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Contents

Preface page 9

Introduction 13

CHAPTER

I. The Beginnings 2i>
- (i) The Old Testament 21

(2) Greece: Plato and Aristotle 27
(3) The Roman Empire and Christianity 38

- (4) The Middle Ages and the Canon Haw 42

II. Commercial Capitalism and its Theory 56

(1) The Decline of Scholasticism. 56

(2) The Quality of Mercantilism 63

(3) Bullionism and Mercantilism 71

(4) Thomas Mun 7$

III. The Founders of Political Economy 88

(1) The Political Philosophers 88

(2) The Growth of Industrial Capitalism 94

(3) Petty v ioo

(4) Locke; North; Law; Hume v 114

(5) Cantillon; Steuart 123

(6) The Physiocrats 130

IV. The Classical System 140

[1) The Quality of Classicism 140

[2) Adam Smith 144

(3) Ricardo . 175

(4) Malthus's Theory of Population 193

V. Reaction anfl Revolution 197

(1) The- Shortcomings of (Classicism 197

(2) Malthus's Critique of Accumulation 195)

(3) The German Romantics 20^

(4) Socialist Criticism 25*9

CONTENTS

CHAPTER

VI. Marx page 249

(1) Life and Sources 249

(2) Method 2*

(3) The Labour Theory of Value 2^,

(4) Surplus Value 260

(5) The Theory of Capitalist Competition 277

(6) The Theory of Economic Development 287

VII. The Transition 296

(1) The Classical Heritage 296

(2) The Historical School 301

(3) J nes 309

(4) The Break Up of the Labour Theory of Value 3 1 6

(5) Senior 340

(6) Mill 351

III. Modern Economics 366

(1) The Quality of Present-day Economic Thought 366

(2) Marginal Utility 371

(3) The Second Generation 391

Conclusion 408

Bibliography 417

Index 423

Introduction

Interest in the development of economic science is little more
than a hundred years old. There are a few unimportant works in
tK *. eighteenth century and there is a book in the Wealth of Nations
which surveys earlier systems of political economy. But when
Adam Smith wrote, the theories which he considered erroneous
had not been completely ousted anti his survey had a critical
aim. We have to wait until the supremacy of classical economy
is being challenged before interest in earlier thought revives.
Indeed, the earliest attempts at a systematic treatment of the
history of economic doctrine were made by adherents of the
historical and socialist schools which developed in Germany after
the middle of the nineteenth century. Those who, like Roscher,
were anxious to develop the historical approach in competition
with the deductive were naturally preoccupied with the history
of ideas. Socialists, on the other hand, hoped to draw inspiration
in their fight against the prevailing liberal-capitalist theory from
a critical study of the origins of that theory. Both the muddle-
headed Diihring (who earns surprising commendation from
Professor ochumpeter) and Marx, in his monumental Theorien
iiber den Mehrwert, tried to supply this critical review.

With the spread of economic teaching at the end of the nine-
teenth and beginning of the twentieth centuries, the history of
doctrine becomes a more popular subject of study. Sometimes,
as in the case of Ashley, it is still an adjunct to economic history
and a consequence of methodological preference. But most his-
tories of this modern period become matter-of-fact outlines, often
because (as in France, where Gide and Rist produced their
widely read history) the teaching of the history of politJcSal
economy remained for a long time the only form of acacfemic

INTRODUCTION

economic instruction. Recently a more narrowly 'technical'
interest has also arisen. Practitioners of economics have become
interested in the evolution of the individual concepts and the
methods of application of their technical apparatus; and special
studies of neglected aspects of past thought are now more
frequent.

It is not the purpose of this book to provide an exhaustive
survey on such narrowly 'technical 5 lines. It is certain that the
material for such a survey is not yet to hand; it is doubtful
whether, even if it were possible to write it, such a specialized
history is the one most urgently needed at the moment. Nor is this
volume intended to supplant those encyclopedic compendia to
which teachers and students must sometimes refer. .

As far as the student is concerned, I have written this book
because I feel that the exigencies of the study of modern econo-
mics create two serious dangers. In the first place, the intricacies
of modern theoretical refinements may make the student forget
the essentially practical nature of his discipline. Realization of
this danger is growing, as the increasing attention given to the
theory of economic policy shows. The modern student of econo-
mics is also apt to lose sight of the contribution which his own
subject has made, and is making, to the general stream of human
thought. English teaching of economics has escaped the undue
subservience to the historical approach characteristic until
recently of French faculties. But there is only small evidence
that the opposite extreme, that of complete neglect of the history
of doctrine, is being avoided. A broad statement of the evolution
of economic thought written as an introduction to modern theory
may provide the corrective of which many students seem to be
in need.

c Other readers, if they are interested in the development of
thought, may welcome an account of one of the most important
of the speculations of the human mind. My aim has been to
provide an historical background to the great theoretical con-
troversies of to-day. Economic theories are always, though often
tortuously, related to economic practice. Only a study of the
interplay between objective conditions and the theorizing of
man can provide a guide through the conflicts of ideas. The
ideas of the past had their roots in institutional arrangements,
in the relations between social classes and groups, in their con-

INTRODUCTION

flicting interests. In so far as the same or similar arrangements
and relations still exist, the ideas to which they gave birth are
not dead. Aristotle's views on the different classes of human"
labour, the strictures of medieval schoolmen on usury, mercan-
tilist theories of foreign trade and physiocratic notions about
agriculture, Ricardo's theory of rent and the practical conclu-
sions drawn from it, and the revolt of the German romantics
against economic liberalism are all still with us. They have gone
into the stock-pot of ideas from which successive generations
have drawn their mental food.

In the latest work of one of the most brilliant living economists,
probably undetected by him, Sismondi and Proudhon come
alive again. A few years ago Professor Gray, in his popular his-
tory of economics, could neglect completely Malthus's Principles:,
to-day the recent controversy between the protagonists of capital
accumulation and the underconsumptionists has directed atten-
tion again to one of the greatest economic controversies of the
past ;that between Ricardo and Malthus.

Many writers have stressed the longevity of economic ideas,
but this has generally led them to regard with contempt those
who still cling to fallacies which the expert has long since dis-
carded. Some, in their enthusiasm about modern developments,
have looked upon past theories as imperfections steadily over-
come; while others have tried to produce an apologia for earlier
ideas by pressing their e Tightness' relative to time and place.
The apprbach for -which I plead is an historical and critical one.
Analogies should not merely be pointed out; an examination
and comparison of material conditions is necessary before their
full significance can be understood. I cannot hope to have done
more than provide a first guide for such a treatment of economic
ideas, but as such it may have its use both for the student and the
general reader.

A history of ideas is by nature selective and interpretative;
by virtue of what he leaves out and by his manner of presenting
that \vhich he includes, the author states his own opinion. Too
often, however, the principle which underlies the author's treat-
ment remains implied and only the shrewder readers may even-
tually detect it. Where the ideas presented relate to social insti-
tutions and policy and have a bearing upon human welfare,
implied assumptions are particularly dangerous. Only an express

INTRODUCTION

statement of the writer's assumptions can enable the reader to
form his own views.

The approach of this book is based on the principle that the
appearance of certain ideas is not fortuitous but dependent upon
causes which can be discovered. This conviction underlies all
scientific investigation; without it nothing but mysticism can
result. It may be that our knowledge of the circumstances of the
lives and times of certain thinkers is not complete enough for an
exhaustive demonstration of the causes which have produced
certain ideas; but we already know enough to be able to form a
broad opinion of the manner in which economic theories arise.

This book is also based on the conviction that the economic
structure of any given epoch and the changes which it undergoes
are the ultimate determinants of economic thinking. Much of this
conviction is shared by most writers on this subject, though it is
seldom admitted. The thought produced in a community in
which slave labour predominates is different from that which
either a feudal society, or one based on wage-labour, brings forth.
Reluctance to accept the general principle arises partly because
it is often stated in a way which appears to make the economic
system the sole determinant; partly because it is difficult to pre-
sent convincingly this causal relation between economic practice
and economic theory in more detailed discussions of their history.

It must, therefore, be emphasized that the economic factor is,
the determinant only in the final analysis; and tha||it is not
always possible to make this final analysis. The causal chain is
long and devious, and not easy to trace back to its first link. In
the history of economic ideas a host of other causal factors have
been operative to produce a given theory or attitude at a given
time, many of more direct influence than the economic one to
which they are ultimately, though perhaps imperceptibly, linked.

Among these other factors any already existing body of econo-
mic theory is of outstanding importance. This is particularly so
when the advancement of economic science comes to depend
upon specialist scholars generally attached to academic institu-,
tions. Every thinker must then begin with the technical apparatus
which he finds ready to hand, even though the original material
'factors which produced this apparatus are no longer operative.

Political theory and political practice are other factors which
have influenced economists at different times* especially before

INTRODUCTION

the strenuous efforts to separate pure economic theory from both
the theory and the art of economic policy had begun. Many
economists were sometimes social philosophers as well; this was
particularly true of the classical economists. And the works of
both old and modern writers show the influence of prevailing
philosophical argument and of the quality of scientific thought
in general of their time. Other writers were either themselves
engaged in politics or had a considerable influence upon policy;
and many a theory bears the mark of the political struggle in
which it was conceived.

There is no inevitable order in which these influences appear.
In the comparatively settled periods of social history the ideolo-
gical factors are of greater importance. Economic relations and
political and legal institutions are taken for granted and theore-
tical refinements are developed. But in the more revolutionary
epochs, when the whole basis of social organization is challenged,
existing institutions and the fundamental notions about them
are called in question and the connection between economic
relations and ideas is clearly revealed.

However clear the succession of forms of social organization
and economic structure may be, it must not be thought that ideas
relating to them show an equally clear-cut sequence. Ideas
appropriate to a past social order have a strange power of
influencing thought and action within a later institutional frame-
work. Together with the existing combinations of material fac-
tors they shape contemporaneous social change; and, in this
process of interaction, it is not always easy to say which is the
proximate and which the remote influence.

This absence of a neat chronological sequence in the evolution
of economic doctrine is most striking when different countries
are compared. The uneven development of separate national'
units, particularly obvious during the last hundred and fifty
years, has created apparent anomalies in the history of econo-
mics. Ideas, dead in one country, reappear in another if the
material environment is more suitable. The emergence of pre-
liberal economic doctrines, for example, in a country* which
embarks upon capitalist industry when there are already full-
grown rivals is not due to differences of national temperament'
and mentality except in a very limited sense. It is true that these
economic ideas will be found to be part of a general system of

INTRODUCTION

thought referring especially to such subjects as the nation,
foreign trade, and the relation between the state and economic
life. But the existence of this general national outlook as anything
like a determinant in its own right is only short-lived; in the long
run it is itself determined by economic conditions.

The purpose and guiding principle of this book have deter-
mined its plan. In the first place many names which a different
type of history would have had to include have been omitted;
while some thinkers who have seldom been regarded as impor-
tant are here dealt with at some length. My choice has been deter-
mined by two considerations. First, apart from the most outstan-
ding economists of the past, only those have been included whose
contributions to economic thought appear to have significance
in relation to present-day theory and controversy. Secondly,
stress has been laid both on writers and views which exemplify
most clearly different trends of thought.

There is always a danger in a book of this kind that the
author's principle of selection may be misunderstood. Let it be
quite clear, therefore, that this book is concerned with the main
streams of thought which have gone to make up present-day
academic economic theory, and with Marxism (which is also in
the classical tradition) . It is not to be supposed, however, that
academic theorizing is either the only, or necessarily the most
important form of economic thought. A different history would
find much of interest in the theories developed by bankers, busi-
ness men, and politicians, particularly in the nineteenth and
twentieth centuries. But it was not my purpose to deal with
doctrines other than those which are habitually included under
'professional' economics.

Another result of the particular approach here adopted has
been that technical developments of economic analysis have not
been given uniform attention. Particularly in the earlier sections,
the reader will find less emphasis laid upon the more obscuffe
antecedents of individual economic concepts; and it is only in
dealing with the developments of the last hundred and fifty years
or so that the discussion becomes detailed. My main concern has
been with the wider questions of economic scope and method, of
the relations between economics and politics, and of the place
which economic theory has occupied in social change. And many
special fields, such as the theories of money and crises, have only

INTRODUCTION

been dealt with if they formed an integral part of an author's
work in pure theory.

The relative weight given to the different chapters requires a
word of explanation. Since the history of ideas is here presented
as an instrument for dealing with current views and trends,
about half the book is devoted to the last hundred years. Apart
from the classics, those ideas of the earlier period which still
show some active force have been treated at greatest length. At
a time when economic liberalism and liberal economics are alike
at a discount, it has been thought right to deal in some detail
with the different forms of criticism of classical economics which
appeared last century and which are the most important deter-
minants of contemporary thought. At the end of the book I have
ventured an opinion on the present trend of the science.

CHAPTER I

The Beginnings

(i) The Old Testament

1 here is much disagreement among economists as to the scope
of economics. The quality of this disagreement is of such signifi-
cance for an estimate of the present and future of the science
that it will occupy us a great deal later. At this stage it is useful
to summarize briefly the points of agreement. Most professional
economists to-day would say that the primary purpose of econo-
mics is analytical, i.e. to discover what is. In other words, what-
ever other aims some of them may have in mind, and whatever
hypothetical examples they may devise for expository purposes,
their chief concern is to establish the principles upon which the
present economic system works. There is a school of thought
which regards economics as capable of becoming as exact and as
'universally valid 5 as the physical sciences, and which denies, by
implication, its essentially social and historical nature. These
views, however, are put forward only on the occasion of metho-
dological discussion and do not seem to affect the scope of the
bulk of the work of members of this school: they are still mainly
interested in the working of present-day capitalism.

It should be said at once that the general public is very rarely
aware of this positive and analytical purpose which the profes-
sional regards as the paramount, or even as the only legitimate
one. The public knows that it can justifiably demand of the
economist a statement of how the system works (though its faith
in the explanation which is forthcoming is seldom great) ; but it
generally wants to know also what is the right thing tb do.
Economists cannot always shirk this question; and when they
answei^they reveal more far-reaching differences of opinion than
any that arise in the positive analysis upon which they all claim
to base their advice* From such disagreement, more than from a

THE BEGINNINGS

desire for scientific neatness, they are lechto an examination of
the limits of their discipline; and thus we return to the differences
of definition.

However often this circuitous route may have been travelled
in the last hundred and fifty years, the main development of
economic thought has proceeded without constant methodolo-
gical discussion. The continual growth of the system they were
investigating made it possible for economists to take the existing
social order for granted. Private property and enterprise, private
exchange, the market economy, in short, capitalist production
was the soil in which the concepts grew which have become
integral parts of the contemporary mind. Capital, labour, value,
price, supply, demand, rent, interest, profit these are the
elements of capitalism and of its theoretical analysis.

The earliest systematic development of these concepts is to be
found at the end of the seventeenth and beginning of the eigh-
teenth centuries. The particular set of material conditions to
which they refer was not present in developed and comprehen-
sive form at any earlier stage of human history. We shall see that
the great minds to whom we owe the foundations of classical
political economy thought that they had discovered more than
the laws appropriate to a particular social system. But it is impor-
tant to stress here that political economy as a science begins at a
time when the foundations of industrial capitalism were already
well laid. There is a surprising unanimity of opinion among
historians of economic doctrine on this point; and many writers
have even gone so far as to ignore completely any earlief econo-
mic thought, or to refer to it only in very slighting terms. ! It is
perfectly true that the total volume of economic theory, in any
modern sense, to be found in the writings of, for example, the
Greek philosophers is very small; but we can only expect state-
ments of an economic character to the extent to which certain of

1 Gide and Rist begin their history with the physiocrats of the eighteenth
century. Cannan, in his Review of Economic Theory (1929), p. 2, says that k we
should be disappointed ' if we expected to find ' interesting economic specula-
tion IK the writings of the Greek philosophers'. Duhring (Kritische Geschichte
der National Okonomie und des Sozialismus, 1874) claims that neither ancient nor
medieval thought contributed anything 'positive' to economic science.
Schumpeter (Epochen der Dogmen und Methodengeschichte, 2nd ed., 1925) admits
the indirect influence of Greek philosophy but minimizes its detailed contri-
bution. Only Marx, in a chapter which he wrote for Engels's Anti-Duhring,
gives Greek economic thought its due.

OLD TESTAMEN^

n-<w"

the material conditions of a commodity-producing society were
already present in ancient Greek society.

The society with which the Greek philosophers were familiar,
or that earlier one which is described in the Old Testament,
undoubtedly possessed some of the characteristics of modern
capitalism. There was private property, division of labour,
market exchange, and money. Some writers have gone farther
than appears justified in their attempt to find ancient analogies
for modern economic phenomena. But - there - ,e.an.b^ no doubt
that_ancient thinkers, discussing the problems of their society^
have made statements which have become the starting-point of
all social theory. The fact that these statements are fragmentary
and scattered does not detract from their importance. The views
of the Hebrew -groghets may appear extremely primitive to a
modern economist; but because they are set in the ethical or
metaphysical system of a patriarchal society their power of
influencing men's minds is often greater than that of many a
refined and scientific theory. The ancient systems of philosophy,
of which these isolated economic statements formed part, con-
tinue to live. And whenever critical convulsions occur in the
economic system, their influence grows, as it does to-day. The
belief in established institutions and practices declines and leads
to a search for comprehensive philosophies of life. Rival policies
compete in the name of one or another Weltanschauung; and
most ideas in the body of human thought accumulated during
more than two thousand years have their champions to-day.

It is not intended to exaggerate either the volume or the
importance of early economic thought. Man cannot begin to
theorize about thc^economic process so long as this is of so
simple a character as to require no special explanation. Modern
economists make even Robinson Crusoe speculate upon the
implications of choice which they regard as the essence of
economy; but all that anthropology shows is that the earliest
human theorizing was concerned with what we would call the
technical aspects of the process of want-satisfaction. In so far
as we can discover the ideas which primitive man consciously
held they appear to be designed to supply some explanation of
the changes of season, of the powers of the soil, of the habits of
animals, and of the bearing of all these upon the ability to satisfy
human wants. Even at comparatively developed stages of tribal

THE BEGINNINGS

society no specifically social economic problems seem to call for
explanation. The economic process of a community in which
property (at any rate, that which is applied to productive uses)
is communally owned, and in which division of labour exists but
has not led to habitual private exchange of products, cannot
appear incomprehensible to the members. The connection
between individual effort and individual satisfaction is obvious
to every one: the process of production and the product are
under the individual's control throughout and there is no need
for any elaborate social or economic theory.

BuXthsr&xomes a stage when different social arrangements^
ae necessary to give the forces of production their full scope.
Division of labour develops to the point at which it involves the
establishment of private exchange of surplus products and the
extension of private property from consumable to productive
goods. Production is then habitually for purposes of private
exchange; the easy supervision and control over the social
economic process is lost: the process has become impersonal. It
is at this stage in man's development that we should expect to
find the first gropings after a theory of society and an explana-
tion of its economic structure. In spite of increasing anthropolo-
gical work we know little of the detailed forms which this
economic transformation actually took; we know still less of the
change in ideas which was part of it. To the collection of myths
and records of varying evidential worth which we call the Bible
anthropologists have, during the last hundred years, added
material which may eventually enable us to be reasonably
certain of how primitive man thought of his society and its
changes. We should not expect him to have an objective view of
the changes in which he was taking part: even modern econo-
mists do not always achieve that. What evidence we have of
ancient social thought consists entirely of myths concerned with
justifying or attacking in supernatural terms an existing social
order.

In the Old Testament and the subsequent collections of laws
and interpretations which constitute original Hebrew thought,
there is mirrored the struggle between the organic tribal society,
with communal property and directly controlled economic acti-
vity, and the impersonal economic process of a class society
based on private property. The animistic views of early Semitic

OLD TESTAMENT

religion give way to an idealized conception of divinity. But the
unearthly majesty of God is tempered not only by two other
Basic attributes, justice and mercy, but also by the covenant
between ^the^deity_and his people. It is difficult not to see in this
union an idealized substitute for older and closer social bonds
that had already been loosened. There was no attempt as yet to
remove from religious doctrine any concern with physical wel-
fare in the life on earth. The code of conduct enjoined upon
members of the community was strict and included a recogni-
tion of certain overriding social obligations that were little
different from those of the patriarchal family of the tribal
community.

Although the scope of private property grew to include land,
the individual's rights over property remained severely restricted
for a long time. Laws to preserve a family's connection with the
ownership of land and the institution of a year of jubilee 1 (even
though no record of its enforcement exists) are examples of com-
munal limitation of individual rights. But the disintegration of
the primitive community could not be stopped. With thdeveloj>
ment of private jgropeyty there ^came tragjj^ both JlCUUC, and
foreign of accumulating wealth. It

was in that period that the Hebrew monarchy grew up. The
picture of the society of the time which is drawn in Kings, and
more emphatically still in the laments, protests, and visions of
the prophets, is one of marked division between rich and poor.
The luxury of the court was based upon the gradual develop-
ment of an enslaved class. The expenses of the royal household,
wars, and lavish public building were financed by tolls and the
profits of the king's foreign trade monopoly, by conscription of
labour and heavy taxation. 2 'fbfijssults were impoverishment
ofjtjjc masggs^ alienatipn of land, and the development of a
prpletariat^

This change in the economic structure is reflected in the
spiritual revolt of the prophets. By their denunciation of the
covetousness of the new society they sought to guide men back
to the way of living of the covenant, to revive justice and*mercy
as the principles of social behaviour. They castigated the excesses
of the new commercial classes, of the usurers and the land
robbers; and they preached once again limitations upon the
1 e.g.^Leviticitf, xxv, 10, u. a e.g. Kings, i, 5, 13 sqq.

THE BEGINNING^

rights of private property. In some matters they were successful.
The prohibition of the levying of execution upon a debtor's
clothes or tools 1 remains a cardinal principle of Jewish law,
observed still, to a large extent, in eastern European Jewish com-
munities. It is also one which has influenced the laws of many
other nations to the present day.

But the prophets' major attack was fruitless. They were able
to describe objectively the consequences of the existing social
order, but they did not understand the forces which were res-
ponsible for the appearance of the order itself. They could only
sigh for the return of an earlier age, not realizing that its social
structure had become inappropriate. Some of the prophets
appear to have been dimly aware of the romantic nature of their
protest; these have no hope of the future, and tHey expect to see
the wrath of God bringing about the universal destruction which
they regard as the only fate their world deserves. 2 Others put
their faith in the coming of the Messiah who would deliver man-
kind from evil and lead it back to the ways of the patriarchal
community. 3

Underlying both the despair of some prophets and the hope
which others attached to the coming of the Redeemer is an essen-
tially idealistic view of social change. The evils which the
prophets denounced were not seen to have been part of a new
economic structure; they were ascribed to a change of men's
hearts. Covetousness and corruption, unrelated to the more
favourable soil in which they could now flourish, were alone
regarded as the cause of misery. The remedy was equally an
idealistic one: a full acceptance of God's law, a life led, once
again, according to the religious code. A clear vision of a new
social structure of the future was impossible. The expansion of
the forces of production and man's growing mastery over nature
still demanded the recently established institutions. In so far,
therefore, as the prophets were concerned with the social order
as well as with man's behaviour they could only express a vain
hope for a return to more primitive conditions. The prophetic
revolt, significant in its day, was doomed to failure. It reached
its zenith with the rise of Christianity; but even this last and
strongest outburst of discontent was incapable of improving the

1 e.g. Exodus, xii, 26-7; Deuteronomy, xxiv, 6.

2 e.g. Amos, viii. 3 e.g. Isaiah, xi.

THE ROMAN EMPIRE AND CHRISTIANITY

elements of Roman social thought. There is little that is original
in the writings of the philosophers, though Pliny may be said to
have carried a little farther the discussion of money by pointing
out the qualities which make gold a particularly suitable medium
of exchange.

The only important new development is the perceptible
change in the view of slavery. There is no longer the constantly
Repeated justification of slavery that runs through the writings
of the Greek philosophers; it even begins to be questioned
whether slavery is a natural institution. In the works of writers
on agriculture (such as Columella) who were concerned with
technical matters, slave labour is generally described as ineffi-
cient; and this view was shared by Pliny. It was true that on the
large latifundia, with their difficulties of supervision, slavery was
becoming an uneconomical form of labour. And when after the
end of the period of conquests the supply of fresh slaves ceased,
the whole economic basis of slavery on the land was destroyed.
The expansion of urban industry, too, could not be carried out
except through the gradual disappearance of the slave; and
while industry and trade (though not money-lending) con-
tinued to be looked upon as ungentlemanly pursuits worthy
only of slaves, foreigners, or plebeians, this only led to the
gradual decline of the old ruling class and to the rise of a class
of freedmen who occupied more and more important political
positions.

For the problems that developed after the second century A.D.
the Roman Empire could find no solution. A ruling class whose
economic power was vanishing was faced by plebeians and
freedmen, crushed by the weight of taxation which an over-
grown administrative apparatus imposed, and by a mass of
despairing slaves. This inner decay, hastened by the weakening
hold of military rule over distant provinces, brought about the
final downfall of the empire. Although it did not produce a body
of economic doctrine, it left two important legacies.

During the height of its power when, for a time, the patricians,
the new landowners, and the commercial classes lived in'com-
parative peace, there was evolved a body of laws which has had
the most profound influence on later legal institutions. In the
first place, the intercourse with other peoples which Rome had
had from very early times brought into contact different legal

THE BEGINNINGS

systems and created an interest in the problems of their relation-
ship. The ins gentium was the body of all those laws which were
the same in different nations and were created by the necessities
of the same historical development. This concept led later to the
idea of the natural law which had a considerable influence on
the evolution of economic thought. Of more direct economic
importance were the doctrines which Roman jurists evolved for
the regulation of economic relations. They upheld the rights of
private property almost without limit and guaranteed freedom
of contract to an extent which seems more appropriate to the
conditions of modern capitalism.

These two features of Roman law, basic in so far as economic
relations were concerned, show the great extent to which Rome
had developed the mechanism of modern commerce. They
reflect the strongly individualist quality of the Roman economic
structure, in marked contrast to the survival of more rigid group
elements in the much less highly developed economy of Greek
society. Nothing could be more striking than the difference
between Aristotle's view of property and that inherent in Roman
law: there, a strong ethical element limiting the rights of pro-
perty; here, an unrestricted individualism. Thus while Aristotle
becomes the philosopher of the Middle Ages and one of the
sources of the Canon Law, it is Roman law which serves as an
important basis for the legal doctrines and institutions of capi-
talism. And although the Roman Empire's law and practice do
not appear to have been exercised over the evils of its social
order, Rome was the birthplace of the greatest movement of
revolt of antiquity.

In its origins Christianity is in the tradition of the Hebrew
prophets. The Messiah would come, Isaiah had said, ' to preach
good tidings to the meek, ... to bind up the brokenhearted, to
proclaim liberty to the captives and the opening of the prison to
them that are bound." 1 And Jesus, having read out these words
in the synagogue at Nazareth, added, 'To-day hath this scrip-
ture been fulfilled in your ears.' 2 Whatever view one may take
of thte Gospels, it is impossible to deny that Jesus was conscious
that His mission as the Messiah was to a very large extent that
of emancipator of the poor and oppressed. Like the prophets, He
castigates the exploiters of the weak and those who, regardless
1 Isaiahylxi. i. 2 Luke, iv, 21, 22.

THE ROMAN EMPIRE AND CHRISTIANITY

of their fellow men, accumulate private riches. Like them, He
threatens retribution through the wrath of God.

There are, however, considerable differences between the
teachings of Jesus and those of the earlier Hebrew prophets.
When the former were making their protest, the memory of the
tribal community with its group obligations was still vivid. They
could look back to it and could appeal to its customs and laws in
their attack upon the invading force of the new society divided
into social classes. With some exceptions there was the romantic
element of laudatores temporis acti in the prophets. This element is
not altogether absent in the Gospels; but in them emphasis
has been shifted from the inherited traditions of the primitive
community to new standards of social behaviour from justice
to love. The Gospels are more revolutionary than the books of
the prophets. Their basis is more universal, since the oppressed
classes for whom their appeal is intended are both larger, more
oppressed, and farther removed from the past in which there
was a greater measure of equality. Not the elimination of indivi-
dual abuses but a complete change of society was their goal.

There are also great differences between the teachings of
Christ and those of the Greek philosophers. We have already
seen that the economic doctrines of Plato and, to some extent,
Aristotle derived from an aristocratic dislike of the growth of
commercialism and democracy. Their attack upon the evils of
the pursuit of wealth is reactionary, that of Christ revolutionary.
They dreamt of an ideal state designed to ensure the 'good life'
for the free citizens only and having the boundaries of the exist-
ing city state; Christ claimed to speak to, and for, all men. Plato
and Aristotle had justified slavery; Christ's teaching of the
brotherhood of man and of universal ^love was, in spite of the
views later advanced by Aquinas, incompatible with the institu-
tion of slavery. The Greek philosophers, concerned only with
the citizens, held very rigid views of the varying worthiness of
different kinds of labour; and they regarded the menial occupa-
tions, with the exception of agriculture, as fit only for slaves;
Christ, addressing Himself to the labourers of His tinrc, pro-
claimed for the first time the worthiness both in a material and a
spiritual sense of all work.

But the same factors which made Christianity more revolu-
tionary also made it more Utopian. The slaves and the poor

THE BEGINNINGS

peasants, fishermen, and artisans, among whom were the earliest
and the most eager disciples of Christ, were unable to find the
conditions in their own society which could have made it pos-
sible to transform that society. In the main social struggle of the
time, that between the plebeian and the patrician (complicated
by the conflict between the peoples of vanquished colonies and
their imperial conquerors), the slaves and the urban proletariat
did not actively intervene. But the plebeians, the only possible
alternative rulers, were unable to acquire economic power.
Industry was undeveloped; the technical prerequisites of a
bourgeois society were absent. The basis of bourgeois wealth
was predatory: colonial exploitation, usury or monopoly. The
class struggle, therefore, led not to the establishment of a new
ruling class but to the decay of Roman society. The slaves and
proletarians, in so far as they embraced the new religion and its
social doctrines, had to abandon the hope of any material
improvement of their condition. The spiritual aspects of the new
teaching grew stronger; an apparent opposition between it and
the material economic problems of the time developed; and in
the end little of immediate social relevance was left. But it was
during this period that the Church developed as a feudal institu-
tion having its roots deep in the economic structure of medieval
society.

When we reach the Middle Ages we find that the words of
Christ are no longer enough as a basis for the doctrines of the
Church, which, embodied in the Canon Law, held sway over
the whole of men's conduct. In addition to the ethical precepts
in which Christ's revolutionary teaching had originally been
contained, the doctrines of Aristotle, derived from a different
historical background and inspired by different motives, form
the foundations of medieval thought.

(4) The Middle Ages and the Canon Law

Controversies about the time covered by the term Middle
Ages are now rare. It is generally considered to cover a period
of roughly a thousand jyears, from the fall of the Roman Empire
in the fifth^entury to about the mid^lL9ih fijteenth Centura.
More precise limits are only imposed by historians with some

THE MIDDLE AGES AND THE QANON LAW

particular thesis to prove and are not necessary to our purpose.
From our point of view the period is important only as an
indication of the length of time during which a certain form of
society and certain social theories held sway. Nor need we side
wifK'any one of the different modes of valuation of the quality
of medieval life, a subject on which controversy is still alive. To
subsequent societies and their theorists it is always tempting to
view the past through dark or rose-coloured spectacles. Many
liberal economic historians could see in the Middle Ages nothing
but stagnation. Impressed with the enormous expansion which
capitalism and its political forms had brought about, they could
only pour scorn irpon the slow-moving economic process of
earlier times: Those, on the other hand, whose social views were
inspired by a reaction against capitalism stressed the order and
stability of medieval society and ignored the evils which were
their indispensable accompaniment. A realistic view must avoid
this one-sidedness and appreciate the social structure of the
Middle Ages in its entirety, even though it contained diametri-
cally opposed elements.

On one point there is now fairly genqral. agreement: the
thousand years that lie between the fall of Rome and the fall of
Constantinople are now no longer regarded as a complete lacuna
in social development. The dark ages of barbarism which over-
whelmed Greek and Roman civilization were real enough; but
they did not lead to a complete break between the society of
antiquity and that of the Middle Ages. The essential features of
medieval social structure, those which concern the distribution
and regulation of property, particularly in land, had their origin
in certain developments which occurred in the latter period of
the Roman Empire. Nor is there any break at the end of the
Middle Ages: tl^e fall of feudal society was slow and commercial
capitalism was prepared in the womb of the medieval world.
The impression of stagnation and of historical isolation which is
often produced by the Middle Ages is explicable only by the fact
that to modern observers, aware of the rapid changes of the last
two hundred years, that social order seems to have persisted for a
very long time. What follows is a summary description of that
social order and not an analysis.

^The essence of medieval society lies in the class-division
between lords and serfs; it was derived from the structure of the

THE BEGINNINGS

latifundia of latter-day Rome. The growing scarcity of slaves had
led to a change in the method of administration of the large
estates, though landed property itself still retained its attraction.
Instead of working these estates themselves by means of masses
of slaves, the landlords would rent out holdings apart from their
own domain to free tenants or to slaves, receiving a rent in kind
and money and having their domain cultivated by the tenants.
There was, in addition, the need to settle the frontiers with a
military population for purposes of defence^ and this also led to
the establishment of coloni, who possessed certain privileges but
were also subject to considerable compulsion. In the fourth
century the free tenant was tied to the estate, and the beginning
was made for a new system of bondage which in time effectively
replaced ancient slavery. The decline of the empire placed more
and more administrative power into the hands of the landlord
and made his estate the new economic and political unit. This
was the forerunner of the medieval manor.

To the social structure which was thus developed the contri-
butions of other peoples made comparatively little difference.
Some of them had already developed a similar economic
organization of their own, or did so later. Others acquired it
through contact with Rome. Even if their experience was at first
different, the people of northern Europe, particularly the
Germans, did in the end evolve a manorial system. The most
powerful factors in this evolution were seizures of land by
conquerors, who became kings, and grants of land by them to
past or future supporters. From these the system of feudal lord-
ship arose. It was of varying extent and complexity, covering
sometimes an empire and sometimes only a few estates; but
its quality remained the same: a rigid division of different
social classes with different and carefully defined rights and
obligations.

Not only on the land, but in trade and industry too, develop-
ment proceeds without a break from the beginnings made in
Rome. The oriental trade of the empire, though limited in scope,
was important and was the basis of the medieval commerce of
the Italian cities; to this was added the large trade which had
developed in the Eastern Empire. And both Northmen and
Moslems, who had begun as raiding warriors, ended by
becoming merchants. Industry, apart from building and con-

THE MIDDLE AGES AND THE CANON LAW

struction, was not highly developed in Rome. And in the
medieval world too, at any rate until its later years, industry
remains confined to the needs of a small local market or to a
few products of outstanding importance in long-distance trade.
But already in Rome the regulation of industry was getting into
the hands of voluntary associations of all those engaged in the
same trade. Both the friendly society and the monopolistic
character of the medieval guilds are contained in these Roman
collegia, even though it is impossible to trace an unbroken line of
descent. ^ / ; " ' - \ ; *' r * ' '

v - What was the unifying principle or this medieval society which
was so sharply divided into social classes and groups? In the first
plage, the principle of division was itself regarded as the founda-
tion of society. In the Middle Ages the worldly inequality of
men was recognized and accepted without question. The activi-
ties of every individual were regulated according to his status.
His place in society, his duties, and privileges, were carefully
defined with regard to the major political features of his state.
Although the organic community of the tribe had gone for good,
and private property, inequality, and oppression had taken the
place of the free association of equals, there was as yet no * atomic
individualism'. The group loyalties were merely more numerous
and more variegated and were exacted by means of often brutal
coercion.

The secgod unifying principle, closely connected with the
first, was provided by the role of the Church. After the fall of
Rome the Church had become increasingly institutionalized
and had added greatly to its spiritual and material power. In
the Middle Ages it had become in its secular aspect one of the
most important pillars of the existing economic structure. Its
property in land had grown to such an extent that it had become
the greatest of feudal lords. But while temporal feudal lordships
were widely scattered and lacked any links of national union,
the Church possessed a doctrinal unity which gave it a universal
power. This combination of secular and spiritual power resulted
in a complete harmony between the doctrines of the Ohurch
and feudalist society. It was this harmony which explains why
the Church could claim to order the whole of human relations
and conduct on this earth as well as to provide the precepts
which would lead to spiritual salvation. It explains also why the

THE BEGINNINGS

economic doctrines which result from this claim were not inap-
propriate to the conditions of their time. 1

Economic ideas were part of the moral teachings of Chris-
tianity. Christian dogma, however, was not enough. The medieval
world could not give up the ethical quality of its doctrines with-
out losing its spiritual raison d'etre. But since it also had its roots
deep in the economic conditions of feudal society, it combined
the teachings of the Gospels and of the early Christian Fathers
with those of Aristotle, the philosopher who had tempered his
realistic views of the economic process with ethical postulates.
We find throughout the canonical discussions of economic
institutions or practices a union between the economic ethic
which had been part of the spiritual mission of Christianity and
the existing institutions with all their imperfections. Often this
union is an uneasy one, but it does not break until the institu-
tions are beginning to crumble under the impact of new econo-
mic forces.

The Canonists accepted Aristotle's distinction between the
natural economy of the household and the unnatural form of
the science of supply, the art of money-making. Economics to
them meant a body of laws, not in the sense of scientific laws,
but in that of moral precepts designed to ensure the good
administration of economic activity. The part of economics
which was in practice very much akin to that laid down by
Aristotle rested on a foundation of Christian theology. This con-
demned avarice and covetousness and subordinated the material
advancement of the individual both to the claims of his fellow
men, his brothers in Christianity, and to the needs of salvation
in the next world. Thus the Church was able sometimes to
condemn those economic practices which increased exploitation
and inequality and sometimes to preach an indifference to the
miseries of this world; it even went so far as to defend the
inequalities of stations to which it had pleased God to call men.

It is a greater emphasis on this latter point which distin-
guishes the Canonists from the early Christian Fathers. The
Gospels and the Fathers leave an overwhelming impression of
opposition to worldly goods. Even if they do not always con-

1 Cf. H. Pirenne, Economic and Social History of Medieval Europe (1936),
pp. 13 sqg.y for a detailed account of the reasons which made the Church the
most important feudal institution.

4 6

THE MIDDLE AGES AND THE CANON LAW

demn the whole institution of property, they attack so many of
its manifestations that the net result is the same. Christ had
condemned the search for riches and Saint Jerome had said,
'Dives aut iniquus aut iniqui haeres.' 1 The whole basis of trade
was called in question, as Tertullian had appreciated, when he
argued that to remove covetousness was to remove the reason
for gain, and, therefore, the need for trade. Saint Augustine had
feared that trade turned men from the search for God; and the
doctrine that e nullus christianus debet esse mercator' was com-
mon in the Church of the early Middle Ages. 2

But in the later Middle Ages these views on property and
trade found themselves in strong contrast with a firmly en-
trenched economic system which rested on private property and
with an increase in trade caused by the growth of towns and the
expansion of markets. The intransigence of the early Church
could not be maintained in the face of this new economic
development. Though some of the schoolmen, like the Dominican
General Raymond de Pcnnafort, continued to condemn trade, 3
we find in the most important of them, Saint Thomas Aquinasj
a distinct tendency to reconcile theological dogma with the exis-
ting conditions of economic life. 4 In regard to property, he did
not go back to the unrestricted rights conceded in the Roman
law, which was beginning to come into its own again. He found
in the Aristotelian distinction between the power of acquisition
and administration and that of use an important separation of
two aspects of property. The former conferred rights on the indi-
vidual, and Saint Thomas's arguments in defence of it are those
which we have already met in Aristotle's attack on Plato; the
latter put obligations upon the individual in the interests of
the community. Thus not the institution but the manner of using
it determined whether it was good or evil. It was the hereafter
that mattered; conduct on this earth was only to be judged with
reference to ultimate salvation. Saint Thomas did not pretend
that wealth was natural or good in itself, but he classed it with
other imperfections of man's earthly life which were inevitable

1 Quoted by L. Brentano, Ethik und Volkswirtschaft in der Geschichte (1901),

P- 5-

2 ibid., pp. 6, 7.

3 G. O'Brien, An Essay on Medieval Economic Thinking (1920), p. 149.

4 For extracts containing St. Thomas's main economic arguments, cf.
A. E. Monroe, EarlyEconomic Thought (1924), pp. 53-77.

THE BEGINNINGS

but which should be made as good as their nature would permit.
While he was prepared to go so far in his restriction of property
rights as to justify theft by the needy, he was well aware of the
implications of status in medieval society. He enjoins, for
example, the giving of alms, but only in so far as it does not
force the giver to live beneath his station in life.

From this view of property a compromise on the question of
trade naturally follows. Saint Thomas does not regard it as good
or natural; on the contrary, he shares Aristotle's view that it is
unnatural and he adds that it implies a fall from the state of
grace. But it was an evil inevitable in an imperfect world, and
could be justified only if the merchant sought to maintain his
household and when the object of trade was to benefit the
country. 1 The profit realized in trade was then nothing else than
a reward for labour. The justification of trade depended also on
whether the exchange which was effected was just; whether that
which was given and that which was received were of equal
value. For this argument Saint Thomas could draw once again
on Aristotle, whose analysis of exchange-value was, as we have
seen, contained in his discussion of justice. But there was another
source. The early Fathers, in spite of their general antipathy to
trade, had had to grapple with the regulation of practices which
they condemned but could not abolish; and they too had tried
to do so by stipulating the principle of the 'just price'. That price
was objective, inherent in the values of articles of commerce, and
to depart from it was to infringe the moral code.

It is impossible to discover what, in the eyes of the theologians,
determined that price or to explain it in terms which would have
any similarity to modern economic theories. Saint Augustine, in
his celebrated example of the honest buyer, merely says that,
though the vendor was ignorant of the value of the manuscript
he sold, the buyer paid the 'just price'. Some attempt at a
theory of the 'just price' is to be found later in the writings of
Albertus Magnus; in a slight reference he develops the ideas of
Aristotle by insisting that, ideally, goods containing the same
amount of labour and expense should be exchanged. Aquinas
too seems to have held some vague labour theory of exchange-
value. Again, it had an ethical form. Cost of production was

1 For extracts containing St. Thomas's main economic arguments, cf.
A. E. Monroe, Early Economic Thought, p. 63.

4 8

THE MIDDLE AGES AND THE CANON LAW

determined on the principle of justice, i.e. that which was neces-
sary to maintain the producer. In general, however, the idea of
the 'just price' expressed little more than that of the conven-
tional price. Above all, it was designed to prevent enrichment
by means of trade. Civil law, with its Roman foundations, and
the natural instinct of man seemed to encourage men to sell
goods for more than they were worth. But this, Saint Thomas
showed, was against divine law, which is superior to man-made
law; and the common instinct of man often led to vice. Trade
could only be justified if it was designed to further the common
weal; it must ensure an equal advantage to both parties.

Apart from these ethical arguments, the idea of a conven-
tional price / as not an unrealistic one in the earlier part of the
Middle Ages. With its still predominant natural economy, diffi-
culties of transport, restricted trade, and local markets, early
medieval society was not a suitable environment for an unres-
tricted play of the forces behind supply and demand. In the
confined conditions of commerce, an insistence on the customary
price of the 'common estimate 3 was not unreasonable. More-
over, though inspired by more practical motives, the views and
practices of secular authority led in the same direction as Canon
Law. Trade was still sufficiently haphazard to make it necessary
to enforce regulations which would ensure as steady a supply of
goods as possible; rules against forestalling, regretting, engrossing,
and the fixing of maximum prices were common features of
legislation and guild regulation.

Even so, the advance of trade was sufficiently rapid to necessi-
tate a gradual retreat from the position first taken up by the
Church. Already Saint Thomas had permitted oscillations round
the 'just price' according to some market fluctuations; in parti-
cular, he had justified the taking of a higher price where the seller
would otherwise incur a loss. And later writers introduced still
further qualifications. The cost of transporting goods to the
market, miscalculation, and differences in the status of the par-
ticipants in exchange became valid reasons for departing from
the 'just price'. In time, even variations of supply and demand
were allowed to affect the market prices; and in the fifteenth
century Saint Antonio, while still insisting on fairness, intro-
duced so many qualifications into the doctrine that the force of
the objective 'just price' was greatly diminished and a begin-

THE BEGINNINGS

ning was made with the 'recognition of the impersonal forces of
the market 5 . 1

This decline in the rigidity of canon dogma is even more
striking in the case of its other main economic precept, that
which related to usury. The teachings of Christ on this point
are quite unmistakable. Although the only precept which appears
in the Gospels 2 is variously interpreted, even an absence of
specific condemnation could not alter the fact that enrichment
through the lending of money at interest was regarded as the very
worst form of the pursuit of gain. Hebrew law had also pro-
hibited the taking of interest. Exodus (xxii. 25) forbids the 'lay-
ing of usury' upon any of God's people; and it has been argued
that according to the Talmud the prohibition appears to apply
universally and not only as between Jews. 3 ' Whether Saint
Thomas was right or not in claiming that the Bible prohibition
implied that a Jew could exact interest from a Gentile, he was
aware that this could make no difference to the universal nature
of Christian teaching. The Fathers condemned usury, and
although some of the schoolmen, notably Duns Scotus, were a
little less intransigent, Saint Thomas's own view that usury was
unjust was the more generally accepted.

The condemnation of usury was part of the general condemna-
tion of unjust exchange. In the early Middle Ages the Church's
own prohibition applied to the clergy only. The absence of any
developed money economy and of opportunities for profitable
investment of money capital made more general prohibition
unnecessary. The Church was the only recipient of large sums
of money at a time when feudal dues to lords and kings were
still paid mainly in kind. When money was lent it was generally
to needy persons for purposes of consumption, and the exaction
of interest was then more obviously branded as exploitation and
oppression of the weak. When kings and princes had to borrow
money they were able to have recourse to Jews, who were
deprived of other opportunities of livelihood, and for whom the
original prohibition of money-lending, in the absence of a
central doctrinal authority, was losing its force.

1 R. H. Tawney, Religion and the Rise of Capitalism (1929), p. 41.

2 Luke, vi, 35.

3 Cf. L. Brcntano, Die Anfdnge des Modernen Kapitalismus (1916), p. 191,
quoting Funk, Die Juden in Babylonien (1902).

THE MIDDLE AGES AND THE CANON LAW

With the development of commerce and the opportunities for
monetary transactions in the later Middle Ages, two tendencies
arose. On the one hand secular practice went in the direction
of increasing the lending of money at interest and of justify-
ing Tt By a reliance on Roman law; on the other hand the
Church, alarmed by the new development, made its original
prohibition more emphatic and universal. At the great Lateran
Council of 1 1 79 the first of a series of stringent prohibitions of
usury was decreed. 1 And the growth of the religious orders, most
of which put a complete asceticism in the forefront of their prin-
ciples, was another symptom of the same movement.

The basis of Church dogma also underwent a change. In the
works of Saint Thomas, the_doctrine against usury became
founded jg much, ifjflot more, on Aristotelian argument as on
Scrigture^Aiistotle's opposition to usury arose out oFnis tlieoirybf
the quality of money. Money, he had said, arose as a means of
facilitating legitimate (natural) exchange, that which had as its
sole aim the satisfaction of the wants of consumers. Barrenness
was thus part of its essential nature; usury, which made money
bear fruit, was unnatural. Saint Thomas took up this view and
combined it with the doctrine of Roman law which distinguished
between goods which were consumptibles and those which were
fungibles. Roman law had not made use of this distinction in
reference to the problem of loans on interest at all. It had merely
classed goods according to whether they were consumed in use
or not. Aquinas and other Canonists, following Aristotle's defini-
tion, put money in the first category and concluded that to
demand interest in addition to the return of the loan was to seek
an unnatural and unjust gain.

In spite of the more determined attitude of the Church and
its more sophisticated arguments, the practice of taking interest
grew with economic expansion. Lay authority became increas-
ingly concerned with the regulation rather than with the pro-j
hibition of interest; and decrees fixing maximum rates became
more frequent in the fourteenth century. When we reach the age
of discoveries of the fifteenth and sixteenth centuries the channels
for profitable investment grow to such an extent that the doctrines
of the earlier Canonists become hopelessly out of keeping with

1 W. J. Ashley, An Introduction to English Economic History and Theory (1914),
vol. i, part i, p. 149..

THE BEGINNINGS

economic practice. Important modifications appear in the theory
of usury, as they had done in the theory of the 'just price'. -

Already Francis de Mayronis, 1 a disciple of Duns Scotus, had
said, 'De iure naturali, non apparet quod (usura) sit illicita'.
This, however, was a view very much in advance of its time.
The retreat of Canon Law in general was slower and involved
the concession of exceptions rather than the abandonment of the
principle. Of these exceptions the most important was the doc-
trine of damnum emergens, the suffering of a loss by the lender,
which had already led Saint Thomas to modify the rigour of the
'just price'. Where a delay (mora) occurred in the repayment of
a loan, the lender was entitled to exact a conventional penalty.
The Church assumed that a bona-fide loss had been suffered or
that there had been a genuine delay. But these exceptions opened
the door to the taking of interest without much discrimination.
The mora became shorter until, among the later theologians like
Navarrus, the tendency arose to dispense entirely with any
period of gratuitous loan.

Still more important in helping to break down the original
prohibition was the doctrine relating to lucrum cessans. To have
lost the chance of gain through lending money became also a
justification of the receiving of interest. The controversies over
this principle were prolonged and very involved. But as the
growing opportunities of trade made it easier to prpye that gain
had been sacrificed when money was lent, the final victory of
this doctrine could not be prevented. Its triumph was made even
more complete by the recognition that a special reward could
fbe claimed by the lender for the risk which he undertook. The
commenda (partnership), which was often a 'sleeping' one, was
another favourite method, particularly in the city of London,
for concealing the lending and borrowing of money. And other
subterfuges, such as the complicated contractus trinus, were devised
to weaken still further the barrier by which theological dogma
was impeding economic progress. In the end the general pro-
hibition fell virtually into disuse. What we might call genuine
investment involving risk of loss as well as chance of gain began
to be regarded as legitimate. Only the lending of money for gain
without any risk or as a consumptive loan proper made to needy
persons remained proscribed.

1 L. Brentano, Ethik und Volkswirtschaft in der Ges^hichte, p. 17.

THE MIDDLE AGES AND THE CANON LAW

This development was by no means a continuous one; the
history of the discussions on usury from the thirteenth to the
sixteenth centuries shows how ideas fluctuate in spite of the exis-
tence of a definite trend. We have seen how Francis de Mayronis
questioned the general prohibition of usury which was still up-
held by Saint Thomas Aquinas and by Canonist doctrine in
general. Again, in 1514, the German professor Eck, 1 in a lecture
before the University of Ingolstadt, justified the contractus trinus
and went so far as to say that a merchant who borrowed money
might justly be expected to pay 5 per cent interest. But Catholic
doctrine of the time was still opposed to the contractus trinus.

The same divergences existed even among the leaders of the
Reformation, in spite of the fact that Protestant teaching was in
general more advanced and, therefore, more in harmony with
the economic trends of the time. Luther held views which were
not very different from those of the Canonists. With regard to
trade, he still believed in the just price', and his condemnation
of usury was as strong as that of any of the schoolmen. Calvin,
on the other hand, in a celebrated letter written in I574, 2
denied that the taking of payment for the use of money was in
itself sinful. He repudiated the Aristotelian doctrine that money
was infertile and pointed out that money could be used to pro-
cure those things which would bear a revenue. He nevertheless
distinguished instances in which the taking of interest would
become sinful usury, as in the case of needy borrowers oppressed
by calamity.

The chronological inconsistencies are perhaps most clearly
exemplified by the writings of Nicole Orcsme. In his Traictie de
la Premiere Invention des Monnoies,* written about 1360, he develops
a theory of money which reveals a very different approach to
economic problems from that of his fellow Churchmen. (The
only exception is Buridan, who had already laid the foundations
on which Oresme built.) The treatise begins with a detailed
account of the origin of money on Aristotelian lines; but it is
enriched with a careful discussion of the qualities which make
goods suitable for adoption as money. This leads Oresme' to dis-
tinguish between the proper uses of gold and silver in a system of

1 G. O'Brien, An Essay on Medieval Economic Thinking, p. 21 1.

2 R. H. Tawney, Religion and the Rise of Capitalism, p. 106.

3 For an extract cf! A. E. Monroe, Early Economic Thought, pp. 79-102.

THE BEGINNINGS

coinage. Although he concludes in favour of both, his bimetal-
lism is tempered with a realization of the need for ensuring that
the proportion of the market value of the two metals should rule
the ratio of their monetary value. Not only is this a very moderate
view of bimetallism, it is also one which implies that the value
of money is ultimately derived from the value of the money
commodity a view which is contained in several modern mone-
tary theories.

Oresme holds that the prerogative of coinage should be in the
hands of the prince, as the representative of the community who
enjoys the greatest prestige and authority. But the prince is not,
or ought not to be, the ' lord of the money in circulation in his
country; for money is a legal instrument for exchanging natural
Riches among men. . . . Money, therefore, really belongs to those
who own such natural Riches.' Such a conception of the function
of the monetary authority leads Oresme to an extraordinarily
vehement condemnation of debasement of the coinage. The
prince has no right, he argues, to tamper with the wealth of his
subjects by altering the proportion, weight, or material of which
their money is made. Gain derived from debasement is worse
than usury; it is extorted from the prince's subjects against their
will without even that advantage which the borrower obtains
from the usurious lender. Debasement is thus a concealed tax
which leads to dislocation of trade and impoverishment. And
finally an anticipation of Gresham's law when the coin is
debased, 'despite all precautions they [gold and silver] are
carried out to places where they are rated higher ', and so diminish
the amount of good money in the realm.

The spirit that breathes through the writings of Oresme is that
<of a much later age. Trade is taken for granted; in spite of his
observance of theological dogma, Oresmc's main emphasis is on
the problems of the merchant. His concern is to protect the
commercial class from the oppressive practices of the prince, a
problem which was becoming increasingly real even though it
did not as yet attract many other thinkers. Oresme foreshadows
both the transformation which the Church's approach to the
economic problem underwent at a later stage and the direction
which secular thought was ultimately to follow.

As for Canonist doctrine itself, we have seen how its teachings
steadily weakened with commercial expansion until it was faced

THE MIDDLE AGES AND THE CANON LAW

with the complete collapse of its power to regulate economic
life. With the Reformation that development enters on a new
phase. It seems clear now that whatever the views of the great
originators of the Protestant movement, the Church was no
longer able to stand in the way of th~growth of

capitalism^ Whether or no Protestant and Puritan doctrines
wefe~tnemselves conducive to the development of the capitalist
spirit, and, therefore, of capitalism itself, we need not decide
here. For with the end of the Canon Law a profound change
occurs in the relation between theological and economic thought.
The harmony between Church dogma and feudal society, which
at the beginning of this section was said to have been responsible
for the all-embracing quality of the Canon Law, came to an end
with the decline'of feudal society. Canonist thought was a ruling
class ideology, an illusory representation of reality which pre-
tended to find unity where there was none. It was successful so
long as the conflicts of reality had not become very acute. With
the sharpening of these conflicts, the antithetical elements in this
ideology were seized upon by the contending parties, and the
original universal character was lost. Although theological
teaching tried to make concessions to the needs of the times, it
could not abandon its essential nature. As the gulf between pre-
cept and practice widened, the foundation on which the precepts
rested could only be saved by jettisoning the claim that they had
an immediate relevance to practical affairs. A separation was
effected by which religious dogma ceased to represent an analysis
of existing society as well as a code of conduct. Religion becamd
something apart from other branches of thought, in particular
from those concerned with the mundane problems of wealth^
getting. Though attempts were again to be made to introduce
ethical elements into the main stream of economic thought,
it remains henceforth independent of religion. The foundation
for a secular science of economy was laid.

