictly and logically to that of " equal competition" : if every one has free and equal access to the factors of production, there is no monopoly ; but wherever this is not true an element of it exists. Such is the case whenever land plays a part : commodities produced with the aid of natural agents are monopoly products, and the person who appropriates a natural agent is a monopolist. Senior divides monopolies into four classes. First come those which are not exclusive, but exist because a producer has the advantage of lower costs, as, for example, Arkwright in producing yarn. This assumes the power to increase the product indefi- nitely. Secondly, there are absolute monopolies, where no in- crease is possible, as in the case of Constantia wine. The third case lies between these two, being an absolute monopoly, but the supply is increasable. A copyright illustrates it. Finally, there is the " great monopoly of land." Here, as already sug- gested, the power of appropriation is limited and competition not equal. Evidently several different points of view are involved in this classification. But a general solvent may be found in the idea of surplus value. A feature common to all classes of monopoly is the fact that income more than covers costs. Thus rent is a surplus above costs ; hence Senior makes rent a monopoly return. Theory of Wages. In his theory of wages Senior's treatment is characteristic. Some suggestive analyses and distinctions are made, and the problem is clearly stated ; but, after much digression, we are taken little further than the statement : the proximate determination of wages depends on " the extent of the fund for trie maintenance of labourers, compared with the number of labourers to be maintained." With these words Senior probably called into being the wages-fund doctrine which lies concealed in the writings of Smith and Ricardo. 2 Increasing Returns. Senior was, on the whole, an optimist, 1 See Ely, Senior's Theory of Monopoly, Amer. Econ. Assoc. Pubs., Feb- ruary, 1900. * Pol. Econ., pp. 154, 174, 195 f. For discussion see Cannan, Produc- tion and Distribution, p. 267 ff. ; Taussig, Wages and Capital, pp. 197-203. 268 ECONOMIC THOUGHT and this shows itself in his doctrine concerning increasing returns from manufacturing. 1 His third postulate was that labor and capital may be indefinitely increased in productivity by using their products as the means of further production. He says, " Every increase in the number of manufacturing labourers is accompanied, not merely by a corresponding, but by an increased productive power." There is a "less proportionate cost," a "constantly increasing facility " in working up materials. No explanation of this fact is given, however, and Senior contents himself with citing decreased prices for manufactures. Though he does not make the point, yet his discussion of division of labor and capital in the same section suggests some explana- tion. Thus the use of tools and machinery makes more power available and gives indefinite possibilities of improvement. Two results flow from increasing returns in manufactures, (i) An increased demand means lower prices. With a rise in demand the price of bread would rise; but under similar cir- cumstances the price of lace would fall, improved processes being made available. (2) A tax on manufactures by decreasing the demand and the output raises prices by an amount greater than that of the tax. Emphasis of the Subjective. One of the most striking general impressions that the careful reader of Senior gets is his emphasis of the subjective element. In this he differs from most of his predecessors. This is seen in the relatively greater importance he attaches to utility. It shows itself in his inclusion of personal elements in capital. But chiefly it appears in his treatment of costs. His was a cost theory of value, but his costs were psychical and subjective ; 2 consisting as they did in the laborer's sacrifices and the abstinence of capitalists. Senior also further developed the Ricardian theory of foreign trade. Critical Estimate. In criticism of Senior's work it may be truly said that it shows lack of constructive power, and even of 1 Ely, Senior's Theory of Monopoly, pp. 83, 86, 119, 74. 2 Though he says (p. 112) that we seldom go farther back than the manu- facturer's expenses. SENIOR AND THE ABSTINENCE THEORY 269 intellectual endurance. His critical powers were remarkable. His logical and keenly analytical mind tore down, and then we are disappointed. He is on the verge of great truths, but does not grasp them. Thus he formulates no law of monopoly price, nor does he realize the significance of a law of increasing returns. He does not grasp the concept of final or marginal utility. He does not give us a valid theory of wages. Yet in all these matters he makes more or less definite suggestions. Among his more positive errors the following only will be remarked upon, namely, the limitation of his first premise, which serves to bring into prominence the unduly abstract character of much of the classical political economy; the uncoordinated character of his classification of the factors of production land, labor, abstinence; his suggestion that the difference be- tween rent and profits ceases when capital goods become the property of another than the abstainer ; l and his inconsistency in treating the relative amount of the social product received by the factors of production, making the rate of profit a cause determining capital's share, for example. 2 1 Ibid., p. 129. 1 Also the period during which capital is advanced is made another cause, yet this period is stated to depend in part upon the rate of profit. Incon- sistency is also shown in statements as to the relative importance of the rent share. b. THE EXPOSITORS OF THE ENGLISH CLAS- SICAL POLITICAL ECONOMY OUTSIDE OF ENGLAND: 1776-1850 CHAPTER XVI SAY, RAU, AND OTHER CHIEF EXPOSITORS IN GER MANY AND FRANCE GERMANY IT is the purpose of this and the following chapter to give some account of the more important of those economists in Ger- many and France who, on the whole, may be classed as followers of Adam Smith. Without making a sub-classification it may be remarked that some of those to be mentioned showed con- siderable originality in exposition or criticism ; a few even made additions to the Smithian economics: the point is that in the more essential matters they accepted the lead of the early British economists, and especially of Adam Smith. Among the following authors may be found men whose sound understanding and solid merit were greater than those of some to whom more distinct attention has been devoted, the reason being that the peculiarity, novelty, or prominence gained, warrants more separate treat- ment. It may well be observed in advance that the Continental economists have frequently gone directly back to Smith, while rejecting in whole or in part the development of English thought by Ricardo and his group. The close of the eighteenth century, as already indicated, found German economic thought in control of the professors of Kameralistic sciences. The Physiocrats had made some few converts, and the great upheavals of the time were not without influence ; but it remained for Adam Smith's teaching 270 CHIEF EXPOSITORS IN GERMANY AND FRANCE 271 to give the great impulse to a new and truer conception of economics. It was not until the year 1794, when the first good translation of the Wealth of Nations by Ch. Garve appeared, that Smith's work was much known ; and even in 1796 Sartorius complained, in the introduction to his Handbuch, that Smith had exerted but little influence. But shortly after 1800 all this was changed, and for a generation or more English political economy was decidedly dominant. The German economists who wrote between 1800 and the rise of the Historical School, about the middle of the century, fall into three groups: the strict adherents of Smith ; those who followed him to a greater or less extent, but with independent criticism ; and those who were more fundamentally opposed. The last group will be discussed when Smith's opponents and critics are taken up. * As between the first two groups it is difficult in some cases to place a man ; but, taking everything into consideration it may be said that Kraus (1753-1807), Sartorius (1766-1828), Liider (1760-1819), Huf eland (?) (1760-1817), and Lotz 2 (1770- 1838) did little more than state Smith's case ; while, on the whole, Soden (1754-1831), Jakob (1759-1827), Nebenius (1784-1857), H. von Thiinen, and Rau (1792-1870) are the more important of those who followed, but criticized or supplemented in important ways. It is beyond the scope of this chapter to give an account in detail of these writers, and differences among them make close generalization difficult. Thus Kraus, Soden, Hufeland, and Lotz followed Smith in their advocacy of free trade, while the others recognized national lines to some extent. Or, on the score of rent, only Jakob, Hufeland, and Thiinen showed much inde- pendence of the classical doctrine. Of the various economists just mentioned the best known are doubtless Nebenius, Thiinen, and Rau. Nebenius won fame with his work Der Oejfentliche Credit (Public Credit), published in 1820. Here he discussed the nature and function of capital, 1 Below, p. 313 ff., 408 ff., 426 ff. 1 Lotz shows some independence in treating value : Revision der Grund- begri/e der Nationalwirthschaftslehre, 1813, III, pp. 3-7. 272 ECONOMIC THOUGHT money, and credit, together with foreign exchange and public debts; and his contributions appear noteworthy. In general economic theory his chief difference from Smith consisted in his belief in the expediency of more state intervention. He was active in promoting the German Zollverein (customs union), thus favoring a protective tariff. Nebenius held Smith's ideas on productive labor, and he appears to have confused the relative with the absolute amounts of wages, profits, and rent. Heinrich von Thiinen is but briefly mentioned here, for his thought forms the topic of the next chapter. His book, Der isolirte Staat (the Isolated State), the first volume of which ap- peared in 1826, enriched German economic literature with one of its most original works. Through his brilliant deductions in the field of distribution he consistently worked out a marginal pro- ductivity analysis of wages and interest, in addition to arriving at a rent theory similar to Ricardo's, with a more just emphasis of the situation factor. 1 Thiinen's warm sympathy for labor led him to criticize Smith's theory of wages, emphasizing productiv- ity and humanitarian considerations. In these matters his views led him to favor a considerable degree of state activity in social reform. Karl Heinrich Rau does not merit attention so much for origi- nal contribution to theory as for effective exposition. Through his Lehrbuch der Politischen Oekonomie (1826) 2 he had consider- able influence not only in Germany, where it was the leading work during the second third of the nineteenth century, but abroad. It is encyclopedic, practical, and admirably adapted for the use of government officials. In an earlier writing, A nsichten uber Volkswirtschaft (1821), he showed some appreciation of the historical viewpoint ; but later reacted. His work is, in the main, little more than a compendium of current and preceding doctrines, 1 Ricardo's work was not much known in Germany till after Baumstark's translation in 1837. Thiinen, however, had read in Ricardo as early as 1826. 2 The last edition prepared by Rau appeared in 1862-1868. Vol. I, Grundsatze der Volkswirthschaftslehre, 1868; Vol. II, Grundsatze der Volkswirthschaftspolitik mil anhaltender Rucksicht auf bestehende Staatsein- richtungen, 1862; Vol. Ill, Grundsatze der Finanzwissenschaft, 1864. CHIEF EXPOSITORS IN GERMANY AND FRANCE 273 enriched with historical, statistical, and technical information. It is a combination of Kameralistic erudition with the political economy of Adam Smith. This fact appears in the subdivisions adopted : economic theory, economic policy, the science of finance. But this suggests Rau's solid merit. In his time it was a service to stress as he did the distinction between theory or science and policy or art. Rau believed that the latter varies with local conditions ; while the former is more exact and mathe- matical. Other merits are : x his well-balanced view of value in use and value in exchange ; his distinction between concrete and abstract value in use ; his attack upon the idea that the demand for labor depends upon the amount of capital. A notable error which Rau, following Adam Smith, maintained, was his narrow notion of the productivity of labor : personal services he defined as unproductive. Though, to the reproaches of Friedrich List, Rau made the claim that he had used the historical method, recognizing stages in economic development, he was quite far from the evolutionary spirit of the " historical school," his idea of stages being rather mechanical. 2 The service rendered by the whole early group of German economists may be stated as follows : (i) The British emphasis upon labor was corrected by an insistence upon the importance of land as a factor in production ; (2) subjective factors were given more attention, the productivity of "immaterial labor" being in- sisted on by some, and the significance of immaterial things like culture and morals generally upheld ; (3) Ethics was taken into their viewpoint; and (4) a greater place was made for state activity, the individualistic teachings of the classical economists being limited. A step was also taken toward a separate analysis of entrepreneur's gains (Huf eland, Hermann, and Rau). One notes a certain refreshing realism which is often found in the German writers, a fact that is no doubt due to the 1 Roscher, Geschichte d. National Oekonomik, p. 858. 2 Similar objections might be made to similar claims set up by apologists of the classical economists on the score of inductive method, appreciation of history, etc. 274 ECONOMIC THOUGHT close connection between the German Universities and the state. To be sure, mere practical information may be associated with a lack of analysis or constructive power ; but the leading German thinkers combined a wholesome practi- cality with a considerable amount of those qualities. FRANCE The rise of political economy in England took place at a period when the study of that science was declining in France. The eminent services of the Physiocrats have been referred to. But their influence even in their own land was never great, and they left no permanent school. Accordingly when, in 1779-1780, the Wealth of Nations was translated, it soon took the lead, easily overcoming the opposition of some surviving Mercantilists. The French showed decidedly less independence and originality than the Germans, a fact partly attributable, perhaps, to their slight interest in economics. But in the field of Socialistic propa- ganda they displayed considerable activity and originality. The chief writer to be mentioned is Jean Baptiste Say (1767- 1832) whose Traite d' Economic Politique, published in 1803, did more to spread Smith's teaching than any other work. Say was a business man and politician who was led to study political econ- omy by a perusal of the Wealth of Nations, thereafter devoting much of his life to service as a teacher and author in this field. The first of Say's contributions to be mentioned, and the most important, lies in the field of definition and arrangement. Per- haps through suggestion from Turgot's Reflexions he divided the second edition of his treatise into books on Production, Distribu- tion, and Consumption, thus originating an arrangement com- mon in later textbooks. Exchange is not illogically treated under Production. Then he added to the idea that the national income falls into three shares rent, wages, profits so as to distinguish three corresponding factors of production in natural agents, labor, and capital. And, furthermore, he somewhat developed the analysis of the part played by capital. And here it is noteworthy that he criticized English economics for com- CHIEF EXPOSITORS IN GERMANY AND FRANCE 275 bining the gains of the undertaker and of the capitalist. 1 He himself distinguished their functions, styling the former " entre- preneur," thus bringing into use a term which has found per- manent place in the science. In a broader way he made some good suggestions favoring the use of the inductive method, and he argued that similar methods to those used in the natural sciences might be followed in political economy. 2 The point in which Say is best known is his theory of markets (Debouches)* He argues that the belief held, for example, by Malthus and Sismondi that there may be a general overpro- duction and glut is an unsound generalization from particular ex- perience. Generalized, there can be no such thing, for selling is at the same time buying, and in producing men are creating a de- mand for other goods. And Say points out the bearing of this reasoning upon foreign trade : imports are no disadvantage, "for nothing can be bought from strangers, except with native prod- ucts." As a matter of fact, there seems to be less merit in this idea, concerning which Say had exaggerated pretensions, than in some others ; for it is but a little development over the Physio- cratic teaching that, in buying and selling, goods exchange for goods. No account of Say's work would be complete without some mention of his position on value. In Book II, Chapter I, he shows his clear appreciation of the importance of the subject to an understanding of Distribution. More than that, he puts the parts played by demand and supply in an advanced way, and gives more significance to utility than his English contem- poraries. Utility is the inherent capability of things to satisfy human wants, and value originates in utility. 4 Price is the measure of value ; value is the measure of utility, so long as the buyer pays no more than his estimation of the utility of his purchase. This makes room for costs, and Say slips over to the idea of normal value based on costs. He criticizes Smith's labor-cost theory, however, holding that " industrial " 1 Bk. II, Chap. VIII, 2. Bk. I, Chap. XV. 1 See introduction to Traitt. 4 Bk. I, Chap. I. 276 ECONOMIC THOUGHT costs, including rent and profits, determine value. He also held that Smith had erred in narrowing economics by limiting wealth to material things : " He should, also, have included under it values which, although immaterial, are not less real, such as natural or acquired talents." 1 Another point in which Say differed from his master was the greater extent to which he carried the laisser-faire doctrine. He would have allowed small place for state activity. The Frenchman was inclined to develop optimistic tendencies, and this is evidenced by his identification of public and private in- terests. I In addition to enlarging upon consumption in general, Say deserves mention for his distinction between saving and unpro- ductive consumption and the discussion of their results. Among the just criticisms passed on Say are his lack of a broad historical training, his narrow and jealous criticisms of Ricardo, his excessive views on laisser-faire and taxation, his belief that wealth consists in a sum of exchange values, and his insistence that from the social point of view gross and net revenue are the same. Shutting his eyes to costs, he held that " the term net produce applies only to the individual revenue of each sepa- rate producer . . . ; but that the aggregate of individual revenue, the total revenue of the community, is equal to the gross produce of its land, capital, and industry." 2 The tendency has been to underestimate Say's services, per- haps because of his own exaggerated pretensions. He was no Smith nor Ricardo ; but he was no mere popularizes His ability was not that of the masters and may be called second rate, but that such as it was it was not small appears from the brief state- ment of his chief merits. The history of political economy would have been different without J. B. Say. An excellent expositor of the Smith-Say doctrines was Joseph Gamier, whose chief work was done between 1848 and 1860. 3 1 Introduction to Traite; also Bk. II, Chap. V, last paragraph. 1 Bk. II, Chap. V. 1 Elements de V Economic Politique (1848) ; Traite de V Economic Politique (1860). CHIEF EXPOSITORS IN GERMANY AND FRANCE 277 The only other French writers whom it falls within the province of this chapter to mention are Cournot (1801-1877) an d Dunoyer (1786-1862). Augustin Cournot has to his credit the first ex- tensive and important use of mathematics in economics ; 1 a method which, though it has resulted in no important discov- eries, undoubtedly has its uses, especially in the concise and accu- rate presentation of deductions and the representation of slight variations. Thus Cournot was the pioneer in showing the rela- tion between small increments in commodities and those in price. Cournot also attacked some of the optimistic notions of the French economists. Even more clearly than Say, Charles Dunoyer was one of the followers of Smith who developed his optimistic tendencies. 2 By the close of the first quarter of the century a group of French- men began to write, who, while adhering to the most fundamental doctrine of Smith and Say, were more influenced by the social question which confronted them. This question was approached with some recognition of its ethics, but the tendency was to warn against government intervention and advise free play for eco- nomic forces. Dunoyer may be taken as the chief representative. Though not so clear-cut as Say, Dunoyer shows more inde- pendence. He lays greater stress than Say upon immaterial wealth, dividing production according as men or goods are the immediate object. In the former case, the physician, the artist, the teacher, and the clergyman work on man's body, imagination, intellect, and morals, respectively. Industries producing commodities are divided into the extractive industries, trade and transportation, manufactures, and agriculture. Mere exchange, not resulting in material things, is not included as an " industry," though its necessity is recognized. 1 Recherches sur les Prindpes M athematiques de la Thtorie des Richesses, 1838. 1 De Tracy (1823), Chevalier (1845-1850), and Gamier (1860) are others. See Kautz, National -Oekonomik, II, 571 ff. Dunoyer's chief works are: De la liberte' du travail (1845) '> Notices d'economie sociale (1870, posthu- mous) ; Nouveau trait 6 d' economic sociale (1830). On Dunoyer see Villey, L'ouvre economique de Dunoyer, Paris, 1899. 278 ECONOMIC THOUGHT, Labor, Dunoyer thinks, is the only productive factor. Value measures services, things exchanging according to the quantity of services stored in them. This is coupled with the belief that nature's services are gratuitous and not to be reckoned as costs. Payment for land is merely interest on capital. Bastiat, who, as has been seen, had similar ideas, was avowedly influenced by these views. Dunoyer dwells on the part which the heedlessness and viciousness of- the lower classes play in causing their ills ; and, while laying part of the blame on society, argues for laisser- faire. He believes inequalities are necessary and advantageous to society, but thinks they may be ameliorated ; the initiative, however, should come from the sufferers themselves, as they know their own needs best. The most notable tendencies, then, of the relatively few im- portant expositors of the British political economy in France, were to take extreme views on laisser-Jaire coupled with a tend- ency toward economic optimism, Cournot being an uninfluen- tial exception. CHAPTER XVH THtJNEN AND THE ISOLATED STATED JOHANN HEINRICH VON THUNEN (1783-1850) was undoubtedly one of Germany's most brilliant theorists. Indeed, he may be com- pared to Ricardo in England, though his work was more technical and did not cover so important a part of the field of pure economic theory as money. The first volume of his one work was pub- lished in 1826 at Hamburg, and had as its full title : Der isolirte Staat in Beziehung auf Landwirthschaft und Nationals konomie, oder Untersuchungen iiber den Einfluss, den die Getreidepreise, der Reichtum des Bodens und die Abgaben auj den Ackerbau ausiiben 2 (The Isolated State in Relation to Agricultural and Political Economy, or Investigations concerning the Influence which Grain Prices, the Richness of the Soil, and Taxes, exert upon Tillage). The first part (Abtheilung] of the second volume (Theil) appeared in 1850 ; and not until 1863 was the work completed by the addition of a second part and the third volume. The whole work was printed as a third edition in 1875. It has been translated into French, and was finally honored by a place in a collection of the chief German economists. In his general economic views Thiinen may be classed as a follower of Adam Smith, of whose work he was a student. In 1 As secondary references on Thiinen see Schumacher, Johann Heinrich von Thiinen, ein Forscherleben, Rostock, 1868. Biichler (M.), Johann Heinrich von Thiinen und seine Nationalb'konom- ischen Hauptlehren, Bern, 1907. Helferich, "H. von Thiinen," Tiibinger Zeitschrift f. Staatsurissen- schaft, 1852. Roscher's and Rambaud's histories of political economy. 1 2d ed. in 2 vols., 1842. The earlier page references refer to the first edition; later ones are to the third edition, which contained his complete work. 279 280 ECONOMIC THOUGHT his youth he acquired a knowledge of practical agriculture and afterwards studied what might be called agricultural eco- nomics under Thaer. Later his now celebrated estate (Gut) of Tellow was purchased, and here he made careful investiga- tions of the same subject. Thus apparently if ever a man was thoroughly equipped for a practical work on the economics of agriculture, it was Thiinen. Method and Plan of Work. In dealing with Thiinen the first thing that strikes one is his method. It appears hi the very name of his book, the Isolated State. Contrary to the usual procedure, then, the examination of this writer's thought will be begun with some discussion of his method of thinking. His method was a contribution. Indeed, the book is one of the best illustrations of the abstract-deductive or " exact " method to be found down to this very day. The first section of the first volume is headed " Postulates," the second, " The Problem " ; then come various changes in the postulates, and finally a comparison of the isolated state with the actuality. Not only is the method abstract and deductive; it is charac- terized by a use of mathematical formulae, these involving, however, only arithmetic or simple algebra. No use is made of geometrical figures. It must be noted, however, that the later parts, which deal with labor, are not so purely abstract and deductive, and in dealing with the effects of climate, and the like, some modification of the method may be observed. It is Thiinen's plan first to reduce the problem stated in his title to its simplest elements. Accordingly he says: Let us imagine a very great city set in the midst of a fruitful plain, through which no navigable river or canal doth flow. The plain itself consists of like land, which is everywhere equally adaptable to cultivation. Far removed from the city, the plain ends in an uncultivated waste which separates this state from the world without. There is no other city than the great one set in the center of the plain, and it furnishes all artificers' products, while the means of life are drawn entirely from the surrounding plain. Metals and salt are produced near the city, (p. i) "Now the question arises: how will agriculture shape THUNEN AND THE ISOLATED STATE 281 itself under these conditions, and how will the greater or lesser distance from the city affect tillage if it is carried on with the greatest skill and care ( Konseqitenz) ? " Under these assumptions the conclusion is drawn at once: " In general it is clear that in the vicinity of the city such products must be raised as have a great weight in proportion to their value (Werth) or are very bulky, and whose cost of trans- portation to the city would be so significant as to prevent their production in farther regions ; so also with perishable products which must be fresh for use." (2) Products of higher specific value would be drawn from greater distances. " On this ground alone pretty sharply drawn concentric circles will be found about the city within which this or that crop will form the chief product." In the first circle, for example, garden truck and milk would be chief products. In this circle the land is the chief object of economy, while labor is relatively less important : " The price of milk must rise so high that the land for milk production can be of so much use through the production of no other thing. As the land rent (Ackerpacht) in this circle is very high, so increased labor is here little regarded. To gain the greatest amount of fodder from the smallest area is the problem." (3) The estate of Tellow is made the basis for the greater part of his calculations, its prices and expenses being taken for granted by Thiinen. 1 A large part of the book is a study of how the economy of this estate would vary with distance from the imaginary city and with changes in prices and taxes. It is assumed that the gross product may be estimated in grain and that the price of live stock will vary with the price of the grain, which is really true, says Thiinen, of a state not surrounded by others which are uncultivated and merely en- gaged in grazing (205). Further, it is assumed that the farm expenditures are made up of fixed percentages of money and of grain, this being done to simplify the determination of the effects caused by a change in grain prices. 1 Results obtained from records kept on his estate during the five years, 1810-1815. 282 ECONOMIC THOUGHT All the various assumptions are adopted consciously, and the attempt is made to indicate what would be the result were they removed (209 f.). As to equality of soil, he points out that one could also have assumed a fixed price for grain and various degrees of fertility in a second isolated state ; but this is unnecessary, for formulae already developed enable the solu- tion of such problems as, for instance, what rent will a farm of any given productiveness yield when grain is worth a given price per bushel. As to water transportation, it merely operates to make points accessible to it virtually so much nearer the city by reducing freights. And, with numerous little towns, each must be thought of as possessing its contributory terri- tory, thus making it necessary for the central city to draw its supplies from greater distances and so increasing transportation costs. The price of grain in the small towns would depend upon the market price in the capital city (214). While he did not fully realize the limitations of his method, Thiinen was partly aware of them. He wrote : " Just as a geometer reckons with points lacking extension and planes without thickness, though neither actually exists; so we may take all adventitious circumstances and contingencies away from an active force, and only so can we recognize what share it has in the phenomena which He before us " (215). He be- lieved that it would be possible to draw up a chart for an entire land indicating the circles of different products ; but while the same principle which controls the industry of an isolated state would be at work, the actual phenomena, he saw, would be quite different on account of the " endless number of other relations and circumstances " (215). In fact, Thiinen never overcame all the difficulties which beset the attempt to introduce the complexities of life into his abstract state. Rent. Tinmen's work in the field of distribution is most interesting, and he naturally gives much attention to rent. In a section falling under the discussion of the three-field system and immediately following one on the determination of the price of grain, Thiinen treats of the origin of land rent (181). The distant producer of rye, under the assumed conditions, THUNEN AND THE ISOLATED STATE 283 must get i thalers per bushel, for it costs him that much. On the other hand, the producer near the city could market his product for much less perhaps \ thaler; but the latter cannot be compelled to take a lower price than the former, nor can it be expected of him. For the buyer, one bushel has as much value (Wertti) as another. What the near-by producer receives above cost is his gain. And " as this gain is permanent and returns yearly, so his land [Grund und Boden] yields an annual rent. The land rent of a farm arises, therefore, from the advantage which it has in its situation and in its soil over the worst farm which must produce in order to satisfy the demand " (182). The value of this advantage expressed in money or grain indicates the amount of the land rent. Rent is " the amount of the landlord's income which, after deducting interest on the value of the buildings, woods, and all valuable objects which can be separated from the land, remains and so belongs to the land as such " (14). In a note, Thiinen intimates that other investigations, which he does not report, show that there are other grounds for rent, that even lands of equal fertility and situation with regard to market can, when completely distributed, yield a rent (182). It must be admitted that, while the significance of rent as a share in distribution is by no means so clearly indicated as is the case with Ricardo, this explanation of rent as such is clearer and more comprehensive than the latter's. If anything, Thiinen goes to the other extreme than that found in Ricardo's theory, emphasizing situation rather than fertility; and his statement is thus a valuable corrective of the Ricardian formulation. In a concluding section on Taxes upon Land-Rent (276) there is an excellent statement of the effects of taxation, im- provements, etc., upon rent. The fact that rent is no fixed amount, but varies with prices and interest rate, is emphasized. It is interesting to observe that Thiinen is not one of those who would minimize or overlook the difference between agri- culture and manufactures, and so between rent and interest. " Agriculture," he writes, " differs essentially from industry (Gewerke) in that, when pursued on different kinds of soil, 284 ECONOMIC THOUGHT the same human activity is rewarded by very different pro- duction, whereas in industry the same activity and skill ever afford a similar labor product " (271). Price and Value. Starting with the assumption that it costs the equivalent of i thalers to produce and transport a bushel of rye from the most distant circle, Thiinen supposes a fall in price to i thaler (177). Then the ij thaler land would cease to send grain to the city, including all land over 23 miles away. Assuming the same population and demand, there would be a great lack of grain, and the price would at once rise: the price of i thaler is impossible. The following " law " is then deduced : " The price of grain must be so high that rent will not fall below zero upon the land on which the pro- duction of grain for the market is most costly, yet whose culti- vation is necessary for the satisfaction of the demand " (179). Another interesting point concerns the determination of the price of the products of labor on the farm (207). This must cover the outlays for food, etc., during the process, and for raw materials. If these materials must be procured from the city, the price of the product is only to a small extent deter- mined by the local price of grain ; but if the raw material say flax is produced on the farm, the price of the produced linen is largely determined by grain prices, since only a few articles for his home must be brought from the city and paid for by the farmer in money. The place of demand is sufficiently emphasized, though not one-sidedly. If the consumption and demand increase, the price rises, and further cultivation " intensive and extensive " (180) is the result. " As soon as this happens, production and consumption are again brought into equilibrium." Consider- ing long-time periods, consumption is related to income : With equal production the rise or fall of grain prices will depend upon the increase or decrease of the income which the consum- ing class of citizens enjoy. Finally the distinction between market price and average (mittel) price is made. Market price rarely, if ever, coincides with the average price v but constantly fluctuates about it. It THUNEN AND THE ISOLATED STATE 285 is observed that the Mittelpreis alone has been the object of the investigation, the long-time viewpoint being taken. Smith's distinction between value in use and value in exchange is also followed (24, 128, 129). Wages and Interest : Surplus. Thiinen was seriously con- cerned over what we call " the labor problem," and to its solu- tion he devoted a large part of his thought. 1 Putting the ques- tion, Are low wages " natural " or are they due to usurpation by capitalists ? he answers, The latter. What, then, is the natural wage? That is, what ought wages to be? Here, he says, the economists do not help us to an answer. They merely state a truism : wages are determined by demand and supply, and are what they are. This does not satisfy one who, like Thiinen, sees hi wages the means of livelihood for men and women rather than a mere price set by competition upon the commodity, labor. 2 He says that Smith had done well for his time, but that, in view of the discontent and danger of class conflict which had since arisen, economists must go further. Thiinen, accordingly, seeks to get at the bottom of the prob- lem by first simplifying it. He goes to the margin of cultiva- tion, thus eliminating rent. He assumes a tabula rasa. He then reduces capital productivity to labor productivity. In so doing, he implies that capital is stored-up labor : his procedure being to divide laborers into two classes, the capital-producing and the mere subsistence-producing; and to determine wages (and interest) for the first class, on the assumption that com- petition will give the same wage to the latter class. It is to be noted in advance that Thiinen had the idea that successive units of labor and capital yield less than propor- tionate returns, and that consequently there are surpluses above the returns on the last units, in which surpluses labor should share. The evil of low wages lies in the fact that capital re- tains more than its share. It is necessary, then, to ask : what 1 See II Theil, i Abtheilung, i Abschnitt. 2 Thiinen states that these ideas came to him in 1826 after reading in Say and Ricardo, and were written then, but not published, because they seemed too radical at that time. 286 ECONOMIC THOUGHT is the natural interest rate, and can the existing rate be en- croached upon? Now with this idea in mind, and reasoning under the above assumptions, Thiinen seeks in four ways to analyze the relation between wages and interest and derive a law for determining the natural or proper wage (and interest) : by regarding (i) capital as produced by labor, or by considering labor as producing capital ; (2) labor as replaced by capital (i.e. substitution) ; (3) marginal productivity of capital ; (4) marginal productivity of labor. From the first point of view he makes the interest on a given capital depend upon the amount of labor or rather the amount of subsistence for labor required for the production of that capital. The formula is: interest is to capital as the (addi- tional) income secured by the laborer as a result of his produc- ing the capital is to the wages of the laborer. According to this idea, " natural " wages (and interest) would vary with productivity. These conclusions must also apply to non- capital-producing laborers ; otherwise they would take to pro- ducing capital. As Thiinen puts it, the excess of wages over subsistence must, at interest, equal the income secured by capital-producing laborersX In a word, under Thiinen's as- sumptions, the additional income received by capital-producing laborers from the productivity of their capital would be a determining factor in all wages. As to the third_and fourth, viewpoints, Thiinen's reasoning is based upon two advanced concepts : (i) a universalized law of diminishing returns; (2) a marginal productivity analysis of distribution. Briefly put, his idea on the third point is that as successive units of capital are added to a given industry or undertaking, the return diminishes in quantity and net value ; additional capital increases the productivity of a nation's labor at a lower rate than earlier portions. More definitely, succes- sive units of capital added to a given amount of labor on mar- ginal land result in a decreasing product per unit (101), and the return upon the whole supply of capital, when lent, is deter- mined by the use of the last bit of capital applied. 2 Thus, as 1 Der isolirte Stoat, 3d ed., pp. 150 f. 2 Ibid., pp. 99, 103. THUNEN AND THE ISOLATED STATE 287 already suggested, a surplus value arises in the use of the earlier units. This surplus above the marginal unit " naturally " belongs to labor. From the fourth point of view he considers wages as deter- mined by the marginal productivity of labor. He illustrates by imagining additional labor put upon a given potato field, and presents a table indicating decreased returns. His con- clusion is that the last laborer employed receives what he adds and that his wage determines the rate for all laborers of equal skill and capacity. 1 From this point of view there is also a surplus : " Even if the last-added laborers do not produce more than enough to cover their wages, yet the preceding laborers afford a very considerable surplus to the undertakers, which gives them the means of paying a higher wage." 2 On all four bases Thiinen professes to reach the same conclu- sion, namely, that the natural wage is indicated by the formula VAP, in which A equals the value of the product of labor and capital, and P equals the subsistence of the laborer and family. The general idea is clear. A surplus arises on the earlier units of an investment of successive increments of labor and capital. Subsistence must be considered as a minimum; but labor ought to have more than a bare subsistence, and ought to share in progress. How, then, shall this surplus be shared? Give labor a share which will vary as the square root of the joint product of the two factors. This would remove the fatal clash of interests between labor and capital, and as long as a laborer got such a wage he would never be in need, a fact of " decisive importance " (208). Needless to say, the above idea of margin and surplus anticipates ideas commonly asso- ciated with more recent developments in theory. 3 In brief criticism it must be remarked, however, that the foregoing idea of a surplus well illustrates a vicious tendency of the so-called " dosing method " of reasoning in economics. In reality no such distinction between the value product of 1 See ibid., pp. 100, 178, 186. * Ibid., p. 187. 3 Professor Clark himself says: "With Von Thiinen's work before us, no one else can claim as his own the application to labor and to capital of the 288 ECONOMIC THOUGHT one group of laborers and that of another, increased by the addition of more laborers, exists. There is no such separation between the two cases as Thiinen's theory implies. One can- not logically assume that in the first case a group of men got certain wages, and then, when additional ones were employed and brought wages down, that the difference between the two wage rates would be left as a surplus in the hands of the em- ployer. Rather the difference ceases to exist as soon as the new arrangement is effected, and the " surplus " is merely an historical thing. The laborers do not produce as much on the average as they did. Simply conditions as to the relative pro- portions of land, labor, and capital have been altered, and, other things being equal, the average laborer is less productive. To his wages formula Thiinen attached an exaggerated sig- nificance, even expressing a wish that it should be engraved upon his tombstone, though his correspondence shows that in later years he felt the impossibility of applying it, 1 and in prac- tice he was fain to use a sort of profit-sharing scheme. In fact, it has no exact validity. So varied is the part played by labor, relatively to capital, in different industries or in different stages of the same industry, that no such formula can express the share of the total value product attributable to it in general. Here, at least, this shrewd economist fell victim to his abstract method. His formula would do under certain limitations, as under an assumption of the dominance of economic motives, of free land, equal opportunity, no capitalist class and little capital, and equal laborers. But it is generally true only when it is deprived of a determinative significance and taken to express the rather obvious truth that the wage ought to lie somewhere between subsistence and product. One cannot but be reminded of Ricardo's difficulties in dealing with different proportions of fixed and circulating capi- principle of final valuation and the basing of valuation on productivity"; and goes on to indicate certain criticisms of Thiinen's thought in regard to which alone recent marginal-productivity theory is an advance. (Distribu- tion of Wealth, p. 324, note.) 1 Schumacher, Ein Forsckerleben, p. 239. THUNEN AND THE ISOLATED STATE 289 tal in working out his attempt at a labor theory of value. In any such attempt the proportions of labor and capital must be known, which is but another way of stating that capital is more than stored-up labor, as such. There is another element of cost or time involved, which makes the application of the labor-pain or labor-subsistence value solvent impossible. In this Senior was wiser than Thiinen. But one must not forget the great truths which accompany the error. The emphasis of the humanitarian and ethical as- pects of the labor problem, while not primarily an economic matter, is important for the application of theory. Thiinen did well, too, in calling attention to the productivity aspect and criticizing others for dealing only with subsistence and supply of labor. The breadth of his thought is illustrated by another criticism which he incidentally passes upon the economists. These, he says, have written as though land were the only pro- ductive factor to be economized. While it is true that the total supply of land is limited in a sense, yet there are places where it is abundant and labor is scarce, as in North America. Economic theory should be broad enough to accommodate all relations. As already implied, Thiinen is the father of an idea of diminish- ing returns that is broad enough to be applied to all the factors. Tariff ; and Miscellaneous. Like Adam Smith, Thiinen was on the whole a strong believer in free trade as a general proposition. He believed that both the strong manufacturing nation and the weaker producer of raw materials were injured in material wealth by tariff restrictions. This theorem he deduced by assuming his isolated state to be divided into two, following with an application of his deductions to the actualities. Such would be the gist of his idea as drawn from the first volume. Later, however, his thought appears to have undergone some modification, for in the second part of the second volume his conclusion is not so simple, 1 though not changed as to general tendency. It may be conjectured as a strong prob- ability that an acquaintance with List's writings was the occa- sion for this development. Thiinen contrasts national and cos- 1 See II. ii, 4, 4 (pp. 83 ff.). u 290 ECONOMIC THOUGHT mopolitan viewpoints: the one considers relative strength, the other absolute; the one seeks the strength of the nation, the other the material well-being of the people. Under existing conditions the former viewpoint may be a necessity. He in- clines to hold that free trade cannot be preached as an absolute good. And, as he says : "So Adam Smith in defending free trade generally held the cosmopolitan standpoint; but there are places in his work which take a national standpoint, and consequently both opponents and followers can find support for their views." * Thiinen's reasoning differed somewhat from List's in that he considered both agriculture and manufactures, though chiefly the former; while List's argument proceeded largely on the basis of manufactures. 2 The assumption that each individual knows his own interest and acts accordingly is specifically made ; and, moreover, some evidence of a tendency to believe optimistically in an economic harmony appears, for he says : " As from the interaction of all, each striving for his own rightly understood advantage, the law according to which the community acts, arises, so on the other hand must the advantage of the individuals be comprised in the observance of these laws." Moreover there is apparent a tendency to regard the laws of society as being the outcome of a divine plan, for "man is the tool in the hand of a higher power " unconsciously working out His great ends. Conclusion. The conclusion is, in brief, that Thiinen pro- duced a masterly piece of deductive economic thought, based in part upon careful statistical investigation; and independ- ently developed the law of rent in an admirably clear fashion. He was the first economist to treat clearly and systematically of the influence of distance from the market upon the economics of agriculture. His method of approaching the price-deter- mination problem clearly suggests the Austrian school's pro- cedure, and the marginal productivity idea is clearly put, though it is properly connected with cost. 3 1 Ibid., p. 85. * This point is put somewhat too strongly by Biichler, Von Thiinen. 1 ist ed., p. 253. THUNEN AND THE ISOLATED STATE 291 III. OPPONENTS AND LEADING CRITICS A majority of the preceding economists who have been classed as Smith's followers took occasion now and then to criticize their master as well as each other. On certain points Malthus criticizes Ricardo, and Ricardo assails the logic of Malthus, while both find imperfections in the Wealth of Nations. Such men, too, as Senior and Thlinen were independent in a considerable degree, and did not fail to point out weak spots in the classical economics. Yet they all wrote within the framework of its doctrines as laid down by Smith and Ricardo, on the whole accepting the typical theories of production, value and distribution, and free trade. Whether tending toward pessimism or optimism, believing in this particular modification or that, the foregoing economists have been, for the most part, at bottom in accord with the doctrines of the English Classical School. It is no simple matter to classify those who, on the other hand, opposed the classical economics or criticized it in so fundamental a manner as to make it illogical to range them among the followers. By no means all of the critics are dis- cussed ; but only those whose criticisms seem the most funda- mental, taken together with a considerable degree of influence. They have been divided into three groups: (i) those whose thought was based upon a philosophy which was opposed to the underlying system of the Classicists, (2) those who are most notable for their criticisms of the method of reasoning pursued, and (3) those whose chief criticism concerns the logic of the theories, regardless of philosophy or method. In other words, there were some who directed their assault upon its funda- mental assumptions, opposing its underlying philosophy and its ethical basis. Others centered their attention upon the method pursued by the Classicists, criticizing their logical processes, while others cared relatively little about philosophy or method in themselves, but attacked the conclusions reached as being illogical. 292 ECONOMIC THOUGHT Of course the heads of such a classification cannot be all- inclusive and exclusive, and, needless to* say, some critics opposed Smith and his followers on all three grounds. Just as philosophy and method are related, so the thinkers who criticize the logical method of the older economists are apt also to be at variance with them in underlying philosophy; and many criticisms of the logic of the classical theories were made by economists placed under one of the first two heads. Nevertheless it seems desirable to distinguish these groups, emphasizing the main characteristics. It is generally possible to say that this or that opponent or critic directed his atten- tion chiefly to one or the other of these three phases of thought. Generally one of the above points of attack is hit the hardest. It will lead to a clearer understanding of the weaknesses of the classical economics and to a better appreciation of the several groups of opponents. i. THE PHILOSOPHICAL AND ETHICAL SYSTEM One of the earliest and most frequent grounds of criticism has been the general underlying philosophy of the economics of Smith and his followers. This philosophy tended toward materialism, individualism, and utilitarianism. It tended to leave ethical factors out of consideration, and to shun ethical responsibility ; to make self-interest its sole basis and to recog- nize little or no good in government interference with industry ; to assume that humanity consists of " economic men " who determine courses of action by balancing pleasures against pains to ascertain a balance of utility. It had the idea of an unlimited possibility of expansion in wants and of an indefinite sum of satisfactions. Furthermore there was a tendency to regard men as equal by nature, and consequently the idea of cosmopolitanism was easy. Men being naturally pretty much equal, actual differences must be due to environment : this was a part of the materialistic tendency. Of course all the followers of Adam Smith did not show all these tendencies. They varied in the number of the tendencies PHILOSOPHICAL AND ETHICAL CRITICISM 293 exhibited and the degree in which they were emphasized. Taken together, however, these tendencies form a closely con- nected group ; and the foregoing paragraphs, together with the sections on philosophy and method in the preceding chapters, will give a sufficiently clear idea of that which the following thinkers attacked. a. INDIVIDUALISTIC CRITICS The relation of the individual to the state has from the be- ginning been a chief point of dispute in economic thought. The social philosophy of the Physiocrats and Adam Smith, on the whole, favored individualism and laisser faire. It was based upon the assumption that the economic interests of individuals and nations are materially the same. One of the earliest at- tacks upon their system centered upon this idea. It is interesting, however, to observe that several different points of view were taken by those who opposed that philosophy, some rejecting it in part, others in its entirety. Thus the least radical group accepted the individualism, but sought to make it more humanitarian by limiting laisser faire, being as a rule less hopeful, or careless, than the Classicists proper. There was, then, an individualistic criticism. But others rejected indi- vidualism, and while they did not go so far as to advocate a socialization of property, they emphasized the nation as an economic unit, favoring more or less interference with industry for national ends. These were nationalists in their criticism. They opposed that part of the individualistic tendency which leads to cosmopolitanism, regarding men as world citizens. Finally, the Socialists must be noted among the opponents and critics, along with the individualists and nationalists. They have been the most radical of all, though the prevalence of misinterpretation and inconsistency sometimes makes Socialism seem quite in harmony with certain points in the philosophy and doctrine of the economists. Socialism, however, is the antithe- sis of individualism, and it must logically ever tend toward idealism in philosophy, while thorough-going Socialists have always opposed the most fundamental postulates of economics. 294 CHAPTER XVIII LAUDERDALE AND RAE AS INDIVIDUALISTIC CRITICS: SOCIAL AND INDIVIDUAL WEALTH Lauderdale. Early in the nineteenth century two shrewd and eccentric Scotchmen wrote books in which they opposed Smith's economic system in a fundamental way. While accept- ing his individualistic viewpoint, they took the Wealth of Nations to task on the ground that it confused public and private wealth. The first of these was Lord Lauderdale (1759- 1830), who in 1804 published his Inquiry into the Nature and Origin of Public Wealth and into the Nature and Causes of its Increase. French and German translations of this work ap- peared in 1808, and an enlarged English edition in 1819. Its main points concern value, wealth, and capital, hi treating all of which the author showed much originality and had a very considerable effect. More will be said of his ideas on value and capital in other chapters. At the very outset, he emphasizes the importance of defining terms and analyzing their meaning ; and he particularly stresses the distinction between " wealth " and " riches." The latter term he uses to designate private wealth. The former consists of " all that man desires, as useful or delightful to him" (56). Then, in his chapter on public wealth and private riches (pp. 43 ff.), Lauderdale begins by stating that all previous writers had made the mistake of confusing individual and national wealth, and had accordingly made national wealth equal the sum of individual riches. With such an idea these writers had naturally reasoned that the proper way to increase national wealth is by means of " parsimony " (saving) ; for that is the way in which individuals become rich. 295 296 ECONOMIC THOUGHT But here Lauderdale points to the fact that the riches of the individual depend in part upon the scarcity of the things saved, or, as we would say, his wealth is the exchange value of his prop- erty. And he asks, does not common sense revolt at the idea of increasing wealth by making things scarce? " For example," he says, " let us suppose a country possessing abundance of the necessaries and conveniences of life, and universally accommo- dated with the purest streams of water : what opinion would be entertained of the understanding of a man, who, as the means of increasing the wealth of such a country, should propose to create a scarcity of water, the abundance of which was de- servedly considered as one of the greatest blessings incident to the community ? It is certain, however, that such a projection would, by this means, succeed in increasing the mass of individ- ual riches ; for to the water, which would still retain the quality of being useful and desirable, he would add the circumstance of existing in scarcity, . . . and thus the individual riches of the country would be increased in a sum equal to the value of the fee-simple of all the wells" (44-45). Or, hi the case of food, to increase the supply would act vice versa. Or, again, would the declaration of a war which decreased the capital value of the national debt, rents, and other incomes, and so reduced private riches, decrease the lands, or waters, or any of the wealth of the nation ? Surely not. He concludes that it is very important to observe that in proportion as the riches of individuals are increased by an aug- mentation of the value of any commodity, the wealth of the nation is generally diminished (50). This strongly suggests opposition between public and private interest. Indeed, he remarks : " ... nothing but the impossibility of general com- bination protects the public wealth against the rapacity of private avarice" (54). In following chapters, Lauderdale treats of the source of wealth and the means of augmenting it, criticizing Smith vigorously on such points as non-productive labor, division of labor, and function of capital. He concludes that wealth can be increased only by the means which produced it, namely, production by LAUDERDALE AND RAE : SOCIAL WEALTH 297 land, labor, and capital ; parsimony, 1 " baneful passion of ac- cumulation," cannot avail. Lauderdale's emphasis of consumption and demand, and his shrewd observations on the effects of varying distribution of wealth are remarkable. He was far in advance of his con- temporaries in these matters. In his discussion of accumulation and consumption, he may be dubbed the father of the overproduction idea. 2 The breadth of his reading is also notable, as he cites Xeno- phon, Locke, Petty, Vauban, Gregory King, Harris, Hume, " the works of all the (Economists " (Physiocrats), William Pulteney, Hooke, Smith, Malthus, and others. To Americans, at least, it is of interest to note that an early economist of the United States, Daniel Raymond (1820), refers to Lauderdale and virtually follows him in contrasting social with individual wealth. 3 In Germany one of the chief econo- mists influenced by him was Hermann. One of the many writers of the early nineteenth century who read and were influenced by Lauderdale was John Rae, concerning whom a word must be said next. John Rae. The American writer John Rae furnishes another instance of early criticism of Smith's economics which should not be forgotten. Rae was a Scotch immigrant, first to Canada and later to the United States. His book was published in 1834 at Boston, Massachusetts, and was entitled, Statement of Some New Principles on the Subject of Political Economy, Exposing the Fallacies of the System of Free Trade, and of Some Other Doctrines maintained in the " Wealth of Nations," * While the title perhaps unduly emphasizes the merely critical part of the work, it sufficiently suggests the reason for pre- senting a brief treatment of its author at this point. The first book of the New Principles is headed, " Individual 1 Considered as a national policy, not world-wide. See p. 266. 2 See below, p. 307. s Cf. above, p. 239. 4 Rae's work has been rearranged and edited by Dr. C. W. Mixter, and reprinted under the title, The Sociological Theory of Capital. (New York, 1905.) This reprint contains a biographical sketch and notes by the editor. 298 ECONOMIC THOUGHT and National Interests are not Identical." Rae adopts Lauder- dale's general idea of a difference between public and individual interests, and develops a theory of government interference in harmony with it. His idea differs from Lauderdale's, however, in that he does not consider a difference in the wealth itself, but one in the " causes giving rise to individual and national wealth." His treatment is diffuse and lacks the verve and acumen of Lauderdale's thought ; but it is his merit that he clearly shows how fundamental to Smith's thought is the notion of an identity between national and individual wealth, and that he connects his analysis with public policy. Rae states Smith's case thus : " The axiom which he brings forward, that the capital of a society is the same with that of all the individuals who compose it, being granted, it follows that to increase the capitals of all the individuals in a society is to increase the general capital of the society. It seems, therefore, also to follow that as every man is best judge of his own business and of the modes in which his own capital may be augmented, so to prevent him from adopting these modes is to obstruct him in his efforts to increase his own capital, and ... to check the increase of ... general capital; and hence, that, as all laws for the regulation of commerce are in fact means by which the legislator prevents individuals conducting their business as they themselves would deem best, they must operate prejudicially on the increase of individual and so of general wealth." l Fur- thermore, Rae points out that it is assumed that as the capital of a single individual grows through saving and accumulation, so the national capital is increased in the same way. This whole scheme Rae rejects. In the first place, even assuming that individual and social interests are the same, it is not true that saving from revenue is the sole means that an individual uses to increase capital. He must first gain his revenue, and thus the amount he can save depends partly on his talents and capacities. Moreover, the fact that an individual by gambling and tricky bargaining may gain wealth shows that self-interest does not always lead to increased national wealth. 2 1 The Sociological Theory of Capital, Mixter ed., p. 380. * Ibid., p. 345. LAUDERDALE AND RAE: SOCIAL WEALTH 299 But it is not true that social and individual interests are iden- tical, nor that the causes giving rise to wealth are the same in the two cases. For, while it is generally true that an individual can find employment and so obtain an income from which he can save, in the case of a nation the " materials on which the national industry may be employed are to be provided, and often are or may be wanting." l Individuals seem generally to grow rich by grasping a portion of existing wealth ; nations, by the pro- duction of new wealth. " The two processes differ hi this, that the one is acquisition, the other creation." 2 But creation of wealth depends upon invention, and national wealth can be increased only through the aid of the inventive faculty. 3 Thus the power of invention plays a leading part in Rae's thought. In this connection it may be remarked that Rae also criti- cizes Smith's treatment of division of labor, holding that it springs from invention rather than the reverse, and hence is effect rather than cause. And, of course, there is an element of truth in this, for in reality the two are interrelated, each being now cause and now effect. In harmony with the foregoing ideas, Rae opposed a strong tendency of the Classical School in holding that there is no pre- sumption against governmental interference. From what has already been written it is evident that he assails the presump- tion in favor of laisser faire. But elsewhere he approaches the question in a different way. He centers his criticism at this point largely on the distinction between natural and artificial. He says that society is natural, proceeding from the operation of natural forces, both subjective and objective. But the states- man cannot be separated from society nor the actions generated by him be called unnatural. Therefore the interference of the legislator is natural, and, Rae thinks, often beneficial. He may promote intelligence and invention, and prevent dissipation of the community's funds. Though criticism of method might more logically be reserved for later discussion, Rae's is so unique and so entwined with 1 Ibid., p. 381. * Ibid., p. 383. Ibid., p. 386. 300 ECONOMIC THOUGHT his criticism of the philosophy that it can hardly be passed over without a word here. Smith's method, Rae says, is not truly scientific, that is, inductive. There are two sorts of philosophy, he explains: one is explanatory and systematic, the other is inductive or scientific. The former seeks merely to explain phenomena, as does Smith, fitting them into some machinery of " natural " assumptions. Furthermore it generalizes from familiar and ill-defined notions, and the confusion in Smith's use of the terms, value, wealth, stock, capital, self-interest, desire of bettering one's condition, etc., are illustrative. The doubts and difficulties into which political economy has fallen since Smith's day are evidence to the weakness of his method. " If we, therefore, view his work as an attempt to establish a science of wealth, on the principle of the experimental or inductive philosophy, it is exposed to the censure of transgressing every rule of that philosophy." Just what influence Rae exerted is not clear. 1 John Stuart Mill was acquainted with his book, 2 and it may be conjectured that some of his modifications of the classical system were the result. An English economist, Hearn, who, as will be seen, had some influence on Jevons, also knew Rae's work. In 1856 an Italian translation was made. Summary. Both of the writers discussed in this chapter emphasized the distinction between social or national wealth and individual wealth, pointing to a lack of identity in public and private interests, and suggesting the advantage of consid- erable government interference. Rae, however, chiefly develops the idea of the different causes which increase the social and individual wealth. Both criticize Smith's emphasis of saving or parsimony, Lauderdale hitting it the harder of the two. Lauderdale em- 1 See Mixter's biographical sketch in The Sociological Theory of Capital, above cited, and the references it contains. For Rae's anticipation of im- portant points in the theory of capital and interest, see ibid. 2 Mill quotes Rae with approval in dealing with division of labor and motives to saving under the head of production. He also mentions Rae in connection with taxation. LAUDERDALE AND RAE : SOCIAL WEALTH 301 phasizes labor as the means of increasing wealth ; Rae, the skill, dexterity, and direction of labor in creating wealth. The latter makes invention the main factor. Both have the idea of a contrast between utility and exchange value underlying their thought, though this is far more marked in Lauderdale's case. It is interesting to note a similarity with the Physiocrats at this point. Lauderdale, indeed, says that the Physiocrats were nearer the truth in their ideas on " wealth " production than Smith ; and Rae, in arguing that national wealth is increased only by creating new wealth, reminds one strongly of the produit net. It is easy enough, when one takes this tack, and especially if ethical notions are mixed up with one's idea of utility, to conceive of general overproduction. For then production con- sists in making goods which men " need " (not want) and in such quantities as are necessary, or " beneficial " to them. Accordingly, as already suggested, Lauderdale laid a basis for the ideas on overproduction for which two other economists with Physiocratic leanings, Malthus and Sismondi, are well known. CHAPTER XIX SISMONDI: THE EMPHASIS OF INCOME AND CON- SUMPTION AMONG the earliest to revolt from the philosophy and ethics of the classical economists was the French writer, Sismondi. This thinker well illustrates the difficulty of making the three- fold classification of opponents very rigid ; for his criticism on the score of method is all but as important as his general revolt against the spirit of Smith's system, while he attempted several criticisms of particular theories. Yet, after all, the notable thing about Sismondi is his ethical spirit and his rebellion against the underlying system. He desired considerable state regulation for social reform, but inasmuch as he did not advocate Socialism, he is to be classed as a limited individualist. Life and Works. 1 Jean Charles Leonard Simonde de Sis- mondi was born in Geneva, Switzerland, in 1773, only three years before the publication of the Wealth of Nations. His father, a Protestant clergyman whose ancestors had fled from France upon the revocation of the Edict of Nantes, had destined young Sismondi for business pursuits ; but the boy was given a classical education, and this, together with experience as a minor government official, and travel through Germany and Italy, developed his taste and ability for historical and economic studies. He lived until 1842, and was the author of numerous works and articles in his chosen field. Thus Sismondi's life was cast among stirring events and great thinkers. The French Revolution, the Napoleonic wars, the consummation of the Industrial Revolution, were witnessed by 1 See Political Economy and the Philosophy of Government, a series of Essays Selected from the works of M. de Sismondi, by M. Mignet. (Lon- don, 1847.) 302 SISMONDI: THE EMPHASIS OF CONSUMPTION 303 him and their attendant evils noted. Malthus, Say, List, and Ricardo were among his contemporaries. His first economic writing was the Tableau de V Agriculture Toscane (1801), followed in 1803 by his more important work, De la Richesse Commerciale ou Principes de V Economic Politique, ap- pliques a la legislation du Commerce. The Richesse Commerciale treats of capital, price, and monopoly, closely following Adam Smith's ideas. If Sismondi had never written again upon politi- cal economy, he would have gone down in history with a bare word to the effect that he was among the minor earlier followers of Smith. Then for a space of sixteen years important economic writing ceased. But history engaged his attention, and a close study of industrial phenomena around him. He observed the suffering and hardship which accompanied the close of the Napoleonic wars, and the extent and severity of the crises of 1815, 1818-1819, and 1825. He studied England, the land of industrial progress and political economy, and there he saw the rich growing richer while the poor grew poorer. He saw relative overproduction and unemployment ; and he remarked, as he states in the preface of his next book, that the laborers, having become mere proleta- rians, cast off all restraint upon the size of their families. He saw danger, too, in the extended use of paper money and bank credit. The book last referred to was his chief economic work, the Nouveaux Principes d' Economic Politique ou de la Richesse dans ses rapports avec la Population (New Principles of Political Economy, or of Wealth in its relations with Population), which was published in iSig. 1 A second edition, considerably en- larged, appeared in 1827. In this new work Sismondi presents a remarkable change of front. While still adhering to some of the main doctrines of Adam Smith and the Classical School, he draws radically different conclusions, and places the emphasis upon new matters. For Smith and his work he professes admiration and would even acknowledge his leadership; but he would complete and make new applications of his master's doc- 1 It resulted from and was based upon an article which he undertook to prepare for an encyclopedia. 304 ECONOMIC THOUGHT trines, and he sharply criticizes Say, Malthus, Ricardo, and M'Culloch. 1 In his last important economic work, Etudes sur V Economic Politique (1837-1838) his new ideas are reiterated: the econo- mists, he states, had been swept off their feet by the spirit of in- dustrial progress. He, however, had seen the suffering of society in an age of " progress " too clearly to go with them. Through observation and historical study he had been led to abandon their conclusions. 2 His Economic Thought. i. Scope of Economics and Criteria of Progress. In his outlook and purpose Sismondi differs from the Classical School. He was a reformer. Ethical considera- tions played a large part in his thought ; and to him economics was largely an art. He aimed to put economics upon a new basis: the economists had taught how to increase national wealth; he would teach how to increase national happiness, and to this end would point out the advantages of government intervention to regulate the progress of wealth. Accordingly his views concerning the scope of economics and the criteria of economic progress were at variance with the domi- nant theories. To Sismondi enjoyment or happiness is the sole end of accumulation, and in it consists the true wealth of the nation. 3 And he criticizes the current emphasis on production, calling the classical economics chrematistique (money-making science). 4 Consumption, then, plays a large part in his system : the history of all wealth is the same, it is destined to yield enjoyments through its destruction or consumption. 5 As limiting consumption, income, he says, rather than capital, is the important thing. But, as in the " public fortune " the capital of one is the income of another, the economists have been embarrassed in deciding what is income and what capital, and have therefore left revenue out of consideration. 6 Neither material wealth nor population is an absolute sign 1 Now. Prin., I, Preface, and pp. 50-51. References are to the second edition. 4 Cf . Aristotle's Thought, above, p. 46. 2 Etudes, II, 211. * Now. Prin., pp. 58 ff. J Now. Prin., I, 51. ' Ibid., p. 9, Preface. SISMONDI: THE EMPHASIS OF CONSUMPTION 305 of prosperity; that depends on the relation between the two. " Population is an advantage only when each man is sure of finding an honest living by labor." 1 " I have endeavored," writes Sismondi, " to establish . . . that to allow wealth to contribute to the well being of all, as being the sign of all the material enjoyments of man, it is necessary that its increase should conform to the increase of population and that its distri- bution take place among that population in a proportion that can be disturbed only with extreme danger. I propose to show that it is necessary for the well-being of all that income increase with capi- tal, that population do not exceed a living income, and that pro- duction be proportioned equally to capital which produced it and population which consumed it." 2 2. His Scheme of Distribution. According to these notions, Sismondi worked out a scheme of distribution which cannot but remind one of Quesnay's in its pretentiousness. As nearly as it can be reduced to exact statement, for his terminology is not free from inconsistency, that scheme is as follows. 3 We begin with the national revenue, through which the popula- tion is to acquire its consumables. In this national revenue two parts may be distinguished : (i) profits on capital and land, which, though distinct, may be classed together here; and (2) labor power. Of these parts the former, profits, is of the past. It is the result of the labor of the previous year, in the hands of consumers. Labor power, on the other hand, is future, as it were, only becoming wealth through opportunity and ex- change. Labor acquires a new right each year by new labor ; capital holds a permanent right based upon control of past labor. On the whole, there is an opposition of interests between the classes receiving the two shares ; yet a certain relation exists between these shares in that they have the same origin. This national revenue is destined to be exchanged for the national production (of the ensuing year), to which it should be equal. The annual production likewise consists of profits and labor power. The annual national production is, then, consumed annually, labor giving labor-power in exchange (for its share), and capital 1 Ibid., I, p. 9. l Ibid., Pref. x-ri. Ibid., pp. 104 ff. x 306 ECONOMIC THOUGHT giving of its revenue (or interest). The labor-power, we are told, becomes converted into capital, and is then reproduced as in other capital. By this annual consumption, involving the ex- change of one year's revenue for the production of the next, each maintains his consumption or replaces his capital. If true economy is used, therefore, and things go prosperously, the annual consumption is exactly limited by the national rev- enue, and all that is produced is consumed. 1 When this is not the case it is obvious that the desired equilibrium is disturbed and that either overproduction or underproduction must result. This equilibrium involves an exchange of all that is called capital for labor, the former being the revenue of the labor class ; and if the " rich " consume their capital, the revenue of the poor for the following year is encroached upon, i.e. not spending, but saving, gives more employment and keeps wages up. Sismondi hardly considers the alternative of underproduction, for he is gunning for the doctrines of the classical political economy concerning productivity. Though arguing thus concerning an equilibrium of production and consumption, Sismondi did not advocate an absolute stand- still or circle ; rather he thought of a spiral brought about by a very gradual increase in production. Even this would cause small losses by disturbing the proper equilibrium, but they might be offset by future benefits. 2 A series of small losses increasing capital and the public fortune, in this consists national economy. In this general connection Sismondi takes occasion to criticize " the economists." They had, he thought, confused past reve- nue with future revenue and omitted to treat of consumption. 3 They had argued for an increase in labor as being possible and desirable as a first step. That would mean an increase in wealth, in revenue, and in consumption, respectively, consumption thus being placed last. But, Sismondi urges, it is more correct to say that an increase in the demand for labor must come first : that is, increased revenue and consumption must precede the 1 Nouv. Prin., I, p. 115. *Ibid., I, p. 121. 3 Ibid., Liv. II, Chap. VI. SISMONDI: THE EMPHASIS OF CONSUMPTION 307 increase in labor and production. Accordingly more wages would have to be paid, whereas wages are fixed in advance, being limited by preexisting revenue. 3. Overproduction and Machinery. This whole scheme of distribution is underlain by an " unorthodox " belief as to the possibility of overproduction which militated against the success of the work. Sismondi argues that if the annual production were in excess of the annual revenue, which is quite possible, overproduction would be the result. Capital would then suffer loss, labor would go unemployed, and thus the consumers' gains through lower prices would be but temporary. 1 In reality there seem to have been two different notions of overproduction in Sismondi's mind : one concerned use values or total utility ; the other, exchange values. It is not unlikely that he was confused in dealing with the two. His reasoning upon the former notion, which to him is the fundamental one, Sismondi appears to have based upon the need for repose. 2 Repose or rest is a " natural " taste of man. It is the reward of labor. Man accumulates only to consume, which implies repose. But under the dominant system laborers must work on, making a superabundance of products, many of which are luxuries. Their efforts are thus separated from their reward. That a line drawn between necessities and luxuries is also an essential part of Sismondi's reasoning here, is clear ; for it is only for luxuries that man's wants are unlimited, and it is in multiply- ing goods beyond needs that overproduction lies. In a word, if men would satisfy their needs only, including repose, the unremitting labor of the day would not be required. If the truth of his semi-ethical idea of necessities and luxuries be granted, and the statement that laborers are overworked, there is nothing inherently fallacious in the reasoning so far. It is on the point of overproduction of exchange values that Sis- mondi falls into positive error. Here his whole idea is that an 1 Ibid., I, pp. 118-119. 2 See Ibid., Liv. II, Chap. III. Repose is partly defined as including change of activity from wealth creation to enjoyment and to intellectual and artistic development. 308 ECONOMIC THOUGHT increased demand must precede increased production, and his criticism of the economists has already been referred to. He fails to see that production and revenue are interdependent in the long run ; that production is the source of revenue ; that it indirectly creates and directly limits demand. He fails to see the significance of the fact that as a general proposition exchange values cannot be affected by changes in the production of com- modities. Hence he is led to uphold the possibility of a universal glut or general overproduction. Indeed, he states that at the time he wrote such a condition prevailed and had been in exist- ence several years. 1 While he calls attention to important truths, Sismondi's over- sights and fallacies on this point are many. He generalizes too hastily from overproduction in particular industries. He illogi- cally breaks into the round of production and consumption, and assumes revenue and demand almost as if they were something absolute, this being accentuated by his constant separation of the operations of one year from those of another, thus artificially chopping industrial life into segments. He ignores the decrease in costs which frequently attends increased production, 2 in this assuming a loss to capital and decreased employment, whereas decreased expenses of production would permit equal net earn- ings and increased employment. He, in his pessimism, does not consider facts as to increased consumption nor as to its greater variety. And, finally, as a criticism of the Ricardian school, his arguments are weakened by not making due allowance for their assumptions 3 as to length of time, mobility, and economic motive. But his truths are not to be forgotten. He justly criticized the economists for reasoning so abstractly as to overlook the delay 1 See the article on " Balance des consommations avec les productions " appended to Tome II of the Nouv. Prin., pp. 379 ff. Here is found an inter- esting criticism of an article by M'Culloch which admirably illustrates Sismondi's method. 2 E.g. in discussion in Nouv. Prin., I, pp. 118-119. 1 While they, of course, are open to criticism for not keeping their as- sumptions duly to the front and limiting their conclusions duly. SISMONDI: THE EMPHASIS OF CONSUMPTION 309 and friction, often involved in bringing supply and demand into equilibrium. To this element of friction Sismondi constantly points. And not only is there the immediate lack of equilibrium ; it is increased and its evils heightened by the fact that laborers frequently must remain at work though wages are lowered and hours increased. 1 The force of habit and the technical difficulties of transferring fixed capital are brought into clear relief. Sismondi attacked the prevailing idea that machinery is an unmixed good. Here again, though he goes too far, his criticism has its value. His real point is that the introduction of machin- ery is an unmixed benefit only when preceded by an increase in revenue and demand which would allow the employment else- where of the labor which is displaced ; otherwise there is suffer- ing through lower wages and unemployment. All of which, for a given time, is frequently too true. Sismondi, however, would have restricted the adoption of machinery ; while the economists, when they did not treat the question in such an abstract and general manner as to sail above it, would have resorted to some system of relief pending new adjustments. 4. Population. As already Indicated, Sismondi deemed the end of political economy to be the discovery of that proportion between population and wealth which would assure the highest well-being. He gives much attention, therefore, to population. 2 His thesis on this subject is that while sympathy or the affections urge to marriage, egoism or calculation deter, and through the interplay of these forces population would naturally be regulated according to revenue. 3 But the evil situation arises in which the births of a nation exceed its revenues, and with overproduction, unequal property, and exploitation by the rich, revenue is encroached upon and wages are reduced. One of the points that Sismondi particularly mentions in his preface is the gloomy idea that the natural limits to population are always respected by those who have, while they are exceeded by those who have not. 1 Nouv. Prin., I, 333 ; and II, 379 ff. 2 Ibid., II, Liv. 7 1 See ibid., II, pp. 253-255. 310 ECONOMIC THOUGHT Sismondi believes Malthus to be quite mistaken in his ideas on the natural limits of population. Population is not limited by the subsistence which land can produce, but is checked before such a limit can be reached. In opposing the ideas of a geo- metric and an arithmetic progression, Malthus was contrasting a mere potentiality with an actuality. Nay, rather with less than the actuality, for the increase of plant and animal life is more rapid than that of man. And history is appealed to for the pur- pose of showing that nomadic peoples have restrained population while their land would have supported a much more numerous people. 1 5. Reforms advocated. Sismondi recognizes a conflict be- tween public and private interests, and so logically calls upon the state to interfere: first to adjust production to revenue or demand (population), and secondly to apply cer- tain particular remedies directly. Thus he urges the restric- tion of inventions, and advocates steps toward giving some property to labor. In agriculture small proprietors are favored ; in manufactures, more small-scale industry and increased re- sponsibility on the part of the employer. 2 Such responsibility as for sickness, accident, old age, would have given the laborer rights akin to those of property. In addition to all this, there are many vague appeals to statesmen to try to stay the struggle for increased industrial production. Under the head of more direct and less general reforms would fall his advocacy of regulation of hours, and of child labor ; and of legislation giving laborers the right to combine. 3 In these matters Sismondi's importance as an early thinker in the field of social reform will be recognized. 6. Exploitation of Labor, and Socialism. Though he does not draw Socialistic conclusions, Sismondi's argument often runs like that of Marx himself, and his thought concerning 1 Of course this fact is not necessarily in conflict with Malthus' .theory, even as it is stated by Sismondi, for it may be subsistence which holds that population in check, whether gained by grazing or agriculture. In any case, the moral restraint idea is overlooked. For Malthus' reply, see his Pol. Econ., ad ed., p. 366, note. 8 E.g. Nouv. Prin., II, 661. 3 E.g. ibid., II, p. 451. SISMONDI: THE EMPHASIS OF CONSUMPTION 311 the exploitation of labor undoubtedly influenced Socialistic criticism. Generally, though not with entire consistency, he states that labor is the source of wealth. The " rich " can only obtain the products of others' labor through exchange. If they gave of their capital, they would become impoverished. But this is not necessary, for in the existing social order they make their property produce through the labor of others. In so many words he says that capitalists exploit laborers, gaining not because they produce a surplus above costs, but because they pay less than cost. 1 At one point the word " spoliation " is used. 2 Luxury is possible only where it is maintained with the labor of others ; unremitting toil, only where it secures a bare subsist- ence, this is a corollary of his ideas on overproduction. Competition is criticized as leading to overwork and the employment of women. Government intervention is advo- cated. Yet Sismondi stops short of Socialism, and criticizes Owen and others. Method. A marked characteristic of Sismondi was his concrete and historical method. Smith and Malthus he praises for their study of history and facts ; while he constantly criti- cizes Ricardo for his abstraction and hasty generalization, and takes Say and M'Culloch to task on the same ground. Indeed, Sismondi was as much an historian as an economist. He was fully aware of the necessity for taking time and place and history into consideration. His best work lies in his concrete study of eco- nomic phenomena, and when he takes to abstract analysis he not infrequently falls into inconsistencies that confuse the reader. No evidence has been found that the German historical school acknowledges a debt to Sismondi, yet it is probable that he was well known to the leaders of that school, Roscher gives him favorable comment in his History of Political Economy in Ger- many, and some small degree of influence seems not unlikely. Influence. Aside from this, Sismondi's influence was chiefly felt by the Socialists. Indeed, he has sometimes been wrongly classed as one. Though his writing was thus effective along a 1 Ibid., I, 92. * EtUdes I, 274-275. 312 ECONOMIC THOUGHT line which he would not himself have followed, he was almost uni- versally rejected by economists. This was no doubt due to the extremely reactionary character of his thought. He called for government intervention in an age of laisser faire. He was a pessimist in a land where optimism reigned. He opposed the very spirit of the dominant economics in his criticism of chretna- listique, competition, etc. And his notions concerning over- production and machinery were not only largely erroneous, but were peculiarly offensive to the " orthodox " English Classicist. J. S. Mill read Sismondi, and his more humanitarian spirit and advocacy of government intervention, even passing over to So- cialistic views in his later years, must have made him a sympa- thetic reader. But to what extent he drew from Sismondi cannot be stated. Fix, Droz (Economic Politique, 1829), and Villeneuve- Bargemont (Economic Politique Chr&tienne, 1834) might be classed as followers; and Buret appears to have been a sole disciple. 1 1 La Misere des Classes Laborieuses en France et en Angleterre, 1841. See Gide-Rist, Hist, des Doctrines Economiques, p. 228. b. NATIONALISTIC CRITICS CHAPTER XX MULLER, LIST, AND CAREY: THE EARLY NATIONALISTS THE Nationalists, the criticism of whose thought comes next, comprise a group of politico-economic writers of the early years of the nineteenth century, who attacked the cosmopolitan, free- trade doctrines of the Classicists. None of them were English. It is natural that this serious outbreak against the authority of Adam Smith should take place outside of Great Britain. Written for his own country and based upon the national life of his tune, it was to be expected that the Wealth of Nations would answer the needs of England longer than those of other countries. It is natural, moreover, that what was perhaps the most thorough- going revolt against its teachings this side of Socialism should have occurred in a land whose development and manner of production differed essentially from those of Smith's native coun- try. Germany, accordingly, has been the one among the great civilized nations to lead the rebellion against English political economy. It was felt that it did not meet her requirements, and from the earliest years of the nineteenth century her economists took a more nationalistic stand. Sartorius (1806), Jakob (1809), Rau (1826-1832), and Hermann (1832) may be mentioned as to a considerable extent recognizing national bounds in theory, and making some place for tariffs. Excepting Hermann, how- ever, these writers were essentially followers of Adam Smith, and nationalism was not the heart of their thought. Adam Miiller. The first to express this feeling of national- istic revolt so as to attract considerable attention were the po- litical economists called, in Germany, Romanticists, of whom the leading representative was Adam Heinrich Miiller, and the two 313 ECONOMIC THOUGHT other most prominent adherents, Friedrich Gentz and Karl Lud- wig von Haller. 1 Gentz translated Burke's Reflections on the French Revolution, which work doubtless had its effect upon Miiller. Adam Miiller was born June 3, 1779, in Berlin. In 1799 he went to the University of Gottingen, where he studied law. Upon his return to Berlin, he received a government appoint- ment. Later he held various positions in Austria in what we would call the treasury department. His death occurred in 1829. While in Vienna, in 1805, he became a Roman Catholic, on which account he has been called a notorious apostate. Soon after this he went to Dresden and delivered lectures, which were published in that place in 1806 with the title, Vorlesungen ilber die Deutsche Wissenschaft und Literatur (Lectures on German Science and Literature). A second edition appeared in 1807. In these lectures he advocated what is called the Schlegel'sche Romantik the romanticism of Schlegel. His writings are often mystical, Catholic, and reactionary. Indeed, they represent the reaction which followed the French Revolution and the Napoleonic wars. 2 A leading thought in Miiller's reaction against Adam Smith is the necessity of abandoning his cosmopolitanism and of founding a national political economy. Believing in the utility of a strong national feeling, he holds that opposition and contest among dif- ferent countries are desirable. Protection to home industry, 1 Justus Moser preceded these men with similar ideas. But his work was not in criticism of Adam Smith. He was, however, opposed to the liberal, rationalistic spirit which led up to Smith's work. He was reactionary, favoring medieval institutions. See Roscher, Gesch. d. Nat. Oek. in Deutsch- land. 2 The most prominent are : Von der Idee des Staats, Dresden, 1809. Die Elemente der Staatskunst (The Elements of Politics), Berlin, 1809. Die Theorie der Staatshaushaltung (The Management of State Finances), Vienna, 1812. Versuch einer neuen Theorie des Geldes (An Essay on a New Theory of Money), Leipzig, 1816. Von der N otwendigkeit einer theologischen Grundlage der gesamten Staats- wissenschaften (On the Necessity of a Theological Foundation for all the Political Sciences), Leipzig, 1819. THE EARLY NATIONALISTS 315 and even prohibition of certain exports and imports, are defended on the ground that they stimulate national feeling and give na- tional character to the wealth of a people. 1 For the same reason, Miiller advocates the use of paper money ; the precious metals are too cosmopolitan for him. And a further argument in favor of paper money is that it furnishes the means of avoiding national debts which tend to divide people into two antagonistic parties, those who possess wealth and those who lack it. 2 In his system the state is viewed hi a very different light from that in which it has been regarded by any writer considered thus far. To him government, in itself, is a good and not an evil. In opposition to the atomistic individualism of Adam Smith, he emphasizes the organic character of the state. He even values war, because it brings into prominence the idea of the state and society as a whole. Thus the welfare of others becomes an object, and individual selfishness occupies a less prominent posi- tion than in times of peace. But, while Miiller desired great centralization and solidarity, he did not wish to extinguish utterly individual freedom : the individual was not to be lost, but was to attain his best development as a closely-knit member of the social organism. It is, moreover, the state which gives security to property. It is impossible to guarantee that one's wealth shall be inviolable save through the state. Man cannot be thought of as existing in any tolerable situation outside of the state. It is to the state that we must ascribe the continuity of society and of national economic life. Progress and accumulation are thus possible. All this meant a different economic viewpoint. Take value theory, for example. Miiller accuses Smith of overemphasizing exchange value or the individual valuation. All things, he held, have a twofold usefulness : one for society ; one for the individ- ual. National power (Nationalkraft), however, is the funda- mental thing, all individual values being gained in and through 1 Miiller comes near to Mercantilist doctrines, and is classed by Kautz as "Mercantilist-conservative." In this he differs from List. It would be an error to class him as a Mercantilist, however. 2 See Stephinger, Die Geldlehre Adam Mailer's, Stuttgart, 1909. 316 ECONOMIC THOUGHT this power, and existing subject to the effects of world and na- tional movements. " The problem of permanence is the most important of all political problems." On this account, Muller values the heredi- tary nobility: it connects the past with the present. Adam Muller was a warm partisan and admirer of the Middle Ages, and longed for a return to them. The world, he thought, had been led astray by gold, Roman institutions, and the en- joyment of material luxuries. Change he hated. The per- manence of institutions was dear to him above all things. He thought God had ordained that agricultural laborers should be bound to the soil. Feudal burdens and institutions of all kinds, including the gilds and corporations of the Middle Ages, seemed admirable to him as binding men together and making them feel their unity. Such arrangements were better for the poorer classes, since our modern money system had made slaves of them. Roscher considers that one of Muller's best characteristics was the earnestness with which he fought the tendency of modern political economists to overvalue economic goods and material enjoyment. He thought that the farmer should not labor ex- clusively for the promotion of his own material welfare, as Smith had represented him as doing ; but, first of all, out of love to God, each one should consider himself a steward, administering his affairs for Him who committed the stewardship unto him. It was in accord with this general conception that Muller dis- tinguished a geistiges Kapital (spiritual capital), which earlier generations hand down to posterity in the shape of a mass of experiences and ideas. 1 Although Muller accused Smith of absolutism in neglecting the differences of place, his own work is not entirely exempt from this error. He did not recognize development in time. He regarded the Middle Ages as representing the normal condition of eco- nomic life for all times. He did not perceive that civilization had outgrown that period, but thought that his own time was simply an unhappy transitional state, and that the following generation 1 Criticized by Hermann, Staatsivirthschafttiche Untersuchungen, p. 54. THE EARLY NATIONALISTS 317 would return to past institutions with a consciousness of their superiority. 1 Miiller may also be criticized for overlooking the part played by individuals and for recognizing them only as they work for the state. 2 While opposing Smith, Miiller did not hesitate to express his admiration for him. He called Adam Smith " the incomparable scholar and the greatest of politico-economic writers of all times." 3 But Miiller held that Smith in writing his Wealth oj Nations, presupposed as a basis for his economic system a condition of affairs and an historical growth such as had taken place in Eng- land. This is true. Here, as in many other places, Miiller corrected the one-sidedness of Smith. He did this again in calling attention to the evil effects of a division of labor, or, as he put it, " to the wicked tendency of the division of labor " (die lasterhafte Tendenz der Arbeitstheilung) . Friedrich List. Friedrich List was born in Reutlingen, Wiirtemberg, in 1789. He entered the civil service at an early age, and by diligence and ability soon attained a very respect- able position. He heard lectures in Tubingen, and in 1818 was made professor of political science in the university at that place. He used his professorship as a means of attacking the bureaucratic routine of the civil service in Wiirtemberg, and at the same time advocated in the press the cause of constitu- tional monarchy. List opposed the union of the government of Wiirtemberg with the reactionary elements of the parlia- ment, and was called to account by the government for having written opposition articles, whereupon he resigned his professor- ship in 1819. He was then made counsel of the German Commercial and Industrial Union (Deutscher Handels- und Gewerbeverein), which he had helped to found. One object of this union was to abolish duties on goods passing from one German state to another and to replace them by duties on the frontiers of Germany. 1 Cf. Knies, Die Politische Oekonomie vom Standpunkte der geschichllichen Methode, 23. 2 Hildebrand, Die Nationalokonomie der Gegenwart und Zukunft, I, Chap. II. Cf. Roscher's Gesch. d. Nat. Oek. in Deutschland, 163. 318 ECONOMIC THOUGHT Reutlingen sent him to parliament as its representative in 1820. At the time, he made a speech in Reutlingen, advocating reforms which were then considered very radical. Among other things, he wished to do away with tolls on roads, tithes, the greater part of the state industries, feudal burdens resting on land, and excise duties ; and sought to introduce publicity and trial by jury into the judicial administration. He also favored a decided reduction in the number of civil service officers, the sale of public domains, and a single direct income tax to meet the expenses of government. 1 This displeased the powers in author- ity, and a petition which he directed to the estates of the realm, in which he pointed out abuses in the administration and in the courts, met with still less favor. He was expelled from parlia- ment, and sentenced to ten months' imprisonment. The govern- ment of Wiirtemberg finally agreed to give him his liberty on condition that he should leave the country. He consented to this, and emigrated to America. He bought a farm near Harrisburg in Pennsylvania, but later became a successful editor and a speculator in coal mines and railways. In Reading, he published the National Zeitung, and wrote a number of articles for it on free trade, which, in 1827, were published in the form of a pamphlet entitled Outlines of A merican Political Economy. This was done at the request of the Pennsylvania Society for the Advancement of Manufacture and Arts. These articles contained the leading ideas of his great work, National System of Political Economy, published fourteen years later. List's residence in America deeply colored his eco- nomic views. Some new ideas he gathered from the writings of Alexander Hamilton. But chiefly he profited by observation of the young and rapidly progressing economy which surrounded him. " There only," he writes, " have I obtained a clear idea of the gradual development of the economy of a people." " There the contrasts between agricultural and manufacturing countries are exemplified in the most decided manner, and cause the most disastrous revulsions." 2 1 See Roscher, Gesch. der Nat. Oek. in Deutsch., 970. 2 Preface to National System of Political Economy, THE EARLY NATIONALISTS 319 In 1832 he went to Germany as United States consul in Leipzig, and, though very ill-received in his native land, never returned to America. His first literary labor after this was his work on the Rotteck- Welckersche Staatslexicon, an organ of South German liberals. He also began at once an agitation for a system of railways in Germany. With this in view, he was a frequent contributor to the press, and wrote a work called Ueber ein sdchsisches Eisenbahn- system als Grundlage eines allgemeinen deutschen Eisenbahnsys- tems (A Saxon Railway System as a Foundation of a universal German Railway System), published in Leipzig in 1833. About this time he wrote an essay for the French Academy on a subject which they had assigned : " What must be considered by a Nation desirous of introducing Free Trade in order in the most just manner to reconcile the interests of consumers and pro- ducers ? " List's essay did not receive the prize, but was declared by the Academy to be surtout remarquable. Finally, in 1841, he published the first volume of his great work, National System of Political Economy. It was the design of List to complete the work in three volumes, but the first alone was finished. 1 It treated of international commerce, the functions of government in matters of trade, and the German customs union. In his National System, List considers chiefly that part of the science which deals with international commerce. He has one distinct end immediately in view, which is to overthrow the free-trade principles of the " School," as he calls Adam Smith, Jean-Baptiste Say, and their followers; while back of this lay his desire to show the nations how they might overthrow England's commercial 1 His collected writings were published together with a biography by Hausser in three volumes in Stuttgart in 1850 and 1851. The National System of Political Economy has been translated into English and published in Philadelphia by J. B. Lippincott. This translation, made by G. A. Matile, contains a preliminary essay on the history of political economy and notes on the text by Stephen Colwell of Philadelphia, together with the notes of the French translation by Henri Richelot. (The note references are to this translation and the quotations are taken from it.) There is a later translation (1904, Longmans, Green, and Co.) with a good introductory essay by Professor J. S. Nicholson. 320 ECONOMIC THOUGHT supremacy. He takes up the subject of international commerce, and makes his whole work center about that, because of all the questions of political economy he considers it to have the pre- ponderant interest. The prosperity and even the existence of nations may be sacrificed by a false commercial policy. At present, he holds, it is of particular importance to devote one's attention to this matter, because the rapid progress of the era renders it more dangerous than ever before to take any false posi- tion. In no previous period had the distance between stationary and advancing peoples increased so rapidly. In past times it was a work of centuries for one nation to obtain a monopoly of woolen manufactures, while in his own time, he says, it required but ten years for one people to obtain control of the manufacture of cotton, and the start of a few years might enable that most dangerous country, England, to monopolize the flax industry of Europe. List begins the Introduction to his work by calling attention to the difference between science and practice in the questions of political economy. He maintains that both sides have erred, though the chief error appears to be on the side of the men of theory. The men of the School, the followers of Adam Smith, have looked away from the world as it is and built upon supposi- tions which do not exist, never have existed, and whose future existence is only problematical. They have regarded the whole world as living in peace and harmony. The differences of nation- ality they have overlooked. 1 The adherents of Adam Smith have in fact established what List calls a cosmopolite (cosmopolitan) or universal economy. Adam Smith followed his master, Ques- nay, in calling his book the Wealth of Nations, of nations in general, or mankind. Now List does not object to inquiries of this kind, if it be under- stood that the principles deduced apply to an imaginary and not a real state of affairs. He even admits that the deductions drawn by Smith and Say are correct, " if we assume with this School an universal association or federation of all nations as a guarantee of perpetual peace." He does maintain, however, that matters 1 National System of Political Economy, p. 193. THE EARLY NATIONALISTS 321 ought to be considered as they are, and not as they may become in a distant millennium. Nations do exist, they do go to war with one another, they do take advantage of one another when they can. The basis of the present life of the world is national life ; the na- tion comes between the individual and humanity ; there should be, then, a national political economy as well as a cosmo- politan. Accordingly, List attempts to take a realistic and historical view of political economy. He wishes to build upon the world's experience, to place himself upon the same ground as men of practice, only enlarging the view they take by considering with the aid of history, policy, and philosophy" the exigencies of the future and the higher interests of the whole human race." So, immediately after his introduction, he begins a review of the history of free trade and protection in the leading modern na- tions. His work might, indeed, have been entitled the History of the Policy of Modern Nations in Respect to International Com- merce. He discovers that the economic life of nations, save those lying in the tropics, may be divided into five periods: first, there is the hunting or fishing or savage stage ; this is followed by the pastoral stage ; people continue to wander for a time, but are finally compelled by external pressure to settle permanently some- where and gain a livelihood by agriculture, thus entering the agricultural stage ; afterwards manufactures are introduced, this constituting the agricultural and manufacturing stage ; finally, commerce is added and the fifth stage, the agricultural, manu- facturing, and commercial stage, is attained. As these stages represent a continual advancement in material life, the proper office of legislation is to aid in the transition from a lower to a higher stage. Different measures are required in different periods. In the lowest stage, that of hunters, free trade should be encouraged as the means of developing higher wants in the people and thus leading them to a more advanced economic stage. As their desires increased, they would take up agriculture more extensively and improve their cultivation in order to obtain raw material to exchange for the manufactured articles of foreign countries. 322 ECONOMIC THOUGHT Presently, they would manifest a desire to manufacture these articles for themselves, and then it would be time for government to introduce protective measures. Only in this manner could they ever enjoy the advantages of manufactures, even if they possessed natural facilities for them, because older nations with more capital would otherwise strangle industries in their infancy. They could sell even below cost for a time long enough to ruin the weak establishments of the new country. Navigation and manufactures should be protected, until the country becomes strong enough to compete with any other country, when free trade should again be introduced to stimulate manufacturer and commerce by international competition. Thus government activity is given a large part in List's teaching. The countries of the torrid zone, he held, had not the gifts which fitted them ever to become manufacturing nations. Nature had failed to bestow upon the people of the tropics the requisite energy. They possessed, nevertheless, a natural monopoly of many products greatly desired by northern countries, and their only road to wealth lay in continuing to exchange agri- cultural products for manufactured commodities. Northern nations were to carry on trade freely with the countries of the tropics, but with one another they ought all to adopt protective measures. No high state of civilization could be attained without manu- factures, an exclusively agricultural people being necessarily rude and barbarous. Agriculture and manufactures should be side by side to stimulate each other and to save the cost of transporta- tion. When they are together under the same political power, they are disturbed by no war; they live in perpetual peace. Besides his attacks on the cosmopolitanism and free-trade doc- trines of the School, the latter being assailed through an exami- nation of England's own growth and the history of the United States, List also criticized the principle of division of a labor and the emphasis laid on exchange value. The true principle of the division of labor is the same thing as association of labor or cooperation. If a dozen men are en- THE EARLY NATIONALISTS 323 gaged in work on one pair of shoes, the labor is divided, it is true, but the results of that labor are united in the one pair of shoes. The men are all working together. Adam Smith gives in his Wealth of Nations an example of division of labor in the manu- facture of pins, which has become celebrated. The labor of a few men united or divided it might be put either way in this manner accomplishes many times more than it would if they worked separately, each for himself. But suppose that, instead of laboring in the same factory, or at any rate near to- gether, the men who made the heads and those who made the points lived in remote countries, would it then work so well? Might not the men who made the heads manufacture too many in expectation of a greater number of points than were actually imported? Might not, in fact, their entire labor be rendered useless by a war which would cut off the supply of points altogether ? Now if this process of division of labor be extended between different countries, might not war or disasters in one country produce a general commercial crash ? Perhaps List is in no place more original or successful than in the exposition of his theory of productive forces and immaterial capital. 1 As at other points, it corrects the one-sidedness of Smith, who had considered value in exchange with little reference to productive power. He supposes two fathers, farmers, each having five sons. Each receives an income of $1000 in excess of his necessary expenses. The one saves it and keeps his sons at manual labor. The other spends it in educating three sons for some profession and in training the other two to become skilled agriculturists. Both fathers die. The first is richer in exchange values. He has left more property. His possessions are divided among five sons. In the second case the productive powers are greater. The farm is divided between the two sons, who have become so skillful that each half yields its possessor as much per- haps as the whole did formerly. The other three sons have been so trained that they are able to take care of themselves. In the one case there is ignorance and increasing poverty as the estate 1 Cf. Hermann's criticism of this idea as to personal elements, below, P- 43o. 324 ECONOMIC THOUGHT becomes more and more divided ; in the other, new talents and aptitudes for the production of wealth are developed, and these go on increasing from father to son to the benefit of society. The mere accumulation of exchange values, then, is not all-important, but is surpassed by the increase of productive power: " The power of producing -wealth is therefore infinitely more important than wealth itself; it insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost." l Thus good morals, intelligence, monog- amy, and Christianity are creative of productive forces. All those membefs of society who tend to develop in any way true manhood and womanhood are productive, not " sterile " or bar- ren, as they might have been called by the Physiocrats, or " un- productive," as Adam Smith designated some of them. It is false, List claims, to say that labor is the source of value. Whole nations may be in poverty, despite the labor of their citizens. The most depends upon society: whether sciences and arts are developed; whether good institutions, laws, re- ligion, morality, security, and freedom exist ; whether agriculture, manufactures, and commerce are harmoniously extended. These ideas are fundamentally connected with List's theory of protection. List's views led him to optimistic conclusions as to the future. He was opposed to the Malthusian doctrine, though more to the popular and dogmatic representations of it than to Malthus' own teachings. These List does not appear to have carefully studied. 2 As in Miiller's writings, one finds in those of List a protest against the absolutistic tendencies of the School. Neither one, however, is himself free from them. Miiller, as already observed, neglected the various developments of different times. List, on the other hand, does not consider sufficiently the diversity in the growth of countries. He lays down one rule for all to follow. He simply makes a distinction between the countries of the temperate zones and those of the tropics, a difference which, 1 Chap. XII, paragraph 3. * Cf. National System, Bk. II, " The Theory," middle of Chap. XI. THE EARLY NATIONALISTS 325 as Knies has shown, includes a new error. So he is wrong in maintaining that " the production of raw materials and commod- ities among the great nations of temperate climes has no real importance but in regard to internal trade." 1 The production of raw material is at present of the greatest importance for the for- eign commerce of the United States. The division he makes is artificial, and cannot be supported by history. It is unreason- able to suppose that all peoples between the Tropic of Cancer and the Tropic of Capricorn should always be content to devote them- selves exclusively to agriculture. And again, the history and present condition of the Orient show a considerable growth of commerce following immediately upon the agricultural stage without waiting for the development of manufactures. Having once recognized a difference of development in place, he ought to have studied more carefully the historic order of national growth. List is also open to criticism on the score of not doing full justice to Adam Smith. That writer was by no means so ab- solutely blind to national lines, warfare, etc., as List would represent him ; but made room for certain duties and bounties and held that "defence is of much more importance than opu- lence." List has many followers to this day, though they have generally taken agriculture within the protective wall, and his influence is strong among German officials. German railway policy has been colored by his economic principles. In the United States the platform of the Republican party for a long time was based upon his doctrines. 2 Henry C. Carey. 3 Though in many respects a follower of Smith's, Carey was also a critic of the classical political economy. He was a protectionist and a Nationalist. Carey's arguments in favor of protection are somewhat different from those ad- vanced by List. He brings other points into special promi- nence. He lays weight, as does List, upon the civilizing influ- 1 National System, pp. 76-77. 2 A section accordingly split off from that party when it abandoned List's idea of evolutionary protectionism. 3 For Carey's life and writings, see above, pp. 240 ff. 326 ECONOMIC THOUGHT ence of manufactures and commerce. He holds that America would be a stupid, uninteresting, and barbarous country, if all Americans devoted themselves to agriculture. Agricul- ture itself would be in a poor way then, as the products of the land would find no convenient market. The cost of transportation to distant countries would consume the greater share of the farmer's profits. While it might be possible to prove Carey's statement that " the first and heaviest tax to be paid by land and labor is that of transportation," it is surprising to read the sentence following, in which the ratio between the distance goods are transported to the cost of transportation is defined with mathematical accuracy. The cost of transportation, says Carey, " increases in geometrical proportion as the distance from market increases arithmetically." This is far from being true. However, Carey's arguments in favor of protection by no means depend upon the accuracy of this formula. His two chief points are the benefit of association, and the necessity of return- ing to the earth what is taken from it. Association develops in- dividuality, " which has ever been in the ratio of the power of man to combine with his fellow-men." Now if protection favors the growth of association, it ought to be encouraged. This fol- lows from the very definition of social science given by Carey ; for it is defined to be " the science of the laws which govern man in his efforts to secure for himself the highest individuality and the greatest power of association with his fellow-men." 1 Asso- ciation cannot take place to any great extent among those who pursue the same employment. Diversity is needed. Unlikes unite and supplement each other. The farmer combines with the blacksmith, and the miller with the baker. The diversity of pursuit promotes and requires intellectual development. America does not wish to become a great farm for a city called England; but this is what would result from following British policy. " It is selfish and repulsive," says Carey, " its essential object being the separation of the consumers and the producers of the world. In that direction lie poverty and sla- 1 Principles of Social Science, p. 47 (Philadelphia, 1858-1859). THE EARLY NATIONALISTS 327 very." It has impoverished every land which has followed it, as Ireland, India, Portugal, Turkey, and the West Indies. It is even ruining England herself. She is constantly exhausting the countries with which she deals, and is obliged to seek continually new markets. She thus becomes more and more dependent upon the rest of the world. Any change in the policy of other countries or interruption of trade by war or natural calamity must bring misery to the English people. All efforts are put forth for the one end of cheap production. Wages are reduced, and man is regarded as but a machine. A few become wealthy, but the people as a whole remain poor and wretched. Carey's second leading argument is the necessity of returning to the soil what has been taken from it. He lays down this law : " The consumer must take his place beside the producer in order to enable man to comply with the condition on which he obtains loans from the great bank of mother earth the simple con- dition that when he shall have done with the capital furnished to him, he shall return it to the place whence it has been taken." l If this is not done, Carey holds that the soil becomes exhausted and the land less productive. Accordingly, if a land begins by exporting raw material, it will end by exporting men, as in the case of Ireland. If, however, produce is carried only to neighboring cities, they return it to the land in the shape of fertilizers. This argument concerning the exhaustion of the soil is undoubt- edly quite specious. It implies a denial of the fact that by foreign trade the wealth of a nation may be increased ; for if it be admitted that exchange with other countries is profitable, it must follow that by such exchange a nation may gain increased power to refresh its soil. Other and possibly cheaper ways exist by which produce may be returned to the soil than by retaining a portion for direct application, as, for example, by the use of chemical fertilizers or the growth of certain crops; and to re- strict foreign trade may check these means of restoring any lost fertility. 1 Social Science, p. 53. 328 ECONOMIC THOUGHT As a follower of Carey's, E. Diihring, a German economist, is worthy of brief mention. 