CHAPTER II

Commercial Capitalism and its Theory

(/) The Decline of Scholasticism

In the three centuries that elapsed between the end of the Middle
Ages and the appearance of Wealth of Nations , the classical system
of political economy was being prepared) Duriftg that period of
keen economic discussion the number of writers and writings on
economic matters increased rapidly. Until lately this large theo-
retical output was somewhat neglected; but during the last few
years historians have given it more attention, and it is now
possible to have a much clearer picture of the development of
economic thought between the end of the fifteenth and the end
of the eighteenth centuries. From a technical economic point of
view many of the writers of this time deserve to be treated in
considerable detail; for our present purpose, however, it is
enough to give an outline of the general trend of theoretical
development. (Prc-classical jgolitical economy canjbe divided
sVThe firsli^^cejdeloical reection of

the rise of commercial capitalism and J^^en^aJIyj-eferred to^as
'mercantiiisin'; with this, the present chapter is concerned. The*
second, accompanying the expansion of industrial capital in the
late seventeenth and early eighteenth centuries, contains the real
founders of the science of political economy; it is treated sepa-
rately in the next chapter.

Any discussion of mercantilist theory must be prefaced by
some account of the changes which led from the particularist,
feudalist economy to the growth of commerce between large,
wealthy, and powerful nation-states. The story of this change
has often been told. A number of factors were operating to sweep
away the medieval world. The growth of national states, anxious
to destroy both the particularism of feudal society and the
universalism of the spiritual power of the Chjurch, resulted in a

'THE DECLINE OF SCHOLASTICISM

greater concern for wealth and a quickening of economic acti-
vity. The loosening of the central doctrinal authority, caused by
the Reformation, and the progress of the concept of natural law
in jurisprudence and political thought prepared the ground for
a rational and scientific approach to social problems; and the
invention of printing created new possibilities of social inter-
course. Feudalism became inadequate as a method of produc-
tion. The revolution in the methods of farming destroyed the
basis of feudal economy. It led to rural overpopulation, growing
commutation of feudal dues, increased indebtedness of feudal
lords and their resort to trade or new methods of farming for the
market. Another powerful factor is to be found in the maritime
discoveries which led to a very great expansion of foreign
commerce.

These two developments were closely interconnected. In
England, for example, where the development of capitalism
can be most clearly observed, the growth of commerce destroyed
subsistence farming and caused agriculture to rely increasingly
on the market. The enclosure movement, perhaps the most
important of the economic phenomena of the later Middle Ages
and the early modern era, was thereby greatly accelerated.
Sometimes it was designed to give greater scope to improved
methods of arable farming; sometimes it converted arable land
into pasture with consequences which social historians have
often described. In either case, it made farming subservient to
the needs of the great markets and the merchant capital which
dominated them. The accumulation of commercial capital was
accelerated by the growth of foreign commerce. For reasons of
profit, political power or merely prestige, this capital was often
invested in land while an opposite movement took place from
the landed aristocracy. And intermarriage completed the union
between finance, merchant capital and the landed interest.

The revolution in commerce was accompanied by changes in
the organization of production. A special stage appeared in
which the merchant capitalist dominated the productive pro-
cess, which was carried out by small craftsmen. The merchant's
profit was the product of monopoly and extortion. During this
phase the dominance of the commercial capitalist was complete.
But this phase inevitably evolved towards a primitive form of
industrial capitalism: the putting-out, or Verlag system. A special

COMMERCIAL CAPITALISM AND ITS THEORY

class of merchant-manufacturers appeared who employed
semi-independent craftsmen, working in their homes. This class
was recruited from the merchant capitalists or the craftsmen,
and its interests were opposed to those of the ' pure ' commercial
capitalists, who were monopolizing the wholesale and export
trades. The seventeenth century saw the struggle between these
two methods of production: the commercial capitalist and the
primitive industrial capitalist. In that century, and even in the
preceding one, factory production with the use of inanimate
power was already beginning and, with it, full industrial
capitalism.

The great importance of the merchant up to that stage is
shown not only by his function in production; it is also exempli-
fied by the methods of home and foreign trading, and by the
social and political status of those engaged in trade. Monopoly
was the outstanding way in which the rising nation-states sought
to increase trade and to create sources of revenue for themselves.
To the merchant who wished to develop a particular manufac-
ture the possession of a monopoly appeared the best possible
way. The tradition of medieval thought was favourable to care-
fully defined privilege, and, what was more important, mono-
poly itself was a necessary form of trading at a time when both
lust of adventure and risk were great. If in the process the crown
exacted a tribute, that was regarded as a necessary expense allo-
cated to the strengthening of an institution which would protect
the trading interest.

In domestic production and trade the beginnings of industrial
capitalism led to occasional anti-monopoly campaigns. But the
arguments against monopoly were ad hoc arguments directed
against any particular interest whose privilege it was desired to
supplant./Primitive industrial capitalism was not opj3QeL-to
monopoly.; itTwas only opposecf to those monopolies which were
in the jiiterests of thejngrchant caprtalj^

having ousted the old, often became, in tneir turn, defenders of
monopoly. Particularly in the first half of the seventeenth
century, the anti-monopoly agitation was due to the struggle
between the Verleger and the bigger merchant capitalists. It was
not until the end of the eighteenth century (and then only in
England) that industrial capital became fully anti-monopolist.
It had no need then of a legal monopoly, since^the new methods

THE DECLINE OF SCHOLASTICISM

of production, requiring costlier means of production, gave it an
effective economic monopoly. And it was anxious to sweep away
all obstacles to the use of the new technique.

In foreign trade the rule of monopoly was even less seriously
challenged for a long time. Throughout the sixteenth and seven-
teenth centuries we encounter the large privileged trading com-
panies which monopolize trade with different regions; they are
the first to use extensively the typically capitalist joint-stock
organization. The Merchant Adventurers, the Eastland Com-
pany, the Muscovy Company, and, most important of all, the
East India Company, are some of the great trading monopolies
of the time. The trade carried on by these companies and by
independent merchants was still largely that of middlemen only.
They were concerned in the same entrepot trade that had en-
riched their earlier forerunners in Genoa, Venice, and Holland.
This carrying business shows the quality of commercial capi-
talism in its purest essence. However, it soon became compli-
cated by a more advanced form of commerce which involved
the export of the country's own manufactures.

To mitigate the hazards of trade, colonization became an impor-
tant weapon. Colonial monopoly was a very important form
of the monopolistic exploitation which produced the primitive
accumulation of capital. The efforts of the merchants and com-
panies to achieve control over the distant areas with which they
traded were seldom sufficient. They had to be supplemented by
the exercise of the power of the state, towards the strengthening
of which the merchants were contributing in such large measure.
The links between the trading interest and the state were thus
still further tightened; and the concern of state policy became
increasingly concentrated on problems of trade. Symptomatic
of this union between commercial capital and the state is the
prestige which some of the merchants enjoyed. All the great
figures in the trading companies, whom we shall shortly meet
as the leaders of the economic thought of their time, were
persons with considerable political influence. For example,
Cockayne^ (who was one of the leaders of the Eastland Company
and a creditor of James I) was able to use his influence with the
king in his attempt to change the regulations governing the trade
in cloth so as to ruin the Merchant Adventurers. Misselden, a
leading mercantilist, became a member of a standing committee

COMMERCIAL CAPITALISM AND ITS THEORY

to inquire into the decay of trade which was later to develop into
the Board of Trade. 1 When Sir Josiah Child defended the East
India Company he pointed out that the joint-stock companies
had brought aristocrats and merchants together. And when
Mun, the greatest of the mercantilists, wrote his panegyric on
the activities of the merchant, 2 he was only expressing in extreme
form a widely held sentiment.

The economic development which had made the merchant
powerful also destroyed institutions and habits of thought which
might have stood in the way of commercial expansion. Particu-
larly striking is the change which comes over the remnants of
social thought that still derive from religious dogma. Like an
echo of the debate of an earlier and more appropriate time, the
discussion among theologians and between theologians and lay-
thinkers turns once again to the problems of money and of usury.
But the difference between the religious and the lay approach
widens. The importance of the former declines while that of the
latter increases. The emphasis of the debate is shifted; and
though, as we shall see, there sometimes appear curiously
anachronistic views, the chief protagonists of economic discus-
sion are no longer inspired by the same motives.

As examples of the thought of this period of transition from
Canonist doctrine to mercantilist theory may be mentioned
ThomaJ Wilson, Carolus Molinaeus, Jean Bodin, and John
Hales. Of these the first two are typical of the last stages of the
discussion on usury, and the third and fourth of the progress of
ist thought.

Carolus Molinaeus, a very distinguished French lawyer of the
sixteenth century, had shocked his contemporaries with his
Tractatus Contractuum et Usurarum (i546), 3 in which he defended
the taking of interest, provided that a maximum rate was fixed.
He thus took up a position little different from that of Melanch-
thon or of the Catholic Navarrus. But perhaps on account of the
heresy hunt to which he was subjected, and perhaps because lay
thought was already of greater consequence, his views seem to
have been regarded as more necessary of opposition than those

1 E. A. J. Johnson, Predecessors of Adam Smith (1937), p. 58.

2 Thomas Mun, England's Treasure by Forraign Trade (Economic History
Society Reprint 1928), p. 88.

3 A. E. Monroe, Early Economic Thought, p. 105.

THE DECLINE OF SCHOLASTICISM

of the theologians. Thomas Wilson, in his Discourse upon Usury,
makes one of his characters whom he subsequently converts rely
on Molinaeus. 1 Wilson's own views were very violently opposed
to usury. He allowed none of the exceptions which by that time
were commonly conceded. Only genuine mora, he thought, could
justify the taking of interest. In his own day Wilson's views seem
to have had some influence on jurisdiction, if not on practice. 2
When for different reasons the mercantilists later again opposed
interest, Wilson's views were quoted in support.

More important for the history of economic thought thari
these last skirmishes of a dying battle are the treatises of Jean
Bodin and John Hales. Bodin, whose influence was of more
immediate importance in the field of political thought, is distin-
guished by a very advanced treatise on money. In his Reponse
aux Paradoxes de Malestroit, 3 published in 1569, he gives the first
elaborate explanation of the revolution in prices in the sixteenth
century. He ascribes the rise in prices, of which he quotes several
examples, to five causes: the abundance of gold and silver; the
practice of monopolies; scarcity caused in part by export; the
luxury of the king and the great lords; and the debasement of
the coin. Of these, the first is the most important. His statement
that c the principal reason which raises the price of everything,

a gj^ntity;_theory_ ,ofljn9ILCy. Bodm proceeds to Describe the
increase of money, the cause of which he finds in the expansion
of trade, particularly with the South American countries, which
had an abundance of gold. The discussion of the different ways
in which foreign trade has brought more gold into France is
remarkably modern in tone. Equally so, even though it is slight,
is Bodin's condemnation of monopolistic price-raising. The third
cause of dearness, scarcity of home produce, is only a corollary
of the first: the influx of money from Spain and other trading
countries.

Bodin does not lay great stress on the fourth cause; but it has
some affinity with modern schools of monetary expansionism.

1 T. Wilson, A Discourse upon Usury (ed. R. H. Tawney, 1925), pp. 343-5.

2 R. H. Tawney, Religion and the Rise of Capitalism, pp. 156, 160.

3 A. E. Monroe, Early Economic Thought, pp. 123, sqq.

4 ibid., p. 127.

COMMERCIAL CAPITALISM AND ITS THEORY

It refers to the inflationary effects of spending as against hoard-
ing. For if the increased gold had been 'saved' the rise in prices
would have been much smaller. Bodin's discussion of the fifth
is a worthy descendant of Oresme's analysis of the nature and
effects of debasement, for with historical and deductive proof
Bodin demonstrates that debasement results in a rise in prices.
Bodin distinguishes between rises in prices due to general
monetary causes and those which are of a more particular
nature; in the remedies he suggests he is as much in advance of
his time as he was in his diagnosis: when severe restrictions on
commerce were thought indispensable, he pronounced the view
that trade ought to be free.

Equally modern in tone if different in substance is A Discourse
'of the Common Weal of this Realm of England, published in 1581,
whose author, first described as W. S. ? is now often taken to
have been John Hales, a scholar who became a state official.
As one of the officers of Protector Somerset's commission on
enclosures Hales came into close touch with the social problems
of his time. In the dialogues of his Discourse he shows himself
keenly aware of the discontent which the agricultural revolution
was producing. But his solutions are always in the nature of
compromises. He is a humanist, though with much less vision
than Bodin, and his approach to social questions is rational and
practical. He does not condemn the pursuit of self-interest which
he regards as an ineradicable trait of human nature. And
although he still believes in the medieval virtues of justice in
all dealings, his proposals for harnessing self-interest to the
common good are of the stuff of which a later age fashioned its
doctrines. The state should so devise its laws that self-interest
worked along channels which were generally beneficial. Some
enclosures, for example, those which improve the arable land,
were not to be condemned. Only those which cause unemploy-
ment by converting arable land to pasture should be prevented
by freeing the export of corn and restricting that of wool.

The same practical attitude is seen in Hales's view of imports.
He is in advance of his time in discounting the general restric-
tion of imports; but he does not go as far as Bodin, since he is
anxious to prevent undue purchases from abroad of 'trifles'.
Moreover, he deplores the export of English raw materials to
be reimported after manufacture abroad, since it robs the

THE QUALITY OF MERCANTILISM

country of work. Like Oresme, Hales ascribes many economic
evils to debasement. His own contribution, not as complete or
as clear as that of Bodin, concerns the effect of debasement upon
the price of imported goods. He does, however, clearly bring
out the way in which an inflationary rise in prices affects the
distribution of wealth among different classes of the community.

(2) The Quality of Mercantilism

So far, we have considered the contributions to economic
thought of lawyers, scholars, and state officials. But although a
Bodin was able to enunciate monetary doctrines of great clarity
and insight, the substantial development of economic thought
was due to the leaders of economic activity, the merchants. The
theories which they evolved were never contained in a body of
doctrine such as that of the Canon Law. What has made it
possible to speak of mercantilism is the appearance in a number
of countries of a set of theories which explained or underlay the
practices of statesmen for a considerable time. The precise defini-
tion of the term has for long been a matter of considerable
controversy. Some writers 1 have argued that certain mercan-
tilist theories begin to appear in crude form towards the end of
the fourteenth and beginning of the fifteenth centuries. Others,
like Cannan, 2 have claimed that a distinction must be drawn
between 'Bullionism', which existed during a large part of the
later Middle Ages, and mercantilism proper, whicludnes jiot
appear until the seventeenth century, witL the. growing^ influence
of early industrial capitalism which was interested in an expan-
sion of the exjpoTtrtrade. As will become clear later, neither of
these two views is exhaustive. The first antedates the rise of the
ideas which are typical of mercantilism and the appearance of
which is dependent upon a certain degree of development of
commercial capitalism. The second is correct only in so far as
bullionism is identified with a high regard for 'treasure', which,
it is true, existed long before the mercantilist era. But although
there was a break between earlier and later mercantilist ideas

1 e.g. A. Gray, The Development of Economic Doctrine, p. 66.

2 E. Cannarf, Review of Economic Theory (1929), p. 7.

COMMERCIAL CAPITALISM AND ITS THEORY

on foreign trade, this break is not deep enough to destroy the
essential unity of mercantilist thought.

Some writers have followed Schmoller in identifying mercan-
tilism with state-making. Professor Heckscher in his recent
treatise, which greatly enriches our knowledge of the antece-
dents of modern capitalism, re-adopts this thesis. In his view,
mercantilism _js_to be regarded^essentially Jisjja J>hase in the
histoiy_o(econgjcnic Tpolicp, 1 whicjiiontaihs a number of econo-
mic measures designed to secure political unification and^national
power. The^^ding-u^TbTTiatibn-states is put in the forefront,
and Thonetary, protectionist, and other economic devices are
regarded merely as instruments to this end. State intervention
was an es.sntiaLpart of mercantilist doctrine wliich, as Professor
Laski has said, transferred ' the idea of social control from the
Church Jff thf* State '.i Those" responsible" Ibr government
accepted Inercantilisf "notions and fashioned their policy accor-
dingly, because they saw in them means of strengthening absolu-
tist states against both the remnants of medieval particularism
at home and the rivals abroad. It must also be conceded that a
great deal of mercantilist literature, from Mun, the enlightened
English merchant, to Hornick, the Austrian nationalist lawyer
and privy councillor, claims to speak in the interests of national
advancement.

But a view which makes political unification the end to which
both economic practice and theory were subservient ignores the
more powerful causal influence on political institutions which
proceeded from changes in the economic structure. It is not
necessary to minimize the effect which the growth of the state
had upon commercial development and the theory of economic
policy in order to emphasize that it was the breakdown of the
feudal economy and the growth of trade which underlay the
decline of the feudalist political structure and the rise of the
nation state. The claim may also be made that the same factors
were still operating in the sixteenth century and that mercan-
tilist views sprang from the needs of commercial capital, even
though they may at times have found indirect expression in the
shape of policies devised for reasons of state-making.

It is not surprising that mercantilists should have clothed

1 E. F. Heckscher, Mercantilism (1935), vol. i, p. 19.

2 H. J. Laski, Rise of European Liberalism (1936), p. 60.

6 4

THE QUAMTY OF MERCANTILISM

their views in the garb of a policy designed to strengthen the
nation or that they should have looked to the state to imple-
ment their theories. The expansion of commerce brought with
it a divergence of individual trading interests. Nearly all these
interests looked to a strong central authority to protect them
against the claims of their rivals. The waverings of state policy
during the long period in which mercantilism held sway cannot
be understood without realizing the extent to which the state
was a creature of warring commercial interests; and that their
only common aim was to have a strong state, provided that they
could manipulate it to their exclusive advantage. For this reason
most pieces of mercantilist policy that were put forward identi-
fied the merchant's profit with the national good, i.e. the
strengthening of the power of the realm. 1

Many mercantilists sincerely believed in such an identity,
which social classes, struggling to obtain or preserve their politi-
cal power, have always claimed. It was true that for a time state
regulation was an essential condition for the widening of markets
beyond their medieval limits. But doubt about the universal
beneficence of intervention was by no means unknown. As early
as 1550 this had been forcibly expressed by Sir John Masone, 2
and during the next hundred and fifty years these doubts were
to grow until they became a storm of protest. Nor were the
mercantilists unaware of the divergence between the interest of
the community and that of the individual, and in the free-trade
attitude of the later mercantilists this awaro*iess finds expression.

The relation then between economic organization and politi-
cal institutions and between economic and political ideas and
policies must be viewed as one of interaction. When viewed over
a long period of time this relation often reveals an antithetical
character. It is generally conceded that mercantile capitalism
preceded and prepared the ground for modern industrial capi-
talism. The latter, as we shall find, saw in the power of the state
and in state intervention in economic matters a serious hin-
drance to its own development. Thus it set itself up in opposition
to the political structure which its own forebear had found it

1 Some examples are quoted by H. M. Robertson, Aspects of the Rise of
Economic Individualism (1933), pp. 66-8.

2 R. H. Tawney and E. Power, Tudor Economic Documents (1935), vol. ii,
p. 1 88.

65 C

COMMERCIAL CAPITALISM AND ITS THEORY

necessary to create. The mercantilists demanded a state strong
enough to protect the trading interest and to break down the
many medieval barriers to commercial expansion. Yet they
were equally clear that the principle of regulation and restric-
tion itself now applied on a much larger scale through mono-
polies and protection was an essential basis of that state. For
commercial capital required wider and consolidated markets
which were yet sufficiently protected to allow of secure exploita-
tion. We know now that monopoly, protection, and state
regulation in general are not essential qualities of capitalism in
its full flower. And it is symptomatic of the development of
modern industry that the outcry against monopoly begins fairly
soon in the field of domestic trade, while in foreign trade
mercantilism survives much longer. The spectacle of capitalism,
in its liberal age, attacking and destroying that which had given
it birth contains a paradox only if our view of economic develop-
ment is static and mechanical.

This latter contradiction between commercial and industrial
capital has its earlier counterpart in the development of com-
mercial capitalism itself. The struggle between bullionists and
mercantilists is its theoretical expression. AdamJ^mith began
his celebrated critique, of mercantilism by an attack on the
popular notion c that wealth consists in money, or in gold and
silver 5 . 1 But this popular notion is explained by the fact that
treasure, i.e. money, is the earliest form of wealth once private
exchange and a medium of exchange have become fundamental
social institutions. The appearance of such notions and of the
practices which are designed to give them effect is an indication
of the stage of economic development. The formation of treasure
implies a great advance in the process of private exchange and
circulation. It is essentially different from the accumulation of
wealth in its natural form; and it becomes possible only when
the production and circulation of wealth have become separate
processes connected by money and mediated by a special class
of merchants. At this stage the concept of wealth becomes
separated from the goods which possess use-value, to reappear in
the shape of the monetary store of exchange- value. The accumu-
lation of the precious metals of which money consisted was
common in the ancient world. In Greece and Rome it was a

1 Wealth of Nations, Book IV, cli. i.
66

THE QUALITY OF MERCANTILISM

continual aim of policy to form a metallic hoard which would
Serve in case of need. And throughout the Middle Ages the
pursuit of wealth and power by Church, kings, and feudal lords
was bound up with the accumulation of treasure.

Commercial capitalism gave a fresh impetus to this view. In
the period in which commerce was the dominating force of
economic development the circulation of goods was the essence
of economic activity. Its end, the accumulation of money, cor-
responded to traditional ideas of wealth and of the aim of
national policy. The search for gold in distant lands is the
specific form which commercial expansion first takes. 'Gold 5 ,
said Columbus,. 'is a wonderful thing! whoever possesses it is
master of everything he desires. With gold, one can even get
souls into paradise.' 1 Luther, who did not share this last senti-
ment, implied a similar regard for gold in his great attack on
trade. He said that the Germans were making all the world rich
and beggaring themselves by sending their gold and silver to
foreign countries; Frankfurt, with its fairs, was the hole through
which Germany was losing her treasure. 2 Hales deplored the
loss of treasure occasioned by debasement and the importation
of useless trifles. Serra, the great Italian mercantilist, took it
for granted that everv one understood f how important it is,
both for peoples and foi princes, that a kingdom should abound
in gold and silver'. 3 Malynes and Misselden, although engaged
in a violent controversy on foreign trade policy, could yet agree
on the importance of treasure. Malynes said, 'For if Money be
wanting, Traffic doth decrease, although commodities be abun-
dant and good cheap.' 4 Misselden, although, as we shall see, he
was more advanced in his views on trade, was still anxious to
restrict commerce 'within Christendom' in order to preserve
treasure. 5 And Mun consistently takes^jtjbr granted that the
aimofpolicy is to increase the treasure of the realm.
^Thu^aTiigh regard fof~money^was common to all mercan-^
tijists. They looked upon the economic process from the point

* In a letter from Jamaica of 1503, quoted by Marx in ur Kritik der
politischen Okonomie (1930), p. 162.

2 'Von Kaufshandlung und Wucher' (1524) in D. Martin Luther's Werke
(1899), vol. xv, p. 294.

3 A. E. Monroe, Early Economic Thought, p. 145.

4 E. F. Heckscher, Mercantilism, vol. ii, p. 217.

5 E. Misselden, Free Trade, or tJie Meanes to make Trade Flourish (1662), p. 19.

COMMERCIAL CAPITALISM AND ITS THEORY

of view of the primitive stage which capitalism had reached
its commercial phase and were thus led to identify money and
capjtal. Professor Heckscher has given an interesting account of
the 'fear of goods', the almost fanatically exclusive concern
with selling which characterized mercantilist thought. The
many examples which he quotes from mercantilist theorists
confirm the penetrating analysis of commercial capitalism
which is scattered in several' of the writings of Marx. l In sharp
contrast with the aim of securing an abundance of goods, which
had characterized earlier state policy, the mercantilists thought,
in the words of their greatest German representative, Johann
c thatts sas tter to

than to buy goods fromjDtEerSjJorjheJbrmer brings a certain
advantage andTKelatter inevitable damage.' 2 This fear of stocks
pf unsold go!53slru^ writings, even though it

assumes different forms. It underlay Malynes's- abhorrence of
luxury imports, Misselden's desire for treasure, as well as the
arguments on the balance of trade of Mun and of such advanced
mercantilists as D'Avenant, Barbon, and Child. Even Petty, the
founder of classical political economy, is uncertain about the
relation between a country's foreign trade and its wealth. .

It was particularly in the sphere of foreign trade that this 'fear
of goods ' showed itself, and resulted in the mercantilist search
for an export surplus. Its essence was a desire to create a surplus
of wealth. JThe only surplus which the mercantilists knew arose
if_a profit was ma3e~Th selling. This, it was obvimis^quld only
resulTm aTelative surplus: what one gainvAsLpther loses, as
ffieTautEbr of a seventeenth century pamphlet pointed^ out.
EverTmbre clearly, D'Avenant, writing in iGgy^afgued that in
domestic trade the nation in general did not grow richer, only
a change in the relative amounts of wealth of individuals took
place; but foreign trade made a net addition to a country's
wealth.

This primitive idea of the origin of profits to be suppla
later by the classical labour theory of value was appropria
a commercial age in which production was still carried out on

1 Cf., particularly, Das Kapital (1922), vol. iii, part i, pp. 307 sqq.\ %ur
Kritik der politischen Okonomie y pp. 1 18-33, 162-4.

2 Quoted by E. F. Heckscher, Mercantilism, vol. i, p. 1 16.

8 The East India Trade a Most Profitable Trade to the -Kingdom (1677).

THE QUALITY OF MERCANTILISM

a pre-capitalist basis. It serves to explain still further the peculiar
views on money and treasure which the mercantilists held. It
amounted to an identification of (or, better, a confusion be-
tween) money and capital. Examples have already been given
of the frequency with which mercantilists spoke of money as
wealth. It is not necessary to believe that they considered wealth,
as did earlier economists, in the concrete material sense and that
they were thus guilty, as Oncken said, of a 'Midas mania ' . l The
term wealth was clearly used in the sense of capital; and the
theory of money of the mercantilists was a part of their one-
sided view of economic activity.

Such an identification of money and capital is still very
common to-day, t. And the mercantilist era could find striking
confirmation of the productive uses of money which had dealt
the death-blow to the feudal economy and to the canonical
prohibitions of usury. It knew capital only in its primitive mone-
tary form and the confusion which was later so much derided
was perfectly compatible with its own economic experience.
Nevertheless the mercantilists were led into* many notions which
are now seen to be erroneous. They ascribed, for example, a
definitely active force to money. Trade, they said, depended on
plenty of money: where money was scarce, trade was sluggish;
where it was abundant, trade boomed. Ironically, however,
their high regard for money led them to reject the defences of
usury which had been put forward by the precursors of com-
mercialism. They returned to the views of the Canonists and
others, who had unconsciously defended the feudal economy
against the attack of money-capital. The mercantilists believed
that money was productive but, as they were anxious to obtain
money-capital, their interests clashed with those of the providers
of it. In their fight against what they considered excessive in-
terest mercantilists were not above using the arguments of those
who would have condemned no less strongly the merchant's
profit.

A striking example is that of jGerald Malynes, who was both
an official and a successful merchant. As such he could not cpn-
demn the taking of interest entirely, but he drew a distinction
between interest and usury. He based himself chiefly on Wilson's

1 A. Oncken, Geschichte der Nationokonomie, part i; Die fyit vor Adam Smith
(1902), p. 154.

COMMERCIAL CAPITALISM AND ITS THEORY

Discourse, and, in his Saint George for England Allegorically Des-
cribed (1601) and later in his Consuetudo vel Lex Mercatoria, first
published in 1622, he attacked most bitterly the evils of extor-
tionate usury. Control of interest rates and the establishment of
monts de piete to prevent the exploitation of the poor were advo-
cated by him as means of avoiding the excrescences of a
practice which, as a business man, he knew could not be
abolished. Sir Thomas Culpepper, in a Tract against Usurie,
published in 1621, argued in favour of a decreed maximum rate
without entering into the question of the legitimacy or otherwise
of interest. Such a maximum, he claimed, would enable English
merchants, who were then paying 10 per cent, yto compete more
successfully with their Dutch rivals, who paiq only 6 per cent.
To this argument, which is linked with mercantilist ideas on the
mechanism of international payments, we shall return in a
moment.

Of the many examples which could be quoted of the mercan-
tilists' attitude to interest, none is more important than that of
Sir Josiah Child. In his New Discourse of Trade (1669), he replies
to the defence of interest put forward by Thomas Manley in his
Interest of Money Mistaken. He claims to be the champion of
industry while Manley, he said, was defending idleness. A low
rate of interest was the cause and not, as Manley had argued,
the effect of wealth. If commerce was the means of enriching a
country and if lowering the rate of interest encouraged trade,
could it be denied that a low rate was a powerful cause of
wealth? 1 Though since 'the egg was the cause of the hen, and
the hen the cause of the egg ' 2 he agreed that an increase in
wealth brought about by a low rate of interest could in its turn
cause a still further reduction of the rate. Like Culpepper, Child
was concerned with strengthening the competitive power of
English merchants. He greatly admired the Dutch, thus uncon-
sciously showing that he saw Holland for what she was: the
country of commercial capitalism par excellence. There the power
of money-capital had long since been subordinated to the needs
of the primitive industrial capitalists the merchant manufac-
turers, a victory which English commerce had yet to achieve.
The mercantilist attack on high interest rates was natural in an

Child, A New Discourse of Trade (1^694), passim.
a ibid., p. 63.

BULLIONISM AND MERCANTILISM

age of great scarcity of liquid funds, undeveloped banking facili-
ties, r J ' ig antagonism between the merchant manufac-
turer; oldsmiths and big merchant financiers.

(jj) Bullionism and Mercantilism

We have so far confined our discussion to those characteristics
which were common to all representatives of mercantilist thought;
the attitude to selling, the 'fear of goods', the desire to accumu-
late treasure, and the opposition to usury. These are the essential
qualitfes of the economic thought of the time. Until recently,
however, it was more common to lay stress on the differences
of opinion of individual mercantilists. Controversies between
adherents of different policies were very frequent in the seven-
teenth century; and the progress of ideas from Malynes to Mun,
for example, is certainly an indication of the change in economic
conditions and of an appreciation of its significance. In this
connection, a distinction is usually made between the bullionists
and the mercantilists proper, but it is possible that these names
encourage a misunderstanding of the real issue between these
two schools. It is sometimes assumed that the desire for treasure
was part of the crude doctrine of the earlier mercantilists; while
the later mercantilists had discarded the gross error of identi-
fying wealth and treasure, and had adopted instead the more
sophisticated mistake of the export surplus. It should be clear
now that the desire for treasure was common to all mercantilists
for reasons which were connected with the merchant's function
in the economic process of the time. What does, however,
distinguish those mercantilists who have been called bullionists
from the rest is a difference of opinion on the best means of
achieving the universally desired end: the enrichment of the
country through an increase of its treasure.

The earlier view on this point goes back a long time and was
not at first connected specifically with the mercantile interest. It
aimed at preserving the stocks of precious metals of a country
by a strict regulation of their movements across national boun-
daries, i.e. by regulation of international monetary exchange.
Granted the search for precious metals as the most highly prized
representatives of Wealth, it becomes an obvious necessity of

COMMERCIAL CAPITALISM AND ITS THEORY

policy to prevent their export and to encourage their import.
Prohibitions of the export of gold and silver date back to
medieval times and persisted until the time of mercantilist con-
troversy. By the fourteenth century foreign trade had sufficiently
progressed to bring to the notice of rulers the connection
between it and the amount of precious metals in the country.
An Act of 1339 attempted to compel wool merchants to bring
in a certain amount of plate for each sack of wool jexported.
Richard II, in a reply to a complaint about the shortage of
money, included in the Navigation Act of 1 38 1 a prohibition of
the export of gold and silver. An inquiry was instituted at which
the wardens of the Mint had to give evidence. The most impor-
tant part of it was the statement made by Richard Aylesbury,
an officer of the Mint. He anticipated the later mercantilist
argument of the balance of trade with the following advice for
preserving the country's stock of bullion: 'Let not more strange
merchandise come within the realm than to the value of the
denizen merchandise which passes out of the realm.' 1

But this view did not reflect prevailing opinion or practice.
The method generally in use to preserve treasure was still the
medieval one of direct control. Prohibitions of the export of
bullion and of the import of luxuries were supplemented by the
establishment of the office of Royal Exchanger, to whom all
exchange transactions were confined. These restrictions and
regulations were not, however, capable of holding up for long
the development of international trade. The activities of mer-
chants found ways of nullifying the attempts to prevent fluctua-
tions of prices and exchange rates and movements of gold and
silver. The growth of trade destroyed the basis on which the rate
books used by customs officers were compiled. The bill of
exchange became the chief instrument for settling payments and
there grew up a new class of financiers specializing in inter-
national transactions. These developments made it impossible
to enforce measures of state regulation. The disappearance of
the staple system made supervision of trade more difficult; and
the increasing influence of the privileged companies is seen in
the relaxation of bullion export prohibitions to enable them to
carry on their trade. For example, the charter of the East India

1 A. E. Bland, P. A. Brown and R. H. Tawney, English Economic History:
Select Documents (1933), p. 222.

BULLIONISM AND MERCANTILISM

Company of 1 600 allowed the export of a specified quantity of
bullion on each voyage to the Spice Islands. l

Yet the commercial expansion of the sixteenth century, with
its problems of national trade rivalries and large-scale move-
ments of the precious metals, was bound to raise once again the
question of regulation. Bullionists is the name given to those
who proposed the revival of the old export prohibitions, the
re-establishment of the office of Royal Exchanger and an
increased regulation of foreign exchange dealings. The most
important representative of this school was Gerald Malynes JL We
have already seen that Malynes had readopTed Wilson's view on
usury. This he seems to have done as part of a somewhat medieval
outlook on social affairs in general, for he believed in the cer-
tainty and harmony which only a well-regulated commonwealth
could secure. Writing in the seventeenth century, he put the task
of achieving these ends into the hands of the state. His interven-
tionism was mainly concerned with economic matters, of which,
in addition to usury, he regarded foreign trade and foreign
exchange dealings as the most important. In spite of his concern
about usury he felt that it was only a symptom of a more deep-
seated evil, i.e. the exchange transactions of private financiers,
which were often usurious and which, by reducing the volume
of bullion in the country, raised interest rates. 2 Indeed, to
Malynes foreign exchange was the main economic problem. He
approached it with a medieval mind and based his diagnosis
and his treatment upon an ethical foundation. Yet by profiting
from the monetary controversies of the previous century which
had produced Gresham's Law, he was able to enunciate a clear,
though limited, analysis of the proximate causes of gold move-
ments and thus to advance considerably the theory of inter-
national trade.

Malynes began by admitting the need for domestic and inter-
national exchange. Like Hales, he claimed that since trade is
inspired by the merchant's self-interest, governments must regu-
late it in order to insure the general welfare. Money, he argued,
was devised as a means of exchange and as a common measure.
The bill of exchange was designed as such a common measure

1 W. R. Scott, The Constitution and Finance of English, Scottish, and Lish Joint-
Stock Companies to ijso (1910), vol. ii, p. 93.

2 G. Malynes, Consubtudo (1636), ch. ix, pp. 272 sqq.

COMMERCIAL CAPITALISM AND ITS THEORY

in international transactions, but it had been corrupted through
the tricks of self-seeking financiers. The growth of illegitimate
exchanges had destroyed the true parity of the foreign exchanges.
This parity was what is now called the 'mint par of exchange 5 ,
i.e. the ratio of the values of two currencies which corresponded
to their bullion content. Exchanges that took place at this ratio
were the only ones to correspond to the par pro pari which was
the moral foundation of exchange. If the ratio varied, exchange
involved an injustice to one of the parties. Moreover, if the
exchange rates were stable, no bullion movements would take
place. If the exchange rate went in favour of the country,
bullion would not flow out; but if it fell below the par, bullion
would be drained away.

So far Malynes had given an account of the determination of
the equilibrium rate of exchange which was fairly common at
the time. He had gone farther by showing the connection
between deviations from the equilibrium rate and international
bullion movements which was later embodied in the theory of
the specie points. His subsequent analysis, however, is less
enlightened. He ascribes the possibility of deviations from the
par pro pari to the existence of two illegitimate forms of exchange
transactions. It is not quite clear what exactly his cambio sicco and
cambio fatitio 1 are meant to be. They appear from his examples
to be not unlike what would to-day be called accommodation
bills (or finance bills, as Professor Tawney has called them) and
acceptances. In the case of the former, a merchant borrows
money from a financier by being allowed to draw a bill
upon the financier's foreign correspondent. Here, although
there has been no trade transaction, foreign exchange has come
into existence. In addition, extortionate rates of interest can be
concealed. In the second case, the credit of a banker and his
foreign agent is used to facilitate the trade of merchants of poor
standing, who again would have to pay very high interest rates.
Malynes's attack upon an operation which is a commonplace of
finance to-day seems to show his lack of understanding of the
real nature of foreign trade. It must be understood in the light
of the mercantilists' general fight against finance; and it is also
an illustration of Malynes's desire to confine trade to the privi-

1 G. Malynes, Consuetudo, ch. ix, p. 253. See also Professor Tawney 's analysis
in his introduction to Wilson: A Discourse upon Usury.

BULLIONISM AND MERCANTILISM

leged few with whom the small merchant was competing with
growing success.

Malynes did not penetrate to the ultimate causes of the varia-
tions in foreign exchanges, although he seems to have allowed
that they were affected in part by the movements of goods. As
his curious theory of the reasons which compel English mer-
chants to sell cheaply abroad shows, his ideas on the connection
between exchange rates, bullion movement, prices, and mer-
chandise trade are mistaken. 1 Malynes's remedy is correspon-
dingly retrograde. Exchange Transactions^sRould be confined
to the Royal Exchanger or some other person authorized by
the king. All exchange transactions above or below the par pro
pari (which was tp be publicly declared) were to be forbidden.
Exchange under these conditions would be legitimate, the tricks
of the financiers would be defeated, the exchanges would be
stable, and the treasure of the realm would be preserved.

Other mercantilists, such as Misselden and Mun, attacked these
views and developed their own more advanced analysis. Already
Hales had said, ' For we must alwaies take hede that we bie no
more of strangers than we sell them; for so we sholde empoverishe
our selves and enriche them.' 2 And William Cecil's statement
that 'Nothing robbeth the realm of England more than when
more merchandise is carried in than is coming forth' 3 was an
echo of Aylesbury's evidence of 1381. Bacon, in 1616, when
governmental practice was still in the direction of monetary
measures, hoped that care would be ' taken that the exportation
exceed in value the importation; for then the balance of trade
must of necessity be returned in coin or in bullion 5 . 4 Thus in
attacking Malynes's undue fear of financiers, the later mercan-
tilists were able to draw on already existing views, even
though these at one time had been used to hamper the develop-
ment of foreign trade. Misselden and Mun carried the arguments
of the bullionists farther so as to explain the ultimate causes of
specie movements. Although their polemic, particularly in the
form which it took in Misselden's writings, makes them violently
opposed to Malynes's way of thinking, they did not, as Professor

1 G. Malynes, Consuetudo, p. 48.

2 J. Hales, A Discourse of the Common Weal of this Realm of England (ed.
Lajpwnd, 1929), P. 63.

3 R. H. Tawney and E. Power, Tudor Economic Documents, vol. ii, p. 451.

4 Quoted in Heaton, Economic History of Europe (1936), p. 368.

COMMERCIAL CAPITALISM AND ITS THEORY

Heckscher has pointed out, deny that there existed a relation
between the volume of bullion and the foreign exchange rates.
They only made both bullion movements and fluctuations in
foreign exchange rates depend upon the balance of merchandise
trade.

Typical of this further development are three mercantilist
writers: Edward Misselden, Antonio Serra, and Thomas Mun.
The first and third were leading English merchants of the period,
one a prominent member of the Merchant Adventurers, the
other of the East India Company. Of Serra, a native of Cosenza,
very little is known.

Misselden (fl. 1608-54) contributed two important tracts to
the war of pamphlets: Free Trade, or The Meanes to Make Trade
Flourish, etc. published in 1622, and The Circle of Commerce, pub-
lished in the following year and noted particularly for the fact
that it was the first publication to use the term 'balance of
trade'. 1 (Bacon's earlier use of the term did not appear m print
until much later.) As with most mercantilists, Misselden's imme-
diate motive for theorizing was to provide a background for
policies designed to foster the interests of the class he represented.
In his first book, self-interest is particularly obvious. He was, as
we have seen, anxious to confine trade within Christendom,
since the oriental trade drained the country of specie which did
not return. This attack on the East India Company did not even
remain implied, for Misselden proceeded to blame his trade rival
for a good deal of the trade depression. 2 As we should expect
from a prominent member of the Merchant Adventurers, he was
not opposed to privileged trading companies in general; on the
contrary, he thought nothing could be more harmful to the
general well-being than unregulated trade. He was equally
opposed to monopoly in trade, and he favoured what is now
called oligopoly. In this respect, he shared a view which was
comrrion among mercantilists. 3

Misselden's attack on the East India Company was not carried
into his second book; he had become associated with the com-
pany in business. It may also be claimed that when he came to
write The Circle of Commerce he had appreciated better the general

1 J. Viner, Studies in the Theory of International Trade (1937), pp. 8 sqq.

2 E. Misselden, Free Trade, or The Meanes to Make Trade Flourish, pp. 13-14.

8 E. F. Heckscher, Mercantilism, vol. i, pp. 270-6.

7 6

BULLIONISM AND MERCANTILISM

interests for which he stood and ceased to represent a narrow
self-interest. While in Free Trade he had still cast his net wide to
find explanations for the trade depression, he concentrated in
his second tract on the balance of trade. Foreign exchange rates,
he claimed, were settled in the same way as the prices of any
other goods. There was a price which was determined by the
'goodness 3 of each commodity. But the price ruling at any time
might be greater or less, varying with buyers' and sellers' judge-
ments. Similarly, there were prices of the exchange which were
determined by the 'goodness' of the money; this was the mint
par. But the rates might fluctuate around this equilibrium point
'according to the occasions of both parties', 1 i.e. according to
supply and demand. The exchanges were not the cause of specie
movements, as Malynes had maintained, since they were them-
selves determined by the volume of foreign trade.

Misselden rejected Malynes's remedy. He argued that in order
to insure that trade was beneficial it was necessary to know first
the relation of imports and exports. Returns should be made and
the nation's trade 'cast into the "Ballancc of Trade" which
would show us the difference of waight in the Commerce of one
Kingdome with another'." Once that had been done, the policy
of the state should be to secure a favourable, and prevent an
unfavourable, balance; for with a surplus of exports the country
would receive treasure and grow rich. Exports should be en-
couraged and the poor be employed in making goods for export.
At the same time imports should be discouraged, particularly
those of luxury goods, and the fisheries should be developed so
as to make England less dependent on foreign supplies of f0^d.

Somewhat similar to Misselden's, and arising also from
polemical needs, were the views expressed by Antonio Serra
in his Breve Trattato.* He set out the means by which a
country that had no gold and silver mines of its own could
obtain a plentiful supply of the precious metals. The first set of
means were those peculiar to an individual country, such as a
surplus of home products, which could be exported in exchange
for bullion, and geographical situation, which might give a
country an advantage in the carrying trade. Of the means

1 E. Misselden, The Circle of Commerce (1623), P- 9&-

2 ibid., pp. 116-17.

3 A. E. Mohroe, Early Economic Thought, pp. 145-67.

COMMERCIAL CAPITALISM AND ITS THEORY

common to all countries he distinguishes four: ^quantity of
industry, quality of the population, ejctensiv.c.jtrading.operations 5
aliffTegulations of the sovereign'. 1 The first is a significant anti-
cipation of an emphasis on manufacture which was later to
become general. Serra said that industry was superior to agri-
culture because it was independent of the weather; it could be
multiplied; and it had a more certain market price since it was
not perishable; finally, the profit from manufacture was generally
greater than that from produce. The second, the quality of the
population, depended on diligence, ingenuity, and a spirit
of enterprise. The third was generally the result of the pre-
sence of the particular factor of favourable situation. It made
a community embark upon commerce which resulted in much
money, for 'commerce cannot be carried on without it'. 2 The
policy of the sovereign also could greatly help or hinder the
attainment of wealth.

Having given his general ideas on economic matters, Serra
proceeds to examine the relation between exchange rates and
the amount of bullion in the country. Although his discussion is
somewhat involved, he succeeds in demonstrating that the theory
that high exchange rates will prevent bullion from coming into
the country and will encourage its outflow did not give a com-
plete explanation. It is the ' foreign goods needed by the kingdom
. . . that should be blamed for the scarcity of money, not the
high rate of exchange'. 3 Serra rejects the prohibition of the
export of money as useless. No one, he argues, exports money
without a purpose. If money goes abroad to pay for imports, which
are re-exported, it will yield a profit and so ultimately increase
the stock of bullion.

(4) Thomas Mun

A similar argument, more lucidly developed, was used some
years later by Thomas Mun (1571-1641). A successful "London
mercer with trade experience in Italy and the Levant, he
became, in 1615, closely associated with the East India Company
of which he was a director until his death. The company was
attacked on account of its privilege to export 30,000 of bullion

1 A. E. Monroe, Early Economic Thought) p. 146.

2 ibid., p. 150. 8 ibid., p. 158.

THOMAS MUN

on each voyage (provided that they reimported that amount
within six months); to defend his company Mun wrote A Dis-
course of Trade, from En^land^nto the East Indies ( i6gL) , l The argu-
ment of this book is very primitive compared with the later work
which made Mun famous* His special pleading was undisguised.
He was only concerned with clearing the East India Company
of the charge that it was draining the country of specie; and in
the process he made the claim that the East India Company's
trade brought in more treasure than all the other trades put
together. He pointed out that the company did not export as
much specie as it was permitted to do, that it had cheapened
the Indian trade by cutting out the Turkish middlemen, and
that it was bringing in raw materials for English manufactures.
But his main argument on behalf of the company was that its
re-exports enabled it to bring back as much specie as it had
exported and more. There is in this book still a trace of the fight
against the financiers which Malynes had carried on, for Mun
puts some blame for the loss of specie on the tricks of exchangers.
England 's Treasure^by_ F^imi^nJTra^ was written in i6^CL and
published posthumously by Mun's son in 1664. 2 In this work,
the ideas of commercial capitalism find their fullest expression.
Here the merchant is assigned a very high place in the com-'
munity. Precepts are given for the perfection of the merchant;
and foreign trade is set up as the means for making a country
wealthy. It was this which lerl j\Hpm Smith - tn_sayjjl?it Mun's
book ought to have been called ' England's Treasure * n Fpr^ign
Trad&'. Mun takes up Misselden's concept of the balance of
trade, but he adds to it another one which is even more impor-
tant and which shows his insight into the quality of commercial
capitalism. This is the concept of 'stock'. He does not speak any

1 Cf. reprint (Facsimile Text Society, New York, 1930). In a chapter
which he contributed to Engel's Anii-Duhring Marx attacks Duhring for
having made Serra the leader of mercantilist thought. He rightly reserves
this place for Mun, whose analysis was not only much cleverer than Serra's
but whose second book obtained an immediate and universal authority.
Marx is, however, wrong in saying that Mun's Discourse appeared in 1609,
four years before Serra's Breve Trattato. The Discourse was published in 1621
and could not have been written before 1615, the year in which Mun joined
the East India Company.

2 Gf. reprint (Economic History Society, 1928). An excellent analysis of
this work is to be found in E. A.J.Johnson, Predecessors of Adam Smith (1937),
pp. 77-89. I do not however agree with Dr, Johnson's identification of
Mun's ' stock * with ' finance-capital '.

COMMERCIAL CAPITALISM AND ITS THEORY

longer of wealth alone, nor does he confuse money and capital.
He clearly distinguishes a portion of wealth, which generally
takes the form of money, which must be employed as 'stock',
i.e. in such a way as to yield a surplus. The way which was
typical of the age and the man was that of foreign trade. In a
celebrated analogy which Adam Smith singled out for quotation
Mun likens foreign trade to a more ancient manner of creating
a surplus. 'For if we only behold the actions of the husbandman
in the seed-time when he casteth away much good corn into
the ground, we will rather accompt him a mad man than a
husbandman: but when we consider his labours in the harvest
which is the end of his endeavours, we find the worth and plenti-
ful encrease of his actions. 5 1 We sec here that the special pleading
of the East India Company director has become refined and
general; it is now a pleading for commercial capital as such.

Stock, Mun argues, is wisely employed in foreign trade when
it secures a favourable balance; this is the only means of bringing
treasure into England, a country that has no mines of its own.
Imports and home consumption of imported goods should be
kept down, exports and re-exports should be encouraged. In
regard to selling abroad, Mun appreciates the doctrine of c what
the traffic will bear'. For goods in which England has something
like a monopoly a high price may be charged; while for others
prices should be low enough to compete with rivals. Yet prices
should never be put so high as to discourage sales. Nor is it wise
to sell cheaply in order to drive out competitors and then to
charge excessive prices. Price-policy should be so devised as to
keep out competitors as long as possible. Mun is also well aware
of the existence of invisible trade. He urges that English trade
should be carried in English ships only, for this will secure ' the
Merchants gains, the charges of ensurance, and fraight to carry
them beyond the seas'. 2

England's Treasure is a clear synthesis and development of the
most advanced mercantilist theories, even though many ideas in
it still remain obscure. In his theory of money, for example, Mun
did not quite succeed in rising above his fellow mercantilists.
Although they had something of a quantity theory of money
(inherited from Oresme and Bodin and reappearing in Hales

1 T. Mun, England's Treasure by Forraign Trade, p. 19.

2 ibid., p. 9.

THOMAS MUN

and Malynes), none of the mercantilists ever fully succeeded in
developing it further into a theory of international prices. Their
great fear of a lack of bullion led them at best to a one-sided
appreciation of the relation of the price-levels of different
countries to their trade. They knew that a small amount of
money in England would make English prices low; so they went
on to argue that, in its trade with a country wealthy in money,
England might be forced to sell cheap and buy dear, 1 and so
lose its mercantile profit and presumably still further diminish
its stock of specie. This was the impasse into which the mercan-
tilists were led; it was left to classical economists to connect
prices, specie stocks, exchange rates, and the balance of trade in
a comprehensive theory of international trade.

Mun seems to have been dimly aware that the high prices
which a large amount of money would create might have an
adverse effect on the balance of trade. Evidently still anxious to
defend the East India trade, he protested that to keep treasure
in the country instead of using it in foreign trade was harmful.
'For all men do consent that plenty of mony in a Kingdom doth
make the natife commodities dearer, which as it is to the profit
of some private men in their revenues, so is it directly against
the benefit of the Publique in the quantity of the trade; for as
plenty of mony makes wares dearer, so dear wares decline their
use and consumption. . . . And although this is a very hard
lesson for some great landed men to learn, yet I am sure it is a
true lesson for all the land to observe, lest when wee have gained
some store of mony by trade wee lose it again by not trading
with our mony. 52 But further than this he did not go; anxious to
conciliate the landed interest, he immediately pointed out how
trade could bring it advantage too. 'For when the Merchant
hath a good dispatch beyond the Seas for his Cloth and other
wares, he doth presently return to buy up the greater quantity,
which raiseth the price of our Woolls and other commodities,
and consequently doth improve the Landlords Rents as the
Leases expire daily: And also by this means money being gained,
and brought more abundantly into the Kingdom, it doth enable
many men to buy Lands which will make them the dearer.' a In

1 E. F. Heckscher, Mercantilism, vol. ii, pp. 238-43.

2 T. Mun, England 3 s Treasure by Forraign Trade, p. 17.

3 ibid., p. &i.

COMMERCIAL CAPITALISM AND ITS THEORY

spite of this zig-zagging, which finally ends in a blind alley, Mun
shows here a much greater insight than other thinkers of the
time.

Very striking is Mun's analysis of the distribution of the world's
.bullion supply among the different countries. In chapter vi of
the book he discusses the reasons for Spain's loss of treasure
and concludes that, apart from war, bullion was leaving Spain
because she was importing so much from abroad. It was c the
disability of the Spaniards by their native commodities to provide
forraign wares for their necessities ' that forced them ' to supply
the want with mony'. 1 This cause was also operating elsewhere.
All Nations (who have no Mines of their own) are enriched
with Gold and Silver by one and the same means, which is
already shewed to be the ballance of their forraign Trade.'
Thus, whether countries have mines of their own or not, the
balance of their trade determines both ' the manner of getting,
and the proportion that is yearly gotten' 2 of the world's stock of
specie.

Another sign of Mun's advanced position in contemporary
thought is the fact that throughout his book there is evident a
much smaller regard for an accumulation of treasure for its own
sake than can be found in other mercantilist writings. Mun pays
the traditional lip-service to the need for treasure as a reserve for
emergencies and as the 'sinews of war', yet he insists all the time
on the outstanding importance of trade for which money is only
a means. Even in connection with the prince's war chest, he
does not fail to point out that this is valuable only 'because it
doth provide, unite and move the power of men, victuals, and
munition where and when the cause doth require; but if these
things be wanting in due time, what shall we then do with our
mony? ' 3

On other topics, Mun's contributions to economic thought
are not considerable. He joins earlier writers in attacking debase-
ment and repeats (in less precise form) Hales's analysis of the
redistribution of wealth caused by debasement. He condemns
the ' toleration for Forraign Coins to pass currant here at higher
rates than their value with our own Standard' as a method for
increasing treasure. It would provoke retaliation from foreign

1 T. Mun, England 9 s Treasure by Forraign Trade , p. 23.

2 ibid., p. 24. 3 ibid., p. 70.

THOMAS MUN

countries; it would cause an unjust distribution of wealth; and
if the discrepancy is large, it would result in a drain of treasure.
Retaliation is also a danger that leads Mun to object to the
statute requiring foreigners to spend their proceeds from exports
to England on the purchase of English goods. A restriction of
this kind imposed upon English merchants, the director of the
East India Company points out, would be disastrous. Like other
advanced mercantilists, it is free trade within the limits of regu-
lated companies that Mun really desires.

The few words on the revenue and expenditure of the
sovereign which Mun includes in his book are noteworthy only
for the views on taxation and on the limits to the accumulation
by the prince. The latter, Mun says, is set by the amount of
treasure which the favourable balance of trade has brought into
the country. A greater accumulation would deprive trade of its
capital. 'For if he [the prince] should mass up more mony than
is gained by the over-ballance of his forraign trade, he shall not
Fleece but Flea his Subjects, and so with their ruin overthrow
himself for want of future sheerings. . . . All the mony in such a
state would suddenly be drawn into the Princes treasure, where-
by the life of lands and arts must fail.' 1 On the former point,
although Mun regards all taxes as 'a rabble of oppressions', he
thinks that they are necessary. He foreshadows a later theory of
wages by saying that indirect taxes are not 'so hurtfull to the
happinesse of the people as they are commonly esteemed : for as
the food and rayment of the poor is made dear by Excise, so
doth the price of their labour rise in proportion'. 2

The only other important point raised by Mun is the differen-
tiation between 'general' and 'particular' balances of trade.
Mun uses it in his polemic against Malynes's foreign exchange
theory. Arguing that the determinant of foreign exchange rates
is the balance of trade, he shows that the exchange with any
particular country depends upon the balance of trade with that
country, while the position of the exchanges in general depends
upon the total balance of trade. 3 More significant, however,
than Mun's argument against Malynes is the fact that he takes
up an advanced position in a controversy which was very
important at the time. The aim of earlier systems for regulating

1 T. Mun, England's Treasure by Forraign Trade, p. 68.

2 ibid., pjt. 6 1 -2. 3 ibid., pp. 48-9.

COMMERCIAL CAPITALISM AND ITS THEORY

foreign trade was to achieve favourable particular balances.
England's imports from each country had to balance her exports
to it. And attempts were even made to balance the trade of each
English merchant. This idea of a 'balance of bargains', as
Richard Jones called it, 1 survived into the seventeenth century.
As a result of the mercantilist theory increasing attention was
given to trade statistics, but policy still remained concerned with
particular balances.

The Board of Trade was required by Parliament to consider
carefully the balance of trade with each particular country and
to advise on means for correcting unfavourable and securing
favourable balances/ The whole of trade policy, with its compli-
cated system of treaties, restrictions, and drawbacks, was devised
with this end in view. It led to France and Sweden being
regarded as bad customers. The former sold to England a large
amount of luxury goods, the latter iron and timber; but neither
of them bought much from England. Trade with them had
therefore to be discouraged. Spain, on the other hand, had a
great supply of bullion, and being devoid of industries had to
import English goods. Trade with Portugal was regarded with
particular satisfaction: wine was exchanged for cloth. Even as
late as 1 703 this way of viewing foreign trade found practical
expression in the Methuen Treaty, which almost excluded French
in favour of Portuguese wine.