1 Summary. Of the economists discussed in this chapter, it may be said that they stood for much criticism of the classical political economy, and especially criticism on the score of its individualism and cosmopolitanism. They were Nationalists. They emphasized the nation as an important fact, often regard- ing it as a living organism or as a quasi-organism, and placing it above the individual and between him and the world. Well down to this day, German economists have frequently called their science National Oekonomie. Accordingly they stood for protection, accusing England's thinkers of recommending in free trade what would benefit their own nation al'one, at least in the then-existing stage of relative development. In this connection, the historical idea frequently appears, and Miiller and List are noteworthy as precursors of the Historical School. The former's resort to earlier times and his treatment of the state as an organism suggest this, but List, with his discus- sion of the stages in the evolution of nations, was more truly his- torical. To the extent that these analyses of institutions and stages are ideals spun out of the mind, they are, of course, me- chanical in nature, and not truly historical, and this is largely true of Mliller's thought. Consistently with their leading idea, Miiller, List, and Carey criticized the one-sidedness of the principle of division of labor as developed by Smith. They called attention to the associa- tion or cosmopolitan phase of it. Their attitude toward individualism and materialism was such that they were led to attack the emphasis laid on objective ex- change value in one way or another. This Miiller and List did from a predominantly ethical point of view. Miiller painted the darker tints of the money economy and de- 1 Kapital und Arbeit, 1865. Die Verkleinerer Carey's, 1868. Kritische Geschichte der Nationalokonomie, 1871. Kurstis der National- und Sozialokonomie, 1873. THE EARLY NATIONALISTS 329 sired to retain the remnants of the " natural economy " of the Middle Ages. List accepted the economy of his time, but as- sailed Smithian teaching on the ground that it worked toward an English monopoly of trade; and Carey likewise developed his doctrine of protection in the interest of his young nation. Though, in a sense, absolutists themselves, their criticisms served to offset the absolutism of the Classical School, and paved the way for a broader and truer economics. c. SOCIALISTIC CRITICS CHAPTER XXI EARLY NINETEENTH-CENTURY SOCIALISM THE changes involved in the Industrial Revolution brought many industrial maladjustments and economic ills in their train. Poverty, misery, and crises became frequent. Naturally, then, in seeking reasons and remedies for these things, some were led to criticize the whole movement and the system of economic thought which attended it. The critic Sismondi was so in- clined, but accepted the existing social order and the main out- lines of the classical system of thought. Others sought relief in a romantic reaction to the cast-off institutions of medieval times. In this chapter, however, a group of thinkers will be discussed, who, while accepting the technical industrial progress of the time, with its large-scale production and division of labor, op- posed some of the fundamental ideas and institutions of the exist- ing social order, and censured the economists for postulating cer- tain social institutions as though they were ultimate and merely to be taken for granted. They sought no mere chimera. They proceeded upon no merely moral basis. And in this general way their schemes differed from those of Sir Thomas More, Mably, Morelly, Godwin, and Babeuf. Theirs was an economic point of view ; and their criticism sprang out of the throes of the Indus- trial and French Revolutions. In a word, the men now to be 1 See Ely, French and German Socialism; Kirkup, History of Socialism; Sombart, Socialism and the Social Movement; Rae, Contemporary Socialism; Menger, The Right to the whole Produce of Labor; Gide-Rist, Histoire des Doctrines Economiques; and many others referred to in those works. This and a succeeding chapter on Socialism do not aim to present a full account of the subject in all its social and political aspects, but merely to indicate some aspects of its significance as a criticism of economic theory. 33 EARLY NINETEENTH-CENTURY SOCIALISM 331 treated were anti-capitalistic, and advocated sweeping economic reforms. They criticized the existing idea of private property and competition. They were Socialists. It is characteristic of these early Socialists that their thoughts partook of the transitional condition of the time. As youths the first of them imbibed the optimism of the early French Revo- lution, as illustrated by Godwin, with his ideas of human perfectibility. 1 The idealistic nature philosophy of the eight- eenth century lingered on into the nineteenth, and is seen in their thought. But all the time the rise of a permanent class of wage- earners and a realization of its oppressed condition went on. Modern industrialism was beginning to take shape. The Smith- ian economics was essentially bourgeois or capitalistic and middle- class ; and as the proletariat or wage-earning class became more numerous and distinct, the conflicts between their interests and the doctrines of the classical economics began to appear. On the one hand, the revolutions in philosophical and political thought had hardly been consummated, and their principles had not been thoroughly applied. On the other hand, the evils of the revolution in industry were beginning to show. But for the time men had reacted against the excesses of the French Revolution ; and as the uneducated and riotous proletariat seemed incapable, and its class consciousness was undeveloped, self-help did not seem adequate as a solution. What, then, was to be done ? Under such circumstances there arose the three noted utopists, Saint-Simon, Owen, and Fourier, who almost simultaneously conceived the idea of bringing down aid to the poor from above, of regenerating mankind by educating them to live in an ideal social order guided by the wisest and best among them. In their schemes for social reform these men were speculative, and reasoned from ideal postulates. Moreover, they were broadly humanitarian in their plans, differing from later Socialists in that they did not seek to organize the laborers in class-conflict, but to improve the lot of humanity through educational experi- mentation. They were not revolutionary, but appealed to the dominant classes for aid. They were rather bourgeois in their 1 Above, p. 195. 332 ECONOMIC THOUGHT ideas, the proletarian movement not having become marked until after 1830. I. The Utopian or Bourgeois Socialists. i. Saint-Simon and the Saint-Simonists. Saint-Simon (1760-1825) is notable for his breadth of view and his creative suggestiveness. 1 He himself departs less radically from the existing order than the others, though his followers went further. While suggesting modifications, he was not so clearly opposed to private prop- erty, and seems to allow it in capital when it is in form of what he calls an investment worthy of compensation. Neither does he have in mind the conflict between labor and capital, but a 'more general one between the workers and the idle. Society should be reorganized in such a way that all must work. The heart of Saint-Simon's idea was to direct the labor of the nation so as to ameliorate the physical and moral condition of all its members. To this end he advocated a broad industrialism. To his mind the industrial class including all workers had achieved the Revolution, and upon it depended freedom. The present social classes must go. The nation was to be organized on an industrial basis in which industrial chiefs should control production. Government would thus be reduced to the direc- tion of a national association for industrial purposes. Man- kind would then cease exploiting one another, and mutually turn to exploit the earth. All this, of course, implies his criticism of the existing system of directing industry. His followers, and notably Bazard and Enfantin, went further than Saint-Simon in attacking private property. 2 As the idle 1 Writings of economic significance : Lettres d'un Habitant de Geneve, 1803. L' 'Industrie, 1817. L'Organisateur, 1819. Du Systeme Induslriel, 1821. Catechisme des Industries, 1823. Nouveau Christianisme, 1825. 2 See Doctrine de Saint-Simon, Premiere Annee, Exposition, 1829. (Paris, 1830) EARLY NINETEENTH-CENTURY SOCIALISM 333 class must go, and all are to work, capitalists, as such, cannot exist. In so far as their income arises from the ownership of capital, it is not earned, but is the result of exploiting labor. Under the present system the industrial chiefs dictate terms on pain of starvation, for they own the instruments of production. 1 Moreover, they keep these instruments through the institution of inheritance. Inheritance must be abolished, then, and the instruments of labor be socialized. In a word, a system of collec- tivism is advocated. From the point of view of production, too, it was maintained that the system of inheritance does not insure that property will fall in the most capable hands. The Saint-Simonists, like Sismondi, point out that in the or- ganization of labor the problem is to harmonize production and consumption. Here the economists turn to laisser-faire com- petition. But this leads to struggle and loss, and crises result from recurring disturbances of the balance of production and con- sumption. They complain of isolated efforts and egoism. 2. The Associationists : Owen, Fourier, and Thompson. Saint-Simon differed from the other Utopian Socialists who are to be discussed, in that his idea was based upon a broader social- ization of industry than theirs. He differed in his idea of cen- tralization. For the latter sought reform in voluntary local com- munities ; whereas Saint-Simon would have reformed society in a lump, a method which could easily suggest State Socialism, though he himself did not advocate such a radical and positive step. Owen and Fourier are both characterized by their ad- vocacy of associations with a limited membership, and may be distinguished by the term " associationists." These associa- tions were to be voluntary, springing from mutual consent of the members. Robert Owen (1771-1858) z was less of an idealist than Saint- Simon and Fourier. He was somewhat more practical in his methods, but altogether unhistorical in spirit. His philosophy, 1 Ibid., 6 S6ance. 2 For his earlier views see A New View of Society, 1812. His maturer doctrine is found in The Book of the New Moral World, 1820. 334 ECONOMIC THOUGHT however, had much in common with theirs. He believed that men are naturally good : evils are not inherent in the nature of things, but lie in the capitalistic system, which perverts the natural order. Concretely there are three barriers: private property, religion, the institution of marriage. In his ideal com- munal order these would be removed, and man's natural goodness could find free expression. At an early age, Owen in 1800 became manager of extensive cotton mills at New Lanark. Here he was a witness of current labor abuses. He estimated that his employees were produc- ing a vast amount of real wealth in which they had no share, and lacked a chance to develop their faculties adequately. He ac- cordingly came to advocate education and a better environment for working people. Then his ideas grew more Socialistic, and he demanded the abolition of profits, speculation, money, and well- nigh the whole machinery of exchange then current. Owen be- lieved that the just price of a good is its cost. To charge more was unjust. But profits seemed to him to arise from selling above cost. Also they stimulate overproduction and lead to crises. Money based upon the value of precious metals helps confuse the relation between the true values of goods in an ex- change, and labor notes based upon the labor time involved in producing the goods should be used as a medium in its place. 1 Owen severely arraigned the idea that competition is in the best interests of society. Charles Fourier (1772-1837) was almost exactly contemporary with Owen, and had very similar ideas. 2 Although his thought is marred by loose and inexact statement, he was a keen critic of the existing industrial system. Association is the leading idea of his thought. It is made a principle of attraction among men, like the law of gravitation in 1 This, it will be observed, would be a narrow application of Ricardo's earlier idea of a measure of value. * La Theorie des Quatre Mouvements et des Destinies Generates, 1808. Traiti de V Association Domestique Agricole ou Attraction Industriette, 1832. Nouveau Monde Industrial et Societaire, 1829. EARLY NINETEENTH-CENTURY SOCIALISM 335 the physical world ; its operation being impeded in the existing order. Harmony could be obtained only in his communities, called phalanxes, which were to contain some 1800 members and carry on production in the interest of the group. These groups would be large enough to afford all useful combinations, but not so large as to necessitate useless classes (soldiers and policemen) or to prevent general cooperation. To the economist, Fourier's ideas concerning labor and its reward are the most interesting. He taught that all labor may be pleasant ; it is only overwork that makes it painful, and over- work would be unnecessary in his association. Moreover, a desire for change is recognized, and each member could take up some dif- ferent task at the end of two hours. Between the ages of eight- een and twenty-eight a man could produce enough to warrant his passing the remainder of his life in leisure. Labor is divided by Fourier into three grades : necessary, useful, and agreeable. The first of these was to receive the highest reward; while pleasant labor of all kinds would be the lowest paid. All mem- bers were to receive a minimum. Thus his scheme makes exer- tion the chief basis for reward. Perhaps Fourier is to be regarded as inconsistent on one im- portant point, either that, or he was not a thorough-going Socialist, for he provided for a return to capital, as such. The surplus remaining after the minimum had been given to each member was to be distributed in such a way that five twelfths would go to labor, four twelfths to capital, and three twelfths to talent. Fourier's merits have been summed up as follows : " There is a good deal of truth in some of his critical remarks. The ii - portance of cooperative production has been recognized chiefly in consequence of his first pointing out the economical benefits of association. The narrow-minded fear of wholesale trade, and machinery, too, was in a measure dispelled by Fourier's unquali- fied recognition of their value. His remarks on the unnecessary hardships of labor and the evil consequences of excessive toil have had their influence on modern factory laws. . . . Sanitary reforms, and improvements of the laborer's homestead . . . 336 ECONOMIC THOUGHT owe not a little of their origin to the spread of Fourier's ideas." l William Thompson was an Irish Socialist whose fame has been less than his deserts. His chief work, 2 entitled An Inquiry into the Principles of the Distribution of Wealth most Conducive to Human Happiness, was published in 1824, and contains a clear statement of ideas that form the basis of the later Marxian Socialism. In his own proposals for reform, however, Thompson was a follower of Owen. He argues that labor produces all value in exchange, and that all the product of labor should belong to it. But with our pres- ent social institutions labor gets a bare subsistence remuneration, the balance of its product going to land and capital. Under the existing social order the dominant capitalist class regards the difference between subsistence wages and the increasing value of the social product as being a surplus value due to its su- perior intelligence and skill. By reason of their political power this class is enabled to make an unjust deduction from labor's product. Accordingly Thompson thinks that there must be a reconstruc- tion of social institutions. But he does not carry his ideas to their logical conclusion, for he would not abolish property rights nor take the whole produce of labor from capitalists and landowners. " Thompson's object, like that of so many other socialists, was to prove the injustice of unearned income and private property . . . : but the communistic tendencies which he borrowed from Owen prevented him from drawing its positive consequences." 3 Thompson's great significance lies in the fact that the basal ideas of such later Socialists as Rodbertus and Marx concerning surplus value may be traced to him. 1 Kaufmann, Sck&ffle's Socialism, cited by Ely, French and German Social- ism, p. 100. 2 Thompson also wrote : An Appeal of one Half the Human Race, Women, against the Pretensions of the other Half, Men, 1825; Labour Rewarded, the Claims of Labour and Capital conciliated, 1827; Practical Directions for the speedy and economical establishment of Communities, 1830. * Menger, A., The Right to the whole Produce of Labour, p. 59. EARLY NINETEENTH-CENTURY SOCIALISM 337 II. The Transition to More Realistic l and Proletarian Socialism in France (1840-1848). In so far as class conflict was involved, all the insurrections and revolutions down through 1830 were essentially bourgeois, that is, capitalist and middle- class. They were not of and for wage-earners or laborers. But early in the thirties there came a change in this regard. Although the French revolution of July, 1830, was a bourgeois affair, it served to bring the proletariat into greater prominence. Then in 1831 the Lyons silk- weavers rose in insurrection. By 1837 the Chartist movement was on foot in England. Finally, in 1848, the great proletarian revolution occurred in France, and from that time modern realistic Socialism may be dated. At about the same time German Socialism took the lead. There is, perhaps, some degree of realism manifest in the work of the following Socialists. Yet they are by no means freed from the Utopian notion that all that is needed to reform society is to invent some scheme through which their ideals might speed- ily be realized. Their thought was transitional. Louis Blanc. Louis Blanc (1813-1882) was not the most original of the early Socialists, but he is notable for being the first to make the connection between politics and social reform. The preceding Socialistic thinkers had depended upon education, upon a recognition of the truth of their doctrines, for the spread of the system advocated. Association was to be voluntary and unaided by the state. With Blanc the state was depended upon to aid in carrying out the system proposed. But in a sense Louis Blanc is only transitionary in this regard. Indeed, he is sometimes classed as an associationist, 2 and he ad- vocated social workshops (ateliers sociaux) where men in similar industries should cooperate. Socialism proper would thus exist only within various separate branches of industry, presumably leaving the relations between these branches to the regime of contract and competition. Blanc's associations were to be ini- 1 The words " realism " and " realistic " are not here used in their philo- sophical sense, but as used in art and literature, meaning lifelike and based on facts, rather than imaginary or Utopian. 1 E.g. Gide-Rist, Histoire des Doctrines Economiques. 338 ECONOMIC THOUGHT tiated and subsidized by the state, however, and were not the self-sufficient units of Owen and Fourier. Louis Blanc's celebrated work, Organization du Travail (Organization of Labor), was published in I84I. 1 The central point in his thought is a desire for the broad and perfect develop- ment of each man's personality. Proceeding from the idea of the brotherhood of man, he advocated payment not according to service or productivity, but according to wants. Only by giving to each according to his needs could his goal be attained. His system, therefore, is not like that of the later Socialists, based upon a demand for " the whole produce of labor," but upon the more philanthropic idea of a right to subsistence (droit a la vie). Certainly such a distribution of property and income does not now exist; and competition, to which distribution in the existing order is submitted, he fairly anathematized. It is mur- derous warfare. It places a man outside of society, emphasizing his rights without indicating his duties. We must seek a new organization which will abolish individualism, competition, and private property, and in their stead place fraternity and har- mony. His ateliers, as established in the different industries, were to bring production to this level and to afford to all a " natural " right, that is, the right to work (droit au travail). But the poor laborers were in no position to set up these shops; therefore the state was appealed to, and was to organize them and furnish the funds. After the first year, however, the heads would be elected. Inasmuch as Louis Blanc advocated needs as a basis for re- wards, he was no egalataire. He wrote : " Equality, then, is only proportionality, and it exists in a true manner only when each one in accordance with the law written in some shape in his organiza- tion by God himself, produces according to his Faculties and consumes according to his Wants." 2 Proudhon. With Pierre- Joseph Proudhon (1809-1865) one 1 There were considerable additions in a fifth edition that appeared in 1850. 1 Organization du Travail, 9th ed., p. 72. EARLY NINETEENTH-CENTURY SOCIALISM 339 comes to a thoroughly proletarian Socialism, and the beginning of one line of Anarchism. Indeed, one finds in his thought much that foreshadows the doctrines of the more " scientific " Socialism taught by Marx and Engels. More sharply and directly than any of the others Proudhon centered his attack upon property rights. Property as distinguished from posses- sion, he said, is robbery ; property-owners are thieves. 1 Even to common property in a communistic state he objects, and "n this foreshadows the split between Socialism and Anarchism. He makes short work of the idea that occupation justifies pri- vate property, turning his attention chiefly to land. J. B. Say is quoted as justifying property in land on the ground that land is fixed and limited in extent; but that merely explains the existence of property, it does not justify ownership. And Comte's argument from limited supply seems to Proudhon to go against him, for that is the reason why it should be free to all. If it were unlimited, all might have property in it and no one would be hurt. But what of the labor theory of property? If labor is to jus- tify property, Proudhon thinks that whenever any one labors on a farm he must acquire property rights in it. " The laborer retains, even after he has received his wages, a natural right of property in the thing which he produced." What labor does is to create increased capacity, and its proper reward is the addi- tional income that results. This does not convey ownership in the soil itself. That no man has made. In short, land is the gift of nature, bestowed upon all equally, and no man has a right to appropriate it and its rent for his own use. Property-owners are robbers because they have made others labor for them, who have lost in laboring what the owners gained. All who labor should become proprietors : " this is an inevitable deduction from the acknowledged principles of political economy and jurisprudence, and when I say proprietor, I do not mean simply (as do our hypocritical economists) proprietor of his allow- ance, his salary, his wages, I mean proprietor of the value 1 Qu'est-ce qui la propriety? (What is Property), 1840. Works, Vol. I, translated by Benjamin R. Tucker, Boston, 1876. 340 ECONOMIC THOUGHT which he creates, and by which the master alone profits." Here, then, is the idea of a surplus value, as to which labor is exploited. At one point Proudhon undertakes to explain how it is that capitalists take a profit from the laborer's product. The capital- ist pays each laborer of a group a mere day's wage. But in the combined labor of the group there is an advantage for which he does not pay. There is a union or harmony through which the product exceeds the sum of the individual products of the sepa- rate laborers. As a remedy he concludes that labor should receive an addi- tional proportion of the product. In accordance with these ideas Proudhon propounds a labor theory of value. He begins by mocking the economists for at- tempting a science while professing that there is no absolute meas- ure of value. To him the matter is simple. " The absolute value of a thing, then, is its cost in time and expense." A dia- mond in the rough is worth nothing; cut and mounted it is worth the time and expense involved. But it sells for more than this ; that is because men are not free. Therefore " society must regulate the exchange and distribution of the rarest things, as it does that of the most common ones, in such a way that each may share in the enjoyment of them." Value based upon opinion (or utility) is delusion and robbery. Somewhat paradoxically Proudhon attacks the thought of his Socialistic predecessors. 1 He rejects association of labor as en- croaching upon the liberty of the laborers. Likewise commun- ism, he thought, would lead to inequality, being an exploitation of the strong by the weak. His position can be interpreted only by grasping his desire to harmonize property and community through liberty after the manner of Hegel's dialectic. Thus he would not have abolished property, but rather have limited it. He would have confined property rights to those things that are clearly produced by labor, and have based them upon labor. Interest, rent, and profits he would have abolished. In this course a distinction is drawn between ownership and possession 1 See Systems des contradictions iconomiques , ou philosophic de la miser e, 1846; and also the earlier work, What is Property? EARLY NINETEENTH-CENTURY SOCIALISM 341 which came more easily to one who lived under the civil law than to an Englishman. Possession he would have allowed to individuals. Thus liberty and property could be made to exist side by side. On the other hand community must modify prop- erty, but must not restrict freedom. Therefore he taught an anarchistic sort of communism ! This latter paradox he solved through a belief that liberty and equality were one, that is, the social cooperation, easy tasks, and equal means of performing them, which he would have instituted, would make equal re- wards natural. Liberty exists only in the social state ; in such a state all have equal capacities for performing tasks ; social tasks are equal. To this whole group of ideas Proudhon applied the term " mu- tualism." By this he meant that reciprocity of services was to govern economic relations : rights and duties were to be mutual. The idea is illustrated by the chief positive reform that he advo- cated, namely, his celebrated exchange bank. Here products would be exchanged without the intervention of money. Paper money would be issued for goods according to the labor-time required for their production, and this medium would exchange for any goods which cost the same labor. Credit, too, would be granted to every one, helping reduce interest to its normal rate, which according to Proudhon is nil. Consequently the instru- ments of production could be freely obtained by all, and land- lords and capitalists would cease to exist. Thus would mutuality reign. A notable feature of Proudhon 's ^thought is its emphasis of the collective or social character of modern production. Neither labor, nor land, nor capital is productive alone ; production results from their cooperation. And he quotes the economist Droz l with approval as saying : " Say credits capital with an active part unwarranted by its nature ; left to itself, it is an idle tool." All production being necessarily collective, the laborer is entitled to a share in the product. All accumulated capital being social property, no one can be its exclusive proprietor. 1 See above, p. 312. 342 ECONOMIC THOUGHT III. Summary. It is scarcely necessary to criticize the thought of the early Socialists. Their utopianism vitiates a great deal of it. It is too one-sidedly idealistic. And its bour- geois origin rendered it inadequate to meet the demands of a suffering and increasingly class-conscious proletariat. On the constructive side a characteristic weakness is shown in the absence of any practicable plan for distribution according to wants or the other bases proposed. In some cases the whole scheme is invalidated by containing discordant elements which would probably intensify competition, etc. Proudhon's theory of value is subject to the same criticism as that of Marx, who was influenced by him, and the criticism of Marx's theory will be found in a later chapter. Considered from the standpoint of their effect upon the stream of economic thought, these Socialists of the first half of the nine- teenth century, though their influence was largely indirect and rather gradual, are of considerable importance. In the first place, they raised the question of distributive justice in such away as to make it more urgent, and placed it in a new light. Put in another way, they criticized economists for being content with what is rather than what ought to be, and in so doing they especially criticized them for taking for granted various social institutions. In the second place, then, these early Socialists brought out the significance of property and inheritance, both for distribution and production. On the one hand, they all emphasized the im- portance of property rights as affecting distribution, tending to place the question of property distribution before that of income distribution ; whereas the economists generally took the former for granted. On the other hand, some of them made the point that the socialization of property would do away with wasteful or less useful production. They did not accept private property as a fixed fact. They taught that it is a relative institution with an historical development. So far they were correct. But they were in error when they reasoned for the abolition of private property instead of qualifications or limitations upon it. Again they all taught some basis for distribution other than EARLY NINETEENTH-CENTURY SOCIALISM 343 costs as determined by competition. With Saint-Simon it was " To each according to his capacity, to each capacity according to results." Fourier would have rewarded " each according to his capital, his labor, and his skill." Louis Blanc made wants the basis. Proudhon said : " The capacity, given to all, of accomplishing a social task, and the impossibility of paying one laborer save in the products of another, justify the equal- ity of wages." These ideas, of course, would chiefly affect wage theories and policies in so far as they exerted any influence. Their general emphasis of the social viewpoint and of the social nature of the productive process no doubt served as a valu- able corrective to the overindividualistic tendencies of the classi- cal school. And closely related to this point is the influence that they have exerted in the direction of practical cooperation. Owen and Fourier are to be remembered in this connection. Not only did they stimulate many practical experiments, but the discussion of their ideas, or those similar to them, has figured prominently in theories of labor and wages. Finally, these men had ideas of social evolution. They are to be remembered in connection with the idea of stages in the evolution of society, the thought of Saint-Simon and Fourier being most elaborated on this point. The Saint-Simonians be- lieved that " Humanity is a collective being which develops ; that being has grown from generation to generation, as an in- dividual man grows, in the succession of life periods [dges]." 1 And Fourier thought of humanity as pursuing a career in which there were three great stages with eight periods. 1 Doctrine de Saint-Simon, i An., p. 45. August Comte's ideas along this line were in part drawn from Saint-Simon, who was his teacher for a time. But all these utopists lacked a true historical sense of institutional develop- ment, a fact which is evidenced by their failure to appreciate the social value of private property, religion, and marriage, and their advocacy of abolition or destruction rather than modification of such institutions. IV. THE RESTATEMENT RICARDO had developed a certain side of Adam Smith's politi- cal economy, carrying it to its logical conclusion. Malthus added his theory of population ; Senior his abstinence theory ; and several writers contributed refinements at this or that point. There was still room, however, for one who should be broad enough to survey the whole field and fuse these various elements into a systematic body of doctrine. In fact, there was need for a restatement of the classical economics : a restatement which would take into consideration the criticisms of the old system, and current conditions ; one that would at least begin to realize the insufficiency of the existing political economy in relation to the problems of modern society, and so prepare the way for a new economics. This was the work of John Stuart Mill. 344 CHAPTER XXn JOHN STUART MILL IF Adam Smith maybe called the Father of Political Economy, John Stuart Mill was his chief heir in the direct line. He it was who, about the middle of the last century, combined, restated, and modified the teaching of Smith, Malthus, and Ricardo, and so successfully that his work has had an effect upon English thought second to none. Writing at a considerably later date than his great predeces- sors, Mill fell within the play of new forces. As will be seen, the common characterization of his thought as transitionary is strik- ingly just. It is essential, then, to study carefully his biography, to the end that these forces may be appreciated. Life and Works. John Stuart Mill was born in London, May 20, 1806. His father, James Mill, was a man of con- siderable eminence as an historian, a philosopher, and a politi- cal economist. The most celebrated work written by James Mill was a History of British India. He wrote also a politi- cal economy, which, though little more than a resume of the work of others, was of considerable influence with followers of Ricardo. The education of John Stuart Mill was a remarkable and most successful experiment. It was partly to describe this experi- ment that Mill wrote his Autobiography. From the earliest years of his life, his father trained him with the intention of making him precisely what he became. Mill undoubtedly exaggerated the effects of the education he received, and under- rated his own natural powers; but its influence was deep and lasting. He could not remember the time when he began the 345 346 ECONOMIC THOUGHT study of Greek, but was told that it was when he was three years of age. In his eighth year he began the study of Latin, and when twelve, had read some of the chief classics in that tongue. Between his seventh and tenth years, while living in Newington Green, he was accustomed to take daily walks with his father, during which he would give him an account of what he had read the preceding day. While reading he made notes on slips of paper and from these prepared a narrative. In this manner he read and discussed Robertson's histories, Hume, Gibbon, Wat- son's Philip II and Philip III, Hooke's History of Rome, the last two or three volumes of Rollin's Ancient History, the Lang- homes' translation of Plutarch, Burnet's History of his own Time, and the historical part of the Annual Register from the beginning to about 1788. He appears to have read these works voluntarily, but his father assigned him other books to read, which would not have interested him sufficiently to have led him to read them of his own accord. 1 It was after he had accomplished this work in Latin, Greek, and history, together with some training in logic, and when he had already arrived at the advanced age of thirteen, that he took a complete course in Political Economy. This was in 1819 ! Two years before this time Ricardo had published his treatise on Political Economy and Taxation. Mill says of this work: " My father's loved and intimate friend, Ricardo, had shortly before published the book which formed so great an epoch in political economy ; a book which never w r ould have been pub- lished or written but for the entreaty and strong encourage- ment of my father; for Ricardo, the most modest of men, though firmly convinced of the truth of his doctrines, deemed himself so little capable of doing them justice in exposition and expression, that he shrank from the idea of publicity." 2 Ri- cardo's work was not suited for use as a textbook, and the elder 1 Among such he mentions Millar's Historical View of the English Govern- ment, Mosheim's Ecclesiastical History, M'Crie's Life of John Knox, Sewel's and Rutty's Histories of the Quakers ; Beaver's African Memoranda, Collins' Account of the First Settlement of New South Wales. 8 Autobiography, p. 27. JOHN STUART MILL 347 Mill accordingly conceived the idea of writing one which should contain Ricardo's doctrines. In his walks he lectured to his son and made him write out and read the next day an account of what had been said. The notes thus prepared were used by the father in writing his Elements of Political Economy. After this work was completed, young Mill went through Ricardo with his father, who questioned him and explained difficulties only after the boy had given the best explanation he could. The study of Adam Smith in the same manner followed that of Ricardo. When Mill was fourteen years of age, that is, in 1820, he went to France and spent a year there. While in Paris he passed a considerable time in the house of Jean Baptiste Say. It will be thus seen that Mill was brought up under such economic influ- ences as would naturally lead him to a firm belief in the doctrines of Adam Smith, Mai thus, and Ricardo. 1 Upon his return to England in 1821, when fifteen years old, he began the study of Roman and English Law. His father put into his hands at the commencement of his legal studies Du- mont's Traite de Legislation, which contained an exposition of the principal speculations of Jeremy Bentham, the distinguished English jurist and founder of the utilitarian system of morals. Bentham was a friend of his father's, and young Mill had en- joyed the advantage of living with him a part of each of the years from 1814 to 1817. What Mill says of his perusal of Dumont's Traite de Legis- lation is very significant, and quite remarkable when one remem- bers that it is the description of the thoughts and feelings of a boy of fifteen : 1 Mill had undoubtedly remarkable advantages. He was surrounded by great men, as, e.g., his father, his father's friends, Ricardo, Bentham, Grote, and John Austin. His own friends and companions were Charles Austin, Macaulay, Hyde, Charles Villiers, Strutt, afterwards Lord Belper, Romilly, afterwards Lord Romilly and Master of the Rolls, William Eyton Tooke, son of the political economist who wrote the History of Prices, William Ellis, an original investigator in political economy, George Graham, Frederic Maurice,, and John Arthur Roebuck. 348 ECONOMIC THOUGHT, " The reading of this book was an epoch in my life; one of the turn- ing points in my mental history. " My previous education had been, in a certain sense, already a course of Benthamism. The Benthamic standard of ' the greatest happiness ' was that which I had always been taught to apply ; . . . Yet in the first pages of Bentham it burst upon me with all the force of novelty. What thus impressed me was the chapter in which Bentham passed judgment on the common modes of reasoning in morals and legisla- tion, deduced from phrases like 'law of nature,' 'right reason,' 'the moral sense,' 'natural rectitude,' and the like, and characterized them as dogmatism in disguise, imposing its sentiments upon others under cover of sounding expressions which convey no reason for the senti- ment, but set up the sentiment as its own reason. It had not struck me before that Bentham's principle put an end to all this. The feel- ing rushed upon me that all previous moralists were superseded, and that here, indeed, was the commencement of a new era in thought. . . . When I laid down the last volume of the TraiU, I had become a differ- ent being. The 'principle of utility/ understood as Bentham under- stood it, and applied in the manner in which he applied it through these three volumes, fell exactly into its place as the keystone which held together the detached and fragmentary component parts of my knowledge and beliefs. It gave unity to my conceptions of things. I now had opinions ; a creed, a doctrine, a philosophy ; in one among the best senses of the word, a religion ; the inculcation and diffusion of which could be made the principal outward purpose of a life. And I had a grand conception laid before me of changes to be effected in the condition of mankind through that doctrine." During this " crisis " in his mental history, also, Mill became acquainted with and was admittedly influenced by the Social- istic doctrines of the Saint-Simonian school. 1 In later years, and 1 See above, p. 332. Since Mill's death in 1873, Miss Taylor, his step- daughter, has given to the world the contents of a manuscript he left, which was the beginning of a work on Socialism. It was published first in the Fortnightly Review and has since appeared in book form. In a "Prelim- inary Notice" Miss Taylor says: "It was in the year 1869 that, impressed with the degree in which even during the last twenty years, when the world seemed so wholly occupied with other matters, the socialist ideas of specula- tive thinkers had spread among the workers in every civilized country, Mr. Mill formed the design of writing a book on Socialism. Convinced that JOHN STUART MILL 349 before writing his Political Economy, he reacted from the some- what extravagant notions concerning the merits of Benthamism. His undoubtedly deep emotional nature, under the influence of his wife, led him more and more toward idealistic Socialistic beliefs. Mill professed to have obtained great assistance in his work from his wife, a Mrs. Taylor before she married him. He calls his acquaintance with her " the most valuable friendship of my life.'' He probably goes too far in ascribing to her all that is best in his writings, as he does frequently. He thought his work on Liberty destined to live longer than any other of his works because she had gone through every sentence of it with him. It is doubtful if the majority of his readers agree with him in the comparative estimate he placed on that work. In 1823 Mill obtained an appointment from the East India Com- pany, in the office of Examiner of India Correspondence, finally rising to the post of Examiner, in which position he remained as long as the East India Company existed as a political body. This was until 1858. He considered his office work as on the whole an advantage to him, inasmuch as it brought him in con- tact with the business world and saved him from speculative errors into which he might have fallen, had he been less ac- quainted with real life and the motives by which men are influ- enced. Mill began to publish his writings in 1822, when sixteen years of age. At first he wrote articles for the newspapers on economic subjects, liberty of thought and speech, etc. The Westminster Review was founded in 1824 by Bentham as an organ of Radi- calism, and to this Mill was a frequent contributor. In the fol- lowing year he was employed by Bentham to revise and edit the manuscript for his five- volume work on Evidence. But he continued to write numerous newspaper articles and essays for the inevitable tendencies of modern society must be to bring the questions involved in it always more and more to the front, he thought it of great practical consequence that they should be thoroughly and impartially considered, and the lines pointed out by which the best speculatively-tested theories might, without prolongation of suffering on the one hand, or unneces- sary disturbance on the other, be applied to the existing order of things." 350 ECONOMIC THOUGHT magazines, particularly for the London and Westminster Review, of which he was editor for a time, and later for the Fortnightly Review. Five volumes of his essays have appeared in book form, with the title Dissertations and Discussions. The first important book Mill published was his System of Logic, the first edition of which appeared in 1843, the ninth in 1875. It is regarded generally on the Continent, as also in Eng- land, as one of the most important works on the subject ever written. A collection of Essays on Some Unsettled Questions of Political Economy appeared in 1844, although they had been written in 1830 and 1831, and at the time had been declined by a publisher. The Principles of Political Economy appeared early in 1848. A seventh edition was published in 1871. The following works appeared successively: On Liberty, Consid- erations on Representative Government, Utilitarianism, Exami- nation of Sir Wm. Hamilton's Philosophy, and Subjection of Women. Mill was an independent member of Parliament from 1858 to 1868. He used his position to advocate advanced liberal ideas, in particular the suffrage for women and the laboring classes. He also took up the cause of Ireland, favoring a permanent ten- ure at a fixed rent for Irish tenants, and brought out his ideas on this subject in a pamphlet, entitled England and Ireland, pub- lished in 1868. When one turns from Quesnay, Turgot, and Smith directly to Mill, one at once feels that a new era has been entered. The science of economics has lost its youthful simplicity and naivete. It is more elaborated; many parts have acquired an entirely different significance in a new time and under changed circum- stances. This corresponds to a changed environment. Manu- facturing industry has made gigantic progress by the aid of numerous inventions, as steam power, railways, and a minute division of labor. The laborers are no longer employed chiefly in the country and scattered here and there, as in Turgot's time and particularly in France, but are crowded together in great cities. Manufactures are no longer conducted in small work- shops, in which a few journeymen and apprentices labor side by JOHN STUART MILL 351 side with the master, but in immense factories, where the capi- talist stands at the head of hundreds of human beings. Large establishments begin to crowd out the little man. Population has grown rapidly, and the want of land makes itself felt. Real estate owners take advantage of the situation regardless of the welfare of other classes. While Smith, less than a century before, was able to praise the self-sacrificing generosity of the landlords and farmers or country gentlemen, the power of gov- ernment is now appealed to for protection against their self- ishness. Nature, too, is viewed in an entirely different manner by Mill. In the time of Turgot and Adam Smith, she was looked upon optimistically enough as a kind, benevolent power. Jean- Jacques Rousseau had found eager listeners and believers when he preached the doctrine that nature would make all men happy if free course were only allowed her. Let nature alone, was the cry, and all will be well. In the time of Mill she is viewed as a hard and heartless power. Civilization is regarded as a struggle against her sway. The state ought to assist in bringing about a more equitable distribution of her " injustices and inequalities." There has come the beginning of a reaction against the idea that man is ruled by the environmental forces of nature. A new organization of economic relations occupies the scene, and this must be kept in mind if one would compare the former with the present condition of things. The Principles of Political Economy. John Stuart Mill's chief writing on Economics, as already stated, appeared in 1848 under the full title of Principles of Political Economy with some of their Applications to Social Philosophy. 1 Po- litical Economy he defines as a science dealing with " the nature of Wealth, and the laws of its production and dis- tribution: including, directly or remotely, the operation of all the causes by which the condition of mankind, or of any society 1 The book was written during the course of two years. Though it went through seven editions in Mill's lifetime, it was not thoroughly revised and freed from inconsistency. For variation in editions see article by M. A. Ellis in Economic Review, 1906, pp. 291-302 ; and Ashley's recent edition. 352 ECONOMIC THOUGHT of human beings, in respect of this universal object of human desire, is made prosperous or the reverse." l Mill was the first among the leaders of English economic thought to adopt an arrangement similar to that now common in our textbooks : his five books being on Production, Distri- bution, Exchange, Influence of the Progress of Society on Pro- duction and Distribution, and The Influence of Government. In this he follows in part his father and the French expositor of Adam Smith, J. B. Say. 2 He differs from both, however, in abandoning their plan of devoting a distinct book to Consump- tion, and from Say in adding one on Exchange. Though Mill added little to economic theory, his formulation of the doctrines of his predecessors, together with certain illus- trations and applications, was such that his book has been a leading authority till very recent times. It is, therefore, fitting to discuss the essentials of his teaching. In his introduction he distinguishes national or social wealth from individual wealth ; attacks Mercantilistic ideas ; passes in rapid review the various economic stages of society as he sees them ; refers to the great inequalities in wealth among different countries, which are partly due to the non-arbitrary laws of pro- duction, and partly to laws of distribution, which are of human institution and arbitrary. " The laws of Production and Dis- tribution, and some of the practical consequences deducible from them, are the subject of the following treatise." Value. Without any attempt to develop his ideas in the order he adopted, what Mill himself called a fundamental ques- tion, namely value, may at once be taken up. In answering this question he immediately introduces the reader to a threefold classification of commodities. In the first class fall those which are absolutely limited, whose supply is not increasable at pleasure, as, for instance, rare pictures. Here, too, Mill includes labor, for short periods of time, and articles of international trade, and all cases of monopoly. In this first 1 Preliminary Remarks, paragraph 2. 2 For discussion of this subject see Cannan, Production and Distribution, pp. 32 ff- JOHN STUART MILL 353 class value depends upon demand and supply : " 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." : Mill states that by de- mand we must mean " effective " demand, and to make demand and supply comparable, he takes them to mean the quantity demanded and the quantity supplied. As his " law of demand and supply " applies without modification to this class alone, it is important to ascertain what this law is. " The law is, that the demand for a commodity varies with its value, and that the value adjusts itself so that the demand shall be equal to the supply." 2 And it was Mill's idea that where cost of production enters as, he argues, it does not in this first class another law controls. Assuming, as Mill does, a certain value to begin with, his statement of the law does not satisfy one who desires to know the cause of value. It lacks an analysis of the sources of de- mand. 3 The recognition of the interrelation of demand and supply suggested, however, seems worthy of note. But this first class of commodities Mill held to be of relatively little importance in the theory of value. The great bulk comes under his second class : commodities which, being the result of " labor and expenditure," can be increased in indefinite quan- tity. Here Mill distinguishes normal and market values, and desires to find a law other than that of demand and supply for the regulation of the former, of " permanent or average values." At any given time demand and supply determine market value, and they always rule its oscillations. But, where goods are producible, there is a minimum point set by cost of production; and, if they can be indefinitely multiplied, the 1 Bk. m, Chap. II, 4. 2 Ibid., Chap. DC, 3. 1 Jevons criticized Mill's theory as follows: "It [Mr. Mill's equation] consists in stating that the quantity x given by A is equal to the quantity x received by B. But this must necessarily be the case if any exchange takes place at all. The theory of value, as expounded by Mr. Mill, fails to reach the root of the matter, and show how the amount of demand or supply is caused to vary." (Theory of Political Science, 1871, p. 102.) 2A 354 ECONOMIC THOUGHT minimum is also a maximum. 1 This is the normal value point. Goods whose costs or production are the same must have the same exchange value. In class two, then, there is " a superior force which makes value gravitate towards cost of Production," 2 the tendency of supply to increase to the point of lowest profitable production. To put it in another way, there is a " latent influence " which makes values conform in the long run to the cost of production. This is the variation which would otherwise take place in supply : if a good sells above the " ratio of its cost of production," its supply would increase, and vice versa. Thus the value of reproducible commodities does not depend on mere demand and supply, except when there is disturbance, and pending the adjustment of supply to demand. This is clearly an undue emphasis of supply. Supply is spoken of almost as a metaphysical entity. The influence of variation in demand is slighted. In case of a fluctuation, for example, the modus operandi runs thus : (i) " Natural " (nor- mal) value equals cost of production plus profits ; (2) there is a certain demand for a certain quantity at this value; (3) to this demand the supply endeavors to conform, " the perma- nent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its normal value." But what are costs of production? Mill inclines, though not consistently, to take the entrepreneur's point of view, and in- cludes wages and usual profits. In this he accepts Senior's analysis. He agrees with Ricardo so far as to say that the rel- ative value of commodities depends principally on the quantity of labor, 3 and that in variations of value the quantity of labor is most important ; 4 but insists that quantity and remuneration must both be considered. As to rent, with certain minor ex- ceptions, it is not a part of costs. Concerning the third class of commodities, those which, like 1 Bk. Ill, Chap. Ill, 2. Free competition assumed. 1 Ibid., last paragraph. 3 Ibid.* Chap. IV, i. , 4 Ibid., 3. JOHN STUART MILL 355 agricultural produce, may be increased in supply indefinitely, but only by a more than proportionate increase in cost, Mill says little. And a discussion of the significance of increasing returns to value will be sought for in vain. This class stands midway between the others, value being determined at the point where costs of producing the needed supply are greatest. I Mill's was an objective exchange theory. Cost of production working through supply was the basis of it. But it was not a labor-cost theory ; and he made several exceptions to cost deter- mination, so as to cover cases in which custom restricts or costs are joint. Its great weakness lies in the absence of analysis of the forces lying back of demand and supply, a difficulty which a follower meets by introducing demand price schedules and supply price schedules. 1 The Shares in Distribution in a Static Society. As to the de- termination of rent, Mill was substantially in accord with Ricardo. The rent which any land will yield with a given em- ployment of capital is the excess of its produce, beyond what would be returned to the same capital if employed on the worst land in cultivation, situation being considered. Even if all land yielded rent, there would always be an intensive margin, and some agricultural capital which paid no rent. Mill suggests that in cases where there is an alternative use, or " scarcity values " exist, rent may enter price. 2 He often regards the landowner somewhat as did Adam Smith : his " exclusive power " over natural agencies is emphasized ; " rent is the effect of a monopoly " and " the reason why land- owners are able to require rent for their land, is that it is a com- modity which many want, and which no one can obtain but from them." But, again, perhaps following Senior, he states that the landowner has no true monopoly, inasmuch as any one may buy land. Mill does not so strongly assert that the interests of the landowner are opposed to those of society as did Ricardo, 1 Marshall, Principles of Economics. 2 For a discussion and criticism see Haney, " Rent and Price : ' Alterna- tive Uses' and 'Scarcity Value,"' Quart. Jr. Econ., XXIV (November, 1910). 356 ECONOMIC THOUGHT but he emphasizes the point that " the interest of the landlord is decidedly hostile to the sudden and general introduction of agricultural improvements." l Wages are determined according to a sort of devitalized wages- fund doctrine. In ordinary circumstances, he says, we may speak of wages as being determined by competition or the de- mand and supply of labor. This may be expressed as the pro- portion between population and capital, if we understand by population only those who receive wages, and by capital that devoted to wage payment. Such capital consists, Mill says, of that part of circulating capital paid in wages, and funds paid to soldiers, servants, and other " unproductive " laborers. Obviously this statement of the case is little more than a mere truism. There is little direct evidence in the Principles of Political Economy that Mill held to the idea of a rigid wages fund. A few passages indicate such an idea, 2 but it was not carefully analyzed, nor were its consequences thoroughly understood. Probably he would not have defended it so far as the long run is concerned. But lie thought a rise of wages in one trade would necessarily mean an immediate deterioration in some other, and that some time must elapse before an adjustment could take place. 3 Later, in 1869, under criticism by Longe and Thornton, Mill made his celebrated recantation of the wages-fund idea. 4 In connection with Mill's use of the wages-fund idea, his belief in the Malthusian principle of population should be recalled. This principle he strongly emphasized, and his discussion of wages is influenced, no doubt, by a desire to show that, accord- ing to the fund idea, a limitation of population was practically necessary to obtain better wages. Profits are closely related to wages. Mill cites Senior's absti- 1 Bk. IV, Chap. Ill, 4. * Bk. I, Chap. V, 9; and notably Bk. II, Chap. XII, i, last para- graph. 3 Political Economy, Bk. V, Chap. X, 5. 4 For discussion of this whole subject, together with some justification of a wages-fund theory, see Taussig, Wages and Capital. JOHN STUART MILL 357 nence idea 1 with approval, and then explains that abstinence is but a part of the cost covered by " gross profits." Besides interest, which is the usual name for that part of profits received for abstinence, " gross profits " includes wages of superintend- ence and indemnity for risk : it is the entrepreneur-capitalist's net income, his surplus after paying wages. Mill states that no practical error results from disregarding rent in this case. The amount of the entrepreneur-capitalist's gross produce , depends upon the productive power of labor. 2 From this he makes advances in the shape of wages. 2 The rate of profit, then, depends on the proportion of the produce of labor obtained by the laborers themselves. " We thus arrive at the conclusion of Ricardo and others, that the rate of profits depends upon wages ; rising as wages fall, and falling as wages rise." 3 Mill, however, would modify this formula to the slight extent of substituting the phrase " cost of labor " for " wages," his ground being that real wages is only one of several factors deter- mining the employer's " advances," the others being price of subsistence and efficiency of labor. To the capitalist, cost of production is not labor, but wages, " and since wages may be either greater or less, the quantity of labour being the same, it would seem that the value of the product cannot be deter- mined solely by the quantity of labour, but by the quantity together with the remuneration ; and that values must partly depend on wages." 4 In his discussion of profits Mill shows some"traces of an influ- ence by Senior ; but, on the whole, his thought is based on Ri- cardo. He generally regards capital as advances to laborers, chiefly in the shape of food or sums for purchasing food. Though 1 See above, p. 265. 1 "But materials and implements are produced by labour; ... in the whole process of production, beginning with the materials and tools and ending with the finished product, all the advances have consisted of nothing but wages ; except that certain of the capitalists concerned have, for the sake of general convenience, had their share of profit paid to them before the operation was completed. Whatever, of the ultimate product, is not profit, is repayment of wages." (Bk. II, Chap. XV, 5.) Bk. II, Chap. XV, 6. * Bk. Ill, Chap. IV, 2. 358 ECONOMIC THOUGHT he explicitly places capital with labor and land as a factor in production, he reduces it to stored-up labor in resolving all expenses into wages, and his recognition of its distinctness in production is at times halting. This is inconsistent with his recognition of the abstinence basis for profits. In a word, here is found an illustration of Mill's imperfect fusing of diverse ideas. If Mill had taken Senior's suggestion and treated interest sepa- rately, not trying to lump it together with insurance, and espe- cially with wages of superintendence, progress might have been made. He was, however, too much under the influence of his early training in Smith and Ricardo. 