Mun and Child, with their experience of the East India trade,
tried hard to direct attention to the problems of the general
rather than the particular balances. Mun's outline of all the
things which had to be taken into account in order to draw up
the balance of trade, 'the true rule of our treasure 3 , 2 shows that
he took a very advanced view of the make-up of international
accounts. Child too asserted that the true profit or loss which a
nation derived from any particular trade could not be ascer-
tained from a consideration of that trade alone. 3 But although
the balance of trade argument had won against that of the
bullionists (the prohibition of the export of specie was abolished
in England in 1663), they did not succeed in their other cam-
paign. The balance of trade theory was used for a long time to

1 R. Jones, * Primitive Political Economy in England ' in Edinburgh Review,
January-April, 1847, p. 428.

2 T. Mun, England's Treasure by Forraign Trade, p. 83.

3 J. Child, A New Discourse of Trade, p. 153.

THOMAS MUN

support rigid trade restrictions, and it was an important part of
the theory on which the colonial system was based. .

Gradually, however, the basis of trade regulation began to
change. Instead of arising from a desire to secure a favourable
balance which would bring treasure into the country, the
encouragement of exports and the restriction of imports acquired
a protectionist character. The creation of work and employ-
ment and the nursing of industries, both as an end in themselves
and as a means of strengthening the country, became the aims
of state policy. The transition to this late mercantilist phase was
not sudden. Professor Heckscher quotes instances of the work-
creation argument for protection in the fifteenth century in
Florence and in some English writings of about I53O. 1 Hales, as
we have seen, objected to the export of English raw materials
since it deprived English workmen of employment. Serra had
stressed the advantages of flourishing home manufactures. And
in English mercantilist writings the employment argument
becomes more frequent at the end of the seventeenth century. |

The importance of treasure (already somewhat diminished by
Mun) is still further reduced; and though commerce may still
be praised extravagantly, the emphasis is slowly shifted to home
industry as the real source of wealth. An interesting illustration
of this tendency is to be found in the writings of D'Avenant, who,
though a mercantilist, was not a merchant himself, and whose
writings again always contained a mixture of old and new argu-
ments. Having praised the calling of the merchant who enriched
the country, he is yet constrained to say, in his Discourses on the
Publick Revenues (1698), that though gold and silver are the
measure of trade, the source and origin of it are everywhere the
natural and artificial produce of countries; 'that is to say,
what their land, or what their labour and industry produces'. 2

Even earlier, Child had developed a theory of colonial
economy which was based exclusively on the employment
argument. 3 Colonization in general, he admitted, might have
harmful effects since it involved emigration. Like all mercan-
tilists of that period, Child was very much afraid of a loss of
population, a word which seems to have carried with it the idea

1 E. F. Heckscher, Mercantilism, vol. ii, pp. 122-3.

2 G. D'Avenant, The Political and Commercial Works (1771), vol. i, p. 354.
8 J. Child, A New Discourse of Trade, pp. 212-26.

COMMERCIAL CAPITALISM AND ITS THEORY

of employment. A small labour force in the days before the
large-scale introduction of machinery meant a low output. And
this, at a time when foreign trade was becoming increasingly
dependent on home manufactures, was equivalent to a reduc-
tion of exports. However, the evils of colonization could be
mitigated, Child thought, by compelling the colonies to confine
their trade to the mother country. Once that was done, emigra-
tion might, after all, yield an advantage, since it might create
more work at home.

As for the American colonies, Child did not think that they
had been an unmixed evil. It was doubtful whether, even in the
absence of the colonies, those who emigrated there would have
stayed in England. The Puritans would have gone to Holland
and Germany. Among the others, there were many rogues and
criminals who, if they had stayed at home, would have been
hanged. What was more important, in the West Indian planta-
tions one Englishman had ten natives working under him, thus
producing more than he would at home; and the combined
demand of these eleven (of whom only one man was an emigrant)
would keep at least four workmen employed in England. New
England, on the other hand, was not a useful colony since the
emigrants there did not give employment to perhaps even a
single workman at home. Thus the value of colonies depended
on their ability to act as exclusive markets for the manufactures
of the mother country, to supply in exchange raw materials and
other produce which would otherwise have to be bought from
foreign countries, and to form a reservoir for cheap labour.

The use of such arguments as these both in relation to colonial
policy and in support of a system of all-round protection shows,
on the one hand, how much capitalism had developed and, on
the other hand, in what theoretical difficulties the later mercan-
tilists were to find themselves. From the point of view of foreign
commerce alone the mercantilists were, as we have seen, led to
a growing demand for a greater freedom of trade. The decline of
the belief in state intervention, which will be discussed in the
next chapter, was already beginning with some of the later
mercantilist writers. D 5 Avenant, for example, thought that trade
was in its nature free and Laws to give it Rules . . . are seldom
advantageous to the Public'. 1 Yet the growth of industry and
1 Quoted in Heckscher, Mercantilism, vol. ii, p. 322.

THOMAS MUN

the changing character of commerce made them supply argu-
ments which led to an increase rather than a decrease of state
regulation.

In the practice of governments at the end of the seventeenth
and throughout most of the eighteenth centuries all-round pro-
tection and state regulation is in evidence. In that period, the
foundations of modern industry were being laid. The methods
used were tariffs or embargos on imports, prohibitions of the
export of tools and skilled craftsmen, the encouragement of the
import of raw materials or of their production at home, the
supervision of the quality of products, and subsidies to those
who were developing new industries. There might still be con-
cern with purely commercial problems. Navigation Acts might
still claim not only to strengthen the king's navy but also to
increase the country's mercantile profit by confining the carry-
ing trade to the country's own ships. But the real meaning of
the growth of industrial and commercial regulation on a
national scale in the hundred years preceding the Wealth of
Nations is to be found in the rise of industrial capitalism. Mer-
cantilist theory and policy had done their work. They had
abolished medieval restrictions and had helped to produce
unified and strong nation states. These in turn became powerful
instruments for fostering trade until early capitalism developed
into mature industrial capitalism. In countries like England and
France where this process was first completed state power was
at once turned to a new use. It had to help industry to achieve
economic power. But earlier mercantilist ideas did not dis-
appear with the destruction of the rule of commercial capital.
Down to the present day they all reappear from time to time in
various guises as symptoms and weapons of economic conflict.

CHAPTER III

The Founders of Political Economy

(/) The Political Philosophers

In the eighteenth century the development of modern industrial
capitalism was greatly accelerated. Its theory, embodied in the
works of the classical economists, comes to maturity in the period
of forty years that separates Smith's Wealth of Nations and
Ricardo's Principles. But its roots reach back almost two centuries.
At least three streams of thought accompany the transition from
commercial to industrial capitalism, and, together with that
economic development, help to mould classical theory. The
first of these is philosophical: the development of political
thought from its canonical origin to philosophic radicalism.
We have already seen the beginnings of the second; it is the
progress of English economic thought from the later mercan-
tilists onwards. The third foundation of political economy is of
French origin, the physiocratic system which was developed by
a number of thinkers in eighteenth-century France. The first of
these contributions has been expounded so frequently and its
history is available in so many text-books that it is not necessary
to give more than an outline of it here. A particularly brilliant
analysis of the philosophical origins of modern liberalism has
recently been made by Professor Laski; 1 readers are referred to
this for a fuller account.

The freeing of thought from the dominance of the Church
was conducive to the growth of mercantilism, although it was
ultimately to be turned against mercantilist theory and practice.
We have seen that economic progress had destroyed the authority
of the Church in worldly matters. Economic activity was less
and less carried on according to the theological laws of what

1 H. J. Laski, The Rise of European Liberalism (1936).

THE POLITICAL PHILOSOPHERS

'ought to be'. And although economic thinking also tended to
become positive, the earlier mercantilists were still anxious to
preserve the normative element; in their writings the analysis of
what is and the precept of what ought to be are still inextricably
bound together. In the field of political thought, however, the
emancipation from theology is more radical.

Some thinkers to whom this emancipation is due were also
concerned with economic matters/ Bodin, for example, whom
we have already met as an enlightened economist, was one of
those who made the relation of man to man, instead of the
relations of man with God, the foundation of social enquiry'. 1
But the main impact of the new modes of thought fell on the
theory of the state. The foremost influence in this direction was
that of Machiavelli. He was able to observe the decay of medieval
society in what was perhaps the most favourable environment,
that of sixteenth-century Italy. There the substitution of secular
for ecclesiastical authority and the struggle for national unity
took the most violent forms. Political leadership became depen-
dent upon an unscrupulous use of all the means of worldly
power. Only^brytQ force combined with intrigue and oppor-
tunism could give power to a prince and enable him to maintain
it. Although it 'Was an experience which every one was sharing,
it was the genius of Machiavelli which made the political
development of his day the starting point for a new method oi
approach to social and political questions. In an oft-quoted
passage he decried those who had endeavoured to build an ideal
republic of their fancy. One had to be aware, he argued, of the
great difference between man as he was and as he ought to be;
to try and be virtuous in a world inhabited by so many who were
without virtue was to court ruin. In his study of the actions of a
wise prince, therefore, Machiavelli said that necessity not virtue
was to be the guide. 2 As the late Professor Brentano has pointed
out, Machiavelli was guilty of many errors. 3 He had no idea of
the forces which fashion history; social development was to him
only the work of great men. His protest against the ethical was
so violent that it was bound to lead to a reaction. He minimized
the power of traditional ideas of right conduct, and thought

1 H. J. Laski, The Rise of European Liberalism, p. 19.

2 The Prince, passim.

3 L. Brentano, Ethih nnd Volkswirtschajt in dei Geschichte (1901), pp. 23-4.

THE FOUNDERS OF POLITICAL ECONOMY

exclusively in terms of the princes of Renaissance Italy. He
could not foresee the rise of a new, non-theological, ethical
discipline which was to continue to exercise some influence on
economic thought. Nevertheless his influence, in spite of initial
opposition, was immense/ Henceforth social philosophy was
based upon a rational and material foundation. v

Even greater perhaps was the vision of Bodin. He too was
impressed with the problem of authority which the decay of
Church power, the religious wars, and the struggle of conflicting
civil units had raised. In Les Six Livres de la Republique (1576) he
laid the foundation for the theory of the need for a central
sovereign authority. This he wanted to be secular. In other words,
he pleaded for the modern sovereign state which was to be the
source of all law and order. Yet, as Professor Laski has shown, 1
Bodin was conscious of the danger of unrestricted authority.
Divine law and natural law, Bodin thought, should prescribe
the broad limits of the state's power. His emphasis on the rights
of private property, as his belief in the beneficence of free trade
which has already been mentioned, show that he was sensing a
possible antithesis between state and society and was groping
for a theory which would give 'some place for the consent of
subjects to the actions of authority'. 2 He was thus a forerunner
of liberalism in a much more direct sense than the natural-law
philosophers of the seventeenth century.

In spite of important differences, the England of the sixteenth
century witnessed a spiritual revolution similar to that of Italy
and France epitomized in Machiavclli and Bodin. The forces
which had made commerce predominant were freeing men's
minds from the fetters of accepted belief and were opening a
new era of speculation and experiment. In almost every branch
of science the new ways of life were presenting new problems.
And whether they were inspired directly by the needs of expan-
ding commerce or only indirectly through the general zest of the
new empirical materialism, scientists began to provide the
answers. In astronomy, mathematics, physics, and optics, and
in the biological sciences and medicine, advance was amazing.
Its great monument, in spite of all the theological interests

1 H. J. Laski, The Rise of European Liberalism, pp. 46-8.

2 ibid.

THE POLITICAL PHILOSOPHERS

of its author, was Newton's Principia. 1 Lessing has well said
of it:

Das Alter wird uns stets mil dem Homer beschdmen;
Und unsrer %eiten Ruhm musz Newton aufsich nehmen. 2

Among the social thinkers of this century and the next, no one
expressed better the spirit of the age or was of greater signifi-
cance for subsequent development than Bacon. *He laid the
philosophical foundations for experimental science; and he
carried the method of rational inquiry from the natural sciences
to the study of man and his community. With the same practical
outlook as Machiavelli and sharing his frank pursuit of power,
Bacon gave the philosophical imprimatur to the authority of
the state. His very tolerance of the Church, which he recog-
nized as a useful instrument in the hands of a strong state, shows
the extent to which he had freed himself from the remnants of
medievalism. His eulogies of the monarch may have been
inspired by the desire for personal advancement; they were
none the less a sincere reflection of his fundamental belief in the
secular authority. Monarchy, he thought, was a natural institu-
tion and obedience to it a natural duty. The doctrine of the
divine right of kings was thus upheld and absolutism given a
powerful theoretical support. To the absolute sovereign was
assigned the role of supreme judge, who would not be fettered
by prejudice or laws and who would stand above the warring
social factions. Here is the political quintessence of the age of
transition to capitalism; here is the authority that was to take
the place of the shattered feudal system.

This change found an even clearer expression in the seven-
teenth century in Bacon's companion, Thomas Hobbes. For-
saking the concept of the divine right of kings, he gave yet a
new and more powerful interpretation to Baconian ideas in
the principle of the sovereignty of the state. Although he based

1 Professor Hessen in his article ' Economic and Social Roots of Newton's
Principia* in Science at the Cross Roads (ed. Bukharin, 1931), has made a very
interesting analysis of the relation of Newton's discoveries to the economic
needs of commercial capitalism. Although Professor G. N. Clark has been
able to show ('Social and Economic Aspects of Science in the Age of Newton'
in Economic History, vol. iii, pp. 362, sqq.) that some of Hessen's conclusions
are based on slender foundations, the general impression that is left still
supports Hessen's main thesis.

2 G. E. Lessing, Santlliche Werke (1836), vol. i, p. 243.

9 1

THE FOUNDERS OF POLITICAL ECONOMY

his analysis on something like a voluntary association of indivi-
duals who agreed that one or more of their number should
represent the common will, he laid great stress on coercion as
an essential element of state organization. For once the state
had arisen, it contained an absolute sovereignty to which complete
obedience was due. Kings, however, did not possess their power,
no matter how absolute, by virtue of divine right. God was the
final judge of their rule, but their power on earth came from the
very nature of their office. Any ruler, lawful or otherwise, was
possessed of the fundamental attributes of kingship.

Hobbes was more akin to Bodin than to Bacon in his greater
freedom from the theological argument for sovereignty; and he
worked in the same direction of religious emancipation as
Spinoza. Like the latter, he was recognized by his contem-
poraries as a foe of belief. And since he had also given a theore-
tical basis to the claims of usurpers of sovereignty, Church and
king were united in opposing him. What made him equally
suspect to the opponents of the king's power was the fact that,
unlike Bodin, he continued the Baconian disregard for laws and
respect for indivisible and unrestricted sovereignty. Hobbes's
belief in a power above the conflicting interests of social classes
was both his weakness and his strength. Hisj^vas ajhcory which
was inevitable in, an age when social conflicts were of all-
absorbing interest and were for the first time rationally viewed,
and when economic forces were pressing for the establishment
of a^strong^central authority. It was limited by its own immc-
"cKate experience, "and within a short time it was to receive a new
twist which completely altered its significance.

Yet Hobbes's importance in the growth of the new society and
its thought was very great. His basis was individualist. Like
Machiavelli, he frankly recognized the individual impelled by
self-interest as the unit from which to start. The contract by
which individuals had submitted to the terrific stranglehold of
the sovereign state Hobbes's Leviathan was based on this
self-interest." J^^jal^ol^^ was a method of obtaining a

greater good than could be provided by the life of primitive
man 'solitary, poor, nasty, brutish, short 5 . If the Leviathan
coerced, it did so in the interests^of J.he ruled themselves. Here,
in spite of the central doctrine of state autEority (in harmony
with the practice of state regulation of economic life), was the

THE POLITICAL PHILOSOPHERS

beginning of utilitarianism. And in apparent contrast with
Hobbes, yet in logical development of the principle immanent
in his system, utilitarian philosophy was henceforth to progress.

Its next advance is contained in the work of John Locke.
We shall shortly meet him again as an economist of the transi-
tion from mercantilism to the classics. In the sphere of political
thought his position is more significant. He synthesized and
carried further all the elements of past thought that could be
made to compose a political philosophy fit for the age when
capitalism was already certain of victory. The social contract
which in Plato had made men build the city, in Hobbes submit
to the Leviathan, and in Bodin had established and set the limits
to central authority, is found again in Locke. Withk,and
again in a significant new guise, is the doctrine of natural Jaw.
Begi nriing~Tn~ Stoic and Epicurean philosophy, it had found a
place in Roman Law and in the Canonist doctrine of natural
justice. Now it was being transformed into a recognition of the
'natural' instincts of the individual; and the social contract that
established civil government became dependent entirely on the
measure of consent of those who were governed.

Realization of self-interest as the motive force of conduct is
inherent in Locke's entire political philosophy. But to him it
was not the medieval Church, nor Bacon's king of divine right,
nor yet Hobbcs's superhuman Leviathan that was to make an
orderly body out of the individual atoms. Through his experience
as administrator of England's colonial possessions Locke had
come into contact with trade. And the orderly voluntary associa-
tion of merchants in commercial ventures that he had seen in
the regulated companies appeared to him the natural form of
organization for purposes of government. It was, therefore, in
constitutional monarchy that rationalism found its political
expression. Freedom, he thought, must only be restricted in the
interests of preserving it. Its basis was property, acquired by
industry and reason; and entitled to the security which the state
could give. Here is a philosophy suited to the new owners of
economic power. It is the embodiment of the victory over the
Middle Ages. But it is more than that; it is a symptom of the
decline of state power which commercial capital had created at
an earlier stage of its war against feudalism. It is an indication
of the development of the antithesis inherent in the relation

THE FOUNDERS OF POLITICAL ECONOMY

between capitalism and its first political expression. It is the first
chapter of liberalism, the philosophy of triumphant capitalism.

(2) The Growth of Industrial Capitalism

The appearance of Locke's philosophy at the end of the seven-
teenth century shows that the state was beginning to be seen for
what it was: the creature of economic power no less than its
temporary master. The change of economic policy was less
rapid than that of political philosophy. Nevertheless, at the end
of the seventeenth century state regulation of economic life was
breaking down. Its decline was by no means uniform in all
countries. Indeed, we shall see that mercantilism reappeared
with additions and distortions in economically backward
countries like Germany, when in England and France it was
already a thing of the past. But the progress of unrestricted
individualism was uneven even in the countries which took the
lead in the transition to modern industry. Freedom from the
fetters of the state was achieved in some directions in the last
years of the seventeenth century. But more often liberal philo-
sophy did not win its decisive victory until well into the nine-
teenth century.

Many of the restrictive regulations of domestic industry were
abolished in England after the middle of the seventeenth century.
Others, regulation of wages, for example, did not finally dis-
appear until 1813. Acts regulating apprenticeships and the
conditions of production in many industries became inoperative
with the expansion of production and the growth of the factory
system; and when Parliament came to abolish them in the
nineteenth century it was only registering an accomplished fact.
Within the system of guilds considerable changes began to take
place. A complex differentiation was growing up which led to
the appearance of many conflicts of interests. The older type of
export merchant company, descended from the guilds of the
fourteenth and fifteenth centuries, was being displaced by the
great colonial companies. There were also the newer capitalist
corporations, dominated either by wholesale merchants or by
semi-industrial capitalists of the Verleger type, and their influence
was growing. The smaller local urban guilds of small master

THE GROWTH OF INDUSTRIAL CAPITALISM

craftsmen, on the other hand, were declining in importance
owing to the competition of domestic industry controlled by the
Verleger. Local regulation was, therefore, continually diminishing
in power in favour of national regulation. 1

The decline of the regulation of foreign trade took place with
a time-lag. The trade-treaties, which had at one time been
protectionist and restrictive instruments, were capable of a
different use. Once economic interests were strong enough,
treaties were concluded for the purpose of expanding trade
between the countries concerned. Free trade suffered many
set-backs, but over the eighteenth century as a whole it was
undoubtedly progressing. The earliest symptom of the new
spirit of trading was the decline of the regulated companies.
Their monopoly rights were undermined by the growth of trade
itself, which gave a scope to independent merchants, 'inter-
lopers' or, more significantly, 'free traders', as they were called.
By the end of the seventeenth century the regulated company
was ceasing to be the dominant form of organization in inter-
national trade. The Eastland Company began to lose its privi-
leges in the Baltic trade in the last quarter of the seventeenth
century. The Merchant Adventurers were deprived of their
monopoly of the cloth trade within their area in 1689. And most
of the other trading companies shared their fate at about the
same time. Only the East India Company, which was in a
different position from the rest, was able to retain monopoly
rights much longer. But even that lost its exclusive trading privi-
lege in India early in the nineteenth century.

Thus the decline of state intervention went hand in hand with
the disappearance of monopoly and the growth of competition.
The cause which produced both these tendencies and which was
powerfully reinforced by them was the growth of industrial
production*. The changes of what is known as the industrial
revolution were of such a spectacular character that they have
obscured the no less important industrial advances of the seven-
teenth and early eighteenth centuries. If the latter were slower
to develop and much smaller in extent than the former, they were
nevertheless more important in kind. Professor Nef 2 has shown

1 G. Unwin, Industrial Organization in the Sixteenth and Seventeenth Centuries
(1902). Gf. particularly chs. ii and iii.

2 J. U. Nef, The Ris* of the British Coal Industry (1932), vol. i, pp. 165-89.

THE FOUNDERS OF POLITICAL ECONOMY

that there was something like an industrial revolution going on
in the sixteenth and seventeenth centuries. By 1700 there were
in existence in England a number of flourishing industries (for
example, mining, salt, copper, brass, and ordnance, alum and
nail-making) run, in part at any rate, on a factory basis and
controlled by fairly large capitalists. If, by the end of the
eighteenth century, the invention and application of labour-
saving machinery and the use of inanimate power were beginning
to spread at a staggering pace, it was because the specifically
social framework of modern industry had already been built at
the beginning of the eighteenth century.

The scientific discoveries of the seventeenth century, which
were the allies of commercial capitalism, could not develop
without the spread of scientific inquiry in a more general sense.
Within a hundred years this was to surpass its narrower utili-
tarian bounds; though even then it remained essentially prac-
tical. In the meantime, however, invention was not dormant;
it was only the by-product of industry itself. A large number of
improvements of manufacture precede the flood which was the
industrial revolution. In the extraction of minerals and the
refining of metals, in the production of textiles and the building
of ships, new methods were introduced; and wind or water power
were increasingly applied in place of human or animal energy.

The comparative slowness of this development illustrates the
interrelation of technical and social-economic factors. Technical
advance was held up by the restricted markets of the earlier
mercantilist era. The ' fear of goods' which characterized it found
its counterpart in the opposition of state and public opinion to
improvements which might have expanded production. In an
age of commercial privilege vested interests were strong enough
to oppose the introduction of new processes which threatened
their monopoly. On the other hand, technical improvement
would have to wait for a larger market before it became profit-
able. That larger market was produced by commercial capita-
lism itself. In the eighteenth century commercial expansion had
both undermined existing restrictions of competition and stimu-
lated invention. This, by improving and expanding industrial
production, was to destroy the very basis of commercial capita-
lism. It found wider markets and encouraged producers to
produce more and more cheaply. It also encouraged them to

THE GROWTH OF INDUSTRIAL CAPITALISM

improve their production and then to go in search of greater
demand by showing them the latent possibilities of increased sales.
The merchant created the industrialist. Very often he turned
manufacturer himself. And his example stimulated recruitment
of the homines novi of capitalism from the land and from domestic
industry. "Already in the early eighteenth century the organiza-
tion of production was changing! It has long been recognized
that the putting-out system was at that time giving way to the
concentrated production of ihc factory system. Every fresh piece of
research on that period strengthens the view that this transition
started earlier and was more rapid than has hitherto been
supposed. The form of production of the mercantile era (in
which the commercial capitalist took the lead by buying raw
materials and sometimes equipment, putting it out into domestic
workshops, and selling the products in ever-widening markets)
might survive for a long time in some districts, countries or
branches of industry. But it was no longer typical; the trend was
definitely in the direction of factory production. In mining and
brewing, in the manufacture of pottery and hardware, the
factory was already leading the way. Wedgwood's Etruria and
Boulton's works at Soho arc now seen not as exceptions but as the
pattern, perhaps still rare, to which industry as a whole was
moulding itself.

* The change in the status of labour was akin to this transforma-
tion of the merchant into the industrialist. For commercial
capital to become industrial capital it was essential for it to find
labour, land, and raw materials as purchasable commodities.*
The last two had been marketable long before the eighteenth
century. The sale and purchase of goods, including raw mater-
ials, had become habitual before the beginnings of modern
industry; and the commercialization of agriculture and the
breakdown of the feudal system had gradually made land into
a marketable good also. In regard to labour the change was
slower; and it was in this respect that the eighteenth century
completed the most important of the social transformations
which capitalism required.

The process by which a class of wage- workers was created is
well-known. 1 Its beginnings are in thq fourteenth century, when

1 The most brilliant short account of it is that given by Marx in Das
Kapital, vol. i, ch. xxiv.

97 D

THE FOUNDERS OF POLITICAL ECONOMY

the manorial system was breaking down. Serfdom had virtually
disappeared and was being replaced by a system of small,
mainly independent, farmers and a small number of wage-
labourers. The enclosure movement made havoc of this system;
it deprived farmers and labourers of their land, cottages, and
common rights and laid the foundation for the modern prole-
tariat. The expropriation of Church lands during the Reforma-
tion, the commercialization of farming, which coincided with
the expansion of trade, and the constitutional changes after the
Restoration, which set the seal on the disappearance of
feudalism and established the modern system of public finance,
pushed this development still farther. Merchants and financiers
viewed this transformation with favour. By destroying the feudal
titles to property and making the landed interest commercially
minded, it helped to establish their own status, that of the
bourgeoisie. By its expropriation of the yeomen, it created a
supply of labour which the industry of the later mercantilist
period needed.

With the transition to industrial capitalism in the eighteenth
century this movement received a fresh impetusfThe amount of
capital required for industrial enterprise increased with the
growing complexity of the manufacturing process. Few crafts-
men were capable of competing effectively either against the
cheaper production made possible by a greater use of capital
equipment or in markets wider than their immediate environ-
ment. If they did not work on their own material but only to
the order of a merchant they became increasingly dependent on
him. Sooner or later, when the few tools they owned had become
out of date compared with new processes and equipment, they
and their apprentices would succumb to the apparent security
of being regular wage-earners. They might remain in their own
domestic workshop for a time; soon however, the factory would
gather them. There they would be joined by others recruited
from the rural population dispossessed by successive enclosure
movements (which in the eighteenth century had acquired
parliamentary sanction) .

* The whole of this process created not only industrialists and
wage-earners; it supplied also the market for capitalist industry.
The .destruction of the domestic workshop of both town and
country and the commercialization of ferming created the

THE GROWTH OF INDUSTRIAL CAPITALISM

demand which absorbed the products of factory industry. On
the basis of this internal market the growth of which com-
pleted the separation of agriculture and industry industrial
capitalism could once again turn to foreign trade, which had
been one of the bases on which it developed.

The relation between the capitalist and his wage-worker was
at first regulated as it had been during the era which knew only
of merchants, master craftsmen, journeymen, and apprentices.
Custom, remnants of guild regulation, and wage legislation
were the determinants of wages and conditions in the early days
of the factory system. But they became too rigid for the needs of
expanding industry.

The mercantilists, if they held any wage theory at all,
believed in an economy of low wages and in strict wage regula-
tion. This was appropriate to merchants engaged in exporting
to markets where they had to meet foreign competition. It was
also in harmony with the views of some mercantilists on the
need for restricting home consumption. But the reliance on
regulation of the labour market became inadequate once com-
petition for labour arose between different industries. Not that
industrial capitalism began immediately to act on an economy
of high-wage principle. But supply and demand became now
the proximate determinants of the relation between capital and
labour. "The guilds lost what little power they had preserved,
customs were lightly discarded, and legislation to regulate
mobility of labour, and to some extent wages, tended to dis-
appear. The process was more rapid with regard to mobility of
labour; and wage regulation did not disappear entirely until the
early part of the nineteenth century. But by then the progress of
invention and the enclosure movement had created a labour
surplus, and the old regulations were appealed to for the purpose
of upholding a minimum wage.

On the whole, however, bargaining between capitalist and
worker tended to become the common method of settling the
labour contract. It was the result, as we have seen, of a twofold
process: one part of it was the concentration of capital in the
hands of the industrialist, who owned the more complex means
of production now required; the other was the driving out of the
urban and rural worker from a place of independence in the
scheme of production, together with his legal emancipation

THE FOUNDERS OF POLITICAL ECONOMY

from the ties of guilds and landlords. The worker was now free
to enter into a contract; he was also forced by the growing com-
plexity of production to sell his labour power in the market in
order to earn his livelihood. By the middle of the century the
process of establishing a free market for labour had gone far
enough for Dean Tucker to describe as ' absurd and preposterous '
any attempt by a third person ' to fix the price between buyer
and seller 5 . Regulations could not be enforced if they were not
supported by the willingness of the contracting parties. More-
over, no laws could be devised that would allow for 'plenty or
scarcity of work, cheapness or dcarness of provisions, . . . good-
ness or badness of the workmanship, the different degrees of
skill . . . and the demand or stagnation at home or abroad'. 1

Side by side with this free market there began to develop the
typical modern labour problems. As early as the second half of
the seventeenth century there appeared examples of working
men organizing themselves in order to improve their position.
Sometimes they readopted the outward practices of guilds. They
stressed the functions of the friendly society, attempted to regu-
late quality of production, and maintained an elaborate ritual.
But gradually their real character became more obvious. They
turned into associations whose main task was to fight the
employers on wages and conditions. It was against these com-
binations, the forerunners of the modern trade unions, that
Parliament enacted its Combination Laws.

(3)

Economic thought soon began to respond to all these changes;
though it took a hundred years to become fully aware of the
revolution it was witnessing. Corresponding with the change in
the quality of capitalism there took place a change in the
interests of thinkers.* Attention was diverted from trade to pro-
duction: from the relation of merchant and financier to that of
capital and labour. Of greatest significance in this change of
approach and content of economic thought is the emergence of
a new problem of price and value'. Hitherto, this problem was
conceived almost exclusively in terms of exchange. With

1 Quoted by H. J. Laski, Ttie Rise of European Liberalism) p. 176.

100

PETTY

Aristotle and the schoolmen it had been a part of the problem
of justice: in what manner must exchange take place in order
that there should be a just equivalence? This was the question
they posed and answered in the doctrine of the 'just price'.

In the mercantilist era both question and answer were different.
With all the obscurities and individual variations, a common
approach underlay mercantilist theory on the question of price.
The approach was that of the merchant. What is the best
means for making the country rich? Since wealth is the same
as commercial capital (represented by money) the answer is: by
making profitable sales. Profit can only arise upon alienation, i.e.
in the act of exchange, when the seller sells more dearly than
he has bought. All the mercantilist conclusions relating to foreign
trade and their limited and distorted view of the relation between
money and prices are the results of this approach. -

With the growth of industry, capitalist production instead of
capitalist exchange became the chief concern of the economist.
The process of production, which in its new form involved a
changed social relationship, was seen to be the core of economic
activity. It was no longer possible to insist that wealth, in a
social sense, was created by exchange, that value (i.e. exchange-
value, which is the attribute of social wealth) and the profit by
which wealth was increased arose in exchange. The problem of
wealth and value was reformulated and answered anew; and,
although the precision of both formulation and answer increased
only gradually, until they reached their most refined form in the
classical system, their quality was now always the same.

This development in economic thought is roughly the same
in a number of countries. With minor though interesting varia-
tions, the problem of value becomes the centre of analysis in
England, Italy, and France, and thinkers of all three countries
provide solutions in similar terms. In a larger book than this the
ideas of Montanari, Davanzati, and Galiani in Italy and of
Boisguillebert in France would deserve detailed treatment; and
so would those of Benjamin Franklin, who was as astute in
economic as in other scientific matters. Their omission may be
justified on the ground that it was in England that the seed of
these founders bore its finest fruit. That part of the French
contribution which is of a somewhat different character will be
discussed separately. .

101

THE FOUNDERS OF POLITICAL ECONOMY

* The most important, as well as the earliest, English economist
who prepared the ground for the classical system is Sir William
Petty (1623-87). He has justly been called the founder of
political economy. l The son of a poor weaver in Hampshire,
he had an extraordinarily varied career which made him in
turn cabin-boy, hawker, seaman, clothier, physician, professor
of anatomy, professor of music, surveyor, and wealthy land-
owner. The formal education which he had received at a Jesuit
college in France and at Oxford was richly supplemented by
friendship with the leading scientists and men of letters of the
day. Petty was a friend of Pepys and Evelyn, and a member of
the company of learned men who met in London and in Oxford
and later became the Royal Society. He was a charter member
of the council of this body. The story of his life told by Lord
Fitzmaurice and the short account given by the late Professor
Hull in his introduction to Petty's economic works can be used
to explain to a large extent the extraordinarily advanced place
which Petty occupies in the history of economic thought. , His
freedom from purely mercantile interests, which distinguishes
him from other seventeenth century economists, his unusually
wide experience of mert and affairs particularly through his
part in the Down Survey of Ireland and the distribution of land
to Cromwell's soldiers and, above all, his association with the
leaders of experimental scientific thought, give to his economic
writings a zest and breadth of vision which was not to be sur-
passed for a hundred years.

* In his Political Arithmetick, written probably in 1672 and
published in 1690, Petty states explicitly a new approach to
economic inquiry which he knows to be still unusual. 'Instead',
he says, 'of using only comparative and superlative Words, and
intellectual Arguments, I have taken the course ... to express
myself in Terms of Number., Weight, or Measure; to use only
Arguments of Sense, and to consider only such Causes, as have
visible Foundations in Nature? 2 Petty truly adhered to this
manifesto of empiricism; and his claim to fame is generally con-

1 Both by Marx, in at least three places : ^ur Kritik der Politischen Okonomie,
p. 33; in Engels' Anti-Duhring (1928), p. 247; and in Theorien tiber den
Mehrwert (1921), vol. i, p. i; and by Brentano Ethik und Volkswiitschaft in
der Geschichte, p. 32.

2 The Economic Writings of Sir William Petty (ed. C. H. Hull, 2 volumes,
1899), vol. i, p. 244.

I O2

PETTY

ceived to rest on the part he played in the foundation of a
science of statistics. There can be no doubt that Petty is rightly
regarded as the first to develop this sister discipline of political
economy. Not only did he show by his own practice and precept
the manner in which data should be collected and marshalled;
he did not neglect the wider functions of statistical inquiry.
Throughout his Political Arithmetick and in his other statistical
papers he set factual research in its proper place in relation to
theoretical analysis.

More important, however, and more interesting for our pur-
pose are Petty's contributions to economic thought. His work in
this respect, apart from some scattered observations in the
Political Arithmetick, is contained mainly in A Treatise of
Taxes and Contributions (1662), in Verhum Sapienti (1664),
in the Political Anatomy of Ireland, written in 1672 and pub-
lished in 1691, and in Sir William Petty's Quantulumcumque
Concerning Money, written in 1682 and published in 1695.
- Petty's modern editor has implied that the particular avenues
through which Petty approached economic problems (public
finance and the coinage) distinguish him sharply from the
preoccupations of classical and modern economists. He has also
suggested that since Petty was a disciple of Hobbes (a fact
which seems well established by Petty's insistence on the
sovereignty of the state) yet not a mercantilist proper, he should
be classed with the German cameralists the pseudo-economist
advisers of absolute monarchs. Such a judgement is based on
misconception and must seriously interfere with a just estimate
of Petty's position in the history of economic thought.

It is true that Petty shared Hobbes's political philosophy.
But the indirect approach which he adopted to the important
economic problems of wealth and value was itself an expression
of the changes in social and political relations that had taken
place as an indispensable part of the development of industrial
capitalism. His interest in state finance is conditioned by the
fact that feudal methods of raising revenue had disappeared
and had been replaced by a system of national taxatioji. To
any one not connected with foreign trade who was anxious to
elucidate the principles of economic activity, there was at that
time no more obvious approach to economic problems than
that of the methods 0f raising and spending the revenue of the

103

THE FOUNDERS OF POLITICAL ECONOMY

state. The problems which these presented raised the questions
of value and wealth in their most acute form.

The Treatise on Taxes seems to be a straightforward dis-
cussion of the sources of public revenue, the forms of public
expenditure, and of the best means of raising the one and
disbursing the other/ Petty's theory of public finance is simple
and need not detain us.* He agrees with Mun in regarding taxa-
tion as inevitable. But he feels that princes ought not to Tie
"'extravagant* Though they might be forced to raise more by
way of taxes than they needed, in order to create a reserve for
emergencies, they should not do so too often since they would
be withdrawing money from the productive circulation of their
subjects! The money which the king has raised could, if wisely
spent, stimulate trade and industry; it wo'uld thus return in
increased measure to the people's pockets'. Petty urged economy
in the running of the state's main services, defence, administra-
tion, justice, and the 'Pastorage of men's souls'. He condemned
expensive wars and the maintenance of supernumeraries, though
he was willing to support the expenditure of public money in
order to provide for those who would otherwise be unemployed
lest, as he said, they 'lose their faculty of labouring'. 1

Petty's views on the raising of the revenue are much coloured
by Hobbes's philosophy. He implies throughout a frank recogni-
tion of individual self-interest and a high regard for property as
the determinant of status. The state exists to protect the indivi-
dual's property, and the individual has to be prepared to
contribute towards the expenses of the state. That contribution
should be in proportion to the property, the benefits of which
the people enjoyed under the protection of the state. Petty
realized that people were not always ready to recognize the
utilitarian nature of taxation. They refused to pay because they
thought that the king was extravagant or because they felt that
they were unjustly assessed compared with their fellow tax-
payers. "Taxation should therefore be so devised as to leave the
relative distribution of wealth unchanged, for Met the Tax be
never so great, if it be proportionable unto all, then no man
suffers the loss of any Riches by it'. 2 It is impossible to institute

1 The Economic Writings of Sir William Petty (ed. G. H. Hull), vol. i,
p. 60.

* ibid., p. 32.

104

PETTY

such a system of taxation if c for not knowing the Wealth of the
people, the Prince knows not what they can bear; and for not
knowing the Trade, he can make no Judgment of the proper
season when to demand his Exhibitions'. 1 The conclusion for
the statistician is obvious.

It is from this point that Petty is forced to plunge into the most
intricate of all his economic analyses. He sets out to examine the
different ways in which taxes may be levied. 2 'He rejects the
setting aside of Crown lands, from which the sovereign is to
draw his revenue. A better way is to levy a tax on the whole of
the rental revenue; this would give the king 'more security, and
more obligees". And the only thing to guard against is that the
trouble and expense of this method of collection should not be
considerably greater than that of administering the Crown
domain. Petty had no doubt that in a new country, c before men
had even the possession of any Land at all' (like Ireland, where
it was in force), such a system of taxation was the best that could
be devised. Future buyers of land would make allowance for
the rent tax; taxation would be in just proportion; and not only
the owners of the land, 'but every man wildcats but an Egg, or
an Onion of the growth of his Lands; or who useth the help of
any Artisan, which feedeth on the same', would pay his con-
tribution. In old countries, however, great difficulties would
arise. New leases would take into account the new tax, while
old leases would continue at the old rent. Some landlords would
gain and others lose. The consumers would lose in any case,
since the prices of produce would rise whether the tenant
farmer who produces was paying the old or the new rent; only
the farmer would make a large profit. At this stage the analysis
of taxation and its incidence peters out and the discussion
leads to a theory of value.

It is necessary to piece together a large number of separate
statements in order to get a clear picture of Petty's analysis.
When/it is summarized a logical structure can be built which
includes a theory of value and wages, a theory of profit or
surplus (which is in effect a theory of rent) , a discussion of the

1 The Economic Writings of Sir William Petty (ed. C. H. Hull), vol. i,

P- 34-

2 ' Treatise on Taxes and Contributions ', ch. iv, Economic Writings, vol. i,
pp. 38 sqq.

I0 5

THE FOUNDERS OF POLITICAL ECONOMY

value of land, and a theory of interest and foreign exchange.
These steps do not follow in this order in Petty's writings. There
are difficulties to negotiate and obscurities to ignore. But the
final picture does not lack a measure of internal consistency.

Petty's theory of value is contained in a short digression on
rent, which follows his theory of the rent-tax, in a discussion of
the real and the political price of commodities at a later point in
his Treatise and also in some remarks on wages in the Political
Anatomy of Ireland. For an understanding w of this theory it is
important to appreciate the emphasis which Petty lays on labour
as the source of wealth.* Although he was not as explicit on this
point as Adam Smith, he did nevertheless leave little doubt that
he had travelled a long way from the conception of the mercan-
tilists. ''Labour', he said, 'is the Father and active principle of
Wealth' as Lands are the Mother. 5 l And when in another place
he spoke of the 'Wealth, Stock, or Provision of the Nation', he
thought of it as 'being the effect of the former or past labour'* 2
Petty also realized that the typical form in which labour
appeared in the new social structure was as divided labour.
His account of the advantages of division of labour lacks none
of the ingredients of Adam Smith's celebrated description. He
takes the making of a watch as his example; and he shows that
cheapening and improvement of production, which division of
labour begets in this particular trade, arise also in the growth of
large towns and their specialization in different manufactures. 3

It is not surprising that this view of labour should have deter-
mined Petty's analysis of value and price. He is led to it by
the question of what is 'the mysterious nature' of rents. His
answer is that the natural and true rent of a piece of land for any
particular year is the difference between the proceeds of the
harvest and the seed plus what the producer 'himself hath both
eaten and given to others in exchange for Clothes and other
- Natural necessaries'. 4 This, however, is not only an explanation
of the origin of a surplus product but also of the origin of value
itself. Petty goes on to ask how much money ' this Corn or Rent is
worth'. His answer is that it is worth as much as the money

1 'Treatise on Taxes and Contributions', ch. iv, Economic Writings, vol. i,
p. 68.

2 'Verbum Sapienti', Economic Writings^ vol. i, p. no.

3 Economic Writings, vol. ii, pp. 473-4. ' 4 ibid., vol. i, p. 43.

1 06

PETTY

which another man producing money (i.e. the money com-
modity) can save during the same time, above his expenses of
production. The hypothetical case with which he illustrates his
proposition is worth quoting. 'Let another man go travel into
a Countrey where is Silver, there Dig it, Refine it, bring it to
the same place where the other man planted his Corn; Coyne
it, etc. the same person, all the while of his working for Silver,
gathering also food for his necessary livelihood, and procuring
himself covering, etc. I say, the Silver of the one, must be
esteemed of equal value with the Corn of the other: the one
being perhaps twenty Ounces and the other twenty Bushels.
From whence it follows that the price of a Bushel of this Corn
to be an Ounce of Silver. 51 Petty is well aware of possible minor
variations; but he argues that when an average is struck over a
long period and covering a large quantity the above analysis
will hold.

Although this is ' the foundation of equalizing and ballancing
of values'" there remains much individual variety. He discusses
this later when he draws a distinction between the natural price,
or 'true Price Currant 5 , as he also calls it, and the political price.
The 'natural dearness and cheapness depends upon the few or
more hands requisite to necessaries of Nature. . . . But Political
Cheapness depends upon the paucity of Supernumerary Inter-
lopers into every Trade over and above all that are necessary.' 3
Other factors which might influence supply and demand and
thus the political price, are customs and manner of living; and
since 'all Commodities have their Substitutes or Succedanea,
and that almost all uses may be answered several waves', these
factors must be considered as adding or taking away from the
price of things. 4

* In spite of all these accidental factors, labour remains the true
source and measure of value. This is made even clearer in two
other passages which supply the beginnings of the classical
theory of wages/ In these Petty does not speak any longer of
labour time as the measure of value. 'The days food of an adult
Man, at a Medium, and not the days labour, is the common
measure of Value. 5 'That a days food of one sort, may require
more labour to produce, than another sort, is also not material,

1 'Treatise*, Economic Writings, vol. i, p. 43.

2 ibid., p. 44. 3 ibid., p. 90. 4 ibid., p. 90.

107

THE FOUNDERS OF POLITICAL ECONOMY

since we understand the easiest-gotten food of the respective
countries of the World.' Nor is it material 'that some Men will
eat more than others, . . . since by a days food we understand
yo part of what i oo of all Sorts and Sizes will eat, so as to Live,
Labour, and Generate.' 1 The last phrase anticipates Ricardo's
natural price of labour, which is the one ' necessary to enable the
labourers, one with another, to subsist and to perpetuate their
race'. 2 And in Petty 's statement that a e Law that appoints such
Wages . . . should allow the Labourer but just wherewithall to
live; for if you allow double; then he works but half so much as
he could have done, and otherwise would; which is a loss to the
Publick of the fruit of so much labour' 3 one may see the
beginnings of the surplus value theory of Marx. 1 But if Petty
believed in the existence of a surplus product of labour, and
therefore, in labour's power to create surplus value, he demon-
strated these two categories only in the case of production from
the land. Rent was the only surplus he knew; and it comprised
the whole concept of profit within it.

At the same time Petty was also aware of the differential
element in rent. A hundred and fifty years before Ricardo he
stated clearly the theory of differential rents. " For as great need
of money heightens Exchange, so doth great need of Corn raise
the price of that likewise, and consequently of the Rent of the
Land that bears Corn, and lastly of the Land it self; as for
example, if the Corn which feedeth London, or an Army, be
brought forty miles thither, then the Corn growing within a
mile of London, or the quarters of such Army, shall have added
unto its natural price, so much as the charge of bringing it
thirty nine miles doth amount unto.' And while nothing is said
here about differing fertilities as the cause of differential rent
(some obscure reference appears elsewhere), 5 other factors are
enumerated and the general principle could not be better
expressed. 6 It should also be noted that Petty was quite clear that
rent was determined by price and not vice versa. Not only is

1 'Verbum Sapient! ', Economic Writings^ vol. i, p. 181.

2 D. Ricardo, The Principles of Political Economy and Taxation (Everyman
edition), p. 52.

3 * Treatise ', Economic Writings, vol. i, p. 87.

4 Marx did so himself: Theorien tiber den Mehrwert, vol. i, p. 3.

5 * Treatise ', Economic Writings, vol. i, p. 89.
8 ibid pp. 48-9.

1 08

PETTY

this explicitly stated in the discussion of differential rent quoted
above; it is implicit in his discussion of the origin of rent as
such, which, as we have seen, led him also to a labour theory of
value.

A further conclusion which Petty wishes to draw concerns the
value of land. 'The question is', he says, 'how many years
purchase (as we usually say) is the Fee simple naturally
worth?' 1 The reason for Petty's attention to this problem is
interesting and shows the error into which he fell, in spite of
his genius. Although he gives ample evidence for his funda-
mental belief in a labour theory of value, he seems nevertheless
to have been uncertain about the part played by land in the
creation of value. We have seen that in one place he makes land
and labour joint determinants of value. This is probably due to
a confusion in his mind between exchange-value and use-value.
Where he is concerned with the latter, he speaks of land and
labour; where he is dealing with exchange-value (at any rate
implicitly) he speaks of labour alone. He was himself aware of
this dichotomy. 'All things ought to be valued by two natural
Denominations, which is Land and Labour. . . . This being true,
we should be glad to finde out a natural Par between Land and
Labour, so as we might express the value by either of them
alone as well or better then by both, and reduce one into the
other as easily and certainly as we reduce pence into pounds.' 2

We have already seen how Petty determined the value of
labour. As to the value of land, he developed a theory of the
capitalization of rent or the usus fructus per annum. This is clearly
sT Break with his own original dichotomy of land and labour,
since he had already determined rent as the surplus product of
labour. He is himself unaware of this inconsistency and goes
on to ask at what rate it should be capitalized. Since Petty's
theory of the surplus is exclusively one of rent, he has no other
rate of return to resort to which would help him in the capitaliza-
tion of the rate of return from land. He discovers an ingenious
way out. People, he thinks, will pay a price for land in accor-
dance with the return derived from it and the number of years
which they themselves or their immediate descendants expect
to enjoy that return/ Petty regards three generations as a
reasonable estimate. And since 'in England we esteem three lives

1 * Treatise', Economic Writings, vol. i, p. 45. a ibid.

109

THE FOUNDERS OF POLITICAL ECONOMY

equal to one and twenty years', he computes the value of land
at twenty-one years' purchase of its annual rent. This would
apply 'where Titles are good, and where there is a moral
certainty of enjoying the purchase'. In other countries this will
vary according to the titles, the number of people, and the esti-
mate put upon three lives. l

This process for computing the value of land can now be used
in the reverse direction for discovering the rate of return on
money-capital. In other words, Petty does not presuppose a
rate of interest which would be used in the capitalization of land,
but derives his conclusions on interest from his theory of rent and
land values. He states explicitly that he proposes to explain the
nature of rent ' with reference as well to Money, the rent of
which we call usury'. 2 And the chapter on usury follows imme-
diately after the discussion on rent. "Petty 's general opinion on
usury is simple. He condemns the taking of interest if the lender
can call upon the borrower to repay on demand. But if the
borrower has the enjoyment of the money lent for a fixed period
of time, the lender can justifiably demand interest. The rate of
interest, he says, anticipating the physiocrats, is determined by
the rent of the land! Where the security of the loan is undoubTcd,
the rate of interest is equal to the 'Rent of so much Land as the
money lent will buy; . . . but where the security is casual, then a
kinde of ensurance must be enterwoven with the simple natural
Interest'. 3 While interest is thus determined by rent, there are
factors which cause it to vary from time to time and place to
place and it is, therefore, impossible to fix it by law.*

This point is emphasized again in the Quantulumcumque
concerning Money.* Here Petty finds another reason for ex-
pressing a view which is implied in much that he wrote and
which is both a plea for freedom in trade and an anticipation of
the physiocratic and Smithian belief in the 'natural order'. He
makes his discussion of interest the occasion for speaking 'of the
vanity and fruitlessness of making Civil Positive Laws against the
Laws of Nature'. 5

On the question of interest, then, Petty held more advanced
views than the mercantilist opinions which were still current in

1 'Treatise', Economic Writings, vol. i, p. 45. 2 ibid, p. 42.

3 ibid., p. 48. 4 Economic Writings, vol. ii, pp. 447-8.

6 ' Treatise ', ibid., vol. i^p. 48.

IIO

PETTY

this time| As for foreign exchange, about which he said little, he,
like the later mercantilists, did not share Malynes's fears, although
he made usury analogous to foreign exchange dealings. But he
considered that the natural measure of exchange was estab-
lished by the cost of carrying money in specie from one place
to another, though variations might arise 'where are hazards
[and] emergent uses for money more in one place than another,
etc. or opinions of these true or false 5 . 1 He accordinglj^jrejected
all measures of fixing exchanges by law; and he was also a deter-
mined opponent of prohibitions on the export of bullion.
* Petty did not go much farther in developing a theory of inter-
national payments; and his views on foreign trade in general are
still coloured by mercantilist notions: However, his references to
this question are slight and scattered; and it may be argued that
he was merely taking for granted certain views accepted at the
time, without devoting much attention to the problems which
they were meant to explain. He seems to have believed as firmly
as Mun that 'the overplus whereof [of exported goods], above
what is Imported, brings home mony, etc/ 2 And his mercan-
tilist belief in the value of exports is clearly in evidence when he
said that ' Ireland exporting more then it imports doth yet grow
poorer to a paradox'. 3 But his chief interest was clearly engaged
in a different direction.

His views on money, at any rate in the earlier writings, were
also mercantilist.' He laid great stress on treasure as the most
desirable form of wealth*. And even in his analysis of value he
was mostly concerned with the monetary form in which value
appeared a remnant of bullionist thought. Yet his own methods
of analysis were constantly interfering with these accepted views.
It was due particularly to his statistical work that Petty was able
to escape more than any other writer of the period from the
common confusion between money and capital. 'In his studies of
Ireland he found that money was only a fraction of the total
annual expense of the country; the same was true when he tried
to compute the national wealth of England. Although he still
regarded money as a very important means for making trade
active, he often expressed the view that a country might have

1 * Treatise', Economic Writings, vol. i, p. 48.

2 ' Political Arithmetick ', ibid., vol. i, p. 260.

3 * Treatise ', ibid., vol. i, p. 46.

Ill

THE FOUNDERS OF POLITICAL ECONOMY

too much as well as too little money. 1 And, in trying to discover
the right money supply for a country, he used the concepFof
the ' velocity of circulation ' of money which was to play an impor-
tant part in later monetary theory. 2

His very method of analysis shows that in spite of inevitable
occasional lapses he was far removed from the primitive mone-
tary errors of the mercantilists. Even when he praised the virtues
of money and trade (particularly foreign trade), and appeared
nearest to the theory of commercial capitalism, he introduced
important qualifications. Money and foreign trade were impor-
tant, he thought, because they helped a country to 3evelop
and improve its industry. At the same time a country should
endeavour by policy to improve its efficiency in the production
of the commodities needed for trade. Again and again he laid
emphasis on c art' as an aid in production; 3 and he measured
the power of the prince by ' the number, art and industry of
his people, well united and governed'. 4

Petty went even farther in the Quantulumcumque, his most
mature discussion of monetary matters. He stated categorically
that a nation might have too much or too little money, implied
that money was only needed as a help in trade and industry,
and gave a computation of the amount of money needed, in
which the concept of the velocity of circulation was also implied.
He repeated his objections to the prohibition of bullion exports
and to the legal regulations limiting interest and exchange rates.
Existing laws, he said, were perhaps ' against the Laws of Nature,
and also impracticable'. 5 If a country had too much money it
should melt it down, export it as a commodity where there is a
demand for it, or lend it out at interest where interest was high.
If there was too little money there should be established 'a
Bank, which well computed, doth almost double the Effect of
our coined Money'. Once again he stressed his belief in England's
ability to capture the trade of the world. (In the 'Political
Arithmetick' he had tried to show 'that the Impediments of

1 'Verbum Sapienti ', Economic Writings, vol. i, p. 113.

2 .bid., vol. i, pp. 35-6, 1 12-13.

3 For an interesting account of the early history of this concept, cf. E. A, J.
Johnson, Predecessors of Adam Smith, ch. xiii, in which many of Petty 's views
are quoted.

4 'Treatise 5 , ibid., vol. i, p. 22.

6 * Quantulumcumque ', ibid., vol. ii, p. 445.

112

PETTY

Englands Greatness are but contingent and removeable'.) 'And
we have', he said, 'in England materials for a Bank which shall
furnish Stock enough to drive the Trade of the whole Com-
mercial World ' 1 an expectation which was to be fulfilled only a
few years later.

Petty seems to have assimilated all the most refined ideas of
his predecessors on the effects of debasement and on the place
of bullion in foreign trade. When states debase their coins,
he said, 'they are like Bankrupt Merchants, who Compound
for their Debts by paying i6s. I2S. or los. in the pound; Or
forcing their Creditors to take off their Goods at much above
the Market rates'. 2 Old unequal money ought to be new coined
at the expense of the state; but the difference between the value
of the new and the old money must be borne by those who hold
the latter, since otherwise people would be tempted to 'clip
their own Money'. 3 The new coinage would make little
difference to foreign trade. In an argument reminiscent of Mun,
Petty showed that merchants would still carry abroad either
commodities or specie with which to buy foreign goods accor-
ding to relative prices. England need not be impoverished if they
took specie since the commodities they brought home would
probably yield a profit.

Although Petty does not discuss specifically the relation
between money and prices, he makes a few statements on the
subject "which are lucid and illuminating. A reduction in the
silver content of the coin, he said, was bound to diminish the
amount of goods which people were willing to give in exchange
for it, except among ' such Fools as take Money by name, and
not by its weight and fineness'. If one had more shillings coined
out of the same amount of silver one would not be any richer.
This was most clearly demonstrated in the case of goods made
of the money metal. A goldsmith would not give his silver vessel
'weighing 20 ounces of wrought, for 18 Ounces of unwrought
Silver'. The same was true of other commodities, 'though not
so demonstrable as in a Commodity whose Materials is the same
with Money'. 4

With this we may take our leave of Petty. The space devoted
to him may appear excessive compared with the short account

1 * Quantulumcumquc', Economic Writings, vol. ii, p. 446.

2 ibid., p. 443. 3 ibid., p. 440. 4 ibid., p. 441-2.

THE FOUNDERS OF POLITICAL ECONOMY

of a number of other pre-classical writers which is to follow.
But since Petty's significance as the most important of the fore-
runners of Smith and Ricardo has so often been neglected, it
seemed necessary to redress the balance.

(4) Locke; North; Law; Hume

Economic thought in England developed briskly in the first
half of the eighteenth century, and there are a large number of
writers whose contributions are of interest. In general, however,
these contributions are only refinements of points originally
raised by Petty or changes of emphasis of varying significance.
From these many writers a few may be chosen for brief
treatment. John Locke and Sir Dudley North are selected as
immediate followers of Petty; and Sir Dudley North also as the
most important free trade advocate of the time. John Law's
monetary theories deserve mention and so does Sir James
Steuart's comprehensive work. Cantillon, who has been redis-
covered comparatively recently, shows the closest affinity to the
French physiocrats; and David Hume's writings, in spite of the
fact that their merit has often been greatly exaggerated, are still
important as a synthesis of economic thought prior to Adam
Smith.

Locke and North are best discussed together both in their
relation to mercantilist thought and to the theories of Petty.
With regard to foreign trade, their views differ considerably.
Locke was largely influenced by mercantilist notions. He still
insisted that a country grew rich by exporting more than it
imported. North, on the other hand, in his Discourses upon frafir*
(1691), took up an intransigent free- trade attitude. He made a
devastating attack on protection, in particular on the prohibi-
tion of trade with France. It was he who expressed, for the first
time, the view that the whole world was as much an economic
unit as was a single nation. All trades he regarded as profitable
since no one would continue in an unprofitable occupation. And
he identified public good with private good in a manner that
would be fit for a nineteenth-century utilitarian writer. His
vigorous pamphlet was not well received, naturally at a time
when foreign trade restrictions were still the rule. But as It

114

LOCKE; NORTH; LAW; HUME

expressed views which were in harmony with the trend of
economic development its theoretical influence was great.

The views of these two writers on the fundamental prob-
lems of economic analysis were of more immediate impor-
tance. Both Locke and North took up some of the points in
Petty's theory of rent, interest, and money. They shared his
views on debasement; and Locke, in particular, gave a very
good analysis of the effect of debasement on prices in his Some
Considerations of the Consequences of the Lowering of Interest and Raising
the Value of Money (1691). Like Petty, they both oppose the laws
for the limitation of interest. Locke followed Petty closely in
deriving his theory of interest from an analysis of rent. He still
regarded rent as the only surplus, and inquired how money,
although by nature barren, could have the same productive
character as the soil, which did produce something useful. His
conclusion was that just as the unequal distribution of land en-
abled those who had more than they could cultivate themselves
to fake a tenant from whom they obtained rent, so the unequal
distribution of money enabled its owners to obtain a tenant for
it from wKom they could receive interest.

North went farther. He seems to have been the first to have a
clear idea of capital, which he called stock. He made the lending
of stock-in-trade, by those who lack the ability to use it or
shunned the trouble to do so, equivalent to the letting of land.
The interest which lenders received was a rent of money akin
to the rent of land. Landlords and 'stocklords' were the same.
North preserved no traces of the mercantilist love for treasure.
No one, he thought, could get rich by having all his possessions
in the form of money. Only those increased their wealth whose
possessions were bearing fruit all the time by either being lent
out or employed in trade. 1 Nobody wanted to keep money;
everybody was anxious to dispose of it in such a way as to make
a profit.

Both Locke and North, but particularly the former, were led
to discuss value, price, and money by way of their discussion of
the nature of interest. North said little about value itself, though
he discussed price. Locke's views on value are not easy to dis-
cover, since his statements on the subject are few and do not

1 D. North, Discourses upon Trade\ principally directed to the cases of the
Interest, Cqynage, clipping, increase of Money ( 1 69 1 ) , p. 1 1 .

THE FOUNDERS OF POLITICAL ECONOMY

occur in the same place as his main economic discussions. In the
Two Treatises concerning Government (1690) he seems to share
Petty's view of the origin of value. In a discussion concerned
mainly with property he stated that the earth belonged to all
men in common. Private property, however, was justified in so
far as a human being had mixed his own labour with the gifts of
nature. Legitimate property was limited by the amount which
anybody needed for his own maintenance. Property in land was
equally limited by the amount which an individual could culti-
vate and the produce of which he could use. Labour was the
main source of value. Nearly the whole value ofTlie proHucts of
tKe soil were due to labour; the rest was a natural gift. 1

However, in none of these statements does Locke reach Petty's
conclusion that labour is also the measure of value. He seems
to have confined himself to use-value and to have endeavoured
to show the importance of labour in its production. Consciously
or not, he avoided the issue of the origin of exchange-value and
made an analysis which has been classed as a supply and demand
theory of price. 2 That analysis appears in the Consequences, but is
prefaced by a statement on money in Government. Locke made
money possess a purely imaginary value which was created
by common consent. Since money was not perishable, one of
the limits to its accumulation in private hands (that no one
should own more of anything than he needed for himself)
disappeared. Great inequalities in property were thus made
possible, though there still remained one limit to the amount
that might legitimately be held, namely, the amount of the
individual's own labour which enabled him to acquire profit at
all. 3 In the Consequences, however, Locke went on to give money
a 'double value'. One arises from the ability of money to supply
a yearly income (akin to rent); the other is the same as that of
any other 'Necessaries or Conveniencies of Life' which money
can procure in exchange. Locke falls thus into the mercantilist
error of identifying money and capital an error which North
had avoided.

It was, however, Locke's emphasis on the medium of exchange

X J. Locke, Two Treatises concerning Government (ed. Morley, 1884),
pp. 203-16.

2 Cf. the interesting discussion of Locke's views in R. Zuckerkandl, %ur
TTieorie des Preises (1936), pp. 125-31, 233-4.

8 J. Locke, Two Treatises concerning Government, pp. 415-6.

116

LOCKE; NORTH; LAW; HUME

function of money which was the starting-point for his further
discussion. This was based on the quantity theory of money,
already outlined in connection with the problem of debasement.
Against the prevailing mercantilist view that a low rate of
interest would raise prices, Locke pointed out that prices were
determined by the amount of money in circulation. This view
was based on a supply and demand theory of price. Although
the vent' of anything 'depends upon its Necessity or Useful-
ness 5 , 1 yet the quantity sold at any time was determined by the
'part of the running cash of the nation designed to be laid' out
on it. 2 The amount available and the amount sold and the
number of buyers and sellers settled the market price. In the
case of money, sale was always certain; therefore, 'its quantity
alone is enough to regulate and determine its value, without
considering any Proportion between its quantity and vent, as
in other commodities'. 3 A number of other passages could be
quoted to show that Locke, in spite of occasional inconsistencies,
held the view that changes in the amount of money were bound
to affect prices.

The greatest inconsistency in regard to the quantity theory
occurs in Locke's application of it to international prices. He
had to reconcile his quantity theory with his mercantilist desire
for an export surplus which would bring in treasure. Like Petty,
he brought himself to say that any quantity of money might be
enough to carry on the trade of a country; yet he emphasized
even more than Petty had done that it was desirable that
England should have more money than her trade rivals. His
way out was ingenious. Since countries traded with one another,
he said, the amounts of money they needed were no longer
a matter of indifference. The prices of all goods in terms of
bullion must be the same in all countries. If, however, a country
had less money than others its prices would be lower. It would,
therefore, be forced to sell cheap and buy dear, a state of affairs
which all mercantilists dreaded. Locke is thus led by different
reasoning to a position not unlike that of Malynes, and one
which had already been abandoned by Mun. 4

But these mercantilist errors are unimportant compared with

1 J. Locke, Some Considerations of the Consequences of the Lowering of Interest ,
and Raising the Value of Money (1692), p. 48 and passim.

3 ibid., p. 44. 8 ibid., p. 70. 4 ibid., p. 76.

117

THE FOUNDERS OF POLITICAL ECONOMY

the chief use which Locke made of the quantity theory of money.
On the problem of interest his position was clear. He avoided
the errors of Child and Culpepper and regarded interest as a
consequence, and not as a cause, of the amount of money seek-
ing employment. North expressed this view more clearly still.
The rate of interest, he said, would fall if there were more lenders
than borrowers. A low rate of interest did not make trade; on
the contrary, with an increase in trade the volume of money
(stock) would increase and the rate of interest would fall. 1 He
went even further and adopted Mun's view of the distribution
of the precious metals through international trade. Whatever
the amount of money brought from foreign countries or mined
at home, anything in excess of the requirements of trade was
nothing more than an ordinary commodity to be treated as
such. This view shows again North's freedom from mercantilist
superstition.

The importance of Locke and North lies in the social and
political significance of their attitude to rent and interest. Their
economic theories were not the result of a deliberate attack
upon the landed interest (this was not as yet an important issue) ;
but taken in conjunction with Locke's whole political philo-
sophy they show a change in outlook which was to have great
significance later. Although the produce from land was regarded
as the only form in which a surplus could appear, and although
interest was, analytically, derived from rent, the conclusions
were unfavourable to the landowners. Their net effect was to
undermine still further the claim to special status made by
landed property and to help in the creation of private property
per se as the institutional basis of capitalism. Moreover, the attack
upon the limitation of the rate of interest was to the disadvan-
tage of the landowners to whom a low rate of interest meant a
high rate of capitalization of their rents, i.e. high land values.
We shall shortly find a similar development, though in a some-
what different form, in the work of the physiocrats.

Of the remaining writers John Law is more famous as a man
of affairs than as an economist. But he made one contribution
to the theory of money which deserves mention, since it contains
the beginnings of an idea which was to be developed by certain
monetary theorists. Law was not, as has sometimes been sup-
1 D. North, Discourses upon Trade, p. 4.

118

LOCKE; NORTH; LAW; HUME

posed, a believer in the equivalence of paper money with
metallic money. He did, however, share the mercantilist belief
that money possessed an active power and that a good supply of
it was necessary in order to create employment. His main
contribution to mercantilist thought was to deprecate reliance
on an export surplus (created by import prohibitions) for
obtaining a good supply of money. In its place, he suggested the
issue of paper money, a proposal which was often, though less
consistently, made at the time and which Law was able to put
into practice with disastrous results. 1 As a good mercantilist he
desired the state to have a stock of treasure, and he hoped that
his notes would take the place of metallic money in the transac-
tions of the public and that bullion would then accumulate in
the state's treasury. The inflation in which his policy resulted
was one of the severest of modern times; and it caused, together
with Law's own ruin, the destruction of many speculative
industrial ventures. It was Law's merit that he contributed to the
creation of those conditions which inspired physiocratic thought.
For the only sort of property which appeared to have remained
intact during the post-inflationary slump was land. This fact,
together with the subsequent increase and improvement of agri-
cultural enterprise, explains much of the trend of thought of
the French economists of the eighteenth century.

Law has also been claimed as the founder of a subjective
theory of value, with special reference to the value of money. 2
He definitely rejected the idea that money had an imaginary
value. Nothing had any value, he argued, except for the use to
which one puts it. The same was true of the money commodity,
even in relation to its monetary uses. The service which it
rendered as money was no different from its other services or
from the service of any other commodity. 8 With this theory Law
becomes a forerunner of the Austrian school.

Although David Hume's fame rests mainly on his work as a
philosopher, he is also distinguished by his work in economic
theory. In recent years, the tendency has even arisen to regard
him as the most important of the pre-Smithian economists. But

1 Cf. E. F. Heckscher, Mercantilism , vol. ii, pp. 234-6.

2 L. Mises, 'Die Stellung des Geldes im Kreise der wirtschaftlichen Giiter'
in Wirtschaftstheorie der Gegenwart, vol. ii (1932), p. 310.

3 J. Law, ' Considerations sur le numeraire et le commerce * in ficonomistes
financitres du XVIIItime,sttcle (ed. Daire, 1851), pp. 447 sqq.

THE FOUNDERS OF POLITICAL ECONOMY

this view is certainly unjustified. In his Political Discourses
(1752), he included a number of economic essays of which Of
Money, Of Interest, Of Commerce, and Of the Balance of Trade are
the most important. They are all clearly written and often con-
tain an excellent summary and synthesis of the ideas of his
predecessors; though even in that respect, Cantillon's Essai sur
la nature du commerce en general, published in 1755, but written
probably over twenty years previously, is much superior.

As an original thinker in the economic field Hume's claims
are not high. Sometimes he repeated mercantilist errors which
had already been discarded and which certainly did not
reappear in Adam Smith. His praise of the merchants as 'one
of the most useful races of men' and as the motive force of
production sounds strange after the writings of Petty, Locke,
and North. 1 Occasionally he praised the uses of money in
stimulating trade and urged the desirability of treasure. Yet he
adopted and emphasized Locke's view that money was only a
symbol and that the amount which a nation possessed was of
no importance. On the quantity theory of money he based the
belief that the balance of trade argument was wrong, since the
movements of specie would affect prices and therefore merchan-
dise trade. The balance of trade of a country could not be
permanently favourable or unfavourable. In the long run a
balance would be established in accordance with the relative
economic conditions of the countries concerned. Hume there-
fore ranged himself on the side of the free-traders; but his
advocacy of free trade was no stronger than that of North. 2

Hume's most interesting contributions to economic thought
relate to money, prices, and interest. He revealed in his views
a curious mixture of arguments that supported and opposed
Locke. In his theory of money and in the view that prices were
determined by the amount of money, he followed and was even
more consistent than Locke; in the theory of interest, on the
other hand, he opposed him in certain respects. Like Locke, he
regarded the value of money as fictitious only. Money repre-
sented commodities, and its value in the process of exchange was

1 D. Hume, ' Political Discourses J in Essays Moral, Political, and Literary
(ed. T. H. Green and T. H. Grose, 1875), vol. i, p. 324.

2 Marx also claims that Hume's statements on all these points were only
repeating the views expressed earlier by Vanderlint in Money answers all
things (i734) (Anti-Diihring, p. 254).

120

LOCKE; NORTH; LAW; HUME

determined by the relation between its quantity and the quantity
of goods for which it was to exchange. It followed that changes
in the volume of circulating money would affect the prices of
goods. Hume had in mind the great changes in prices caused by
the increased output of precious metals from the newly dis-
covered American mines. But he drew no distinction between
changes in the value of the money commodity itself and changes
in the exchange relationship between money and goods caused
by an increased volume of circulating money. His view of
money led him to believe that the prices of commodities would
always be proportioned to the quantity of money. The absolute
quantity of the latter did not therefore matter: a point which he
demonstrated in a celebrated illustration. 1

Nevertheless, he thought that changes in the quantity of
money were of importance, since they could alter the habits of
people. Prices might not change if the changes in the amount
of money were accompanied by alterations in habits which
affected the volume of trade and the demand for money. If,
however, these rose following upon an increase in money, there
would be beneficial effects because industry would be stimu-
lated. On this point Hume's analysis was particularly lucid. In
tracing the path which an increased amount of money would
travel and the gradual manner in which it would affect prices,
he developed a theory which was later used by many economists.

Increases in the quantity of money were only beneficial owing
to the time-lag with which their effects appeared. 'It is only in
this interval or intermediate situation, between the acquisition
of money and rise of prices, that the encreasing quantity of gold
and silver is favourable to industry.' Prices of different goods
are affected in turn and the increase of money will c quicken the
diligence of every individual, before it encrease the price of
labour'. 2 In other words, Hume described what Mr. Keynes
has called a profit inflation, which was taking place at the expense
of labour a fact about which Hume was quite happy.

In his essay Of Interest Hume began by stating the well-
accepted doctrine that a low rate of interest was the surest sign
of the flourishing state of a country's trade. But having paid his

1 D. Hume, ( Political Discourses ', Essays Moral, Political, and Literary,
vol. i, p. 333.

1 ibid, pp. 313-14,

121

THE FOUNDERS OF POLITICAL ECONOMY

respect to the doctrine of Culpepper and Child, he went on to
show, as Petty, Locke, and North had done, that a low rate of
interest was not a cause but an effect. He joined them, therefore,
in opposing state regulation of interest. But he went farther than
Locke by rejecting the view that a low rate of interest was the
result of an abundance of money, although he admitted that
both occurred together. Among the factors which determined
the rate of interest he distinguished first of all, as North had
already done, the supply and demand of borrowers and lenders.
A high rate of interest would, he thought, be caused by 'a great
demand for borrowing ' and * little riches to supply that demand ' .
Both these were in their turn the results of a small amount of
industry and commerce. Following North's view of the profit-
creating quality of capital, Hume added a third determinant of
the rate of interest: the profits arising from commerce. Profits
and interest he regarded as interdependent. ' The low profits of
merchandise induce the merchants to accept more willingly of
a low interest.' On the other hand, 'no man will accept at low
profits, where he can have high interest'; and low profits and
low interest were both the result of great commerce.

Although he repeated that land was the source of all useful
things, Hume showed that he had little love for the landed
interest. He pointed out that landowners who received incomes
without any exertion of their own were inclined to be extrava-
gant; and that they would diminish rather than increase the
amount of available capital, thus helping to raise the rate of
interest. The commercial classes, on the other hand, were con-
stantly working in the interest of the nation by creating both an
abundance of capital and low profits. 'Among merchants, there
is the same overplus of misers above prodigals, as, among the
possessors of the land, there is the contrary.' For his lucrative
employment will give the merchant a passion for gain and he
will know ' no such pleasure as that of seeing the daily encrease
of his fortune'. Commerce, then, creates frugality, helps
accumulation and increases the number of lenders. At the same
time a highly developed commerce produces competition :
'There must arise rivalships among the merchants'; and this
diminishes profits and consequently interest. 1

1 D. Hume, ' Poli'ical Discourses ', Essays Moral, Political, and Literary,
vol. i, pp. 320-30. Most of Hume's views on interest, are also to be found

122

CANTILLON; STEUART

Whatever his merits as an economist, Hume's place as one of
the foremost exponents of capitalism is clearly established. His
views on the landed interest and his recognition of self-interest
and the desire for accumulation as the driving forces of economic
activity in his time helped to consolidate the forces that were
struggling to add political power to the economic supremacy
which they had already achieved.

(5) Cantillon; Steuart

Richard Cantillon's Essai sur la nature du commerce en general
( I 755) 1 i s ^e most systematic statement of economic principles
before the Wealth of Nations. Since its rediscovery by Jevons over
fifty years ago its prestige has steadily risen until there is now a
danger that the justifiable pride of his foster-parents may have
given Cantillon too high rather than too low a place in the
history of economic theory. It must be emphasized, however,
that Cantillon was not only responsible for a lucidly written
and well-planned treatise, and for elegant reformulations of
ideas already in existence, but that he also made some original
contributions on individual points of economic analysis.

The Essai begins with a definition of land as the source of
wealth, labour as the power which produces it, and all material
goods as its constituents. It goes on to discuss the economic struc-
ture, wages, value, population, and money. The second part of
the book is taken up mainly with problems of money, exchange,
and interest; while the third part deals with foreign trade, the
mechanism of the foreign exchanges, banking, and credit. It is
in the last two parts that Cantillon excels in original analysis
and description. For it is here that he is able to combine his
insight into economic principles with his own commercial

in an anonymous publication, An Essay on the governing causes of the natural rate
of interest; wherein the sentiments of Sir William Petty and Mr. Locke on that head are
considered^ which appeared in 1750, two years before Hume's essays, and
which Marx attributes to J. Massie. Karl Marx, Theorien uber den Mehrwert,
vol. i, pp. 23 sqq.

1 An excellent reprint edited by Mr. H, Higgs and containing an English
translation and articles on Cantillon and his work was published by the
Royal Economic Society in 1931. All subsequent notes on Cantillon refer to
this edition.

123

THE FOUNDERS OF POLITICAL ECONOMY

experience and to write sentences which can take their place
with any modern work on those subjects. He has none of the
difficulties about the mechanism of foreign payments which had
troubled Locke. If a state, he says, has an export surplus for any
considerable time and is drawing specie from other countries,
6 the circulation will become more considerable there . . . money
will be more plentiful there, and consequently Land and Labour
will gradually become dearer there'. 1 This will at once redress
the balance of trade.

The analysis of the effects of an increase in the circulating
medium is even better worked out than in Hume. Assuming an
increased gold output from the mines, Cantillon is able to show
how the benefits of the increased purchasing power that has
become available are distributed. The owners, smelters, refiners,
and other workers will be the first to be able to increase their
demand for food, clothes, and manufactured goods. The sup-
pliers of these commodities will in their turn be able to increase
their expenses. But the share of commodities that goes to other
people in the state must of necessity be diminished, since they do
not participate at first in the wealth of the mines. The path of
rising prices and the ensuing changes in the distribution of
wealth are then carefully traced; and even international effects
are not ignored. Altogether, this argument remains an excellent
demonstration of an important aspect of monetary theory. 2
Cantillon was also aware that the effects of an increase of the
money commodity and those of paper money were only appa-
rently the same. Ultimately an abandonment of 'fictitious'
money would vanish c at the first gust of discredit' and would
precipitate disorder. 3

On the question of foreign exchanges, too, Cantillon was able
to express clearly the principles which underlie economic
practice. He showed better than any previous writer the rela-
tion between merchandise trade, speculation and specie move-
ments; and he showed also their interaction with exchange rates
and price-levels in the mechanism of international payments.
Particularly lucid was the explanation of the causes which raise
or lower the exchange from parity and the way in which such
movements can be foreseen and discounted. 4

1 R. Cantillon, Essai sur la nature du commerce en gen&ral, pp. 157-9.

2 ibid., pp. 163-7. * ibid., p. 31 1. \ibid., pp. 257-9.

124

CANTILLON; STEUART

The central questions of value, wages, and price are contained
in part one of Cantillon's Essai. His treatment of these is not
always strikingly new. He owes more to his predecessors, and he
gets less far ahead of them than he does in other matters. In par-
ticular, the analysis of value lacks some consistency; though it is
perhaps for that very reason that Cantillon may be taken as one of
the early representatives of the eclecticism which became a char-
acteristic of English economic thought. His theory of value can be
classified as a labour theory; but it is amplified into a cost-of-
production theory and contains some admixture of a supply
and demand theory. The first strand of thought is derived
largely from Petty, the second from Locke.

We have seen that Cantillon repeats in different words
Petty's theory of the origin of wealth. In chapter x of the Essai
he goes on to develop a theory which is already summarized in
the title of that chapter, 'The Price and Intrinsic Value of a
Thing in general is the measure of the Land and Labour which
enter into its Production.' 1 The meaning .of the subsequent
analysis amounts to this: if two goods are produced by the same
amount of land and labour of the same quality, they will have
equal value. But the proportion in which land and labour will
determine the value of particular goods will vary. In some cases
a watch-spring, for example 'Labour makes up nearly all
the value'. In others for example, the price of 'a Wood which
it is proposed to cut down' land is the chief determinant. 2

Besides making cost of production (wages of labour plus cost
of material) determine value, Cantillon also distinguishes between
the intrinsic value and the fluctuating price at which goods are
sold in the market. A rich man who has spent much money on
beautifying his estate will not necessarily get its intrinsic value
when he comes to sell it. Nor will farmers get the expense of the
land and labour which have entered into the production of corn
if they have produced more than is necessary for consumption.
The ensuing excess of supply over demand will depress the
market price below the intrinsic value. Intrinsic values never
alter. But since it is impossible always to apportion production
among the different commodities in perfect harmony with con-
sumption, variations in market prices will occur.

1 R. Cantillon, Essai sur la nature du commerce en ge'ne'ral, p. 27.
8 ibid., p. 29.

125

THE FOUNDERS OF POLITICAL ECONOMY

The supply and demand forces are again mentioned in con-
nection with the problem of money. Cantillon agrees with
Locke's quantity theory, but corrects it by pointing out that
commodities destined for export must be excluded when the
mass of commodities is compared with the volume of cir-
culating money. He does, however, disagree with Locke's view
of the value of money. Like Law, he rejects the definition which
gives money an imaginary value. It is true, he said, that common
consent has given gold and silver value; but so it has to every-
thing which cannot be regarded as an absolute necessity of life.
The precious metals have a value which is determined in exactly
the same way as that of any other commodity, namely by the
land and labour which enter into their production. 1

Cantillon develops this point at some length. He gives a theory
of the value of money, and of money's function as a measure of
value, which is based on the labour theory and which would
have earned the commendation of Marx. 'The intrinsic Value
of Metals', he said, 'is like everything else proportionable to the
Land and Labour that enters into their production', though
their market value, like that of other goods, might vary accor-
ing to supply and demand. 2 As for acting as a measure of value,
money ' must correspond in fact and reality in terms of Land
and Labour to the articles exchanged for it'. 3

Like Petty, Cantillon was troubled by his dual source of value;
and he proceeded to inquire, in chapter xi, whether 'some rela-
tion might be found between the value of Labour and that of
the produce of the Land'. 4 This inquiry into the Par, an expres-
sion taken from Petty, resolves itself into a discussion on wages
which leads to results somewhat similar to those of Petty. The
clue to the Par is to be found in the amount of subsistence required
to produce a given amount of labour. From that, the amount of
land which has to be allotted to this purpose can be deduced.
And an equivalence between land and labour is thus estab-
lished. Cantillon uses a number of examples covering slaves,
serfs, craftsmen, and others; and he concludes that the intrinsic
value of labour is found in the amount of land needed to support
the labourers' sustenance plus an equal amount for the rearing
of two children up to the age at which they can work. Cantillon

1 R. Cantillon, Essai sur la nature du commerce en gMral, p. 113.

2 ibid., p. 97. 3 ibid., p. 1 1 1. 4 ibid., pp. 31 sqq.

126

CANTILLON; STEUART

speaks of two children, since he accepts Halley's calculations that
half the children that are born die before the age of seventeen.

Cantillon's argument in this chapter is as clear as any for-
mulations of the classical theory of wages. It possesses also the
distinction of having been quoted by Adam Smith. 1 To complete
Cantillon's theory of wages it is necessary to add that he antici-
pated much of Smith's reasoning on the difference of wages in
different occupations. 2 Finally he can be said to have antici-
pated ideas on population which were made famous by Malthus. 3

The last of this series of immediate forerunners of Adam
Smith is Sir James Steuart. Although he is the most voluminous
writer of them all, he adds comparatively little to the bod^ of
doctrine. In some respects he represents a step back to the
mercantilists, though in others, notably in the theory of money,
he is in advance of Hume. Steuart's main work, his Principles of
Political Economy, published in 1767, bears a title which has
become the standard one for comprehensive treatises, although
Steuart was not the first to use the term 'political economy'.
It is not, however, a comprehensive work and it falls far below
Cantillon's Essai as a systematic exposition of the subject. ,

The mercantilist remnants in Steuart's thought concern
mainly the origin of profit, or the surplus. Steuart still spoke of
a profit which arises in exchange, i.e. when a commodity is sold
above its value. But he went farther and admitted that such
profit did not really create new wealth. He distinguished, there-
fore, between positive profit and relative profit. The latter
represented only ' a vibration of the balance of wealth between
parties'; it did not add to the existing volume of stock. Positive
profit, on the other hand, did not cause any one any loss; it
arose from a general increase in labour, industry, and skill, and
it added to the public good. 4

He carried a similar distinction into his explanation of value.
Developing a cost-of-production theory of value, he distinguished
between the real value of commodities and the profit upon
alienation obtained in their sale. Real value was determined by

1 Adam Smith, Wealth of Nations, ed. W. R. Scott (1925), vol. i, p. 69.

2 R. Cantillon, Essai sur la nature du commerce en general, pp. 19-21.

3 ibid., pp. 67 and 83.

4 The Works, Political, Metaphysical, and Chronological of the late Sir James
Steuart (edited by his son, Sir James Steuart, 6 volumes, 1803), vol. i,
pp. 275-6.

127

THE FOUNDERS OF POLITICAL ECONOMY

three factors: first, the amount of it which a workman could on
an average produce in a given period of time; secondly, by 'the
value of the workman's subsistence and necessary expense, both
for supplying his personal wants, and providing the instruments
belonging to his profession'; and thirdly, by the 'value of the
materials, that is the first matter employed by the workman'.
Given these three amounts, the real value of a good is deter-
mined. Anything above this is the profit of the manufacturer
and depends on the conditions of supply and demand. 1 The
significance of this analysis is twofold. In the first place it
makes the manufacturer's profit arise only in exchange and
thus represents a consistent application of the mercantilist theory
of the surplus. In the second place, it leads Steuart to develop a
supply and demand theory of price which was very elaborate
for his time.

f This theory 2 can be summarized as follows. Prices are in
equilibrium when demand and work balance. (Steuart's own
theory of real value shows that he thought of the harmony
between market prices and intrinsic value in the same terms as
Cantillon.) This balance may be disturbed and the price will
vary. Steuart enumerated some of the factors which would
cause discrepancies between supply and demand, among which
the purchasing power of the buyers and the degree of com-
petition were the most important. He explained the mechanism
of 'double competition' which would be brought into play
by discrepancies between work and demand. If demand was
lower than supply, sellers' competition would reduce the price,
destroy profits, and even cause losses. If demand exceeded
supply, buyers' competition would raise prices and profits. In
the case of merchants engaged in regular trade this mechanism
would work sufficiently well to make real value effective, and
only variations in profits would occur. But bigger changes must
not be allowed to affect equilibrium; in these, as in many other
cases, Steuart was a firm believer in the desirability and efficacy
of state intervention.

Steuart also tended to mercantilist views in the theory of
money, and his statements on the value of money and the balance
of payments are often obscure and contradictory. He was never-
theless able to correct a number of errors in the analysis of Locke

t, pp. 244-6. a ibid., p. 289.

128

CANTILLON; STEUART

and Hume. In particular, he avoided their mechanical juxta-
position of the mass of commodities and the quantity of money
in circulation. He took up the view, which had been expressed
before by Petty, that the circulation of a country could only
absorb a definite quantity of money. Money, he thought, was
needed within a country for two purposes: to pay the debts one
owed and to buy the things one needed. The state of trade and
manufacture and the habits of the people determined the
demand for money; this a given quantity could satisfy.
Following North, he said that any metal over and above that
required for monetary purposes would be hoarded or converted
into plate. Should, on the other hand, the amount of gold and
silver be insufficient to sustain a country's circulation the
difference would be made up by symbolical money. 1 The result
is that f whatsoever be the quantity of money in a nation, in
correspondence with the rest of the world, there never can
remain, in circulation, but the quantity nearly proportional to
the consumption of the rich and to the labour and industry of
the poor inhabitants ' . 2

To give a true picture of Steuart's position it is necessary to
add a few words about his views on the economic structure.
Steuart's attitude to the economic process was old-fashioned and
somewhat reactionary. His work breathes little of that air of
unbridled self-interest and freedom of trade that was common
at the time. But it is perhaps because of this attitude that
Steuart was able to give a very logical account of the develop-
ment of capitalism. He began with the origin of society (this
incidentally led him to an anticipation of the Malthusian theory
of population somewhat similar to that of Cantillon) and traced
its structure through changes in methods of production and
relations of classes. He stressed the fact that labour was the only
source of an increase in the supply of the means of subsistence
and developed the concept of an agricultural surplus, the divi-
sion of classes and rise of industry. Finally, he brought out clearly
the difference between particular concrete forms of labour
which created specific use-values, and labour as a social category
which created exchange- value. He called industry that form of
labour which by alienation created a universal equivalent. 3

1 Works of Sir James Steuart, pp. 165-6. 2 ibid., pp. 403-8.

3 ibid., Book I, passim.

129 E

THE, FOUNDERS OF POLITICAL ECONOMY

(6) The Physiocrats

The body of economic theory to which the name 'physiocracy '
is given developed in France in the eighteenth century. Although
based on different experience and put in a different form, its
effects on the development of economic thought were very
similar to those of the English economists discussed above.~TKe
two contributions are united into a single system in Adam
Smith. With the physiocrats we enter the era of schools and
systems in economic thought; and it is not surprising to find
that they have been the subject of a great many studies. It is
unlikely that an inquirer will to-day be able to discover any
hitherto neglected aspects of their teaching, or to add anything
of importance to what has already been said about individual
points in their system. What remains is to give a brief summary
of that system and to assess its significance.

There has been some misunderstanding about the essential
qualities of physiocratic thought. Adam Smith criticized their
emphasis on agriculture and to this day the merits of the physio-
crats are often depreciated by the same criticism: Again, the
relation between the general political philosophy of Quesnay
arid Turgot and their specifically economic ideas is often wrongly
stated. The belief in the natural order, which was the charac-
teristic of their philosophy, is either left unconnected with their
analysis of the production and circulation of wealth; or it is
regarded as the underlying principle on which their economic
doctrines were built. Only recently has it been suggested that
fjhysiocf acy was a rationalization of certain specific political
aims; 1 and whatever truth there may be in this semi-psycho-
logical explanation, it certainly appears that the political philor.
sophy of the physiocrats was the logical development of their
Economic ideas. '

The physiocrats share with the more advanced pre-classical
English economists, such as Petty and Cantillon, the merit of hav-
ing finally discarded the mercantilist belief that wealth and its
increase were due to exchange. They transferred to the sphere

1 Norman J. Ware, < The Physiocrats: A Study in Economic Rationalisa-
tion ' in American Economic Review, vol. xxi, pp. 607-19. Cf., however, a much
earlier and more penetrating analysis of the social implications of physiocracy
by Marx, Theorien tiber den Mehrwert, vol. i, pp. 33-49.

130

THE PHYSIOCRATS 1

of production the power of creating wealth and the surplus
which might be available for accumulation. The central point in
their analysis was the search for this surplus, the celebrated
produit net. Having discovered its origin in a manner which
from the point of view of subsequent classical thought was an
advance on the English economists, they went on to add, in
Quesnay's 'Tableau oeconomique', an analysis of its circulation
among the different classes of society.

( The starting-point is a division of labour into two classes, that
which is productive and that which is sterile. The former con-
sists only of labour which is capable of creating a surplus, i.e.
something over and above the wealth which it consumes in order
to be capable of producing. All other labour is sterile. This divi-
sion is to be found in the whole classical system; and the defini-
tion of what did and what did not constitute labour was one of
the most important subjects discussed by Smith and Ricardo,
The physiocrats tried to discover the concrete form of produc-
tive labour. They had no clear idea of the distinction between
use-value and exchange- value; and they thought of the surplus
entirely in terms of differences between use- values which had
been consumed and those which had been produced. \Theproduit
net was not a surplus of social wealth in the abstract (exchange-
value), but of concrete material wealth of useful goods. It was
this approach which led the physiocrats to single out one parti-
cular branch of production as the only really productive one.

The difference between goods produced and goods consumed
is most easily seen in agriculture. Here, the amount of food
consumed by the labourer plus what is used as seed is on the
average less than the amount of produce raised from the
ground. It is the simplest and most obvious form of surplus.
Smith and Ricardo were able to show the appearance of a
surplus in industry as well. But there the process was com-
plicated by exchange, and therefore by the problem of exchange-
value. The physiocrats concentrated on agriculture and thus
were able to ignore the problem of exchange- value altogether.
Agriculture was that 'branch of production which can be
thought of entirely separately and independently of circulation
and exchange; which prcsugposes only exchanjgc^bctweenjtnan
and nature but not between manandjnan*. 1

1 Marx, Tktorien uber den Mehrwert, vol. i, p. 40.

THE FOUNDERS OF POLITICAL ECONOMY

By adopting this approach, the physiocrats did not achieve as
penetrating an analysis of the historical conditions which made
the creation of a surplus possible as they otherwise might have
done. Clearly, a surplus product appears only at a certain stage
of development" of man^s productive powers, i.e. when human
beings Van wrest from nature something more than their bare
subsistence. But whereas Steuart had proceeded to show not
only the origin of an agricultural surplus but also the develop-
ment on the basis of it of industry, the physiocrats did not go so
far. They realized that the number of those engaged in industry
and trade depended ultimately on the amount of subsistence
which those who worked on the land could raise above their
own requirements. In other words, they understood that that
degree of productivity of labour which made a surplus possible
made its first appearance in agriculture. But since they did not
go beyond agriculture they regarded this surplus as a gift, due
not to the productivity of labour but to the productivity of
nature.

However, this very limitation implies an advance. It shows
the physiocrats as the first school of economic thinkers to
employ consistently the scientific methods of isolation and
abstraction; though they themselves were unconscious of this
contribution which they were making to the methods of econo-
mic analysis. And as we shall see, they managed to surpass their
own limitations in their discussion of the process of circulation.
On the basis which they laid, later economists, notably Smith
and Ricardo, were able to build. They could use consciously, as
an analytical tool, what in the hands of the physiocrats had been
the whole content of the discussion.

The analysis of the circulation of the produit net between the
different classes of society forms the most spectacular part_of
physiocratic doctrine. The attempt to show the whole process
of circuIStTon in the simplified form of a table is one of the
earliest examples of the rigorous application of scientific method
to economic phenomena. The genius which inspired Quesnay's
c Tableau oeconomique' (first printed in 1758 and discussed and
popularized by a great number of other economists) was at
once recognized by the more discriminating thinkers of the
time. It was regarded by many as the most penetrating piece
of economic thinking to date; and Mirabeau the elder went even

132

THE PHYSIOCRATS

so far as to class it with the invention of writing and of money as
one of the most important discoveries of the human mind. The
' Tableau 5 has often been misunderstood and is still sorjietimes
regarded as nothing but a literary curiosity. 1 But, given the
basis of the physiocratic system and the method of abstraction
which Quesnay employed, it is perfectly simple and logical. 2

The 'Tableau 5 is based on the existence of a certain social
structure, the implications of which we shall discuss later. The
land is owned by landlords, but cultivated by tenant farmers,
who thus become the really productive class. The produit net
which they create has to serve not only for the satisfaction of
their own needs above their subsistence, but also for the needs
of the proprietors of the land (including the king, the Church,
the public servants, and all others who are dependent upon the
income of the landowners), and for those of the sterile class (the
artisans, merchants, etc.). The 'Tableau 5 sets out to show two
things: first, how the produit net circulates between the three
classes; and, secondly, how it is reproduced each year. The
c Tableau 5 ignores circulation within each class 'and it assumes
constant prices and reproduction each year of the same produit net.

A very simplified account of the analysis in Quesnay's
'Tableau 5 would be as follows: we start with an annual gross
product of five thousand million livres. Of this, two thousand
million are at once deducted in kind as the necessary expenses
of reproduction (the farmer's food, the seed, etc.). The produit
net is three thousand million, of which we assume two thousand
million to consist of food and one thousand million of the raw
materials of manufacture. In addition to this produit net in kind
the farmers also hold the total amount of the nation's money,
say, two thousand million. How they have obtained this the
subsequent development of the process of circulation will show.
The proprietors hold nothing, but have a claim upon the
farmers for rent to the amount of two thousand million livres;
while the sterile class possesses two thousand million livres 5
worth of manufactured goods produced in the preceding period.

The farmers now pay the proprietors their two thousand
million livres as rentJThe proprietors buy one thousand million
s"

1 e.g., A. Gray, The Development of Economic Doctrine, p. 106.

2 Excellent analyses of the * Tableau ' can be found in Marx, Theorien iiber
den Mehrwert, vol. i. pp. 05-125, and Engels, Anti-Dtihring, pp. 263-70.

133

THE FOUNDERS OF POLITICAL ECONOMY

livres' worth of food from the farmers, who thus receive back
half the amount of money they had paid out. The proprietors
then spend the second half of their rental revenue on the purchase
of manufactured goods from the sterile class, who spend the
money thus received on buying food from the farmers. The
farmers now spend one thousand million livres in buying manu-
factured goods from the sterile class, who send the money back
in return for raw materials. The process is now completed. The
farmers are left with two thousand million livres in money,
which will serve to set the whole process going again in the next
period. The food part of the produit net has gone to the proprie-
tors and to the sterile class, the raw material part to the latter
alone. The manufactured goods originally held by the sterile
class have been divided among proprietors and farmers.
And in return the sterile class has one thousand million livres 5
worth of food and the same amount of raw materials, which
combine to create manufactured goods to the value of two
thousand million.

Quesnay's own 'Analyse du Tableau oeconomique' 1 (and
even more so the above summary of it) is a very simplified
account of the process of circulation and reproduction. But
within its limits it is consistent and lucid. It never departs from
its fundamental postulate, that agriculture alone can yield a
surplus; and it shows how the surplus is appropriated. Part of it
(in the * Tableau' it is the one thousand million livres which the
farmers spend on manufactured goods) is kept by the farmers
themselves. The other part goes to the proprietors and to the
sterile class. The significance of the appropriation by the farmer
we will discuss presently. As for the sterile class, they are given
a share in the surplus product merely because they are servants
of the producers and the proprietors. They cannot create any
value themselves; they only transform the value created in agri-
culture into manufactured goods, which are consumed in
addition to the necessities of life.

Although the ' Tableau ' operates with sums of money and

purchases and sales, it is not in effect concerned with the process

[of exchange. Its essence, behind the monetary form, is a circula-

\tion in kind; and its main concern is with the distribution and

reproduction of the use-values of the produit net. The physiocrats

1 F. Quesnay, (Euvres ficonomiques (ed. A. Oncken, 1888), pp. 305-78.

134

THE PHYSIOCRATS

started a train of thought which was a powerful stimulus to the
development of a labour theory of value and surplus-value.
They* did not, however, develop such a theory of value them-
selves. What attention they gave to the problem of exchange-
value and price produced results of an altogether different
character. Thus while one of their contributions finds its con-
tinuation in Smith, Ricardo, and Marx, the other leads to the
post-classical supply and demand and utility theories of value.

Quesnay himself, the founder of the school, did not treat the
problem of value in a systematic way. He held a cost-of-produc-
tion theory of price, as far as manufactured goods were con-
cerned. We have already seen that he regarded manufacture as
incapable of creating new values; it only added up existing
values. When manufactured goods were exchanged, he said
(consistently with his theory of \hz produit net], only equivalents
were exchanged. No profit (or surplus of value) could arise in
exchange. The natural price of manufactured goods was
explained by a number of other prices: those of the expenses
(depenses or frais) of the producers and of the 'merchants who
brought them to market. At the same time competition among
buyers and sellers would settle the right amount of expenses
which producers could incur. Competition was a very impor-
tant factor in the explanation of price; it settled a price which
was independent of buyers and sellers. Although these were
actuated by self-interest and were trying to buy cheap or sell
dear, the interplay of their actions compelled them to sacrifice
some of their interests. Neither could have their own way
completely. x

The role of competition was, however, developed entirely in
relation to the subjective factors in the minds of buyers and
sellers. The emphasis on the power of competition in deter-
mining the price was designed to answer the problem which
arose from a consideration of the estimates of buyers and sellers.
Quesnay admitted that the valuations of individuals had some-
thing to do with exchange. They provided the motive for
exchange but did not influence the terms on which exchange
took place. These were settled by a sort of general estimate
independent of the estimates of the individual parties.

1 F. Quesnay, ' Dialogue sur les Travaux des Artisans ', CEuvres &ono-
miques, pp. 538 sqq.

135

THE FOUNDERS OF POLITICAL ECONOMY

Turgot, who was otherwise the most mature, and politically
the most important, of the physiocrats, went even further in
introducing a certain dualism into the theory of value and price.
He did not depart from the main physiocratic tenet, that_gnly
labour in agriculture could create a surplus. But in at least one
of his writings he gave an important place to subjective elements
in the determination of exchange-value. l He made a list of the
different factors which an individual took into account in form-
ing a judgement about a particular good. Its ability to satisfy a
want, the ease with which it could be obtained, its scarcity, and
other considerations would together form what he called the
valeur estimative of a good. From this exchange- value was derived.
Turgot called it valeur appreciative and said that it was deter-
mined by the average of the valeur s estimatives of the parties to the
exchange.

Turgot provided a somewhat tenuous link between this theory
of exchange-value and the theory of the function of labour. For
he said that the individual would apply portions of his labour
to obtain the goods he needed according to his valuation of
them. On the other hand, this evaluation was itself 'le compte
qu'il se rend a lui-meme de la portion de sa peine et de son
temps, . . . qu'il peut employer a la recherche de Pobjet evalue '. 2
This appears to be circular reasoning; but it bears some resem-
blance to the relation between subjective valuation and cost of
production which was to be developed by the subjectivist
school. The apparent inconsistencies in the explanation of value
by the physiocrats were due to the fact that, although they made
labour the exclusive creator of the surplus (nature being its
source), they thought of value in this connection as use- value
only. Thus A when they came to consider exchange they were
forced to adopt a different explanation.

The theory of exchange-value, however, was much the least
important part of the physiocratic system. It was from the
concept of the produit net that they drew both their political
philosophy and their precepts for policy. Since agriculture was
the only form of surplus, the mercantilist measures of Colbert,
designed to foster industry, were useless. It was against these

1 A.-R.-J. Turgot, * Valeurs et Monnaics * in (Euvres de Turgot (ed. M. E.
Daire, 1844), vol. i, p. 75 sqq.

2 ibid., p. 83.

136

THE PHYSIOCRATS

that the physiocrats raised their battle-cry of laisser fain, laisser
passer. Industry created no values; it only transformed them. No
regulation of this process of transformation could add anything
to the wealth of the community. On the contrary, it was only
likely to make it more cumbersome and less economical. Inter-
vention in every form was, therefore, to go. Similarly in the
sphere of taxation, the most powerful instrument of state inter-
vention, industry and trade were to be freed from all contribu-
tions. The only branch of production on which taxes could
rightly be levied was that which created value agriculture. To
tax industry was only to tax the land in a roundabout and
therefore uneconomical way. A single tax on the land was the
financial maxim of physiocracy.

These views were embodied in an elaborate system to which
many books were devoted. Quesnay himself wrote one of its
main expositions. 1 The chief concept of that system was that of
the 'natural order'. Human society, according to the physio-
crats, was ruled by natural laws which could never be altered
by the positive laws of statecraft. These laws, "established by a
benevolent Providence for the good of mankind, were so clearly
in evidence that it should require only a little reflection to
recognize them. Quesnay seems to have thought that reflection
would not be enough, for he advocated that the natural order
should be taught, with the 'Tableau 5 forming presumably an
important part of the instruction. The essential aspects of the
natural order were the right to enjoy the benefits of property, to
exercise one's labour, and to have such freedom as was consistent
with the freedom of others to follow their self-interest. The
natural order was an anticipation of utilitarianism at a time when
the economic and political conditions were not really ripe for it.
It is this fact which explains the contradictions of the physio-
cratic system itself and of the theoretical and practical conclu-
sions that were drawn from it. There is an almost feudal air
about the physiocratic attitude to land which is reinforced by
their passionate defence of landed property. Yet since land was
regarded as the only source of wealth, the practical conclusion
was one which was against the landed interest the single tax.
This, together with the non-interventionist policy with which it
was related, became a powerful help in the development of
1 F. Quesnay, 'Le Droit nature!', (Euvres ^conomiques, pp. 359-77.

137

THE FOUNDERS OF POLITICAL ECONOMY

industry, although the physiocrats themselves never designed it
for that purpose.

Even on the question of property the analysis made by the
physiocrats was capable of being turned against their own
political beliefs. Many of their supporters saw in the physiocrats
only defenders of feudalism. Their views on landed property
and their frequent defence of an enlightened despotism 1
endeared them to those who were fighting a rearguard action
on behalf of feudalism. But when it came to the discussion of
economic problems the physiocrats were already forced to look
through capitalist glasses. For them the owner of the land had
already become a capitalist who employed the labourer.

Particularly in the writings of Turgot is this development
made clear, and thereby the subsequent development of
capitalist industry anticipated. He began with a consideration
of the produit net in its most primitive form. 2 In a discussion
which is very reminiscent of Steuart he showed that the surplus
created by the cultivator of the soil was the only fund from
which the other members of society could draw their subsistence.
Once he had produced a surplus the cultivator could realize it
by buying the labour of others. Those employed in industry
became stipendies of the cultivator.

The time comes, Turgot went on to say, when the cultivateur-
proprietaire ceases to be the only one concerned in the appropria-
tion of the produit net. Proprietors are separated from cultivators
when all the available land has passed into private property.
Those who own no land must become hired labourers either to
the stipendies in industry or to the owners of the land. In the
latter case the proprietors cease to cultivate their own land: the
work is done for them by wage-labourers. The juxtaposition of
capital and labour has now appeared in agricultural production
and with it the problem of wages and profits. The wage of the
labourer, said Turgot, will be determined by the subsistence he
needs (the strict necessaire which occurs in physiocratic writings).
But the bounty of nature will return to him more than that; and
the surplus will become the proprietor's rent. It is out of this

1 e.g. F. Quesnay, * Maximes gn6rales du gouvernement conomique
d'uri royaume royale ', CEuvres &onomiques pp. 329-37.

2 A.-R.-J. Turgot, * Reflexions sur la Formation et la Distribution des
Richesses' (1766), CEuvrcs de Turgot, vol. i, pp. 9 sqq.

138

THE PHYSIOCRATS

rent that accumulation takes place. Capital is created; and
advances for the growth of industry and for the improvement of
agriculture become habitual.

The physiocrats themselves were innocent of any desire to use
this kind of analysis for the purpose of attacking existing institu-
tions. But the analysis was capable of being used in that way.
The practical effect of their teaching, like that of their English
contemporaries, was to help in the removal of the last obstacles
that stood in the way of capitalist industry. In retrospect the
physiocrats must be given a high place among those who pre-
pared the ground for the French Revolution.

139

CHAPTER IV

The Classical System

(/) The Quality of Classicism

1 he last quarter of the eighteenth century is full of events
which seem to herald the founding of a new era in economic
and political organization. In the field of production it witnesses
the beginning of the Industrial Revolution, which was to open
up vast possibilities of expansion to the recently established rule
of industrial capitalism. The partnership of Mathew Boulton
and James Watt, concluded in 1775, brought about a union
between the captain of industry and the scientist which may be
taken as symbolical of a new alliance. A year later the American
Declaration of Independence brought to a close the exploitation
of one of the most important colonial areas and withdrew a
powerful prop from the old colonial system on which so much
of mercantilist thought was built. In the same year was pub-
lished An Inquiry into the Nature and Causes of the Wealth of Nations,
by a Scottish philosopher turned economist, which was destined
to be regarded as thefons et origo of economic thought by many
subsequent generations. And the fate of what remained of
medieval society was sealed a few years later by the great French
Revolution.

We have already seen that the beginning of this new era could
be placed almost a hundred years earlier. Industrial capitalism is
older than the Industrial Revolutions mercantiUsT policy begins
to wane sometime before the end of the eighteenth century; and
at any rate in England, the most advanced capitalist country,
the political structure had begun to change in accordance with
the changed distribution of economic power long before the
French Revolution released its stimulus for the forces of
liberalism everywhere. Economic theory too had acquired a
new content and new methods long before Adam Smith

140

TltE QUALITY OF CLASSICISM

appeared on the scene to make it conscious of its own changing
character.

Yet there is justification for the view that the fifty years around
the turn of the century mark a profound social change. New
forms of production, of social relations, of government and of
social thought, which in their struggles against the old had been
slow and often hesitant, were now advancing triumphantly; and
over their spectacular progress the earlier battles were easily
forgotten. The ideological reflections of economic and political
changes show a difference even more striking than those changes
themselves. Social thought becomes self-conscious; it shows a
more complete awareness than hitherto of the quality of the
social order which was being erected before its eyes. It becomes
capable of seeing the whole structure of that order and the
complex interrelation of its component p^jrts. The individual
social disciplines become integrated into a comprehensive social
philosophy; and each one is itself systematized* Scattered frag-
ments are collected, refined, and pieced together to make a body
of doctrines possessing internal consistency,

In the realm of economic thought this process is clearly in
evidence. What the century had so far produced had been
confused and haphazard. There had been brilliant anticipa-
tions, such as North's defence of free trade. There had even been
treatises which displayed a marked insight into the economic
process, such as Cantillon's Essai and Steuart's Principles. There
had been Petty, whose genius had succeeded in stating the great
problem of value. And from the controversy on money and
interest certain common views were arising. But in spite of all
this the achievement was limited and much confusion remained.
Petty's pre-occupation was with public finance, and his more
fundamental contributions were hidden beneath a mass of less
important material. Steuart's title was a misnomer: he lacked
the understanding of the inner laws of social processes. And even
Cantillon's Essai was hardly systematic enough to present to the
world a coherent picture of the economic mechanism.
* It jwas^the supreme achievement of Smith and Ricardo to
bring order Jnto the still chaoticTstaTe oTeconomic inquiry. To
this^prder the~name"" oF'the classical syste'm has been given.
DiffefeiiTsl5Ecx^ have chosen

this name for difFeBent reasons. Sometimes the term 'classical' is

141

THE CLASSICAL SYSTEM

applied to the doctrines of the system in order to describe the
unquestioned and widespread authority which they possessed.
Sometimes it is used to add a special significance to the conse-
quences in the realm of policy which flowed from these doctrines.
Sometimes, again, the system is called classical in order to
distinguish it from the critical schools (for example, the romantic)
which developed after it and which to many economists signify
a certain decadence. *

If we were to summarize the distinguishing characteristics of
the economic analysis contained in the Wealth of Nations or in
Ricardo's Principles, we should have to put first the insight
which they reveal into the economic mechanism of their own
time. With extreme rigour their analysis tries to lay bare the
prindjT^Jv^^gHj^ oLxh^capitalist system,

together with the hy^tprical development which producedttrXQ
tEIs Ricardo also added an attempt jo djrover the trend oFthe
system's future development. Its second claimjtp ^distinction lies
in the fact that it wag^the first .to x^QQgQi^^exgjicitly that social

gh^nomena^^mcluding history, had laws of {heir own which
coiHd^bj^discovered. /It waTtTiis appreciation of anirmer GeseTz-
massigkeit, as compelling in the individualist capitalist economy
as had been the outward forms of regulation of feudalism, which
gives to the work of Smith and Ricardo its scientific imprint.
That they were limited, as later critics have pointed out, not
only in their technical analysis but also in their views about the
validity of the laws they had discovered, does not diminish the
size of their achievement.flThey showed to subsequent economists
the need for a unified principle of explanation of economic
phenomena which related them to each other. Building on the
foundation of the physiocrats, they tried to give a complete
picture of the economic process abstract, it is true, yet contain-
ing the essence of reality. And even though parts of the picture
had to be redrawn the pattern remained.*!

It is not easy to define the chronological limits of the classical
system. Provided that we bear in mind the spadework of the
earlier eighteenth-century economists in England and of the
physiocrats in France, we can make its starting-point coincide
with the work of Adam Smith. The determination of its end is
more difficult. Indeed, some economists would claim that it
never ended and that its* tradition has lived on through the work

142

THE QUALITY OF CLASSICISM

of the leaders of modern economics. Nevertheless it seems impos-
sible to neglect the change that comes over economic thought in
of classicism, after the first two decades of

tKeTnineteenth century. It is true that the attempt made by
Malthus to destroy the foundations of the Ricardian system
failed and that the chief tenets of classical political economy
continued to enjoy considerable authority. Those that were
easily popularized quickly passed into the public consciousness.
Jn England, and to a less extent in other countries, the material
conditions were extremely favourable to the reception and sur-
vival of many of the classical ideas, and their influence on policy
was for a time very great.)

In the field of thought, however, signs of decay began to
appear, and James Mill's Elements of Political Economy, published
in 1821, is the last expression of unquestioning faith in the
Ricardian school. But already this work points to the impending"
dissolution of the system. After that, evidence of declining
authority becomes more abundant. In England and in France
economists reared in the classical tradition begin to be disturbed
by real or imaginary contradictions in inherited doctrine and by
some of its implications; and they begin to strike out on new
paths. In both countries too, but especially in England, the
influence of classical political economy makes itself felt in an
unexpected quarter: the infant working-class movement. Yet
another new development, particularly striking in Germany, is
a romantic reaction from classical teaching; in this, mercantilist
theories show a sudden revival. For nearly half a^&TITury it
becomes inTjpossible to speak of a single school of economic
thought which commands universal authority! It is only with the
advent of the marginal utility theory in the 'seventies that some
unification takes place and that it becomes possible once again
to regard one doctrine as the commonly accepted one. But even
then authority is no longer unquestioned, nor is it universal. /Its
hold is secure only over academic thought and its impact upon
policy cannot be compared with that of the classical theory*

The building up of the classical system was so much the work
of two men that it seems best to concentrate entirely on their
work in these pages. The only writer to be considered besides
Smith and Ricardo in this chapter is Malthus, but only for
that part of his wo t rk which entered into the classical tradi-

THE CLASSICAL SYSTEM

tion. We shall meet Malthus again in the next chapter as an
important critic of some of the vital conclusions of Ricardo.