1 The foregoing comprises the chief points in Mill's theory of value and distribution. Aside from exposition and illustration, he adds little to the framework of economic theory. His treat- ment of value is far in advance of Ricardo's, however, and his discussion of the relation of wages to profits, while weak, is also an improvement. Consumption and Production. On the relation of consump- tion to production, there was much confusion in the classical economics, and Mill was no exception to the rule. He denied a distinct place to consumption, and gave no book or chapter to the subject. The idea of utility, which forms the heart of the recent theory of consumption and value, he was content to leave with a sweeping general recognition that it was essential to exchange value. It is in connection with his treatment of capital and the 1 Bohm-Bawerk is astray in stating that Mill gives three inconsistent answers to the question, 'whence comes profit'? (Capital and Interest, Smart's translation, p. 408.) Bohm-Bawerk fails to distinguish between possibility and necessity. Mill would not have thought of calling his ad- mission of productivity to capital a "theory." Productivity, like utility in value, makes a return possible; but what "determines" ? This was the question. The other was assumed. Mill consistently holds that the interest element in "gross profits" is payment for cost of abstinence. This makes a certain payment necessary. As to Bohm-Bawerk's discovery of an exploitation theory in Mill, it is illusory. He does not note the distinc- tion between replacement and reward. As the result of a round of produc- tion (Mill's statement in this passage is incomplete in imputing production to labor alone) the advances of the capitalist are more than replaced, thus making possible a reward for abstinence. On this point see Bk. II, Chap. II, i- JOHN STUART MILL 359 wages fund that the confusion just referred to is most apparent ; for here Mill attempts to prove the " theorem " x that " demand for commodities does not in any manner constitute a demand for labour." 2 His idea at this point is that the demand for labor | is constituted by capital the wages fund and that a change in consumption only modifies the direction of this already existing demand ; and through several pages, he struggles and twists and turns in the vain effort to disprove the simple fact that wants form the mainspring of economics and that the inten- sity and variety of consumers' demands acts effectively upon production and wages. 3 In fact, the payment of wages itself may be regarded as buying the utilities produced by labor. In a notable chapter on Excess of Supply which appears in his book on Exchange, Mill expounds some other phases of the rela- tion of consumption to production which he had pointed out in his Essays. He argues that, contrary to the belief of Malthus, Chalmers, and Sismondi, a general oversupply or glut is impos- sible. Partial gluts exist, and may temporarily become general ; but are then not due to oversupply, but to an excess of specula- tion leading to a collapse of credit. In this he follows Say and his father, James Mill ; but his development of the doctrine is an addition to the Ricardian scheme. International Trade. Another contribution of Mill's was , his development of the Ricardian theory of international trade, \ and especially its value aspect. 4 Following Ricardo, his conclu- sion was that it is not difference in absolute costs of production, but in comparative costs, which determines international ex- change. If English cloth and corn both cost 150 days' labor, 1 "Truth," before 3d ed. * Principles, Bk. I, Chap. V, 9. 3 But Mill himself says (Bk. I, Chap. X, i) that production is "stim- ulated not only by the desire of the producers to augment their means of consumption, but by the increasing number of the consumers." It appears to be a mistaken idea of capital, its importance and relation to wages, that led him into error. 4 This was done in the first of his Essays on Some Unsettled Questions of Political Economy (published 1844). Mill's chief dogmatic contributions appear in these essays. The subject is treated in Bk. Ill, Chaps. XVII and XVIII, of the Principles. 360 ECONOMIC THOUGHT and Polish cloth and corn both cost 100 days' labor, there will be no exchange; but if England's corn cost 200 days' labor, it will pay her to buy that commodity from Poland. All this was substantially Ricardo's doctrine. But Mill went farther than his predecessor in reasoning that the law that per- manent value is determined by cost of production does not hold for foreign commodities. The value of such commodities de- pends rather upon the cost of producing the goods exchanged for them. 1 Capital does not move readily from one nation to another; but may remain in a country having no advantages to production, and cause foreign trade to exist. In other words, international values obey a law of " equation of international demand " : " There is some proportion at which the demand of the two countries for each other's products will exactly cor- respond; so that the thing supplied . . . will be completely paid for, and no more . . . " 2 " Supply and demand are," in this case, " but another expression for reciprocal demand." Mill points out admirably the various advantages flow- ing from an extended international trade, the saving in prices to consumers being the great point. Accordingly, certain " vul- gar " Mercantilistic notions, namely that a market for surplus products exported is the benefit, and that the national gain from commerce comes in the shape of profits to merchants, are disposed of. In this connection Adam Smith is criticized as not being entirely free from error. In criticism of Mill's idea of international value, one notes that he is wrong in believing that, in any ultimate sense, the cost of production in the other country does not enter. If the cost of the things exported be taken to enter, the question re- mains, "what determines how much must be exported?" As elsewhere, Mill here shows the undigested character of his theory as a whole. He does not bring his reasoning sufficiently into relation with his general theory of value. He makes a difference in degree appear as though it were one in kind. 1 Mill here means, not entrepreneurs' outlays, but real costs. 2 Bk. Ill, Chap. XVIII, 5. JOHN STUART MILL 361 The Influence of Progress on Distribution in Dynamic Society, In Book IV Mill treats of the Dynamics of Distribution ; but he contributes little to Ricardo's ideas, so far as economic principles are concerned. It is here that he most plainly shows the influence of Comte. After describing the elements of industrial progress, invention, security, business capacity, united action, and other factors which give man greater control over nature, he proceeds to show that prices of agricultural prod- uce tend to rise, while a tendency to perpetual increase of the productive power of labor in manufacture causes manufactured articles to fall in price. The rent of land increases; money wages rise ; the rate of profits falls. In spite of industrial progress, the increase of laborers is ordi- narily such that a greater population has been enabled to live the same life of drudgery and imprisonment. " Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of a judicious foresight, can the conquests made from the powers of nature . . . become the com- mon property of the species. . . ." 1 In the last chapter in Book IV, " On the Probable Futurity of the Laboring Classes," he wishes to fix attention upon improve- ment in distribution and a larger remuneration of labor as the desiderata. 2 These ends may be achieved by a voluntary con- trol of population arising with better education and the opening of employment to women, and by " a more and more complete realization of the ends which Socialism aims at, not neglecting its means so far as they can be employed with advantage." 3 He advocates " organization of industry " along the lines of Le- Claire's profit-sharing plan. Mill held that, ultimately, in spite of unlimited progress in the arts, a stationary state must be reached. In such a state 1 Bk. IV, Chap. VI, last paragraph. 2 It is to be remembered that this chapter was largely affected by his wife and by his later interest in radical social reform. On the whole, its tone is very different from the main body of the work, which was drawn from Ricardian thought, somewhat influenced by Comte. It might almost be regarded as a sort of appendix inserted in his hastily written volume. 8 5- 362 ECONOMIC THOUGHT increase in material production and in population would be at a stand. Another result would be a minimum rate of profits ; and one of the most interesting points in the Principles is the discussion of the " tendency of profits to a minimum." Why? What minimum? When ? one asks. Mill argues that, were it not for the opening of new outlets, the expansion of capital which accompanies the progressive state would soon reach a limit, and capital receive the rate which would be the lowest that would induce people to accumulate savings and employ them productively. Two forces cause this expansion : a diminution of risk, and increase in providence. Accordingly, " when a country has long possessed a large production, and a large net income to make savings from, ... it is one of the characteristics of such a country that the rate of profit is habit- ually within, as it were, a hand's breadth of the minimum." 1 But, so far, this idea of a stationary state and minimum profits might have come from the Wealth of Nations. Mill's reasoning is not based on a mere competition among capitals, however, but on Ricardian ground. As capital increases, labor would or would not increase. If it did, poorer investments of agricultural capital would become necessary ; the price of sub- sistence would rise ; so with money wages ; and, as a result, the rate of profits would fall. If population did not increase, there would be a greater capital to divide among laborers, and wages would rise, with the same result. This last conclusion is based upon the assumption that al- though " capital " increases, " there would not be any increase of the produce," an assumption possible only if by increase in capital is meant wages-fund capital in the shape of subsist- ence. This assumption appears quite unreasonable when Mill's own emphasis of invention and " comity of action " are recalled. Mill on the " Social Question." A point has now been reached at which Mill's views on what may be called the Social Problem may well be discussed. 2 1 Bk. IV, Chap. IV, 4. Mill excepts countries having large reserves of land. 2 Lange, /. S. Mill's Ansichten iiber die sociale Frage. JOHN STUART MILL 363 Two questions are to be answered. What is the problem con- tained in the Social Question? What is the office of govern- ment in respect to its solution? This problem, perhaps the weightiest of our time, is also an important one in connection with political economy. But it is the same problem as that of utilitarianism. Without understanding Mill's utilitarian prin- ciples, it is quite impossible to comprehend his political economy. In his utilitarianism alone is unity to be found in Mill, a unity of purpose. What is, then, the problem of utilitarianism ? It is to increase the entire sum total of human happiness. Happiness, in the best utilitarianism, includes all elements of well-being : the great- est amount of material wealth, still more of physical, spiritual, and moral welfare, associated with the least possible suffering, the same problem which confronts us in the social question. That does not mean either the happiness of laborers alone or of the higher classes alone. If a renunciation of pleasure on the part of one class brings with it an increase in the total amount of happiness, this renunciation is justified, and ultimately so, even if it is a compulsory renunciation. Not the present alone, however, but, so far as we can judge beforehand, the entire future, is to be taken into consideration. ^If it is proved, or if it is probable, that private property will in the end contribute to the happiness of mankind, this institution is to be maintained on that account.^ This seems to be Mill's belief, or rather it is the belief which he expresses in his political economy. As already noticed, Mill's belief underwent a change in after life ; and to make the matter of his final opinions still more uncertain, it is mentioned in one place in his Autobiography, that he did not always speak out his whole mind, but only said what he thought the public could bear. The passage referred to is this : "In the ' Principles of Political Economy ' these opinions (on Socialism) were pro- mulgated, less clearly and fully in the first edition, rather more so in the second, quite unequivocally in the third. The differ- ence arose partly from the change of times, the first edition having been written and sent to press before the French Revo- 364 ECONOMIC THOUGHT lution of 1848, after which the public mind became more open to the reception of novelties in opinion, and doctrines appeared moderate which would have been thought very startling a short time before. In the first edition the difficulties of Socialism were stated so strongly that the tone was on the whole that of op- position to it. In the year or two which followed, much time was given to the study of the best socialistic writers on the Con- tinent, and to meditation and discussion on the whole range of topics involved in the controversy ; and the result was that most of what had been written on the subject in the first edition was cancelled, and replaced by arguments and reflections which represent a more advanced opinion." i As already indicated, the whole question of private property, according to Mill, is at bottom one of utility. If communism could be shown to minister to the happiness of society as a whole better than the system of private property now in vogue, it ought to be adopted. Which system carries with it the greater amount of happiness ? The answer to this question is the solu- tion of the problem. To be considered are historical experiences, all motives which have influenced and which might influence men under different social systems, all effects of society on the individual, of the individual on society, and a host of facts and forces. The calculation of probabilities is always difficult, but nowhere more so than in this case. Now in the discussion of the social question the theory of population plays an important role, and a pause must be made here to consider Mill's position in regard to Malthusianism. Mill accepts the doctrine of Malthus substantially as he found it taught hi the writings of the latter._ He agrees with Malthus in the doctrine of preventive and positive checks to population, but goes farther than Malthus did in the advocacy of preventive checks. He dwells particularly upon the sin of calling human ^beings into the world without having the means to support them. He wishes to strengthen the feeling of responsibility in parents and to spread among the people an understanding of the conse- quences of overpopulation. " Poverty, like most social evils," says he, " exists because men follow their brute instincts, with- JOHN STUART MILL 365 out due consideration. But society is possible precisely because man is not necessarily a brute." A little farther on he makes use of this strong language, in which he would probably find few to agree with him. " Little improvement can be expected in morality, until the producing of large families is regarded with the same feelings as drunken- ness or any other physical excess. But while the aristocracy and clergy are foremost to set the example of this kind of in- continence, what can be expected from the poor? . . . One would imagine that children rained down on married people direct from heaven ; that it was really, as the common phrases have it, God's will and not their own, which decided the number of their offspring." * It is, then, clear that above all things legislation must not weaken the feeling of responsibility in begetting children, but must strengthen it. In connection herewith Mill explains the ground of his objection to a legal minimum of wages. It would remove all the barriers which now oppose overpopulation; until finally this world with its human race would resemble a great ant-hill or a beaver colony. Such an interference of the state would, therefore, be productive of harm onlyj It must not be imagined that Mill had any a priori objection to such interference of government. If the matter concerned the present generation only, he maintains that it would be pos- sible to employ all and to establish a minimum of wages. " So- ciety mainly consists," he says, " of those who live by bodily labor, and if society, that is, if the laborers " (is this an identi- fication of laborers and society ?) " lend their physical force to protect individuals in the enjoyment of superfluities, they are entitled to do so, and have always done so, with the reservation of a power to tax those superfluities for purposes of public utility ; among which purposes the subsistence of the people is the foremost. Since no one is responsible for having been born, no pecuniary sacrifice is too great to be made by those who have more than enough, for the purpose of securing enough for all persons already in existence. But it is another thing altogether, * Bk. II, Chap. XIII, i. 366 ECONOMIC THOUGHT when those who have produced and accumulated are called upon to abstain from consuming, until they have given food and clothing, not only to all who now exist, but to all whom these or their descendants may think fit to call into existence." That would, according to Mill, as already stated, reduce us to the con- dition of ants in an ant-hill. But the state has by no means solved the social problem, when it has found means to prevent starvation. A rise of wages is not occasioned thereby, nor a fall of wages prevented. The purpose aimed at is higher wages, since the present condition of affairs is intolerable. Passages have been quoted indicating that Mill would prefer communism to an unimproved continuance of our present sys- tem. But the choice does not lie between the continuance of our present system without improvement and communism, in- asmuch as it is possible to better the actual condition of things. The first measure to be introduced is universal education. The laborers lack the means and the will to provide for the education of their class ; the state must care for the schools. The instruc- tion provided by the state should be thoroughly practical in its character, aiming to develop sound common sense, good judg- ment; an understanding of surrounding circumstances. Besides schools, a participation in political affairs is an im- portant and necessary means of educating the people. Every adult should have the right of suffrage under the sole condition of demonstrating that he has improved the advantages of edu- cation offered him. Taking an active part in politics is the first thing in modern times which accustoms the mind to more ex- tended interests and views than those merely personal, the first step taken outside of individual and family selfishness. 1 1 Dissertations and Discussions, Vol. Ill, "Thoughts on Parliamentary Reform." The German economist, J. H. von Thiinen, demanded universal education as essential to the economic progress of the labor class much earlier than Mill, but was oversanguine as to the possibility of truly educating people in pov- erty. Der isolirte Staat in Beziehung auf Landwirthschaft und National- b'konomie, II Theil, I Abtheilung, "Ueber das Loos der Arbeiter, ein Traum ernster Inhalts," S. 41 u. s. w. JOHN STUART MILL 367 Among the poorer, as among the higher, classes, the concep- tion of a proper standard of life would be formed and the increase of population would be limited thereby. Besides, when public opinion was once far enough advanced to allow it, legislation could make it a legal offense for one to beget children without having the means to support them. 1 But Mill thinks that such a law would be unnecessary, if only women were emancipated " so that they should not depend for their living upon the exercise of a single physical function." Becoming more inde- pendent, they would not submit to the burden of large fam- ilies. 2 ^] At least two measures are suggested by which the government may permanently improve the condition of laborers: by ex- tensive colonization according to Wakefield's system ; 3 and by the sale of public land to the industrious poor, thus forming a class of small proprietors. The laws, too, ought to favor asso- ciations of laborers, cooperative undertakings, and voluntary communistic experiments. Mill also recommended various measures to encourage im- provements on land, small holdings, and the cultivation of waste lands. He thought that it might be advisable for the state itself to own land and lease it to cooperative agricultural associations, and, in small portions, as to farmers. The fact that land is limited both in quantity and quality gives government a function to exercise respecting it. The right of property, which one enjoys in the fruits of one's labor, exists only by support of the authority of society; and this support can be withdrawn. Now if the right of property in that 1 Principles, Bk. II, Chap. Ill, 2. 1 Dissertations and Discussions, Vol. II, pp. 411-449; "Enfranchisement of Women." * E.g. Wakefield, View of the Art of Colonization, 1849. Proceeding from the idea that the highest productiveness of industry depends on a proper proportion of labor to land, Wakefield proposed that the government reserve unappropriated lands in the colonies, putting a higher price upon them than prevailed in the market, so as to prevent too hasty and ex- tensive acquisitions. The proceeds were to be used for assisting the emigra- tion of laborers to the colonies. 368 ECONOMIC THOUGHT which one has created is of this nature, how much more depend- ent must be the right of property in land, which nature, not man, created. Here private property is only justified if land- lords make those improvements which benefit society. 1 The state should invariably reserve and exercise the right to inter- fere when the public good demands it. The single fact that the land supply is limited gives government this right, which it ought to have in case of all monopolies. 2 The Unearned Increment. Mill was the first to use the term " unearned advantage " 3 in connection with land, a term since become so significant as " unearned increment." The basis for the idea is laid by Smith and Ricardo in their treatment of taxes on rent, but they do not advocate any absorption of economic rent as an unearned increment. Mill favored a period- ical valuation of land by the government, with the object of enabling it to take over the difference in value, the " spon- taneous increase " which had accrued to rent. 4 He assumed that there would be a rise in value, due to social forces, not to im- provements by landlords. The foregoing account of some of Mill's views as to private property and the social question are those found in his Prin- ciples of Political Economy, or earlier essays. Though they are not, strictly speaking, Socialistic, their tendency is unmistakable. Indeed, Mill later avowed himself a Socialist 5 in a qualified and conservative sense of the term. While repudiating that tyranny of society over the individual which Socialistic systems were " supposed to involve," he looked forward to a time when in- | dividual liberty might be combined with common ownership * of raw materials and equal participation in the " benefits of ' combined labor." 1 Principles, Bk. II, Chap. II, 6 ; Dissertations and Discussions, Vol. IV, " Explanatory Statement of the Programme of the Land Tenure Reform Association." 1 Dissertations and Discussions, Vol. IV, "The Right of Property in Land." 3 First used in third edition (1852) ; "unearned appendage," "increment of rent," in earlier editions. 4 Principles, Bk. V, Chap. II, 5 ; Dissertations and Discussions, Vol. IV, "Land Tenure." * Autobiography, pp. 230-234. JOHN STUART MILL 369 Governmental Interference ; Laisser Faire. Thus far the interference of government in economic affairs has been but in- cidentally mentioned. But Mill's statement of the "rights" of government and individuals and the limitations upon them has become a classic. 1 Government interference should be limited by a general right of citizens to their individuality, in so far as such a right is not injurious to others: if I do not injure my fellows, I may be or think as I choose. And a point greatly emphasized is that a large degree of individual initiative is desirable as an education. 2 Other points are that division of labor may be restricted through the inability of the government to do all things, there being limitations to its activity which do not obtain in the case of its individual members. This, however, might be obviated by greater division in administrative function. Private activity is generally better and cheaper, as is shown by the fact that the government is seldom able to compete with private individuals. An objection to all acts of governmental interference lies in the increased influence thus obtained by the state. This is always dangerous, but nowhere more so than in a democracy. Individuality, a rich diversity of human develop- ment, is a source of all progress, and should be jealously de- fended. 3 " Laisser-faire, in short, should be the general practice : every departure from it, unless required by some great good, is a certain evil." But Mill allows a great place for government activity. Utility is the only test : if the greatest good of the greatest number is thereby conserved, let the government step in. There are two great classes of interference, according to method : " Authorita- tive," in which the government says, " do this," or " do not do that " ; " Non-authoritative," or optional, as when the govern- ment merely spreads information, establishes models, and the 1 Principles, Bk. V, Chap. XI. 2 It is to be noted, however, that this point may have an opposite bearing in connection with other points. For example, an argument for municipal ownership is that the people would take interest in municipal affairs, eco- nomic and otherwise. 3 Principles, Bk. V, Chap. XI, 3 ; On Liberty, Chap. III. 2B 370 ECONOMIC THOUGHT like. The burden of proof of those advocating the former is very heavy ; the latter is less open to objection. More specifically Mill would permit government action in cases where the consumers' interests demand, they being unable to help themselves. Here the competition of the market does not apply. The matter of schools, for instance, cannot be left to the judgment of individuals. In the interest of the incom- petent, as the insane; of those under a personal contract in perpetuity, as married women ; and of those who have but an indirect control over their property, as investors in joint stock companies, governments may properly interfere. Similarly, where people are acting for others and are not properly guided by self-interest, as in the administration of charity and in such public service as erecting lighthouses or conducting scientific experiments, there is room for public activity. In the foregoing cases Mill is substantially in accord with Adam Smith, 1 except that he gives a much broader application to the principle of interference in behalf of the consumer, as such. But he goes much further when he says : " There are matters in which the interference of law is required, not to overrule the judgment of individuals respecting their own interest, but to give effect to that judgment ; they being unable to give effect to it except by concert, which concert again cannot be effectual unless it receives validity and sanction from the law." 2 Under this principle Mill would, under certain conditions, justify such measures as the legal establishment of a nine-hour day, and pub- lic administration of colonization schemes. Comparing these two great English economists, one conclusion is that the difference in their opinions is associated with the difference in the extent to which utility was given rein : Smith's belief in natural law forbade the immediate application of the principle of utility, and made his application of laisser faire more absolute than Mill's. Mill was not committed to individualism as an absolute generalization. Doubtless this difference was in no small measure due to the industrial evolution that had intervened; just as Mill could say that his argument did not 1 Cf. above, pp. 177 f. l Principles, Bk. V v Chap. XI, 12. JOHN STUART MILL 371 apply to private corporations, whereas now they are the domi- nant unit of business organization, so by Mill's day what had seemed to Smith the exception had in some cases become the rule. Philosophy and Method. In studying Adam Smith it was found that though there was a utilitarian element in his politi- cal economy, this was largely concealed by the veil, after all transparent, of natural right. In Mill this veil is dropped altogether, and utilitarianism comes forward openly as such. If any course of action has utility, nothing further is to be said against it. But perhaps enough has been written already on this matter. Mill distinguishes between different kinds of utility, that is to say happiness, and assigns a far higher rank to that which is useful to the mind than that which benefits only the annual body. One must not, therefore, accuse Mill of mate- rialism or of selfish principles because he professed himself a utilitarian. In fact Mill the Mill of later years, at least may be classed as an idealist. Here his inconsistency, resulting from change and growth, makes it difficult to speak. His economics proper, especially his statics, based as it was upon Ricardo, is essentially materialistic. Man is regarded as the creature of physical laws. Utility is a material concept. But where he preaches, where he discusses progress, where he inconsistently with the Benthamic utilitarianism distinguishes different grades of happiness, there he is the idealist. There the influence of Comte's philosophy, of the Socialists, and his wife, modify the Ricardian foundation. Man dominates nature. Utility in- cludes happiness of a high order. It is one aspect of Mill's idealism that shows itself in his differentiation of the laws of Production from those of Dis- tribution. 1 In the former nature is supreme and her action is to be accepted without question. Her facts are physical truths. Man merely moves things so that they will be acted upon by her forces. But in Distribution human institutions 1 Patten, Dynamic Economics, p. 21. 372 ECONOMIC .THOUGHT dominate. Here laws are not unalterable ; nor the things that are, the best that can be. Led by his idealism, Mill made this addition to the simpler Ricardian creed, the " primitive economy." * In this fact is in part to be seen, no doubt, the working of the changed conditions mentioned in the introduction to this chapter. Many great inventions made social readjustments necessary. The growth of population and the rise of the Mal- thusian idea suggested the need for and possibility of human control and improvement. Mill first puts social institutions along with physical laws as a controlling force, and then argues for a progress, not merely quantitative, but qualitative, through social action. This invocation of social activity is an ear-mark of Ideal- ism. Mill, however, draws too sharp a distinction between the laws of Production and Distribution, nor is he able to carry it out consistently. 2 The pillars or framework of his economic theory remain materialistic. " A primitive man " moved by self-interest " is put into the mechanism of modern society." In thus asking a primitive man one actuated by self-interest and molded by physical environment to progress along lofty social lines, he again shows the same lack of harmony or fusion in the elements of his philosophy already observed. What position does Mill take as regards the new ordering of economic forces? On the one hand a strong adherence to the old laisser-faire principles is found ; on the other, a recognition of the evils developed by a later time, and a decisive declara- tion that individualistic egoism is not sufficient to work a cure. In fact, at points an approach to the opposite of laisser faire, Socialism, appears in those parts of his work which discuss the labor question. " Extremes meet." From either standpoint Mill's system appears inconsistent. Notwithstanding the ad- mirable acuteness and clearness of his understanding, he appears 1 Principles, Bk. II, Chap. I, i ; Preliminary Remarks, last four paragraphs. 1 See, e.g., Bonar, Philosophy and Political Economy, p. 252. JOHN STUART MILL 373 occasionally to become confused between the old and the new times. His system may be compared to a Janus head, of which the one face looks back into the past, the other forward into the future. Or he may be likened to a man standing at a place where two roads part without being able to decide which one to take. Mill's method is to be criticized on lines similar to those followed in examining his philosophy. In his earlier work he regarded the a priori and deductive method as the only fruitful one for a study of first causes. His Unsettled Questions shows a belief in this method, not only for Political Economy, but for the broader Social Science. He began his System of Logic with the idea, more or less conscious, of establishing the reign of law in society as in the physical world, and showing that the a priori methods of Ricardo and James Mill were the same as those used in the " natural sciences." x Even while at work on the Logic, he was corresponding with Comte, 2 and the latter's influence, together with that of Ma- caulay and a study of chemistry, led him to modify his belief. For social science, he was led to believe that the old method was dangerous, and to advocate a combination of induction and deduction which he called the Concrete Deductive Method. This method, it will be observed, would readily appeal to one grounded in the Ricardian law of Rent, which is " a plain in- duction, followed by a bold deduction with plenty of verifica- tions." This much may be said : Mill went further than any great English economist preceding him in expressly using perfect competition as a hypothetical assumption made only for scien- tific purposes, and in pointing out exceptions and limitations. The framework and foundation of the Political Economy, however, remain a priori. He sets out with the same supposi- tions as Adam Smith and Ricardo, namely, that man is gov- erned by self-interest in economic affairs, that the individual pursuit of selfish ends promotes the general welfare, that profits 1 See Patten, Development of English Thought. * See Leroux, Lettres d' Aug. Comte a J. S. Mitt. 374 ECONOMIC THOUGHT and wages are equal, and that taxation is shifted about in such manner as to make them so. Only in distinguishing the laws of Distribution from those of Production he breaks from the earlier idea, removing, as the distinction does, a part of eco- nomics from the dominance of physical causes. V. OPPONENTS AND LEADING CRITICS (Resumed) i. THE PHILOSOPHICAL AND ETHICAL SYSTEM (Resumed) THE FOUNDERS OF "SCIENTIFIC" SOCIALISM IN GERMANY THE earlier French and English Socialism down to 1848 was largely Utopian and idealistic. Down to 1848, too, it was dominated by a bourgeois or middle-class spirit, and was not of and for the wage-earning class; though with Louis Blanc and Proudhon the transition to a proletarian spirit, opposing labor to capital, is manifest. Moreover, none of the writers who have been discussed can be called " State Socialists," that is, Socialists who accept existing governments as the agency for carrying out their programs. True, Louis Blanc and Proudhon relied to some extent upon the state ; but the former was half an associationist, or group Socialist, and the latter was an anarchist in his way. We are now to pass to Germany and the purely proletarian Socialism of the second half of the nineteenth century ; a Socialism which ridicules the Utopian ideals of the earlier group and prides itself upon its " scientific " realism, though it draws largely from its French and English predeces- sors. And first it is logical to take up the thought of a group of thinkers commonly known as " State Socialists," chief of whom are Rodbertus and Lassalle. 1 See the references under Chap. XXI ; and Handworterluch d. Staats- vrisscnschaft, articles on "Socialism," " Rodbertus," and " Marx" ; Flint, Socialism; Bohm-Bawerk, Capital and Interest, Bk. VI, Chaps. II and III, English translation by Smart, pp. 328-392; Conner, The Social Phi- losophy of Rodbertus; Masaryk, Die philosophischen und soziohgischen Grundlagen des Marxismus. 377 378 ECONOMIC THOUGHT As just intimated, they accept the state as the agency for applying their theories and seek to enlarge its economic func- tions accordingly. Properly speaking, a " State Socialist," then, is one who advocates a radical scheme of social reform to be carried out by government. They are, therefore, generally nationalists, and stand opposed to the cosmopolitan, interna- tional, or universal Socialism of Marx, on the one hand, and to the associationist or group Socialism of Owen and Fourier, and Louis Blanc, on the other. i. State Socialism: Rodbertus and Lassalle. (a) Rod- bertus. Karl Rodbertus (1805-1875) has probably exerted more direct influence upon economic thought than any other socialistic writer, unless it be Marx. This is especially true in Germany, where such men as Wagner admit his influence ; but it may be seen even in the thought of American economists. His chief economic writings are: Zur Erkenntniss unserer staatswissenschajtlichen Zustande (1842) (Our Economic Con- dition), which contains his leading views; Sociale Brief e an von Kirchman (1850-1851) (Social Letters) ; Zur Beleuchtung der Sociale Frage (1875) (Light upon the Social Question) ; and Der Normal Arbeitstag (1871) (The Normal Labor Day). The last essay contains his plans for immediate reform. Rodbertus' economic thought may be analyzed as proceeding from two main ideas : a labor theory of productivity, and a belief in a decreasing wage share. The second idea is con- nected with the so-called iron law of wages, that is, a sub- sistence theory. Putting these two main ideas together, he emphasizes the problem of distributive justice and evolves a notable theory of crises. In the first place, then, he believed that labor produces all economic goods, either directly, or indirectly through tools and machinery. 1 Those goods only are economic which are produced by labor, others being " natural." More than that, manual labor is meant. Intellectual labor is very important; but it is not costly, and is to be regarded as a free gift of nature, 1 See Zur Erkenntniss, pp. 7 ff. ; Schriften, II, pp. 105 f. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 379 like land. It will be observed that this does not necessarily mean a labor theory of value: Rodbertus says labor creates products; he does not say values. Economic goods, however, all have value, and he thought this labor was the best measure of value. Simply, he does not say that labor determines value. The " law " of a decreasing wage share (Gesetz der fallenden Lohnquote) was formulated by Rodbertus as early as I837. 1 By it he meant that the proportion of the national income received by laborers continually decreases. The total amount paid in wages may increase, but rent and interest take an in- creasing percentage of the aggregate income. In formulating this law Rodbertus was probably influenced by Sismondi, and it appears to be a simple deduction from the subsistence theory of wages of the classical economists, narrowly, and errone- ously, interpreted. If production is continually increasing, while labor as a commodity merely gets enough to cover cost, its proportional share decreases. The national income, consisting of goods that are of direct importance to life, is divided by Rodbertus into two parts or shares : wages and rent. Rent, in its turn, falls into two parts : land rent and capital rent. Its existence is due to the economic fact that there is a surplus produced by laborers over their subsistence, and to the juristic fact that private property in land and capital enables the owners to exploit labor and retain that surplus. In these ideas, again, Rodbertus is clearly fol- lowing the thought of Sismondi, Proudhon, and the Saint- Simonians. From the two main ideas thus briefly sketched, Rodbertus concluded that the great mass of mankind is unjustly shut out from a participation in the income which it creates, a condition that is inimical to culture. Indeed, his great service is to have brought out sharply the question of distributive justice. With more economic learning and statistical data than his predeces- sors, coupled with a forceful presentation of the issue, he drove home the fact that there is a problem in the poverty of the masses which partly, at least, concerns economics as a science. 1 Die Forderungen der arbeitenden Klassen. 380 ECONOMIC THOUGHT Rodbertus' famous theory of crises is also derived from his theory of a decreasing wage share. Very briefly stated, it is that, as the great mass of wage earners have a diminished pur- chasing power, consumption fails to keep pace with production. A contraction of production ensues, with unemployment and a further decrease in purchasing power, leading to an intensifica- tion of the crisis. The similarity of this idea to Sismondi's theory of overproduction will be observed, and it is open to the same criticism. Moreover, if we are to assume that an increase in labor's share, or wages, would remedy the matter, it appears that the validity of the theory depends on an assump- tion that capitalists in general are receiving more than a return necessary to secure the activity of their capital; otherwise wages could only be increased at the expense of capital and a consequent restriction of production. Thus the theory rests upon the exploitation idea. Poverty and crises are to be done away with, and distribu- tive justice attained by an ultimate socialization of property. This, however, should be an evolutionary process. History, Rodbertus thinks, shows three great stages. The earliest is the period of heathen antiquity, in which human beings are owned and labor is thus exploited by the rent receivers. In the second, or Christian-Germanic stage, land and capital are private property for the use of which the owners demand an unearned rent. This is the existing condition. In the future a Christian-Social stage is to come, in which land and capital will be nationalized and private property be allowed only accord- ing to service or desert. This stage might be expected in five centuries, perhaps. As to immediate and practical remedies Rodbertus chiefly proposed various regulations of the labor contract, with the idea of increasing labor's share in the national income. He advocated the legal establishment of a normal working day. Moreover, the determination of a normal amount of work to be performed by an average worker in a given time was favored by him. This average production would serve as a standard of value, according to which each laborer would be credited. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 381 Prices, too, would be fixed, and be measured in a labor currency in a manner quite similar to Owen's scheme. By such devices the transition to his third stage would be hastened. Of course Rodbertus attacks Smith's system with its com- petitive basis. His most fundamental critical idea lies in the opposition of a social demand to the " effective demand " of the economists ; or, just to put it in another way, he emphasizes utility rather than exchange value, an idea in developing which Sismondi preceded him. Rodbertus, however, fits it into the garb of Socialism. The effective demand, he says, is a property demand. Property-owners determine production, directing it so as to secure the largest net profits rather than the largest amount of essentials. Luxuries are produced, while the most intense wants go unsatisfied. Among other points, Rodbertus criticizes the Classicists on historical grounds for assuming the existence of an original state in which men were equal in property and political rights. His- tory, he thought, always shows inequality and exploitation of the weak by the strong. And in a similar vein a distinction is drawn between capital as a logical functional concept and capital as an historical fact. Naturally the wages-fund theory is rejected, as, according ^ to his assumptions, Rodbertus could not believe that wages are paid out of capital. Passing over his criticism of Bastiat's interest theory, this resume of his chief economic criticisms may be concluded with a note concerning his theory of rent. Ricardo's doctrine he thinks is overturned by his fancied proof that rent would exist even if all land were equally productive ; differences in pro- ductivity explain differences in rent, not the origin of rent. 1 His own theory, which is probably suggested by certain pas- sages in the Wealth of Nations, 2 is a notable illustration of the inconsistencies which so abound in the strictly economic thought 1 See Beleuchtung, pp. 170 f. 2 Bk. I, Chap. VI, paragraphs 10 and n. "In the price of flour or meal, we must add to the price of the corn, the profits of the miller, and the 382 ECONOMIC THOUGHT of Socialistic writers. Starting from the idea that the price of all products corresponds naturally to their labor cost, and that the price of manufactures and raw materials are thus on a similar basis, even though land ownership is a legal monopoly ; he concludes that landowners get a larger return than capital- ists, in that the latter must pay for raw materials, whereas land is a free gift of nature. Landowners, as such, having no expenses for raw material, secure a larger net return, which is land rent. Or to put it another way, land itself is the land- owner's raw material, and he can normally demand enough for its use to cover the customary gain of the capital engaged in producing raw materials required in other industries. The whole idea reminds one of the Physiocrats' surplus and Smith's notion that in agriculture " nature " labors with man in a peculiar way, and rests upon the failure to see that in economic society land values are themselves capitalized. But, one asks, what then of the differences among different manufacturing industries in this regard? Does the manu- facturer of rails or girders secure a lower net return > v lian the producer of iron and steel, just as the latter is assumed to secure less than the owner of the iron mine or land? Not if the labor cost theory is to be maintained, for this reasoning makes land ownership an element in value ; yet this conclusion would follow from his rent theory. His rent theory is incon- sistent with his theory of labor cost ; and leads to conclusions that are contradicted by the facts of equalized " profits " in com- petitive industry. 1 (b) Lassdle. Ferdinand Lassalle (1825-1864) was the Louis Blanc of German Socialism. His chief work was that of the agitator and propagandist. He founded the Social Demo- cratic Party. His thought needs no long consideration, for in its main outlines it was that of Louis Blanc, Rodbertus, and wages of his servants," etc. "In the price of linen we must add the wages of the flax dresser." "The capital which employs the weavers . . . must be greater than that which employs the spinners. . . ." 1 Cf. Lexis, " Zur Kritik der Rodbertischen Theorien," Jahrb. f. Nat. Ok., N. F., IX, 469; Oppenheimer, Ricardo's Grundrententheorie, pp. 38 f. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 383 Marx. 1 Lassalle it was who made the phrase "iron law of wages " his own. Accepting the subsistence theory of wages, he taught that under the capitalistic system the position of labor is hopeless. Therefore capitalism must be abolished, and coopera- tive association be put in its place. " Productive association with state credit " was his scheme. 2 And the state was to guard the funds of the associations and maintain suitable rules. The most notable points in Lassalle's writing are the bril- liant way in which he seeks to drive home the significance of capitalism, and his theory of Konjunctur. Capital he takes broadly to be the name for a group of political, economic, and juristic conditions which are not absolute and permanent, but the result of an historical development. An examination of the existing economic order shows that its essential features are division of labor, production for a world market, com- petition, and the ownership of the instruments of labor by the capitalist class, which exploits wage-earners by paying them according to the iron law of wages, pocketing the surplus. Capital, " the dead instrument of labor," has become the active agent, degrading the living laborer. 3 In opposing individualism Lassalle was led to deny that the individual controls his own destiny. There is a large element of chance, or conjuncture, he said, that dominates individual endeavor and makes control by society necessary. Wars, crises, etc., are of social origin and largely beyond the scope of individual action. It is therefore folly to rely upon individual initiative and self-interest as do the classical economists. 2. International Revolutionary Socialism: Karl Marx and Friedrich Engels. For a generation Karl Marx was the undisputed leader in Socialistic thought, and his chief work, Das Kapital (Capital), 1867, came to be called the Bible of the 1 Das System der Erworbenen Rechte, 1861. Workingmen's Programme, 1862. Open Letter, 1863. Bastiat-Schulze, 1864. 2 Open Letter, passim. 3 Bastiat-Schulze, pp. 181 f. 384 ECONOMIC THOUGHT " scientific " Socialists. 1 If it is now true that its prestige has been somewhat shaken by "higher criticism," it is still the leading source from which the great mass of intelligent Socialists draw. Born in 1818 at Treves, Marx was, like Lassalle, a Jew. He studied philosophy and history at Bonn, and became in- timately acquainted with Hegel's thought. He was also in- fluenced by Lorenz von Stein in regarding the social movement as an evolution. 2 Marx became a radical editor, was driven from Germany to France and thence to Belgium, finally taking up his residence in London, where he lived until his death in 1883. The spirit of the generation in which Marx lived was largely his, and it has been well characterized as " the irreverent and revolutionary spirit of what was once known as Young Germany; the spirit of a race of disillusioned men, without belief in God or unsensuous good ; a hypercritical, cynical, and often scurrilous spirit. In passing into its latest or German stage, Socialism gained intellectually, but lost morally." 3 With Marx socialism took on a purely materialistic garb, and became international or cosmopolitan in its scope as con- trasted with the national industrialism or associationism or State Socialism of his various predecessors. Marxianism is the classicism of Socialistic thought, abstract, deductive, cosmo- politan. Rodbertus was an idealist. So were the earlier French writers who clung to the institution and believed in 1 Other works are : Einleitung zur Krilik des Hegelschen Rechls philosophic (1843) (Introduction to a Critique of Hegel's Philosophy of Rights), containing the germs of his materialistic conception of history; Misere de la Philosophic (1847) (the Poverty of Philosophy, a criticism of Proudhon) ; Discours sur la question du libre exchange (1848) (Discourse upon the Question of Free Exchange) ; Zur Krilik der Politischen Oekonomie (1859) (a Contribution to the Critique of Political Economy). Only the first volume of Capital appeared in 1867. The two other volumes were brought out in 1885 and 1894, after Marx's death (1885), by his collaborator, Engels. Engels' chief work was Uerrn Eugen Diihring's Umwalzung der Wissen- schaft, 2d ed., 1886. The Communistic Manifesto of 1848 was the joint work of Marx and Engels. 1 See below, p. 408. * Flint, Socialism (1895), pp. 136-137. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 385 the innate goodness of man. But Marx was in fierce revolt against institutions including the existing states, and was far from believing that good predominates in mankind. Accord- ingly he put Hegel's dialectic upon a materialistic basis, and made social evolution a matter of material and economic forces. To Marx " the ideal is nothing else than the material world reflected by the human mind." l Indeed, one of the things ordinarily associated with the name of Marx is his materialistic interpretation of history, and especially his analysis of the existing capitalistic stage. Several others of the Socialists had analyzed the development of society into stages, with more or less elaboration of their material characteristics. It remained for Marx, however, to develop the idea that all social changes have their ultimate causes in the modes of production and exchange, or that economic factors dominate all history and determine social organization, classes, and class interests. 2 In the present stage of history capital which he, like Rodbertus, regards as an " historic concept " stands opposed to labor, the latter being exploited. Here Marx presents an acute analysis of industrial conditions, which has its value, even though largely vitiated by a warped view- point. It is essential to understand his notion of capital, for it is not the ordinary one. 3 To Marx, circulation of commodities is the starting point of capital, and he dates the "modern" history of capital from the sixteenth century, when a world commerce arose. " As a matter of history, capital, as opposed to landed property, invariably takes the form of money ; . . . the first form of appearance of capital is money." Then by pur- chasing labor power for less than it is worth and retaining the surplus, money is converted into capital. " By turning his 1 Capital, preface to second edition. 2 Friedrich Engels, Marx's collaborator, urges that Marx did not take such an extreme view; see his Socialistischer Akademiker (1895). It is not unlikely that to say that Marx makes the economic factor the sole factor in historical development is going too far. 8 See Capital, Vol. I, Part II, Chap. IV, and Part III, Chap. VII. 2C 386 ECONOMIC THOUGHT money into commodities that serve as the material elements of a new product, and as factors in the labour-process, by incor- porating living labour with their dead substance, the capitalist at the same time converts value, i.e. past, materialized and dead labour into capital, into value big with value, a live mon- ster that is fruitful and multiplies," a " vampire " that sucks the blood of labor. Capital is wealth used to exploit labor. Thus Marx's idea of capital as an " historic concept " is part and parcel of the idea of a surplus value that labor creates and capital appropriates. The idea of surplus value is his most famous contribution. It demands attention next. In the first place it will be remembered that most of the earlier Socialists had the same general idea, and that the English- man, Thompson, had a very definite one. Such originality, then, as Marx has, must lie in his formulation'and attempt at proof. This begins with his theory of value. Marx starts with an abstraction. Use value is distinguished from exchange value, or value, for short ; and all that remains of commodities " if we abstract their use- value " is value. Marx thinks labor pro- duces all value, capital being nothing but stolen labor; there- fore this abstract value exists " only because human labor in the abstract " has been embodied in goods. Value is " a mere congelation of homogeneous human labour " " crystals " of a " social substance." l All this concerns the qualitative aspect of value, a phase which Marx thinks the economists had un- duly neglected. The value of a commodity being thus " abstracted " from all relation to its form or use, it remains to discuss its deter- mination in exchange, or the quantitative aspect. Briefly, this is reduced to socially necessary labor-time, to the time spent by the average laborer under existing social conditions. If it requires x labor hours to make the linen and 2 x labor hours to make a coat, the coat has a value twice as great as that of the linen. Marx criticizes economists for not analyzing the qualitative 1 Vol. I, Chap. I. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 387 and quantitative aspects of labor as entering value, and for not reducing labor to abstract social labor. It is obvious that certain difficulties are inherent in the attempt to reduce labor to an abstract fund, owing to the differing character and intensity of labor, to say nothing of the differing utilities of products, which Marx " abstracts." These difficulties Marx in part recognizes. He attempts to get around them, (i) by conceiving of all labor power and all values as funded into homogeneous social aggregates, divisible into equal units ; (2) by limiting his conclusion to " normal conditions of production " and " the average degree of skill and intensity prevalent at the time." Having thus defined value and based it upon labor time, Marx proceeds to argue that capitalists secure a surplus of value in hiring labor. In itself an old idea, Marx elaborates its argument somewhat. Assuming that the exchange value of a day's labor power is a certain sum, determined by the fact that the means of subsistence required for the day cost half a day's labor, he argues that this does not prevent his working a whole day, nor determine the value of the laborer's daily prod- uct. The capitalist, in short, buys of the laborer the " use- value " of a day's labor power for its exchange value or cost, and the difference is his surplus. 1 Criticism of the main points in Marx's economic theories must be adverse. To begin with, his underlying philosophy of history is indisputably one-sided. Too many things occur for reasons not entirely economic, or even not economic at all. There is an element of truth in his position, namely, that eco- nomic forces are very important factors in shaping history. This it was well to emphasize. But others had done this, notably Comte; and Marx's countryman, Lorenz von Stein, may have given him some of his ideas. His chief historical conclusion immediately concerns capital. One must feel that here as elsewhere his desire to prove surplus value and exploitation, rather than historical study, influenced him. To say that capital has not always existed where men use 1 See Capital, pp. 174-176. 388 ECONOMIC THOUGHT tools to aid in production is only possible when a peculiar and question-begging definition of capital is adopted. Moreover, it is contrary to his own method of historical interpretation to overlook the social services and the economic function of the capitalist class. Its initiative was largely in- strumental in overthrowing feudalism; its enterprise and management are of value to-day. But the heart of the whole system lies in his theory of value, and that heart is unsound. (1) In the first place it is unsound in its vicious abstrac- tion of utility. 1 This unfits it for a general explanation of the source of value. Regardless of form or use, in Marx's scheme things would be valued according to abstract labor time. As a result of such a theory the free gifts of nature could have no value; and so with anything that has not cost labor. Marx here tries to meet the difficulty by drawing an inconsistent and illogical distinction between value and price, stating that such things may have a price but not a value ! On the other hand there is this question : Are all things that have involved labor valuable? Marx admits that such things may not have value. He says that they must be socially useful to acquire exchange value. But where such is the case he seems arbitrarily to regard the labor involved as being useless, over- looking the fact that it is primarily the utility of the com- modity that decides. Marx again glides over the utility difficulty by assuming a " social process " by which labor is directed and equated, a process which, when it is analyzed, is seen to operate through utility. One cannot get away from the question, Why do men work? Why do they devote labor time to cotton rather than to linen ? (2) But in the second place, even assuming that cost alone can explain exchange value, it is not true that costs can all be reduced to labor. The claims of capital must be met even in a 1 In reality Marx scarcely deals with utility at all, his "use-value" appear- ing to be generally thought of as the material of the good and having merely the negative quality of providing a body for the abstract labor-time units. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 389 collective state, they being based primarily on the economics of the situation. Marx did not go back far enough here. His assumption of the sufficiency of his " historic concept " of cap- ital was made to serve. If labor alone made the spindle, the machinery that, in turn, helped make it, and finally the metal and the mine appliances, how were these last made ? The ele- ment of saving and waiting is there and it must be paid for, whether private ownership exists or not. Marx assumes that his surplus is produced by labor. This, however, cannot be proved ; and unless it is, it does not indicate any exploitation of labor. (3) Finally the reasoning concerning abstract labor-power units breaks down before insuperable differences in the quality of labor. 1 We are virtually told that as entering value deter- mination the labor of the artist may be equated with that of the hod-carrier by merely taking one day of the former's exertion to equal twenty or thirty of the latter's. As well think of an ounce of canvas from the masterpiece as equal to so many pounds of mortar! Labor is exerted on different planes. It can be reduced to a common basis and funded only by eliminating a large part of the laborers, or by performing the impossible feat of adding art or skill to brute force to get " congelations " and " crystals." The foregoing is but the barest sketch of the leading ideas in Marx's economic doctrines. Space forbids further discussion of the numerous merits and demerits of his thought. 2 Marx was 1 Cf. Adam Smith's idea of an average labor cost. Above, pp/i6g f. 2 A sympathetic statement of his merits is the following : "In the combination of learning, philosophic acumen, and literary power, he is second to no economic thinker of the nineteenth century. He seems to have been master of the whole range of economic literature, and wielded it with a logical skill not less masterly. But his great strength lay in his knowledge of the technical and economic development of modern industry, and in his marvelous insight into the tendencies in social evolution deter- mined by the technical and economic factors. Whether his theories in this department are right or wrong, they have suggested questions that will demand the attention of economic thinkers for a long time to come. It is in this department, and not in his theory of surplus value, that Marx's sig- nificance as a scientific economist is to be found." (Kirkup, History of Socialism, pp. 164-165.) 390 ECONOMIC THOUGHT a learned and ingenious writer, and possessed of a good deal of dialectical skill. But he was filled with a preconceived idea which led him into question-begging assumptions and one-sided analyses. He took certain ideas from Smith and Ricardo, for whom, of all economists, he had the most respect, and, rob- bing them of the qualifications made by those writers, applied them hi an even more abstract way than they had done. 3. Revisionists or Opportunists. Since the active days of Marx and Engels, another group of Socialists has arisen, which may be called opportunist or revisionist. Its members are not revolutionary, but " evolutionary." They await developments. Toward the doctrines of Marx they are more or less critical. Thus, in Germany, Bernstein criticizes the theory of surplus value, and denies that the condition of the laborers is going from bad to worse, or that capitalism 1 will necessarily collapse. And he is far less materialistic than Marx. Much the same may be said of Jaures in France. In England, Sidney Webb is the leading " Fabian " Socialist. The tendency is to reject both the materialistic interpretation of history and the theory of sur- plus value, while accepting the doctrines of class struggle, in- ternationalism, and the socialization of the instruments of pro- duction. The Influence of the Socialists. The influence of Social- istic writers upon economic thought has been a very important one. Especially is this true of Marx and Rodbertus, though it should be remembered that both were heavily indebted to their predecessors. The effect of Socialistic criticisms can be fully appreciated only when its twofold aspect is realized; for, in addition to its direct or primary results, there has been a pro- found influence which might be called reactional, a tacit tendency so to modify or state economic doctrines as to take the ground from underneath Socialism. i. Direct or Primary Effects. (a) In the first place, among the primary effects of Socialistic thought upon eco- 1 Die Voraussetzungen des Sozialismus (American translation, New York, 1909). THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 391 nomic theory, a point already made with regard to the earlier Socialists should be reiterated. The so-called " scientific Social- ists " continued and strengthened the idea that social insti- tutions are of historical growth and relative to environment, particularly Karl Marx, who added a wealth of illustration from industrial history to strengthen his position. This idea was potent in overthrowing the conceptions of nature philosophy and the " natural." (b) The Socialists gave greater strength to such tendency as there was among the economists to take the social viewpoint. As already stated, they emphasized the fact that modern pro- duction involves a large degree of cooperation and that the prod- uct is to that extent a social one. A similar idea appears in the doctrine of conjuncture. And in their ideas concerning crises and overproduction they kept to the front the concept of social utility, as contrasted with the private, individualistic viewpoint, which considered exchange value alone. (c) Socialistic criticism, moreover, has led to a closer analysis of the economic functions of the state. Whether collectivists, State Socialists, communists, or anarchists, some more or less radical change in the office of the government was involved; some alteration in the scope of the individual's activity. The discussion of such topics has made possible a more accurate separation of those activities which are most profitably intrusted to the state from those which are properly private. The result has been a saner individualism on the one hand ; while men are no longer alarmed when the government takes over some branch of industry which the principles of politics and economics show will be best administered for the public welfare when in public hands. (d) Socialism, too, has emphasized the problems of distri- bution as contrasted with production, and, above all, has kept the question of distributive justice heavy upon our consciences. It must not be thought for a moment that economists as a whole had overlooked this question. From Adam Smith on, some had dealt sympathetically with it, while others, like Senior, had honestly believed and perhaps correctly that their science 392 ECONOMIC THOUGHT would make most progress by eliminating such questions, leav- ing them to ethics and politics. But there is such a thing as undue abstraction and narrowness in this regard. The Socialists, then, with their charges of exploitation, have perhaps done a service to economists by causing them to consider the question, What is a just wage? On the other hand, it may be that some economists have been led too far afield in discussing such problems, that is, have unduly broadened the field of discussion open to economists as such. (e) Socialism as a whole has brought the general idea of un- earned income into prominence, and particularly " agrarian socialism," in centering attention upon landed property, has emphasized the " unearned increment " of land. (/) Undoubtedly the function of capital and the nature of profits have been placed in a clearer light on account of Socialistic attacks. It is most obvious that the refutation of arguments that capital is merely congealed labor and that profits are rob- bery, involved a more careful analysis of the doctrines of Smith and Ricardo than had been given to them prior to the days of Rodbertus and Marx. Even the writings of the earlier Socialists probably had some direct effect in this way. But somewhat less obvious would be a possible negative in- fluence upon certain theories. It is possible that the downfall of the wages-fund doctrine may have been furthered by Socialistic criticism ; 1 while the separation of profits from interest would be encouraged, partly because of the Socialist emphasis of the non-productivity of capital, partly to put interest in a better light. Both of these developments, however, would have come regardless of Socialism. 2. Secondary or Reactional Effects. (a) By way of reac- tion, Socialism has deeply influenced the tone and emphasis of economic writings. The effects here referred to are far too subtle to be pointed out in detail. One cannot read the works of the Austrian school or of Professor J. B. Clark, however, without finding evidence of what is meant. To-day there 1 See above, p. 381, and below, pp. 438 ff. THE FOUNDERS OF "SCIENTIFIC" SOCIALISM 393 is no text-book of economics but that gives some space to a criticism of Socialism, and here and there stresses some point in theory as running counter to its doctrines. (b) Certain particular theories have probably received their present emphasis, in part, at least, from a desire to refute Social- ism. For illustration, the productivity theory of distribution as developed by the Austrians and Professor Clark may be men- tioned. A part of the idea seems to be that If it can be shown that each factor of production gets what it produces the problem of distributive justice is solved. 1 And so it is with the utility side of value. It is not improbable that the narrow, labor-cost theories of the Socialists helped bring on the reaction to extreme marginal utility theories beginning in the seventies. 2 This would be the logical result of the narrow and extreme way in which Marx carried the doctrines of Smith and Ricardo on value to a reductio ad absurdum. Even before this, as has already been suggested, the theory of abstinence was doubtless stimulated as a result of Socialistic criticism; and in later days, the refinement of this theory as illustrated by the adoption of such concepts as those of " sav- ing " and " waiting " clearly have been stimulated by the at- tacks which have been made upon the doctrine of abstinence. 3 1 Which idea overlooks the difference between personal and functional distribution. 2 See below, p. 445. There had been marginal-utility theories long before, but they had fallen on deaf ears. 8 E.g. Lassalle's classic bit of irony concerning the abstinence of Baron Rothschild. Cf. Bullock, Principles of Economics, 3d ed., p. 140. 2. THE METHOD IN the hands of Ricardo and his followers, method in political economy becomes largely deductive and abstract. One does not have to read far in the works of M'Culloch, James Mill, and De Quincey to become convinced of that. And, as has just been seen, John Stuart Mill in his Political Economy tended to perpetuate the method. The next two chapters will recount how critics of this method arose. They attacked the method and at the same time pointed out the existence of narrowness and fallacies in the conclusions of the Ricardians, Smith also coming in for a share of criticism, though, on the whole, not so large a one. 394 CHAPTER XXIV CONCRETE-HISTORICAL CRITICISM IN ENGLAND ONE of the most just criticisms of the English Classical School concerns the abstract character of its reasoning. In order to weigh rightly this criticism, however, it is essential to observe that it has at least two aspects, and that they vary in their importance. Thus it is one thing to set up a number of abstrac- tions and then to proceed as though they were the concrete facts ; but it is another matter to cut away certain complica- tions with the idea of ascertaining clearly what would happen without them, consciously leaving the introduction of any com- plications desired to further inquiry. Too often, a thinker begins with the second mode of procedure only to become blind to the complications, and so to end in the narrowness and abso- lutism which characterize the first type. But this need not blind one to the legitimacy and the advantages of the second. It has, however, blinded certain critics in whole or in part ; and, as will appear, the valid and the invalid, the conscious and the unconscious abstraction, have been assailed without discrimina- tion. Some of the reasons for the abstract character of the early political economists, English and French, have been referred to in discussing those men. For one thing, the material and machinery for effective concrete investigation were deficient. History was inadequate; statistics likewise. Even had the material existed in abundance, there is, perhaps, some force in Leslie's point that the canons of induction had not been de- veloped, that branch of logic being then an inferior instrument. The outline of the science had to be developed in order to cause a demand for materials to complete and correct it. More posi- 395 396 ECONOMIC THOUGHT lively, the methods of the other sciences were influential. In the natural sciences, the more abstract and deductive methods of astronomy were the pattern, while the speculations of moral philosophy gave the more immediate background. Further- more, the nature philosophy dominant at the birth of political economy begot a tendency to doctrinal absolutism that easily resulted in undue abstraction : laisser faire was made a law of nature, applicable in all times and places, and forthwith its existence in the shape of free competition became assumed as more than an hypothesis. To be sure, there is much historical matter in the Wealth of Nations, and Smith's method is by no means entirely deductive. And, following Smith, Malthus introduces the results of travel and wide historical reading in his Principles of Population. But in both cases the facts were introduced chiefly to illustrate a priori conclusions. This tendency to undue abstraction reached its height in the Ricardian school, and at about the same time a reaction and criticism of it appeared. It has already been pointed out that nations whose circumstances differed from those of England especially Germany and the United States took issue with generalizations which did not fit their concrete conditions, and the Nationalists arose. This line of objection and others were then developed and given a broad, scientific setting by the Ger- man Historical School. In the present chapter are to be traced similar developments in the land of Smithianism and Ricardian- ism. It should be pointed out in advance that the writers to be treated do not form a " school " as did the German historical economists. Their work was sporadic, and, as will be seen, was scattered over a long period of time. Though merely to be mentioned here, the importance of the example set by Darwin and Spencer about the middle of the century needs to be remembered. The careful study of facts was stimulated by Darwin's work on the law of struggle for sur- vival ; and Spencer's Social Statics (1850) treating of the evolu- tion of society through natural law gave further impetus to the historical idea. CONCRETE-HISTORICAL CRITICISM IN ENGLAND 397 John Craig and John Rooke may be passed over with a word : The latter was optimistic, somewhat inclined to refer to history, and criticized Ricardo for overlooking temporary and concrete things ; l the former in his Remarks on Political Economy (1821) argued against the doctrine that wages and profits must vary inversely, appealing to history for evidence. Craig also was critically inclined toward the Ricardian wage and rent theories. Richard Jones. Richard Jones (1790-1855) may be named as the first important rebel. His particular point of attack was the Ricardian doctrine of rent, which he assailed in vigorous terms in his Essay on the Distribution of Wealth and on the Sources of Taxation (i83i). 2 All land rents he divides into two classes : peasant rents and farmers' rents. The former are determined solely by bargain between the proprietor and a set of laborers who are chained to the soil and use their small capital to get a bare living. Jones' contention is that farmers' rents deserve the exclusive attention given to them only as a scientific problem affording mental gymnastics ; if the number of people concerned be considered, peasant rents are far and away the more impor- tant, in the past they have prevailed everywhere, and are the predominant form of rent now (1831). The abstract assumptions of Ricardo's teaching are pointed out as follows. If (i) lands were first appropriated by those willing to bestow pains on cultivation, and (2) if there were free access to uncultivated lands, the theory would hold; "but the past history and present state of the world yield abundant testi- mony, that it neither is, or ever has been, a practical truth, and that the assumption of it as the basis of a system of political philosophy is a mere fallacy." 3 Jones further states that Ricar- dians make the " visionary " assumptions that (3) while there is unoccupied land, no rent, except in proportion to superiority over such land, exists, and that (4) rent is never the immediate result of cultivation. Jones also denies that rent increases only through the resort to inferior agricultural investments, his 1 Principles of National Wealth (1825). * Vol. I. No other appeared. 3 Distribution of Wealth, Chap. I. 398 ECONOMIC THOUGHT argument being easily triumphant, as he sees it, since he denies diminishing returns on the ground that improvements in the arts of production invalidate it. 1 That these criticisms do not touch the heart of the theory of rent will be readily recognized. Properly interpreted, the third Ricardian assumption is correct as a long-run tendency, and Jones seems to be in error in putting the fourth assumption into the mouth of Ricardo. His criticism of diminishing returns, however, brought out the necessity for a distinction between the historical law and one good at any given time. His chief service in this connection is that he called men's attention to the fact that frequently what is called rent is not economic rent, and, in general, pointed out that the rent theory as commonly stated rests on certain abstractions which limit its application. In this same work, Jones shows that where peasant rents obtain the interests of the landlord and society are not opposed ; and he criticizes the wages-fund theory, as will appear later. Something of Jones' purpose and method are revealed in the following excerpt : " If we wish to make ourselves acquainted with the economy and arrangements by which the different na- tions of the earth produce or distribute their revenues, I really know of but one way to obtain our object, and that is to look and see." 2 And in 1833 in addressing the Indian cadets he said : " We must get comprehensive views of facts, that we may arrive at the principles that are truly comprehensive " otherwise " general principles " would have no generality. This spirit is to some extent illustrated in an article on " Primi- tive Political Economy of England " published in the Edinburgh Review for 1847. Here he gives an account of Mercantilism which is still worth reading. Jones was little known to the outside world, but after 1859, 1 Ibid., p. 199. * Introductory Lecture at King's College, Literary Remains, p. 569. Professor Marshall has pointed out that Jones did not sufficiently distin- guish between generality of conception and method on the one hand, and generality of doctrine on the other. (Old Generation of Economists and the New, Quar. Jr. Econ. XI, 116.) CONCRETE-HISTORICAL CRITICISM IN ENGLAND 399 when his Literary Remains were published through the activity of Dr. Whewell, he powerfully affected the minds of many Eng- glish students. Shortly following Jones' criticism came that of the American John Rae (1834) to which reference has already been made. 1 On the basis of Bacon's Novum Organum, he formulated certain canons of inductive science, and showed that Adam Smith's thought was not truly inductive. Walter Bagehot (1826-1877), banker and son of a banker, and editor of the Economist, was an admirable combination of student and man of affairs. Though more inclined to follow Ricardo than any other writer to be mentioned in this chapter, he was kept from undue abstraction, and his great service was to show the relation between facts and theories, especially in reconciling economics and history. 2 Bagehot's only notable thought on the material of pure theory concerns the entrepreneur or employing capitalist. His func- tions and importance are stated in some detail, and Bagehot was in advance of English economists in this matter. He insists that the costs of production are entrepreneur's expenses, of which he gives a peculiar and erroneous analysis. 3 His greatest posi- tive contributions to economic thought lie in the field of money and banking. But here the chief concern with Bagehot is his treatment of the method and scope of political economy. For one thing, he limited the application of the science to conditions such as pre- vailed in a well-developed exchange economy : " The science of Political Economy as we have it in England may be defined as 1 Above, p. 300. 2 Bagehot's writings are as follows : International Coinage. 1869. Depreciation of Silver (1877). Reprinted from Economist. Lombard Street (1873). Economic Studies, a collection of his essays, published 1880. The English Constitution. Essays on Parliamentary Reform. Physics and Politics (1872). * Economic Studies, chapter on "Cost of Production." 400 ECONOMIC THOUGHT the science of business, such as business is in large productive and trading communities." This science he recognized as a product of developments dating from the Industrial Revolution. There had been a pre-economic age when the assumptions now made would not apply. He was among the first of English econ- omists to appreciate the idea of evolution in connection with social science. (In these matters Sir Henry Maine was to Bagehot what Savigny was to the German historical econ- omists.) This fact appears clearly in his work on Physics and Politics (1872), in which he discusses the evolution from a pre-economic to an economic age. In this same work he brings out the force of custom as limiting competition. In fact, Bage- hot states that there are three valid objections to the English political economy : it is too often put forward as explaining the principal or even all causes of wealth in all societies ; it is too abstract ; there is not enough verification. Moreover, he saw that competition did not always work for the best interests of mankind. But Bagehot did not desire to abandon the deductive method nor abstraction. " The process by which physical science has become what it is, has not been that of discarding abstract speculations, but of working " them out. More verification is needed. Rightly understood, the historical and abstract meth- ods are not in conflict. The complexity and ceaseless change of modern economic life make a complete record of industry im- possible ; statistics are a " scrap of scraps." Though an admirer of Ricardo, Bagehot was not blind to that writer's tendency to reason about abstract things as though they were real : " He [Ricardo] thought he was considering actual human nature in its actual circumstances, when he was really considering a fictitious nature in fictitious circumstances." x Of James Mill he says : " He would have shuddered at our modern conception of Political Economy as a convenient series of deductions from assumed axioms which are never quite true, which in many times and countries would be utterly untrue, but which are sufficiently near to the principal conditions of the 1 Ibid., p. 157. CONCRETE-HISTORICAL CRITICISM IN ENGLAND 401 modern world to make it useful to consider them by them- selves." Leslie. In several respects the successor of Richard Jones was the Irish economist, Edward Cliff e Leslie (1825?- 1882). He was educated at King William's College, Isle of Man, and Trinity College, Dublin, where he was greatly influenced by the lectures of Sir Henry Maine. In his writings, he carries Maine's historical method over into political economy. He was also a reader of Comte, and knew the German Historical School through the works of Roscher and Knies. Leslie's chief work is collected in two volumes of essays: Land Systems and Industrial Economy of Ireland, England, and Continental Countries (1870) ; and Essays in Moral and Political Philosophy (1879). His positive contributions concerned prices, wages, distribution of precious metals, and agrarian problems. His attack on the wages-fund theory will be mentioned in an- other chapter. But Leslie's significance lies in the negative or destructive work he did, notably his opposition to abstract, a priori methods in political economy. Ricardo, he says, in his " laws " of natural wages, profits, and prices, ignored the essential difference between stationary and progressive societies. Had the economists, for example, in place of reasoning from an assumption, examined the facts, great inequalities in wages, even within the same occupation, would have been recognized. In Leslie's eyes, as in those of the German Historical School, man is not a mere exchanging animal a personification of an abstraction ; " he is the actual human being such as history and surrounding cir- cumstances have made him, with all his wants, passions, and infirmities." Pure deduction, he held, had betrayed Ricardians into " enor- mous fallacies," from which Smith's element of induction had saved him, such as the doctrine of equalized wages and profits and the theory that the rate of profits cannot rise except by a fall in wages. Leslie strove valiantly to dispel what he termed " the ancient mist of realism," that is, the practice of confusing several ideas 3D 402 ECONOMIC THOUGHT in one word. Thus he argued that the "wages-fund " was an imaginary category; that "private interest" is merely a col- lective term for a number of individual wants, wishes, and tastes which vary with time and place; it is confused, too, with the phrase, " desire for wealth," which, in turn, stands for a mul- tiplicity of ideas. 1 Even such a word as " emigration," Leslie shows, has been used to confuse a healthful movement such as is effective in raising wages, with an ineffective and harmful one resulting from evil institutions. The opinion that political economy had been prostituted to the ends of class interest was pretty clearly expressed by Leslie. Smith, he says, could not have foreseen how " ' the progress of opulence ' would govern the interpretation of his doctrines, or how the system he promulgated as the system of liberty, justice, and divine benevolence, would be moulded into a system of selfishness by ' the private interests and prejudices of particular orders of men.' " 2 Again he states: " Instead of a science of wealth, they give us a science for wealth." 3 This broad-minded economist vigorously opposes the utilita- rianism of the economists of his day. Happiness cannot be the ultimate and only test : if it is better to be a sad philosopher than a merry fool, as, according to Mill, all men of elevation admit, then there must be something more desirable than mere happiness. Leslie thinks that " the progressive improvement of living creatures " is the best purpose the world contains. He does not, however, escape one of the weaknesses of the historical school. The negative character of his work has been mentioned, and his tendency is to leave us without definite conclusions. Political economy to him was " an assemblage of speculations and doctrines which are the result of a particular history." He believed that " no complete and final philosophy of life and human aims has been constructed; that the world abounds in unsoluble problems, and man's ideal of virtue is both historical and progressive." In short, Leslie was inclined to deny any validity to economic " laws." 1 Land Systems, etc., pp. 85 ff. 1 Essays, p. 149. Land. Systems, p. 89.. CONCRETE-HISTORICAL CRITICISM IN ENGLAND 403 It is not true, however, that he denied a place to the deductive method : " by combining the closest observation of phenomena with the boldest use of speculation and scientific hypothesis," 1 other sciences had progressed. His whole contention is admir- ably formulated in the following quotation : political economy's " fundamental laws ought to be obtained by careful induction, that assumptions from which an unreal order of things and unreal uniformities are deduced cannot be regarded as final or adequate ; and that facts, instead of being irrelevant to the economist's reasoning, are the phenomena from which he must infer his gen- eral principles, and by which he ought constantly to verify his deductions." : This may be profitably compared with Senior's views. 3 It is to be remembered that final judgment can only with difficulty be pronounced concerning Leslie's thought; for the work which was to have set forth his ideas systematically was lost while in manuscript form. This severe blow is known to have hastened his death. Ingram. John Kells Ingram (1824-1907) was, like Leslie, an Irish economist in Trinity College, Dublin; and his views are in many respects identical with his countryman's. His chief works are an address on The Present Position and Pros- pects of Political Economy (1878), and A History of Political Economy, originally published as the article on political economy in the Encyclopedia Britannica. Ingram complains that the classical doctrines are " homogeneous with the school logic, with the abstract unhistorical jurisprudence, with the a priori ethics and politics, and other similar antiquated systems of thought." 4 They are too individualistic, unmoral, and con- sider exchange value too exclusively. We must base our studies more on modern physics and biology. The old abstract formulae that all men desire wealth and dislike exertion, must be given up : " The laws of wealth must be inferred from the facts of wealth, not from the postulate of human selfishness." However, " re- flective analysis " will be continually used : ascertained truths 1 Essays, p. 378. * See above, p. 264. 1 Land Systems, p. 358. * History, p. 240. 404 ECONOMIC THOUGHT respecting human nature may be used as guides ; and, occasion- ally, a deliberately instituted hypothesis may be legitimate. Ingram was an outspoken follower of the philosopher, Auguste Comte, from whom he professed to draw his inspiration, though he was perfectly familiar with the German Historical School. 1 Toynbee. Arnold Toynbee (1852-1883) should not be forgotten among the concrete-historical critics. A young man when he died, his views had scarcely ripened, and his frag- mentary writings sometimes show signs of haste and even incon- sistency. 2 All his work was colored by an earnest and enthusiastic de- sire for social reform, and he made a special study of poverty and the labor problem, frequently addressing labor meetings. He was a pioneer in settlement work. The final collapse preceding Toynbee's untimely death was brought on by one of his numerous speeches, this particular one being directed against the doctrines of Henry George. Toynbee shows the relativity of the doctrines of the Classical School, making a survey of industrial history and bringing out the effects of the local setting on Smith, Malthus, and Ricardo. He then urges that democracy has made man deal with the ques- tion of a better distribution of wealth ; economists must answer the question, whether the mass of workers can raise themselves under present conditions of competition and private property. Ricardo and Henry George answer, no. He cites statistics showing that real wages have risen, to " disprove Ricardo's proposition that no improvement is possible." In stating that interest tends to fall, Ricardo, he says, had overlooked the possibilities of expansion in the field of investment; and he denies the Ricardian laws as to the tendencies of rent, wages, and profits. 1 His position is most clearly and concisely stated in his preface to the English edition of Ely's Introduction to Political Economy, London, 1891. 2 His published writings are embraced in a volume of Lectures containing essays on "Ricardo and the Old Political Economy," "The Industrial Revo- lution," and popular addresses on " Wages and Natural Law," " Industry and Democracy," "Are Radicals Socialists?" etc. CONCRETE-HISTORICAL CRITICISM IN ENGLAND 405 Toynbee shows his optimism in believing improvement com- patible with the present social order, urging that since 1846 free trade, factory legislation, trade unions, and cooperative societies had caused higher wages. He hopes much from moral progress and self-help, and also advocates an extension of gov- ernment ownership and public housing. He is not, however, a Socialist, for he accepts private property and repudiates all confiscation and violence. Some noteworthy characteristics of his thought appear in his emphasis of the distinction between theory and practical science or art ; of that between what is and what ought to be ; of the force of custom; and of the relativity of human nature " it slowly changes, and is modified by higher ideals." His stand on the point of method may be summed up by stat- ing that while criticizing the overuse of deduction, he saw no real opoosition between it and the historical method. Thorold Rogers. Finally, Professor James E. Thorold Rogers (1823-1890) must be mentioned to complete the account of the earlier historical reaction in England. Rogers was in spirit somewhat more akin to Jones and Bagehot than to Leslie and Ingram, with their greater emphasis on ethics. Thus he more nearly followed the classical doctrines, while making a departure in the direction of careful historical and statistical investigation. His best-known work, the celebrated, though not uncriticized History of Agriculture and Prices in England (1866- 1882), is a monument of patient research. Others are, Manual of Political Economy (1868) ; Six Centuries of Work and Wages (1884) ; The First Nine Years of the Bank of England (1887) ; and The Economic Interpretation of History (1888). Rogers took up economics under Cobden's influence and was also affected by Bastiat; therefore he might be classed with the Manchester School in so far as that school's peculiar tenets are concerned. He was opposed to what he believed to be the Ri- cardian doctrine of rent, however, laying emphasis upon the situ- ation element and upon the fact that a movement from more to less fertile lands is not shown by history. Indeed, Rogers was very scornful toward Ricardo and his followers. The following 406 ECONOMIC THOUGHT quotations show his spirit : " By this historical study, I began to discover that much which popular economists believe to be natural is highly artificial ; that what they call laws are too often hasty, inconsiderate, and inaccurate inductions ; and that much which they consider to be demonstrably irrefutable is demon- strably false. . . . Two things have discredited political economy the one its traditional disregard for facts ; the other, its strangling itself with definitions." l Summary. It would be a serious error to fail to remark sufficiently upon the differences among the writers mentioned in this chapter. From the point of view of method and of relation to the classical political economy, however, there is considerable unity among them. Thus, without exception, they show some appreciation of the historical method, though Bagehot would so limit the definition of political economy as to make more place for abstraction and deduction than the others. The in- fluence of Sir Henry Maine has been noticed, being marked and direct in the case of Leslie and of Bagehot. In accord with this historical attitude is a common revolt against abstraction. All would limit it in some way or other. All call for more verification, more concreteness. All criticize the economists, though Leslie and Rogers go far in defending Smith, and Bagehot is inclined to follow Ricardo in some matters. In each case, some one or more particular doctrines of the Ricardians is attacked in a monograph or essay. Not one accepts the wages-fund theory ; all but Bagehot assail it. The same can be said concerning the Ricardian theory of the relation between wages and profits. Jones, however, largely concentrates his criticism on the rent theory; Bagehot, on cost of production; Leslie, on the abstract assumptions, like that of a universal desire for wealth, and on the wages theory; Toynbee, on the movement of wages and profits ; Ingram, on method. The group is characterized by a rather clear tendency to optimism. All its members are either critical or hostile to Malthusianism. Jones and Toynbee reject what they under- stand as the law of diminishing returns. Holding that social 1 Econ. Inter p. of Hist., Preface. CONCRETE-HISTORICAL CRITICISM IN ENGLAND 407 institutions are potent in the field of distribution, as they were inclined to do, there was ground for hopefulness. Three of the later writers, at least, believed in the relativity and progress even of " human nature " and morals themselves. These same three men Leslie, Toynbee, Ingram desired a close relation between political economy and other social sciences. These men deserve an honorable place in the history of eco- nomic thought. Though they left no important general treatise, 1 and their main significance is negative, they supplied a much- needed corrective to English political economy. They stood for breadth or concreteness, or both. True, with the exception of Bagehot, they entertained vain hopes for the establishment of a new political economy; but what they really achieved was a better and more human economics. 1 Rogers' Manual is little more than a primer. CHAPTER XXV THE GERMAN HISTORICAL SCHOOL* DURING the middle years of the nineteenth century there arose in Germany an almost violent reaction against the dominant economics of Smith and Ricardo. This reaction found its chief expression in criticism of the philosophy and the methods of the earlier economists. It came about somewhat in this way. Circumstances giving rise to the School. Important develop- ments had recently taken place in the world of thought outside of economics. Among the more remote of these was the phi- losophy of Hegel. 2 Hegelianism as a social theory regards the course of culture as an unfolding of the human spirit, as a sort of inherent self-development moving in an innately deter- mined cycle. It contains a remarkable idea of evolution, though not of evolution in the Darwinian sense, and its influ- ence is apparent, as will be seen, in the thought of at least one of the Historical School. The economist and political scientist, Lorenz von Stein (1815- 1890), was influential in applying Hegelian ideas to economics. A professor at Vienna from 1855 to 1888, Stein was a stimulating teacher and writer who combined a knowledge of French Social- ism, and a realization of the interrelation of philosophy, eco- 1 In what follows, the historical method, as such, is emphasized. Several of the historical school were keen theorists and wrote valuable works dealing with economic theory; but their significance for this chapter lies in their revolt in method. 2 Hegel's Logic was published 1812-1816; Philosophy of Right, 1820. See Encyclopedia Britannica, " Ethics " : " the essence of the universe is a process of thought from the abstract to the concrete ; . . . the history of mankind is a history of the necessary development of the free spirit through the different forms of political organization." 408 THE GERMAN HISTORICAL SCHOOL 409 nomics, and law, with a considerable touch of the historical idea. He may be regarded as transitional from German classicism to a more advanced historical and social viewpoint. 1 Of more immediate importance were developments in juris- prudence and philology. In the former science the work of Eichorn and Savigny was of notable effect. These men taught that juristic systems are of relative validity only ; that they are the product of the social conditions in which they arise ; and that what is just and proper at one stage may be the reverse at an- other. And at the same time, in the domain of the languages, the laws of comparative philology were being formulated, so that in the evolution of words and the methods of tracing that evolu- tion there were suggestions for a comparative method of study- ing economics. Bases for the new movement were also laid in the social and political developments of contemporary Germany. The Zoll- verein had been established in 1833, and German nationalism was on the rise. New and complicated industrial problems had come, especially the labor problem, and these clamored for a solution which the Classical School did not afford. A confusion of conflicting ideas prevailed, while the old leaders, as Hildebrand said, were silent. 2 Muller and List had already expressed nationalistic ideas, and had made a limited use of historical comparison ; but they were partisans, and their historical knowledge was imperfect. Already the characteristic tendency of several German economists to emphasize nationality, moral forces, and the place of govern- mental activity has been observed. What the members of the Historical School did was to take all these tendencies, and acting under the stimuli just mentioned, to formulate them hi a broad, scientific way, while concentrating attention upon the problem of method. The thinkers of the new school saw that economic life is not isolated from political and social life, but has close connections 1 Stein wrote Socialismus u. Kommunismus des heutigen Frankreich (1843), Lehrbuch der National Oekonomie (1858), and other works. 2 Die Nationalokonomie der gegenwart und Zukunft. 410 ECONOMIC THOUGHT with all civilization ; that it is not the same with all men, but varies in different societies and nations under different circum- stances and at different times. They revolted against the one- sided and rationalistic doctrines of their predecessors, and pro- ceeded to formulate an " historical method " for political economy. It is essential to an understanding of the historical movement in Germany, to distinguish between the older group which origi- nated that movement, and the younger group which carried the tendency further, even going to extremes. The older group was largely, though not entirely, negative in its thought, in so far as method was concerned. Its members were attacking and tear- ing down the faulty abstract-deductive methods which they found predominant, and, while they formulated a method of their own, and their spirit of free investigation had most valuable positive results, still the negative aspect of their work bulks very large. They did not deny the existence of laws in economics, but they attacked absolutism and abstract deduction from ideal postulates. The younger group sought to develop and apply the historical method further, and in so doing they took a posi- tive stand that the older group would not have sanctioned. They, too, carried on a negative work ; but this had been largely done for them, and in their several ways they took it as their task to get more positive results from a pretty exclusive appli- cation of their method. They differed from the older group in that they denied the existence of natural laws in economics. As will appear, they have lately undergone a modification of spirit in the direction of greater breadth. The Older or More Negative Historical Group. First among the German historical economists came Wilhelm Roscher (1817- 1894), professor at Gottingen and Leipzig. Roscher thoroughly understood the classical school, and in his positive theoretical writing was at one with it. Perhaps as a result he was the author of one of the few well-balanced German treatises on economics. In his now famous Grundriss zu Vorlesungen iiber die Staatswissenschaft nach Geschichtlicher Methode (Outline of Lectures on Political Science according to the Historical THE GERMAN HISTORICAL SCHOOL 411 Method), published in 1843, however, he laid down the follow- ing program : 1 1. Political economy is a science which can only be explained in the closest relation to other social sciences, especially the his- tory of jurisprudence, politics, and civilization. 2. A people is more than the mass of existing individuals, and an investigation of its economy cannot, therefore, be based upon a mere observation of present-day economic relations. 3. In order to derive laws from the mass of phenomena, as many peoples as possible should be compared. Ancient peoples, having run their full course, are peculiarly instructive; and similarities between the old and the new are especially fruitful. 4. The historical method will be slow to praise or blame economic institutions, for there have been few that were entirely good or entirely bad for all peoples. Accordingly, Roscher denied absolute truth as to general economic laws : " general principles " are necessarily incom- plete abstractions. He would have recognized only national economics, holding that each people and each age has its own peculiar economy. The economist should thus confine himself to the statement of rules of government which are applicable to his particular economy and are based on a study of various stages of industrial evolution. Roscher shows clear evidence of the influence of Hegelianism. 2 The history of a nation is the unfolding of the human spirit : it is a cycle, repeating itself in different ages. The province of economics is to determine the laws of this process from the eco- nomic viewpoint. This idea is probably to be regarded as having a taint of error, for there is no proof of the existence of any such cultural laws as it assumes. It is surely overidealistic to regard environmental conditions as mere disturbing elements in a self- development cycle, as Roscher sometimes seems inclined to do. The next apostle of the historical method was Bruno Hilde- 1 Vorrede (preface). A full translation may be found in the Quarterly Journal of Economics, October, 1894. On Roscher see also the excellent article by Oncken in Palgrave's Dictionary of Political Economy. 2 Veblen, " Gustav Schmoller's Economics," Quart. Jr. Econ., 1901. 4 I2 ECONOMIC THOUGHT brand (1812-1878), whose book, Die Nationaltikonomie der Gegenwart und Zukunft (The National Economy of the Present and Future), appeared in I848. 1 Hildebrand writes brilliantly and clearly, but his profundity seems much less than Ingram, for instance, ascribes to him. His criticism of Socialism is ad- mirable, but he shows a lack of thorough understanding of the founders of the Classical School. Hildebrand opens with the explanation that his work is an attempt to break the way for an historical direction and method in economics, a reform similar to that already made in phi- lology. Smith, Hildebrand says, erred, like the Mercantilists and Physiocrats before him, in attempting to build a theory which would apply to all times and places. Though Rau had denied this, on the ground that national lines are recognized by Smith, he did not meet the objection : " The cosmopolitan character of the Smithian school is not to be sought in a denial of the exist- ence of states, but rather in the fact that it applies its doctrines to all states and peoples equally, considering the state only according to its external boundaries as a mere fragment of the whole mass of humanity and ascribes the same validity to its laws everywhere." 2 The Classicists forget that man, as a social being, is always a child of civilization and a product of history, his wants, his character, his relations to goods and men ever changing. More- over, they are atomistic, making the individual the end of society, and holding that society itself is based upon an exchange con- tract, private advantage being regarded as the source and bond of the community. Then, too, they slight the moral problem of the human race, a course which leads to materialism. Even if immaterial things are recognized, they are not given the 1 Vol. I appeared only. Hildebrand promised others. While he lived many years and wrote other works, he never fulfilled this promise. I will not go so far as to say this shows inability on his part, as some have done, but simply observe that we do not have his complete thought and our judgment must contain some reserve. J p. 28, note. THE GERMAN HISTORICAL SCHOOL 413 slightest effect upon economic doctrine. On the other hand, it is a merit of the Socialists that they have emphasized ethical factors. Hildebrand believed that the present money economy is only transitional to a more complete stage of development which he called credit economy. Karl Knies (1821-1898) was the most thorough and logical expositor of the historical method. His work, Die politische Okonomie wm Standpunkt der geschichtliche Methode (Political Economy from the Standpoint of the Historical Method), appeared in 1853, with a second edition containing some addi- tions in 1881-1883. It was dedicated to Roscher. The title of the second edition, it is important to observe, was changed to read, " Political Economy from the Historical Standpoint." Like his fellows, Knies attacks absolutism in theory. No eco- nomic laws can be declared absolutely final, for they concern points in a " constantly unfolding evolution," and can do no more than reflect a progressive manifestation of the truth. " The truth of all theories which have their foundation in empirical Life rests upon concrete hypotheses. Relativity in the validity of their conclusions or judgments is a necessary result of the circumstance that those hypotheses do not remain identical nor occur constantly in all times, places, and circumstances." x No complete parallelism between the past and the present exists. Knies dwells upon the fact that the concept of private property has been a changing one, and that self-interest often conflicts with the social welfare. And he calls attention to the fact that various ideas as to what kinds of labor are productive have pre- vailed. Valuations themselves rest upon such shifting hypothe- ses. He shows in some detail the circumstances which have given rise to the various kinds of economic thought, developing the idea of relativity between economy and economics. He believes in a certain relationship between the industrial stage and the development of the science. The next question is, what method shall be followed in each case ? By method Knies means the manner in which f unda- 1 ist ed., p. 286. 414 ECONOMIC THOUGHT mental facts are gained, demonstration is made valid, and con- clusions established. The method applicable in any scientific discipline stands in the closest relation to the character of the science; therefore, progress in the science affects the method, and vice versa. Knies criticizes Roscher for the un- usual and unscientific way in which he uses the term, " historical method," stating that Roscher devotes his attention to the exposition of historical material, method meaning to him merely a general point of view. A beautiful and fruitful field is opened alongside of political economy, but economic doctrines remain uncorrected. 1 The chief problem remains, which is to establish the causal connection between ever-changing phenomena. When the question concerns phenomena, and the laws of phenomena, in which likeness and difference appear, Knies says that we cannot expect to establish identities, but only analogies : " Only laws of analogy can be won, not laws of absolutely equal causa- tion." 2 We are concerned with clarifying the regularly occur- ring analogies in economic phenomena. In this connection Roscher is again criticized for believing that a comparison of historical conditions which are merely similar, not identical, will lead to the establishment of laws of cause and effect. Knies shows a usual tendency of the German Historical School by differentiating natural and social phenomena and by laying strong emphasis upon the modern importance of social institu- tions in connection with the distribution problem. The foregoing economists had no idea of a revolution in eco- nomics, and were by no means averse to theory and deduction, as the character of their work shows. As much has already been indicated concerning Roscher ; and Knies wrote acute theoretical works on money and credit, telegraphs, railway transportation, and statistics. In these books there is no one-sided application of historical-descriptive methods. Rather one wonders if, after all, there is much difference between the methods of the members of the Historical School and those of the men they criticize ; and no little misunderstanding has arisen on this very point. *p. 32. *p. 346. THE GERMAN HISTORICAL SCHOOL 415 Knies, it will be remembered, changed the title of his work to read " from the historical standpoint " instead of " from the standpoint of the historical method." This he did to disarm just such criticism as still follows the school, and to show that he advocated no exclusive, one-sided method. In the new edition he wrote : " Taken in the true methodological sense, therefore, the designation, ' historical method of Political Economy,' would be unreservedly permissible only if historical investiga- tion were to be recognized as the sole task of the science. Though we may strongly desire to refer to history and stand upon it in a well-considered way, yet we must never on that account allow to pass unrecognized the difference between economic history and political economy, nor that between the special tasks of the his- torian and of the economist." x As a matter of fact, the older group of the German Historical School stood first for a criticism and attack upon the narrow, error-breeding abstractions of the Classical School ; and secondly, and positively, for a theory of evolution and for a spirit of free and full investigation. 2 Roscher believed that by the study of his- tory we can find a " firm island of scientific truth which may be accepted in the same manner as the adherents of different sys- tems of medicine all admit the teaching of mathematical physics." He believed that there are general principles or laws, only they are to be applied to particular cases with the aid of statistics of local conditions. Knies denied, not that any laws exist, but that there are laws like those of the external universe, e.g. physics and astronomy. This group will be remembered as standing for 1 Introduction, p. vii. 2 The spirit of the group appears in the following quotation. Speaking of unrealism Knies said: "The difference is that the idealists demand con- ditions which we, according to the known and knowable fundamentals of the real and personal conditions in economic life, must designate as impos- sible ; and that, in conflict with the content of life, they wish to make their absolutely complete conditions stationary, while we ... proceed from and upon the ground of positive results and with means the reality of whose existence is confirmed by experience : we can point to goals which we view like the forms of the present which are already attained as points in a con- stantly unfolding evolution." (Pol. Oek., ad ed., pp. 42 f.) 41 6 ECONOMIC THOUGHT a new spirit and a fresh viewpoint. It cannot be maintained that their effect was merely negative, for in America and England and Italy and France the stimulus of their thought was a virtual emancipation, and produced profound results. The Younger or More Positive Group. In the course of a few years, another group of thinkers appeared, however, and determined to apply the historical method, as they conceived it, in a thoroughgoing way to concrete studies. Chief of these was Gustav Schmoller, at the present time one of Germany's leading economists. In 1895 Schmoller wrote : " The older historical political economy has repeatedly desired to turn too quickly to account the lessons of universal history ; we are now aware that laborious inquiries into the details of economic history can alone supply the right basis for the study of history in its economic and socio-political aspect, and for the satis- factory empirical establishment of national economic theory." l In these words the difference between the two groups is suggested, and also, perhaps, a certain degree of impatience with the older group for not following the inductive method to such lengths as the members of the younger group in their various ways desired. To get the setting for Schmoller's work it is necessary to turn aside for a moment to note a new development in German eco- nomic thought. Beginning about 1863, Germany was powerfully shaken by a social agitation which brought out the younger group and gave the Historical School its great prominence. In 1872 the now famous Verein jur Sozial Politik was founded. 1 This society was based upon the recognition of a social problem, and stood for participation in political activity for social reform. It gave rise to much controversy, and brought new life and purpose to the historical economists. 2 At this time, however, they became con- fused with these advocates of social reform sometimes called 1 Handworterbuch der Staalswissenschaften, article on " Volkswirthschaft," 9- 1 Cf. Schmoller, Ueber einege Grundfragen des Rechls und der Volkswirth- schaft, 1875. See also below, p. 484. THE GERMAN HISTORICAL SCHOOL 417 rx> t " socialists of the chair." The movement was thus a broad one, embracing most of those in revolt against the Classical School. In it were those who advocated the inductive method, those who emphasized ethical factors, and the adherents of realism. From among these different phases of the movement, however closely associated they may be, the idea of the historical method, as such, must be kept distinct. Schmoller, who was born in 1838, and is now professor at the University of Berlin, was active in the Verein. He sees in eco- nomic history and statistics the means for establishing a methodi- cally complete empiricism. By this means alone can the founda- tion for a concrete theory of political economy be derived. The deductive method is not entirely excluded by Schmoller, though at first he gave it a very small place, but is rejected only in so far as it is connected with abstraction. As his thought has ma- tured, Schmoller has come to hold that the proper method is a combination of induction from historical and statistical observa- tion with deduction from the known properties of human nature. Natural environment, ethnology, and psychology are all appealed to; and in his last and most important work, Grundriss der Allgemeinen Volkswirthschaftslehre (1901-1904), these factors play an even larger part than purely historical observation. All these things are the factors which determine the industrial situa- tion at any given tune. Psychology, for instance, must be in- troduced in order to explain motives ; while the facts of climate and geological structure place limitations. Certainly Schmoller's later writings show slight evidence of Hegelianism, his idea of evolution being more nearly like Darwin's. Meanwhile Bucher in his Entstehung der Volkswirtschaft (1893) has taken a pointof view similar toBagehot's in England, 1 holding that while the historical method leads to a theory of the laws of economic evolution, the deductive methods of the Classi- cal School are valid for developing the laws of a modern economy. Like Bagehot he would stress the modernness of economics, saying it is a thing of the present complex money- and-division-of-labor economy. Here abstraction and deduc- tion may be necessary. 2 E l See above, p. 399. 4 i8 ECONOMIC THOUGHT Schaffle (1831-1904) may also be mentioned as an important recent economist who had affinities with the school. A notorious characteristic of his is an overextension of the analogy between the body politic and a physical organism. 1 He stands for a large amount of government intervention, and is rather sympathetic toward Socialism. 2 Nor among the later adherents of the school should Brentano and Held be forgotten ; while Conrad, Miaskowski, Nasse, Schanz, and Schonberg are among those who combine the historical method with a considerable use of deduction. Schmoller and Ashley in England, however, are the clearest representatives of the younger group; the others are mentioned not as forming a compact or closely re- lated group, but as displaying similar tendencies in method. At the present time the notable tendencies of the historical school have been summed up by a prominent English historical economist of the younger group in a way similar to the following : 3 1. But small space is given to the general principles or theory (the Grundlegung), the importance of the historical study which usually follows being emphasized. 2. Relatively slight attention is given to the theory of value, especially to its subjective aspects. 3. Individualism and the principle of self-interest are greatly limited by the introduction of general anthropological and his- torico-philosophical considerations. Under the last head would be included their ideas concerning the relativity of theories and institutions, the importance of ethics, social institutions, etc. The general tendency is toward a partial return from the extreme reaction of the later historical movement, and toward a better-balanced method, and, in a word, toward a recognition of the fact that each method has its place. This change is 1 Bau und Leben des sozialen Kdrpers, 1875-1878, 4 vob. See Econ. Jr., xiv, 138, for convenient biographical and bibliographical note. 1 Die Quintessenz des Sozialismus, 1875. Schaffle grew more critical of socialism, and is not to be thought of as having been a socialist himself. 1 See Ashley's article on " Historical School " in Palgrave's Dictionary of Political Economy. Professor Ashley has been one of the most extreme members of the historical school. THE GERMAN HISTORICAL SCHOOL 419 seen in Schmoller's thought and is expressed in Biicher's posi- tion. Summary and Critical Estimate. From the standpoint of pure theory, the largely negative character of the earlier group of the German Historical School, and the weakness of the method advocated by the later group, are evidenced by the fact that after two decades or more the founders of the school had accomplished directly little beyond the preliminaries of the introduction of sys- tematic reforms ; and, indeed, aside from their valuable studies in industrial history, the work of' the later and for a time, at least more radical group was polemical and speculative. Directly, it led to results which were largely negative. Indirectly, however, as has already been emphasized, the thought of the school has been one of the great liberating and stimulating forces of the century, bringing positive results in the economic theory of all the advanced nations. The reasons for this result are not far to seek : strictly inter- preted, the method itself has inherent weakness ; it is, in fact, itself one-sided. The adoption of the exclusive use of the his- torical method as urged by the more radical group would devital- ize the science by depriving generalizations of their validity. As Hasbach and others have pointed out, 1 a purely inductive method one according to which deductions are made only from premises derived from observation will not suffice for a science of exchange among men. Suppose that we make a long series of observations concerning a phenomenon, and as a result formulate a rule ; suppose further, that we verify this rule ; is there not still the question, what is the cause ? The historical law must ever be an empirical one based on an ever incomplete experience. 2 It is the recognition of this fact that accounts for the general tendency to deny the validity of economic laws which character- izes the school. Even Ingram criticizes them on this score, show- 1 See article by Lexis in Die Entwickelung d. deutschen Volkswirthschafts- lehre, I, i, 38 (Leipzig, 1908). 2 Menger in Untersuchungen uber die Methode der Sozialwissenschaften, 1883, made a most acute criticism along this line. 420 ECONOMIC THOUGHT ing that there may be laws in change and development, and " that there exist between the several social elements such relations as make the change of one element involve or determine the change of another." 1 In more positive criticism, the Historical School at least that of Schmoller and Ashley has sometimes overlooked the ex- istence of the power to judge of causes from a knowledge of the motives of men and the action of environment. There are certain psychical qualities, certain physical laws, and perhaps certain tendencies in social organization, which may be taken as fundamental. These are like the axioms of geometry. By referring to them, economic may become more than a branch of historical learning, for thus one may determine the causes or sources of the observed regularities, and so allow economics to partake of a scientific character. In fine, both inductive and deductive methods are needed. 2 The words of an eminent adherent of the latter method state the truth with admirable moderation : this method " recognizes the utility for technical reasons of tracing causal connections, not only from special to general, but also, for the sake of experi- ment, from general to special. It thereby often discovers links in the chain of causes which were, of course, present in the com- plex, empirical facts, but which were there so deeply inwrapt that they would hardly, if ever, have been discovered by a purely inductive method." 3 The service of the Historical School has been to counteract an undoubtedly overabstract tendency. In applying the prin- ciple of least sacrifice some economists had forgotten that what one people or time considers a gain, another may look upon with indifference or regard as a loss. So it is also with the " at any given stage of the industrial arts" qualification of the "law" of diminishing returns. The school has broadened the conception 1 History of Political Economy, p. 205. This the older historical group, though differing as to the nature of the relations, would not deny. 2 See above, pp. 9 f. 3 Bohm-Bawerk, " Method in Political Economy," Ann. Amer. Acad., I, 263. (Writer's italics.) THE GERMAN HISTORICAL SCHOOL 421 of human motives by emphasizing the interaction of non -economic with economic motives. It has clearly shown the fallacy of ex- treme individualism and laisser faire. Finally, the followers of the Historical School are to be thanked for valuable studies in economic history, studies from which data have been obtained for verifying and correcting the theory of the Classicists. 