It may appear odd to make Smith and Ricardo jointly
responsible for the founding of the classical school. When Smith
published his chief economic work Ricardo was only four years
old. It was forty-one years later (twenty-seven years after Smith's
death) that Ricardo himself published a comprehensive treatise.
Again, while Smith started as a philosopher, Ricardo came to
economic thought as a successful business man who later turned
politician. Although a promised definitive edition of Ricardo's
works will run to many volumes, his chief work is a slim book
compared with Adam Smith's bulky treatise. Nothing could be
more different than their plans, methods, or styles. Yet with all
these differences, their agreements are so fundamental that their
names must for ever remain linked in the history of econ-
omic thought.

(2) Adam Smith

(a) The Sources. Adam Smith was born in 1723, the son of a
Scottish Judge Advocate and Comptroller of Customs. He was
educated at the universities of Glasgow and Oxford and became
professor first of logic and then of moral philosophy at Glasgow.
After thirteen years of academic teaching he travelled for two
years in France as tutor to the young Duke of Buccleuch, from
whom he afterwards received a substantial pension which
enabled him to devote himself entirely to his writing/In 1778,
however, he accepted an appointment as Commissioner of
Customs, which he held for the remaining years of his life. He
died in 1 790. -

These chief facts of his life may provide some explanation of his
method of approach to economic inquiry. *Adam Smith was the
first academic economist; and his career is not very different
from that of many economists of the last hundred and fifty
years. From his time onwards much of the progress of economic
thought is bound up with the work of academic teachers of the
subject, many of whom had, like him, been philosophers. The
academic influence on Adam Smith is seen in the much higher
degree of systematic thinking which he was able to achieve as
compared with those who preceded him. A.certain detachment

144

ADAM SMITH

from affairs (with a knowledge of them) would almost appear to
have been necessary at that stage of development of economic
thought in order to complete the transformation of the subject
into a science. Nor is it surprising that it should have been a
moral philosopher who effected that completion, for at that
time this subject consisted to a very large extent of political
philosophy, political science, and jurisprudence. And already
in his first great work, * The Theory of Moral Sentiments (1759),
Adam Smith had indicated both some of his special interests in
the problems of human conduct and the methods of treatment
which were to distinguish his later work. It appears that some
of his ideas on economic subjects were formed even before he
was appointed to a chair at Glasgow. 1 At any rate, it is evident
from lecture notes which were edited by the late Professor
Cannan 2 that between 1760 and 1764 his lectures on moral
philosophy contained a great deal of economic material. And
if it were not otherwise known, internal evidence would show
that the Wealth of Nations took many years to complete... -

Adam Smith absorbed many influences during the twenty-
five years or more in which his economic views were maturing.
Although the Wealth of Nations contains few references to earlier
writers and hardly any acknowledgement of inspiration received
from others, it would be easy to show thatjnone of its main
features is original. The socTal^pEIIosophy which underlies it was
widely held at the time, and Smith's teacher, Francis Hutchesoif,
was one of its chief exponents. It was from him that Adam Smith
derived his faith in the natural order. The naturalist school of
philosophy to which he belonged had had an unbroken tradition
from the later Greek Stoics and Epicureans onwards. It reap-
peared in the works of Roman Stoics like Cicero, Seneca, and
Epictetus, received an enormous stimulus in the Renaissance
and Reformation, showed itself again in a modified form in
Bacon, Hobbes, and Locke, and came to full flower in the
writings of Smith, the physiocrats, and the later radicals.

In spite of their sharp distinctions, these schools can be
regarded as representative of a single trend of thought. Its
essence is a reliance on what is natural as against what is

1 Dugald Stewart, Biographical Memoir of Adam Smith (181 1), pp. 90-101.

2 Adam Smith, Lectures on Justice {Police, Revenue and Arms (ed. E. Cannan,
1896).

THE CLASSICAL SYSTEM

contrived. It implies a belief in the existence of an inherent
"natural order (however that may be defined) which is superior
to any order artificially created by mankind. It claims that all
that wise social organization need do is to act as nearly as possible
in harmony with the dictates of the natural order. At different
times this involved different action; and the policies urged by
the protagonists at different stages appear contradictory in
retrospect. Their common characteristic, however, is the
principle from which they claim authority: the superiority of
natural over man-made law. We have already seen in the works
of the physiocrats in what particular direction the philosophy of
natural law was tending at the end of the eighteenth century.
We shall find a similar trend in Adam Smith.

-The influence of physiocratic economic doctrine on Smith is
more difficult to establish* He was certainly acquainted both
with the writings of the school and with many of its leaders. The
Wealth of Nations has references to at least two eminent physio-
crats, Quesnay and Mercier deja Riviere, and the final chapter
of the jburth book is^IevotedjtQ a. critique of physiocracy.* More-
pver, in spite of his own belief to the contrary, SjnithJbidd many
views which were very similar to ihose of the physiocrats! Both
in KIs adherence" !6~nafufalism and in his interest in the problem
of the surplus, his path is parallel to theirs.* On the other hand, it
is known that the main outline of this analysis was ready before
he had an opportunity of acquiring any considerable knowledge
of physiocracy. We must conclude that the economic and
political conditions which produced the founders of French
political economy were not fundamentally different from those
which were responsible for moulding the thought of Adam
Smith.

"The debt which Smith owed to earlier English economic
thought cannot be in doubt.' In his onslaught off mercantilism,
for example, he had often been anticipated. We have already
seen that there were many conflicting views among the seven-
teenth-century writers themselves; and the slashing attacks on
protection of a writer like North cout^pot have been bettered
by Smith himself. In the theory of money which he does not
treat at length or with great success Smith was much indebted
to Hume, Locke, and Steuart. From the last he seems also to
have been inspired in his historical interests, though instead of

146

ADAM SMITH

using Steuart's conjectural method he effectively employed
realistic illustrations. From Petty and Steuart, to mention no
others, Smith took over not only the problems of public finance,
but also some of the solutions. An indication of the celebrated
four canons, for example,, may be found in Petty's Treatise.
Finally, and perhaps most important of all, Smith's treatment
of the question of value and of all the problems that flow from
it, owes much to the whole body of economic thought which had
already developed. "Petty, Steuart, and Cantillon, in particular,
must be mentioned as his forerunners.

No recital of Smith's debt to others can diminish the impor-
tance of his own achievement. He wove together the separate
strands of thought which he had found and in the process
transformed their significance. *And_on at lg^JL one P_21t~ a
fundamental one his work meant a revolution of economic'
tHmkme

In order to summarize Smith's work in a few pages it is
necessary to divide it in some way. It seems best to distinguish
two aspects, having due regard to their interrelation. These are:
the underlying social and political philosophy and the precepts
of economic policy which are derived from them; and the
technical economic content. Opinions differ on the relative
importance of these constituent elements of the Wealth of 'Nations,
but the view here adopted is that the above order is one of
ascending significance.

(b) The Political Philosophy. The philosophical elements are not
present on the surface of Smith's analysis. T^\e work is divided
into five books dealing respectively with problems of produc-
tion, distribution^and exchange, with jr.apital, with (jifferehl:
economic^ pofiHiLl^^ tl51 es ^Y different nations,

with previous systems of political economy

public finance.* With the exception of the very short second
chapter of Book I, there is no special section set aside for a dis-
cussion of the scope of economic inquiry in relation to the study
of human conduct in general; nor is there any explicit mention
of the system of philosophy from which Smith's economic
principles are derived. Yet this system is very much in evidence.
It pervades the whole book even more than it does the work of
the physiocratic writers. 'Again and again Smith will make a

147

THE CLASSICAL SYSTEM

particular argument the occasion for emphasizing the supreme
beneficence of the natural order and for pointing out the
inevitable imperfections of human institutions.* Take away arti-
ficial preferences and restraints, he says, and ' the obvious and
simple system of natural liberty' will establish itself. *" Again,
' that order of things which necessity imposes. , . is . . . promoted
by the natural inclinations of man '/Human institutions only
too often thwart these natural inclinations. 2

We must not forget that the author of the Wealth of fflhtions
was also the author of the Theory of Moral Sentiments; and we
cannot understand the economic ideas of the one without some
knowledge of the philosophy of the other. ' ^lman.^onduct,
according to Smith, was naturally actuated by six motives:
seIF-love,"sympathy, the desire to be free, a sense of propriety, a
habit of labour, and the propensity to truck, barter, and
exchange one thing.Xor^another.' Given these springs of conduct,
each man was naturally tKe best judge of his own interest and
should therefore be left free to pursue it in his own way! If left
to himself he would not only attain his own best advantage, but
he would also further the common good. This result was
achieved because Providence had made society into a system
in which a natural order prevailed. The ^different motives of
human action were so carefully balanced that the benefit of
one could not conflict with the good of all. Self-love was accom-
panied by other motives, particularly sympathy; the actions
resulting from it could not but involve the advantage of others
in one's own gain. Itjvvasjiis belkf^injJiL natural balance of
human motives which led Adam Smith to make his celebrated
statement that in pursuing his own advantage each individual
was ' led by an invisible hand to promote an end which was no

Smith doubted whether the

individual did not in this way promote the interest of society
more effectively than if he had set out to do so. c I have never
known', he says, 'much good done by those who affected to
trade for the public good.' -

The consequences of this belief in the natural order are simple.
Government can rarely be more effective than when it is nega-

1 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
(ed. W. R. Scott, 1925), vol. ii, p. 206.

2 Wealth of Nations, vol. i, p. 385. , 3 ibid., p. 456.

148

ADAM SMITH

tive. Its intervention in human affairs is generally harmful. Let
it leave each member of the community to seek to maximize his
own advantage and, compelled by natural law, he will contri-
bute to the maximization of the common good/ The natural
system knows only three proper duties of government which,
though of great importance, are 'plain and intelligible to
common understanding'.* The first is the duty of defence from'
foreign aggression; the second, the dutj^rf establishing an exact
administration of justice; and the third^the maintenance of such
puBEc works and institutions as would not be maintained by
any individual or group of individuals for lack of adequate
proStrrPeace^ ait home and abroad, justice, education, and a
minimum of other public enterprises, like roads, bridges, canals,
and harbours, are all the benefits which government can confer.
Beyond these the 'invisible hand' is more effective.*

'When Smith applies these rules of the natural order to econo-
mic matters he becomes a strong opponent of all forms of state
interference with the ordiriary^biisiness of industry and com-
merce.* The natural balance of motives is most effectively at
work in economic affairs. Every individual is most anxious to
obtain the greatest profit for himself. But he is a member of a
commonwealth and his search for profits can only lead along
paths ordained by the natural social order. Through division of
labour man increases the productivity of his labour, but he also
ceases to be independent of others. Man as a member of society
has almost constant occasion for the help of his brethren and it
is in vain for him to expect it from their benevolence only. He
must, in his desire to achieve his own ends, appeal to the self-
love of others and not only to their sympathy. 'It is not from
the benevolence of the butcher, the brewer, or the baker, that we
expect our dinner, but from their regard to their own interest.' 2

* Exchange makes possible this simultaneous satisfaction pf two
individual interests^ Every individual in using his property or
labour for his own benefit has to produce for the purposes of
exchange, i.e. for purposes determined by all other members of
the community. Whether he wishes to do so or not, he is obliged
by his very membership of the social order to confer a benefit in
exchange for the one he receives.* Every one is obliged to bring
the results of his efforts 'into a common stock, where every man
1 Wealth of Nations y vcA. ii, p. 206. a ibid., vol. i, p. 15.

THE CLASSICAL SYSTEM

may purchase whatever part of the produce of other men's
talents he has occasion for'. 1

Smith saw in the most complicated processes of industry and
trade the same inherent order which ruled the simplest acts of
barter, In the different branches of home trade, in foreign com-
merce, in the relation of industry and agriculture the principle
held good that order would arise spontaneously and that inter-
ference would only result in a diminution of benefit. c It is the
maxim of every prudent master of a family, never to attempt to
make at home what it will cost him more to make than to buy.
. . . What is prudence in the conduct of every private family,
can scarce be folly in that of a great kingdom.' 2 It follows that
if goods could be bought abroad more cheaply than they
could be made at home it would be unwise to put obstacles in
the way of their importation; for this would direct industry into
channels which were less remunerative than those which it
would find for itself.

Again, all domestic iiieasures^ designed to favour one trade or
suppress another, to encourage agriculture as against industry,
or vice versa, were unwise. Encouragements which drew more
capital into an industry than would naturally go to it, and
restraints which were designed to repel some or all capital from
an industry in which it would otherwise be employed, were ill
conceived. They did not promote the social good for which they
were designed, for, by stultifying the individual search for
maximum profit, they also diminished the common profit. 3
* Smith becomes thus a champion of laisser faire^of even greater
force than the physiocrats* since he applied the principle without
basing it on the view that agriculture occupied a specially exalted
position. 'The universality of the theory gave it its peculiar
strength.'Smith was not content to state an abstract principle:
his aim was to destroy the real conditions which conflicted with
the principle. To apply the principles of Naturalism to economic
policy involved a struggle against the still substantial structure
of mercantilist foreign trade policy, against the mass of industrial
regulation which had been left from preceding centuries, and
against any attempts to add fresh monopolies and privileges to
them.

1 Wealth of Nations, vol. i, p. 17. 8 ibid., p. 457.

8 ibid., vol. ii, pp. 205-6.

150

ADAM SMITH

Among the forces which freed English foreign trade from
regulation, which removed prohibitions, excessive import duties
and restrictive trade treaties, Adam Smith's work deserves a
prominent place. "A substantial part of his work was devoted to
an attackjyx>n ^^^^aU^^J^e.^^canti[e systeroLAlthough
Smith was mistaken in his assessment of the views of mercantilist
writers his analysis and rejection of mercantilist policy was most
penetrating and lucid. One by one he examined the methods
which had been, or were still being used to manipulate foreign
trade in the interests of an individual country, and found them
all ineffective and harmful.'Bounties and restraints, the colonial
system and trade treaties, these and all other measures to secure
a favourable balance of trade and a large stock of bullion, were
quickly disposed of. They were all shown to have been produc-
tive of no common benefit, however much they may have
enhanced the profits of individual sections of industry or trade. *

Similarly, regulations concerning wages and apprenticeship
and all other aspects of production were condemned/ Governi
ment should refuse to set up any special economic privileged
and it should take positive action to destroy any monopolistic
position, whether of capital or of labour, which men by con-
certed action might have obtained. Preservation of free competi-
tion, if necessary by state action, was the principal duty of
economic policy. Only complete competition was consistent
witFT naturalTifTerty; and only complete competition could
insure that everybody obtained the full reward of his efforts and
added his full contribution to the common good. *

The results whkhJbHo\v^_S^ were amazingly

rapid ancTcomplete. The impact of the Wealth of Nations upon
business men and politicians alike was very great. But although
the apostle of economic liberalism spoke in lucid and persuasive
terms^Tiis" success \vould not fiave* been so great if he had not
Spoken to ah audience that was ready to receive his message'.
He spoke with their voice, the voice of the industrialists who
were anxious to sweep away all restrictions on the market and
on the supply of labour the remnants of the out-of-date regime
of merchant capital and the landed interest. Moreover, the class
of industrial capitalists was not yet matured enough to have
acquired respectability. Smith presented this class with a theory
which supplied whet was still lacking. By analysing economic

THE CLASSICAL SYSTEM

activity against a background of naturalist philosophy, this
theory gave to the conduct of the prospective leaders of econo-
mic life an imprint of inevitability. They recognized in the self-
interest which he put at the centre of human conduct the
motive which inspired their everyday business^ life. And they
were delighted to know that their pursuit of profit was now to
be regarded as unselfish." Gone was anj^ lurking^ suspicion that
trade might be sinful or^HeneatK~tHe dignity of gentlemen.
These remnants of platonic and canonist thought were swept
aside; the business man now became in theory what he already
was in practice the leader of the economic and political order.*
* By basing economic policy on a natural law which implied
non-intervention by the state, Smith also gave theoretical expres-
sion to the essential interests of the business class.* The indus-
trialists saw enormous possibilities of expansion of production
and trade which were being frustrated by irksome restrictions.
To abolish state regulation and monopoly might have been
destructive of sectional privilege* but it was in the interests of
the most progressive class of the community, and indeed of the
community as a whole. When Adam Smith inveighed against
corrupt politicians he was only censuring a state of affairs well
known to business men. When he showed that most of the actions
of government were designed to impede economic progress he
was expressing a truth of which his readers were aware.' When he
said that 'in the mercantile system, the interest of the consumer
is almost constantly sacrificed', and production not consump-
tion is regarded ' as the ultimate end and object of all industry
and commerce V he could again claim that he was speaking the
truth. At the stage which capitalism had then reached, compjeti^
tion, unrestricted by the state or any other agency, was the first
condition of economic expansion and, therefore, ultimately ofjm
increase in the satisfaction of the wants of all members of the
community.

* It has often been said that Adam Smith represented the
interests of a single class! This is undoubtedly true not only in a
historical sense but even subjectively. We shall see that, in spite of
his usual mildness of expression, Smith used very heavy invec-
tive against the unproductive members of the community.
Although he included many in that category, he could have
1 Wealth of Nations, vol. ii, p. r/y.

ADAM SMITH

been under no illusion that his main attack was directed against
the privileged position of those who were the most formidable
obstacles to the further growth of industrial capitalism, But the
success of his advocacy of a particular interest was due to the
fact that it could be made into a defence of the common good.
This, indeed, is the quality of any successful ideology. Partisan-
ship had often appeared under the guise of universal benevo-
lence and justice; but this time the coincidence of interests was
worked out more skilfully and had, for a time, a solid material
basis.*Economic progress was dependent upon the establishment
of the supremacy of the industrial capitalistrin helping to create
an economic structure in which alone that supremacy was
possible, Adam Smith could claim that he was furthering the
welfare of the whole community .

Whether the same was true of other countries is another
matter. We shall see that it took a long time for similar schools
of thought to arise elsewhere and to achieve a substantial
following." There is good ground for saying that the full doctrine
of economic liberalism which was elaborated by Smith never
took as deep roots in other countries as it did in EnglaiidC For
the peculiar conditions of England on the eve of tHe Industrial
Revolution were never reproduced in other countries. When
Smith wrote, England was already the most advanced capitalist
country in the worldf With a large accumulated capital, she was
preparing to acquire and to consolidate the industrial leader-
ship over the rest of the world. Although it was not until the
middle of the subsequent century that England could truly be
called 'the workshop of the_wprld' a she was already beginning
to establish that position for iierself in Smith's clay. And the
policy which Smith advocated was one which was designed to
quicken that trend.' The attack on monopolistic practices at
home, made in the interests of industrial expansion, became
part of a general fight against privilege, in harmony with much
contemporaneous political thought. The attack on protection
could similarly be developed as being in the interests of con-
sumers who desired cheaper goods, although it was also dictated
by the interests of manufacturers who desired low costs of pro-
duction which would enable them to monopolize export markets.

The identification of particular and general interests was
possible at this st^ge of development. It was, however, not

153

THE CLASSICAL SYSTEM

made with an historically limited objective, but it was embodied
in a theoretical system which claimed universal validity and
which involved its adherents in a special view of society and of
the state. In particular it implied that there was a harmony of
interests of individuals and classes which could only be disturbed
by the acquisition of privilege. And this privilege was made to
result not from any social institutions but from action contrived
in defiance of the natural law, i.e. political intervention. The
state was thusjglaced mjpa^r^^sidejiid jaboye society. Its inter-
ventiorTon behalf of a sectional interest was something artificial.
If it intervened to create a privilege, it had been illegitimately
manipulated/ Its real function was to be impartial. It was
nothing but a piece of machinery designed for certain very
limited ends which the interests of society as a whole required.
That machinery should not be allowed to get into the hands of
any section of the community.

Adam Smith himself was under no illusion about the desire
of individuals, particularly business men, to create privileged
positions for themselves. But he nevertheless believed in the
harmony of interests, since he thought that these privileged posi-
tions could only be maintained with state support. Without the
intervention of government to help them and with an active
policy to preserve competition, those in search of monopoly were
powerless. ^Fundamentally, h^ like later liberal philosophers,
was_anMggtimistu" The social evils which he saw around him he
ascribed to past mistakes of government; past history was only
a record of misconceived attempts to buttress sectional privilege;
sweep them away, and all would be welTTSmith's whole work
implied great faith in the possibility of freeing the state from the
mcubus of individual or class influence. Once this emancipation
was achieved the natural social harmony would be manifest
to all.-

The belief in the natural order led Smith to criticize state
action. But it did not lead him to doubt the compatibility of
social harmony with the institution of private property. He
knew well the relation between property and the development
of government, -Civil government, he thought, was primarily
needed for the pipi^ction_of^ropertyl It was unnecessary in
primitive communities, since there was hardly any property
L that could excite the envy of the poor and create a sense of

154

ADAM SMITH

insecurity in the rich. But once property increased government
became essential to safeguard it.* c Civil government, so far as it
is instituted for the security of property, is in reality instituted
for the defence of the rich against the poor, or of those who have
some property against those who have none at all.' 1 Smith also
believed that property was the chief cause of authority and
subordination; and^thaj 7 birth 3 t^^ most important of the other
causes^jvvas fojind^d_upon .origin aLdifGer^n^e^-efwecrfth . *

Yet he did not fear that any disturbance of natural harmony
could result from the existence of private property or from the
great inequalities in its distribution. In an opulent and civilized
society and in one in which state action was confined within the
limits he had prescribed, great fortunes, he thought, need not
create oppression and exploitation. Nobody was dependent
upon the benevolence of others; lor everything that one got
from anybody one gave an equivalent in exchange. Moreover,
the free play of natural forces would be destructive of all posi-
tions that were not built upon contributions to the common
good.

Other political philosophers and economists were later to
refine and elaborate these views of Adam SmithrAnd for a long
time the theory of harmony and an optimistic view of social
development " were to remain essential qualities^ pf classical
ecoiiomic thought* However, Adam Smith's attempt to link his
economic analysis with his social philosophy was not so success-
ful. His economic theory, which formed the basis of the classical
position, contained elements which could be made to support
an entirely different view of society and different political pre-
cepts. This does not detract from the success of Smith's theory as
a ruling-class ideology. For every ideology contains antithetical
elements precisely because it has to include the aspirations of
the exploited classes. It presents a harmonious picture of reality;
and it is on the contradiction between reality and that deceptive
picture that, at a certain stage, the exploited classes seize in their
revolt against the rulers. Smith's success, therefore, could not be
permanent. Already, in Ricardo's formulation, Smith's theory
loses its optimistic and harmonious implication, and in its subse-
quent development by Marx it is turned against the very interests
which it had been Smith's historical task to champion.
* Wealth of Nations, vol. ii, p. 233.
155

THE CLASSICAL SYSTEM

(c) The Theory of Value. The great advance in economic thought
which is due to Smith is the emancipation from mercantilist and
physiocratic fetters! For two hundred years economists had
been searching for the ultimate source of wealth. The mercan-
tilists had found it in foreign trade. The physiocrats had gone
farther and had shifted the origin of wealth from the sphere of
exchange to that of production'. But they had still remained
confined within a single concrete form of production, agricul-
ture. Adam Smith, building on the foundations of Peity and
Cantillon, effected the final revolution. With him labour as such
becomes the source of the fund which originally supplies every
nation c with all the necessaries and conveniences of life which
it annually consumes'. 1 Smith still spoke of wealth in the sense
of useful material objects, as his English predecessors had done,
but, by making it result from labour in general, he was led to
inquire into the social rather than the technical appearance of
wealth:" The wejalth of a nation, he said^wijl ..depend jjpon two
condiUQns: first, the degree of productivityj3fjne JaboiTr to
which it is due^ and secondly, the amount of useful labour, l;hat
is tcTsay, labour productive of wealth^ which is employed? The
examination of the first of these factors leads Smith to the dis-
cussion of the division of labour, exchange, money, and distribu-
tion, to which the whole of the first book is devoted. The second
involves an analysis of capital; and this is made in the second
book.

Smith begins his analysis with the division of labour because
he wishes to find the principle which transforms particular con-
crete forms of labour, which produce particular goods (use-
values), into the social category labour, which becomes the
source of wealth in the abstract (exchange- value) . Division of
labour becomes for Smith the principal cause of the increasing
productivity of labour. After giving his well-known account of
its quality and consequences, 2 he proceeds to inquire into the
causes which produce it. It is here that he reverses the true logical
and historical process by making division of labour depend upon
the propensity to exchange, which he regards as one of the
principal motives of human conduct. There can be little doubt
that on this point Smith confused cause and effect/However

1 Wealth of Nations, vol. i, p. i. 2 ibid., Book I, ch. i.

156

ADAM SMITH

true it may be that exchange (it is private exchange of which
Smith is thinking) cannot exist without division of labour, it is
certainly not true that division of labour necessarily requires the
existence of private exchange* It is logically demonstrable that
a certain social organization (for example, the centrally directed
economy of a patriarchal tribe which lacks the institution of
private property) can have a highly developed division of
labour without exchange. And communities of which this was
true can certainly be shown to have existed. "Adam Smith was
guilty of making the characteristics of the society of his own
day valid for all time; he regarded as a natural human motive
and, therefore, as a principle of explanation, a feature of the
contemporaneous social order which was historically condi-
tioned. 1 But Smith's purpose was propagandist. He emphasized
the influence of the market on productivity in order to demon-
strate that trade had to be freed as a prerequisite to the develop-
ment of productive power, and not merely to the full use of the
existing powers of production. '

He proceeds to analyse the determinants of the degree of the
division of labour and concludes that it is limited by the extent
of the market.* He elaborates points made originally by Xeno-
phon, and later by Petty, and gives what has since been regarded
as the classic description of the relation between the circle of
exchange and the division of labour. 2 He shows thsyt when these
have reached a certain stage of development the dependence of
each individual upon the rest of the community is very great.
Every man becomes then 'in some measure a merchant, and the
society itself grows to be what is properly a commercial society 5 . 3
The efficiency with which this society carries out its now habi-
tual exchanges must remain seriously defective so long as
exchange is in kind. -The well-known disadvantages of barter
lead to the adoption of a generally accepted medium of
exchange, money.* Smith describes how the precious metals
came to be chosen as the commodity of which money should
be made, and briefly traces their progress through history. But
this is only incidental. The important point to which the short
discussion of money leads is the question of e the rules which men
naturally observe in exchanging [goods] either for money or

1 Wealth of Nations, Book I, ch. ii. * ibid., ch. iii.

3 ibid., vol. i, p. 33.

157

THE CLASSICAL SYSTEM

for one another. . . . These rules determine what may be called
the relative or exchangeable value of goods/ 1 In this rather
roundabout way Smith reaches the central problem of economic
inquiry. But the problem was inherent in the very fact that he
had started by rejecting the mercantilist and physiocratic con-
cern for the concrete embodiments of wealth in favour of the
social category, wealth.

Beforc_beginning the analysis of value Smith distinguishes
twpjises of thejword. One, he points out^signifies^ the utility of
^or^j^T&ul^objtci^ and this he calls value in use\ the_other
refers to thejxxwer possc^sed^y^^^oBjecFoF^rchasirig other
52?S^ He niiitipns_a_garadpx in

terms which have since become famous. Sqmc_of the jnost useful

, "He say^jhave scarcely any value in

exchange, wMe others, liEe ^ diamonds j_jj though of Jjttle

command a great deal of other commodities in exchange. It was
this paradox which was to provide the starting-point for the
theorizing of economists of the later nineteenth century which
finally led to the* marginal^ utility doctrine'. Smith himself was
not interested in elucidating the intricacies of use-value. He puts
the distinction of the two meanings of the term c value ' at the
end of his chapter on money in order, so it seems, to get it out
of the way before beginning the really important work, the
analysis of exchange- value. This resolves itself into three parts:
what is the measure of the exchange-value of commodities or,
as Smith also calls it, their real or natural price? what are the
constituent parts of this natural price? and, finally, how do
variations of the market price of commodities from their natural
price arise? To these questions, chapters v, vi, and vii of Book I
are devoted.
* S not ^ a sumi1: ofAdam_.Smjth*s

. -

ambiguous and confused theory of valueTSubscquent economists

Have found two or three different strands of thought which
Smith did not separate sufficiently clearly. He developed the
labour theory inherited from Petty and Cantillon; but he also
added to it certain elements of the supply and demand analysis
of Locke. And in his struggles with the difficulties of the concept
of capital and its place in the economic process he contradicted
his own labour theory of value and bequeathed to later genera-
^W^alih of Nations, vol. i, p. 280

158

ADAM SMITH

tions what became a mechanical cost of production theory.
According to their predilections economis'ts'fiave stressed one or
the other of these different principles. But not even adherents
of the same school can agree on their interpretation of Smith's
theory. One writer, for example, is anxious to show the progress
of the theory of value towards the subjectivist school to which
he belongs; and he criticizes Adam Smith for having concen-
trated on the exchange-value (or purchasing power) of goods to
the exclusion of their utility, which, to this writer, is the real
cause of value. l A recent writer, on the other hand, who is also
apparently a follower of the subjectivist school, finds in Adam
Smith traces of the beginning of that school. She thinks that
Adam Smith, by adopting the consumer's concept of wealth,
raised the problem of the connection between production and
demand. It was due, she says, to Smith's indecision in the
treatment of this problem and to the subsequent victory of the
Ricardian school that the demand aspect was neglected in
England, and that that part of Smith's tradition was left to
flourish on the Continent. 2

* It is true that Adam Smith's theory is inconsistent. But
although he involved himself, as we shall see, in many contra-
dictions, he made considerable progress in the explanation of
value. What is fundamental in his theory is that which Ricardo
singled out as the basis for his own analysis;* the labour theory
of value! However inconsistent Smith may be in his exposition
of it, he keeps to it most strictly in one important application of
it in his discussion of the surplus product which, after its
transformation into what Marx later called surplus value, formed
the basis of all profit.

It seems established that the earliest theory which Adam
Smith held regarded labour as the sole source of value and the
qulmUtj^ each commodity as the measure

of that value. But here, already, confusion biegins. His ^jjis

of exchange-value in the Lectures^ little" diffeFefit from that of
^fevious~wiTfcrs wholEad adopted a similar cxplanationT Like
Petty, ^teuart, and Cantillon, he con^ercd^e_^alug of a
commodity to be^jjetermined by the cost of producing the^
amount of labour necessary for the production of the com-

1 R. Zuckerkandl, %ur Theorie des Preises, pp. 65-6.

a M. Bowlcy, Nassau Senior and Classical Economics (1937), pp. 67-6.

159

THE CLASSICAL SYSTEM

modity. This cost included not only the subsistence of the
labourer himself but also allowances for education and repro-
duction. Like his predecessors, he admitted the influence of
Demand which determined the distribution of labour in such a
way as to make value and cost of labour equal. l *

In the Wealth of Nations the theory is elaborated, but
becomes even less clear-cut. In the first place the scope of the
labour theory becomes limited and an additional theory is
developed in order to explain a further range of value pheno-
mena. In the second place, the exposition of the labour theory
itself, even within the limits in which Smith still admits its
validity, is very confused. The explanation of exchange-value
in chapter v begins with an analysis of the quality of exchange-
value derived from the social facts of division of labour and
private exchange. A man is rich or poor, he says, according to
the amount of useful things which he can obtain. When division
of labour has taken place his own labour can provide him with
only a few of these things, and his wealth will come to depend
on the amount of other people's labour which he can command.
The value in exchange of any commodity which he possesses
will then be equal to the amount of labour it can command.
Smith concludes that labour c is the real measure of the exchange-
able value of all commodities'. 2 '

There follows immediately another account of the orjgmjof
valu^and itsjnea^ure, which Adam Smith evidently intended to
be only a version of the first but which is quite different. For
he goes on to measure the value of a commodity not only by the
amount of labour which it can command in exchange (or as he
now puts It, me value of a certain quantity of labour), but also
by the amount of labour which its production requires. These
two explanations now perast side by side; and the confusion
between them is well illustrated by the statement that a man's
'fortune is greater or less, precisely in proportion to ... the
quantity either of other men's labour, or, what is the same
thing, of the produce of other men's labour, which it enables
frim to purchase or command.' 3 In the first half of this statement

1 Adam Smith, Lectures on Justice, Police, Revenue and Arms, cd. Cannan,
pp. 173-82.

2 Adam Smith, Wealth of Nations, cd. W. R. Scott, vol. i, p. 30.

3 ibid., p. 31.

160

ADAM SMITH

the exchange-value of labour is made the measure of the
exchange- value of other commodities; in the second half that
measure is given by the amount of labour embodied in a com-
modity. Ricardo was later to take over the second explanation
though hcTdiiT riot succeed in fully elaborating its consequences.
Marx was able to do so and thus to develop the first consistent
laBmTfiFeor^ of value. On the other hand, this part of Smith's
tfieoFy served also as the starting-point for a psychic cost theory
of value which operates with the concept oF^dfsutility' and
formrari important part of many later explanations of value.

The cause of Smith's confusion lies in his desire to emphasize
the importance of the division of labour and the changes which
its introduction brings about."' Labour', he says, 'was the first
price paid ... for all things.' 1 But once division of labour is
introduced it is no longer the product of one's own labour that
determines wealth but the amount of other people's labour
which this product can command, i.eT the quantity of the labour
of society which one can buy with the quantity of labour con-
tained in one's product. 2 In other words, what Smith was here
doing was merely to develop the concept of exchange-value as
such, a concept which, as Marx pointed out, only arises so far
as the labour theory of value is concerned when labour has
become a social factor. For through division of labour and
exchange the products of the labour of different individuals
must somehow be equated. But Smith applied this concept in
a way which involved an equation not only between the products
of labour but also between the product of labour and labour
itself; and it was the difficulty inherent in this which finally led
him to develop a different theory of value.
x Before he proceeds to that Smith once again discusses money.
Here too he is involved in some confusion. He now speaks of
labour as the measure of value not in the sense of the inherent
substance of exchange-value, but in the sense of a yard-stick
with which the value of commodities is compared. In this sense,
he finds labour to be an inefficient measure. Commodities, he
says, are seldom exchanged with labour (here the above-men-
tioned confusion is again apparent) but with other commodities.
The exchange-value of commodities is, therefore, more com-

1 Adam Smith, Wealth of Nations, ed. W. R. Scott, vol. i, p. 30.

2 Karl Marx, Themen uber den Mehrwert, vol. i, p. 1 34.

l6l F

THE CLASSICAL SYSTEM

monly estimated in terms of quantities of other commodities,
which are 'plain and palpable 5 objects, than in labour, which
is 'an abstract notion'. 1 Once money is used every commodity
|s most frequently exchanged for it; and this now becomes the
commonly used measure of value. Through his confusion of the
exact significance of the term 'measure of value', Adam Smith
setsjij} .monfiy^As being of equal status with labour. Or almost
so, for he proceeds to search for something which possesses
constant value and which can therefore be used as an efficient
measuring rod * He dismisses gold and silver^ the most widely
used money commodities, as being subject to fluctuations in
value, i.e. in the amount of labour which is necessary to produce
them, or (again the confusion) in the amount of labour which a
quantity of them can command. He returns therefore to labour
whose own value, he says, never varies and which remains
' alone the ultimate and real standard by which the value of all
commodities can at all times and places be estimated and com-
pared'. 2 Labour becomes^ the real and money the nominal price of
commodities.*--

We see that the confusion between amount of labour and
value of labour has persisted. Adam Smith himself seems to be
aware of a difficulty for he admits that the value of labour (which
he has just regarded as unchangeable), although always the
same to the labourer, appears to vary for the person who buys
it; for sometimes a larger and sometimes a smaller volume of
goods will purchase the same amount of labour. Smith side-
tracks the problem by saying that it is not labour which is cheap
or dear, but the goods which buy it.* To the terms 'real' and
'nominal' price, he now gives a different meaning: the former
is the amount of necessaries and conveniences of life, the latter
the amount of money which We are given in exchange for any-
thing, including labour. 1 The distinction is nowadays familiar;
it is often used in economic analysis as, for example, when real
wages are distinguished from money wages. Smith does not
pursue the question of the real price of labour at this stage, but,
after some discussion of coinage, the changing proportions of
gold and silver and the fluctuations in the value of the com-
modities, he proceeds to expound still further his theory of
value.

1 Adam Smith, Wealth of Nations, vol. i, p. 32. < 2 ifeid, p. 33.

162

ADAM SMITH

(d) The Theory of Capital and Distribution. The confusion with
which he started makes him limit the validity of the labour
theory to primitive societies. At the beginnmgfof cnapter vi the
del;enmimtion of the exchange-value of commodities by the
amount of labour necessary to produce them is said to hold only
in ' that early and rude state of society which precedes both the
accumulation of stock and the appropriation of lands', 1 i.e., in
precapitalist times. The celeFrated beaver and deer example is
given to "sKow that, in a society of hunters, commodities will
exchange in the same ratio as the labour spent on their produc-
tion. Smith rightly points out that in that stage of social
development the whole produce of labour belongs to the
labourer. The parties to the exchange are then all equal owners
of commodities which embody a certain amount of the labour
of their owners. These amounts are equated in the process of
exchange.

When product A and B are exchanged at their value, a double
equivalence is established. In the first place, there are exchanged
two equal amounts of labour embodied in the commodities. In
the second place, a commodity can procure for its owner an
amount of labour of another person equa.1 to the amount of
labour which he has spent on the production of his commodity.
In other words, Smith rightly sees that in the conditions he has
stated (i.e. when the labourer is the owner of the whole produce
of his labour), there is not necessarily a confusion between the
two determinants of exchange- value with which he began. The
'value of labour (the quantity of a commodity which can be
bought with a given quantity of labour, or the quantity of labour
which can be bought with a given quantity of a commodity)
can be regarded as the measure of value just as much as the
amount of labour embodied in a commodity.' 2

But once the postulated conditions are absent, difficulties
appear. When stock has accumulated in private hands its
owners will employ it to set to work ' industrious people whom
they will supply with materials and subsistence in order to make
a profit by the sale of their work 5 . 3 When goods are sold they
must fetch not only enough to cover the wages of these ' indus-

1 Adam Smith, Wealth of Nations, vol. i, p. 47.

2 Karl Marx, Theorien uber den Mehrwert, vol. i, p. 129.

3 Adam Smith, Wealth of Nations, vol. i, p. 48.

163

THE CLASSICAL SYSTEM

trious people ', but they must also bring in something by way of
profit for their employers. If he did not get a profit, the owner
of the stock would have no interest to employ it; nor would he
employ a greater rather than a less amount of stock unless his
profits bore some proportion to that stock.
* Smith dismisses the idea that profits may be merely a special
type of wages, the reward for a special kind of labour: they bear
no relation to the labour of inspection and supervision which
their owner expends, but only to the size of his stock. Profits,
Smith says, are a quite separate constituent of the value of
commodities. The labourer must share his produce not only
with the owner of the stock but also with the landlord who
exacts rent. The real value of all commodities must, therefore,
resolve itself into three component parts :_ wages, profit? and
rent. That, however, means that the original theory of value Is
no longer applicable. For although Smith begins by saying that
the value of every commodity ' resolves ' itself into these con-
stituents, he soon adopts a terminology that amounts, in effect,
to enunciating a new theory of value. He still claims that the
real value of each constituent of price is equal to the amount of
' labour it can command. But wages, profit, and rent are not
only the sole sources of the revenues of the different classes of
society, i.e. the forms in which the value of commodities is
distributed; they become also c the three original sources ... of
all exchangeable value'. 1 In these words Smith has stated a
mechanical cost-of-production theory of valueJU
* The cliscussion remains now on this basis and proceeds to deal
with the difference between the natural and the market price.
The former is a price which is neither more nor less than the
sum of the natural prices of its component parts. The second is
determined by supply and demand. The excesses or deficiencies
of supply will cause the component parts of the price to be
below or above their natural rates. This will bring about a
diminution or increase of the supply in accordance with the
demand. Market price will constantly tend to equality with
the natural price. The latter itself varies with the natural rates
of wages, profit, and rent, and it is to these that Adam Smith
demotes his next chapters.*
Before we follow him in his further analysis it is necessary, at

1 Adam Smith, Wealth of Nations; vol. i, p. 53.
164

ADAM SMITH

the risk of some repetition, to show why he apparently aban-
doned the labour theory of value. Smith's difficulty was to explain
the origin of any revenue other than that of labour. He saw that
when there existed capital and private property in land the
exchange of a product brought its owner (i.e. the capitalist)
something above what he had laid out in the production of the
commodity. How did this surplus arise? Unlike the mercan-
tilists or Steuart, Smith did not regard it as a profit upon aliena-
tion. He did not believe that a surplus arose because a commodity
was sold above its value. This value merely resolved itself into
two parts, one of which was appropriated by the owner of the
stock. Like the physiocrats he believed in the existence of a
produit net. But unlike them, he regarded it as the value added
by the workman to the materials, i.e. as the product of labour
and not as a gift of nature. The existence of the capitalist and
his profit made it difficult for hnh "tcTmaihtairi that labour was
the sole" source of value and its inherent measure. For in the
conditions of capitalist production the quantity of labour
embodied in a commodity and the value of labour were no
longer identical. Adam Smith did not realize this; and it was
left to Ricardo and Marx to lead the labour theory of value out
of this blind alley. Smith himself wanders in and out of it. He
never quite abandons the labour theory; indeed, in his discus-
sion of the origin of the surplus he continually makes use of it.
On the other hand, his original confusion makes him unable to
apply it to his theory of distribution and he has to have recourse
to other methods of explanation.

A part of his theory of the revenues of different classes of
society is consistent with his own original theory of value. Here
he distinguishes clearly only two kinds of revenue: one the
subsistence of the worker, the other tlie deduction, as he calls it,
from the value produced by the worker which is appropriated
by either the landlord or the owner of stock, or by both. 1 This
deduction under the name of surplus value becomes the central,
pomfof tKeH\/tarxian analysis. It is important to emphasize this
reTalToTrStiTprsihce Adam Smith's influence on Marx is generally
neglected in favour of Ricardo's. In effect, Smith was the first
to develop clearly the concept of surplus value and to stres^rthe
fact that it was bound up with capitalist production. Ricardo's
1 Adam Smith, Wealth of Nations, vol. i, p. 66.

165

THE CLASSICAL SYSTEM

contribution, on the other hand, was to avoid Smith's inconsis-
tency in regard to the determination of value itself.

But although this aspect of Smith's theory of distribution may
be regarded as the vital one, in the sense that it is in a direct
line of logical descent from his premisses, it is not the one to
which he devotes most attentionTHe starts from the statement
that wages, profit, and rent are the three original .sources of
exchange-value and then examines the manner in which they
are determined. In regard to "wages, he enunciates partly a
subsistenoe^or labour, theory and partly a cost-of-prodLuctipn
tEebry. In the former He regards the natural value of labour as
determined by what is necessary to maintain the labourer plus
an allowance to enable him to rear a family and maintai^the
supply of labour. This theory is not much different fromfhaf of
Petty or Cantillon, the latter 6f whom Smith quotes. He adds

.^ CT ^ > .'|"" ii " *"*> ^-u^ v ^.^-afc t ^Bi.. w.^ ^ "*' -.. .*,, -, , -

a discussion of the influence on wages of supply and demand
(which is not incompatible with the subsistence theory), and he
analyses the causes which alter them. But he is not able to
escape entirely from the vicious circle of the cost-of-production
theory.

In the discussion of the profits of stock the departure from the
labour theory is even more marked.* Although he has defined
profit as that part of value which the capitalist appropriates
after he has paid the wages of his workmen* Smith makes the
size of profits depend upon the size of the total stock which the
capitalist employs. He admits the difficulty of speaking of
profits as such (i.e. of an average rate of profits) since they are
subject to great variations of time, place, and type of business.
And he says that the interest on money can provide a clue to the
rate of profits. 'The rate of interest, Smith implied, was deter-
mined by the rate ofprofitsjuie "maxim was 'that wherever a
great deal can be made by the use of money, a great deal will
commonly be given for the use of it ', and vice versa. l *,

Having examined different periods and countries^ he con-
cludes that generally wages and_ profits ^re inversely related.
An increase of stock/Tby increasing competition among its
owners, will tend to lower profits; on the other hand, it will
e the demand for labour and thus tend to raise wages,
must always be at least 'something more than what is

1 Adam Smith, Wealth of Nations, yol. i, p. 91.
1 66

ADAM SMITH

sufficient to compensate the occasional losses to which every
employment of stock is exposed'. They can never be higher than
what ' eats up the whole of what should go to the rent of the
land and leaves only what is sufficient to pay the labour of
preparing and bringing them [the commodities] to market,
according to the lowest rate at which labour can anywhere be
paid, the bare subsistence of the labourer'. 1 Though profits may
fluctuate between these limits, they will tend to fall with the
progress of society.* The accumulation of stock will lead to
increasing competition, and (a point Ricardo was to elaborate
later) as new countries become more peopled, less fertile soil has
to be taken into cultivation and the profits of the stock employed
ofMt declines. 2

iSiHith "develops a separate tfy^ry ofn^L_He had originally
made rent a deduction from Value/Later, it had become a
constituent element of price $kin to wages and profit. But in
the cTiapfeF cTevoted to rent (Book I, ch. ii), both these views
are abandoned in favour of a third. Rent, he says, 'enters into
the exposition of the price of commodities in a different way
from wages and profit. High or low wages and profit are the
causes of high or low price; high or low rent is the effect of it.' 3
In other words, rent does not enter in the determination of
price at all; it is not a cause but an effect. And it is an effect
which only appears!!" thFprice is higher than what is sufficient
to pay wages and profit. Rent is purely differential. If the price
of the produce of land is only just enough to recompense the
capitalist, the land will bear no rent; if it is higher, the landlord,
being a monopolist, will be able to take the excess from the
capitalist. The price will depend on demand. For some products
of land there is always a demand which makes their price
higher than what is sufficient to bring them to the market; with
others there is not. With all its inconsistencies, this is the
beginning of Ricardo' sjheor^olTent? 1

TTo mmpli^^ views contained in the

first and most important book of the Wealth of Nations a few
words will suffice. He makes certain very interesting contribu-
tions which arise incidentally in the confused discussion of the
central themes of value and distribution. His treatment of

1 Adam Smith, Wealth of Nations, vol. i, pp. 98-9.

2 ibid., p. 95. 8 ibid., p. 151.

167

THE CLASSICAL SYSTEM

competition, for example, both in its relation to the price of
commodities and to wages and profit, is most lucidly worked
out and full of apt historical and hypothetical illustrations.
Here he is on the solid ground of experience and is speaking
with the authority of the new social order behind him. These
parts are, therefore, probably the most living ones of his whole
analysis.

Particularly successful is the examination of the differences of
wages and profits in different employments. Little of this analysis
has had to be thrown overboard by later economists; and what
has been added has been only in the nature of refinement. The
whole theory of net advantages and non-competing groups
derives from chapter x of the first book. Here Smith clearly
shows that competition among qapital or labour which is seeking
employment will tend to equalize not profits or wages but net
advantages; and he classifies and analyses the non-monetary
advantages which are taken into account in determining the
relative attractiveness of different employments. Smith's descrip-
tion is now a part of every economic text-book and need not,
therefore, be outlined here. Nor is it necessary to say anything
about his description of the way in which restriction of competi-
tion produces inequalities of wages and profits, except to point
out that the opponent of state action is concerned only with
rigidities in the competitive mechanism which are deliberately
contrived by policy.

Other sections of the book have been less free from subsequent
criticism and emendation, but they still contain important con-
tributions. There are, for example, glimpses of the theory of
population already found in earlier writers and fully expounded
by Malthus. 1 Again, in developing a theory of rent in anticipa-
tion of Ricardo, Smith makes differential rent depend on
difference^ of fertility and positloii, 2 ^n some respects Smith's
anatysisls even superior to that of Ricardo, for he works out very
carefully the different conditions under which private property
in land can lead to the receipt of rent. The whole discussion is
lucid and takes one step by step through different branches of
agriculture, through the extractive industries, and through
building land. Smith concludes his chapter on rent by saying

1 Adam Smith, Wealth of Nations, vol. i, pp. 81, 152.

2 ibid., p. 153.

1 68

ADAM SMITH

that the progress of agriculture and the growth of population
which follow on an increase in the wealth of the community
will tend to increase the share of the product which goes to the
landlord in rent. Increased population will increase the demand
for, and the price of, agricultural produce; more stock will be
employed in agriculture; the produce will increase, and so will
rent, since, with improvements in cultivation, no more labour is
required after price has risen than before. 'A smaller proportion
of it [labour] will, therefore, be sufficient to replace, with the
ordinary profit, the stock which employs that labour. A greater
proportion of it, must consequently, belong to the landlord.' 1

Book II is an elaboration of the ideas expounded in the first
book and contains two very important ideas. It deals with the
nature of stock and contains Adam Smith's ideas on the
accumulation of capital and his" very important distinction
betWeenrpro"3uctIve and unproductive labour. Of minor impor-
tancelrthe disc'ussttfn on" money. The introduction of the book
attempts to explain the reason for the accumulation of stock.
Smith is not altogether successful here/He begins by saying that
where there is no division of labour no stock need exist,* since
each individual endeavours to supply his wants as they occur.
Once division of labour has been introduced and everybody has
become dependent on everybody else, there must be a stock
sufficient to maintain people until they have made their tools
and the product itself and have succeeded in selling it. On the
other hand, he immediately goes on to say that accumulation
must precede the introduction of division of labour and he never
in fact makes up his mind on the exact sequence.

This indecision appears also in another place, when the
accumulation of capital is discussed in connection with the
increase of production. In his critique of physiocracy he says
that an increasejof the annual produce of society can result only
from an improvement of tHe ^productive power of labour or an
incrBa^F^n^&e"^uantity ^ ^naBoiirrThe former depends on
increaseH~skill and^greater use oTrnachinery; the latter on an
increase of the capital of society which must, in its turn, be
c exactly equal to the amount of the savings from the revenue,
either of the particular persons who manage and direct the
employment of that capital, or of some other persons who lend
1 Adam Smith, Wealth of Nations, vol. i, p. 262.
169

THE CLASSICAL SYSTEM

it to them 5 . 1 Here Smith claims that an increase of produce
depends on increased productivity. This depends on increase of
capital, which must wait on an increase of produce. Again, an
increase of produce can be brought about by using an increased
quantity of labour; but this can only be done if there is more
capital /Although Smith does not resolve this problem, he has
meanwhile introduced a new factor which becomes in effect the
chief source of accumulation, namely, saviijg/
% The rest of his analysis of accumulation, the classification of
capital, and the discussion of money depend entirely on Smith's
distinction between productive and unproductive labour. This
distinction, which began with the physiocrats TnTwas implied
in mercantilist thought* (it is inherent in any search for the
causes of wealth), remained one of the most important parts of
classical thought! Although it was later often thought of as a
mere piece of scholasticism, it was an integral part of the theory
of value and the surplus. The confusion to which it gave rise
subsequently was due to the nature of Smith's own exposition
of it.

Throughout chapter iii of the second book, two separate
definitions of productive and unproductive labour are inter-
mingled. At the very beginning, both these definitions appear:
* There is one sort of labour which adds to the value of the
subject upon which it is bestowed: there is another which has
no such effect.' Immediately, as if by way of amplification of
this statement, there follows :XThus the labour of a manufacturer
adds generally to the value of the materials which he works
upon, that of his own maintenance, and of his master's profit.' 2
Productive labour is thus defined both as labour which creates
value and as labour which creates a surplus for the employer.
With this confusion there is mixed/up another. Smith also
defines productive labour as that whirn 'fixes and realizes itself
in some particular subject or vendible commodity', and this
leads him to regard as productive those activities which result in
material goods and to exclude all services.*

We have thus three definitions which are not necessarily com-
patible; one is linked with the output of material goods, another

1 Adam Smith, Wealth of Nations, vol. ii, pp. 194-5. See also Marx,
Theorien uber den Mehrwert, vol. i, pp. 275-6.

2 Adam Smith, Wealth of Nations, vol. i, p. 335.'

170

ADAM SMITH

with the creation of value, the third with the production of
surplus value. The third is the only one which is consistent with
Smith's own original analysis of exchange-value and capitalist
production. It is, moreover, the only one which follows and
develops the trend of thought of mercantilism and physiocracy.
The former had stressed foreign trade by which a country could
increase its stock of bullion. This created an inflationary move-
ment which encouraged industry at the expense of labour, owing
to the time-lag in the rise of wages. The physiocrats had gone
farther and had spoken of the produit net which went to the pro-
prietors of the land. Smith extended the concept to cover all
labour which created a surplus appropriated by the owner of
stock. Productive labour is thus defined entirely in accordance
with the social conditions of production, i.e. with capitalist
production.

Accumulatiqn_qf capital can only take place through the
employment of productive labour in the above sense.' And
capital is only that part of stock which is used to set in motion
productive labour,* i.e. labour which will replace and increase
the original outlay .^Unproductive labourers, on the other hand,
are maintained by revenue. 1 The reason why Adam Smith was
led away from this definition into the other two was probably
his desire to controvert the physiocratic emphasis on agriculture:
His very advance from the view which regarded those engaged
in industry and trade as sterile led into contradictions which
were only gradually overcome. Smith's further insistence on the
material quality of the result of productive labour is a remnant
of the early bullionist notion which confused wealth and money.

Smith, however, largely maintains his first definition. On it is
based his division of stock into capital (that part which is
destined to produce a revenue) and the remainder, which is
reserved for immediate consumption. The Former is again
divided into ckcuj^^^and_ fixed capital, according to the
manner in which it is employed to set productive labour in
motion. The distinction is not worked out carefully enough to
avoid confusion. The same definition of productive labour is
also implied in Smith's treatment of foreign tra.cJ_and of the
relation of money and capital. This is particularly so in regard
to the former. If gold and silver are used to purchase from

1 Adam Smith, Wealth of Nations, vol. i, p. 337.
171

THE CLASSICAL SYSTEM

abroad luxuries such as foreign wines and silks, prodigality is
promoted and production is not increased. If, on the other hand,
they are used to bring back materials, tools, and provisions for
the employment of productive labour, industry is stimulated
and, although consumption is increased, the value of that con-
sumption is reproduced with a profit. 1

The remainder of the Wealth of Nations need not detain us.
Books III and IV, which contain an historical account of the
progress of wealth, of different economic policies, and the
critique of mercantilism and physiocracy, are noted mainly for
Free-trade views which have already been dealt with* Book V
deals with publicfinance, an d in it Smith develops his ideas on
what are the legitimate items of public expenditure in confor-
mity with his general view of the functions of government*. There
are many interesting observations in these sections, which are
not, however, as important for our purpose as the general
philosophy which underlies them. Smith's discussion of the ways
in which public revenue is to be raised has formed the starting-
point of all subsequent liberal theqry^of Laxatiori! Here, he sets
out his celebrated four maxims of taxation; equality, certainty,
convenienceT^nd^econojniy. He shows that all taxes (and, there-
fo7e~ all tHose supported out of the proceeds of taxation) must
ultimately be paid out of the three revenues of society or, con-
sistently with his original analysis of value, out of wages or
surplus value. He examines in turn rent, profits, and wages. If
the price of provisions and the demand for labour remained
unchanged, direct taxes on wages 3 he thought, would be paid by
the capitalist. The capitalist would endeavour to recoup himself
by charging a higher price to the consumer. If this was impos-
sible the demand for labour would fall.

Smith does not appear to favour taxation of profits. The
element of profits wKicE is interest was" not^ he thought, as
suitable an object of taxation as the rent of land, because the
quantity of stock which a man owned was very difficult to
ascertain and because stock could easily be removed by its
owner if the tax was burdensome. As for that part of profit which
was a compensation for risk, it was unsuitable because it was
generally only a moderate amount and because no capitalist
could pay such a tax and continue to employ his capital. He

1 Adam Smith, Wealth of Nations, vol., i, p. 295.
172

ADAM SMITH

would endeavour to shift the incidence which would ultimately
fall on the consumer, on the landlord, or on those who had lent
the money at interest." This leaves only the tax on rent-JThere
can be little doubt that, like the physiocrats Before him and
Ricardo after him* Smith, as a true representative of industrial
capitalism, favoured a tax on the revenue of land.*' Both ground-
rents and the ordinary rent of land are a species of revenue which
the owner, in many cases, enjoys without any care or attention
of his own. Though a part of this revenue should be taken from
him in order to defray the expenses of the state, no discourage-
ment will thereby be given to any sort of industry. . . . Ground-
rents and the ordinary rent of land, are, therefore, perhaps
the species of revenue which can best bear to have a peculiar
tax imposed upon them.' 1

The above account of the work of Adam Smith has concen-
trated on the core of his analysis, and this was found to contain
considerable contradictions. But in spite of these, perhaps even 1
because of them, the subsequent development of economic
thought would have been impossible but for him. *He mapped
out the field of economic inquiry in such a way that all subse-
quent thinkers were guided by those landmarks: production,
value, distribution. The structure of economic science was
firmly established.*

But in addition to this achievement Adam Smith's work
possesses a deeper significance which rests on its social philo-
soji)hical implicatiojis. We have already seen that he gave the
first systematic statement of the harmony of social interests and
that he implanted a utilitarian tradition in economic science..
His economic analysis could, however, be shown to demonstrate
an opposition and conflict of social interest. Smith did not
directly attack the landed interest: opposition to the landlord
was still not the supreme issue which it was to become in
Ricardo's day .'The main objective of Smith's attack was still the
merchant monopolist. He lived in, and thought in terms of, that
transitional eighteenth-century society which had its indus-
trial capitalism, but in which industry was not sufficiently
developed to be preoccupied with cheap labour and, there-
fore, cheap food. The labour theory of value and the theory of
the surplus which run through the first two books of the Wealth
1 Adam Smith, Wealth of Nations, vol. ii, p. 373.

173

THE CLASSICAL SYSTEM

of Nations reveal a possible cleavage between different classes;
and this remains in spite of Smith's subsequent exposition of a
cost-o -production theory which could be used to establish equal
claims to revenue for all classes by making them all into
sources of value. *

This dichotomy persists in two post-Smithian schools of
thought: one carries on the tradition of harmony and distin-
guishes three co-operative factors of production; the other
develops a theory of exploitation. It is true that both can claim
authority from Smith. He did not develop a consistent theory of
value. It may be argued that at that stage of economic develop-
ment the movement of the revenues of the different classes of
society was not yet the central economic problem. It was not
necessary to have a theory of value to answer the sort of ques-
tions which Smith was asking. He was, therefore, content to
state a few empirical generalizations which show the factors
which are relevant to a complete theory., But his formulation
j:ould later be interpreted in different ways. If he wrote of
an invisible hand which made every one contribute to the
common good, he also bejigd his theory of harmony by his
attacks upon the economic status of ' unproductive ' labourers.
He wrote most savagely of the prodigality of princes and
ministers. And although he did not attack the institutions which
maintained the whole apparatus of government, justice, and
education, he made no bones about his opinion of their econo-
mic significance." ' The sovereign,' he said, 'with all officers both
of justice and war who serve under him, the whole army and
navy, are unproductive labourers. ... In the same class must
be ranked, some both of the gravest and most important, and
some of the most frivolous professions: churchmen, lawyers,
physicians, men of letters of all kinds; players, buffoons, musi-
cians, opera-singers, opera-dancers, etc.' 1 The new view of the
social structure could not be more consistently expressed.
Capitalist production is the foundation of society; everything
else rests upon it.*

On one occasion at least Smith allows himself to discuss
directly the interests of different classes and of their relation to
the good of the community as a whole. 2 He has a low opinion

1 Adam Smith, Wealth of Nations, vol. i, p. 356.

2 ibid., pp. 261-5.

174

RICARDO

of the quality of intellect and character of landowners. They
get their income without any labour (on another occasion, he
says that they 'love to reap where theyj^v_ejQ^sowedl^) ; and
they are, therefore, often ignorant of their own interest and
incapable of understanding the consequences of any piece of
policy that may be proposed. Nevertheless, their interests can-
not be opposed to the interests of the community as a whole
because rents rise with the general increase of wealth. The
interest of the labourer is also bound up with the interests of
society, even though he may not be capable of appreciating it.
The interest of those who live by profit, on the other hand, may
often conflict with the common advantage, since profits tend to
fall as society becomes more wealthy. The capitalists are at the
same time better able than any other class to judge of their own
interest, and their attitude to public policy is therefore always
to be suspected. Any proposal coming from them 'comes from
an order of men whose interest is never exactly the same with
that of the public, who have generally an interest to deceive and
even to oppress the public, and who accordingly have, upon
many occasions, both deceived and oppressed it 5 . 2

Thus, whatever his uncertainties, Smith knew of class conflict,
in particular as it arises in the course of social change. Ricardo
was to elaborate Smith's sketch into a theory of economic
development with disharmonious and pessimistic results.

(5) Ricardo

(a) Ricardo and Smith. Adam Smith has been dealt with at
length for two reasons. He is universally acknowledged as the
founder of classicaljgplitical economy ,* and disciples and critics
alike have baseHTnemselves on him. He was also the first to develop
all the categories which form the content of subsequent economic
controversy, and later economists can be more easily discussed
in reference to his work. At the same time it is important not
to allow the detailed exposition of Smith's theory to lead to an
excessive regard for his achievement. In particular, if Ricardo
is rather summarily dealt with, no comparison unfavourable to
him is intended.

1 Adam Smith, Wealth of Nations, vol. i, p. 50. 2 ibid., p. 265.

175

THE CLASSICAL SYSTEM

David Ricardo is without doubt the greatest representative of
classical^ political economy,' He carried the work begun by
Smith to the farthest point possible without choosing one or
other of the roads which led out of the contradiction inherent
in it. Perhaps for that reason recognition of his importance has
sometimes been withheld and has often been grudging. Jevons
was convinced that Ricardo had given economic inquiry a
w r rong twist; the American, Carey, regarded the Principles as the
source of inspiration of agitators and disrupters of society; and
Professor Gray, who gives abundant praise to Smith, has even
gone as far as to call Ricardo's literary work ' the production of
an unliterary Jewish stockbroker 5 distinguished by a certain
inherited 'Jewish subtlety'. 1 Such judgement is hardly based
on evidence. Ricardo, writing fifty years later than Smith,
showed a greater insight into the working of the economic
system; but as for subtlety (whatever demerit there jnay be in
that!) the Scot does not lose by comparison with' the Jew. In
the opinion of his own contemporaries at home and abroad,
Ricardo was acknowledged the leader of the science. Hisjjreat
opponent, Malthus, his disciple, James Mill, and the latter's son,
John Stuart Mill, speak with the greatest respect and admira-
tion of the man and his work. *

David Ricardo (1772-1823) came of a Dutoh^Jewish family
which Tiad settled in England, though he himself seceded from
the Jewish faith early in life. Like his father, he became a stock-
broker, and, after acquiring a large fortune in a short time, he
became a landed proprietor and a member of Parliament.
Virtual retirement from business enabled him to embark on
intellectual pursuits at an early age. Although he died young,
he gave to the_world the chief results of Es studies.,' His most
important work is 'The^nnciples of Political Economy and Taxation,
first published in 1817, of which the third edition (1821) is the
definitive one. In addition, he wrote a large number of essays (of
which T^High Price of Bullion (1810) is the best known), letters,
and notes, which ~" alT "contain" important contributions. An
edition of his complete works which is now being prepared will
make all this material available.

Ricardo lacked all the advantages for a scholarly career which
his great predecessor had had. As a result, the Principles have
1 A. Gray, The Development of Economic Doctrine, p. 172.

176

RICARDO

not the polish of the Wealth of Nations, nor are they so clearly
part of a comprehensive social philosophy. Ricardo's writing is
more condensed and demands a greater attention from the
reader. His exposition is rarely relieved by those historical
digressions and philosophical diquisitions which comfort the
readers of Adam Smith, even though they may help their author
to sidetrack analytical obstacles. Smith's manner of presentation
was such that his book could eventually be read and enjoyed by
educated people who were not specialists in economic discus-
sion. Ricardo, unschooled in the academic manner, was more]
strictly a scientist, He wrote for his fellow economists; and it isf
on them that his influence was greatest.

To make a step forward in the discovery of the laws under-
lying economic structure a change of method seems to have been
necessary: the celebrated (or notorious) deductive method
which is often" ascribed to Ricafdq replaced the less austere
mixture of deduction and history which Smith had practised.
There is plenty of a priori ^reasoning in the Principles. There is
the^asMrmptioiVof the" ecDjiqrnic; JQiaji always' striving to achieve
his maximum advantage; There are postulates about the social
framework, such as the existence of competition; and illustration
is generally hypothetical rather than historical. Altogether, the
reader of the book breathes a highly rarefied air of abstraction.
Nevertheless, the method had not really changed much. The
economic man leads as lively an existence in the pages of Smith
as in those of Ricardo. Eyen in Smith's demonstration the work-
ing of the invisible hand gradually loses its providential basis and"
comes to depend on the social fact of competition. And if
Ricardo reverted to the method of 'let us suppose V, he did so
because the essential economic categories, which Smith and his
predecessors had laboriously endeavoured to extract from the
totality of historical development, were now available in their
abstract form. Moreover, with all his apparent abstraction,
Ricardo was essentially a concrete thinker: his theorizing
was always about his contemporary world, which he knew
well. 1

* The ntein achievement of Ricardo is to be found in the theory
of value and distribution. He begins with value and to it he

1 Cf. S. N. Patten, 'The Interpretation of Ricardo ', in Quarterly Journal of
Economics) 1893, pp. 322-52.

177

THE CLASSICAL SYSTEM

devotes Jhis longest chapter. Nor does he leave any doubt about
his interest in distribution^In the preface to the first edition he
begins with the statement that the whole produce is divided
among the three classes of the community, that the proportions
of this division vary in^differentstages of society, that 'to deter-
mine the laws which regulate this distribution is the principal
problem in Political Economy', and that hitherto there has
been given 'very little satisfactory information respecting the
natural course of rent, profit, and wages'.*) He makes this point
even more emphatically in a letter to Malthus. Against the
latter's definition of political economy as an inquiry into the
nature and causes of wealth, he urges that/' it should rather be
called an enquiry into the laws which determine the division of
the produce of industry amongst the classes who concur in its
formation'. 2 }

1 Ricardo was interested in the problems which Smith had
raised without succeeding in elucidating them./He wanted to
discover what Marx later called the physiology of capitalist
economy, the relations of the different classes of society, and the
dynamics of the economic system AH e found the clue in the most
striking phenomenon of the capitalist system, exchange-value.
His analysis of the causes of value had the same purpose as
physiocratic theory: the discovery of the origin of the surplus
product, and a consequent classification of different activities
and classes of society and of various policies in relation to the
production, accumulation, and distribution of that surplus
product.xThe structure of the Principles is not in harmony with
Ricardo's own interest. The argument is often ill arranged. The
distinction between use-value and exchange-value which is
quickly discussed in chapter i occupies, Tn Different form, the
whole of chapter xx. Chapters ii and iii, which contain Ricardo's
famous theory of rent, are supplemented by several later chapters
which controvert the views of Smith and Malthus. The discus-
sions on price, supply, demand, and foreign trade spread over
several non-contiguous chapters. Wages and profits, discussed in
chapter v and vi, are further elucidated in the last chapter but
one (added in the third edition) which deals with machinery.

1 D. Ricardo, Principles of Political Economy and Taxation (Everyman edition,
1926), p. i.

2 Letters of Ricardo to Malthus, 1810-1823 (ed. J. Bonar, 1887), P- J 75

178

RICARDO

And a disproportionately large number of chapters are con-
cerned with the subsidiary problems of taxation.

(b) The Theory of Value and Distribution. In view of this absence
3f a logical plan, Jt is convenient to describe Ricardo's theory
under the following Jieadings: \first, (the theory of yalueYsecood,
the'tHeory^pf wages, profits/'and rent); third,(the theory of
accumulator^ and^ finally^the theory ofeconomic development
Tcrcomplete the picture there must also be added a few words
about Ricardo's theories of money, banking, and international
trade.

To understand Ricardo's development of the theory ofyalug
it is importantlo remember the position in which Smith had left
it. (He_had wrestled-.with the determination of value by labour
(i.e. the actual time of labour used to produce a commodity)
and its determination by the value of labour power. j In pre-
capitalist production this dualism did not matter because the
two factors could be shown to be identical: the value of an
amount oflabour embodied ifTa commodity was equal to the
value of the same amount of labour power^But in capitalist
production the value of the labour power which the capitalist
bought was greater than the amount of labour ' embodie3jn
wages ^wliicfo he gave for itAThus a surplus appeared which was
appropriated by the capitalist. One way out would have been
to accept the fact thatj^n capitalist production the postulated
identity disappeared^nd that in the exchange of capital and
wage-labour capital received a greater value than it gave. This
way was chosen by MarxA "

Smith was anxiousjp avoid such an exploitation theory; h
had, therefore, recourse to an explanation which recognizejd
other factors, additional to labour, as productive of value.
Ricardo was faced with a similar difficulty and his solution
represents a half-way house between Smith and MarxJ^ He is in
advance of]5nuth^e^use^of Hs greater consistency. He refuses
to limit, the jvalidity_ of the labour theory of value to pre-
capitalist times, He deliberately states it as the fundamental and

1 Cf. M. Bowley, Nassau Senior and Classical Economics, p. 82, for the
typical petitio principii which is involved in many current estimates of the
classical theory. The very possibility of capital and labour exchanging on
unequal terms 'in equilibrium* is glossed over with a reference to the * crude
exploitation theory'!

179

THE CLASSICAL SYSTEM

universal principle and proceeds to examine how far the different
aspects of capitalist economy are compatible with it.

He begins by referring to Smith's, distinction of the two uses
of the term value. \He admits that utility is essential if a Com-
modity is to possess exchange-value^ but dismisses it as a measure
of that valuenExchange-value is derived from scarcity or labour.
Rare statues or pictures have a value which is not measured by
the amount of labour originally bestowed upon them. But these
are comparatively unimportant commodities in a capitalist
system. The vast bulk of commodities used by man are capable
of almost limitless multiplication. In primitive societies their
value is determined 'almost exclusively' by 'the comparative^
quantity of labour expended on them'. \Ricardo uncovers the
confusion in Smith's statement of the theory and concludes that
it is c the comparative quantity of commodities^ which labour
will produce that determines their present or past relative value,
and not the comparative quantities of commodities which are
given to the labourer in exchange for his labour'. 2

But Ricardo is not free from confusion himself. He says that
thejieterminatipn pf,this relative value of commodities helps to
determine how changes in the ratio in which commodities
exchange arise, and speaks in another place also of the compara-
tive values of commodities. However, relative value^ as he calls
it, may change equally for two commodities if the amount of
labour necessary to produce them alters at the same rate, thus
leaving their comparative value ^the ratio of exchange) un-
changed. Rjcardo seems to be unaware of this double meaning.
He claims that his interest is in the variations in the 'relative
value of commodities and not in their absolute (or real) value.
Yet it is clear that his own labour theory of value refers precisely
to that absolute value. It is this_ confusion between (labour-
determined) value and the ratio of exchange which was later to
be used by Bailey in his attack on Ricardo.-

-Ricardp tries to show that labour creates value in capitalist
as_well as in primitive conditions of production. In section 3 of
the first chapter, he states that not only

labour, embodied in implements, tools, buildings, etc., deter-
mines value.' The ^g^pjiiento^hii^ J? used, in^jrbduction

1 D. Ricardo, Principles (Everyman edition), p. 6.

2 ibid., p. 6.

1 80

RICARDO

represents so much jtoffd-up laB'our which, enters into the
value of tKe product as it is used up. The question of ownership,
i.e. ot the pafH^tltar "sociST^conditions of production, does not
affect the result. Value remains __ determined by current and
stored-up labour, whether tKe latter belongs to the labourer or
ndt^The only" difference is that in the latter case the value of the
product which is appropriated by the capitalist is divided into
two parts, one which pays the wages of the labourer, the other
which is the capitalist's profit. v

In this way Ricardo plunges at once into the problem of
surplus 'value" 1 ( which throughout he refers to as profit) and into
tKe ^question of wages; and he is brought face to face with the
dilemma which had made Smith retreat from the labour theory.
The way in which Ricardo deals with these questions is obscure
and ill arranged. His solution depends on his theories of wages
and profits; but although these are not dealt with until later, he"
already anticipates their results in the sections of the first
chapter which deal with the law of value in capitalist produc-
tion. The ostensible purpose of sections 4 and 5 is to show how
changes in the value of labour (i.e. wages) cause changes in the
value of commodities owing to the use, in different proportions,
of capital of different degrees of durability, and to the differing
periods of turnover of capital. In other words, he is here dealing
withTcertain modifications in" the law of value the possibility of
which he had, in controversion of Smith, denied at first, but
which he appears to have regarded with increasing concern and
to which he gave more and more space in successive editions of
the Principles.

Whatever his original intention, Ricardo does not show in
these sections that these variations in value have in fact anything
to do with changes in wages. He does, however, demonstrate
that, assuming an average rate of profits and an average level of
wages (both established according to laws which he developed
subsequently), the existence of differing capital structures (pro-
portions of labour and capital), together with the other factors
mentiqjied, will contradict the law of value. Some commodities
will exchange* at a higher, some at a lower, value. Value, as
determined by quantity of labour necessary in production, is no
longer identical with market price; this is equal to the wages
paid by the capitalist and the average rate of profit which he has

181

THE CLASSICAL SYSTEM

to earn if he is to continue to employ his capital. What Ricardo
in fact does is to pose a fresh problem which he never solved.
The problem was taken up again by Marx and led to his distinc-
tion between values and prices of production.

On this point must be added the statements of chapter iv, ' On
Natural and Market Price ', and of chapter xxx, 'On the
Influence of Demand and Supply on Prices'. They show again
Ricardo's confusion between value (determined by labour) and
price, which depends on the averaging of profits. "A difference
arises between the two owing to differences in capital structure.
But the fluctuations with which Ricardo is concerned are those
of the market prices due to the changes in supply and demand.
This particular failure to show how discrepancies arise between
price and value persists through the theory of rent. It is no doubt
due to the influence of Adam Smith, against whose views of the
problem of value in capitalist production Ricardo was struggling.
It explains why many later economists claimed to see in Ricardo's
work nothing but a cost-of-production theory, and why it was
possible for them to eliminate the labour theory of value
altogether.

Ricardo's theory of wages and profits contains also a mixture
of efror~and real acln&vement. In the chapter on wages Ricardo
regards labour as a commodity whose value must be determined
in the same way as that of any other commodity." Its 'natural
price' is that which is 'necessary to enable the labourers, one
with another, to subsist and to perpetuate their race, without
either increase or diminution'. This in its turn depends 'on the
quantity of food, necessaries, and conveniences become essential
to him from habit '.'This, in other words, is a subsistence theory
into which the social and historical factor of habit has been
introduced.* The market price of labour may differ from the
natural price in^aocorSaiJCC^WifH supply and..dgmand; but it

is determined by

the customary level ofsubsisleficeT"*

^Hfre pnn^ population tends to increase with an

increase In 'the "means 01 subsistence, which had been fully

developed by Mai thus, underlay the Ricardian theory of wages.

If wages remained above the natural price for any length of

time the supply of labour would increase and bring them down

1 D. Ricardo, Principles* p. 52,

182

RICARDO

again. A steady improvement in wages depended on a con-
tinually increasing demand for labour and that could only be
brought about by perpetual accumulation of capital. Here is
one way in which the Ricardian insistence on accumulation
could be made palatable to labour; though, in the factor of
habit, Ricardo had introduced a new variable which could be
made to destroy his system. 1 Ricardo himself did not pursue
this point; his theory becomes, however, a part of his view of
economic development.

. In spite of a mixture of arguments Ricardo determines wages
fairly consistently with the labour theory of value. The value of
the labour bought by the capifalist^ he"say37~Is determined by
the quantity of labour embodied in the commodities that form
the f^Eaurer's subsistence.'' feut at once he has to face Adam
Smith's difficulty. According to the labour theory the exchange
of ~C5fiimodities involves the exchange of equal quantities of
labour embodied in them. This equivalence seems to disappear
when capital and labour are exchanged. The real wages paid
to the labourer (i.e. the commodities which he buys) possess a
smaller value than the commodity which he produces for the
capitalist. Ricardo had clearly pointed out that Smith had come
to grief through continuing to use as equivalent the terms
'amount of labour' and 'value of labour' when, as in capitalist
production, they were no longer equivalent. His own way out
is simply to say that the value of labour is itself variable, 'being
not only affected, as 1fl~otfier things are, by the proportion
between the supply and demand, which uniformly varies with
every change in the condition of the community, but also by the
varying price of food and other necessaries, on which the wages
of labour are expended'. 2

But this is not really a solution. It does not explain the
origin of the capitalist's profit; and it also involves leaving a
serious gap in the structure of the labour theory of value in so
far as the value of labour (as Ricardo calls it) is itself concerned.
In capitalist production wage-labpur is a commodity like any
other; indeed, its existence as a commodity is an essential condi-
tion of capitalism* To establish a theory of value and then to

1 For an excellent discussion of this point, cf. M. H. Dobb, Wages (1928),
pp. 73-6.

2 D. Ricardo, Principles, p. 8.

183

THE CLASSICAL SYSTEM

make it inoperative in its most important application was a
contradiction in Ricardo's work which his opponents soon dis-
covered and used to destroy the whole theory. Ricardo's for-
mulation made it impossible for him to solve the problem. Marx,
who consistently developed the labour theory, pointed out that
Ricardo conceived of an exchange between labour as such
and commodities as such. This conception made inapplicable
the law that commodities exchange in accordance with their
/values as measured by the amount of labour embodied in them.
Ricardo, he said, ought to have spoken of the value of labour
power and not of the value of labour. This would have made
him face the problem of the exchange of 'embodied 5 for 'living'
labour, or of capital for labour power. And he would have been
led to see this particular exchange as a social and historical
relationship from which the concept of surplus value could be
derived. 1

Ricardo, however, wanted to avoid this conclusion but not to
sacrifice the labour theory. By making the value of commodities
depend on past, equally with present, labour and by saying that
the value of labour varied (this involved abandoning his original
theory of wages), he thought to have incorporated capital into
his system, and to have found an explanation for profits which
did not involve a theory of exploitation. At the same time he
thought that he had avoided Smith's admission of capital as a
productive agent. But when he came to deal with profits he
tacitly accepted much of Smith's theory, since he did not work
out the distinction between surplus value and rate of profits
which Marx did later.

He seems to have become increasingly aware of the direction
in which this theory was taking him and in the end he came very
near to saying that capital was productive of value. In a letter
written to McCulloch in 1820 he almost admitted this. 'I some-
times think ', he said, ' that if I were to write the chapter on value
again ... I should acknowledge that the relative value of com-
modities was regulated by two causes instead of by one, namely,
by the relative quantity of labour necessary to produce the
commodities in question, and by the rate of profit for the time
that the capital remained dormant, and until the commodities
were brought to market. 'The theory of distribution, he thought,
1 K. Marx, Das Kapital, vol. ii, part i y p. 119.
184

RICARDO

could perhaps be separated from the theory of value. 'After
all, the great questions of Rent, Wages, and Profits must be
explained by the proportions in which the whole produce is
divided between landlords, capitalists, and labourers, and which
are not essentially connected with the doctrine of value.' 1 Here
we see once again that the difference between prices and value
caused by the existence of different capital structures was lead-
ing Ricardo, not to the distinction between value and prices of
production which Marx worked out, but to a cost-of-production
theory of value. Indeed, in one place he speaks of a difference in
value being 'only a just compensation for the time that the
profits were withheld'. 2 The only additional point of impor-
tance that Ricardo makes in connection with profits is to
demonstrate how competition tends to establish a uniform rate
of profits, by attracting capital into channels which yield a rate
above the average and repelling it from those in which profits
are below the average. It is only when he comes to his dynamics
that a concept of profits more in harmony with the labour theory
reappears. ^~ - -

In order to make his supposed rescue of the labour theory
from the Smithian dilemma complete, Ricardo had also to
exclude land from the creation of value. On the other hand, he
hacTno need to avoid conclusions which were hostile to the
landed interest. If he was forced by the same social purpose
which was inherent in the Wealth of Nations to imply the produc-
tivity of capital, he was also determined far more than Smith
to^represent the claiqis of landed property as economically
unjustified. The resulting theory of rent reflects these two

* The significant features of Ricardo's theory of rent are the
denial of absolute rent and the explanation of differential rent.
The exclusion of absolute rent was essential if the theory of value
was to remain coherent. The very existence of rent seemed to
Ricardo to imply that the produce of land exchanged for more
than its value as compared with manufactured goods. This he
could not admit. What then was the explanation of the undoubted
existence of a revenue from landed property? The answer is con-

1 Letters of David Ricardo to J. R. McCulloch (ed. T. H. Hollander, 1895),
p. 72.

2 D. Ricardo, Principles, p. 23.

185

THE CLASSICAL SYSTEM

tained in his well-known theory of differential rent. By building
on the foundations laid By Smith he showed! tlTat there were
conditions in which rent did not exist. '

" Given differences in the fertility of the soil and in its situation
in relation to the market, the cost of production of agricultural
produce will vary. The price of that produce must, however, be
high enough to cover the highest cost of production (i.e. the cost
of production on the worst soil) which, given a certain demand,
must be incurred in order to bring forth the necessary supply.
Production on the worst land will just cover cost; cost will equal
price. On better land a surplus will appear, which will accrue to
the owner of the land if he cultivated it himself, or may be
exacted by him from the tenants owing to the competition
between these for better land. This theory explained not only
the existence of rent in certain conditions and its absence in
others; it also made rent into a pure surplus and eliminated it
From the determination of valuef In addition, it explained
differences in the amount of rent yielded by different lands/

This way out of the difficulty was certainly more successful
than the method which Ricardo had adopted in relation to
capital. Moreover, this theory of rent tiad the advantage of
enabling Ricardojo inveigh strongly against the lande(TmteresE T
Rent still remained a surplus; and in his account of changes in
the proportions of the revenues of the three classes of society
which take place in the course of time, Ricardo concluded that
the share which went to rent increased steadily.' He thus pro-
vided industrial capital with a powerful new weapon against
the landed interest. The defenders of rent had henceforth to
stress its constituent element, the interest on the capital, spent in
the improvement of land, which Ricardo had already men-
tioned. But they had to use the differential theory to explain why
there were differences in rent even when the capital invested
was the same. And this differential theory implied the notion of
a surplus and of an unearned increment/

Analytically, however, the differential theory wasnotsatis-
factory. It was based on Ricardo's frequent confusion between
valu<r(amount of labour) and price (wages plus average profit).
Only by identifying the two could Ricardo conclude that on the

1 D. Ricardo, Essay on the Influences of a Low Price of Corn on the Profits of
Stock (1815), passim.

1 86

RICARDO

poorest (no rent) land, on which price equalled cost, the pro-
duce sold at its value and the labour theory of value was satisfied.
Once the false identity between value and price was abandoned,
the problem of fitting rent into the labour theory still remained.
It was a problem which Marx also had to face; and we shall see
his solution in a later chapter.

(c) The Theory of Economic Development. We now have to con-
sider in what way Ricardo applies his theories of distribution
and value to the analysis of dynamic problems. His account of
the effects of capital accumulation on wages, profits, and rent,
although not systematically worked out, has had an even more
profound influence on subsequent economic thought than the
rest of his work. Apart from the fact that it touches the most
controversial problems of social welfare, it possesses significance
also because it has a bearing on the question of economic crises
which soon after begins its chequered career in the history of
economic thought.

Indications of a theory of economic development had already
appeared in the Wealth of Nations. "Smith had shown that profits
on an average tended to fall with economic progress. Increasing
accumulation of capital brought with it increasing competition
among capitalists; and this reduced profits. Ricardo does not]
accept this view. He tries to show that accumulation would only
tend to reduce profits in certain conditions. In the first place, he
has to find out how profits vary at all. The price of corn, he
says, is determined by the 'quantity of labour necessary to pro-
duce it, with that portion of capital which pays no rent'. The
price of manufactured goods rises and falls in accordance with
the amount of labour necessary to produce them. The whole
value of manufactured goods and of the corn grown on the no-
rent land is divided into two parts only: profits and wages. Then
follows a vital passage: 'Supposing corn and manufactured
goods always to sell at the same price, profits would be high
or low in proportion as wages were low or high. But suppose
corn to rise in price because more labour is necessary to produce
it; that cause will not raise the price of manufactured goods in
the production of which no additional quantity of labour is
required. If, then, wages continue the same, the profits of
manufacturers would remain the same; but if, as it is absolutely

187

THE CLASSICAL SYSTEM

certain, wages should rise with the price of corn, then these
profits would necessarily fall.' 1

Ricardo thus uses his theory of differential jnsn> his subsis-
tence tKeoiryloFwageSj and his oWiTversion of the labour theory
of value to show that profits and wages are inversely related. It
follows that though confipetition"wiirfend to establish a uniform
rate of profits, the accumulation of capital will reduce that rate
only if it is accompanied by a rise in wages/In other words,
population must grow more slowly than capital, the demand for
labour must increase at a greater rate than its supply, if, as a
consequence of the rise in wages, profits arc to fall.* The theory
of population shows that such a permanent excess of demand
over supply is impossible. Yet Ricardo maintains that there is a
tendency for profits to fall, only for a different reason. Since he
regards profits and wages as inversely related, the reason for the
fall of the former must still be found in a circumstance which
makes the latter rise. Wages^ according to this theory, will rise
if the value of the commodities which form the labounerisuEair
t6hce rises. 'But the value of manufactured goods must decline
witlfthe progressive improvement in the productivity of labour.
Thus only food remains; and here the theory of rent is called in
to furnish an explanation. It amounts to this, that 'the only
adequate and permanent cause for the rise of wages is the
increasing difficulty of providing food and necessaries for the
increasing number of workmen '. 2

The theory of differential rent implies that progressively less
fertile (or less favourably situated) Tands are taken into cultiva-
tion as population and the demand for food increase. It was this
implication which was expressed in the 'law of diminishing
returns' and formed the basis of the Malthusian theory of
population. It meant that in spite of his references to the rent-
lowering effects of some improvement in agriculture 3 Ricardo
continued to believe in a progressive decline of the fertility of
land and in a continual rise in the price of food. Money wages,
he thought, would have to go on rising in order to keep up with
the rising cost of subsistence, though real wages need not rise.
Rent would rise steadily and profits would ^stea^l^ndecline.
c ^Rlcardb dfawf^rpessimistic jp^cfure^T tKe^futureT What is

1 D. Ricardo, Principles, p. 64. 2 ibid., p. iyy.

8 ibid., p. 40, pp. 42 sqq.

1 88

RICARDO

more, he destroys the harmony of social interests which Smith
had been at pains to establish even at the cost of contradictions.
The interest of the landlord is now opposed not only to that of
the labourer and industrialist; it conflicts also with the general
interest of society. It requiresjhat the price_of food__shpuld con-
tinually rise while both capitalists^and workers desire a low cost
of^jiyj^sistencp. 'The dealings between the landlord and the
public are not like dealings in trade, whereby both the seller and
the buyer may equally be said to gain, but the loss is wholly on
one side, and the gain wholly on the other.' Adam Smith,
although many of his conclusions were antag onistic_ to the
landed interest, had still identified the interests of the landlord
with those of society. Ricardo's theory of rent leads to a more
ruthless conclusion. -'The interest of the landlord is always
opposed to that of the consumer and manufacturer.' It is to 'the
interest of the landlord that the cost attending the production of
corn should be increased. This, however, is not the interest of
the consumer . . . neither is it the interest of the manufacturer
. . . All classes, therefore, except the landlords will be injured by
the increase in the price of corn.' 1

4 iLiLiiypJ^i-- 1 ^ P n a fallacious interpreta^

tion of the differential theory of rent. Even if poorer lands are
talcen into cultivation as society progresses, the application of
science to agriculture can more than make up for the deteriora-
tion of the soil used. The 'law of diminishing returns', on which
Ricardo based the theory of rent and Mai thus the theory of
population, is certainly not applicable to conditions of change.
As later economists have pointed out, it possesses a formal
validity in an idealized state of stationary equilibrium^ and it
may~also contairTan^HIstoncal truth In the very rare cases in
which technique docs not change/ Moreover, the theory oi
differential rent does not require that the fertility of land should
continually decline; it only rests on the existence of lands of
differing fertilities! It is possible for general fertility to increase
without altering the relative fertilities of different qualities of
soil. The price of agricultural produce could, therefore, fall
while rent increased.

The other aspect of Ricardo's theory of economic develop-
ment, the decline of the rate ofjgrpfits, was also based on an
. 1 D. Ricardo, Principles, p. 225.
189

THE CLASSICAL SYSTEM

unsound foundation. The tendency for the rate of profits to fall
could only be true if profits were indeed inversely related to
wages. In his discussion of capital Ricardo himself had dimly
realized that two separate categories could be distinguished: the
rate of profit which bore a relation to capital, and the surplus,
which consisted of the difference between the value of a com-
modity and the wages paid by the capitalist to the worker who
produced it. But he did not work out the distinction and con-
cluded that if wages fell, profits rose, and vice versa, without
pointing^oTTt that lMsr3I3^6t^ rate of

profits.

But the analytical faults in Ricardo's theory made no
difference to its effect on political thought and action." Ricardo
was as ardent a free-trader and believer in competition as Adam
Smith." And with his theory of rent he had provided free-trade
doctrine with a specific problem to tackle. "The interests of
society demanded a low price for corn. A rise, however, seemed
inevitable particularly in view of the observed rise during the
crises of the Napoleonic wars; and the only way to delay it was to
secure as large a supply as possible, in particular from countries in
which the fertility of the soil had not yet appreciably declined.
The abolition of the^Cqrn LawSjjn the interests of cheap food and
lov^manulacturing cost, was now based on an economic analysis
and became the immediate objective of the free-trade movement.

The doctrine of rent also revealed the disharmonious implica-
tions of classical economic theory. Ricardo, unlike Smith, attacked
strongly the landed interest; and his analysis was not only an
important theoretical weapon in the campaign against the Corn
Laws; it became the foundation of the single-tax and land-
nationalization proposals of later social reformers. Moreover,
once the possibility of a conflict of individual and common
interest and exploitation arising from one form of property had
been admitted, criticism of the whole social order could no
longer be prevented. The post-Ricardian English socialists and
Marx started where Ricardo left off and made an analysis of the
economic system which could be used as a weapon for the over-
throw of that system.

* Two other questions connected with the accumulation of
capital have a place in the Ricardian system: over-production
and crises! 'Ricardo's Principles do not contain much on eifKer 61

190

RICARDO

these points. Writing at a time when capitalism had not reached
maturity, he had little to say about crises! He had witnessed the
disturbances of the Napoleonic wars and was forced to deal with
the problem of fluctuations in economic activity. But he only
devotes one short chapter to it, which he significantly calls ' On
Sudden Changes in the Channels of Trade'. Here, he ascribes,
these changes to fortuitous^ circumstances and not to any cause
inherent in the economic system. War, taxation, fashion will
alter the relative profitability of different branches of production
both in the country in which these factors operate and in the
countries that maintain trading relations with it. Labour and
capital will have to be transferred and distress will occur until
the economic system has adapted itself to the changed condi-
tions. Rich countries, which have large amounts of capital
invested in manufacturing industry, will find these sudden dis-
locations more painful than poor countries. And even agricul-
ture will be affected by wars and the changes in the export
and import of produce which they bring about.

Having put the causes of economic fluctuations outside the
economic system, it is natural that Ricardo should also claim
that tljd't system had no inherent tendencies to disequilibrium.
In this respect he was accepting the theory which he attributed
to the French economist, Jean Baptiste Say, that there could
never be any general over-pfoductlon or glut of capital in a
country. This became a very important part of the classical
tradition. Ricardo's advocacy" of this view involved him in a
controversy with his friend Mai thus which is one of the most
famousTn the history of economic thought. This controversy
revealed an important departure from, and criticism of, the
classical position and is therefore deferred to the next chapter.

Ricardo's other theories, though important in their special
fields, do not affect his general position and can be quite sum-
marily discussed. They concern the problems of money and
banking and the mechanism on_nternatimiar payments. Ricardo
was led"to"tReIFstudy"^By urgent qiiestions oTthe day. He had
witnessed the great currency upheavals connected with the wars
and he had seen the suspension of cash payments in 1797, the
great depreciation of paper money, and the marked rise in prices
which followed it. In The High Price of Bullion, published in 1809,
on the eve of the issuje of the famous report of the Bullion Com-

THE CLASSICAL SYSTEM

mittee, he explained that these phenomena had beer caused by an
over-issue of paper money/ He developed a^rigoiious quantity
theory of mone^ applied it to the international mechanism,
slTowe3"TKat inflation and depreciation caused an outflow of
gold, and proposed that the Bank of England should gradu-
ally reduce the amount of notes in circulation until the price
of gold had been brought down to its previous level. Ricardo
did not advocate the complete abolition of paper money: On
the contrary, like Adam Smith he regarded the use of a sub-
stitute for the money metal as an important result of economic
progress and he urged the complete withdrawal of gold from
active circulation? What he advocated was a sfold-bullion stan-

dard in which there were no gold coins, and barilcriotes were
convertible at a fixed rate, but only in large amounts, into gold
bars. This, in effect, is the only gold standard envisaged to-day.
The essence of Ricardo's theory was accepted by the Bullion
Committee, and subsequent banking legislation, particularly the
resumption of cash payments in 1822 and Peel's Bank Charter
Act of 1844, reflect strongly the Ricardian influence.

It is necessary to point out that Ricardo's treatment of money
is by no means free from contradiction, for he had himself
approached the question of money from the point of view of the
labour theory of value. He had said that the value of gold and
silver, like that of other commodities, was determined by the
amount of labour in them: Given their value, the quantity of
currency in a country will be determined by the sum of the
values of all goods that enter into exchange! The metals may be
replaced in the process of circulation by substitutes (paper
money), which must be issued in a proportion determined by
the value of the money metal. The essence of this theory of
money is that the quantity of currency depends on prices and
not vice versa! Here is a clear conflict with the quantity theory.

But it is the latter to which Ricardo has recourse in stating his
theory jrf international payments. His analysis is now^a part of
acc^pe5 economic tEeory. "Briefly, it amounts to this: a rise or
fall in prices is due to an excess or deficiency of the amount of
currency in circulation.' If that currency consists entirely of the
internationally accepted precious metals, the fluctuations in the
circulating medium (and therefore in prices) will bring about
their own correction.' If, for ex^mple, ther.e is too much gold in

192

CHAPTER V

Reaction and Revolution

(/) The Shortcomings of Classicism

(classical political economy can be viewed as a representation
of the economic structure of the time, as a scientific system, as a
theory of development and as a theory of economic policy. A
study of Smith, Ricardo, and of the lesser writers of the school
shows that those who developed classicism looked upon their
work as an integration of these four forms of economic inquiry.
Their effort to build an organic economic theory involved them
in some contradictions which gave their successors an oppor-
tunity of shirking the same task. Only once afterwards was it
undertaken again. But Marx's system, although comprehensive,
led to conclusions which were opposed to those of the classics,
and therefore unacceptable to writers who thought of them-
selves as guardians of the classical tradition. The most noticeable
feature of post-classical thought is the fairly rapid disintegration
of its original unity.

In each department of the classical system shortcomings could
be discovered. The classics were most successful perhaps in their
representation of early capitalism. Their abstractions were far
more representative of the essence of reality than anything that
had gone before.' But even some of their abstractions and assump-
tions became inadequate with changes in the quality of the
capitalist system'. In this respect, however, the faults which were
later revealed were more closely connected with inadequacies in
the other parts of their analysis. As a scientific system, too,
classicism achieved a far greater degree of perfection than pre-
vious economic thought. It attempted to relate every part of its
analytical structure to every other and to the whole. And in so
far as emphasis on the functional interdependence of its com-
ponent parts is a characteristic-oCa scientific system, the classics

197

REACTION AND REVOLUTION

were the founders of economic science. They certainly did not
avoid mistakes; and the inconsistencies which we have noted
:aused the disintegration of their system.-

* As a theory of economic development classicism failed badly.
Not only did the weaknesses of its static system rob it of a
basis on which to build an economic dynamic; what is more
important, its outlook was essentially unhistorical. In spite of their
attention to past fact and idea and in spite of their preoccupa-
tion with the future, the classical writers were rigidly static in
their view of the economic order.. Their speculations about
economic development were vitiated by an uncritical attitude
to the economic system of their own day. They regarded its
categories as inherent in human nature, and, therefore, as
possessing eternal validity. They had to admit the absence of
the categories of capitalism in earlier systems, but they could
not bring themselves to envisage the possibility that these might
disappear again. For this reason also much of their exposition of
contemporaneous capitalism was lifeless and liable to become
out of date.

As part of a political theory economic classicism was consis-
tently successful and fairly long-lived. Some of its characteristics
in this regard have already been noted. The labour theory of
value had its roots in the theory of property which was part of
the natural philosophy as developed, for example, by Locke.
Labour constituted the source of, and title to, property in the
natural state. The natural state demanded, therefore, freedom
from any intervention which would disturb the natural property
relations. Here, however, a possible conflict appears. The
classical school applied the requirements of the natural order
to the facts of the real world. Since in the real world the property
relations which have been established in a long historical evolu-
tion are by no means equivalent to those of the natural order, it
becomes possible to draw from the classical economic analysis
opposite political conclusions. One trend becomes conservative
with regard to the existing social order, the other revolutionary.
These conflicting trends, inevitable in any ideology, run through
classical literature and are still to be found to-day.

Not only the postulate of freedom, but also the assumption of
a harmony of interests which underlay the classical school,
became the subject of conflicting conservative and revolutionary

198

MALTHUS'S CRITIQUE OF ACCUMULATION

interpretations after the appearance of utilitarianism. It is not
necessary to go here into the details of utilitarian philosophy.
But it must be pointed out that in assuming the existence of
social harmony, it could be held to imply an egalitajjartvicw of
society; it considered the poor equally with the rich in calculat-
ing a maximum of social advantage." Bentham, the greatest
exponent of this philosophy, went so far asTcTregard as desirable
an equal distribution of income, a conclusion which many
economists tried to defend later by means of a psychological
refinement of Bentham's analysis. At any rate, the revolutionary
interpretation of the concept of harmony had as much authority
as the conservative one/

- The criticisms of the classical school can be roughly divided
into a technical and a political one*. The former endeavours to
eliminate logical inconsistencies and analytical imperfections.
The latter attacks the political implications of classical econo-
mic analysis. These two kinds of criticism cannot be strictly
separated. Technical criticism is often inspired by support of, or
opposition to, the political philosophy underlying classicism. If
this philosophy is accepted, the economic analysis may still be
regarded as an insufficient basis. Attempts will then be made to
buttress it with fresh economic arguments. On the other hand,
if the social philosophy is not accepted, criticism will fasten
on the inadequacies of the economic analysis. It is not always
possible to disentangle the two types of attack on the classical
school, but some such division must be made. In this chapter
we are concerned with theoretical developments which carry
with them a criticism of the social and political doctrines of the
classical school, whether those responsible realize this or not.

(2) Malthus's Critique of Accumulation

Indeed, the first attack upon classicism does not come as an
explicit negation of its conclusions favourable to the capitalist
system. It comes in the guise of a highly technical argument
which accepts many of the fundamental tenets of the Ricardian
school but opposes their application to certain practical prob-
lems. This attack is Malthus's theory jrfgluts. Ricardo, as we
have seen, had accepted Say's dictuni(wmch may have been

199

REACTION AND REVOLUTION

due to James Mill, in the first place) l that general over-produc-
tion was impossible. We shall meet Say again as a Continental
popularizer of Smith and as one of the gravediggers of the
labour theory of value. He is important here for his theory of the
market, the thiorie des debauchees, which he developed in his Traiti
d* Economic politique, published in 1803. The theory rests on the
concept that every supply involves a demand, that product
exchanges for product, that every commodity put on the market
creates its own demand, and that every demand exerted in the
market creates its own supply.

Put in this way, the theorem contains a simple, but none the
less significant statement about the interdependence of an
exchange economy. Its importance lies' in its application. If
supply and demand are. indissolubly jbound together one can
deny, as did Say and Ricafdo, the possibility of a general glut
of commodities, of general over-production. Partial over-pro-
duction may well occur. One cannot deny that from time to
time certain commodities are produced in excess of demand, i.e.
that costs are incurred in production which price subsequently
does not cover/But that only means that other commodities
have not been produced in a quantity sufficient to supply the
demand for them. As Ricardo's most faithful disciple, James
Mill, put it, 'there never can be a superabundant supply in
particular instances, and hence a fall in exchangeable value
below cost of production without a corresponding deficiency of
supply, and hence a rise in exchangeable value beyond cost of
production in other instances. 3 Such partial maladjustments
must correct themselves. If there be 'from maladjustment, . . .
superabundance or defect', the rise and fall in prices would alter
the relative profitability of different lines of production. 'There
are certain kinds of goods which it is less profitable than usual
to produce: and this is an inequality which tends immediately
to correct itself.' 2

'No man', said Ricardo, adopting Say's argument, 'produces
but with a view to consume or sell, and he never sells but with
an intention to purchase some other commodity, which may be
immediately useful to him, or which may contribute to future
production. By producing, then, he necessarily becomes either

1 Cf. M. Dobb, Political Economy and Capitalism (1937), p. 41.

2 James Mill, Elements of Political Economy (2nd edition, 1824), PP- 2 34~6.

20O

MALTHUS'S CRITIQUE OF ACCUMULATION

the consumer of his own goods, or the purchaser and consumer
of the goods of some other person.' 1 If all individual supplies
and demands are exactly balanced, demand and supply in the
aggregate must clearly also be balanced. If an individual balance
is disturbed; if, for example, there is a glut of cloth, because
supply has been increased, while demand has remained
unchanged, 'there must of necessity be a deficiency of other
things; for the additional quantity of cloth, which has been
made, could be made by one means only, by withdrawing
capital from thej>roduction ofpther commodities, and tliereby
lessening the quantity produced ... a demand equal to the
greater quantity remaining, the quantity of that commodity is
defective'. 2 A supply in excess of demand of one commodity is
balanced by a supply below demand of another commodity. A
general glut of commodities, apart from the temporary disloca-
tion of^qljanBrurmTlnL the supply and demand of particular
goods, is thus impossible.

But Say and the Ricardians drew a still further conclusion.
As general over-production was impossible, it was also incon-
ceivable that there should ever be an accumulation of capital in
excess of the useTo^^vvTiicTTTf could T5e put. This was the really
important poirifT Ricardo and James Mill, even more than
Smith, were the apostles of capital accumulation. They were
anxious to show that continual accumulation was beneficial.
One example which Ricardo had used to prove this was to show
that a rise in wages depended upon an increase in the capital
of the community. But he also wished to demonstrate the stricter
theorem that capital accumulation could never be harmful. "The
proposition he liad""1to" prove was that there could not 'be
accumulated in a country any amount of capital which cannot
be employed productively'. The only cause which could make
the motive for accumulation cease was a rise in wages (occa-
sioned by the rising cost of subsistence) to such an extent that
profits diminished below the level at which further accumula-
tion was profitable. 3

The identity of supply and demand (and the impossibility of

1 D. Ricardo, The Principles of Political Economy and Taxation (Everyman
edition), pp. 192-3.

2 James Mill, Elements, pp. 228-9.

3 D. Ricardo, Principles, p. 193.

2OI

REACTION AND REVOLUTION

demand falling below supply) is easy enough to demonstrate if
it is assumed that what is currently produced is also currently
consumed. But the accumulation of capital creates a difficulty.
Ricardo's proof depended on being able to show that there was
as inevitable a balance of supply and demand, as far as canital
was concerned, as there was in regard to goods. The distinction
between productive and unproductive labour was applied to
consumption in order to give this proof.

Following Smith, Ricardo makes^a distinction between pro-
ductive labour and unproductive labour. The formeFprocftices a
surplus above the wages paid to it; the latter does not." In other
words, as the French economist Sismondi pointed out ? pro-
ductive labour exchanges for capital, unproductive labour
for revenue^ Ricardo also distinguishes between productive
consumption and unproductive consumption. The former
involves spending in order to produce, that is, to set productive
labour in motion, by paying wages and providing the instru-
ments of production and the necessary raw materials. (It should
incidentally be noted that Ricardo never differentiated very
clearly between what Marx later called variable capital that
laid out in wages and constant capital.) Unproductive con-
sumption does not aim at further production: A person con-
sumes unproductively whether he buys wine for his table or
employs a footman; though Ricardo also tried to show that
unproductive consumption which consisted in employing
unproductive labour was preferable to that which consisted in
the purchase of luxuries.

' Capital was that which was consumed productively. An
accumulation of capital meant a rise in productive consump-
tion, that is a rise in the demand for productive labour. The
question then was: could that rise in demand go to such an
extent that it permanently exceeded the supply? In other words,
could there be a glut of capital? The answer was clearly no. 'If
capital increased too rapidly for the population, instead of
commanding seven-eighths of the produce, they might com-
mand ninety-nine hundredths, and thus there would be no
motive for further accumulation. If every man were disposed to
accumulate every portion of his revenue but what was necessary
to his urgent wants, such a state of things would be produced,
for the principle of population is not strong, enough to supply a

202

MALTHUS'S CRITIQUE OF ACCUMULATION

demand for labourers so great as would then exist.' 1 Wages
would be high, profits low; the incentive to accumulation would
disappear and so would the apparent glut of capital. There
could be neither over-production of goods nor over-accumula-
tion of capital. "There was this connection between accumula-
tion and consumption (or saving and spending) that the more
the capitalist accumulated, the less he spent unproductively,
and vice versa.* Any change in the proportions of the streams of
saving and spending involved a change in the amounts of
labour laid out on the production of different goods and,
therefore, in their exchange-values. This consequential change
provided, as we have seen, the equilibrating force.

The significance of Ricardo's elaborate argument (which has
been greatly simplified above) was this: it buttressed the case
for capital accumulation by destroying any objection to it; it
denied the possibility of economic dislocations for reasons
inherent in the capitalist system, since that system was shown to
be self-adjusting; and it strengthened the distinction of produc-
tive and unproductive labour, which had a definite social and
political objective. It was an argument with implications that
both approved the existing system and helped to put in its
proper economic place the whole structure of unproductive con-
sumers, which had played such an important part in the old
social order.

The significance of Malthus's attack on the Ricardian theory
lies in its attitude to these implications. Its main purpose was to
defend the unproductive consumer. Historically, therefore, it
was reactionary. Malthus was defending the primitive, Smithian,
formulation of the theory of value at a time when capitalism was
sufficiently far advanced to require a more consistent theory.
Malthus, like Smith, was probably thinking in terms of a per-
manent so<jftal structure having the qualities of the transitional
phase of tHe eighteenth century. He seems to have aspired to a
sort of balance between Whig-aristocratic and primitive indus-
trial-bourgeois elements at a time when a complete victory of
the latter was already inevitable. For this reason, Ricardo's
theory was clearly superior because it was appropriate to the
direction of contemporary economic development. But for his

1 D. Ricardo, Notes on Malthus' ' Principles of Political Economy ' (ed. J. H.
Hollander and T. E. Gregory, 1928), p. 159.

203

REACTION AND REVOLUTION

purpose, Malthus had also to show that the capitalist system was
not self-equilibrating and thus to put himself in apparent opposi-
tion to that system. The interest of Malthus's contribution lies
precisely in the fact that a defence of pre-capitalist conditions
had to be combined, not only with an approval in genrral of
capitalism, but also with the uncovering of some of its contradic-
tions and shortcomings.

Malthus's attempt to prove that capital accumulation could
go too far begins with an attack on Ricardo's method and on his
theory of value. This attack is not particularly important in
itself, but only in its relation to Malthus's main thesis. In his
introduction to the Principles of Political Economy (1820) Malthus
emphasized the difference between the material of economic
science and that of the exact sciences; and he warned his readers
that the propositions of political economy could never have the
same capacity as those which relate to figure and number'. 1 In
letters to one another Ricardo and Malthus often referred to the
differences in method to which their different conclusions seemed
to point. 2 Neither, it appears, was anxious to establish one
method as superior to another. It is doubtful whether they were
interested in method, as such, at all. What they wished to
elucidate was the reason why, in spite of their common accep-
tance of so many fundamental propositions, they reached
different conclusions on so important a practical problem as
the question of over-production. It was this difference which led
Malthus to stress the need for supplementary premisses drawn
from fresh empirical material in the discussion of short-run
problems; while Ricardo continued to rely on the long-run
processes which could adequately be explained by deductions
from the initial premisses. The controversy was not based on an
opposition between the deductive and inductive methods. It was
a difference of opinion about the correct application of an analy-
tical apparatus of a particular degree of abstraction. This
difference itself, however, was due to a more profound difference
in ultimate aim.

Malthus's objections to Ricardo's theory of value have a more
direct bearing on the point which was really at issue between

1 T. R. Malthus, Principles of Political Economy (1820), p. i.

2 For a useful summary of the debate, cf. M. Bowley, Nassau Senior and
Classical Economies) pp. 31-8.

204

MALTHUS'S CRITIQUE OF ACCUMULATION

them. Malthus did not, in fact, develop a theory of value that
could seriously rival that of Ricardo. What he did was to take
advantage of some of the confusions in Adam Smith and to ;
modify the labour theory, in order to controvert those of
Ricardo's conclusions from it which supported Say's theorem. 1
The result, as far as the theory of value itself is concerned, is
again confusion. But it enabled Malthus to reveal some of
Ricardo's own inconsistencies with regard to the theory of
surplus value. Throughout Malthus's work a number of theories
of value intermingle. In one of his earlier writings, Observations
on the Effects of the Corn Laws (1814), he took Smith to task for
regarding the amount of labour which a good could command
as the measure of its value. But he himself later used Smith's
definition of value as the power to command other goods,
including labour. He thought that 'when the value of an object
is estimated by the quantity of labour of a given description
(common day-labour, for instance) which it can command, it
will appear to be unquestionably the best of any one com-
modity, and to unite, more nearly than any other, the qualities
of a real and nominal measure of exchangeable value.' 2

In other works he/ilso\ states that the amount of labour, both
past and current, necessary for the production of commodities
determines their value. Later he develops a cost-of-production
theory which is interesting because it includes profits. By defin-
ing value as the amount of stored and current labour plus profits
(which, according to Malthus, was the same as the amount of
labour which the commodity c$uld command), Malthus shows
that he was really trying to get over the Ricardian dilemma of
the origin of surplus value. The difficulty which had arisen in
Ricardo's formulation is not overcome by including profit in
value; but, by his definition, Malthus demonstrated that a com-
modity commanded more living labour than was embodied in
it. Unconsciously, perhaps, he laid bare the nature of the
exchange between capital and labour which followed neces-
sarily from Ricardo's premisses, but which Ricardo had failed
to show. Malthus was all the better able to do this and so to
destroy Ricardo's original theory, because the latter had failed

1 Cf. M. Bowley, Nassau Senior and Classical Economies, pp. 87-9, and Karl
Marx, Theorien uber den Mehrwert, vol. iii, pp. 1-29.

2 T. R. Malthus, Principles , p. 119.

205

REACTION AND REVOLUTION

to develop the distinction between price and value which was
caused by the existence of different capital structures.

Mai thus uses this definition of value to develop the concept of
effective demand, that is, of demand which is high enough to insure
a continual supply (i.e. a continuous process of production) .
Malthus regarded the effective demand for a commodity as the
amount of labour which as a rule it commanded, because that
amount represented the quantity of labour plus profit which was
necessary to produce it. In other words, production depended
on the existence of effective demand, that is, demand which
enabled the producer to cover a cost which was defined as the
capitalist's advances in the form of wages, material, and capital
plus a profit in accordance with the prevailing rate.

It is from this point that Malthus launches his defence of
unproductive consumption and his attack on Ricardo's theory
of accumulation. The condition for keeping production going
is that the producer should be able to sell his product at its
value in the Malthusian sense, i.e. at a price which covers out-
lay plus profit. How is it possible, Malthus asks, to fulfil this
condition? Having discovered (without realizing it) Ricardo's
error with regard to the exchange between capital and labour,
Malthus makes the mistake of regarding all exchange in the
same light as that between capital and labour. Following
Smith's confusion, he regards exchanges between goods and
labour as the most frequent form of exchange as such. 'Now of
all objects it cannot be disputed, that by far the greatest mass of
value is given in exchange for labour either productive or unpro-
ductive.' 1 After this beginning, the rest follows quite naturally.
The capitalist who buys productive labour pays for it, by defini-
tion, less than he aims to get for the product of that labour. But
he cannot get a price that will do that from the labourers he
employs. By definition again, the sum of the wages they are paid
is less than the sum of the values of their products. The demand
of the labourers can never be big enough to enable the capitalist
to obtain his profit. It can, therefore, never be big enough to
ensure continuous production. Nor can exchange between capi-
talist and capitalist supply that incentive to production. They
both sell the product at a price which includes profit, so that,
while they may exploit each other, on balance no incentive

1 T. R. Malthus, Principles, p. ! 19.
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MALTHUS'S CRITIQUE OF ACCUMULATION

remains. 1 A deadlock is reached, if the producer has to rely on
the demand of his fellow producers and of his workers.