3. THE LOGIC THE following chapters deal with some developments in the history of economic thought which concern the logic of particular points made in the economic theory of Smith and his followers. The writers to be discussed are notable not so much for their emphasis of a different underlying system of philosophy and ethics or for the adoption of new methods, as for their direct criticism of the economic doctrines of the Classical School. It is difficult to classify these thinkers and to select the most representative and important. Their criticisms vary in depth and essentiality and viewpoint. Now it is the rent doctrine, now free trade ; now the theory of wages, and again that of value. From one point of view, they might be grouped accordingly as they criticize from an ethical or non-ethical standpoint. Or the subjective element might be made the basis for classification. But a simpler course has been taken in merely discussing a few of the more notable and typical critics and theories. Not a few of the important criticisms of the class now to be discussed have been mentioned as incidental to the thought of those whose opposition proceeded from a philosophical or meth- odological viewpoint. Lauderdale and Rae, for illustration, criticized Adam Smith's discussion of division of labor and its advantages : and Sismondi, Miiller, and others, pointed out the evils which flowed from such division. Then Sismondi began a notable series of criticisms concerning income and consumption. Friedrich List attacked the labor theory of value, as did Bas- tiat and Carey, and proposed to amend the classical doctrine of capital by including immaterial wealth, a proposition in which Say and others had preceded him. Senior was a notable critic of the Ricardian theory of value, and censured the econo- mists for lack of precision in defining their field and terms. Jones, Thiinen, Carey, and Rodbertus, in their several ways, sub- jected the Ricardian theory of rent to adverse criticism; the various members of what might be called the concrete-historical group in England denied the validity of the Ricardian doctrine 422 THE GERMAN HISTORICAL SCHOOL 423 concerning the relation between wages and profits; and the German Historical School, along with others, in broadening the treatment of economic concepts and motives, led up to further criticism. In fact, almost a volume might be written describing and analyzing the bearing of the historical method upon eco- nomic theory, largely by way of modifying the premises. This school, too, together with such predecessors as Sismondiand Miil- ler, called attention to the element of friction and delay in the working of the economic " laws " of the Classicists. The Mal- thusian principle of population, implied in Smith's thought and accepted by Ricardo and Mill, is perhaps the most criticized theory which has become part of economics. On the one hand, the optimists assailed it ; numerous non-optimistic critics found this or that particular fault with it, on the other. All this leaves unmentioned, too, the criticism involved in such isolated points as Senior's abstinence theory of interest, Lassalle's idea of conjuncture, and the like. CHAPTER XXVI LAUDERDALE AND HERMANN: EARLY CRITICISM OF THE THEORY OF CAPITAL, PROFITS, AND VALUE THE theories of Adam Smith and Ricardo did not clearly set forth the nature and function of capital as an independent factor of production, and accordingly contained no clear-cut and dis- tinct analysis of " profits." They held to an objective cost theory of value in which labor, though not the sole element, was over- emphasized. Naturally, too, consumption received scant atten- tion. Two groups of criticism, then, are suggested : on the one hand the theory of capital and income needed development ; on the other, there was need for a critical examination of value theory which should bring the subjective factors into due promi- nence. Criticisms along these lines were essayed by Lauderdale, who has already been mentioned in another connection, and the German economist and statistician, Hermann. Naturally, cer- tain correlaries of the theories attacked were also open to objections, some of which are set forth in this chapter. Lauderdale's Criticism of the Theory of Capital and Profits and his Doctrines of Consumption and Value. 1 Capital and Profits. Lauderdale at once takes Smith to task for his treatment of capital, his point being that that factor had not been given due importance as a distinct element in produc- tion. Of his own work he says : " Land, Labor, and Capital are separately treated of as the sources of wealth; an opinion which, though it has been announced by some, and hinted at by others, does not seem to have made on any author so strong an impression as to be uniformly adhered to in the course of his 1 See also above, pp. 295-297. 424 THE THEORY OF CAPITAL, PROFITS, AND VALUE 425 reasonings." l Capital, he argues, is productive in itself, its services being twofold, namely, to economize labor in producing the results already obtainable and to make the production of new results possible. Accordingly, the profit on capital arises either from its supplanting a portion of labor which would other- wise be performed by the hand of man, or from its performing a portion of labor which is beyond the reach of the personal exer- tion of man. 2 Now this conclusion is most important ; for the notion that capital operates merely by putting labor in motion and adding to its powers implies that industry and the employment of labor are limited by capital. The true analysis, however, " suggests the inference, that a country cannot be benefited by the possession of a greater portion of capital than can be employed in performing and supplanting labor, in the production and formation of those things for which there exists a demand. 3 And he goes on to argue against parsimony as creating a more than requisite quantity of capital. This is not only a radically different conception of capital, its function and income, from that found hi Smith's thought ; but also its bearing upon the wages-fund doctrine which soon gained such prominence, is apparent. With Lauderdale's theory that doctrine would have been impossible. Value. In accord with Lauderdale's general emphasis of productivity and demand, his theory of value shows some devel- opment toward a proper correlation of utility and cost. Value, he says, is the necessary characteristic of individual riches. The essentials to its existence are: usefulness and pleasure to man, together with a certain degree of scarcity. The following illustrative passage makes his idea clear : "Water, it has been observed, is one of the things most useful to man, yet it seldom possesses any value; and the reason of this is evident : it rarely occurs that to its quality of utility is added the cir- 1 Inquiry into the Nature and Origin of Public Wealth (1804), p. 10. ! Ibid., pp. 161, 203. 3 Ibid., p. 204. Note the conception of an absolutely predetermined demand and of the possibility of general overproduction which is im- plied. Cf. above, pp. 297, 307. 426 ECONOMIC THOUGHT cumstance of existing in scarcity ; but if in the course of a siege, or a sea-voyage, it becomes scarce, it instantly acquires value; and its value is subject to the same rule of variation as that of other com- modities." l Lauderdale criticizes Petty, Harris, and Smith for seeking an absolute standard of value. Moreover, he quotes from the Wealth of Nations to prove Smith's inconsistency in making labor the measure of value, showing that it is stated or implied at various points in that work that labor differs in value at different times and at different places. 2 Though Smith's use of the word " price " instead of " value " at points saves him, yet his not infre- quent confusion of value in use with value in exchange lets Lauderdale's shaft hit. Consumption. Lauderdale was a pioneer in the discussion of the economic significance of consumption, pointing out the relation of the subject to value, and dwelling upon the effects of varying degrees of elasticity in demand. 3 To understand riches (individual wealth) and their variation, he says, we must study the interrelations between demand and supply, and all the indirect effects of changes in value of one good upon another. As the tastes of individuals differ, so men will differ in the extent to which they will go in renouncing a commodity when its supply is dimin- ished ; while, in turn, the prices of different commodities will vary according to the degree in which they seem necessary. Changes in demand are discussed in a similar fashion, something of the importance of necessity, habit, and taste being indicated. Then Lauderdale examines the effects of changes in supply and demand upon the order of consumption, using meat, wine, and mustard to illustrate different elasticities in demand. These commodities would be affected very differently : the change referred to "would have very different effects in altering the proportions betwixt the quantity and the demand of each of these articles, so it must alter, in a very different ratio, the value of a given quantity of each." Some undesirable results of an unequal distribution of wealth are also mentioned. 1 Inquiry into the Nature and Origin of Public Wealth (1804), pp. 15-16. 2 Ibid., p. 30. 3 See pp. 66, 85 f., and elsewhere. THE THEORY OF CAPITAL, PROFITS, AND VALUE 427 The Theories of Hermann and Other German Economists chiefly concerning Capital and Undertakers' Gains. From among the numerous German economists of the early nine- teenth century, Thiinen and Hermann stand out clearly as the two most acute and original theorists. Of the two thinkers, Thiinen was undoubtedly the more original, but Hermann's work was based upon a far wider reading, 1 and, being in closer touch with the current of economic thought, appears to have exerted a greater influence upon his contemporaries. This rela- tive result was doubtless due in part to the clear, concise style in which Hermann wrote, and, perhaps, to the absence of mathe- matical formulae. In some respects, Hermann was a follower of Adam Smith, and he generally begins his discussions with a statement of Smith's views on the point involved; but his philosophy and theories of value and distribution are so at variance with those of the Wealth of Nations that he must be classed as a critic, while, his criticism being non-ethical and directed against Smith's logic on fundamental points, he hardly falls among those who opposed the philosophical and ethical system. Friedrich Benedikt Wilhelm von Hermann (1795-1868) pub- lished his chief work, Staatswirthschaftliche Untersuchungen (Investigations in Political Economy), in 1 832.2 In his preface he sounds a note of criticism of existing economics, and presents a most interesting statement of the weak points in the science. In general, he warns his readers against the notion that it is a com- plete and perfect science. It is too closely related to life, with its continual change, for that. In fact, he states that economists had arbitrarily limited their field by excluding certain objects. 3 1 The following are some of the writers to whom Hermann refers : Aris- totle, Hegel, Physiocrats, Steuart, Smith, Malthus, Lauderdale, Sismondi, Ricardo, M'Culloch, Jakob, Hufeland, Sartorius, Nebenius, Miiller, Storch, Lotz, Rau, Von Thiinen, Read, James Mill. The careful study of and influence by James Steuart and Lauderdale are especially interesting to the Engish reader. 2 Revised and enlarged edition in 1870. The following references in the text are to the pages of the first edition. 3 Cf. below, p. 430. 428 ECONOMIC THOUGHT Again, in accord with a common German idea, he argues that to conclude that individual interest always leads to public advantage goes too far. The more particular shortcomings, as Hermann sees them, are the following. The lines of demarcation between the several classes of society were not clearly drawn, and the faulty dis- tinction between productive and non-productive occupations is especially pointed out as an illustration of this weakness. The theory of price seemed to him to be full of defects: the factors which enter into the determination of a particular price had not been sharply and completely indicated ; neither had the treatment of the equalization of prices, or comparative price, been adequate; the distinction between exchange value and price, he refers to as "unsatisfactory" ; and he states that there was need of an analysis of price into its ultimate elements, so that the cost of the finished product would be traced back through its component materials to wages and profits. Hermann also complains of the narrow interpretation of the concepts, "goods" and " income." Say and Sismondi, he says, had made valuable suggestions, but had not carried them out consistently. Finally, consumption is mentioned. Here numerous writers had touched upon the abuse of the current interpretation of income ; but they had failed to develop their ideas or to discuss the effects of consumption upon exchange and economics in general, as their varying treatment of such problems as are presented by absentee landlordism, and parsimony, manifests. Aside from its intrinsic interests, as a statement of the case against the political economy of the day, the foregoing criticism is of value in that it outlines the contents of Hermann's book fairly well. Only the part dealing with capital and profits has been withheld, in order that it may serve as an introduction to the discussion of Hermann's theories concerning these subjects. Passing over his theory of value for the moment, the point to be stressed in Hermann's thought is the theory of capital and the correlated criticisms of the classical wages and rent theories. Capital. In his preface, Hermann states that previous dis- cussions of capital had been deficient in their treatment of its THE THEORY OF CAPITAL, PROFITS, AND VALUE 429 origin, nature, classification, and working; while the existing theories of profits were marked by shortcomings in that they did not explain with sufficient accuracy the determination of that share in distribution nor its relation to wages. It may be inferred from his remarks that he thought that Ricardo and M'Culloch had done the best in this regard, but that the former was exces- sively abstract and the latter was even more so. Smith's con- ception of capital was good, but had not been carried out consist- ently. Most writers had followed Smith ; though Sartorius and Hufeland had shown some independence, both of these writers distinguishing between the usability of a good as capital and its capacity to satisfy wants directly. The latter had made capital embrace all goods which can be used for production, including those which for the moment await productive application (p. 47). But, to hasten to the point, Hermann tells us that capital rightly means all sources of income which endure and have exchange value. Thus he approaches the determination of the capital con- cept from the standpoint of income, and income in the sense of utility (57). Smith, he says, had made income mean the excess of product over cost, or net income. But income is really the use of property ; and " production, in relation to the yield of capi- tal for producers, is nothing but an exchange, through the agency of capital, of the direct usufruct of one property owner's goods for a more convenient form " (57). Accordingly, all houses and lands are to be included in capital, so long as they are durable sources of utility income and have exchange value. Hermann's classification of these economic categories which are related to capital is as follows (59) : Property : I. Immediate consumption goods. II. Capital: - 1. Use capital (yielding satisfactions directly). 2. Industrial capital (yielding satisfactions indirectly). A. Loan Capital. B. Production capital. (a) Fixed. (b) Circulating. 430 ECONOMIC THOUGHT Thus he follows Say and Ganilh in distinguishing a so-called " use capital," or what we would to-day rather call durable con- sumer's goods, the category being illustrated by such public prop- erty as highways, gardens, and buildings. " Immaterial capital " is also admitted, consisting of trade secrets, special privileges, etc. " Personal capital," however, he rejects on the grounds that it cannot be exchanged, is not a sufficiently durable source of income, and that the motives which lead to the production and education of men are different from those which obtain in the production of goods. Manifestly there is nothing in Hermann's definition of capital to prevent the inclusion of land, and it is in this point that its peculiarity is most sharply apparent. Land being a good which endures and yields an income, is capital (48). To the usual arguments in favor of a distinction between the two factors, Hermann replies that cost is not an essential aspect of capital, the fundamental thing being a stock of goods which furthers production ; and this is just as true of land as any other agent. Moreover, to obtain the fruits of the earth, labor must be ex- pended, while the operation of fixed capital depends upon the forces of nature, so that there appears to be no fundamental dif- ference on that score (50). He believes, too, that the income on improvements is inseparably bound up with that from the land. Against an idea sometimes expressed by Smith and others, Her- mann argues that land is not a monopoly, but merely exists in scarcity like fixed capital (153). This early economist, then, anticipates a tendency which has recently threatened to divide economists in the United States. It remains to be observed that Hermann clearly expressed the idea of capital as an abstract fund of wealth; for he says that above all one must distinguish the object in which a capital is expressed from the capital itself (335-336). The latter goes on undiminished, regardless of the consump- tion of its products; machines are used up, but not neces- sarily capital, for normally the value of the product yields a replacement fund (337). Even irregular losses are shifted from capital to income by means of insurance. Here, again, THE THEORY OF CAPITAL, PROFITS, AND VALUE 431 theories which have gained some prominence of late years are anticipated. 1 Rent and Wages. Hermann's notion of capital led him into conflict with several ideas held by Smith and other members of the Classical School. For one thing, it was inconsistent with the Ricardian doctrine of rent. Like others who have taken the same course, he regarded rent as a percentage of the value of the land, which, once the land is sold, obeys the laws of interest. But perhaps more noteworthy is his criticism of the wages-fund theory. The downfall of the wages-fund theory is the subject of the next chapter. It came in the seventies. But more than forty years earlier, this German economist, in a clear, concise fashion, advanced those arguments which were to overthrow it. Some statements made by Smith, and the doctrine of M'Culloch, and Rau, says Hermann, make capital the source of wages and the wage rate depend upon the proportion of population to capi- tal. But, even granting that wages depend upon such a pro- portion to circulating capital, nothing follows as to capital in general ; a greater percentage might be invested in fixed capital (281). Again, the number of those laborers who furnish per- sonal services and are paid directly from income, is too great to be overlooked. As a matter of fact, wages are paid out of the value of the product. The undertaker buys labor, not to consume it, but to sell what it produces. From the income of the consumer, then, comes the true compensation of the laborer's services. The growth of the aggregate capital, however, does have an in- direct influence in that it causes a demand for more products. ; Hermann resents the idea that the capitalist-undertaker, or enterpriser, nourishes the labor class. Rather, he simply uses labor to procure a more advantageous sale of part of his capital. Labor and capital mutually facilitate the transformation of their separate services into forms more suitable to each, and stand on equal terms as to economic function. In fact it was a fundamen- tal error of Smith's that he at points considered capital merely as the maintenance of laborers. Hermann argues that this is false 1 Cf. below, p. 523. 432 ECONOMIC THOUGHT as far as fixed capital is concerned ; and so much of circulating capital as is expended upon material buys not merely labor, but uses or utility (Nutzungen). Undertakers' Gains. After his theory of capital and the criticisms of rent and wages doctrines which flowed from it, the next great point in Hermann's theory is his treatment of under- takers' gains, that is, the income received by the entrepreneur as such. As this point is found an interesting illustration of the close relation between industrial environment and economic thought. In England, the existence of large commercial and industrial organizations, and especially joint-stock concerns, had familiar- ized Adam Smith and his followers with the idea of profits as a return upon capital considered as a distinct factor of production. Profits to these writers generally meant the revenue of capital (interest) plus a half concealed something for management, though Senior's ideas differed somewhat from the common notion. But in Germany, industrial conditions were not so developed. Industry was generally carried on with small-scale units, and the handicraftsman who used his own capital and managed his own establishment was the prevalent manufacturer. Agriculture, too, was largely in the hands of peasant proprietors. Thus the function of the business undertaker as the Germans called the entrepreneur or enterpriser was relatively more distinct than in England, while there was less income upon in- vested capital, capital dissociated from management by its owner. Incomes consisted more largely of satisfactions or uses derived directly from products. Thus it would have been natu- ral for German thinkers to emphasize the function and income of the undertaker, and that is what they did. But meanwhile the English doctrines with their emphasis of capital had penetrated German thought, so that interest could not be slighted. The result was a rather well-rounded theory of profits, which, in its addition of a clear-cut idea of the under- taker's gain to that of interest on capital, amounted to a con- tribution to economic theory. Indeed, in these early German discussions over the functions and income of undertakers may THE THEORY OF CAPITAL, PROFITS, AND VALUE 433 be found many of the ideas that are now common in the debates concerning the nature of profits. It will be observed that the idea, common among French theorists, that profits are the wages of management of the entrepreneur, would, in so far as it in- fluenced German thought, 1 produce a result similar to that caused by this environmental condition. Huf eland was one of the earliest writers to show the German tendency 2 toward the separation of " profits " into interest and undertakers' gains, and the analysis of the business undertaker's functions. He made undertakers' gains consist partly of com- pensation for risk, and partly of a rent for the undertaker's talents and capabilities. And Rau (iSaoJ^emphasized the same point, regarding undertakers' gains as a peculiar income spring- ing from the inner relation between capital and labor, in which the shares of both these sources cannot be separated. Hermann made the subject clearer. Approaching the prob- lem from the viewpoint of income, he reasoned (204) that the business undertaker's proper income is a reward for these serv- ices : (i) combining the factors of production, (2) evolving plans, (3) furnishing rare capacities and talents of supervision, (4) guar- anteeing a fixed rate of interest while his own gam depended upon price fluctuations. And all these services, he added, vary with the amount of capital involved. The undertaker's gain, then, is the necessary reward for these services, cares, and risks. On the one hand, it is to be distinguished from the wages of labor, the compensation for exertion of a small-scale undertaker at some trade ; on the other hand, the fourth service is not to be confused with a compensation for risk. Such a compensation is not income at all : it is capital, and must be saved against losses. The amount of the undertaker's gam is determined by demand and supply as to capital (208). The quantity of capital which owners of capital do not themselves wish to employ makes the demand for the business undertaker's services, while the num- ber of those who seek to turn capital to productive employment fixes the supply. His services and income, then, being related 1 Lotz, Jakob, Nebenius. * Neue Grundlegung der Staatswirthschqftskunst, Vol. I, 1807. 2F 434 ECONOMIC THOUGHT to the amount of the capital involved, if a given gross profit (Gewinri) is assumed, the undertaker's gain varies with the amount of interest, the higher the interest the lower his gain, and vice versa. He may temporarily increase his gains by mak- ing such improvements or inventions as will lower costs; but when others learn of these improvements profits are lowered so as just to cover costs again. The earlier period in the evolution of the German theory of undertakers' gains may be regarded as brought to a close in 1855 by Hans von Mangoldt (1824-1868) with his notable mono- graph on this subject, Die Lehre vom Unternehmergewinn (The Doctrine of Undertakers' Gains). He reviewed the previous theories and sought to prove the necessity of undertakers' gains on economic grounds. His own very eclectic theory made them consist of a premium for risk, wages of management, undertakers' interest, and undertakers' " rent." The interest included was that arising from such capital as from its nature could not be loaned or the undertaker's own capital; and the "rent" was a premium on undertaking ability. His work shows a leaning toward overminute analysis, not uncommon among the German theorists. Consumption. In Chapter VIII, Hermann deals with the consumption of goods, showing evidences of Lauderdale's in- fluence. He takes up the concept of consumption, order of con- sumption, consumption in relation to the employment of goods, in relation to the economy of the consumers, and in relation to political economy in general. The effects of parsimony, luxury, purchases abroad, etc., are dealt with; and several interesting charts or diagrams are presented to show the course of distribu- tion among landowner, renter, laborer, and manufacturer, perhaps an echo of the Physiocratic analysis. Hermann made an acute criticism of the labor-cost theory of value, his thought on this point being in several respects akin to that of his contemporary, Senior. Thus, he discusses more care- fully than his predecessors the particular factors in value and price determination, analyzing demand and supply. Market price, under conolitions of two-sided competition, is determined THE THEORY OF CAPITAL, PROFITS, AND VALUE 435 by demand and supply. Demand, however, depends upon three main factors : the use value of the desired commodity, the abil- ity to pay of the one who desires it, which factors form the subjective limits (Granze) of price for the buyer, and the alternative cost of its production, that is, the lowest cost of pro- ducing or acquiring the commodity in some other market (74). These things set an upper limit to prices. On the side of supply, there are the following forces : the cost of the commodity, alter- native sale price, and the exchange value of the commodity in which price is expressed. Thus a lower limit is set. In dealing with the cost factor, the interaction of price changes and costs are discussed (82-88). Though considering that for reproduc- ible commodities cost is decisive, he gives considerable weight to utility, and makes an important place for demand. Hermann's general criticism of the labor-cost theory of value proceeds from the idea that labor is not directly related to prod- ucts in whose production capital figures ; " but only indirectly, and in so far as the laborers can, by means of an increase or de- crease in the supply of labor, work against the variation in the value of their subsistence with the rate of profit" (131). Any good, to be a just measure of value, must vary in price directly with capital and labor, and to that end must contain both fac- tors. Furthermore, he makes the five points which follow (133). (i) It is not true that goods which are not freely producible form a negligible quantity. Among them must be placed land, and through it most goods are affected. If a machine, even, con- tains labor, this is not to be thought of as passing into the prod- uct ; only in so far as the machine is used up is it to be considered as raw material ; on the whole, the labor and capital uses united in the machine are withdrawn from circulation and are merely bases of a usufruct. (2) The second and third points together form one argument. If labor cost determines value, and goods containing equal labor costs exchange on equal terms, it must follow, not merely that 2 x labor buys twice as much as x labor, but also that x labor always exchanges for x labor and no more. (3) Assuming that the rate of profits is everywhere equal, however, a product must exchange for more labor than it contains. 436 ECONOMIC THOUGHT That is, a day's labor of a farm hand, if exchanged for a pair of boots upon which a day's labor had been put by the shoemaker, tanners, etc., involved in its production, would be securing not only that day's labor, but a capital use. " But if n labor in product A exchanges for \n labor in product B, how can n labor in B at the same time buy n in A? " 1 If it be argued that materials and subsistence are necessary to make labor effective and that therefore past labor is used, it is thereby conceded that there is an element in production beyond labor, namely, the use of capital ; and if the product has an exchange value in excess of the labor cost, its existence is explained by the fact that this capital use has not only value in use, but also ex- change value. (4) If one overlooks or abstracts the capital-use element and regards it as equal in each product, labor may be thought of as determining; but, in fact, these uses are hardly alike in any two products. (5) In truth, Ricardo's rule, as ex- pressed by M'Culloch, merely says A = A and does not explain the essence of exchange value. Conclusion. There is no need for a detailed criticism of the views of Lauderdale and Hermann. The former was in error in positing a limited demand based upon an assumed body of " needs " ; and his notion of the function of capital, while con- taining a correction of Smith's ideas, was crude. Hermann's chief mistake appears to be an undue minimization of the dif- ferences that exist among productive agents. First, he too nearly overlooks the significance of the question of directness of yield, which results in the inclusion of durable consumers' goods in his classification of capital (" use capital "). But chiefly this minimization is seen in his denial of the significance of cost differences between the factors which are ordinarily called land and capital. He virtually omits any recognition of the importance of the fact that the supply of land in general is limited, and that this is especially true for any one of the different grades of land. His treatment of undertakers' gains, too, is open to the objection of including payments for diverse 1 Cf. the argument on Ricardo's theory of profits, above, p. 230. THE THEORY OF CAPITAL, PROFITS, AND VALUE 437 functions, 1 and he is sometimes classed as one of those who attempted to combine the English and French theories. The more modern tendency would be to classify a part of the rewards given to the undertaker by Hermann as wages and part as " pure profits." The merits of the two writers have perhaps been sufficiently indicated. The similarity between their views upon important points and the probable influence of the earlier author upon the other do not seem to have been recognized. Resemblances have been noted in the independent place given to capital, the subjective element in value, and the treatment of consumption. Both also point to the distinction between public and private wealth, Her- mann undoubtedly following Lauderdale to some extent. 1 Mangoldt's theory is open to a similar criticism. CHAPTER XXVII THE DOWNFALL OF THE WAGES-FUND THEORY DURING the space of a generation, roughly covered by the life- time of John Stuart Mill, that method of explaining wages rates known as the wages-fund theory played an important part in the history of economic thought. Some account of this theory has already been given. 1 Though a faint trace of it may be found in Turgot's writing, it is an English product, dating from the time when capital and a capitalist class began to be of prime impor- tance in industry. Following the Industrial Revolution there came a certain new dependence of labor upon capital as ad- vances of subsistence and direct aid to production which the economists soon exaggerated. Passages from Smith, Ricardo, Mai thus, 2 and M'Culloch 3 might be cited, showing a suggestion of the idea that wages depend on a wages fund of circulating capital, the two writers last named being clear and definite in their expression of it. Senior, as already seen, puts it quite clearly, and is commonly named as the father of the theory. But it was James Mill who stated the theory in a hard and fast manner, and his son John fitted a somewhat modified form of the doctrine into his restatement of the classical political economy. Passing over some early criticism in Germany 4 which had no influence in England, that interesting series of assaults by Eng- lish writers which sapped and overthrew this dogma may be taken up at once. Perhaps the first came from Richard Jones, who wrote in 1831. At this time the theory had not gained such prominence as it later 1 See above, pp. 228, 236, 267, 356. 8 Political Economy, p. 379. 1 Political Economy (1836), p. 234. * Above, pp. 273, 381, 431. 438 THE DOWNFALL OF THE WAGES-FUND THEORY 439 attained, and Jones was chiefly concerned with rent ; therefore his treatment was too brief to give him the honor of a definitive attack. Jones' words were as follows : " We should take a very false View of the causes which regulate the amount of their [the laborers'] earnings, if we merely calculated the quantity of capital in existence at any given time, and then attempted to compute their share of it by a survey of their numbers." [ For, as laborers " produce their own wages, all the circumstances which affect either their powers of production, or their share of the produce, must be taken into the estimate." These ideas were not expanded, and Jones' judgment appears to have had small effect. A similar lack of effectiveness, so far as recognized and avowed, at least, attended the much more conclusive work of Francis D. Longe. Longe was an Oxford man and a lawyer, being admitted to the bar in 1858. Through a connection with the Children's Employment Commission he became acquainted with the labor problem ; in 1860 he published a treatise on the law of strikes ; and this was followed, in 1866, by his pamphlet, A Refutation of the Wages-fund Theory of Modern Political Econ- omy. Longe quotes passages from Mill and his follower, Fawcett, to show that they believe (i) in a definite fund destined for pur- chasing labor ; (2) that the laborers form a group within which competition can distribute wages ; and (3) that the factors controlling this distribution are demand and supply. These things Longe denies. Even as an abstract principle, he holds, the theory is false. The fallacy lies in treating the fund taken to represent demand for labor " as a sum which would all be spent in labor, notwithstanding the purchase of a part of the supply with a smaller portion of it than would represent the proper price of the part bought, as determined by the pro- portion between the whole supply and the money-measure of the original demand." Even if the circulating capital of a coun- try were a certain per cent of its wealth, there is nothing to in- sure that the laborers would get all. And he shows that Mill falls 1 Essay on the Distribution of Wealth, Chap. VI. 440 ECONOMIC THOUGHT into some confusion by using " demand," now as money demand, now as the quantity demanded. As to the existence of any such fund, Longe himself maintains that the mere psychical process of " destining " a thing cannot bring it to pass ; it is demand in the sense of quantity of labor demanded that enters into the determination of the wage rate. The whole fallacy, he states, lies in a confusion of two funds : one consisting of the goods available for maintaining laborers during the productive process; the other, of the amount of wealth available for purchasing the product. 1 The former may come from the laborers' own resources or be borrowed, as well as be advanced by the employer directly ; the latter might come from consumers, from the goods produced, or from the employer. It is the latter " fund " alone that is significant. Mr. Longe sent copies of his Refutation to Mill and Fawcett, but it provoked no reply. Two years after the appearance of Longe 's pamphlet, another concise refutation of the doctrine under consideration was pub- lished, being found in the North British Review for March, i868. 2 The article is unsigned. Its writer begins by stating that the fal- lacy of the wages-fund theory lies in its premise that everything which decreases profits thereby decreases the means of paying wages. But he calls attention to the fact that manufacturers do not all receive a bare minimum profit, the inference being that wages could be increased by drawing upon surplus profits ; and he goes on to argue that diminished profits may lead to an increase in saving and capital. For one thing, the fund for pay- ing wages is mostly drawn from the price of the product, and is reinvested without conscious effort. " A manufacturer will generally work his mill or factory to the utmost so long as he does obtain a profit ; he does not voluntarily set aside a certain sum for wages, diminishing and increasing that sum according to profits, but he employs as many men as he can, and pays them what he must." In the second place, there is another class of savings, coming from investors, and this increases when the in- 1 Ibid., p. 47- 2 p P- S ff- THE DOWNFALL OF THE WAGES-FUND THEORY 441 terest rate decreases. In short, the wages fund may increase either through higher prices or through lower profits. This unknown writer sums up his criticism in the following words. " Our argument is briefly this : Wages, like the price of all other limited commodities, depend on a conflict between the desire for the commodity, and the reluctance to sell it. Any- thing affecting either feeling as to labour will alter wages. The total desire, measured by the total sum paid for wages, may in- crease in consequence of large profits leading men to wish for an extension of trade, but it may also increase owing to increased reluctance on the part of labourers to sell, leading the purchasers of labour and produce, one or both, to pay more, lest they should lose wholly, or in part, their profits, or the enjoyment of the prod- uce." The price of labor is ascertained through competition, which establishes an equilibrium ; but this does not explain the forces which determine. Next Cliffe Leslie deserves mention as taking up the cudgels against the wages-fund theory. His criticism appeared in two articles published during 1868 in Fraser's Magazine, one in May and one in July. 1 He held that there were no funds destined to employment as wages. Capital can emigrate and be shifted from one employment to another. Capital may be substituted for labor. The unequal distribution of the aggregate available for wages, moreover, might make wages much lower than if that aggregate were equally shared by employers. Or through com- bination wages might be forced down. But even if there were such a fund, the question would still remain, what determines its amount ? 2 Finally, competition does not work to distribute the " fund " among laborers so as to equalize wages and sacrifices. Leslie was acquainted with Longe's pamphlet, and at one point refers to it in order to make a criticism. Meanwhile Thornton had published some " Stray Chapters from a Forthcoming Work on Labor " in the Fortnightly Review. 1 Land Systems and Industrial Economy, pp. 87, 358 ff. It will be noted that articles by Thornton preceded these in course of time. 2 In connection with this criticism Leslie mentions the article in the North British Review, March, 1868, p. 6. 442 ECONOMIC THOUGHT This was in the fall of 1867. Two years later the book itself appeared under the title, On Labour. In Book II, Chapter I, which contains his attack, Thornton begins with a criticism of the whole demand and supply theory of value as stated by the classical economists. He then proceeds to argue his case against the wages-fund doctrine on this basis. Fixity or definiteness, he says, is the essence of the supposed wages fund. But such a fund can have no existence save as an aggregate of individual funds, and such funds are far from fixed. Every employer, it is true, has a certain amount of money. But he may devote more or less to domestic expenditure, and so with buildings, materials, and labor. In any case, be is not bound to spend all he could upon labor. With such reasoning Thornton made short work of demolishing the idea of a defi- nite sum of money set aside as a wages fund, the idea com- monly held at the time. On this particular matter Thornton is behind Longe in grasp and keenness of analysis. Moreover, as was pointed out by the American economist, Francis A. Walker, who will be next dis- cussed, the fact that individuals have no definite funds does not necessarily prevent the existence of a social or statistical definite- ness. Yet Thornton's attack took immediate effect. In the Fortnightly Review for May, 1869, Mill made his classic recanta- tion, declaring that the wages-fund doctrine was a barrier to an important province of economic thought, a " shadow which will vanish if we go boldly up to it." It is not improbable that Mill had been gradually weakened by the attacks of Longe and Leslie, and by his sympathy with trade unions in their efforts to raise wages. His belief had been accepted from the Ricardians, including his father, and at a time when the labor problem was less imminent and his sym- pathies less aroused. Moreover, his ideas on demand and sup- ply were rather superficial, and were not based upon a thorough analysis. Then, upon the appearance of his friend Thornton's book, he decided to give up publicly. Just why the gates of his belief were opened with such a rush is more or less of a mys- tery, and not a few have surmised a lack of candor in dealing THE DOWNFALL OF THE WAGES-FUND THEORY 443 with Longe. An opinion favorable to Mill, however, seems most just, nor has any proof of dishonesty on Thornton's part been advanced. 1 Walker's attack was more constructive and suggestive of the true relation between wages and capital ; though, like his prede- cessors in criticism, he directed his assault upon the idea of a wages fund in the shape of money, not clearly distinguishing capital from product. " Given a certain body of labor em- ployed," he asks, " what is it that determines the amount which the employer can afford to pay in wages ? Is it the amount of capital at his command, or the value to be realized from that labor ? " And his answer is, it is production which limits wages, and production is in its turn limited by consumption. Wages are ultimately paid out of the product of industry, and in so far as paid before the product is marketed capital merely ad- vances the amount. In new countries, in fact, wages are mainly paid out of the product of current industry. Walker makes a second point in regard to the effect of the number of laborers. The sum of possible wages is far from being fixed without regard to the number of laborers. On the contrary, their number and efficiency form an important element, and an increase in labor supply may result in a more than proportionate increase in the aggregate of possible wages. It is folly to postu- late " other things being equal," for this cannot be when popu- lation changes. The final word in this stage of the discussion, however, re- mained for another American economist, Prof. F. W. Taussig. In his Wages and Capital, an Examination oj the Wages Fund Doctrine (1896), Taussig presented a careful and accurate anal- ysis of the relation of capital to wages, together with a his- tory of the wages-fund discussion from its beginning to the close of the last century. His conclusion is that there is an element of truth in the wages-fund idea, and that to the extent that this is so, Walker's ideas are wrong. The argument, briefly put, runs thus: real wages being 1 Cf . Walker, " The Wage-Fund Theory," North American Review, Vol. 1 20, pp. 94 ff. 444 ECONOMIC THOUGHT properly the subject under consideration, it is apparent that, in a division-of-labor economy, laborers and others are supported chiefly by the product of past labor ; for the reward of present labor is enjoyable goods, which, for the most part, exist only as the result of a long period of production. In any but the shortest periods, then, the resources of a community exist in the form of capital from which income in the shape of consumable commodities immediately flows; while the hired laborers of our industrial system, being dependent for their money income on a bargain with capital owners, do draw their wages from a sort of wages fund. This does not mean, however, an unalterable relation between real capital and real wages, but that wage-earners get their money wages, and thus their share of real income, from what the capitalist class, including middlemen and bankers, find it profitable to turn over to them. Moreover, a limited degree of elasticity is allowed to wages by Professor Taussig's theory. In a word, the significance of roundabout methods of produc- tion and our dependence upon past production for enjoyable goods are made clear, and Professor Taussig's fame largely rests upon this sound and generally-accepted analysis. The whole wages-fund episode in the history of economic theory, while it has led to fruitful discussion and a clearer under- standing of the relation existing between wages and capital, after all owes its existence chiefly to a confusion of thought. Perhaps springing from the industrial organization at the time common in England, the idea prevailed among economists that capital consists of money, or consumers' goods, at least, in the hands of employers. This was the underlying notion of all those who took part in the controversy on this point, even down through Walker's day. A large part of capital goods was neg- lected, and its function in this connection left unanalyzed ; while capital was mixed up with product or goods for consumption. The forces of demand and supply, as they operate in the evalua- tion of labor, were not carefully and fairly analyzed. As long as this idea obtained, false notions concerning the interrelation of wages and profits (interest) could easily pre- THE DOWNFALL OF THE WAGES-FUND THEORY 445 vail. Capital was thought of as a " residual claimant " from an ill-defined wages-plus-profits aggregate. The downfall of the wages-fund theory meant a forward step not only in the theory of wages, but also in speculation on capital and interest. Undoubtedly, too, in the long and widespread sway of the wages-fund doctrine is to be seen the influence of class bias. It served to emphasize the prime importance of capital in in- dustry and defend it from increased taxation. It also furnished the capitalist class with a ready argument against strikes : the wages fund being a fixed amount, what one union gained would necessarily be at the expense of another. VI. ATTEMPTS AT RECONSTRUCTION THE two preceding chapters have concerned those criticisms of the dominant classical economics which applied not so much to the philosophical basis or the method pursued as to the cor- rectness of the reasoning the logic. One further line of criti- cism of this last order remains for discussion ; one which has been so ambitious, so sweeping, and, withal, so successful, that it is well to set it apart and call it an attempt at reconstruction. At various points in the preceding pages, attention has been called to evidences that the significance of wants, utility, and the subjective side of value generally, did not pass unnoticed. All the time, indeed, though the fact was not appreciated, a leading point of difference in economic thought lay just here. But the dominant schools everywhere were little disposed to dwell upon subjective aspects, and psychology was slow in fur- nishing the basis for adequate analysis. Here, then, was an opportunity for reaction and even for a reconstruction of economic analysis. Shortly after the opening of the second half of the nine- teenth century, several factors combined to occasion this reaction. The classical economics sank into some disrepute because of the narrowness and dogmatism which developed in it: it failed to adjust itself to times and places; and one reason for this fact was its one-sided dependence upon material and objective considerations. This fact invited and facilitated the reaction. Again, socialistic attacks with their illogical appeals to the classical theory of value stimulated economic thought to a deeper analysis : Marx' theory needed recognition of the part played by utility for its refutation. Finally, the development of psycho-physics showed the way, opened the door for progress. About the middle of the century, a physiologist, E. H. Weber (1795-1878), gave to the world some investigations concerning 446 ATTEMPTS AT RECONSTRUCTION 447 the intensity and duration of sensations or mental facts. 1 His results were elaborated and expounded by Fechner in 1860 (Elemente der Psycho-physik) , and have become known to every student of psychology as Weber's Law, or, sometimes, Fechner's Law. Observing that the greater the intensity of the original stimulus the greater must be the increase in stimulus in order to cause a perceptible difference in the resulting sensation, these investigators framed a principle as follows : In order that the intensity of a sensation may increase in arithmetical progres- sion, the stimulus must increase in geometrical progression; or, to put it another way, within short periods, if the stimulus be continued in equal amounts, the intensity of a sensation is diminished. Such a principle, of course, necessitates a scale of excitation- or stimulus-values with minima and maxima of perceptibility. Here, then, was the basis and the model for a law of diminish- ing utility. The principle suggests a scale of utilities, with an estimation of goods according to the intensity of the gratifica- tion-sensation of the last unit of consumption-stimulus. The significance of the last or marginal unit of stimulus was apparent, and naturally suggested the way to make definite the vague concepts of total utility which had prevailed. It seems impossible to say just how direct is the relation between this development in experimental psychology and the analysis of Jevons and the Austrian School ; but here, as else- where, progress in one science gets "in the air " and soon influ- ences others. 1 See Wagner's Handworterbuch der Physiologic, 1842-1843, vol. III. CHAPTER XXVHI EARLIER DEVELOPMENTS IN THE MARGINAL UTILITY CONCEPT: GOSSEN, JEVONS, AND WALRAS THE development of the marginal analysis in value theory is commonly associated with the names of Jevons and of the members of the Austrian School. But, both in the concept of the margin and in the emphasis of utility and demand, these men were anticipated. As is usually the case, there were fore- runners. I. First Developments. Not to dwell upon such faint sug- gestions as may be found in the writings of Galiani, Barbon, and others, the French writer, Condillac, 1 must be mentioned. Con- dillac stated that value depends upon wants, being less in the thing itself than in the estimate we form of it, and that it varies according to the intensity of wants and the supply of goods. 2 Jeremy Bentham, famous in English jurisprudence and politi- cal philosophy, suggested the idea when he wrote : " The greater the quantity of the matter of property a man is already in pos- session of, the less is the quantity of happiness he receives by the addition of another quantity of the matter of property, to a given amount." 3 1 Le Commerce el le Gouvernement consideres relativement I'un d Vautre, Paris, 1776. See p. n of ed. of 1803. * "Now since the value of things is founded upon the want, it is natural that a more keenly felt want gives to things a greater value. . . . The value of things increases with scarcity and decreases with abundance. In abundance it could even decrease to nil. A superabundant good, for ex- ample, will be without value whenever one cannot make use of it, since then it will be quite useless." 3 Works, IX, 18 (Edinburgh, 1843). 448 EARLIER DEVELOPMENTS IN UTILITY CONCEPT 449 Also noteworthy in this connection are the English writers Craig, Longfield, and Lloyd. John Craig in 1821 developed the significance of utility in value determination in an original way, analyzing the utility of a good into different strata which come into play as supply is increased. 1 But Longfield (1833) had a clearer expression of the marginal idea as applied both to utility and cost : to him market price was " measured by that demand, which being of the least intensity yet leads to actual purchases." In the following year, W. F. Lloyd published a most remarkable Lecture on the Notion of Value. Value, he reasoned, may be defined as the esteem in which an object is held. Although human wants are varied and no limit can be assigned to their development, yet, for any specific object, an increase hi supply will bring satiety and value will vanish (p. 10). Lloyd says: " In its ultimate sense, value undoubtedly signifies a feeling of mind which shows itself always at the margin of separation between satisfied and unsatisfied wants." 3 The claim of this Englishman to the distinction of first clearly explaining value in terms of marginal utility seems strong. 4 The German, Thomas, has often been overlooked in this connection. In his Theorie des Verkehrs (1841), however, he very clearly states the main ideas of the modern subjective theories of value: Value depends on estimation, and for esti- 1 Remarks on Political Economy, p. 4. "... if more is now to be disposed of, it must be to those who did not reckon its utility equivalent to its former cost. New purchasers indeed will appear in proportion to the reduction of price ; because at every step of the decline it is brought down to the estimate which an additional number of persons had formed of its power of producing gratification, or, in other words, to their estimate of its value in use." 1 Lectures on Political Economy, p. 113. On Longfield see Cannan, History of Theories of Production and Distribution, and Seligman, Some Neglected British Economists. 3 pp. 1 2- 1 6. Lloyd takes a now familiar illustration in the shape of a hungry man and successive ounces of bread, and clearly distinguishes " ab- stract" (total) utility from "special" (marginal) utility. He compares diminishing utility to the decreased pressure of a spiral spring as it uncoils ! 4 Lloyd appears to have been "discovered" in recent times by Professor T. S. Adams. See his article on " Index Numbers " in the Journal of Political Economy, December, 1901, p. 19. 2G 450 ECONOMIC THOUGHT mation there must be not only an object, but a subject who evaluates. Value depends upon the strength of desire, and price upon a comparison of the estimations put by the parties to an exchange upon their goods. He expresses the idea of a scale with upper and lower limits (Grenzeri). 1 Thomas, however, seems not to have thought it necessary to enter into the minute psychological analysis characteristic of the modern marginal- utility thinkers. Similar ideas were soon advanced quite independently by a French engineer named Dupuit. 2 He wrote that " goods have a utility not only for each consumer, but also for each want for the satisfaction of which they are employed " ; and seems to have clearly grasped the concept of final or marginal utility. Finally, Senior should also be mentioned as a forerunner; and Banfield and Jennings, to whom Jevons himself expressed indebtedness, should not be forgotten. The first writer, however, who developed the ideas now under consideration, and centered a more or less comprehensive system of economic theory in them, was Gossen. II. Gossen. Hermann Heinrich Gossen (1810-1858) was one of those unfortunate geniuses whose work falls upon deaf ears and unseeing eyes. Yet, although his book was all but for- gotten and unknown, so clear and important was his contribu- tion to economic theory that a few pages should be devoted to him. Gossen's book, Die Entwickelung der Gesetze des menschlichen Verkehrs (Development of the Laws of Exchange among Men) was published in 1854 at Brunswick. The author states that it is the result of twenty years of meditation ; that what Coper- nicus had done in founding the physical laws of the universe, that he, Gossen, had done for human society, though some metaphysical Kepler or Newton might be needed to fill in the outline and determine the precise application of his forces. 1 Theorie des Verkehrs, pp. 16, 25, 66. 2 De la mesure de I'utilite des travaux publics, 1844; De I 'influence des peages sur I'utilite des votes de communication, 1849; " UtilitS," Jr. d'Econ., July, 1853. EARLIER DEVELOPMENTS IN UTILITY CONCEPT 451 The confusion which existed in economic doctrine he conceived to lie in the absence of mathematical treatment : to deal scien- tifically with complicated forces requires mathematics. He even suggested that while it is not now possible to measure absolute quantities of satisfaction, comparisons may be made by geometrical principles, and measurements of unknown quan- tities arrived at, just as distances are computed in astronomy. It may be said that his book is an attempt to put economics on an exact, mathematical basis. The philosophy is essentially utilitarian. But the broad goal of a greater sum total of human happiness is constantly kept in view. Gossen at once proceeds to develop a law of decrease in amount of satisfaction, using the common geometrical figures with their ordinates, abscissa, and curves. From this law he derives the following principles : (1) " There is a manner of enjoying each satisfaction, chiefly dependent upon the frequency, according to which the sum of the man's satisfaction reaches a maximum. If this maximum is reached, the sum of the satisfaction will be decreased by a more frequent, as well as by a less frequent, repetition." (2) " The man who has the choice of several satisfactions, but whose time is not sufficient to procure all completely, in order to attain the maximum of satisfaction must however the absolute amounts of the satisfactions may differ partly enjoy all, even before he has completely enjoyed the greatest one; and this [must be] in such proportions that at the moment his consumption ceases the amount of each satisfaction is the same." (3) The possibility of increasing the sum of the satisfactions of life, even under present conditions, exists when a new satisfac- tion, be it in itself never so small, is discovered, or when one already known is extended. 1 According to Gossen, things have value in proportion as they yield satisfactions or enjoyments. On this basis commodities may be divided into three classes: first, those which have all the properties for yielding satisfactions, that is, consumers' 1 Gesetze des menschlichen Verkehrs, p. 21. 452 ECONOMIC THOUGHT goods, or Genussmittel, as he calls them. Next come " goods of the second class," comprising those in which the union of all the properties for complete enjoyment is lacking, as, for example, pipes and ovens and other complementary goods. Finally, production goods are distinguished. These embrace land, machinery, etc., and have an indirect value due to their ability to produce goods of the other classes. " With increase in quantity, the value of each added unit (Atom) must undergo a continuous decrease until it sinks to nil." * Thus, goods which yield only one satisfaction have their consumption limited by time, or the number of units consumed. As to a complex of goods : "If his powers are not sufficient to produce all possible means of satisfaction, man must produce each one to such an extent that the last unit of each has equal value to him." 2 But, meanwhile, what of costs? Gossen here states that different goods require different degrees of exertion for their production, " and the value of the things produced thereby will naturally be diminished in the same degree with the estimation of the difficulty, as such." 3 He draws a diagram like the accom- a Gesetze des mensMichen Verkehrs, p. 31. 8 Ibid., p. 33. 'Ibid., p. 38. EARLIER DEVELOPMENTS IN UTILITY CONCEPT 453 panying figure, and concludes that " the value reaches a maxi- mum when the quantity ad is produced, i.e. when the produc- tion is carried on so long that the difficulty and the value are equal." 1 It follows that in order to obtain a maximum of satis- faction, men have to divide their time and energy spent in pro- curing different satisfactions, so that the last unit of any one satisfaction is equal to the amount of difficulty or disutility which would be caused if that unit were produced in the last moment of exertion, i.e. at the margin of disutility. 