It is worth noting here that Malthus has, in effect, slipped
back into a pre-Smithian theory of profits. Not only has realiza-
tion of profit become dependent upon sale, but the very category
of profit has ceased to exist outside exchange. In spite of this,
Malthus tacitly recognizes the inevitability of the sort of exploita-
tion which is implied in the labour theory of value. The deadlock,
however, remains and Malthus has to provide a solution. This
he finds in unproductive consumption; it is this which enables
demand to remain effective. 'It is absolutely necessary that a
country with great powers of production should possess a body
of unproductive consumers,' says the author of the pessimistic
theory of population. 2 These consumers enable the capitalist to
get the profit without which he would cease producing and
which he cannot get from the market which the combined de-
mand of labourers and other capitalists offers. Another solution
would be that the capitalists themselves should consume the ex-
cess of products. 'But such consumption', Malthus thought, was
'not consistent with the actual habits of the generality of capit-
alists ', who were always trying to save a great fortune and whose
business interests did not give them the opportunity for unpro-
ductive spending on a sufficient scale. 3

The need for unproductive consumers becomes even more
apparent when we consider their function in the light of the
capital accumulation which goes on in a progressive country.
Malthus maintained ' that an attempt to accumulate very rapidly
which necessarily implies a considerable diminution of unpro-
ductive consumption, by greatly impairing the usual motives to
production must prematurely check the progress of wealth'. 4
Rapid accumulation, or saving, diminishes the efficacy of the
safety-valve of unproductive consumption. It diminishes, there-
fore, effective demand and destroys the incentive to production.
Malthus could not deny that it was important to maintain some
measure of accumulation in order to improve the productive
powers and increase the wealth of the community. But he

1 T. R. Malthus, Principles, Book II, ch. i, section ix, passim. For a detailed
examination of this argument, cf. Marx, Theonen uber den Mehrwert, pp. 35-47.

2 T. R. Malthus, Principles, p. 463. 3 ibid., p. 465.

4 In a letter of 7 July 1821, quoted in J. M. Keynes, Essays in Biography

p- 14*-

207

REACTION AND REVOLUTION

claimed that accumulation might be pushed to excess and
that it was necessary to maintain a proper balance between
saving and consumption, though his analysis of the way in
which such a balance could be attained was not very detailed.

Malthus went into great detail in enumerating the different
classes of unproductive consumers. The landlords come first.
Although they extract their rent from the capitalists, they per-
form a very useful function, because they are able to exercise a
demand which is not balanced by production. In addition, there
must be a large body of menial servants, statesmen, soldiers,
judges and lawyers, physicians and surgeons, and clergymen to
add their demand to an otherwise deficient total. They may be
unproductive labourers Malthus did not break with Smith's
and Ricardo's classification but without them there would be
no effective demand.

One thing which is striking in Malthus's theory is his insistence
on contradictions and conflicts in the capitalist system. The
system is shown not to be self-adjusting. Unless a large class of
unproductive consumers was maintained, periodic over-produc-
tion and stagnation would inevitably occur. For the first time,
in English economic theory at any rate, the possibility of crises
arising from causes inherent in the capitalist system was admitted.
Even more strikingly than in Ricardo, the opposition of interests
between capital and labour was brought out. c lt is indeed most
important to observe that no power of consumption on the part
of the labouring classes can ever alone furnish an encourage-
ment to the employment of capital.' 1 Here were the seeds of an
attitude antagonistic to capitalism itself.

But equally striking and more accurate a reflection of Malthus's
intention is the new role which his theory assigns to unproduc-
tive consumers. It is difficult not to see in this argument the
forerunner of many underconsumption theories an attempt to
reconcile the old and the new social order. Malthus is in favour
of capitalist industry, but he does not like its revolutionary
function vis-a-vis the remnants of feudalism. He is prepared to
accept capitalism since it brings an increase in production. He
has seen its virtual triumph in England and he realizes that it is
hopeless to attack it root and branch. But he has to find a secure
place in it for the classes whom capitalism has relegated to a

1 T. R. Malthus, Principles, p. 471.
208

THE GERMAN ROMANTICS

very inferior economic status. Hence the 'aristocratic clergy-
man's 5 protectionism, his tenderness for the landed interest, for
its extravagance in maintaining large bodies of retainers, his
desire for public works, and his complacency about government
debt.

Modern social reformers who acclaim Malthus as one of their
forerunners have, to put it mildly, overlooked more than half
of his work. The sort of society which emerges from his writings
is by no means a pleasing spectacle. The working class is con-
stantly pressing on the means of subsistence. The capitalists pay
them wages which are below the value of their products and
which afford them little more than subsistence. Society is saved
from destruction by a large unproductive class of parasites on
the system.

On balance, then, Malthus was a reactionary. The particular
form which his reaction took was determined by the very high
degree of development which capitalism had reached in England.
Advocacy of pre-capitalist interests involved at that stage some
attack upon capitalism itself; it also involved, if it was to have
any effect, a considerable insight into the working of the
capitalist system. It is no accident that a similar reaction in the
less highly developed conditions of Germany took a romantic
and mystical form; while in France, with the experience of the
great revolution as a background, criticism, formally akin to
that of Malthus, assumed a revolutionary significance.

(5) The German Romantics

(a) The sources of romanticism: Burke; Fichte. The environment
in which Malthus lived was that of successful capitalist industry
and penetrating economic analysis. His reaction against the
classical school shows the power of that environment. Malthus
had fought a rearguard action. He had realized that capitalism
and utilitarianism had to be accepted. At first, he was still a
faithful disciple of the classical school: the arguments of the
Essay on Population became an accepted part of its tradition. But
when he saw that interests which he held dear were threatened
by the progress of capitalism he became an apologist for
feudalism on a capitalist and utilitarian basis. The English social

209

REACTION AND REVOLUTION

reform movement (which arose later on the non-interventionist
basis of economic classicism) of which John Stuart Mill was the
chief exponent is another form of that compromise. In Mill's
explicit reference to the influence of Coleridge one may see a
further proof of the essential sameness of the movement.

In the Germany of the early nineteenth century neither the
practice nor the theory of capitalism was highly developed.
Those who opposed the attempt to bring Germany in reality
and idea to the level of its neighbours were not compelled
from the start to come to terms with classical political economy
and the philosophy of which it formed a part. Like its literary
counterpart, the German romantic school of political economy
had no need to have any truck with the philosophy of capitalism.
The romantic economists were not yet fighting a losing battle
against capitalism: they had no need to take much notice of its
economic theory. The time-lag in the development of the
German material environment accounts for the belated and
often distorted reappearance of ideological battles that had
already been decided elsewhere. It accounts for the rise of
romantic political economy; and it continues at work through-
out the nineteenth century.

Compared with Malthus, the romantic movement in economic
thought produces work of a markedly inferior theoretical level.
It could not be otherwise, since its purpose was not the objective
understanding of reality and its representation in a consistent
scientific system. As if the works of the leaders did not proclaim
it, we are told by a modern admirer of political romanticism
that its 'science' rejected logical analysis. 1 It could be argued
that any kind of economic and political thought produced on
such a basis has no place in the history of the development of
economic science. And such an argument could be supported by
the fact that the study of economics in those countries in which
the liberal tradition survives hardly ever concerns itself with the
vapourings of the German romantics. But though the universi-
ties may ignore them, their power or, at any rate, the power of
ideas similar to theirs, is not yet dead. In their native home they
have achieved a belated triumph which, even if it may turn out
to be short-lived, entitles them at least to criticism.

1 F. Billow, in his introduction to a selection of Adam Miiller's writings:
A. Muller, Vom Geiste der Gemeinschaft (1931)5 P- xvu \,

210

THE GERMAN ROMANTICS

It may be asked at the outset how it is that a body of ideas
which freely confesses its lack of logic and its scorn for rational
comprehension should ever be able to achieve a wide influence.
In fact, romantic social thought has never in the past been able
to survive criticism. Even in Germany it was short-lived; and
after the middle of the nineteenth century a version of English
political economy was generally accepted. The disappearance
of romanticism then, and its recrudescence to-day, suggest that
two circumstances (related to each other) are unfavourable to
the existence of economic and political illusions. One is econo-
mic expansion and a fairly universally rising standard of well-
being. The other is freedom of scientific inquiry. About the first
little need be said. It is a well-known fact that irrationalism
derives a great stimulus from economic depression. Only when
men despair about the future are they liable to lose faith in the
power of human reason to understand and solve their problems.

The second factor is of a different order of importance.
Material despair may make an environment favourable to illu-
sion; but so long as there is some rational thought left illusion
cannot persist. Romantic illusion must, therefore, be an impla-
cable enemy of rational thought, not only in theory but also in
practice. A condition of the continued existence of political
romanticism is that there should not be any rational thought.
Reason, scientific inquiry, and the atmosphere of freedom in
which alone these can flourish must be abolished in the literal
sense if illusion is to consolidate its power over men's minds.
The economic development of the nineteenth century which
made Germany into an industrialist and capitalist country also
liberalized its political and social structure and created the
institutional environment which made possible a rational analy-
sis of economic processes. To-day that rational analysis has gone
and has been replaced by innumerable variants of the romantic
illusion. It has gone because its existence has been made physi-
cally impossible. What remains from the past is being driven out
by the enormous facilities which are now available for propa-
ganda; and into the increasing vacuum is being pumped the
thought of a more primitive age.

Judged by English and French standards, Germany at the
beginning of the nineteenth century was an economically back-
ward country. Its economic basis was a feudalist agriculture. It

211

REACTION AND REVOLUTION

had only a primitive industry which was still ruled by medieval
guild regulations. Politically, the distinguishing characteristic
was the multitude of small states ruled by absolute princes.
Economic policy reflected these conditions. Obstructionist
regulations of trade and commerce abounded. Each individual
state had got so far on the mercantilist road as to possess a
'national 5 currency for its own territory and to enforce a rigid
protectionism vis-a-vis other German states. As Friedrich List
complained, German merchants and manufacturers had to
spend most of their time endeavouring to overcome vexatious
tariffs and exchange regulations. To the outside world, how-
ever, Germany was not a closed economic unit. Central direc-
tion was lacking, and foreign goods manufactured in the more
advanced conditions of England and France found a ready
German market.

The eyes of business men and theorists were turned towards
their successful rivals. There was keen discussion about the
reasons for Germany's backwardness. The theory and practice
of English and French society were eagerly examined in the
hope of finding in them features which could profitably be
imitated. The economic theories of Smith and Ricardo, the
philosophy of the utilitarians, and the political reforms of the
French Revolution were beginning to influence people's minds.
In them the rising German business class found the expression
of its own interests and of those of the whole community. A
movement arose, in close alliance with that for national union
and political liberalism, which aimed at economic liberalism in
theory and in practice. Its immediate form involved measures
which were not compatible with English classical economic
policy; but in essence it was an attempt to transplant liberal
economic theory into a somewhat different environment from
that in which it had first grown up.

The romantic movement appears as a reaction against the
influence which English economic classicism was beginning to
exert. For its economic theory and policy it could draw on
mercantilist and cameralist tradition; for a basic social philosophy
it constructed from its own view of the Middle Ages a theory
which was opposed to the philosophy of natural law and its
utilitarian development. The two political philosophers who
greatly influenced the romantics were Johcyin Gottlieb Fichte

212

THE GERMAN ROMANTICS

and Edmund Burke. Neither of them was really romantic or
medievalist; but their views were complex enough to serve as
inspiration for opposed schools of thought.

The admiration for Burke which is so striking a feature of the
romantic economists is difficult to understand. Burke was essen-
tially in the tradition from which English liberalism developed,
the tradition of Locke and Adam Smith. He had the utilitarian
doubt about the efficacy of government action. He upheld free
trade; and he was liberal in his attitude to India and the
American colonies. His whole work breathes the spirit of the
English constitution. The Thoughts on Scarcity, as Professor Laski
has pointed out, might have been written by Adam Smith. 1

Yet there is a conservative and aristocratic streak in Burke. In
spite of his non-interventionism, he had on practical grounds a
greater opinion of the power and importance of state finance
than Adam Smith. For the sake of expediency, too, he favoured
a wealthy and financially independent Church. The rights of
property, which are implicitly sexfeguarded in all classical
political economy, were strongly emphasized by Burke. He
did not regard the lower classes as capable of governing;
property alone, he thought, was the basis of government; and
to landed property he gave pride of place. This emphasis in
Burke could be loosened from the capitalist and utilitarian basis
on which he had developed it. It could be applied to a reac-
tionary purpose.

The Burke whom the German romantics acclaimed was not
the author of the Thoughts on Scarcity but of the Reflections on the
French Revolution. Burke was alarmed by the influence of the
French Revolution on English utilitarian thought. He accepted
the results of the English revolution of 1688 but feared the
effects of the new revolutionary fervour on the domination
which the bourgeoisie had now safely established in England.
Burke's Reflections show more clearly than any other document
in the history of political thought the loss of that revolutionary
purpose which had inspired bourgeois thought before its
triumph. The utilitarian attitude to government is still main-
tained in them. Burke did not revert to doctrines which had
been disposed of by Locke. He still regarded kings as the servants

1 Cf. H. J. Laski, The Rise of European Liberalism, pp. 196-205, for a bril-
liant short account of Burke.

213

REACTION AND REVOLUTION

of the people and their power as having a utilitarian basis. The
declaration of the rights of man was not attacked because it was
based on a wrong theory of the purpose of government. Burke
condemned it because it took no account of political expediency.
His anti-democratic attitude was that of the practical statesman
who denied that the scribes who had inspired the French
Revolution and the political ignoramuses who had carried it
out were the best judges of the general interest. Their actions
had produced bad results; and the pragmatic standard was the
only one which could be applied to political problems. The
doctrine of the sovereignty of the people must not be allowed to
lead to the same error as that of the divine right of kings. It
must not be used to defend actions which those with experience
of political leadership judge to be productive of evil. Man
acquired advantages or rights by entering society, but he also
renounced rights. His power to choose his representatives did
not give him power to destroy the whole fabric of government.
Stability, tradition, history, says the conservative in Burke, are
as important as the abstract rights of popular government.

A condemnation of the French Revolution on these grounds
was more than welcome to German reaction. Completely ignor-
ing Burkc's agreement with the essentials of utilitarianism and
capitalism (which was the most important part of Burke), the
romantics fastened on to his conservative qualities and rejected
individualist liberalism, which saw in the state only a utilitarian
institution.

The Reflections were translated into German in 1793 by
Friedrich Gentz and became at once one of the chief sources
of romanticism. Its other great inspiration comes from the
political philosophy of Fichte. In 1796 appeared Fichtc's
Grundlage des Natumchts nach Principien der Wissenschaflslehre,
which gave an interpretation of natural law not unlike Burke's
conservative reading of utilitarianism. Fichte was also in the
tradition of Locke; but, like Burke, he did not draw democratic
conclusions from the philosophy of natural law. The experiences
of the French Revolution combined with the conditions of
Germany to lead him to a view of the state which could be used
by the romantics. According to Fichte, the individual became
'Zufolge des Vereinigungsvertrages, ein Theil eines organisirten
Ganzen, und schmilzt sonach mit demselben in Eines zusam-

214

THE GERMAN ROMANTICS

men'. 1 The state was best described as an ' organisirtes Natur-
produkt', each particle of which had existence only by virtue
of its participation in the whole. 2 This emphasis on the organism
of the state became even more pronounced in Fichte's later
writings. From an Aristotelian view of the state, he was led to
distinguish the state as a special entity independent of the indivi-
dual members of which it was composed. From this derives the
totalitarian view of the romantics.

(b) Gentz; Muller. Mention has already been made of one of
the leaders of the romantic movement. Friedrich Gentz (1764-
1832) was a politician who began as an ardent admirer of the
English liberals and the French Revolution. Even after he had
translated Burke and had become critical of the Revolution, he
remained a believer in the liberal as well as the conservative
parts of Burke's thought. For some years he continued to advo-
cate freedom of the Press and freedom of trade. He did not think
England's supremacy in international trade was harmful to the
rest of Europe, as did the later protectionists. Economically and
politically, England represented an ideal structure which he
thought ought to be carefully studied. He shared Adam Smith's
optimism and believed that the triumph of Smith's economic
principles would cure political evils and bring peace. He
thought that self-interest was the main motive of human con-
duct; and he was certain that providence made each individual
contribute to the common good even when only searching for
his own. His belief in the possibility of perpetual progress made
him disparage the Middle Ages and hail the discovery of
America.

However, even at this early stage in his development Gentz
did not accept economic liberalism in its entirety. He stressed
Adam Smith's abandonment of free trade when defence was at
stake. He regarded the development of trade, industry, and
scientific agriculture as unnatural, though he could not deny
their usefulness. He welcomed the opening up of America, but not
because it brought increased opportunities of trade. Not gold
and silver, trading monopolies, or greater political power of the

1 J. G. Fichte, 'Grundlage des Naturrechts' in Fichte's Sdmmtliche Werke
(1845), vol. iii, p. 204.
2 ibid., p. 208.

215

REACTION AND REVOLUTION

mother country were the true benefits derived from colonies, but
the tremendous impetus to fresh human activity and intercourse.

But the emphasis on the ideal values of liberalism was soon
replaced by a complete rejection of its political and economic
precepts. There set in what Roscher, in his essay on the roman-
tics, called a process of 'drying up'. 1 The ambitious and able
politician in Gcntz grew impatient of the constant regard for
popular opinion which democratic liberalism demanded. Con-
tact with the powerful Austrian state machine gave him a view
of the functions of government which was not compatible with
Smith's doctrines. Gentz tried to compromise by stressing the
power of public finance in moulding the economic activity of
the community as a whole. He was strongly in favour of indirect
taxation as an instrument of state policy. Direct taxation, he
thought, would constantly have to be changed if it was not to
become out of date. From that it was only a short step to Gentz's
defence of feudal domains, which, he claimed, set an example to
farmers.

The excessive power assigned to the state is much in evidence
in Gentz's theory of money. He was a strong upholder of incon-
vertible paper money and opposed the ideas of Ricardo and the
Bullion Committee. Under the influence of his friend, Adam
Miiller, he expounded the view that it was only the word of the
state which made anything, be it paper or metal, into money.
This view, which was later elaborated by Knapp into the state
theory of money, became a common characteristic of all roman-
tic economic thought.

His increasing belief in the strong state made Gentz turn to
the Middle Ages for inspiration; and though he did not go so far
as his fellow romantics, an idealized view of feudalism is more
and more marked in his later writings. The influence of Muller
grew stronger arid his own practical sense gradually disappeared.
The one-time admirer of Burke ended by being a complete
reactionary. He became friend and confidant of Metternich;
and his gifts of statesmanship were devoted to oppression and
intrigue. All traces of liberalism left him. He even discarded the
idealistic excuses which had served to hide his earlier retreat
from liberal principles. He spent the last years of his life in

1 W. Roscher, ' Die romantische Schule der Nationalokonomik in Deutsch-
land ' in Zjeitschrift fur die gesammte Staatswissenschaft ,(1870), pp. 51-105.

2l6

THE GERMAN ROMANTICS

constant fear of revolution; and he died an embittered and hated
crank.

Gentz was the politician of the romantic school. His friend
Adam Muller (1779-1829) was its theorist. Muller was largely
forgotten until the search of German national-socialism for
theoretical ancestors led to a rediscovery of his doctrines. Mailer
was born in Berlin, received his main stimulus at the University
of Gottingen, and spent some years as literary critic, tutor, and
lecturer. He was on friendly terms with many politicians and
with the leaders of literary romanticism. He took some part in
politics, particularly in giving the aid of his literary talents to the
reactionary politics of the landlords who were opposing liberal
reforms. Through Gentz's influence with Metternich, he received
a number of state appointments in Vienna, where he spent the
last years of his life.

In judging Muller's ideas it is important to remember his
career. Although he had acquired his dislike for the philosophy
of natural law and for liberalism from his teachers in Gottingen,
his literary efforts were not unconnected with his political activi-
ties. With all their vagueness, their flamboyant style, their
'poetic' quality, Muller's writings were weapons supplied to a
particular social class for use in the political struggle. Muller
was not in the thick of politics. He had not Gentz's practical
experience and wisdom. But he was sufficiently intimate with
politics to know what function his articles and lectures were
performing. He was entrusted by Metternich with many diplo-
matic tasks; and it would be wrong to believe that a man who
was very ambitious, and who could make the most skilful use of
political opportunities to further his own position, had his head
in the clouds when he came to write about political theory.
Reaction was fighting for all it was worth against the tide of
liberalism. It knew the value of an ally on the literary front who
could use the fashionable language of romanticism and who
could hide the hard facts of oppression behind high-sound-
ing, but ill-defined, words which appealed to everybody's
idealism.

Adam Muller did not begin as a whole-hearted romantic.
His first work as a literary critic was a review of Fichte's Der
geschlossene Handehstaat (1800). In this work Fichte applied to
economic problems his compromise between individualism and

217

A1NJJ Kii.VUL.U HUiN

the state. The basis of the Handelsstaat was still the natural law.
But Fichte rejected laisser faire because power was too unevenly
divided. This led him to draw up a plan for a Utopia. The
function of the state was conceived of in a more than utilitarian
sense. It was the duty of the state not only to safeguard the
property which each member owned, but also to ensure that
each member should have the property which his contribution
to the common labour made his by natural law. The state must
act positively in order to give its members what they needed;
and Fichte described in detail the constitution of the ideal state
which would have the ability to do so. In order to have the
power to act according to the dictates of natural law, the state
must become a closed unit. That is why, in spite of many agree-
ments on fundamentals, Fichte opposed Adam Smith's cosmo-
politanism and free trade. It was not only nationalism that
made him urge self-sufficiency. The embargo on all dealings
with the outside world was regarded as indispensable if the ideal
state was to be insulated from the shocks which foreign trade
must bring about. Like the more sophisticated protagonists of
autarky to-day, Fichte regarded foreign trade not only as a
source of economic dislocation but also as a cause of national
rivalries culminating in wars.

In discussing the best means for closing the state Fichte
stressed the abolition of metal money. He took the view that
money had no utility: the stuff it was made of was irrelevant; it
was only a representative; and the state alone could make it
such. Fichte then proceeded to make a distinction between
Weltgeld and Landesgeld, the world money which is the precious
metals and the native money which the state's decree has made
generally acceptable. Fichte was sufficiently clear about the
nature of trade, price, and money to know the implications of
his proposal that there should be no Weltgeld in his ideal state.
His Landesgeld was to have a fixed value. Accepting the quantity
theory of money, Fichte realized that this involved fixed prices
(his general view of the economic functions of the ideal state led
him to revive the notion of the 'just price') and a completely
closed economic unit. In this he was more consistent than later
adherents of the state theory of money. And he was perfectly
clear about the relation of his proposals to existing practice. He
emphasized that he was not concerned with the then existing

218

THE GERMAN ROMANTICS

inconvertible paper moneys: his Landesgeld applied only to the
future ideal state.

Miiller's review was a violent criticism of Fichte. It opposed
Fichte entirely in the spirit of Smithian doctrines. It accused
Fichte of lack of realism, of ignorance of the literature of political
economy, and of a narrow parochial attitude. It compared his
views unfavourably with Adam Smith's deep insight into econo-
mic processes. And in particular it questioned Fichte's praise of
the wisdom of the state. The defence of Smith, due probably to
the influence of Gentz, gave no inkling of the undemocratic
views which its author was soon to champion.

Indeed, if there is any leading thought running through
Miiller's later writings, it is that of reaction to Adam Smith.
The two most important of these writings are the Elements der
Staatskunst (1809) and the Versuch einer neuen Theorie des Geldes
(1816). They contain the essence of Mailer's social and econo-
mic philosophy. It is difficult to distil this essence from the
chaotic mixture of ideas which Miiller propounded. Nor, when
one has isolated certain basic notions, is it easy*to give them
precise expression.

Muller never abandoned his regard for Smith; but he attacked
his undiscriminating German disciples. They had, he said,
brought over the dry bones of Smith's theory without the master's
qualifications; and they had tried to apply the theory without
regard for the different nature of the German state. Smith, he
thought, had unduly generalized from English experience. He
had been excessively influenced by the industrial and urban
character of English civilization, and had illegitimately raised
the practice of exchange to the status of a natural principle.
This had made him look upon the community from the point
of view of the selfish interests of the individual. Muller stressed
altruism and religion in opposition to what he regards as Smith's
egoism and materialism. The state, he thought, must be regarded
as an organism; the individuals, who were the cells, could not be
thought of outside the totality of the state, the Volksganzes. One
cannot say more than this about Muller' s view of the state. He
himself claims that it is impossible to put the nature of the state
into words and definitions. Every new generation, every great
man gives it a new form and makes the old definition inadequate.
Muller spurns dead^ concepts, as he calls them. 'Vom Staate

219

REACTION AND REVOLUTION

aber gibt es keinen BegrifT; of this exalted subject there can
only be an idea which is constantly moving and growing. l

Mliller does, however, proceed to give a definition. 'Every
man stands at the centre of civic life: he has behind him a past
which must be respected; before him a future which must be
cared for. No one can break away from this time chain. . . .
Finally, the state is not merely an artificial institution, not just
one of the thousand useful and pleasurable inventions of civic
life; it is the totality of that civic life itself, necessary as soon as
as there are men, inevitable. . . .' 2 These are his three funda-
mental propositions which are meant to explain the relation of
the individual and the state. They lead to the conclusion that
without the state man cannot 'hear, see, think, feel, love; in
short, he cannot be thought of otherwise than within the state'. 3

The two social sciences are law and wisdom; they include
politics and economics; and religion unites them. God must be
thought of as the supreme judge and the supreme paterfamilias.
Without religion, economic activity loses its ultimate purpose.
Production should be undertaken for its own sake, and for God's
sake, not for the material reward it brings. The difficulties in
economic life arise mainly because men forget divine power.
Labour is not the sole source of produce. It is only the tool to
which must be added power (which comes from God) and the
material aids of landed estates and already existing capital. This
religious emphasis in Miiller's writings is very marked. The
Elements were published four years after he had entered the
Roman Catholic Church; and into all his subsequent writings
he infused the kind of Catholicism which was so closely bound
up with Austrian politics of the time.

Miiller's view of the state is an essential part of his economic
theories. As the spokesman of the reaction he idealized the
Middle Ages. The ideal organic state, in which rights and duties
were instinctive in every member of the community, in which
status was accepted and the three estates of clergy, noblemen,
and burghers (Miiller never includes peasants) live in harmony,
is transplanted to the feudal Middle Ages. How idealized
Mailer's picture of feudalism was is to be seen in the fact that
his predilection for medievalism did not conflict with his desire

1 A. Miiller, Vom Geiste der Gemeinschaft, pp. 15-16.

2 ibid., pp. 21-2. 3 ibid., p. 23.

220

THE GERMAN ROMANTICS

for an omnipotent state. Nevertheless, it served as the back-
ground against which Muller's defence of feudal landownership
could be made to appear less reactionary.

Muller's theory of property, wealth, production, and capital
is suitably vague and idealist. Property, he says, must be con-
ceived of in such a way as to avoid the unhappy separation
between persons and things. The union of these is a characteristic
of a happy state; and it is achieved in feudalism. Every man is
both person and thing. As the former, he owns; as the latter, he
is owned. The state is the person which owns him. Strict obser-
vance of private property, such as is implied in Roman Law,
destroys the community. The feudal system does not recognize
absolute private property, only usufruct. It is necessary to pre-
serve this aspect of property; and Muller proposes marriage of
feudal law and Roman-British law. 'Agriculture, landed pro-
perty and war will constantly advocate feudal relations; industry,
trade, moveable property and peace will champion strict private
property. 51 Both must be present in the organic state. Their
nexus is made necessary particularly by the needs of war. Trade
and industry are impeded by feudal institutions. But since these
institutions are based on the principle that the state cannot be
thought of without war, their limitation of wealth is compen-
sated by the warlike spirit which they infuse into all peaceful
institutions. On the other hand, while feudal law appears to be
impeded by the rights of private property, war obtains a greater
ease of operation through the existence of the money interest
which depends on strict property rights.

Wealth is also defined in relation to the totalitarian state.
Everything has a private and a civic character, and therefore an
individual and a social value. Wealth is also both private and
national property. It cannot be defined by reference to things
alone: 'it lies in use as well as in property'. 2 The wealth of a
nation cannot be estimated in weight and number; these only
show that wealth may arise. Its real existence can be recognized
only in use. The state must concern itself not only with tangible
things but with the totality of material and non-material goods,
with persons and relations, all of which constitute its wealth.
Production, in the classical economic sense, consists of increasing
material goods and private possessions. Adam Smith had argued

1 A. Muller, Vom Geiste der Gemeinschafi, p. 117. a ibid., p. 150.

221

REACTION AND REVOLUTION

as if the wealth of a nation was only the sum of the private
wealths of the members; he had, therefore, urged statesmen to
adopt a laisser faire policy which would give self-interest the
greatest scope. The real object of political economy, according
to Muller, is a double one: (a) the greatest multiplication of all
the utility of persons, things and ideal goods; (V) the production
and intensification of that * product of all products', the econo-
mic and social union of the great community or the national
household. 1 The emphasis is on national production, on the
interet general rather than the interet de tous; just as the idea of the
state is based not on the volontede tons but on the volonte generate. 2

The factors of production are not land, labour, and capital,
but nature, man, and the past. The last includes all capital,
physical, and spiritual, which has been built up in the course of
time and is now available to help man in production. Econo-
mists, says Muller, have tended to ignore spiritual capital. The
fund of experience which past exertion has made available is
put in motion by language, speech, and writing; and it is the
duty of scholarship to preserve and increase it. All these
elements collaborate in all production; though in different
spheres the emphasis will differ. In agriculture the stress is on
landed property; in industry it is on labour; in commerce on
capital, particularly in its monetary form; and in science the
accent is on the capital of ideas. But in all of them the other
elements are also preserved. Feudalism is praised because its
social structure reflected the existence of these factors of produc-
tion. Land leads to nobility, labour to the estate of the burgher,
spiritual capital to the clergy. As for physical capital, it was
at first also attached to the clergy; but the disintegration of
feudalism brought a separation between physical and spiritual
capital. The concept of physical capital began to invade every
other factor and to obtain supremacy over the whole of civic
life. Physical capital acquired the strongest influence in all
spheres of production and economists began to distinguish land,
labour, and capital only.

Muller's attitude to the economic structure which resulted
from his political purpose is clearly incompatible with the
laisser faire policy of classicism. Muller adopts the views of Fichte,
which he had once criticized, and proposes complete autarky.

1 A. Muller, Vom Geiste der Gemeinschaft y p. 157. 2 ibid., p. 159.

222

THE GERMAN ROMANTICS

But true to his romanticism, he has to clothe the policy of the
absolutist state and of the landed interest in an idealist garb.
Economic patriotism, he said, should be neither calculating nor
imperative: not mercantilist balancing of the money that comes
in against that which goes out, nor the mere closing of the door
to foreign goods. A love for home-produced goods must be
inculcated into the citizens. The state's duty is to awaken
national pride, the feeling of oneness ' with the national state in
the economic sphere. Utility, as an attractive quality of goods,
has in every country its own special meaning. The government
must develop the national content of wants. Wise economic
policy mediates between national production and national
consumption; it establishes an equilibrium between them by
strengthening the feeling of national power in each citizen.
Free trade destroys national cohesion; it makes each member of
the state a citizen of the world. Fichte wished his ideal state to be
insulated from the shocks of the outside world; Mliller wanted
it to be a closed unit, because it might otherwise lose the blind
obedience of its citizens.

Perhaps the most important application which Miiller made
of all these ideas was in the theory of money. He discussed money
frequently in the Elements and he devoted a separate book to
monetary problems. Again it is not easy to extract the main
idea from the jungle of verbiage. Roughly, however, the under-
lying principle is borrowed from Fichte's distinction between
Weltgeld and Landesgeld, or Nationgeld, as Muller calls it. He
develops a mystical theory of the nature of money which leads
to the view that money is only the economic form of the
inevitable union of men in the state. Like the state, it binds men
together. It is the mediator between the personal and the civic
character of persons and things: in so far as they possess social
value they are money; but it would be wrong to think that they
alone are money. Everything in a state, man or object, might
become money. Indeed, it is one of the chief signs of a great
and powerful nation that more and more individual persons
and things become money by entering into the social relation-
ship which constitutes the state. l

But all this symbolism has a purpose. Fichte had said in the
Handelsstaat that he was not concerned with existing currencies.

1 A. Mullen, Vom Geiste der Gemeinschaft, pp. 152-5.
223

REACTION AND REVOLUTION

But Adam Muller, who was later in the pay of Metternich, was
very much concerned to eulogize and justify existing incon-
vertible paper money, particularly that of Austria. ' If I am
asked', he said, 'what is money in Austria ... I say, it is an
imperial word, a national word. 51 Can a theory be evolved to
justify inconvertible paper money? Adam Muller is not at a loss
for one. Metal money is cosmopolitan; it is of a piece with
international trade. It destroys the links which should tie each
individual indissolubly to his own national state. Paper money
is national; it is patriotic; it is medieval. National money
expresses national cohesion and power. Credit too should be
viewed as a national factor. National credit is a creative power
which is capable of setting in motion the national capital; it
must be regarded as another expression of that complete
c Durchdrungenheit, Verschmolzenheit und Einhcit zwischen
der Regierung und der Nation'. 2

After all this mysticism what concrete political and economic
institutions does Muller advocate? Paper money, protection, no
taxation of landed property (to ask 'what is an estate worth', he
says, in a typical passage, 'is to look for the momentary equiva-
lent of an everlasting value' 3 ), are perhaps the only definite
economic suggestions he makes. Politically, the mystic view of
the state seems to resolve itself into an advocacy of a marriage
of the landed interests with certain capitalist sections and with
reactionary professional politicians to form an absolutist state.
The reality behind phrases full of false emotive power was not
attractive in Midler's day; nor is it at the present time. That
reality was seldom allowed to peep out from behind the scenes.
In only one respect did Muller forsake any concealment of his
real purpose, much though he decked it out in fine clothes; and
since this is also the one purpose of his modern imitators which
is never obscure, it is fitting to close this account of him with a
selection of passages which relate to it.

' In the war of one national power against another (not of
national insolence against national impotence) the essence and
the beauty of national existence, that is, the idea of the nation,
becomes particularly clear to all those who participate in its
fate.' 4

1 A. Muller, Vom Geiste der Gemeinschqft, p. 154.

2 ibid., p. 195. 3 ibid., p. xliii. 4 ibid., p. 49.

224

THE GERMAN ROMANTICS

c ln a long peace, the most tender and intensive quality of
social union must disappear, because the eyes of the citizen are
turned exclusively to internal affairs. This union can only be
re-established afterwards in a long war which involves the neces-
sity effacing the enemy with a social totality.' 1

' It should have been the first aim of government policy to
hold fast to that proud spirit of war, to infuse it into the so-
called state of peace, to let it penetrate every single institution
of peace and every branch of the administration.' 2

' Perpetual peace cannot be an ideal of politics. Peace and
war should implement each other like rest and motion.' 3

(c} List. Before we leave the romantics it is necessary to men-
tion one other writer who is influenced by them, but is not one
of them. Friedrich List (1789-1846) was not a romantic, nor
did he, like Mullcr, represent the landed interest. In a sense List
is more correctly placed with the classics ;ffor in spite of his
opposition to their doctrines he representecl in Germany a
theoretical movement which had social roots similar to those
of Smith and RicardoTlAlready Muller had tried to marry
feudalism and capitalism. He had granted the inevitability of
industrial and commercial development, but had wanted to
make it subservient to feudalist purposes. List, on the other hand,
was the representative of nascent industrial capitalism. But
whereas the greater age and more solid foundation of capitalism
in England had made Smith and Ricardo into free-traders, the
backward condition of Germany made List the apostle of
economic nationalism. List's association with romanticism is due
to the fact that the nationalism which he was forced to adopt
brought him into opposition to Smith's doctrines.

In the process, he expressed many views which were reminis-
cent of romanticism. He rejected liberal cosmopolitanism on the
ground that it ignored the nation, without which individuals
could n&t.,exi&t. The atomism of Smith took no account of the
national bond: in considering man, the producer and consumer,
Smith had forgotten the citizen. The individual's position, even
as an economic unit, depended on the strength of the national
power. That national power was not to be estimated in terms of

1 A. Muller, Vom Geiste der Gemeinschafty p. 51.

2 ibid., p. ,53. 8 ibid.

225 H

REACTION AND REVOLUTION

exchange- value. What was important to a nation and to the
individuals who composed it was not so much the actual amount
of material wealth which they possessed as their productive
power: the ability to replace, preferably with an increase, what
had been consumed. A true view of national productive power
should take into account all the nation's resources^ in their
mutual relationship. All this, combined with other manifesta-
tions of List's nationalism (such as his pan-Germanism and his
qualified approval of war), might well have been said by a pure
romantic. But List's manner of saying it is of a different kind. It
lacks the romantic pseudo-poetical phrase-mongering. And what
is more important, the purpose for which it is said is made per-
fectly clear.

What is essential in List is not his political metaphysic, but
his economic policy. List, it should be noted, gave up an aca-
demic career for the sake of political activity. He became the
inspirer and active leader of the association of German merchants
and industrialists which was formed in 1819 as an instrument
of agitation and propaganda on behalf of the trading interest.
In numerous articles and petitions to the governments, of Austria
and the different German states List put forward the economic
policy which _was to remain associated with his name. It has
already been mentioned that at the beginning of the nineteenth
century Germany was split into a number of independent states
which maintained powerful customs barriers against each other,
but offered no resistance to the influx of the products of English
industry. In 1818 Prussia had made an important change.
Customs duties were all levelled at the frontier; on manufac-
tured goods they did not exceed 10 per cent; and most raw
materials were allowed to come in duty free. The association of
manufacturers, formed a year later, was trying to generalize
this reform. Its aim was to create a free-trade area focthe whole
of Germany which would at the same time be strongly protected
against foreign competition.

List had comparatively little part in the first successes which
the movement for economic national union achieved. As deputy
in Wlirtemberg List took a liberal line which brought him into
opposition to the reactionary government. He was thrown into
prison, had to seek exile in France, England, and Switzerland,
ancTfinally settled in America. When he returned to Germany

226

THE GERMAN ROMANTICS

in 1832 the first step to economic union had been taken. Two
customs unions had been concluded, and List entered into the
agitation for an extension of the system. Within two years the
^ollverein was achieved and practically the whole of Germany
(though not Austria) was made into a single economic unit,
inside which free trade offered a large market to German
industry. At first this unit had a low tariff against the outside
world; but pressure from certain sections of industry made the
question of increased protection more urgent.

It was at tliis point that List became the theoretical spokes-
man of protection. In 1840 there appeared his most important
work, Das nationale System der politischen Okonomie. In this book
he expounded a theory of protection which was particularly
adapted to the needs of the youthful German industry. It is in
regard to this theory that the difference between List and
Miillcr becomes most striking. Although they were personal
friends and both anxious to develop national power, Miiller
always expressed hostility to modern industry. He spoke of the
vicious tendency of division of labour, of factories which were
nothing but barracks, and of the slavery to which modern
industry subjected every one. List accepted manufacturing
industry. His theory of the importance of productive power led
him to postulate as ideal an equilibrium between the different
branches of production. Manufacture was an indispensable part
of a well-balanced national productive equipment. Both manu-
facture and agriculture were essential to the strength of a state.
Indeed, without manufacture the other parts of the economic
structure could never flourish. Industry led to agricultural
improvement and to a development of art and science such as
no purely agricultural state could ever attain. The balance
between agriculture and industry was the true principle of divi-
sion of labour; Adam Smith's exposition of it was only a one-
sidecTone, due to his neglect of the national interest.

Nations could be divided according to the degree of civiliza-
tion which they had attained. There were the savage, the
pastoral^the agricultural, the agricultural and manufacturing,
and finally, the agricultural-manufacturing-commercial states.
Not all states could reach the highest stage of development. But
those which possessed the necessary material and human
resources, like Germany, had to aim at doing so. Clearly the

227

REACTION AND REVOLUTION

equilibrium between agriculture, manufacture, and commerce
did not arise spontaneously; the state had to act so as to, bring
it about. That is why List rejected laisserfaire. He thought that
it was necessary to maintain a number of favourable institu-
tions; and he did not omit to mention among >them the various
social, political, and legal arrangements of democratic govern-
ment. But the most important thing a government could do was
to ensure the establishment of manufacturing industry, not only
for the purpose of competing at once with the industries of other
countries, but also and this was more important in order to
posses^ a permanent productive power from which future
generations of members of the nation would draw benefits.

Protection should be used to help in the establishment of
industry. It should be resorted to only if the nation had a natural
basis for industry but was retarded in its economic development
owing to the existence of fully fledged foreign rivals. Tariffs
were then justified as educative measures. They should be used
to nurse infant industries, but only until these industries were
strong enough to compete with those abroad. After that tariffs
must not be introduced, except when the very basis of the
industrial structure of the country was threatened with extinc-
tion. Agriculture was excepted from protection. In accordance
with the pre-eminent place which he assigned to manufacture,
List argued that agriculture benefited greatly from the exis-
tence of a powerful industry. Industry, however, required cheap
food and raw materials. Moreover, differences of soil and
climate gave agriculture a kind of natural protection. Finally,
protection was envisaged as a transitional policy which would
bring all the suitable nations up to the level of the most developed
(which at the time was England), and would then be replaced
by a system of universal free trade.

Such, in brief outline, is the protectionism of List. It will be
seen that List's theory was by no means of a completely different
quality as compared with that of the English classics. It is true
that there are many differences of emphasis and markedly
opposed conclusions with regard to policy. And also in matters
of theory, that is, in the comprehension of fundamentals of the
capitalist system, List must not be mentioned in the same
breath as Smith and Ricardo. But when due allowance has been
made for differences in the material envirgnment, his social and

228

SOCIALIST CRITICISM

political significance was not unlike theirs. Like them he was a
champion of industrial capitalism.

(4) Socialist Criticism

(a) The growth of Socialist Thought. The progress of capitalism
in the early nineteenth century called forth two types of
theoretical criticism. That which was in essence reactionary has
been described in the sections on Malthus and the romantics. J^t
was in the nature of this criticism that it should have to come
to terms with the economic system whichjt opposed. Neither in
practice nor in theory was this rearguarcf action of feudalism
able to delay the victory of capitalism and of its political
economy. Without the revival to-day of romanticism in the
fascist pseudo-criticism of capitalism, its antecedents in Mliller
or even Malthus would have only a historical interest.

The other criticism of capitalism which finds expression in the
first few years of the nineteenth century is of a different character
and has had a continuous influence. It is revolutionary, because
it is not bound up with the waning~pnvileges" oFa particular
social class: it represents neither the landed nobility nor the
clergy. It has no past golden age to long for: feudalism and
medievalism mean nothing to it. It is not obliged to sigh for the
return of something which is gone for ever. If it finds anything
to criticize in the new social order it can attack it root and
branch. It has no need to draw its inspiration from an outworn,
system of status, nor is it forced to defend the new economic/
system, for if it represents a class at all, it is one which ha$
neither gained nor lost any privileges.

The early history of modern socialism would deserve a chapter
to itself, were it possible to devote here more space to political
and social theory. As it is, our concern with it is limited to its
relation to economic thought; and a somewhat cursory treat-
ment must suffice. Both in relation to socialism as a whole and
to political economy, Marx is by far the most important figure.
But Marx's theories did not develop in a void. He had his fore-
runners not only in the classical economists, but also in the early
revolutionary critics of capitalist practice and theory. It is with
these that we have to deal in the present section.

229

REACTION AND REVOLUTION

The points of contact between early socialist thought and non-
socialist critics are to be found in some of the anti-capitalist
theories which Malthus and others were forced to expound.
They had to discover weaknesses and contradictions in the
capitalist system and in classical economic theory in order to be
able to suggest their remedies. But once these weaknesses were
laid bare other remedies could be proposed. We find in fact that
some of the early writers whose criticism of capitalism carries a
revolutionary message began their attack in terms which are
formally similar to those used by the reaction. But as their
socialist purpose becomes more marked this formal resemblance
disappears.

Here is not the place to discuss in detail the conditions which
led to the rise of the modern socialist movement. This, however,
may be said. Socialism launched its attack upon capitalism on
two separate fronts. In the first place, it began as a movement
of revolt against specific evils of capitalist industry. We have
already seen that the creation of capital required the creation
of a new social class, and we have noted the process by which
the working class, the wage-earning proletariat, was brought
into the world. The ruthlessness of this process persisted and was
even intensified during the first decades of the nineteenth
century. The story of the exploitation, oppression, and misery
which the working-class suffered during that period has often
been told. The ability freely to enter into contracts, the increas-
ing equality before the law which the worker could be said to
enjoy, were one part of his new position in the economic process.
The other, an inevitable corallary of the first, was his utter
dependence on the capitalist employer who owned the means of
production. The power which economic inequality gave to the
capitalist was more than enough to make up for the disap-
pearance of medieval bondage. The mechanism of a market in
which bargaining parties were unequal appeared to the weaker
of them to be as harsh a ruler as any feudal lord. Indeed, the
comparative economic security which, with all his subjection,
the labourer had enjoyed contrasted favourably with the
threat of unemployment which the rapidly changing complexion
of industry, and even more so the youthful spectre of capitalist
crises, kept constantly before his eyes.

To its theorists capitalism meant an undreamed of expansion

230

SOCIALIST CRITICISM

of production^ increase of wealth, and economic intercourse
between nations, ^

those involved, it meant liberalism in politics and jhFdestruc-
tion ofoppressive rcguTatTonlind obscurantist restriction. To the
workers it sccmcd^TfrartKey were bcinfi called upon to bear the
wEgle_ost of this"7evolution. ^^Qthem _carly capitalism meant
pauperism^riemployment ; or at best, hard labour in factories
for themselves^ their wives, and chiMren^
aHH^insanitary condifions, and Oppressive supervision made
tEcm into little more than slaves. Tlie earliest worlong^cTass
revolts aimed at the abolition ofllicsc evils of the factory system?
They took the form of combinations of workmen which, by
offering a common front to the employer, tried to make up for
economic inequality and to resist exploitation. In this way the
trade-union movement was born. Through the experience of its
struggles against individual symptoms of the system and against
individual capitalists, it gave rise to a sense of solidarity of the
workers as a class and to a theory and practice of opposition to
the system as a whole. Gradually the working-class movement
became imbued with a socialist purpose.

The other aspectjgmodgrn socialism is anJjiaLagical-onc . It
has its roots in the very liberalism which industrial capitalism
.had developed as its political philosophy. It has already been
pointed out that the philosophy of natural law, and the utili-
tarianism which was one of its expressions, could bear a revolu-
tionary as well as a conservative interpretation. Capitalism had
b^enjniH^J^volutionary than any previous social system. Tfhad
swept a way~wTthouF scruples old institutions and modes of
thought, if they were found to stand in its way. And it had done
all this, not in the name of some narrow class interest, but in the
name of all humanity. Freedom, equality, justice, the greatest
happiness of the greatest number, progress, and the rule of
reason these were its watchwords. It had awakened hopes in
every one that a new ideal age was being built. And it could not
prevent the revolutionary fervour from persisting and turning
against the new social order, if that order was found deficient
in the light of the promises made. The critical attitude to human
institutions which Machiavelli, Bacon, Hobbes, Locke, and the
utilitarians had founded could not be made to disappear at once.
Men began to look upon the state and the economic system with

231

REACTION AND REVOLUTION

the eyes of reason. They were not afraid to criticize and to
agitate for reform, to call capitalism to account, and to work for
a new social order. From this movement based on liberal philo-
sophy, socialism received its second great inspiration.

As far as individual critics of economic practice and theory
are concerned, it is not always possible to distinguish accurately
between the different influences. In all of them a mixture can
be found. T^hejnspiration comes from dissatisfaction wijtli.jhe
conditions of the working class and from the disappointed hopes
of the liberal revolution. The content (at least thatwKich interests
us here) is a criticism of certain conclusions of classical political
economy. In spite of the mixture, it can in general be said that
critical economic thought has a greater socialist content where
it is more closely in contact with working-class experience and
with the rising labour movement. Where it is more directly a pro-
duct of liberal social philosophy it is generally less economically
precise, and often contains an admixture of romantic illusion.
The difference is clearly brought out in the comparison between
English and French socialist thought.\In England, with the
earlier development of modern industry and of a working-class
movement with aims distinct from those of liberalism, early
socialism has a marked class character. It takes the revolutionary
elements in the classical English economists and applies them to
the purposes of the working class. In France, the experience of
the French Revolution, the slower pace of industrial expansion,
and the importance of the financial interest give early socialist
thought its liberal and sometimes romantic flavour.

It is not necessary to deal here with all the writers who can
claim to have been socialist pioneers. Nor can any one of them
be dealt with at great length. In a history of socialism Saint-
Simon, Fourier, and Robert Owen would certainly have to be
considered. They have been left out here because their influence
on economic thought has not been very great/ Sismondi and
Prondhon have been selected for Franre^ ^r\c\ Thompson 7 Gray.
Bray, andjiodgskjii^as representing EJnglaadJ The order in
which they appear below is an ascending one as far as their
relation to socialism is concerned. Sismopdi is only.a_.littlejg
tJTg ]eft nf M^l^ns in thp 0rVj though far to the left of him in
intention. Proudhon is a g^H^Vji p 1ir pO'Sl_J^ 11f hejacks
clarity in his analysis ot the capitalist system. The English socia-

SOCIALIST CRITICISM

lists are the clearest in their perception of the quality of capitalism
and most closely in contact with classical political economy.

(b) Sismondi. There is a great deal in Sismondi (1773-1842)
which is romantic; but there is also a feeling of sympathy for
those whom capitalism is making suffer, and a genuine attempt
to understand the causes, inherent in the system, which are
productive of distress. Sismondi's chief works were historical;
and his voluminous histories of France and of the Italian
Republic were those which earned him fame in his lifetime. But
he also wrote two economic works, separated by sixteen years.
In 1803 he published La Richesse commerciale; in 1819, the
Nouveaux Principes de V Economic polilique. In his first book he is
still a faithful disciple of Adam Smith: an uncompromising free-
trader and non-interventionist, He accepts fully not only the
theoretical structure of Smith's work, but also its practical con-
clusions and its political philosophy. Laisser faire is described as
the best possible economic policy. Faith is expressed in the
natural harmony which made the undisturbed pursuit of indivi-
dual self-interest the means for achieving the greatest common
advantage. Absence of government interference would cause
capital to be distributed among the different channels of
employment in accordance with their relative profitability. This
would result in the most advantageous use of the whole capital
of the nation. But even into this complacent picture of a laisser
faire world Sismondi allows certain doubts to enter. He is not
completely reconciled to see the labourer's lot remain per-
manently that of producer of everything and consumer of only
a small part of what he produces.

Before he ventured out again with a theoretical work
Sismondi did a considerable amount of historical research and
travelling. In Italy, Switzerland, and France he came into
direct contact with the first crises of the nineteenth century; and
he discovered that they had also ravaged England, Germany,
and Belgium. This experience left its mark; and when he came
to formulate again his economic views little of the indiscriminat-
ing repetition of Smithian doctrines remained. Sismondi did not
break entirely with the classical school. He always retained his
respect for Adam Smith, and he always claimed to have pre-
served intact the main theoretical apparatus of classicism. Like

233

REACTION AND REVOLUTION

Malthus, whom he admired, Sismondi objected to the applica-
tion of classical theory to practical problems, particularly in the
way in which this was done in the Ricardian system. Like
Malthus, too, he began with a criticism of the classical method,
and to this he added an objection to the classical conception of
the aim of economic science.

Sismondi makes the often-repeated and ill-founded charge
that Ricardo had been too abstract. He holds up Malthus as an
example of the careful balance between deduction and induc-
tion which, he claims, was more truly in the tradition of Smith.
He claims that political economy has so wide a scope that it
has to base itself on a wide experience and a knowledge of
history in order to comprehend fully the social relations which
were its object of study. Political economy has a moral purpose.
It is not concerned with wealth as such, but with wealth in
relation to man. It has to study economic activity from the
point of view of its effect on human welfare. For this reason
Sismondi regards the problems of distribution as more impor-
tant than any other economic problems. In this respect he is
oddly in agreement with Ricardo, whom he otherwise opposes.
This agreement of emphasis brings out also the different
approach and purpose of Malthus and Sismondi. Malthus had
begun by stressing consumption, since his purpose was to justify
the unproductive consumer. Sismondi stresses distribution,
because his concern is mainly with social justice. Although they
reach formally similar conclusions, Sismondi began with a revo-
lutionary aim; but Malthus's theory could never become poten-
tially socialist.

Sismondi's remarks on the method and object of economic
inquiry are not the important parts of his theory. What is
important is his rejection of classicism, in so far as it implies
optimism and a belief in harmony and in the self-equilibrating
character of the capitalist system. Gone is the complacency
which characterized his earlier work. The emphasis is now
entirely on all that is bad in the contemporaneous scene. Every-
where Sismondi sees an expansion of productive forces, without
any equivalent increase in the well-being of the masses of society.
Political economy has no reason to describe the system and then
to sit back and hope for the best. The outlook for humanity is
black and something must be done about it.

234

SOCIALIST CRITICISM

Gone too is the harmony of social interests. SismondLwas
of the^ earliest economists to speak of the pvistenr^^nf two
social^classcs. the rich and the poor^ the .capitalists^ and "~ the
worEersTwjiosc interests he regarded^^ojjjx^d^theY^wftre. in
constant conflict with one jyi.Qth.6iLu.His formulation of the class
struggle is__aJmps_t as rigorous as that of Marx;^ ^ncTln TEe
^Communist^Manife^to Marx and Engels acknowledgcd~Tt. l
SismonjJL also jeix^}]iasi^s_t^^ in3e-

pendent workers on the farm and in the workghglLiBying to the
ruthless competition of concentrated capital and large-scale
gnterprise. 5ociety,Jie says, is_bCQnu,rig divide.djLutoJa^QJilasses,
the owners^ jLnd_the^ proletariat. Property and Jabour are
separated. .

Having thrown optimism and the idea of social harmony
overboard, Sismondi proceeds to analyse the causes inherent
in the capitalist system which are responsible for the misery of
the masses. As Marx said of him, 2 Sismondi feels that there is
something wrongTjtTTti^conditrons ^oTcapitajis t proHTTctlonT^e
sees~tliat this form oj5rojLluUqn is_ tendjii^jt^lncrease J^he
productive powers_and ^hg output ^fgooHs^ but that

relations which determine production create a barrier to this
expansion,. /^nHjthe more the productive powers increase, the
greater becomglKesg con iradictions between
between production andTale. '"HejcesjKat

ticmjrjvorvcs aT^ corollary th^LJhgjroducers (the workers)
shall be limited inJlheirxoDsumptijon to tli. mmiirflTm r>f QJif^,

realizes that it is inherent irncapitalist
not be in a positiorTTo a

the ^whole^ou^ut of capitalist industry rBut he "isHof "prepared
to^accept thisas a natural phenomenon and to suggest as mitiga-,
tion the use of the safety-valve of unproductive consumption.

All this is implied in his work. But his analysis is based mainly
on one idea: over-production and crises which arise from com-
petition and the separation of labour and ownership. The latter
makes the labourer completely dependent on the capitalist. The
workers are at the mercy of the employers. In order to live they
haVe ,to accept employment at any wage the employer cares to
offer. The supply of labour is entirely determined by the demand

1 Marx and Engels, TTte Communist Manifesto (ed. Ryazanov, 1930), p. 57.

2 Marx, Theorien iiber dtn Mehrwert, vol. iii, pp. 55-6.

235

REACTION AND REVOLUTION

of the capitalist for wage-labour. Population does not tend, as
Malthus had claimed, to outrun the means of subsistence.
Population depends on revenue. When the worker is indepen-
dent he has control over his revenue; he knows his present posi-
tion and can calculate his future chances; and he can determine
whether, and when, to marry and produce children. Since
property and labour are separated, revenue is under the control
of the capitalist. It depends on the capitalist's demand for
labour and this is constantly fluctuating, because it is deter-
mined, not by the needs of consumers, but by the need to
produce in order to employ capital profitably.