2 Nor does Gossen let wants or desires go without some analysis along the line of difference in elasticity, etc. He distinguishes " needs " (Bediirfnisse) from luxury or pleasure desires, the former being those which cannot be trenched upon without bringing economy in other satisfactions; 3 and he notes some of the results which flow from the fact that men differ in their purchasing power. The conclusion is that this obscure German anticipated much of recent development in economic theory. The sub- jective side of value, wants, is emphasized ; the marginal utility idea of value determination is formulated ; and this is brought into correlation with the margin of disutility. And his classi- fication of goods into different orders or classes is suggestive of Menger's thought. All this he did, to say nothing concern- ing his development of mathematical methods of presentation. Perhaps the lack of elegance and clarity in exposition may account for a part of the neglect accorded him. The chief general criticisms seem to be his lack of system in presenta- tion, and a failure to deal adequately with market price. III. Jevons. Some seventeen years after the appearance of Gossen's book, yet quite independently, the English economist, Jevons, worked out similar ideas, and along similar lines. In an introduction to a collection of his essays another English economist, and one whose opinion has no small weight, says: " But I do not think it too much to say that the future his- torian of the science . . . will trace the main sources of its advance in the writings of four men, each of marked genius 1 P- 39- * Gesetze des mensMichen Verkehrs, p. 45. * Ibid. t pp. 135 ff. 454 ECONOMIC THOUGHT Petty, Cantillon, Ricardo, and Jevons ; and of these four, the name of Jevons . . . will not, I think, rank last in order of fame." l Though the words, " main sources," make the state- ment an exaggeration, it has its element of truth. William Stanley Jevons was born in Liverpool, England, in the year 1835. He was a shy and thoughtful man, much given to introspection, and possessed of a very inquiring turn of mind. He attended University College School and University College, London, and in 1854 was made assayer of the mint at Sidney in Australia. Returning, he became successively lec- turer and professor at Owens College, and professor at Uni- versity College (1876-1880). His untimely death in 1882 came by drowning, and men have always regarded it as a great loss to economic thought. Though he wrote several books and numerous essays, 2 his Theory of Political Economy, published in 1871, will be mainly considered here. Jevons' political economy, while treating of the wealth of nations with the purpose of teaching how the poor can be made as few as possible and all be well paid for their work, inquires how wealth may be best consumed. Consumption he gives a distinct place, and puts it before production and distri- bution, 3 in this departing from the practice of Mill and the classical economists in general. Thus wants, and their satis- faction by utilities, are emphasized. " The most important law in the whole of political economy " is the " law of variety " in human wants: each separate want is soon satisfied, yet there is no end to wants. Banfield is quoted with approval as 1 Foxwell, p. xliii of introduction to Jevons' Investigations in Currency and Finance. 2 The Coal Question, 1865. Theory of Political Economy, 1871. Money and Mechanism of Exchange, 1875. The State in Relation to Labor, 1882. Methods of Social Reform. Investigations in Currency and Finance. \ Posthumous. Logic. J 3 See Primer of Political Economy, EARLIER DEVELOPMENTS IN UTILITY CONCEPT 455 saying : " The satisfaction of every lower want in the scale creates a desire of a higher character." A "law of succession of wants " is also suggested, and is roughly illustrated by a range of utilities shading from air down through food, clothing, and lodging, to amusements. Jevons employs the word, " utility," " to denote the abstract quality whereby an object serves our purposes." He does not allow moral considerations to enter; mere pleasure and pain are the ultimate objects of the calculus of political economy. He goes on to point out that utility is not inherent. 1 It is relative to wants, and too much of a good brings disutility. Utility decreases as the quantity increases. There is thus a difference between total utility and degree of utility, the degree of utility of successive units decreasing while total utility in- creases. " There is a certain sense of esteem, of desirableness, which we may have with regard to a thing apart from any distinct consciousness of the ratio in which it would exchange for other things. I may suggest that this distinct feeling of value is probably identical with the final degree of utility. While Adam Smith's often quoted value in use is the total utility of a commodity to us, the value in exchange is defined by the ter- minal utility, the remaining desire which we or others have for possessing more." 2 This final degree of utility is the degree of utility of the last or the next possible addition to a stock. It is the now famous term with which Jevons designated what we ordinarily call marginal utility. By it, exchange value is determined. " The ratio of exchange of any two commodities will be the reciprocal of the ratio of the final degrees of utility of the quantities of commodity available after the exchange is completed." In fact, " The final degree of utility is that function upon which the whole Theory of Economy will be found to turn." 3 To illustrate, take water. Water has no value, for we have so Theory of Political Economy, Chap. III. Ibid., p. 157. 8 Ibid., p. 61. 456 ECONOMIC THOUGHT much of it that its " final utility " is o. But let the supply run short through drought, and we begin to feel a higher degree of utility, and value comes into being. Like Gossen, Jevons concluded that in consumption the tendency is to equalize final, or marginal, utilities. He makes some further analyses: such as the distinction between actual, prospective, and potential utility; and the indication of three dimensions in utility quantity, degree, and duration. The time element, too, must be allowed for, as an element of uncertainty. 1 1 Jevons' other economic theories. One of the notable services of Jevons was his work as a statistician. Here he showed marked ability, powers of analysis and imagination being happily combined. His countrymen, Petty and Malthus, had made use of statistics, but with inferior data and less natural acuteness. Jevons had that peculiar gift of detecting likenesses and differences of discerning "move- ments" in masses of data, which is essential to the statistician. His chief work was in the field of prices. Here he detected monthly movements, yearly movements, in the autumn, periodic movements due to crises, and longer cycles resulting from changes in the value of money. His famous hypothesis concerning the relation between industrial depressions, and the periodic recurrence of sun spots will be familiar to most. It is to be regretted that so acute an observer should have failed to show the deepest insight in dealing with the labor problem. Starting from the premise that the wages of workmen are "the value of the goods produced, after the necessary rent of land and interest of capital have been paid " (Primer, p. 64), he concluded that strikes are folly, that to decrease hours would result in decreased wages, and that the objections of trade unions to piece work wages are absurd, " for men must generally be supposed capable of taking care of their own health." It is but to be remarked that a preponderance of the best economic thought would not accept these con- clusions without essential qualifications. Though his labor doctrine smacks somewhat of laisser-faire, it is one of Jevons' merits to have thrown light upon the relation of state to industry. In his Slate in Relation to Labour he shows that, while the presumption is perhaps in favor of individual freedom, yet happiness must be the ultimate test. Four cases are distinguished in which the state may properly inter- fere: (i) where numerous scattered operations require such interference for their best coordination ; (2) when the processes involved are of a routine character ; (3) where the work is under the public eye ; and (4) where little capital is involved. EARLIER DEVELOPMENTS IN UTILITY CONCEPT 457 Quite naturally Jevons attacked the labor-cost theory of value, or, for that matter, all cost theories. His brief runs something as follows. In the first place, many valuable things are not reproducible at any cost ; hence all such goods are not subject to a cost-explained valuation, and a cost theory is at best partial. Again, the facts show that market values gen- erally fluctuate either above or below cost, seldom equaling it. Finally, there seems to be little relation between the quantity of labor expended and the ultimate value of the product. Take the Great Eastern steamship, for example. In spite of its cost, what is its value when it is found impracticable to use it? In short, " labor once spent has no influence on the future value of any article : 1 " its value on the contrary rises and falls according to the degree of its utility. The obvious reply to Jevons is that this degree of utility depends partly upon supply, which in its turn is subject to limitations of cost. Indeed, Jevons himself goes on to admit that labor plays a part as a determining circumstance, reason- ing that labor affects supply, supply affects degree of utility, value depends on degree of utility. This appears to be vir- tually an admission that the case for utility is overdrawn. Jevons has been further criticized in two matters of impor- tance: first, he confuses demand price what marginal pur- chasers will pay with marginal utility, apparently assum- ing that the relations of the two to value are the same ; 2 and, in the second place, he is guilty at points of substituting the idea of social utility for that of individual utility, leaping the gulf which lies between the utility scales of different men. 3 In his theoretical writings, Jevons' method was deductive and mathematical, and, indeed, his conception of political economy was not dissimilar to that held by Senior: He believed, as Gossen had believed, that the mathematical method is necessary to make economics a science, a necessity inherent in the measurement of pleasures and pains. 1 Theory of Pol. Econ., p. 159. 1 See, e.g., Marshall, Principles, Bk. V, Chap. XIV, note. 8 See, e.g., ibid., pp. 61, 96. 458 ECONOMIC THOUGHT IV. Walras. Leon Walras (1834-1910) is another economist who was slow in gaining recognition, and whose fame has suf- fered from no fault of his work, but from causes exterior to it. His EUments d'tconomie politique pure (Elements of Pure Economics) was published in 1874, thus shortly following the works of Jevons and Menger. His thought was undoubtedly independent, however, and he himself recommends Jevons' book as complementary tojiis own. He constructed a more complete system based upon mathematical analysis than did Jevons. The establishment of the mathematical school may be dated from Walras, for, though he was preceded by Cournot, his work was much more complete and systematic. To some extent, like Senior, Gossen, and Jevons, Walras sought to make economics an abstract science, distinguishing pure economics from applied economics, on the one hand, and social economics on the other. Truth, he held, rather than the useful or the good, should be the goal. His great object was to expound a mathematical theory of exchange, and it is on the second part of his book, entitled " mathematical theory of exchange " that interest is to be chiefly centered. To achieve his end he assumes a perfect competition such as might obtain in the Bourse, and, like Say^ makes the entrepreneur receiving and distributing payments for " productive services " the center of the scheme. Social wealth, as defined by him, consists of all things, ma- terial and immaterial, which have utility and are limited in quantity. The amount of the value of external things is pro- portional to the amount of satisfactions they bring us. There is no direct or immediate relation between supply and price; but such a relation does exist between price and demand, and the demand curve depends upon this relation. The cause is intensity of utility. And where two commodities are concerned the demand curve depends upon the relation between the in- tensity of utility of the one commodity and that of the other. The price, then, where neither of the commodities entering the exchange is valueless, is such that the intensity of the last want satisfied is the same for each. EARLIER DEVELOPMENTS IN UTILITY CONCEPT 459 For Jevons' " final degree of utility " and Gossen's Werth der letzten A tome Walras uses the word r arete, which he defines as " the intensity of the last want satisfied." 1 Ex- change values are proportional to raretes. Two commodities being given, for instance, if the utility and the quantity of one of the two commodities in respect to one or more exchangers varies, so that the rarete varies, the value of that commodity in relation to the other, or its price, will likewise vary. In some respects Walras' rarete appears to be a truer con- cept than the common notion of marginal utility; for, in defining it as depending on supply and utility, 2 he gives clear recognition to the fact that supply limitations are included and expressed in it. It would not be difficult for both cost and utility theorists to approach some agreement with Walras' formula, according to which utility and supply, working in obedience to the theory of maximum satisfaction, determine the demand curve from which, positing the law of a single price for the market, comes price. 3 It is to be emphasized, however, that rarete is subjective. Like his fellows of the mathematical-utilitarian school, Walras' theory stands opposed to objectivity. In contrast with Gossen, Walras treats with notable clearness the subject of market values ; and he goes beyond Jevons in formulating his exchange equations for dealings in any number of commodities rather than two alone. 4 Summary. In brief summary of the character and im- portance of the thought of the three economists just discussed, 1 Economic politique pure, p. 101. 2 Walras expresses indebtedness to his father, Auguste Walras, who used the word rarete, and denned it similarly. See De la nature de la richesse et de I'origine de la valeur, Paris, 1831. M. Walras, senior, did not work his ideas out with breadth or clearness, however. 3 Ibid., p. 99. 4 For a brief statement of Walras' geometrical theory of the determina- tion of prices in English, see Ann. Amer. Acad. Ill, 45-64 x (1892). Walras' problem is to represent the causation of prices of commodities in general all commodities while recognizing that these prices are interdependent. 400 ECONOMIC THOUGHT it may be stated that all emphasized the subjective element in value causation, that all pursued a deductive, mathematical method, and that all arrived at a concept of the margin, where a final or most intense want is satisfied. Their philosophy is utilitarian and hedonistic. Another notable point of likeness is that each of the three formulates more or less precisely some law concerning the attainment of maximum satisfaction. Walras puts it thus : " Taking two commodities on a single market, the maximum satisfaction of wants or the maximum of effective utility exists when and where the ratio of the intensities of the last wants satisfied, or the ratio of the rareles, is equal to price." l As will appear from a reading of the next chapter, the analysis of subjective elements made by these men lacks the refine- ment to which it has been carried by the Austrian school. And of Jevons, at least, it may be said that the theory of value is not strictly subjective, but follows the idea of value as a relation between commodities. 1 con. pol. pure, p. 86. CHAPTER XXIX THE AUSTRIAN SCHOOL, AND ESPECIALLY THE DE- VELOPMENT OF SUBJECTIVE VALUE THEORIES MANY of the earlier economists show a general recognition of the fact that utility is essential to value. Subjective factors, too, were more or less recognized. These economists were, how- ever, inclined to take utility and the demand based upon it for granted. It was a matter of course with them. This is espe- cially true of the English, less true of the Germans, and least so in the case of Say. As has been seen, Gossen, Jevons, and Walras developed this aspect ; but Gossen remained almost un- known, while contemporary with Jevons there arose a school of Austrian economists who carried on this line of development with a broader and deeper analysis. The " Austrian School " so analyzes utility as to base a comprehensive theory of value upon subjective elements. Their reasoning they apply to the valuation of the factors of production, with the result that they have developed a notable theory of capital and interest. In these points they stand as critics of the Classical School. The Austrians and their Value Theory. Carl Menger laid the corner-stone for the Austrians with his Grundsatze der Volkswirtschaftslehre, iSyi, 1 the same year in which Jevons' Theory appeared. Menger felt that economic theory had fallen into disrepute with many scholars, and he sought to restore it to its place of honor by freeing it of inconsistency 1 Other writings : Untersuchungen uber die Methode der Sozialwissenschaft, 1883. Die Irrthumer des Historismus, 1884. Beitr&ge zur W ahrungsfrage in Oesterreich-Ungarn, 1892. Die Ubergang zur Goldwiihrung, 1892. 461 462 ECONOMIC THOUGHT and basing it upon more fundamental laws of causation. All things, he says, are subject to the law of cause and effect. In economics the human want is the fundamental thing. Things which have the capacity of being placed in causal connection with the satisfaction of human wants are utilities. To bring an object into the sphere of economic causation four conditions are necessary : (i) a human want, (2) such properties of the thing as make it capable of being placed in causal connection with the satisfaction of this want, (3) the recognition of this causal relationship by man, (4) the power to dispose of the thing so that it can actually be applied to the satisfaction of the want. 1 With such analysis Monger sought to arrive at ultimate causes, and to explain value which he regards as the heart of economic theory from the economic activity of the individual, that is, from his exchange contracts. Although some recognition is given to the influence of society, according to Menger, value is an individual phenomenon : it is independ- ent of society and law. He defines value as " the significance which concrete goods or groups of goods gain for us through the fact that in the satisfaction of our wants we are conscious of a dependence upon the disposal of them." 2 In opposition to cost theories, he maintains that value rests on utility and relative scarcity. Goods are divided into different classes, or " orders," accord- ing to their nearness to the consumer. 3 Thus bread is in the first order; flour in the second; wheat in the third. Goods of the last description are of the " higher order," and their value is reflected back from those of the " lower order " : wheat has value because and in so far as men want wheat bread to maintain life and well being. Differences in value are due to the different estimations which men put upon the satisfaction of various wants. The value of a concrete good, or of a certain aggregate, at the dis- posal of an economic man is equal to the significance of the least important want satisfactions yielded. 1 Grundsatze, p. 3. * Ibid., p. 78. 8 Chap. I, 2. DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 463 Always, where there are the bases for an exchange between men who are actuated by economic motives, certain limits are set by the quantities of exchangeable goods which are deemed equivalents by the parties; and these quantities, which in a subjective sense are equivalents, differ with different individ- uals. Within these limits price is determined. If A esti- mates ico units of grain at 40 units of wine, and B estimates 80 units of grain at 40 of wine, an exchange can take place, the price in grain lying somewhere between 80 and loo. 1 Over and over again Menger repeats his statement that value and the measure of value are subjective and dependent on wants. The quantity of labor or capital expenditure in- volved has no direct or necessary connection. 2 In a primeval forest one may chop wood till doomsday without making that wood valuable, while a diamond picked up by chance has great value. Nor does the cost of reproduction solve the matter ; 3 for there are many goods which cannot be reproduced, and many others, like out-of-date clothes, whose value is less than that of the agents of their production. The next important step in the development of the Austrian theory comes with the publication in 1884 of the Ur sprung und Haupt-Gesetze des ivirthschaftlichen Werthes (Source and Principal Laws of Economic Value) by Wieser. He built upon Menger, applying his theory to the phenomena of costs, and deepening the psychological analysis. Wieser's complicated statement of what gives economic value to a good may be translated thus : (i) If things are capable of producing useful effects (aside from things of indifference, and perhaps those which are harmful) ; (2) if their supply does not equal the employment for them ; (3) if they allow encroach- ments by men which, when economic, increase their usefulness, and, when uneconomic, decrease it ; (4) if all subjective suppo- sitions which complete these objective ones agree; (5) and if, then, the existence of the good, its utility, and other external circumstances are perceived ; (6) if the need for it is not only 1 Grundsatze, p. 176. * p. 120. 3 Cf. above, pp. 241, 244. 464 ECONOMIC THOUGHT distinct, but also its satisfaction is desired; (7) and if the purpose is formed to do the economic acts which show them- selves practicable while shunning the temptation to uneconomic action, then will the interest be transferred from the expected economic uses to the goods, and become associated with them, i.e. then the goods receive economic value. " The value of a single good out of a store is determined by the interest in that useful service which is the least important among the most important ones afforded by the store." For Jevons' " final utility " he substitutes the term, Grenznutzen (marginal utility), which has since become so generally used. 1 In explaining the value of the factors of production, Men- ger had held that the decisive thing is the portion of the return which would be lost through the loss of a factor. This theory Wieser differs from. In his Natural Value (1889) he bases such value upon the " productive contribution " of the factor a theory of imputation. He uses the principle of complementary goods, and argues that " the elements that are bound up ... may alter, and this fact makes it possible for us to distinguish the specific effect of each single element," 2 by comparing a number of equations. It would seem that while Wieser's scheme is useful in an illustrative way and may be used for measuring the value of production goods, it is lacking when it comes to the more funda- mental problem of determining their value. It does not explain causes or points of fixation. Meanwhile, what becomes of the idea that it is the cost of these elements of production that determines the value of the product? This Wieser denies, though admitting that costs have an indirect and partial effectiveness. It is his idea that only men's interests, based on utility, induce them to estimate value at cost. To use his own words : " If we ask why products thus produced neither under 1 It will be remembered that Thiinen developed a marginal productivity theory, and he used the word Grenze (margin) in connection with it. See above, pp. 286 f. * p. 87. DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 465 nor over costs have value, and why they have definite amounts of value, we shall doubtless find that they have them- selves alone to thank for it. They create it out of their utility, taking into consideration the amounts produced. The circum- stance that costs of a certain value have been expended in making them is of no consequence as regards their value. The cost value does not determine the use value ; the use value exists of itself, and sanctions the cost value." l Cost is " sanctioned " by use value, is, in fact, nothing but a complicated form of value in use. But, as just intimated, costs are admitted to " affect " values. Though not consistently followed, the idea appears to be that the anticipation of value (utility?) gives costs them- selves a value. Then the " value of costs " 2 may even deter- mine value of goods, either indirectly, by regulating supply, or directly, in individual cases, by communicating their own value to the good. " The Austrian School does not in any way destroy the idea of cost or the law of cost, it only endeavors to com- bine both with the general idea of value and its general law, and to explain them in this way." ' Wieser's explanation of the existence of the old notion con- cerning costs is ingenious and interesting. Just as the value of a mineral spring depends on the utility of its water, so iron, coal, and labor derive value from the utilities produced. But here, any one unit of commodity reflects so small a portion of its total utility that it seems that the process is reversed, and that the commodity derives its value from the elements enter- ing into its production. The individual capitalist, for example, if his means of production have other applications, finds them evaluated in the general market, and he tends to regard the situation as one in which the value of his wares must replace his expenses of production. But, argues Wieser, the buyers of his wares pay only according to their estimation of their mar- ginal utility. All that cost does is to limit the supply put 1 Natural Value, Smart's ed., p. 177. 2 Ibid., p. 176. 8 Wieser, " The Theory of Value " " (A Reply to Professor McVane)," Ann. Amer. Acad., II, 620 (1892). 2H 466 ECONOMIC THOUGHT upon the market. " At the sale of the products the capitalists continually rectify their calculations, and according to their gains or losses the value of the means of production increases or diminishes in their estimation." Put more abstractly, when production is bringing forth products, productive powers are at the same time limited, making economy necessary. This leads men to conceive of production goods as costs, directing their attentions to the equalization of related productions, and causing them to regard productive employment as an outlay or sacrifice. 1 " Costs are production goods when these are devoted to one individual employment, and, on account of their capacity of being otherwise employed, take the shape of outlay expenditure." 1 In examining the foregoing idea of costs in relation to value, one is struck with the juggling way in which now all that the properly limited Classical idea contains is admitted, now all is denied. No one denies that " the idea of utility cannot possibly be separated from the purposes of economy and the conception of wealth " ; 2 nor that men's interests based on utility lead them to estimate value at cost; nor that value is created out of utility, " taking into consideration the amounts produced." But many deny that the fact that certain costs have been expended is of no consequence in value. The trouble seems to lie in a confusion of the ideas of source or causation and deter- mination or fixation. As in the case of the proverbial hen- z>s.-egg conundrum, it is of small importance whether wants or costs come first as causes or sources of value. We may well grant that the want, with its corresponding utility, is the first of the fundamental forces to act. No one will deny that utility in a sense " sanctions " cost. But when we are taken further and told that costs have no determining importance, the harmony is broken. In cases where supply is limited by costs, and so cost enters into the determination of the " margin," it is as important a factor as the utility which decreases as the supply is increased. 1 Natural Value, Smart's ed., pp. 174-175. * Ibid., p. 196* DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 467 To speak of " use values " and " value of costs " is quite misleading. If " use value " means any more than utility, cost or rarity has entered; just as costs can have no value unless utility is joined with them. Wieser goes on to argue (i) that labor cost has " use value " only (a) when, if the labor failed, it could not be repeated, and so the utility would be unique, or (b) when, in the same case, some other utility would have to be foregone ; (2) while, on the other hand, services are estimated according to cost only when, in the event of failure, one would not need to give up the utility, abundance of free labor power existing ; and he concludes that this is a contradiction, " Labour could only be estimated at once by its utility and by personal effort, if it were at once capable and incapable of repetition." To this objection it may be immediately replied that in a sense this seeming para- dox is the very truth: the very point in the two-sided theory of value is the fact that while labor can be repeated, it can be repeated on the whole only with difficulty, that is, with cost, which fact limits its repetition. It may be further observed that in the first clause (i) of the argument just stated the first assumption (a) involves a case of absolutely limited supply; while the second clause involves an abstract assumption which is contrary to fact. Last of the three pillars of the Austrian School comes Eugen von Bohm-Bawerk. Bohm-Bawerk opened his important con- tributions in 1884 with his well-known Capital and Interest, a critical history of economic theory ; following with a monograph, Grundzuge der Theorie des Wirtschaftlichen Guterwerths l (Out- lines of the Theory of Commodity Value) (1886), and his master- piece, the Positive Theory of Capital (1888). Bohm-Bawerk is notable not only for independent thought, but for clear exposition and illustration, and a " careful and fruitful revision of many matters of detail." To some extent following the German economist Neumann, he further elabo- rates the division of value into subjective and objective with which he would replace the old division into use value and 1 Conrad's Jahrbucher, f. Nat. Oek., N.F., XIII. 468 ECONOMIC THOUGHT exchange value, and one of his distinct merits lies in his treatment of objective value or purchasing power. Subjective value is denned as the significance which a good acquires as the recognized condition of a use for well-being which would have to be foregone without the good. The amount of value depends upon the amount of gain in well-being which the good brings, or what want would remain unsatisfied without it : " The value of a good is determined according to the importance of the concrete want or increment of want, which is the least important of those met by the supply of such goods at disposal," i.e. by its marginal utility. As for subjective exchange value, it differs much less from value in use than it does from objective value : it is simply " the importance which a good obtains for the welfare of a person through its capacity to procure other goods." But the word "value" does not always suggest the subjective. 1 Thus when we say that a pound of gold has a higher exchange value than a like weight of iron, we refer only to an objective relation between commodities. Exchange value in the objective sense is nothing but the capacity of a good to command other goods in exchange. It is a social phenomenon, and could only exist in society, but Bohm-Bawerk attempts to show that it rests upon individual valuations. First he takes an isolated pair ; then competition among a group of buyers is introduced, then among sellers, till finally two-sided competition is con- sidered. 2 To cut a long story short, he concludes, with consider- able amplification and refinement of his predecessors' teaching, that objective exchange value is determined somewhere between an upper limit set by the valuation of the last buyer and the most capable seller excluded, on the one hand, and a lower limit estab- lished by the valuation of the least capable seller the last seller and the most capable buyer excluded. 3 In every case it is the narrower of these double limitations that decides. " If, finally, we substitute the short and significant name of 'Mar- 1 " Grundziige," Conrad's Jahrbiicher, 1886, p. 477. 1 Ibid., pp. 492 S. ; Positive Theory (Smart's trans.), pp. 198 ff. 3 Ibid., p. 208. DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 469 ginal Pairs ' for the detailed description of the four parties whose competition determines the price, we get this very simple for- mula : The market price is limited and determined by the subjec- tive valuations of the two Marginal Pairs." The factors which determine the valuation level are: the number of desires for the ware, the height of the buyers' valua- tion figures, the quantity of the ware for sale, and the height of the sellers' valuation figures. But these valuation figures are no simple quantities; they are obtained by comparing valua- tions of the wares with the valuations of their " price goods." l This makes it necessary to introduce two further elements : the absolute quantum of the subjective value of the " price good " or price equivalent to the would-be buyers ; and the same quantum to the would-be sellers. Bobm-Bawerk, like Wieser, admits that cost plays a part in determining value, but a subordinate and indirect one. 2 In the case of freely-producible goods there is substantial identity of cost and price ; but this is because the price of the product controls, and the price of the cost goods is the controlled. The law of costs is not against, nor beside, but within the law of mar- ginal utility. Interest Theories. The Austrians have differed among themselves as to the true theory of interest. Menger and Wieser supported what may be called a productivity theory; while Bohm-Bawerk holds what has been rather unsatisfactorily called an exchange theory, or, sometimes, a value theory. Wieser bases interest upon the productivity of capital as its cause. Taking a series of cases of production in which different proportions of capital function, he concludes that a part of the product which varies with the amount of capital is imputable to capital. The " productive contribution " imputable to capi- tal is the direct cause of interest. On this point Wieser criticizes Menger, who had attempted to 1 Grundziige, above cited, 509. The Germans use the word "price" (Preis) not to signify the money expression of exchange value, but the amount of any good received in exchange for that sold. * See ibid., above cited, p. 540. 470 ECONOMIC THOUGHT solve the problem from the other side, so to say, by observing what is lost when capital or units of capital are removed from the productive complex, a sort of negative imputation. As to this imputational reasoning it is merely submitted that the question, why, still remains. Granting a relationship of cause and effect, what is its explanation ? * On this capital and interest question Bohm-Bawerk differs from Wieser, denying the validity of the theory of imputation and basing his reasoning upon the " technical superiority " of roundabout processes of production. In the process of pro- duction capital goods of a relatively low present value are trans- formed or " ripen " into consumers' goods of a higher value. As a result of the time element there is a growth of values in excess of labor costs from which interest flows as a permanent net income. The problem is to determine the causes which guide into the hands of capitalists a part of the stream of national production. Bohm-Bawerk makes an interesting distinction between different sets of interest theories : naive productivity theories, which regard the shares in distribution as separate from the beginning ; exploitation theories which look upon the shares as forming one stream to the end, where labor is robbed ; the value theory, which, in a sense, lies between the two, holding that the stream begins to separate when it comes under the influences which create value. 2 This is his theory, and according to it the expla- nation of interest lies in the valuation process, in the fact that men tend to value the same good more highly in the present than in the future. All this stands opposed to cost theories of interest, as, for example, Senior's abstinence theory. Senior gave a place to the time element, but it was the cost of waiting and abstinence in- volved that he thought of. Bohm-Bawerk denies that abstinence is an independent sacrifice, holding that it cannot be added to labor pain to get a total cost cumulatively. And to illustrate 1 For detailed criticism see Ann. Amer. Acad., V, 522 f. (Green); and criticisms on similar theories of J. B. Clark and his followers. 2 Capital and Interest, pp. 421 f. DEVELOPMENT OF I SUBJECTIVE VALUE THEORIES 471 his attack, and the criticism of that attack, take this passage. The planting of fruit trees is mentioned, and the alternatives of a destructive storm and undisturbed fruition in ten years, are assumed. Bohm asks, Is my sacrifice any greater if the storm does not come and I wait ten years for the fruit? thinking the answer must be no, and therefore abstinence can- not be taken as the ground of interest on such an investment. 1 But the answer should be: The question is misleading. As well ask, if one orchard bears 100 bushels in ten years, and an equal orchard bears 100 bushels in fifteen years, would produc- tivity be greater in the latter case ? and, if the answer be no, conclude that the time element or difference between present and future estimation plays no part. At this point Bohm- Bawerk confounds general with special values. In the long run, interest rates must normally be high enough to cover the losses the unrewarded abstinences. In a supplement to Capital and Interest, called Recent Litera- ture on Interest, 2 Bohm-Bawerk argues that, if a good equals 10 in value now and 6 five years hence, it would be uneconomic to undergo sacrifice in labor and waiting to exceed the latter amount, or 6, and that there is thus no room for a sacrifice aside from labor or money. This mode of procedure assumes the future value, 6. But the 6 cannot be taken for granted : the sacrifice is not limited to 6, but to 10 6 (?). The truth appears to be that the relation of future to present value in the interest problem is a more complex one : the future gratification is worth less, partly because of the sacrifice which is involved in saving and waiting and which enters immediately into the estimation of the future; and then interest must be paid Bohm-Bawerk explains how it can be paid because men are unwilling to submit to any greater sacrifice than is indicated by that estimation of future value (6?). It is another shortcoming of Bohm-Bawerk's that he ignores the problem of the determination of wages, leaving the question, 1 Ibid., p. 281. 1 Translated by Scott and Feilbogen. Chap. IV. 472 ECONOMIC THOUGHT how is the product divided between labor and capital, un- answered. The Later Austrians. Among the followers of the Austrian School, Robert Meyer (Principiender gerichten Besteurung, 1884 ; Das Wesen des Einkommens, 1887) ; E. von Phillipovich (Aufgabe und Methode der Politischen Oekonomie, 1886 ; Grundriss der PolUischen Oekonomie, 3d ed., 1899) ; Sax (Grundlegung der theoretischen Staatswirthschaft, 1887) ; and Robert Zuckerhandl (Theorie des Preises, 1889) are especially noteworthy. 1 Phil- lipovich is the leading general theorician. The Italian, E. Cossa, the Frenchman, Block, and the Ameri- cans, Patten, Clark, and Fetter, should be mentioned here as being influenced by the Austrians. Philosophy. The philosophy which underlies the Austrian thought is that phase of utilitarianism which is known as hedo- nism. Its leading idea is that the object of desire is pleasure, and that all volitional acts have happiness as their goal. In other words, men are assumed to act upon a pleasure-and-pain cal- culus. This philosophy, proceeding as it does upon the ground that man's ends are psychological, is at the bottom of the sub- jective standpoint of the school. It is of fundamental impor- tance, then, to inquire if this philosophy be sound. It has been subjected to serious criticism. 2 Briefly, it has been objected that in making pleasure the object of desire, the desire is taken for granted, and so the cart is put before the horse : we do not desire things because they are pleasurable, but rather they are pleasur- able because they gratify a desire. There is a wide difference between the hedonistic idea of pleasure causing desire, and the true idea, which regards objects and activities as gratifying de- sires and so giving pleasure. But, if the criticism of the philosophy is sound, what of the related subjective theory of value? To put utility forward as the force which controls valuation would also be putting the cart before the horse, but of that more in the following sec- 1 Mataja, Seidler, and Komorzynski are also to be mentioned. 2 See Martineau, Types of Ethical Theory; Green, Prolegomena to Ethics; Sidgwick, Methods of Ethics; James, Principles of Psychology. DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 473 tion. Certainly a system of economic analysis which rests upon a hedonistic philosophy has serious limitations. When it comes to classifying the thought of the Austrian School under the heads of materialism and idealism, the matter is not so simple. Inasmuch as the Austrians are deductive, and set out from more or less ideal postulates, inasmuch as they regard man as acting upon prospective pleasures and pains unhampered by objective limitations, their philosophy shows evidence of idealism. To the same effect, they minimize the importance of costs and scarcity in connection with marginal utility. Moreover, a frequent tendency among their followers to take the social viewpoint leads to the same conclusion. On the other hand, the founders of the school were individualists and strongly opposed to Socialism. Marginal utility is an indi- vidual concept conveying the idea of supply limitations. In fact, there seem to be inconsistent elements in the Austrian system of thought, elements which must be carefully fused into a synthesis if that system is to endure. Based upon utility, and proceeding from the subjective viewpoint, it would logically take the social point of view and balance total utility with sub- jective costs; but instead, it turns to the individual and the concept of the margin, an individual estimation, not directly translatable into social terms. While, as has been suggested, the truth lies in a synthesis of idealism and materialism, the Austrian doctrine, in its attitude toward objective limitations, falls short of the requisite balance : idealism dominates in the philosophical basis, while, in the structure reared upon it, the materialistic element becomes more apparent. Critical Estimate and Summary. The leading Austrian economists are justly called a " school." In the first place, they have worked in virtual collaboration ; then, they agree in center- ing attention upon value, their value theory being their chief doctrine ; and finally, they proceed from a common philosophy, hedonism, and pursue a common method, the deductive, in this opposing themselves to the Historical School. 1 Even compared 1 Menger and Bohm-Bawerk both are versed in history, and neither is blind to its merits. 474 ECONOMIC THOUGHT with Jevons, they are distinct ; for he, making value a relation between goods, followed an objective exchange concept, while they hold to a subjective theory. Thus they make more use of psychology and less of mathematics than did Jevons. The essence of the Austrian economic thought lies in its quest for an ultimate and unified analysis based on subjectivity. And it may be observed in advance that its achievement has been a deeper analysis of valuation psychology and a coordination of theories. The significance of the school appears most clearly in contrast- ing it with the doctrines of the Classical School. The Ricardian economics makes value equal effort expended, and wealth, effort saved; the Austrians make value equal utility (margi- nal), and wealth, utility or satisfaction secured. The Ricar- dian theory is, in a sense, dualistic, referring now to utility, now to labor or effort ; the Austrian theory might be called monistic, being based upon utility alone. Thus Ricardo made two laws : one for non-reproducible commodities scarcity value ; the other for reproducible ones cost of production. But the Austrians fit costs into their unified scheme, arguing that it is not cost which functions, but limitation of supply, and cost indirectly through limitation. Wieser writes : " We have tried, above all, to abolish the dualism of labor and utility, that com- bination of irreconcilable causes, which only proves that the true cause has not yet been recognized." l Accordingly, while the Classicists refer to temporary fluctuations and natural level as controlled by different laws, the Austrians say there is one law for both ; and what the former distinguish as value in use and value in exchange, the latter combine as subjective value. Finally, a great merit of the Austrians is their attempt to extend their theory of value hi a logical way to the factors of production and the distribution of wealth among them. Ricardo limits his theory of value to commodities, and it will be remem- bered that J. S. Mill was criticized for not broadly coordinating his theory in this regard. Now Menger, Wieser, and Bohm- Bawerk extend their value theory to the means of production. 1 The Theory of Value, Ann. Amer. Acad., II, 603. DEVELOPMENT OF SUBJECTIVE VALUE THEORIES 475 Wieser states : " We also wished to bridge over the chasm which yawns between the theory of value and that of distribu- tion and especially of interest." 1 In addition to the points already suggested, it may be said in brief general criticism of the Austrian value theory 2 (i) that marginal utility is a purely individual conception, and that in no real sense can there be a social demand scale ; (2) that it is difficult, to say the least, to compare men's judgments, on ac- count of differences in sensibilities, tastes, and purchasing power, while such a comparison is necessary to secure an exchange value; (3) that the individual's judgment of value, moreover, is in fact influenced by social forces ; (4) that their theory has the limitations of one based on a pleasure-and-pain calculus, being too abstract in overlooking important institutional facts and important motives ; (5) and that marginal utility is itself an expression not only of wants, but of limitation upon the satis- faction of wants set by supply conditions and costs. The absence of any adequate treatment of wages is a notable deficiency in the Austrian writings. It is the generally accepted fact that the leaders of the Aus- trian School have served to broaden and clarify our ideas by emphasizing the subjective; but perhaps a majority of econo- mists will now admit that both the novelty and the destruc- tive character of their theory have been overdrawn. Objective limitations remain as important factors necessary to the explana- tion of valuation levels. 3 1 For criticism of the Austrians see the writings of Dietzel, Lexis, Gerlach, and Bortkiewicz, in German; Bonar, Carlisle, McVane, Veblen,and Daven- port, in English ; Landry, in French ; and Loria, in Italian. 3 This, in the last analysis, is all that Professor Veblen means when he points out that the marginal-utility theory is optimistic, Ideological, and not based on a cause-and-effect relationship. By adopting a purely subjective viewpoint, for example, man is regarded as acting upon future consideration with an abstract belief in his power to control his destiny. And, in assum- ing that men act merely upon estimation of prospective pleasures and pains, a truly scientific cause-and-effect basis is impossible. (Cf . Veblen's article in Jr. Pol. Econ., XVII, 620 (1909). D. GENERAL ACCOUNT OF RECENT LEADING SCHOOLS THE difficulty of presenting an accurate concise account of recent and contemporaneous economic thinkers and their thought is great. They have not acquired a perspective. In some cases, even, there can be no certainty that the thought is quite com- plete. A hundred years hence what is here written may seem inconsequential, and the important thinkers and thoughts appear slighted. Obviously, too, such an account opens an easy door to bias. Nevertheless, certain advantages are to be gained from the attempt at a record which is more than a mere catalogue of names and dates. The younger reader or the busy man sees a reference to Schmoller or Graziani or Molinari, or he picks up a translation of some text by Laveleye, Loria, or another, and if he has in mind some general characterization of the conditioning factors in the author's work, he is enabled to meet the book with some basis for independent judgment. It is desirable as helping one to become oriented in the world of thought around him, and to realize that all the time he is advancing in a broad stream of ideas which issues from many points of view. The following chapters also serve to round out the foregoing discussion of various general tendencies, as it were, capping the climax with a summary of existing schools. And the significance of national boundaries in the molding of economic thought is further emphasized. Partly with the idea of lessening the difficulty of this part of the work, certain limits have been arbitrarily set and should be noted in advance. Thus no attempt has been made to cover the field since 1900. Though it would be unreasonably artificial to draw a " dead line " through that year, and some later devel- opments will be referred to, the discussion virtually ends with the closing of the nineteenth century. Furthermore, the field in space is not all-embracing, for no attention has been given to the economic thought of Russia, Scandinavia, Holland, and Spanish- speaking countries. The three first named have each produced excellent economists. It still remains true, however, that the stream of economic thought would not be different had these men not written; while no ground of continuity demands a discussion of them. 478 CHAPTER XXX RECENT ECONOMIC THOUGHT IN GERMANY AND ITALY 1 Germany. As already stated, Smith's system of economics at first had little effect on German thought, only to be rather closely followed later. Then Rau's Lehrbuch held the field down to the last generation ; Thiinen and Hermann, two of Germany's greatest theorists, had little influence during their own lifetimes. Scope and Subdivision of the Science. This sketch for it can be no more of the more recent developments in German thought may well open with Roscher, whose System appeared in 1854, being notable for its historical tendency and breadth of view. And the first point that demands attention is the German notion of the scope and subdivision of the science. Roscher put first the Grundlagen der Nationalokonomie, dealing with general theory and the interrelation of economic phe- nomena. Then came his treatment of technics and of the economic activity of the state ; and finally finance. 2 Somewhat similar tendencies appear in more recent works. Thus Conrad (Grundriss, 1900) divides the field into (i) National- 1 The most valuable source is found in Die Entwickelung der deutschen Volkswirthschaftslehre im neunzehnten Jahrhundert. Leipzig, 1908, espe- cially the Erster Teil. See also Palgrave's Dictionary; Phillipovich, Quart. Jr. Econ., Jan., 1891 ; Taussig, ibid., Oct., 1894; Cohn, Hist, of Pol. Econ., Suppl. to Ann. of Amer. Acad., 1894; Handworterbuch d. Staatsw. under the various names, manuals of Ingram, Eisenhart, etc. Cusumano's Scuole Economiche della Germania is a valuable older work ; also Meyer, Die neuere Nationalokonomie in ihren Hauptrichtungen (3d ed., 1882). 2 The titles of his volumes were : I, Grundlagen; II, N ationalokonomik des Ackerbaues; III, Nat. ok. des Handels u. Gewerbfleisses ; IV, i, System der Finanzwissenschaft. 479 480 ECONOMIC THOUGHT okonomie, dealing with laws of cause and effect in economic phenomena; (2) Volkswirthschaflspolilik, treating of the func- tions of state and society; (3) Finance; (4) Statistics. Also Wagner, after first developing a Grundlegung in which he defines and correlates such fundamentals as economic motives and prop- erty, distinguishes theoretic national economy from the prac- tical branches; and finance, though it is a part of the latter, is given a separate place. Indeed, Wagner comments upon the fact that there is no fundamental logical basis for any of these divisions ; simply expediency warrants it. Not unnaturally those opposed to the historical method give historical economics a distinct and less important place. Menger (1883), for example, distinguished three branches: historical, theoretical, and practical, the last to cover state policy and such particular practical subjects as finance. Phillipovich's distinc- tion between systematic and evolutionary-historic economics (Grundriss, 1893) further illustrates the idea. This relatively sharp separation between theoretical and practical or applied economics, which is on the whole an admir- able characteristic of German, thought, is doubtless to be asso- ciated with the Kameralistic origin of German economics. To the police (Polizei) and finance of the Kameralists, the theoretical system of Smith was added. Furthermore, it is generally true that in Germany to-day a close relation between state and uni- versity obtains which leads to an emphasis of the practical or political aspect of the science and to a certain admirable realism. As Cossa remarks, 1 however, the distinction between pure theory (science) and practice (art) must not be confused, as it has been by some writers, with the distinction between the general and the special, although very often the former distinc- tion leads to a treatment of subjects according to the latter. The prominence given to statistics may well be observed, Conrad and others having pointed out its place as a distinct branch of economics. In general, in these matters, German thought is not so differ- ent from that of others as formerly. Germans realize that their 1 Introduction to Political Economy, p. 401. ECONOMIC THOUGHT IN GERMANY AND ITALY 481 subdivisions really grow out of mere expediency in presentation ; and the French and English-speaking economists often add a separate treatment of finance to their general works. The broader scope of German economics, with its inclusion of juristic and ethical elements, is familiar to all, and, indeed, is implied in the foregoing distinctions. Method. On the score of method there has been great variety and difference of opinion. The deepest difference lies between induction and deduction, historical and anti-historical. Schmoller, as already observed, would exclude purely abstract deductions, and favors induction from history and statistics, together with deduction from the known properties of human nature. On the other hand, the followers of Menger believe that only through abstraction and deduction can exact laws, the goal of science, be reached. Such are Wieser, Bohm-Bawerk, Sax, Zuckerhandl, and, to a less extent, Phillipovich. The tendency to get together is seen in the position of Bucher and Wagner. The latter favors a considerable use of induction from history and statistics; but, dealing largely with recent phenomena, he uses deduction more and history less than does Schmoller. Bucher (1893) has concluded that historical methods give the laws of the evolution of peoples, but that abstract deduction is necessary in dealing with the complicated exchange economy of to-day. Statistics, he believes, offer some scope for induction as a complementary and controlling process. Then various minor categories exist: the mathematical (deductive), the statistical (inductive), and the juristic, the last-named method being most frequently associated with the Historical School's tendencies. The most prominent German exponents of the mathematical method are Launhardt, whose Mathematische Begriindung der Volkswirthschajtslehre appeared in 1885 ; and Auspitz and Lieben (1889), who have worked out price curves. These men follow in the footsteps of Jevons and Walras. Jurisprudence, with its minute logical classifications and defi- nitions, furnishes an example by which the economic thinkers of Germany have profited. So Knapp has treated money as a 21 482 ECONOMIC THOUGHT creation of the law, Neumann (Grundlagen, 1889) has applied the method to practical problems of taxation, and many others like Wagner show the same influence. In fact, it is a not uncommon tendency of German writers to go to extremes in this direction, making definitions and distinctions which are perhaps useless and are certainly not used. , German economists have been foremost in realizing the im- portance of statistics as a means of verifying theory and putting it on a more " positive " basis. 1 Knapp, Lexis, Inama-Sternegg, G. v. Mayr, Stieda, and Van der Borght are recent writers who combine economics and statistical knowledge, not to mention Professor Wagner, who has applied the statistical method to banking problems. The names of Mayr (Die Gesetzmassigkeit im Gesettschaftsleben, 1887) and Meitzen (Geschichte, Theorie, und Technik der Statistik, 1886) will always be mentioned in connection with statistics ; and perhaps this is the place at which to recall the valuable work of the Austrian professor, Neumann- Spallart, whose Uebersichten der W eltwirthschaft began in 1870, and were continued, after his death in 1888, by Juraschek. Schools of Thought. Some seven distinct tendencies may be distinguished in German economic thought since 1850. These are not all of equal importance and are not mutually exclusive, but to refer to them will help to an understanding of the present situation. i. There has been a group of men who follow the classical theory, pushing its conclusions to extremes, and omitting the limitations and qualifications found in the writings of the masters Epigonen, as the Germans call them. Such names as Prince-Smith, Michaelis, O. Hiibner, Schultz-Delitzsch, K. Braun, Treitschke, Max Wirth, O. Wolff, Bohmert, Emming- haus, and A. Meyer may by common consent be placed here. The first two were in a sense the founders of the so-called Ger- man Manchester School. 2 The Vierteljahrsschrift fur Volks- wirthschaft und Kulturgeschichte is the organ of this group. 1 See Cossa, Introduction, pp. 26-27. 2 Following the successful activity of the English Anti-Corn Law League (1846), the ideas of Cobden and Bright were transplanted to Germany, ECONOMIC THOUGHT IN GERMANY AND ITALY 483 2. Following List, a small group is notable as standing in opposition to the preceding, and advocating protection : Her- mann, Diihring, following Carey, and L. Stein. 3. The Historical School. This school has been made the subject of a chapter, to which the reader is referred. Schmoller is its most prominent representative, and its chief publication is the Jahrbuch fur Gesetzgebung Verwaltung und V olkswirthschaft im Deutschen Reich (Schmoller), together with the Zeitschrift fur Sozial- und Wirtschafts Geschichte. 4. The Subjective School. Most of the members of this school stand for deduction and more or less criticism of the His- torical School. Here come the mathematical economists above referred to, the Austrian Phillipovich, and perhaps Dietzel, though the latter has opposed the Austrian School. Needless to say, the members of the last-named school are included. The three remaining groups are in their various ways inclined toward Socialistic reforms : 5. Socialism pure and simple. The founders, Rodbertus, Lassalle, and Marx, having passed away, Bebel and Liebknecht now deceased may be mentioned as the later-day repre- sentatives. Samter, too, has leanings in this direction. 6. The professorial Socialists, or Katheder Socialisten, as they have been dubbed. The Verein fur Sozialpolitik 2 is the organ- ization which embraces most of this group, and through the Schriften of this union they speak. 2 The famous Eisenach suffering some change in the process. Whereas in England the work of the Manchester group was essentially a practical one based upon an actual condition rather than an absolute system of thought, in Germany the idea of free trade was given an abstract theoretical setting, and stood for extreme individualism and free play of self-interest. The German Manchester School was undermined by List's ideas, and given a death blow by the His- torical School. 1 See E. Conrad, Der Verein f. Socialpolitik u. seine Wirksamkeit, 196. 2 The " Professorial Socialists " (Katheder Socialisten) are not Socialists, properly speaking. They merely stand for an extension of the functions of the state to accomplish various measures of social reform, and not for any sweeping alteration in the fundamentals of our social order. The name was given as a term of reproach or criticism, and has been resented by 484 ECONOMIC THOUGHT assembly leading to the formation of the Verein was held in 1872, with the cooperation of the following notable economists : Bren- tano, Cohn, Conrad, Engel, Held, Hildebrand, Knapp, Knies, Meitzen, Nasse, Neumann, Roscher, von Scheel, Schonberg, Schmoller, and Wagner. The Verein was first led by Nasse, then by Schmoller. Held, Schaffle, 1 Schmoller, and Wagner may be named as its chief representatives. These men came together, not as the result of Socialistic agitation, but to discuss causes of and remedies for the obvious evils that go to make up the labor problem. They believe that a greater proportion of humanity should partake of the culture and well-being of the time. They infuse a considerable element of ethics. Without confusing science and art, they believe that it is the proper duty of science to observe the results of measures and to judge by rational standards. Schmoller has well summed up the beliefs of the "Socialists of the Chair" concerning the ends and methods of social reform. 2 Reform must be gradual ; the state rests on existing laws, and to change these at one stroke would expose society to lawless- ness. It should be based upon a reform in the character of those participating; it must not be merely external. The demands of the state must be general and equal, appearing as a just sacri- fice for the common good. And, wherever possible, the state should not take directly, but should work indirectly for a different future distribution of income. This last result may be attained through the following activities: (i) public education; (2) fac- tory, building, and sanitation laws to further a normal family life; (3) technical and moral encouragement to small scale some. It has been the source of considerable misunderstanding. The Verein, moreover, never stood for a complete unity of views; and with time new differences and points of alignment have arisen. 1 Schaffle was not a member of the Verein, however ; and held peculiar views concerning the possibilities of corporate organization. 2 Uber einige Grundfragen des Rechts und der Volkswirtschaft. Ein ojfenes Sendschreiben an Herrn Professor Dr. Heinrich von Treitschke. 1874-1875; ad ed., Leipzig, 1904, pp. 119 ff. One of the famous controversies in economic literature. Treitschke's article may be found in Preuss. Jahr- bitcher, 1874 : " Der Sozialismus u. seine Conner." ECONOMIC THOUGHT IN GERMANY AND ITALY 485 agricultural and industrial enterprise, where it is capable of competition ; (4) recognition of trade unions, etc. ; (5) tax legislation which falls upon property rather than labor, and tends to prevent swollen fortunes through progressive rates on income and inheritance; (6) restriction of dishonorable kinds of industry by laws controlling stock companies ; (7) agrarian and real property laws to encourage the small farmer ; (8) a more humane application of military service ; (9) a more demo- cratically administered national bank ; (10) encouragement of peasant proprietors on the state domains; (n) all possible reforms in labor contract, conditions of employment, profit- sharing, and the like. Though Adolf Wagner (b. 1835) was one of those who united to form the Verein, he has, since 1877, drifted gradually to a somewhat different position, holding to a more thoroughgoing advocacy of government activity for social reform. Indeed, he recognizes the influence of Rodbertus and Schaffle, to whom, with von Mohl, he ascribes some mastership. From 1878 to 1888 Wagner and Schaffle edited the Tiibinger Zeitschrijt fur die gesamte Staatswissenschaft. He entered economics as a specialist in statistics and finance. Then, at the request of Rau's family, he undertook to revise Rau's book, but finding his views diverg- ing more and more from that writer's, only the first part was issued in this way. His great Lehr- und Handbuch der Politi- schen Oekonomie is his chief work, and the first volume on Grundlagen der V olkswirthschaft (26. ed., 1879 ; 3d ed., 1892) contains his fundamental economic ideas. He has become more and more interested in the general principles of economics, in treating which he emphasizes the significance of juristic forces. 7. Finally, the groups which, for want of a better name, are called Christian Socialists are to be noted. Perhaps " religious socialists " would be better. These men are conservative. They are idealistic. They believe that a theological basis would be best for society. Ketteler, Moufang, and Jorg belong to the Catholic branch ; Todt and Stocker to the Protestant. Value Theory. From the viewpoint of pure theory the domi- nant note in Germany is eclecticism. Take value theory, for 486 ECONOMIC THOUGHT example. Here one finds neither the cost nor the utility theory clearly ascendant. On the whole, it may be said that the straight marginal-utility theory has few adherents, among which the Austrians, Sax, Zuckerhandl, and Phillipovich deserve especial mention aside from the Austrian leaders. The marginal idea seems to have served merely to develop a neglected point, leaving the refined classical theory, so modified as to include develop- ments on the utility side, in the ascendant. Wagner is typical. 1 Two factors, he states, determine price : one is temporary, being the relation between demand and supply ; the other is perma- nent, being the cost of production where perfect competition exists. Marginal utility functions in demand. And Dietzel would combine the rival theories, holding that the classical theory gives ample place for the recognition of utility ; simply, the Classicists saw in labor the great disposable factor which is both useful and limited in supply. So with the Historical School : Schmoller, while strongly subjective, does not accept marginal utility as the determinant of market value, believing that cost theories afford a simpler solution. Others, like Dietzel, Gerlach, and Lexis, have severely criti- cized the marginal-utility theory. 2 This situation has led some into a sort of doubting opportun- ism that might almost be classed as skepticism. 3 Thus Gottl, in Der Wertgedanke, ein verhiilltes Dogma der N ationalokonomie (1897), Neumann, and Diehl may be placed here. These economists believe or are inclined to believe that there is no simple and single problem of value, but perhaps several, varying with different classes of goods. General Characteristics. Some of the chief characteristics of modern German economics may be stated as follows. It 1 See his Theoretische Sozialokonomik, 1907. 2 Dietzel, in Jahrbucher fiir N ationalokonomie, 1890; Theoretische Sozialokonomik, 1895; Lexis, " Grenznutzen " in Handworterbuch der Staalswissenschaft; Gerlach, Uber die Bedingungen wirtschaftlicher Tdtigkeit. 3 So classed by Diehl in his article on " Die Entwkkelung der Wert und Preistheorie," in Die Entwickelung der Deutschen Volkswirthschaftslehreim iQten Jahrhundert, Erster Teil, II, 71. ECONOMIC THOUGHT IN GERMANY AND ITALY 487 stands for nationalism as opposed to individualism and cosmo- politanism. A careful analysis of the functions of the state is a service for which we must thank German thinkers. To be associated with this fact, no doubt, is their progress in scientific criticism along the line of social reform. They have seen that history evidences that private property rights are neither so comprehensive nor so absolute as at first appears: the social side of property has been illuminated. Professor Marshall says it is true, " as German writers have well urged, that economics has a great and an increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims." l In general, it is true that in Ger- many socio-political questions seem to be the dominant ones, and most of the younger men are critical as to the shortcomings of capitalism. A broad analysis of economic motives is characteristic of German economic thought. From Hermann to Wagner, national, moral, and ethical factors have been more often allowed for than in English economics. These various characteristics are accompanied by the preva- lence of comparative and historical studies. Under the wide- spread influence of the Historical School, monographs dealing with such subjects abound. The German economist tends to take the biological or organic point of view, regarding the evolu- tion of institutions and thus avoiding the particular form of ab- solutism so common in English and French economics. Some, however, have shown a certain narrowness in interpreting the views of the classical economists, reading into their works a belief in unlimited competition, freedom of trade, etc., which is not to be found there. Italy. 2 No better illustration of the relationship between 1 Principles, p. 87. 2 Rabbeno, "Econ. in Italy," Pol. Sci. Quar.,Vl, 439 (1891); Loria "Econ. in Italy," Ann. Amer. Acad., II, 203 (1891) ; Palgrave's Dictionary, Graziani, " Sulle relazioni fra gli studi economici in Italia e in Germania nel secolo XIX," in Entwickelung d. deutscken Volkswirlhschaftslehre, No. XVII; Cossa, Introduction; Schullern-Schratenhofen, Die theoretische Nalionaloko- nomie Italiens in neuester Zeit (1891). ECONOMIC THOUGHT industrial evolution and the progress of economic thought could be given than that afforded by recent developments in Italy. Down to but little more than a generation ago Italy was torn and divided, politically and industrially; while her backward- ness withheld both the problems and the phenomena apparent in more advanced states. Accordingly, prior to 1870 a shallow optimism prevailed in economic thought, the chief contributions consisting in some scattering studies in currency and taxation. The names of Gioji and Ferrara may be noted. The latter's work has extended into the new period, and, from him may be dated the beginning of the modern development of economics in Italy. In general, his views on method, government inter- vention, and the nature of economic laws were like those of Bastiat and the French optimistic school. Indeed, Ferrara is notable as being, along with the German, Diihring, a follower of Henry Carey; for he accepted Carey's peculiar rent ideas and made his cost-of-reproduction idea of value the center of his own scheme of distribution. Like Bastiat and Carey, he was full of paradoxes. But in 1870 Italy became united. Soon thereafter the phe- nomena of transportation, tariffs, currency, and the like, began to develop, while a single government and a united people could confront the problems which attended an evil social and financial condition. Forthwith a more scientific study of such subjects as population and public finance made its appearance. The leaders of the new movement were Messedaglia, Nazzani, and Luigi Cossa. Messedaglia (1820-1901) was the father, leading the reaction against the illogical though brilliant optimism of Ferrara, which was then dominant. He had but little constructive power, but was a keen analyst and a careful, accurate worker with great powers as logician and statistician. His best work is found in the field of statistics and public loans. He will be remembered for his modification of Malthus' statement of the law of popula- tion; for he reasoned that even as a tendency the increase of population could not be in a geometric ratio 2, 4, 8, 16 ; but that if the food supply falls short, the power of population ECONOMIC THOUGHT IN GERMANY AND ITALY 489 to increase will be diminished and the rate of growth decreased. Thus 4 will tend to produce, not 8, but 6, the result being an arithmetic progression, though still a more rapid one than gov- erns food. Meanwhile the influence of German economics, which, as will be remembered, was undergoing important developments at this same time, must be observed. The reaction of 1870 was largely stimulated and guided by German thought. Nazzani (1832- 1904), for example, combined the doctrines of Roscher, Schaffle, and Wagner with* the classical economics. His writings show considerable critical ability. 1 In the main he held to the Ricar- dian economics as developed by Senior. Also Lampertico (Econ. del Popoli e degli Stati, 1874) and Cusumano (Le ScuoleEcon. delta Germania, 1875) are to be noted here. Luigi Cossa (1831-1896), however, was the first Italian econo- mist to win international recognition, and to him is due in a large measure the establishment of Italian economics. The greater number of young Italian economists have felt Cossa's influence as a teacher. He is best known by his investigations in the his- tory of economic thought, though, like so many of his country- men, he has done good work in the science of finance (1875). His book, translated into English as An Introduction to the Study of Political Economy, besides showing an extensive knowledge of the economic literature of all countries, together with much critical ability, has a " theoretical part " which contains valuable suggestions on the scope and method of economics. He is, perhaps, too severe in his criticism of the Historical School's method. Cossa studied in Germany under Roscher and Stein, being particularly influenced by the former. Naturally these developments meant war with Ferrara and his followers. Ferrara opened the hostilities in 1874, and here Luzzati won a name by a temperate but weighty rejoinder. This writer's statement of the case, as being typical of the new Italian movement, is worth quoting from : 1 Sunto di econ. pol., 1873 (a clear, concise text-book much used in Italy) ; Saggio sulla rendita fondiar ia, 1872. 490 ECONOMIC THOUGHT " Between the classical economists at one extreme and the socialistic iconoclasts at the other, there is to-day a mediation in the historical or inductive school. ... Its adherents do not admit a priori either harmony or contradiction of interests. They investigate the world as it is, and not as it ought to be. ... They admit liberty as a principle. . . . They respect and uphold progress equally with liberty; and where compulsory social action, i.e. the action of the state, serves to prevent con- flicts which liberty promotes and to procure benefits which lib- erty obstructs, they accept in their economic proceedings a directive action." l The new school founded the Giornale degli Economisti in 1875 as its organ, 2 and Ford as editor spread German economics. The most important Italian economists appear to be Ricca- Salerno, Graziani, Rabbeno, Loria, Pantaleoni, and Pareto, though such men as Supino, Conigliani, and others, should not be overlooked. Of this group, Ricca-Salerno (b. 1849), a pupil of Wagner's, holds somewhat the eclectic position of his teacher on the score of method, tempering his classical basis with a knowledge of the historical criticism. He follows Sax in financial theory, apply- ing the deductive method and the marginal-utility analysis. Graziani and Conigliani are his pupils. The former has written well on machinery and wages, stock exchanges, and other topics in applied economics. He follows the Austrian theory of value. In this he is to be classed in part with Pantaleoni, whose Prin- ciples of Pure Economics (1889) has been translated and is one of the best known Italian works. 3 His Theory of Transference 1 Giornale degli Economisti, Sept. 1875. Cited by Rabbeno in Pol. Sci. Quar., VI, 444. * Discontinued 1878 ; reestablished in 1886 by Zorli. He had the coopera- tion of Pantaleoni, Mazzola, and De Viti. 3 Pantaleoni, however, is a classicist. He would define economics as Senior and Jevons do. Every economic theorem, he says, may be expressed in the form of a conclusion of a syllogism, having for its major premise the hedonic hypothesis. He goes against Bohm-Bawerk in his theory of interest, and also does justice to the classical English economists by reconciling marginal utility and marginal cost or disutility. Economic problems may ECONOMIC THOUGHT IN GERMANY AND ITALY 491 of Taxes is also notable. Alessio, too, has written on value from the Austrian viewpoint. Rabbeno (d. 1897) is of the historical order, showing a concrete, practical turn of mind, an inductive method, and sociological tendencies. His chief works (1883- 1892) deal with labor, cooperation, and American protectionism. Loria deserves a separate paragraph, not because his views are more sound, but because they are more original than those of his fellows. 1 He makes a study of real property the basis for an attack upon the present system of distribution. Though Loria by no means accepts the organic conception of society, his peculiar contributions largely lie in the field of sociological economics. He follows a hedonistic philosophy and a purely economic interpretation of history; morals, law, and politics are not causes, but results, of economic conditions. But land is the corner stone of the system. Capitalistic property is founded upon the violent suppression of free land. Thus no mere laws could remedy present evils, but only a diffusion of property. In his latest writings he defends the right of each man to land, and, as a practical remedy, suggests the payment by employers of a " territorial wage " for a term of years, with the idea that at the end of the period substantial equality would exist as in " final " or primitive society and cooperation could be hoped for. 2 Loria appears to overlook the significance of bases for capitalization other than land ; and few will accept so rigidly economic an interpretation of human motives and history. be solved indifferently in terms of cost or of degrees of utility (p. 1 73). " But whoever admits this, must recognize that the new doctrines of the final degrees of utility are a no less unexpected than crushing demonstration of the precision, elegance, and truth of all the theorems of the orthodox and classic economists." (Id., note.) 1 Chief works : La rendita fondiaria e la sua elisione naturale, 1879. Analisi della proprield capitalista, 1889. Studii sul valor e della moneta, 1891. La terra ed il sistemia sociale, 1892. 2 Constituzione economica odieria, 1900. See also La rendita fondiaria e la sua elisione naturale, 1879; an d Economic Foundations of Society, London, 1899. 4Q2 ECONOMIC THOUGHT Following the classification of German schools, one finds that all the tendencies are similarly manifested in Italy, excepting that the protectionist policy has little or no hearing among economists, and the more radical aspects of Socialism are almost equally weak. Up to 1900 the most prominent group has been the historical. Here come Fornari, 1 Toniolo, Supino, 2 Ricca-Salerno, 8 Loria, 4 A. Montanari, 6 and, in most respects, Rabbeno. It must be noted, however, that these men stand for a degree of eclecticism not associated with the most typical members of the German school. They hold fast to a larger part of the classical English economics than their German models. Closely connected is a group of sociological economists: Boccardo, Cognetti, 6 and Rabbeno. State Socialism of the Chair, so called, has Ferraris as its chief representative, and Montara 7 and perhaps Luzzati may be mentioned here. Ferraris is one of Wagner's pupils. The conflicting German tendency, the Austrian School, has been quite active in Italy, as would be inferred from its adoption by such men as Graziani, 8 Mazzola,E. Cossa, 9 and Conigliani (d. i90i). 10 As already indicated, Pantaleoni accepts the marginal- utility idea of value in an eclectic sort of a way, but by no means follows the Austrian School in their typical conclusions concern- ing cost and interest. After all, it is in finance rather than in 1 Teorie economicke nelle Provincie Napoletane, 1882-1888. La Scienza Economia in Italia nel Secolo XVI-XVII, 1888. Storia delle Dottrine Finanziarie in Italia, 1881. Teoria del Valore negli Economisti Ilaliani, 1882. Contributo alia Storia della Teoria del Valore negli scrittori Ilaliani, 1889. Bora 1844; died 1891. Chief works: Le forme primitive dell' evoluzione economica, 1881; Socialisms Antico, 1889; // Socialismo negli Stati Uniti, 1891 ; On the Formation, Structure, and Life of Commerce. Excellent at historical research, Cognetti was not strong at nice reasoning in economic theory. 7 Doveri delle Proprietd Fondiari, 1885. 8 Storia critica della Teoria del Valore, 1889. 9 Le forme naturale della economia sociale, 1890. 10 La riforma delle leggi sui tributi locali, Modena, 1898; Saggi di economia politico, 1903. ECONOMIC THOUGHT IN GERMANY AND ITALY 493 general theory that the Austrians have made most converts in Italy. This most recent tendency has found determined resistance, Supino, 1 Loria, 2 and Rabbeno having broken valiant lances in attacking it. These critics seem agreed that the emphasis of " marginal utility," including as it does the ideas of utility and scarcity in a single word, means little but a change in terminol- ogy, while they regard the purely subjective tendency as one- sided and as leading to the use of standards which cannot be precise. All authorities seem agreed that the Italians have a notable tendency to eclecticism in economics. They soften and har- monize the teachings of various schools. Beginning with the classical economics, they fell under the influence of Bastiat and Carey, and somewhat modified the English doctrines in the direction of optimism. To this condition came the historical tendency, out of which admixture arose the dominant historico- liberalistic eclecticism of recent times. Even the marginal- utility theorists make some modification, approaching more closely the classical theories, and so making a fusion with the other group less difficult. When all has been said, it remains true that well down to the close of the last century the original contributions of Italian thought to the progress of economic science had been slight. But as Italy develops industrially, and as Italian thinkers enrich the soil of a national economic literature, those useful studies in the history of Italian theory led by L. Cossa will surely bear fruit. Already one may consult Italian works with advantage, and the time is at hand when the advanced student who can only master two foreign languages may perhaps hesitate between French and Italian. 1 Giornale degli Economisti, 1889. 1 Nuova Antologia, April i, 1890. J CHAPTER XXXI RECENT ECONOMIC THOUGHT IN ENGLAND AND FRANCE England. 1 The more recent developments in the eco- nomic thought of England have been touched upon to some extent in preceding chapters. Thus Jevons has been dis- cussed; and the concrete-historical work of Bagehot, Leslie, Toynbee, Rogers, and Ingram has been outlined. Thornton and others, too, were mentioned in connection with the down- fall of the wages-fund theory. In short, the way has been pre- pared for a brief general statement of the English economics and economists of very recent times. For about a generation after 1850 the Ricardian economics as restated by Mill reigned supreme in England. Its spirit and that of its followers were quite absolute and dogmatic. To be unorthodox in economics was a serious reproach. The tone of the whole system was decidedly materialistic and neglectful of ethical factors, and, needless to say, deduction was its logical weapon. Henry Fawcett (1863) and John Elliott Cairnes (1824-1875) may be named as the leaders of the later classicists. Fawcett did little more than present a compendium of Mill's economics. Cairnes, however, was an acute and original thinker, whose works, entitled Some Leading Principles of Political Economy and Char- acter and Logical Method of Political Economy, have had much influence. The former is notable for its portions on Value and 1 Beside the works of the authors referred to, see Foxwell, " Economic Movement in England," Quart. Jr. Econ., II (1887) ; Ashley, "The Present Position of Pol. Econ. in England," in Die Entwickelung d. Deutschen Volks- wirthschaftslehre, Erster Teil; Palgrave's Dictionary; Price, Political Economy in England; etc. 494 ECONOMIC THOUGHT IN ENGLAND AND FRANCE 495 International Trade. It is in the part on value that the author discusses non-competing industrial groups, 1 the theory of which will ever be associated with his name. In view of Thornton's and Jevons' attacks upon the classicists, Cairnes restates and modi- fies the theory of value, emphasizing the effect of prospective supply, and denning demand as desire accompanied by purchas- ing power measured by the quantity offered. At this point he severely criticizes Mill. 2 In method, he was on the whole deductive. He held that with nothing but strict induction the economist could reason till the crack of doom and get nowhere. His definition of economics is typical : " the science which, accepting as ultimate facts the principles of human nature, and the physical laws of the external world, as well as the conditions, political and social, of the several communities of men, investigates the laws of the production and distribution of wealth, which result from their combined opera- tion." As compared with Ricardo, the method pursued by Cairnes was an advance, in that he did put many of his deduc- tions to the test of facts. Cairnes, however, is open to criticism on the score of narrow- ness. He hardly grasped Jevons' idea of final utility, and con- sequently saw no good in it. Similarly he was inclined to state too absolutely the application of his non-competing groups. But, in a way, Cairnes was in his day the last of the English classicists. Forces were at work which wrought great modifi- cation in the old viewpoint. In the first place came a broaden- ing of economic analysis which arose from a recognition of the interrelation of ethical factors ; it became affected with a hu- manitarian interest. The labor movement was largely respon- sible for this development. In the same year that Cairnes died (1875), Parliament passed the Conspiracy and Protection of Property Act, and shortly thereafter the Trade Union Acts (1871, 1876), which legislation gave greater legal rights to organized labor. Toynbee was only one of many whose thought was largely colored by sympathy for labor. The attacks of Carlyle 1 Part I, Chap. Ill, 5. 2 Ibid., Chap. IV, 3. 496 ECONOMIC THOUGHT (Past and Present, 1843), and of Ruskin, 1 too, no doubt had their effect. At the same time the criticisms of the Historical School were working to give a less absolute and abstract cast to English thought. This development began notably with Leslie, who had been influenced by Sir Henry Maine and the German school. It is interesting to note that, just as in the case of France herself, England's attention was attracted to Germany and German thought as a result of that nation's success in the Franco-Prus- sian war (1870). And, oftentimes associated with the historical viewpoint, there came a notable development in the biological sciences. The names of Spencer, Darwin, and Huxley cannot pass unmen- tioned here, for their philosophy and method have had no small influence upon economic concepts. It is difficult to say just what progress has been due to the mere activity of theoretical criticism proceeding from within, as it were, and uncolored by the above developments from with- out. For example, it might not be easy to say how much of the downfall of the wages-fund theory was due to the activity of labor organizations, and how much due to a recognition of the inherent logical weakness of the theory. Such progress, how- ever, has been exemplified in the work of Cairnes, Jevons, Mar- shall, and J. A. Hobson ; and the theories of the American econ- omist, F. A. Walker, had great influence in England. All these developments involving the overthrow of " ortho- doxy " came to a head in the decade 1870-1880, and, for a time, economics was a much discredited science. Meanwhile, there had been no effective teaching of economics in the colleges and universities, " no real working professorship of political economy in Great Britain comparable to the ordinary professorships in any German university," as Professor Ashley puts it. 2 Then Jevons made the most of a chair of political economy and logic at Owens College ; a chair was founded at Edin- 1 E.g.,Munera Pulveris, 1872, Unto this Last, 1860; Fors clavigera, Letters to the Workmen and Labourers of Great Britain, 1871-84. 1 Just as in France some of England's best economic thought has come ECONOMIC THOUGHT IN ENGLAND AND FRANCE 497 burgh in 1871 ; and, above all, in 1885 the chair at Cambridge was taken by Professor Marshall, insuring effectiveness at one of the older universities. In 1890 the British Economic Asso- ciation was founded, and the following year the Economic Jour- nal, with Professor Edgeworth as editor, became its organ. The Economic Review, the organ of the Christian Social Union, was established in the same year. From this time on the spread of economic teaching was rapid. When one turns to the question, to what extent are the va- rious schools or tendencies in economic thought represented in England, notable absences appear in the case of that active spirit of social reform in academic circles, often somewhat mis- leadingly called " Socialism of the Chair," and also in the case of the optimism found in France, Italy, and the United States. 1 For the rest, the Historical School is represented by such men as Rogers, Cunningham, Ashley, and Unwin ; the Austrian or marginal-utility idea by Wicksteed, Edgeworth, and Smart ; and the Classical School by Sidgwick (1838-1900), Nicholson, and Marshall. Wicksteed and Edgeworth are prominent exponents of the mathematical method, in which Marshall is also an adept. Henry Sidgwick's Principles of Political Economy was pub- lished in 1883, and undoubtedly did much to regain for economics some of the respect it had lost. The book is based upon Mill, amended by Jevons' theory, with Walker's wages theory in- cluded. It is notable, too, that the Germans, Held and Wagner, are referred to. Sidgwick lays marked emphasis upon the theory of value and exchange. While holding that Mill's theory of value is sound in the main, he points out that " equation of supply and demand " is deficient as an explanation of exchange value when both supply and demand vary with price. The fact that cost is to some extent determined by demand is also indicated. In connection with the theory of international values, Mill without academic circles. In more recent times there are, to mention just a few, Bagehot, Booth, Rowntree, Palgrave, Webb, and Hobson. 1 The latter line of thought is to some extent represented by the states- man, Robert Giffen. Perhaps J. A. Hobson, though outside academic circles, might be classed as a representative of the former movement. 2 K 498 ECONOMIC THOUGHT is again criticized, and originality is shown in the discussion of the importance of cost of carriage in the problem. Sidgwick analyzes the Ricardian theory of rent into a confusion of three different ideas : (i) a historical theory of rent origins, (2) a static theory of present tendency, (3) a dynamic theory of tendency to increase in the future as population and wealth in- crease. 1 This point is characteristic : Sidgwick's work is subtly analytic, and his critical examination of the fundamental con- cepts of economics is noteworthy. Alfred Marshall, until recently Professor of Political Economy at Cambridge, is admittedly the greatest living English econo- mist. Indeed, there is, perhaps, no contemporary economist who surpasses him in constructive general theory. Marshall's chief works are Economics of Industry (1879) with Mrs. Marshall as joint author and Principles of Economics, 1890 (5th ed., 1908). Marshall's great work has been to take the English classical economics at a time when it had fallen into considerable disrepute, and, by interpretation and modification, so to round it out and adjust it as to place it abreast of the best recent thought, and regain for it the respect of the world. A recent criticism of eco- nomic theories has a chapter headed, " The Attempt at Recon- ciliation ; Marshall," 2 and this is a fairly good characterization. " Marshall's synthesis " might have been better. On the whole, Marshall falls in the Classical or, perhaps, Neo-Classical school, and his most frequent logical weapon is deduction. But he seeks the truth in the golden mean. He calls a halt to mere historical grubbing and organic metaphors, asking for careful and rigorous reasoning, and declaring that " the growing prominence of what has been called the biological view of the science has tended to throw the notions of economic law and measurement into the background." Yet he accepts the idea of relativity, and recognizes the contributions of biological sciences. He rejects Comte's idea, according to which economics 1 Book II, Chap. VII, i. 2 Davenport, Value and Distribution, Chap. XX. It is true that Mar- shall may be justly criticized for reading too much into the words of the old English economists, J Principles, 4th ed., p. 72. ECONOMIC THOUGHT IN ENGLAND AND FRANCE 499 would be fused in a general social science, and defines econom- ics as dealing with those motives and desires of man which can be measured by money. * On the other hand, he writes : " Even for the narrower uses of economic studies, it is important to know whether the desires which prevail are such as will help to build up a strong and righteous character," 2 and does due homage to German analysis of motives. Both induction and deduction are recognized as having their places, and Schmoller is quoted with approval. Simply, where there is still uncertainty as to causes, analysis and deduction are needed. History shows that one event follows another ; but the historical method does not show the causal connection. Marshall holds that enough of generality exists in certain economic characteristics to base gen- eral laws upon : that, making the usual allowance for equality in conditions, there are laws or tendencies which resemble the sec- ondary laws of natural science. But in economics they must be handled with peculiar care. 3 Marshall's economics certainly has a practical element in it ; nor is it free from " preaching " and advocacy of reforms. This side does not seem to warp the scientific character of the conclu- sions. Marshall has brought together in a masterly way the Austrian analysis and the cost concepts of his English predecessors. Util- ity is one side of the arch whose keystone is value, or one blade of the pair of scissors, with cost as the other. Both blades cut. They mutually determine. Thus he avoids the one-sided em- phasis of both schools, and makes marginal utility the two-sided thing that it is. Though at points he appears to confuse price a ratio between marginal utilities with the marginal utility of the thing purchased, 4 his treatment of " demand price " is sound, and is a contribution to economics. 6 In the light of recent developments in thought concerning differential returns, Marshall has broadened the classical theory 1 With due limitations. * Principles, 4th ed.,p. 77. * See pp. 93, 101. 4 E.g. p. 174. See Davenport, as above cited. 6 See Bk. Ill, Chap. II, 2 ff. 500 ECONOMIC THOUGHT of rent along lines already suggested by J. S. Mill. He by no means sees the necessity or expediency of abandoning a recog- nition of the peculiarity of land rent, but adopts the term, " quasi- rent," to denote those less permanent differentials which may be yielded by the superior productivity of units of capital or labor. The device of the " representative firm " is one of the more questionable characteristics of this author's thought. Such a firm is one which, as others rise and fall, continues on an average level of prosperity while meeting normal (or average ?) expenses for labor, including management and capital. This representa- tive firm serves somewhat the same end in his reasoning that the marginal one ordinarily does for others. Marshall's device may be merely an expression of his belief that under his assump- tions as to competition, and in the long run, all producers just meet normal expenses and, in this sense, all are marginal. Thus it would be valid if not useful for long periods, but would be indefinite, and perhaps misleading, for shorter periods. 1 One of the most notable features of Marshall's thought is his development of the idea of the surplus. He includes not only land rent, as a surplus above cost, but also the vaguer ideas of "consumers' surplus" and "workers' surplus." The former appears to rest largely upon a psychological basis, and is briefly defined as the excess of the total utility of a commodity over the " real " value of what is paid for it. 2 The consumer of matches, salt, and newspapers enjoys or may enjoy such an excess. It might also be called a net benefit derived from fortunate sur- roundings or conjuncture. Workers' surplus, on the other hand, is the excess of remuneration coming from payments for total work made at the same rate paid for the last and most costly part, with a deduction for the trouble of acquiring skill, etc. 3 Similarly, a savers' surplus is distinguished in the case of the capitalist. These surpluses, it will be observed, are not meas- ured from the payments necessary to secure the cooperation of the 1 It suggests Adam Smith's reasoning as to labor and value. See above, pp. 169 f. 2 Principles, 4th ed., pp. 124, 830. * Ibid., p. 830. ECONOMIC THOUGHT IN ENGLAND AND FRANCE 501 factors of production, nor from the subsistence level ; but depend upon sensibilities, and their elasticity, and upon surroundings. Marshall's treatment of quasi-rent also makes it a temporary surplus on all material agents, it being the excess of total money returns over the direct outlay. C While it is well to call attention to such matters as a possible consumers' surplus, and the idea has been widely adopted, its value in a purely economic analysis may be questioned. ^ In this connection Hobson's treatment of surplus will not be forgotten. In his Economics of Distribution (1900), he reasons that distribution is carried on through the fixing of market prices, accompanied by a process of bargains in which, by the superior economic strength or cunning and varying differential estimates of buyers and sellers, a " forced gain " is obtained, leav- ing the weaker bargainers a bare minimum inducement. " Thus emerges the true surplus value, derived not from some vague, un- intelligible idea of tyranny, but from the various hindrances to perfect equality of bargaining-power in the owners of the vari- ous factors of production, and the consequent establishment of different forms and pressures of economic force." * According to this theory, surpluses may be found anywhere, and are not confined to rent or profits only, and a conclusion drawn from it is that taxes upon commodities are not necessarily borne by consumers, but may merely absorb some one of the numerous " forced gains." It may be objected that many of these so-called surpluses may be better explained as rewards for superior skill in bargaining as differential wages, for example ; and in other cases, they appear to resemble Marshall's consumers' surpluses in their origin/ J. S. Nicholson, in his well-known Principles of Political Econ- 1 p. 360. Hobson holds to a large part of the framework of the Classi- cal doctrines (Economics of Distribution, 1900), but rejects the ideas of the beneficence of competition, and, apparently, of diminishing returns. In his Evolution of Modern Capitalism, 1901, and The Industrial System, 1909, he shows leanings toward a sort of State Socialism in suggesting government monopoly as the alternative to the absorption of all "forced gains" by tax- ation. ECONOMIC THOUGHT omy, presents a survey of economic principles based on Mill, adapting the classical doctrines in the light of historical criticism on the one hand and of advanced mathematical analysis on the other. The treatment of relative prices, and of profits and wages, has been thought especially noteworthy. The various brands of Socialism all have appeared, though Marxian Socialism has gained relatively little ground. 1 Chris- tian Socialism, so called, 2 not Catholic has had such well- known leaders as Kingsley, Ludlow, and Hughes. England is the peculiar home of that opportunist order of Socialism called Fabian, of which Webb is the best-known representative. It is perhaps true that in England the question of land nationalization has been discussed with relatively great fre- quency. The attention given the question by Mill has been in- dicated, and such men as Dove and Wallace have become known in this subject. 3 The most recent development in English thought has been a renewal of interest in the tariff question. 4 With increasingly effective competition from Germany and the United States, the question has long been raised as to whether England cannot pro- 1 On Socialism in England, see Flint, Socialism, Chap. II, and supple- mentary note ; Webb (S.), Socialism in England; Villiers, The Socialist Move- ment in England. 2 It will be remembered that Christian Socialists are commonly not Socialists in the technical economic sense of the term. Their ideas are not generally very definite and as a rule they stand merely for reform of various particular social evils. However, there is a real Socialism which bases its doctrines on the teachings of Christ. 3 Patrick E. Dove (1815-1873) believed in a natural right to liberty and property which should be confirmed by legislation. He was not a Socialist, nor was he revolutionary. But he favored taking taxation from labor, and placing it chiefly upon land. His views may be traced in his Theory of Human Progression (1850), but are elaborated in the Elements of Political Science (1854). A. Russell Wallace's chief work in this connection is Land Nationalization, its Necessity and its Aims (1882). He advocates common ownership with cultivation by leaseholders, the land being let to the highest bidder. 4 Beginning about the early nineties, and reaching a climax with Joseph Chamberlain's activities from 1903 on. ECONOMIC THOUGHT IN ENGLAND AND FRANCE 503 tect herself by establishing preferential relations with her nu- merous colonies and by offsetting foreign bounties and aids by tariffs on imports of manufactures. Ashley, Cunningham, and Welsford have favored " tariff reform " ; Smart, Pigou, Dawson, Money, and Farrer have opposed it. France 1 (and Belgium). The first real economists, the Phy- siocrats, were Frenchmen, and to France belongs an honorable part in the founding of the science of political economy. But with the close of the eighteenth century, it will be remembered, England took the lead, and after Say, France neither produced any important works nor possessed a school of economists until about 1845, though French idealistic or Utopian Socialism flour- ished. At length, near the middle of the nineteenth century, there arose a revival of classicism, marked by the advent of such men as Dunoyer and Bastiat. English influence was decidedly domi- nant, and after 1860, when tariff barriers between England and France were largely removed, the "Manchester School" carried the day with a high hand. The commercial agreement just al- luded to was largely influenced by Cobden and the French econo- mist and statesman, Chevalier. Individualistic philosophy and deductive methods reigned supreme; but, as observed above, the French were more optimistic than the English. This period, extending down through 1878, has been called one of traditional- ism. Bastiat was its dominating spirit. And, as Professor Gide has pointed out, it is well to note here that the French school of liberalists has never been quite iden- tical with the English in its thought. From Mercier de la Riviere to Leroy-Beaulieu, their optimism has been underlain 1 See B6chaux, L'Ecole Economique Fran$ais (1902) ; Feilbogen, "L'Evo- lution des Idees Economiques et Sociales en France depuis 1870," in Rev. d'Hisl. des Doct. Econ., 1910, pp. 1-41 ; Gide's articles on various tenden- cies in French economics, in Econ. Jr., June, 1907, and Pol. Sci. Quar., December, 1890, and Jahrbiichcr (Schmoller), 1895; De Foville, "The Economic Movement in France," Quar. Jr. of Econ., 1890, pp. 222-232; Bonar, " Studies in the Origin of French Economics," Quar. Jr. of Econ., 1890, p. 100; Palgrave's Dictionary. 54 ECONOMIC THOUGHT by a belief in the beneficence of natural law. Their optimism has concerned the future, that is, the possible future. Evils they recognize ; but these arise, they believe, from failing to observe the natural law in not leaving industry free and untrammeled. Some reasons for this optimistic tendency have been suggested in connection with Bastiat's thought. 1 If to these reasons is added the fact that the prevalence of small farms and industrial enterprises in France has made individualism more natural and reasonable than elsewhere, it will be easier to understand the tenacious hold of an old school in the land of the Physiocrats. To be sure, there have been exceptions among French-writing economists; Rossi (1787-1848), Sismondi, Cherbuliez (1797- 1869), and Le Play were such. But Rossi was an Italian; Sismondi and Cherbuliez were Swiss ; and, if Le Play was in- ductive and something of a romanticist reactionary, still he does not fall in the enemy's camp. The work of Cournot and Walras has been rejected by the dominant school, the latter having been virtually an exile in Switzerland. Such was the situation in 1878 when the new movement be- came effective in France, as, in various ways, it had been work- ing in other countries. German influence had been virtually unfelt till about this time. Then, as a result of the Franco- Prussian war (1870), more curiosity concerning German thought sprang up ; Laveleye made the so-sailed " Socialism of the Chair " known, and M. Block wrote of German books and thought ; while through the activity of Paul Gide the historical spirit of Savigny penetrated the teaching of Roman law. Laveleye (1822-1892) was a Belgian writer and professor at Luttich. His works deal with freedom of commerce, money and crises, rural economy and land systems, property and Socialism. 2 His views were considerably like those of the Katheder Social- isten, as he took the historical standpoint and denied the 1 See above, p. 237. 2 Chief writings : De la propriety et de ses formes primitives, 1874. Le Socialisme contemporain, 1881. Elements d'Economie politique, 1882. ECONOMIC THOUGHT IN ENGLAND AND FRANCE 505 existence of natural laws. He will be remembered for his argu- ments favoring the belief in an original community of property ; and, as to economics proper, for his analysis of the forces deter- mining the productivity of labor. The war, too, brought in its train a host of practical problems, and ultimately a veritable regeneration in politics and economics. All the preceding activity would probably have been ineffec- tual, however, if the monopoly of economic instruction which was held by a few special schools in Paris and the College de France had not been broken. 1 In 1878 courses were instituted in the faculties of law of various French universities. This meant new teachers, of whom it will be noted that as teachers of law they were sympathetic toward state interference, and that they were not trained in the doctrines of the French liberalists. These new men, then, were inclined to follow the Historical School and to advocate government intervention for social re- form. Accordingly, in 1879 came Cauwes' Cours d'Economie Politique. Gide published his Principes d'Economie Politique in 1883. Translations of Schmoller, Wagner, and Brentano appeared ; and in 1887 the Revue d'Economie Politique was es- tablished as the organ of the new tendencies. Cauwes' notable book advocated protectionism, and followed German ideas to the extent of placing the nation and the actual to the fore, abandoning the procedure of reasoning from absolute universal laws. In this, List was his master. However, the Historical School proper and its peculiar methods seem to have found little favor among the French economists. It is rather to an increased study of systems other than individualism that the new movement has led. And here the difference between the French government and that of Ger- many has made a difference in the thought of the two nations. The French do not look upon the state with the eyes of Germans, but regard it more as an American would. Consequently they have sought some other means of obtaining the goal of the Ger- 1 French economic writings have mostly come from men other than pro- fessional economists. 506 ECONOMIC THOUGHT man State Socialists than that of state activity. Indeed, the great mass of the French population is middle-class, not prole- tarian, in its interests, and, except for the laborers of the manufacturing centers, does not respond to movements for ex- tending the power of the state so as to restrict individualism greatly, nor to anti-capitalistic Socialism. Solidarite is a term much used in France and championed by such men as C. Gide and L. Bourgeois. The distinguishing features of their plan seem to be the abolition or fundamental modification of the wages system and the emphasis given to coop- erative action and various forms of voluntary association. It regards as the foundation of solidarity " those voluntary con- tractual associations and institutions that are created deliber- ately with a view to creating this feeling." l Solidarite rejects the principle of competition, and so stands opposed to Liberalism. On the other hand, it differs from State Socialism in opposing government action, and from revo- lutionary Socialism in general in that it disbelieves in the efficacy of revolution or expropriation. It virtually accepts, however, the program of the so-called Katheder Sodalisten as laid down by Schmoller. 2 As to their economics, the majority of the professors in the facul- ties of law, as just indicated, differ from the liberalists. They are what M. Gide terms " interventionists." They devote their energies largely to the study of current problems, notably the labor problem, and advocate government protection. The Inter- national Association for the Legal Protection of Labour (Paris, 1900) draws from their number, M. Cauwes being president of the French section. Gide mentions as adherents Jay, Pic, Aftalon, and Bourguin, the last named being the author of Les Systemes Socialistes et V Evolution Economique (1904). In this book the author, after critically examining the various plans for 1 Gide, Principles of Pol. Econ., 8th ed., Amer. trans., p. 38. 2 For a statement and discussion of the program and ideas see Gide, Essai d'une Philosophic* de la Solidarite (1902) and Applications Sociales de la Solidarite (1907). See also Bourgeois, La Solidarite (1894), Bougl6, Le Solidarisme (1907) ; Gide-Rist, Histoire des Doctrines Economiques. ECONOMIC THOUGHT IN ENGLAND AND FRANCE 507 solving the social problem, decides adversely to Socialism. The only recent product of the professorial group in pure theory, Landry's L'lnteret du Capital (1904), appears to have come through the faculty of science. 1 France also has her Christian Socialism or perhaps more properly Social Christianity with both the Catholic and Protestant branches. Indeed, this tendency seems to com- mand more respect in France and Belgium than elsewhere. Meanwhile the French classical economics is far from van- quished, for the Liberalists (economic conservatives) are still found in certain universities. 2 Moreover, it reigns in the acad- emies, and speaks through such journals as Le Temps, Les Debats; Revue des deux Mondes, and the venerable Journal des r r Economistes. So, too, with the Economiste Franqais and the Monde Economique. Among its adherents are numbered Cour- celle-Seneuil (1813-1892), Leon Say, Block, Molinari, Passy, Levasseur, Baudrillart, Juglar, Colson, Schatz, Stourm, Leroy- Beaulieu, YvesGuyot, De Foville, Neymarck, Cheysson (d. 1910), and Beuregard. This list may be divided into two groups. One, the older in- dividualists, may be represented by Frederic Passy and Gustave de Molinari. Passy (b. 1822) is an idealist, and strongly empha- sizes property rights. He also considers ethical ideas, and is widely known for his activity in promoting international peace. Molinari (b. 1819) is an utopist, and individualism is the keynote of his thought. He appears to simplify the complexities of society unduly when he virtually reduces all activities to the sway of three laws : self-interest, competition, and value. He has long been the editor of the Journal des Economistes. 3 Emile Levasseur may also be classed here, though his realism and the wonderful grasp of facts shown in his numerous writings somewhat dif- 1 Professor Landry's Manuel 57, 53of. Colonies, 97. Colonization, 43, 367. Commerce. (See Foreign trade, Free trade, Regulation.) Communism and communal property, 5, 43 f., 72, 81, 193, 197- 340, 366. Competition, 30, 338, 400, 531. Conjuncture, 383. Consumers, 81, 188, 530. Consumption, 117, 188, 276, 297, 304, 306, 352, 358, 370, 426, 434, 452, 454, 524, 543- Continuity in economic thought, 24, 537 f- Contract, 55. Corn laws, 96, 97, 184 f. Cosmopolitanism, n, 161, 294, 314 f., 320, 384, 412. Cost, nature of, 123, 266, 465 f. (See Value.) Credit, 60, 92, 359, 413, 414. Crises, 359, 380. D Deduction. (See Method.) Demand and supply, 106, 144, 170, 264, 284, 353, 360, 426, 435, 442, 444, 495, 549- Diminishing returns, law of, 200, 207, 264, 286, 289, 398, 525. Distribution, 214; relative importance in Economics, 143, 234, 274, 522 ; S63 564 INDEX Carey's scheme, 241 f. ; Clark's scheme, 522; Physiocrat ic scheme, 145; Ri- cardian scheme, 218 fi. ; Sismondi's scheme, 305 f. Division of labor, 18, 40, 63 f., 159, 160, 164 f., 290, 317, 322 f. Domains, 89, 115. Dutch Economics in England, 06 n., 102. Economics: definition and scope, 46, 52, 106, 122, 124, 264, 276, 304, 351, 399, 479 f-, 495. 54$; history of, 3, 4 &.; polity and, 122; practical in- fluence, 4, 153, 184, 325, 537; social sciences and, 5 f., 34, 248, 409, 546. Eisenach Assembly, 483 f . Emigration and immigration, no, 201, 202, 239 n., 367 n., 402. Encyclopedists, the, 8. Entrepreneur, 275, 357, 399, 432, 458, 544- Environment, influence of, 4, 18 f., 69, 74, 88, 92, 98, 114, 134, 136 ff., 192, 214, 318, 350, 372, 409, 432, 488, 511 f., 5i6, 536 f. Epicureans, 8. Epigones, 13, 482. Ethics and Economics, 16, 52, 57, 83, 99, 104, 234, 277, 289, 304, 307, 418, 455, 484, 522, 528, 531, 539 f-, 542. Evolution, Economics and, 343, 396, 400, 408. Exchange, place of, in Economics, 274, 277, 352, 522. Exploitation of labor class, 173, 310, 333, 336, 340, 379, 386. Fatalism, 35, 36. Feudalism, 70, 88. Final utility. (See Marginal utility.) Finance, public, 125, 149, 177, 238, 492; economic thought and, 19, 134 f., 143. Foreign trade, 268, 359 f. ; attitude toward, 41, 49, 63, 90, 93, 160, 320; regulation of, 42, 63, 80, 95, 123, 179, 313 ff. (See Protection.) Free trade, 123, 140, 151, 161, 162, 252, 260, 271. French Economics, 274 ff., 503 f., 541. French Revolution, 138, 164, 314, 330, 331- Friction in Economics, 205, 309, 423. Fungible thing*, 7 g. General Economics, 479 f ., 546. Geometrical ratio, 196, 246, 486. German Economics, 100, 270 f., 479 f., 518; Germanic contributions: early Germans, 70; economists, 273; in- fluence, 489 f., 504, 518 f. ; Kameral- ism and, 130, 480; German universi- ties, Economics at, 274, 480. Gilds, 81, 98, 115, 116, 121. Gluts, 205. (See Overproduction.) Goods, different orders of, 451 f., 462. Government, functions of, 79, 95 ff., 139, 177, 257, 3io, 332, 338, 369 f-, 456 n., 484, 517, 524. (See State, im- portance of.) Greek Economics, 5, 15, 16, 39 f. Gresham's Law, 118. H Harmony of interests, 140 f., 161, 190, 242, 253, 256. Hebrews, 24 ff., 52. Hedonism, 472, 531, 545. Hindu economic thought, 24 f., 53. Historical method, n, 160, 208, 244, 311, 321, 328, 395 f., 400, 410 f., 499. (See Relativity.) Historical School, 408 f., 483, 496, 505, 516. History, economic interpretation of, 39, 385, 49i. Humanism, 69. Idealism in Economics, 7, 35, 83, 247, 371, 415 n., 473, 533, 540. Immaterial factors and immaterial wealth, 241 n., 273, 276, 277, 316, 323 f- 363, 549- Improvements, effects of, 222, 223 n., 226. Imputation, valuation by, 464, 469 f. Increasing returns, 223, 264, 267 f., 526, 542. Independent domestic economy, 18, 79, 109. Individual vs. social interests, 109, 125, 129, 161, 170 f., 239, 298, 310, 391, 418, 428. INDEX 565 Individualism in Economics, 7, 8, 17, 35, 43, 71, 83, 140, 187, 294, 315, 370, 383, S4- Induction in Economics. (See Method.) Industrial Revolution, the, 105, 106, 107, 192, 214, 235, 330, 400, 438. Inheritance, 42, 333. Interest theory, history of, 5, 26 f., 48, 57, 101 f., 147 f., 160, 161, 173, 229 /., 242, 255 f., 265, 286, 357, 362, 404, 469 f-, 5*3, S25, 547- International trade. (See Foreign trade.) International value, 359 f. Interventionists, 506. Italian Economics, 100, 153 n., 487 f. Jurisprudence and Economics, 55 ff., 114, 383, 409, 411, 481. Just price, 28, 29 f., 61, 76, 80, 107. Justice, Economics and distributive, 342 f., 366, 370, 391, 484. Kameralism, 13, 113 f., 270, 273, 538. Katheder Socialist. (See Socialism, pro- fessorial.) Labor (see also Wages) : labor class and economic thought, 16, 172, 180, 214, 285, 331, 365, 404. 409, 445. 456 n., 485, 495, 506, 518; dignity of labor, 72, 80; factor of production, too, 160, 164, 278, 305, 378; painful- ness of labor, 335. Laisser faire, 4, 140, 151, 156, 163, 177, 276, 278, 299, 369, 526, 529. Land (see Rent) : as factor in pro- duction, 103 f., 155 f., 175, 239, 244, 283 f., 430, 512; as social basis, 33, 491 ; relation to man, 7, 8, 241, 351 ; value of, 244, 255, 259. Land banks, 97, 104. Land nationalization, 368, 502. (See Socialism, agrarian.) Landlords' interests, 171 n., 175, 204, 222, 255, 3SS- Latifundia, 60. Laws, nature of economic, 398, 400, 402, 411, 414, 415, 417, 419, 499- Liberalists, 503, 510, 531. M Machinery, 309. Manchester School, 185, 260, 405, 482, 503- Margin of cultivation, 219, 227, 229, 283 ff. (see Rent, and Marginal pro- ductivity); extensive, 219 f. ; inten- sive, 219 f., 222, 287. Marginal cost, 169. Marginal productivity, 286 f., 512, 522, 525- Marginal utility, 393, 447, 448 ff., 464, 468, 473, 486, 493, 499, 536, 544, 549- Materialism in economic thought, 7 f., 36, 83, 180 f., 187, 233, 293, 371, 384 f., 473- Mathematical Economics. (See Method.) Measure of value. (See Value.) Medieval Economics, 5, 70 ff. Mercantilism, 13, 87 ff. Metaphysical stage, Comte's, 12 f. Method, 9 ff., 413 f., 417, 481, 545; ab- stract, 12, 183, 228, 234, 280, 288, 395 f., 400, 545; concrete deductive, 373; deductive, 10, 183, 234, 248, 264, 280, 373, 401, 403, 481, 495; in- ductive, 10, 275, 300, 403, 416, 419, 481; mathematical, 280, 451, 457, 459, 481 ; statistical, 9, 400, 417. Middle Ages, significance of, 5, 24, 69 f ., 82 f., 104, 316. Monasteries, 80. Money: definition and nature, 56 f., 97, 119, 160; origin and use of, 48, 56 f., 78; value or purchasing power of, 77, 80, 334, 525; labor currency, 334, 34i, 381 ; foreign trade and, 91, 93 ; regulation of exports of, 118. Monopoly, 117, 175, 204, 266, 355, 524, 526; in medieval towns, 80. Mosaic law, 15, 26, 32, 34, 38, 77. N National lines, significance of, 37, 108, 271, 321, 409, 518. Nationalists, the, 294, 313 ff., 533. Natural prices, rates, etc., 13, 46, 49, 147, 149, 170, 226, 286, 522. Natural science, progress in, and eco- nomic thought, 138, 139, 396, 447, 496. Nature: bounty of, 47, 141, 204, 223 f. ; law and philosophy of, 12, 55, 75, 138 ff., 163, 183, 234. INDEX Navigation Acts, 97, 107, 109. Negativism, in economic thought, 155, 187, 402, 410. Neo-Maithusianism, an. Non-competing groups, 495. Occupations, attitudes towards the vari- ous, 49, 58, 71, 74, 93, i4- Opportunism, 182, 300, 502. Optimism, in Economics, 141, 179, 100, 242, 261, 290, 406, 475 n., 504, 524, 540. Order of cultivation, 223, 243. Organism, society as an, 315, 328, 418, 491, 498, 521. Oriental economic thought, 5, 23 Jf., 52. Overproduction, 204, 275, 297, 301, 307, 359, 38o. Parsimony, and frugality, 96, 101, 295, 297, 425- Personality of man, 35, 56, 71, 73, 99, 338. Pessimism, in economic thought, 172, 190, 223, 232, 530, 540. Philosophy and Economics, 6 f., 57, 138, 180, 371, 411, 472, 544 f. (See also Idealism and Materialism.) Physiocrats, 87, 104, 106, 133 f., 159, 162, 164, 238 n., 270, 275, 297, 301, 382, 427 n., 434, 529. "Political Arithmetic," 87. Politics, Economics and, 17, 83, 122, 131, 411. (Cf. Jurisprudence.) Poor, the, in economic thought, 26, 33, 79, 95 f Poor laws, 193, 263. Population, 43, 79, 95, 96, 103, 106, 115, 123, 125, 129, 148, 161, 172, 188, 193 Jf., 228, 245 f., 257, 264, 309, 356, 361, 364 Jf., 488, 526. Prices, 77, 80, 81, 89, 90, 192, 361, 405. (Cf. Money, value of.) Production, 141 ; factors of, 103, 135 (see Labor and Land) ; relative im- portance in Economics, 143, 188, 274, 304- Productive and non-productive classes, 104 f., 141, 145, 153, 157, 165, 205, 239, 272, 273. Produit net, 141, 144, 301. Profits, 174, 334, 357, 362, 432 f., 542, 547 f- Property, private: basis of, 140, 339; economic thought and, 55, 71, 332, 334, 339, 342, 364, 487- Protection, 63, 80, 96, 116, 117, iao, 179, 239. 289, 314 f., 321 /., 327 f., 502, 505, 513- Public finance. (See Finance.) Pure Economics, 480, 546. (See also Economics.) Q Quietism, 59. R Reformation, 20, 69. Regalia, 89, 115, 126 f. Regulation : of everyday life, 25, 35, 42 ; of industry and commerce, 29, 42, 62, 81, 97, nof., 123, 179, 239. Relativity, 6, 161, 404, 409, 413. Religion, economic thought and, 34, 95 f-, 138, 316, 485. (See Bible, and Theology.) Renaissance, 20. Rent, 141, 157, 175, 204, 210, 242, 255, 267, 282 f., 355, 381 f-, 397, 431, 498, 500, 523. Representative firm, 500. Re rustics, Scriptores de, 60, 65 f. Residual claimant, 230, 548. Risk, 174, 230, 433, 525, 548. Roman economic thought, 54 Jf. Roman law, 71, 128, 341, 538. Romanticism, 313. Saint-Simonians, 132. Savings and capital, 393, 425; and pro- ductive labor, 171, 172, 306, 359, 425, 440 f . (Cf. Capital, relation to labor.) Scarcity and value, 143, 215, 264, 352, 355, 459- (Cf. Demand and supply). Scholasticism, 74 f., 538. Self-interest, 45, 159, 161, 163, 178, 402, 418. Single tax, 135, 149. Slavery, 60, 72. Social viewpoint in Economics, 7, 9, 41, 170, 298 f ., 343, 544. Socialism: agrarian, 148 n., 392; Chris- tian, 38, 485, 502 ; professorial, 483 f., 497, 506; revisionistic, 300; State, INDEX 567 377. 378; relation to Economics: reaction upon Economics, 259, 342, 390 ff., 446; misinterpretation of economists, 172 f., 390; history of Socialistic ideas, 38, 193, 208, 274, 294, 3io, 330 ff., 348, 363, 368, 377 S; 492, 506, 520, 530, 533, 540. Society, concept of, 37, 298, 299; and value, 462, 468, 473, 522. Sociology, 5. Solidariti, 506. Sophists, 8. Stages, Industrial, 321, 343, 380, 413. State, Origin of, 39 f. ; Importance of, 41, 79, 89, 247, 273, 315, 391, 505, 517. Static vs. dynamic, 498, 523, 548. Stationary state, 190, 511, 523, 540. Statistics, 9 n., 88, 193 n., 236, 456 n., 480, 481, 482, 508, 509, 520. Stoics, 7, 56, 59. Subjective viewpoint, 248, 268, 273, 424, 435, 446, 463, 467 f-, 472, 483, 543, 547- Subsistence, minimum of, 202, 227. (See Wages.) Supply. (See Demand and supply.) Surplus, consumers', 500, 543. Surplus value, 140 f., 204, 232, 267, 285 f., 336, 386, 500 f., 541. Tableau Eeonomique, 145 ff. Tariffs. (See Protection, and Regula- tion.) Taxation, 79, 105, 116, 125, 127, 149, 161, 176, 268, 283, 501. Technics and Economics, 114, 115, 129. Theological stage, Comte's, 12, 23. Theology and Economics, 13, 74 ff., 163, 245, 200. Time, interest and, 265 f., 470, 525. Towns and economic thought, 80. Treasure, importance of, 91 f., 107, 118. U Unearned increment, 368, 392, 542. United States. (See America.) Universities and Economics, 114, 121, 496, SOS, SIS- Usury, 25 f., 50, 57, 58, 74, 77 f; 101. Utilitarianism, 182, 233, 363, 371, 402, 451, 531- Utility, 7, 145, 160, 241, 253 f., 266, 358, 371, 381, 455, 456, 543, 549 (see Value) ; diminishing utility, 266, 447, 451 ; mar- ginal (see Marginal utility). Utopists, 331 ff. Value: cost and, 62, 76, 99 f., 145, 166, f-, 215, 353, 464 ff., 469, 525, 543; exchange value, 99, 143, 166, 215, 315, 323, 468; in international trade, 360; labor-cost theory, 100, 160, 162, 167 f., 215 f., 236, 241, 254, 275, 324, 340, 386, 435, 457, 467; measure of, 48, 100, 167 f., 205, 218, 426, 464; service theory, 254, 278; subjective, 47, 100, 268; utility and, 62, 77, 144, 160, 161, 166, 215, 236, 253, 275, 388, 425, 435, 448 ff., 457, 461 ff., 472, 486, 549, 521 f. Value, history of theory of: Austrian School, 461 ff . ; Bastiat, 253, 260; Cairnes, 492 ; Carey, 241 ; Ger- man, recent, 485 f. ; Greek, 47; Jevons, 454 f. ; Marx, 386 f. ; Mer- cantilists, 98 ff.; Mill, J. S., 352 f.; Physiocrats, 144 f. ; Ricardo, 215 ff. ; Roman, 61 f. ; Say, 275; Scholastics, 76; Senior, 264; Smith, Adam, 1 66 ff.; Thiinen, 284. Verein fur Sozial Polilik, 416, 483. W Wages, 103, 147, 171, 202, 225 ff., 241 f., 267, 285, 471, 513; subsistence and, 147, 171, 226, 379, 383- Wages-fund, 228, 236, 267, 356, 381, 392, 425, 431, 438, 512. Wants, importance of, 39 f., 159, 253, 338, 426, 453, 454, 462. Warfare, changes in method of, and Economics, 90. Wealth : attitude towards, 35 f., 50, 58, 74, 91; inequalities in, 51, 135, 334, 361, 365, 379 i-, 485; nature of, 119, 125, 134, 135, 143, 160, 239, 276, 296, 298, 304, 458, 474, 532, 549; rules for national gain in, 95, 120, 124. 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