Here the theory is joined to the ideas of competition and
over-production. Capital is obliged by its very nature to seek
continual increase of production. The classical economists had
regarded this tendency with complacency; the Ricardian
mechanism had shown where the self-adjusting force lay.
Sismondi now points out that this continual increase in produc-
_ rise^tq perioduTexcess. 1 he workers* demand is

_ ^

always insufficient to absorb^IT products; with the progress of
machinery periodic unemployment is created which still further
reduces the workers' purchasing power. Neither capital nor
labour can be easily withdrawn from industries which are faced
with a declining demand for their products. Fixed capital will
have to stay in the declining industries; the workers will accept
longer hours and lower wages; and production will continue to
remain excessive. Sismondi condemns competition. Not only
does it lead to increased exploitation, since every capitalist is
anxious to obtain the greatest profit; it also intensifies over-
production. Competition is determined by the profitable employ-
ment of capital, not by the needs of the consuming public.

Over-production appears most strikingly in the crisis. Accor-
ding to Sismondi crises are caused by three things: t the competi-
tive character of production which makes it impossible for each
producer to know the market, the fact that capital, not want,
determines production, and the'separation of ownership and
labour which increases the revenue of the capitalists, but not
that of the labourers who form the mass of consumers. These
three factors create disequilibrium. Demand will increase
unevenly: that for the products of industries which cater for the
mass of the people cannot grow uniformly \yith producing power,

236

SOCIALIST CRITICISM

since it is only the revenue of the capitalist which increases pro-
portionately with production. The capitalist will exercise a
greater demand for luxury goods; but this cannot make up for
the other demand which has shrunk; it only causes changes in
the distribution of productive resources which bring about
fluctuations in economic activity and aggravate the difficulties
of over-production. The progressive concentration of capital
aggravates this disparity of demands. Tl^jr^jt^ist^ysteip has
thus an inherent tendency to widen the gulf between production
and consumption. ~ ~~~

Sismoiicli's description of the weaknesses of capitalism was
extremely acute. His break with classical self-satisfaction posed
the question of the desirability of the capitalist system itself: a
question which socialists have since continued to ask. His
unorthodox conclusions were salutary even for the progress of
non-socialist economic thought, because they forced economists
(more than Mai thus had done) to examine the problem of dis-
equilibrium. His influence in both fields was less great than it
might have been, partly because of his inability to link his
theory of disequilibrium with the corpus of pure theory of
Ricardian economic analysis. Sismondi's formulation of most of
the fundamental economic concepts was vague or confused. And
however much his practical conclusions may have had a basis in
reality, they lacked the theoretical background which would
have made them significant to economists or to those socialists
who came under the influence of Marx.

Sismondi's remedies reveal this lack of a unified principle of
analysis even more clearly. He discovered the cause of economic
evil in the disparity between productive power and the social
relations which determined their use. He wavered between a
remedy which would replace the existing social order by one
which would be in harmony with the productive powers, and a
remedy w r hich would limit the expansion of productive powers
so as to make them congruous with the opportunities offered by
existing social relations. Jte_M2&r~h^^ that tfee

laisserfaire policy of the classics was useless. Jhejjtate must step
in toTnitigate evils and rpninvpj^fj^ (fliises. But wHenlt j:omes
tcTsaymg how this could He don^Sismondi hesitated and indeed
cxpresseg^oubraT^out his ability to prescribejthe correcjj^cy.

He reiecIcHTommunism, because he was too great a believer

237

REACTION AND REVOLUTION

jnJJTg impnrtanre of pn^v^Jriterest. He rejected feudalism too,
Because he regarjdedjt j.s_a restriction of the^groHuctiye powers
oTlnankinjd. But his policy did in the encf amount to a return to
more primitive conditions. Hejjefined the aim of policy as the
reunion of property and 1 gjbour^and _the rp-p.stn.hlishmp.nt nf
equilibrium between production and ^ consumption. This migKt

. AQcialist aim. But whereas the

socialist way _ojfachieving it was the aboKtion^fxHiyate property
- mp.ans ^j2rod]icti^n j Sismondi wanted to see a revival of
independent producer, the small farmer and the artisan.
Pending this return to the golden age it should be the task of
government to prevent the increase in disequilibrium. This
could best be achieved by slackening industrial progress.
Government should, above all, put a brake on invention and
aim at having such a rate of progress that the necessary adjust-
ments could be made smoothly and without causing over-pro-
duction and misery. In effect, then, the policy is a reactionary
one. With all his historical interest, Sismondi lacked the insight
into economic development which would have prevented his
sympathy for the oppressed from leading him into a position
incompatible with his intention.

(c) Proudhon (1809-1865). Proudhon is better known than
Sismondi and has had a vastly more important influence on
socialist thought. He is one of the majn mjpircrs^Qf syndicalist
and anarchist ^flctrTne. But his role as political theorist has
been more important than as economist; and since he has been
the subject of many specialist studies, including a crushing
criticism by Marx, a short summary of his theories will suffice.

To understand the quality of Proudhon's criticism of capi-
talism and of other socialist thinkers, as well as his positive
theory and policy, it is important to remember Marx's charac-
terization of him as ^^ttyj-bourgeois._He was the son of a small
brewer and was born into an environment of small peasant
proprietors. He became a printer, and, although he spoke of
himself as a son of the workirfg-class, his social roots were defi-
nitely in the lower middle class. An unquenchable thirst for
knowledge made him read and study continually; and although
the knowledge he acquired was never fully digested, it was large
enough to make him conscious of the importance of learning

238

SOCIALIST CRITICISM

and somewhat vain and contemptuous of those whom he thought
without it.

From an early age he was interested in social problems. He
showed himself possessed of a critical mind which was not afraid
to attack accepted ideas. At the age of thirty-one he published
his first important and perhaps his most brilliant book, Qu'est-ce
que la propriete ou recherches sur le principe du droit et du gouvernement.
This was followed 1 Jnjj:j^6 1 byjiis other great work^ Contradic-

Miser e^ to which Marx

rcplicdLinJiis La Miser e de la Philosophic: a reply
"'

In these books the influence of Kis
environment is supplemented by his natural bent for philoso-
phical speculation and his love of dialectics. Contact with the
working-class movement, which led to his active participation
in the revolutionary movement of 1848, determined the critical
aspect of his theory. The interest in philosophy determined his
love for abstraction and for verbal paradoxes. This factor
became even more important when, largely through Marx's
influence, Proudhon took up seriously the study of the philo-
sophy of Hegel. Among other ideological influences must be
mentioned the Bible (although Proudhon was not religious, he
derived his idea of justice to some extent from the Old Testa-
ment) and the writings of the political philosophers of the period
after the French Revolution, particularly of Fourier, who had
stated the view that social development proceeded by way of
continual contradiction between what it aimed at and what it
achieved.

One moral idea underlies the whole of Proudhon's thought:
the idea of justice. Again and again Proudhon speaks of justice
as the supreme principle of human life. But how is justice to be
achieved in society? Here an Aristotelian concept is used. Justice
is the same as reciprocity, equality, equilibrium. Social life,
nature itself even, contains irremovable contradictions. The anti-
nomies of Kant, later the thesis-antithesis of Hegel, are Proud-
hon's inspiration for the theory that contradiction is the eternal
principle in human affairs. Having raised contradiction to this
exalted status, Proudhon is prevented, in spite of his critical
intention, from offering a revolutionary solution to social prob-
lems. Since he makes contradiction into an abstract idea, his
search is not for the means of changing social institutions, but

239

REACTION AND REVOLUTION

for the discovery of the right idea which would abolish contra-
dictions in the abstract. That idea is the concept of justice as an
equilibrium of opposing forces. Society can only make the fullest
use of its powers when 'les forces en fonctions dont il se compose
soient en equilibre'. 1

The idea of a reconciliation of opposing forces underlies all
his theory and his practical proposals. It is particularly marked
in his attitude to property. Even in his first work, which launched
into the world the famous definition 'la propriete, c'est le vol',
Proudhon's object was not to analyse the different economic
relations which underlay different forms of legal property. He
did not attack private property as such. On the contrary, he
regarded property as an essential condition of liberty. Since he
accepted the view that labour was the sole source of wealth and
constituted the only title to property, he regarded it as vital that
every one should be able to enjoy and own the fruits of his
labour. What he objected to was the abuse of property, the cele-
brated droit d'aubaine, the power to exact an unearned tribute
which modern capitalist enterprise and its law gave to the
capitalists. Rent, interest, profit, should be abolished, but pro-
perty should be preserved.

How were the excrescences of private property to be removed?
Proudhon made a large number of suggestions for various
reforms relating particularly to rent, but he never went so far
as to propose common ownership of the means of production.
On the contrary, just as he opposed the contemporaneous
French socialists like the Saint-Simonians for being Utopian and
for ignoring the laws of the economic process, he also rejected
communism, because he thought that it was based on a false
analysis of property. In his Theorie de la propriety published post-
humously in 1866, he even went so far as to propose the retention
of private property in its existing form with its power to use and
destroy mitigated only by 'equilibrating' guarantees. 2 But his
ideal was really not unlike that of Sismondi. The balance of
contradictions is achieved and the power of exploitation is
abolished when property is parcelled out and agriculture and
industry are carried on by numerous small producers. Property
may then be said to exist no longer for ' les droits et les preten-
tions de chacun se faisant contrepoids . . . le droit d'aubaine est

1 A. Cuvillier, Proudhon (1937), p. 253. 2 ibid., p. 194-5.

240

SOCIALIST CRITICISM

a peine exerce'. 1 And similar to Sismondi also, in spite of his
explicit rejection of Sismondi's view on invention as retrograde,
is Proudhon's instinctive dislike of machinery, because he feels
that it is incompatible with his small-producers' commonwealth.

The political organization of this ideal society should also
reflect the equilibrium of forces, or, as Proudhon calls it, the
social 'mutualism'. The state, he thought, must disappear.
Anarchy was the ideal form of social living; that is the absence
of government as a coercive force, and its replacement by volun-
tary association for the administration of things, not the rule
over persons. This theory was never carefully worked out, and it
did not prevent Proudhon from approving some of the most
coercive acts of authoritarian government. It did, however,
make Proudhon object strongly to socialist and communist
theories which seemed to him to involve the maintenance of a
coercive state. Proudhon realized that large-scale industry can-
not be entirely abolished. It had to be integrated with his society
of small farmers and artisans. The way to do it was to hand it over
to voluntary associations of independent workers which would
be free from state interference. The workers should follow the
example of the capitalists and form companies for running big
industries.

This syndicalist dream comes at once up against the reality of
the need for capital. And this leads to Proudhon's most specific
economic theory and proposal. The abuse of private property,
he had said, consists mainly in the ability to extract income
without labour. One of the most important ways in which this
is done is through the charging of interest on money. If only
everybody were able to obtain loans gratuitously no exploita-
tion would take place. Nor would there be any difficulty in
establishing workers' syndicates. Proudhon regards money as
merely a medium of circulation. Following the Canonists, he
thinks that, like a commodity, it ought to be bought and sold at
cost, and not lent at interest. Lending at interest enables the
owner of money to sell one and the same thing several times over
without losing his property in it.

Having confused capital in its monetary form and money as a
circulating medium, Proudhon applies the idea of lending with-
out interest to bank credits, the most common form in which
1 A. Cuvillier, Proudhon, p. 72.

241

REACTION AND REVOLUTION

loans are made. Nature, he argues, supplies man freely with raw
materials; labour, therefore, not capital, is productive. Credit,
being nothing but an exchange, should not bear interest. The
most important part of Proudhon's economic programme
becomes the creation of free credit through the establishment of
an s exchange bank'.

There should be set up, he says, a bank without capital and
thus without any interest burden. This bank would issue notes
(bons d'echange), which, being inconvertible into gold, would cost
little to produce. These notes would be issued against commer-
cial bills representing a sale already made, or one to be com-
pleted but already decided on. If everybody agreed to accept
these notes in payment for goods they would circulate in place
of money. The bank would run no risk because it would only be
discounting genuine commercial transactions. The important
point, however, would be that this service would not cost any-
thing. Interest being abolished, exploitation through property is
abolished too. Moreover, since the exchange bank enables every
worker or group of workers to get free credit with which to buy
the means of production, the division of classes would disappear.
Property and labour, which, as Sismondi had complained, were
separated, would now be re-united. The way to the ideal com-
monwealth of free and equal producers, to justice, and, therefore,
to the abolition of oppressive government is clear.

We see to what the idealization of social categories and the
lifeless view of contradiction have reduced Proudhon's original
attack upon capitalism. His socialism which is itself an unrea-
listic dream of a past golden age is to be achieved by the
abolition of interest within capitalism. It may be said as an
excuse of Proudhon's views that he lived in an environment in
which the power of exploitation in the capitalist system seemed
symbolized in finance. But Proudhon's failure to analyse the
principles of capitalist production and to understand the quality
of capital and the function of money make his practical proposal
as ineffective as his ideal is retrograde. The impetus which he
gave to French socialism was marred by the confusion he sowed.
His ideas have lived on in anarchism and in the host of ill-con-
sidered nostrums that appear periodically when crisis revives
doubt about the continued desirability of the capitalist system.
One cannot deny that Proudhon was moved by a revolutionary

242

SOCIALIST CRITICISM

fervour. But he combined with it much that was reactionary.
What he said about women and about war/ no less than the
rnuddleheadedness which is evident in his economic analysis,
makes him akin to the romantics. From Proudhon, Mai thus, and
Sismondi monetary reformers and underconsumptionists of all
ages have drawn their inspiration.

(d) The Forerunners of Marx. The last group of earlier socialist
writers is easier to deal with. Bray, Gray, Thompson, and
Hodgskin did not wrap up their theory in quite so tortuous a
philosophy as did Proudhon. They are distinguished by the fact
that they base themselves on the teachings of the Ricardian
school itself; they use the classical conclusions to point a revolu-
tionary moral. Having grown up in an environment that was
full of labour struggles, they had an opportunity to observe the
early energetic trade-union movement and to acquire a more
determined and clear-cut socialist theory. What is more impor-
tant, the development of this socialist theory was an almost
natural outcome of classical political economy. The socialist
could not have stated better the existence of a conflict of classes
than did Smith, Ricardo, and Malthus. Those who claim that
Marx invented the idea of the class struggle should read not
only his English socialist forerunners, but also a man like Burke.
As Professor Myrdal has said, the surprising thing is not that
Thompson, Hodgskin, and Marx drew socialist.conclusions from
the Ricardian system, but that the Ricardians themselves did
not do so. 2 As it was, the triumph of the Ricardian school,
exemplified by the doctrinal certainty of a James Mill, was
accomplished by a flood of writings which showed that some
people were not prepared to accept fatalistically the pessimistic
conclusions of classicism. 3 The authors who are here specifically
mentioned are by no means the only ones in this movement.
They are selected because they represent the trend in its clearest
form.

There are two common features in their writings. They all

1 A. Cuvillier, Proudhon, pp. 254-7, 162-6.

2 G. Myrdal, Das Politische Element in der Nationalokonomischen Doktrinbildung
(1931), p. 124.

3 For a discussion of some examples, cf. Marx, Theorien uber den Mehrwert,
vol. iii, pp. 281-313.

243

REACTION AND REVOLUTION

start from the Ricardian formulation of the labour theory of
value. They accept the explanation that the amount of labour
embodied in a commodity is the substance and measure of its
exchange-value. They rely on the distinction between produc-
tive and unproductive labour. And they all develop in one form
or another the concept of surplus value. In the capitalist system,
they say, the wages paid to the worker are always less than the
value of the product which the worker has produced and the
capitalist has appropriated. Hence exploitation, oppression, and
misery.

The other characteristic common to all these forerunners of
Marx is their revolutionary interpretation of utilitarianism.
They all accepted the utilitarian postulate of the greatest happi-
ness of the greatest number. We have already seen that this ideal
could be given an egalitarian content and was given it even by
some of the non-socialist utilitarians. The early English socialists
also accepted the utilitarian emphasis on liberty and the critical
attitude to existing institutions which was a natural result of
philosophical radicalism. Bentham had shown the way. An
existing social structure with its fictional concept of law, rights
and duties had nothing sacrosanct about it. It had to be judged
in the light of the utilitarian ideal. Thus when the socialists
came to inquire into the reasons for the absence of the ideal
order in which there was no exploitation, since every one
obtained the full fruits of his labour, they were not precluded
from finding the answer in existing social arrangements and
laws. In particular, they could, without being inconsistent,
attack the existing property distribution and the whole system
of private property.

With these basic ideas held in common, the writers in ques-
tion laid stress on different aspects of their socialist creed.
William Thompson (1783-1833) is very close to the utilitarians;
so is John Gray (1799-1850?) in his earlier writings. Later,
both he and John Francis Bray (1809-1895), through concentra-
ting on certain practical remedies, were led to put forward pro-
posals that resembled those of Proudhon; but as they came
from England they never led their authors into the arms of
reaction. Thomas Hodgskin (1787-1869) was perhaps the most
cogent socialist economist among pre-Marxian writers. The
germs of many of Marx's ideas are found in his books; and

244

SOCIALIST CRITICISM

Marx acknowledged the importance of Hodgskin's pioneer
work. l

Thompson's chief works are An Inquiry into the Principles of the
Distribution of Wealth most conducive to Human Happiness ( 1 824) and
his Labour Rewarded (1827), which was a reply to Hodgskin. In
the former book, he gives a consistent socialist interpretation of
Ricardian economy and Benthamite philosophy. Labour is the
sole source of value; the working class should be the only one to
receive the product. In capitalist society labour was deprived of
a part of what was its due by the claims of capital and land. This
meant not only unnatural and unjust distribution which could
never achieve the greatest happiness of the greatest number; it
also created the striking contradiction of capitalism: plenty and
poverty, and with them all manner of social evils. The remedy
was the abolition of the capitalist's tribute. Thompson knew
that the capital which was consumed in the process of produc-
tion added its value to the product. What he objected to was the
capitalist's ability to appropriate the whole surplus value which
arose through the worker's dependence upon the capitalist who
owned the means of production. The policy of socialism is not
very clearly worked out; but as an analysis and indictment of the
capitalist system, the Inquiry is an important document. In his
second book Thompson took up the problem of policy. But what
he gained in precision he lost in breadth of vision. He had
become an out-and-out disciple of Robert Owen and he saw
salvation in a system of co-operation.

A similar process can be observed in John Gray. His first
work, A Lecture on Human Happiness, published in 1825, was a
trenchant condemnation of the existing social order. It was
based on the view that labour was the sole source of wealth and
it analysed the falsification of natural justice in contemporaneous
capitalism. Those who produce all are shown to receive only a
fraction of the fruits of their labour, while the unproductive
classes lead a parasitical existence. Labour creates the only title
to property; and exploitation through the exaction of rent,
interest, and profit is the real cause of all social ills.

In two later works, The Social System: A Treatise on the Principle

of Exchange (1831) and Lectures on the Nature and Use of Money

(1848), Gray endeavoured to describe the principles of the ideal

1 Marx, Theyrien uber den Mehrwert, vol. iii, pp. 313-80.

245

REACTION AND REVOLUTION

society. In these he outlined a system which was in many ways
similar to Proudhon's plan for an exchange bank. Its superiority
over the latter lies in its consistent application of the labour
theory of value. Gray's national bank was to ascertain accurately
the amount of labour time necessary for the production of
different commodities. The producer would receive in exchange
for his product a certificate of its value which would entitle him
to receive a commodity in which an equivalent amount of
labour was embodied. This system would organize exchange
(which Gray regarded as the great need) in such a way as to
ensure an equilibrium between production and consumption. It
would destroy the tyranny of money as a measure of exchange-
Value and put in its rightful place the only true measure, labour
time. As a socialist policy this could be shown to be Utopian, as
it was by Marx, 1 because it lacked a sound analytical basis.
What Gray wanted was to abolish private exchange, but to
allow the capitalist conditions of production (which involved
private exchange) to continue. He never analysed clearly the
role of money in the capitalist economy, and was therefore led to
isolate the process of exchange as that which needed reform.

Similar ideas occur in Francis Bray's Labour's Wrongs and
Labour's Remedies or The Age of Might and the Age of Right., first
published in 1839. Bray opposed Owenism, as expounded for
example by Thompson in his Labour Rewarded. Like Gray, he
found the source of evil in unjust exchange. Labour time was the
true measure of exchange-value; and just exchange was that in
which equal quantities of labour exchanged for one another.
But Bray went farther than Gray. He dimly recognized the con-
nection between the social conditions of production and those of
exchange and distribution. His universal exchanges involved
universal labour, that is, the disappearance of private capitalist
property and production. But at the same time Bray's method of
reaching this ideal state of affairs was again somewhat reminis-
cent of Proudhon. It consisted in the establishment of companies
which would be able, through the issue of paper money, to
purchase land and capital equipment. The result achieved with
the aid of trade unions and friendly societies would be a sort of
syndicalism.

Thomas Hodgskin wrote a number of books, of which Labour

1 Marx, %ur Kritik der pohtischen Okonomie, pp. 70-3.
246

SOCIALIST CRITICISM

Defended against the Claims of Capital, Or the Unproductiveness of
Capital proved with Reference to the Present Combinations among
Journeymen, published anonymously in 1825, is the most impor-
tant. His influence appears to have been quite considerable. It
was exercised not only through books, but also through lectures.
Although inspired, as the sub-title says, by the growing trade-
union movement and the opposition to it, Labour Defended was
not merely a pamphlet of momentary political significance. It
contained a careful analysis of the economic system. Its aim was
to prove that the combinations of working men were justifiable
if they were directed against capitalists who exacted an unjust
profit. Capital had to be proved to be unproductive. This is done
by basing on the Ricardian theory of value a skilful analysis of
capital's function in the process of production.

In this analysis, Hodgskin laid the foundation of the distinc-
tion, later elaborated by Marx, between the material aids to
production, to which economists give the name of capital, and
the social category of capital as a certain form of property rela-
tion. It is this social relationship which makes steam-engines,
raw materials, and the labourer's means of subsistence into
capital. By using the term indiscriminately to describe both the
stored-up labour, which is a material aid and condition of future
production, and a social relationship, which gives the capitalist
command over current labour, the economists have created for
themselves the problem of the productivity of capital. If, says
Hodgskin, by the productivity of capital is meant its power to
create exchange value; and if it is, therefore, implied that cap-
italist property is entitled to a share of the product, capital is
definitely not productive. It may, however, be admitted that the
results of past production, etc., for which the word capital is
illegitimately applied, are material conditions for the expendi-
ture of current labour.

Hodgskin does not perhaps make very clear the distinction
between use-value and exchange-value; but when he speaks of
capital as a magic formula which is used to hide the reality of
exploitation, he is very near to the Marxian theory. According
to the already accepted economic tradition, Hodgskin distin-
guishes circulating and fixed capital. The former, he says, is
nothing but co-existing labour. Capital accumulation is nothing
but the storing-up of labour; and the increase of the skill of the

247

REACTION AND REVOLUTION

labourers themselves is a more irriportant aspect of accumula-
tion than the storing-up of the products of labour. Fixed capital
is equally only a form of stored-up labour which becomes useful
in production. It is also dependent on current labour for its utili-
zation. Without the skill and energy of existing labour these
embodiments of past labour would be useless. Whether they are
productive or not depends entirely on whether they are, or are
not, used by productive labour. If all these machines, buildings,
and so on were left unused, they would only decay. Fixed capital
acquires utility not from past labour but from present labour.
It brings a profit to its owner not because it contains stored-up
labour, but because it enables him to command present labour.

Hodgskin carefully resolves all the productive qualities usually
ascribed to capital into co-existing labour. By doing this, he
builds up a case against those who transplant these qualities into
the material embodiments of labour and so make capital itself
productive independently of labour. The capitalist, according to
Hodgskin, is the middleman who intervenes between labour and
the things with the aid of which labour is exercised; and who
appropriates the larger share of the product. The natural social
order is one in which this alienation of labour from its means of
production and livelihood is abolished.

Hodgskin has not much to say about policy. He adopts to a
large extent the anarchist ideal. He was so much aware of the
extent to which the magic formula of the productivity of capital
had impressed men's minds that he was sceptical of any other.
He doubted the efficacy of government even when it was demo-
cratic in form. The progressive enlightenment of the workers
and their increasing strength through union would, he thought,
make them abolish privilege, obtain the full fruits of their
labour, and establish labour as the only title to property.
Government would no longer be necessary, since class division
would have disappeared. The ideal society to which Hodgskin
aspires had the same characteristics as that of the other English
and French pioneers of socialism: it was Utopian. It was left to
Marx to build a different socialist theory on the same foundations.

248

CHAPTER VI

Marx

(/) Life and Sources

It is a sound tradition which assigns Marx a place in every
history of economic thought, but puts him in a separate chapter.
Nobody would now* deny that Marx was an economist who
worked in the classical tradition* But friends and critics alike
agree that Marx was much more than an economist^He was a
revolutionary socialist for whom the study of political economy,
and before that the study of philosophy, was only an instru-
ment. He used it to discover the laws of social development and
ISO "to arm himself with a theoretical weapon, without which he
regarded the social practice in which he was interested as con-
demned to be impotent. )

Marx would have brushed aside the accusation that in using
scientific inquiry for social ends he was infringing the injunction
that scholarship should be impartial, that knowledge should be
sought for its own sake. His^ philosophy made him impatient of
the assertion that sjcieu^e could be^ultimately pure, both in the
sense of being divorced from practical use and free from political
implication. He admirecT and studied intensively past and^con-
temporaneous achievements in the exact sciences; and he
claimed that however distant their inquiries seemed ta be from
practical needs,_they were jyjtimately traceable to them. What
was true of the natural sciences was equally true of the science
of society. All great economists of the past had desired to under-
stand their economic system for some practical purpose. But
they only achieved an imperfect understanding; and sometimes
they concealed their practical aim. Social science had to become
as exact and as penetrating a study of society as the natural
sciences were of natural conditions. The latter, by making man
aware of the laws which underlie natural phenomena, enabled

249

MARX

him the better to master them. The former by uncovering the
laws of society made man able to master the problem of social
relationship.

It could not be the insistence on a practical aim as such to
which the critics of Marx could raise objections. After all, even
when they have been loudest in proclaiming the 'purity' of their
science, economists have never been able to deny that in the last
resort it had a practical significance. Nor could Marx's econo-
mic theory itself explain the flood of criticism, hostility, and
abuse to which it has been subjected. If one takes individual
elements of the Marxian system, one might say that there are
comparatively few that cannot be found in classical doctrine.
But the tenderness with which Adam Smith is treated contrasts
strangely with the bitter intensity with wtrfch errors are looked
for in Marx. Nor can Marx be blamed for being so ambitious as
to want to erect a system in which economic analysis, political
philosophy, and policy are integrated. As we have seen, it was
precisely this integration which was the distinguishing feature
of the classical school.

There can be no doubt about the virulence of the hostility
which has been shown by the critics of Marxism. Again and
again his economic theories have been said to have been killed.
But the superstition which says that those who have been
wrongly reported dead will have a long life has certainly proved
true in regard to the ideas of Marx. No other body of economic
ideas, not even classicism at the height of its power, has exer-
cised so lasting an influence on political practice. It has become
the theoretical basis of a revolution which is likely to have as
far-reaching consequences as had the French Revolution in its
day. And it is accepted to-day as the basis of its social structure
by the whole people of one of the largest countries of the
world.

Marxism has had to face not only intellectual criticism, but
downright abuse. Its theories have been ascribed to the warped
personality of its founder. Criticism, even in England, has not
disdained to evoke antipathy against them by describing them
as 'alien' (with a hint that, like those of Ricardo, they were the
product of Jewish subtlety) and yet also as borrowed from
Marx's English forerunners, whom, so it is quite incorrectly
asserted, Marx never acknowledged.

250

LIFE AND SOURCES

How is this almost morbidly violent reaction to Marx to be
explained? The reason must be found not in the details of Marx's
economic ideas, nor yet in the fact that he had a political pur-
pose, but in the particular quality of this political purpose. As
Professor Myrdal has well said, Marx laid bare the inherent
conflict in economic classicism. The existence of this conflict
between the conservative and the revolutionary interpretation
of classical doctrine was always making economists uncomfor-
table. Marx increased the discomfort by carrying classical
doctrine to its logical conclusion. To make economists face up
to the great classical contradictions was well calculated to irri-
tate them. 1 The outcome of this irritation was prejudice. One
form of that prejudice has been the constantly reiterated state-
ments that Marxism is difficult to understand, that Marx's style
is clumsy, and that his work is full of inconsistencies. Yet we
find, olTefrr^cTose juxtaposition tb~ thes~e, fhe"assertion that the
greatJaufi in Marx is Bis undue reliance on one single concept
upon whicfTHe^mlcfs [wiW logical consistency, "it Is" admitted)
a whole system. Other critics say that it is unnecessary to read
more than the first volume of Marx's chief work; the rest of his
voluminous writings can safely be ignored.

None of these contradictory statements contains any sub-
stantial truth. Style may be said to be a matter of taste; to very
many readers, Marx's style has offered neither difficulties of
comprehension nor aesthetic discomfort. Although Marxism has
had many conflicting interpreters even among his adherents, it
has also spread so rapidly and so widely that the style in which
it was expounded cannot have been very much of an obstacle.
As for the theory itself, when viewed in its proper place of
historical sequence, it is fairly simple. It links up very closely
with the social and economic thought which preceded it and it
is so consistently worked out that its main structure can be
understood quite easily. It is however true that the exposition
is often difficult, spread over a very large volume of writings,
and is frequently not well arranged. To get a clear picture of
Marxian economic theory in all its implications it is essential to
read not only Marx's economic writings but a good deal of the
philosophical and historical ones as well. It is this, rather than

1 G. Myrdal, Das politische Element in der Nationalokonomischen Doktrinbildung,
pp. 123-4.

25'

MARX

clumsiness of style or lack of systematic thought, which makes
understanding difficult. Marx might have claimed, as he said
of Ricardo, that he was developing what was ' new and signifi-
cant in the midst of the "manure" of contradictions'. 1 His life
provides ample explanation of the elemental manner in which
his ideas had to find expression.

Karl Heinrich Marx was born in Trier in 1818. He came of
an upper middle-class Jewish family, but his father left the
Jewish faith soon after Marx was born. The son was destined
for an academic or official career and was sent to study at the
universities of Bonn and Berlin. He came into contact with the
circle of young Hegelians who represented the most advanced
section of German intellectuals at the time. Quite early in his
career Marx became critical of Hegelian philosophy in its current
form, and began to search for a more practical mode of expres-
sion of social criticism than the idealism of his fellow Hegelians.
When he realized that an academic career was impossible in the
reactionary conditions which prevailed in Germany, he took to
journalism as the form of political activity which was most
readily available to him. From that time he never left politics.
For nearly a year he worked on, and later edited, the Rheimsche
eitung. He left because the strictness of the censorship pre-
vented him from expressing his increasingly revolutionary views.
jt about that time he wrote his very important critique of the
Hegelian philosophy of the state, which already shows clearly
his infusion of materialism into Hegelian dialectics.

After his experience on the Rheinische^eitung^ Marx's long
period of exile began. He moved to Paris where, at the end of
1843, h e to k over th e editorship of the Deutsch-franzosische
Jahrbucher, of which, however, only one issue appeared. It con-
tained two important articles, one on the Jewish question and
the other a critique of the Hegelian philosophy of law. The latter
contains one of the clearest statements of Marx's theory of
history, of the class struggle, and of the nature of revolution to
be found in any of his writings. Here he spoke of the coming
union of German philosophy and French socialism, of philo-
sophy as the head and of the proletariat as the heart of revolu-
tion. As an analysis which reproduces the essence of the position
of Germany at the time, it is unequalled.

1 Marx, Theorien fiber den Mehrwert, vol. iii, p. 94.
252

LIFE AND SOURCES

The persecution by the Prussian government extended across
the German frontier and succeeded in getting Marx expelled
from Paris. At the beginning of 1845 he moved to Brussels.
Before that two important and related events had occurred.
Marx had become interested in political economy (his first
economic work, Nationalokonomie und Philosophic, which shows
many traces of its philosophical antecedents, has only recently
become available), 1 and he made the acquaintance of one who
was destined to be his lifelong friend and collaborator, Frjedrich
Engels.

Friedrich Engels came of an old-established Rhenish bour-
geois family. His father was a textile manufacturer and he himself
entered the family business of Ermen and Engels, cotton spinners
in Manchester. Engels had become acquainted with English
classical political economy and had developed a critique of it
which led to results similar to Marx's critique of Hegelian philo-
sophy. Engels had expounded it in a short article, ' Umrisse zur
Kritik der Nationalokonomie', which Marx had published in
the Deutwh-franzdzische Jahrbiicher. After they had met in Paris
they began to co-operate and one of the chief fruits of this
co-operation was Die Deutsche Ideologic, a critical discussion of
German philosophy which finally freed its authors from Hegelian
idealism. Marx left Brussels in 1848 and returned to Germany
in order to take an active part in the revolution of that year.
Exiled again, he went in 1850 to London, which remained his
home for the rest of his life. He died there on the I4th March

His chief economic writings began in 1847 w ^h La Misere de
la Philosophic, a reply to Proudhon. In January of the following
year, on the eve of the revolution, appeared the Communist
Manifesto, written jointly with Engels, which presented the
theory and programme of the Communist League formed in
London in 1847. The next two years were mainly taken up with
journalistic work, Marx having started to edit in June 1848 the
Cologne Neue Rhcinischc ^eitung. During his subsequent career in
London Marx began to study political economy in a systematic

1 I do not know whether this work has yet appeared in the Marx-Engels
Gesamtausgabe, published by the Marx-Engels-Lenin Institute at Moscow.
It was published, but may be no longer available, in the series ( Kroner's
Taschenausgabe': Marx, Der Historische Materialismus (1932), vol. i,
PP- 285-375.

253

MARX

way. His researches in the British Museum made him acquainted
with the founders of classical economy, and on the basis they
had laid he began to develop his own theory.

Political activity never disappeared from his life; it was even
intensified. And his interest and participation in contemporary
events gave birth to many important works, such as The Eight-
eenth Brumaire of Louis Bonaparte (1852) and The Civil War in
France in i8ji (published immediately after the Paris Commune).
But from our point of view the most important writings of Marx
of that period are his economic ones. In 1859 h^published his
Critique ofPoliticaLEconomv* which contain^ the germs of Capital.
It^is LjiQ.te.worthy particularly,for itsjstatement of Mgrx^theorft
ofmoney. In 1867 appeared the first volume of Capital; the
remaining volumes of this, Marx's greatest work, did not appear
in his lifetime. It was left to Engels to publish them: in 1885
appeared volume ii and in 1894 volume iii. The fourth volume,
which was itself in three parts and which gave an account of
the history of economic doctrines, was edited, after Engels's
death, by Karl Kautsky; it appeared under the title of Theorien
tiber den Mehrwert in the years 1904-10.

V This brief account of Marx's life and writings should serve as
atJackground for his theory. To understand it we must be aware
of all the forces which exerted an influence on him. As far as
economic and political conditions are concerned, we must
remember that Marx lived at a time \^^^jG^rma.y^^
emerging from a state of economic backwardness and political
reaction to join its wesfe^neighbours as a capitalist democracy.
The lateness of this development gave Marx an opportunity to
see the German struggle against the background of the already
established new society elsewhere. The whole_ex2eriencc of
E^gljSjh industrialism and the trade_unjqniiiLit had produced,
as well as, QJLlhe Jrench post-revolutionary political struggles,
was available for inspirationrAn3 Germany herself wasTbegiri-
ning to havelier share ofsocial and political conflict*

This development was reflected in political theory. Utilita-
rianism a\ad early En^Ijsjijocialisia) French socialist fEftiJffkt^
and the"5egTnnings of German radicalism were tbgjnsgiration
of Marx's youth. He breathed an air full of political discussion.
All the young intellectuals with whom he came in contact
debated the problems of political emancipation. Republicanism,

254

METHOD

constitutional democracy, freedom of thought and of the Press
were the issues of the day, just as they had been a century' and
more earlier in France and England.

But these matters were discussed by philosophers; the solutions
which were offered had somehow to be explained in terms of
the philosophy of the day. Here is the second great influence or\
Marx., Hegelian philosophy aimed at a comprehensive and dy-
namic vievTof society by using the dialectical method. Marx was
interested in the laws^o^jnovement of society, in the prmcipjes
which dfitcrmijifid snriajl change*. He re]e5ecljlegers idealism
amiT tried to combine materialism with-dialectics. The system
which_resultcd was peculiarlyjiis own. It is difficult to summar-
ize this system, which has been named dialectical materialism,
in a few words. There are numerous conflicting expositions of
what dialectical materialism as a philosophy really involves; and
it is almost impossible to formulate it in a way which would find
general agreement. Since we are here concerned with it only in
so far as it underlies Marx's economic theory, it is sufficient to
say that the significant features which differentiate Marxian
frojn non-Marxian economic thought are itsjgnphasis on p^Qvg-
menX^d jc|iaige, on contradiction as the cause of movement,
and~~7)n~ the jractical aHrv^nSy^hic^
resolvedT~~~~

In his application of his philosophy to social phenomena
Marx came to the conclusion that it was necessary to examine
the economic system, to analyse its past development jind pre-
sent structure; and by laying bare the contradiction ir^it to
discover the laws of movement of society.

(2) Method

Marx himself telr us, in the preface to the Critique of Political
Economy, how he was led to study the economic structure of
capitalist society. The need to define his attitude to current
political controversy which had an economic content was one
reason. The other was his desire to explain, by way of a criticism
of Hegelian political and legal philosophy, the determinants of
different state forms and legal institutions. He came to the con-
clusion that the roots of these were to be found in the totality of

255

MARX

the material conditions of social life. Man, he said, is a social
producer of his means of livelihood in the widest sense. Social
production ^involves of necessity certain socialisations, the
quality of which will 3^^d*T5pon ~the degree of development
SfThe social productiye owen>/Thj^^ constitute

tHe economic structure of society, on which jis buillTaTnOTrstruc-
ture of j)pliticariLii3 legal instituHons, of ideas and modcs^of

tHbught, which jeflect in the lastjresort tlie^exlitin^ economic
s^^fure. (Marx and Engels were always at pains to dissociate
themselves from the mechanical determinists; and they laid
great stress on the fact that political, legal, and cultural forms
were only ultimately determined by the economic structure. 1 ) To
understand these institutions and ideas in their existing form
and in their continual change, one has to study the economic
structure which has given them birth. Political economy is the
study of the anatomy of society, i.e. of the social productive
relationships which constitute the economic system.

This statement, Marx claims, points at once to the funda-
mental principle of society, as well as to the contradiction within
it which is the cause of social change. The principle is the social
relationship inevitably entered into by men for the purpose of
social production: a relationship which is appropriate to a given
development of productive power. It enables society to make
the fullest use of these productive powers and to increase them.
But this very increase of productive powers brings them into con-
flict with the social relationship which they had created. The
relationship becomes inappropriate: instead of aiding the full
utilization of man's ability to produce and reproduce all his
material conditions of life, it begins to hamper it. And sooner or
later man will change this social relationship in order to allow
the expanding productive powers to find their due scope. Political
and legal institutions will have to change and so will ideas.
Social change involves a political revolution, the abolition of an
existing political structure based on property relations which
are no longer adequate, and its replacement by one more
appropriate to the new economic order.

If, then, the economic structure is the basis of social existence,
what is its essence? The productive relationship in society con-

1 Cf. for example, Engels's letter to Bloch (21 September, 1890) in Karl
Marx and Friedrich Engels Correspondence 1846-1895 (1934)? p. 475.

256

METHOD

sists of a distribution of the members of society in relation to
ownership of the material means of production. In legal terms,
it is ja property relationship. When there is private property
society is divided into classes which can be defined according to
their position vis-d-vis the means of production. This division
determines the place which each class occupies in the process of
production, and it is also the basis of all other economic pheno-
mena. The economic structure of society is simply a particular
social arrangemenL&f .production. It is the ultimate (not the
immediate and exclusive) determinant of all social phenomena.
This social arrangement may in the first place have been a
natural growth. Biological and anthropological research may
tell us how it developed in the most primitive stage of society.
But once economic relations have been established the process
of production itself makes them subject to change: they become
historical categories. ' If, to one period, they appeared as natural
conditions of production, they were to another the historical
resultof production. They are continually changed within pro-
di^ction itself.' 1

It is thus possible to distinguish different economic structures
that have existed in the past. The essential characteristic of the
earliest one was common ownership of the means of production;
which at that stage meant a communal property of land. The
progress of the productive powers makes this economic structure
inappropriate. Society becomes capable of producing more than
its barest subsistence and the surplus becomes an object of
private appropriation. Henceforth private property is an essen-
tial quality of the economic structure. There arise the ancient
slave societies in which private ownership of the means of pro-
duction extends to man himself. When these societies become
inadequate they are replaced by serfdom and feudalism. These
in their turn have to give way to capitalism, in which those
engaged in production are no longer part of private property,
but in which the producer is separated from the material pre-
requisites of production. This is the latest stage of social develop-
ment: modern bourgeois society.

It is to this that Maixaow aggljes the apparatus of dialectical
materialism. It is important to kep in mind Marx's philosophy
of History in order to assess correctly his position in relation to
1 Marx, ur Kritik der politischen Okonomie, p. xxxi.

257 i

MARX

the classical economists. Dialectical materialism makes Marx
capitalism iiQt^as a neyi^cEanging social order, but
a .chain. His approach isjrpm the very beginning
e*..He is not prepared to accept as sacrosanct the
existing property relations which are at the basis of bourgeois
society. He views them in historical perspective and finds them
as transient as those that have gone before. It is this critical atti-
tude, more than anything else, which is the distinguishing
characteristic of Marxian economic analysis. And it should also
be remembered that criticism meant for Marx practical critical
activity, i.e. political action.

If capitalism was subject to change, what was the motive force
of that change? According to his philosophy of history it had to
be some contradiction inherent in the system which produced
conflict, movement, and change. It is the task of political
economy to discover this contradiction and not either to slur it
over or to proclaim it as a natural (and inevitable) law, as Smith
and Ricardo had tended to do. This basic contradiction of
capitalism is the increasingly social, co-operative nature of pro-
duction made necessary by the new powers of production which
mankind possesses and the individual ownership of the means of
production. It shows itself in the existence of two classes, capita-
lists and workers: the one owning the means of production (the
material conditions of production), the other owning nothing
but labour-power (the means of setting production in motion) .
This inevitable antagonism results in a struggle between the two
classes whose interests are incompatible. This struggle between
capital and labour, itself the outcome of the antagonistic social
productive arrangement, takes many forms, of which the most
comprehensive is the political one. To be armed for this struggle
one had to study the economic structure and to show how it
reflects the fundamental contradiction in all its parts.

It is important to emphasize the peculiarity of Marx's method
of approach. This method is expounded in the Introduction to the
Critique of Political Economy, and without an understanding of it,
is it difficult to follow the subsequent analysis in Capital. Marx
first analyses the four departments into which economists have
divided economic activity: production, consumption, distribu-
tion, and exchange. He is anxious to distinguish the relation
between the universal qualities of these categories, those which

258

METHOD

possess validity for all time, and the historical ones, which are
significant only for a particular phase of social development. In
the work of non-socialist economists, he claims, these two quali-
ties are continually mixed up, as part of their general error of
regarding the capitalist system as eternal. He admits that there
is a connection between these four departments which econo-
mists have pointed out. 'Production brings forth the things
needed for the satisfaction of wants; distribution shares them
out according to social laws; exchange distributes that which
has already been shared, according to individual want; in con-
sumption, finally, the product leaves the social sphere, it
becomes directly the object and servant of individual want, and
satisfies it.' 1

But this, he says, is only a superficial connection. It makes
production subject to natural, and distribution to social, laws.
It puts exchange in an uneasy place between the two. And it
excludes consumption from the economic sphere, except as the
end of one process and the starting-point of a new one. M'arx
goes on to show the natural, that is the universal, connection]
between production and consumption. First, there is productive
consumption, which is the use of the product in a new process
of production, and consumptive production, which is the repro-
duction of human life itself through consumption. Secondly,
production is the means for consumption, and vice versa.
Production supplies the material for consumption, consumption
the want, that is, the purpose of production. Finally, they are
both parts of each other. Consumption is the final act of pro-
duction; through it alone the product fulfils its function as a
product. Production is part of consumption because it creates
wants.

But, he argues, one must not stop at this natural connection.
The identity of production and consumption exists only if we
ignore the social relationship which mediates between them.
This mediation is distribution. What is the connection between
it and production and consumption? Superficially, distribution
means distribution of products. But before it can be that, it has
to be 'first, a distribution of the means of production and
secondly (which is only a further quality of the same relation-
ship), a distribution of the members of society among the
1 Marx, ur t Kritik der politischen Qkonomie, p. xx.

259

MARX

different branches of production'. 1 Production must, therefore,
presuppose such a distribution. And distribution in the conven-
tional sense is determined by distribution as a social element in
the process of production. Ricardg^ according_to_Marx, was
getting near the truth when he made distribution, ratfier than
production, the subject of political economy. He erred in think-
ing tKat the laws of distribution were~natural and not historical.
Exchange, finally, is a part of production and is entirely deter-
mined by it. There can be no exchange without division of labour
(a productive factor) ; and the quality of exchange depends on the
quality of production (for example private exchange arises from
private production). The result, then, is not an identity between
these four elements of the economic process, but a dialectical
interdependence. To keep in mind their interaction is to become
aware of the historical-social relations which lie behind their
superficial universal connection.

Marx makes a similar analysis of the method of economic
inquiry. He was well aware of the relations between induction
and deduction, between description and abstraction. It would
be natural, he said, to approach the economic phenomena of
society in their concrete reality. This is how economic inquiry
began. It took as its starting-point 'population, nation, state
. . . and ended by having discovered in its analysis certain
determining, abstract general relations, like division of labour,
money, value, etc.' 2 Once these abstractions had been made,
political economy took them as its starting-point and worked
its way up to concrete reality. Although this is the correct
scientific method, it has its dangers. It reverses the order in
which reality itself proceeds. One must, therefore, always
remember that even the most abstract economic concept pre-
supposes an existing concrete reality of which it only represents
a single element. It is true that simple economic categories may
have had an actual historical existence in their abstract simpli-
city; but they do not acquire their full significance except in a
highly developed economic system.

Marx gives an interesting example. The nature of labour in
the abstract, he says, is a very simple and very old one. But as an
economic concept it has only gradually reached this degree of

1 Marx, ur Kritik der politischeh Okonomie, p. xxx.

2 ibid., p. xxxv.

260

METHOD

abstraction. The bullionists thought only of the product of
labour in monetary form; the mercantilists transferred the
emphasis to the activity which produced money; the physiocrats
ignored the form and spoke only of the product; but they were
still limited to a particular kind of labour. Adam Smith, finally,
developed the complete abstraction of labour as such. His
achievement was not merely that he had discovered the simplest
category which is valid in all societies. His indifference to parti-
cular types of labour presupposed a multitude of such particular
types, of which no single one was dominant. The validity in
practice of the most abstract concept depends on the existence
of a most complex concrete reality. Only then does it appear as
a common characteristic of a multitude of particular instances.
Bourgeois society is the most complex organization of produc-
tion. That is why the abstractions of political economy enable
one to understand earlier less highly developed economic struc-
tures. But this should not lead one to slur over historical
differences. 1

Political economy must begin with the most abstract cate-
gories. But it must go on to study them in relation to the
anatomy of capitalism. This is the structure which underlies
Capital. Not only does Marx endeavour to relate continually the
elementary economic concepts such as value, labour, money, etc.,
to the fundamental conditions of capitalist production. He also
breaks off his theoretical analysis in order to trace the historical
development which leads up to modern capitalism; and he
shows the earlier more primitive form of existence of these
economic concepts. This method makes Capital very different
from the majority of economic treatises after Ricardo's* James
Mill had poured the principles of political economy into a mould
which has served as the model for most subsequent expositions.
Nearest in formal resemblance to Capital are two earlier works,
The Wealth of Nations and Steuart's Principles, and, in our own
day, Marshall's Principles. They are all attempts to combine
economic theory, economic history, and the history of economic
doctrines. But the resemblance is no more than formal.

1 Marx, ur Kritik der politischen Okonomie, pp. xxxv-xlv.

26l

MARX

(jj) The Labour Theory of Value

We begin then with the simplest concept which relates to
man's activity of producing his means of livelihood; this is
human labour. Labour may be viewed in a number of ways;
and it is important to distinguish its natural (universal) from its
social (historical) qualities. The most universal quality of labour
is that of ' a purposeful activity directed to appropriating natural
objects in one form or another'. As such, 'labour is a natural
condition of human existence; a condition of the metabolism of
'man and nature which is independent of all social forms'. 1
Labour in this sense produces objects which satisfy human
wants,^ in other words, T objects ^vEich ^possess" use-value. Use-
value isTnsepafablelrom the concrete qualities of any particular
object. When we look at the commodities which form the
material of economic activity in capitalist society we find
different use-values which coincide witfy differences in the
material qualities of these commodities. As use-values, these
commodities_realize thejr_purposc in consumption. Labour,
viewed as a producer of use-value, is not the sole producer; for
this labour cannot be exercised without some natural material.
We find that different use-values embody different proportions
of labour and nature; but the latter element must always be
present.

We can distinguish two further aspects of labour in its
simplest form: particular use-values, and the sum-total of the
individual labours of all members of society which produces the
sum- total of use-values which society requires. In its second
r acquires a social significance. As soon as man

produces socially, human wants become subject to social deter-
minants, and use-value becomes part of the social network.
This means that the quality of use-value is independent of
particular individual labour: a use-value becomes the product
of a fraction of the total labour of society AThis means further
that individual labour has in some way become generalized: it
has become a part of social labour. Some social arrangement
has been found for apportioning the labour of all individual
members of society to the production of all the use-values of
society.

1 Marx, %ur Kritik der politischen Qkqnomie, p. 13.
262

THE LABOUR THEORY OF VALUE

As far as individual use-values are concerned, it is a matter of
indifference on what particular social arrangement their produc-
tion has been based. The material qualities of commodities
(which constitute their use-value) are not thereby affected. ' We
cannot say from the taste of thj wheat, whether it was raised by
Russian serf, French smallholder or English capitalist.' 1 But it is
clear that some social productive relations must exist. * Every
child knows that^cCLUQtry which ceased to work . . . would djc.
Every child knows, too, mat the mass ot products corresponding
to the different needs require different and quantitively deter-
mined masses of the total labour of society. That this necessity
of distributing social labour in definite proportions cannot be
done away with by the particular form of social production, but
can only change the form it assumes, is self-evident. No natural
laws can be donea,]^ay^vvith. What can^hange^in changing

historical oircurostances, is ihcjormin\vhich these laws operate. '

Thus social production involves a transformation of thelaBoiir
of every individual into a part of the total labour of society. The
way in which this transformation takes place will depend on the
social relations which underlie production. There are social
relations in which the labour of each individual is by virtue of
the social order itself immediately a part of social labour. A
patriarchal peasant family, for example, which satisfies all its
own needs by producing corn, animal products, yarns, linen,
and clothing, has a social structure which makes the individual
labour of each member of the family at once into a part of the
family's total labour. The social relations of these members
imply a social planning of production in accordance with the
total needs of the family and its productive powers. The labour
of every one is exercised only as 6 an organ of the common labour
power of the family'. 3 Similarly, in an association of free men
who communally own the means of production, each one would
'consciously expend his individual labour-power as a part of the
labour-power of society '. 4

There are, however, societies in which there is no immediate
identity of individual and social labour; it has to be specially
achieved. In feudal society the means of production and, in a

1 Marx, %ur Kritik der politischen Okonomie, p. 2.

2 Marx, Letters to Dr. Kugelmann (no date), p. 73.
8 Marx, Das Kapital, vol. i, p. 45. 4 ibid.

263

MARX

measure, man himself are private propef ty^The characteristic
feature of this society is the personal dependence which under-
lies social production. ) But even here the connection between
individual and social labour is transparent, and is to all partici-
pants an obvious corollary of their social structure. Every serf
knoWs that he has to expend a certain amount of labour on
behalf of his master. And this obligation makes each individual
labour into a part of social labour.

The characteristics of bourgeois society are private property
in means of production, individual enterprise, and private
appropriation and exchange. How is social labour apportioned
in such a society? Like all social production, bourgeois produc-
tion has to generalize individual labour. The way in which it
does this is to make commodities into carriers, not only of use-
value, but also of exchange-value. * The form in which this pro-
portional division of labour operates, in a society where the
interconnection of social labour is manifested in the private
exchange of the individual products of labour, is precisely the
exchange-value of these products. 51

(Jn capitalist production every commodity has a double
character: use-value, due to its material qualities, and exchange-
value, due to the fact that a portion of social labour has been
expended upon itlA commodity may have use-value without
having any exchange- value at alii This is so in the case of the
gifts of nature, which are appropriated by man without the
mediation of human labour. But exchange-value presupposes
use-value. The qualities which give a commodity use-value are,
in the capitalist system, the 'material carriers of exchange-
value'. 2 The exchange- value of a commodity is nothing but a
fraction of 'abstract human labour'; its measure, 'the amount
of value-forming substance, i.e. labour, which it contains '\That
amount ijself can be measured by the labour time spent on the
production of the commodity A This labour time must not be
regarded as the time spent by a particular labourer on that
particular commodity: one must not think that 'the lazier or less
skilled a man is', the more valuable will be his product. tyVe
must remember that we are considering the sum of human
labour abstracted from its individual appearanceYThe measure

1 Marx, Letters to Dr. Kugelmann, pp. 73-4.

2 Marx, Das Kapital, vol. i, p. 2.

264

THE LABOUR THEORY OF VALUE

of the exchange-valtie of a commodity is, therefore, the 'socially

embodied in its productions 'Socially

necessary labour time is the labour time necessary fo produce
any use- value with the given normal conditions of social produc-
tion and the social average degree of skill and intensity of
labour.' 1

In capitalist production labour too has a double character. It is
productive of both use- value and exchange-value. As the former,
j^JLSS^crGtG^^ml^ztd labour; as the latter, 'it is abstract,
general, and equal labour'. 2 To the variety of use-values in
society corresponds avariety of human labour. This can exist
without private exchange. But in capitalism, in which there is
private exchange of products, there appears also the pheno-
menon of exchange-value which ignores the individual material
differences of commodities as use-values and creates a general
equivalence of them. Similarly, labour in such a society, in so
far as it results in exchange-value, is an abstraction from the
differences of various forms of useful labour:

6 expenditure^/ human lj.boHpQwcr '. 3 In relation to use- value,
the labour embodied in a commodity has only a qualitative
significance; in relation to exchange-value, only a quantitative
one. The existence of different types of labour and different
skills does not matter; each type of labour can be expressed in
terms of the simplest, least-skilled form of human labour. In a
given time the more complex, more highly skilled types of labour
produce commodities with a higher exchange-value than the
less-skilled ones. They can be reduced to multiples of the simplest
form of labour. Such a reduction does in fact take place all the
time: different types of labour are reduced in the social econo-
mic process to a universal equivalent.

By formulating the labour theory of value in this way, Marx
has made one important departure from the classical economists,
the full significance of which we shall appreciate presently. One
thing is already clear Jt If the exchange-value of a commodity is
nothing but the expression of the socially necessary labour time
used in its production, labour itself can have no value) c To speak
of the value of labour, ... is equivalent to speaking of the value

1 Marx, Das Kapital, vol. i, p. 5.

2 Marx, %ur Kritik der politischen Okonomie, p. 13.

3 Marx, Das Kapital, vol. i, p. 10.

265

MARX

of value; or to wish to determine, not the weight of a body, but
the weight of weight itself. 51 It is a mere tautology to say that
labour is the sole source of value in the sense of exchange- value;
for labour is the substance, and its quantity is the measure, of
exchange-value.

The two-fold character of commodities and of the labour
which produces them creates two difficulties. To one, Marx gave
the famous name of 'commodity fetishism'. He argued that if
we looked on a commodity merely as a use- value there was
nothing mysterious about it. Nor was exchange-value, looked
at by itself, difficult to understand. It is not difficult to think of
social human labour in the abstract, as expenditure of brain,
nerve, and muscle; nor to think of its quantity, as distinct from
its quality. ^The trouble is the contradictory nature of the com-
modity: it is use- value and exchange- value at the same time.
This shows itself in three ways: the equivalence of human
labour leads to the equivalence of the exchange-values of the
products of labour; the expenditure of human labour, in terms
of time, appears in the form of the measure of the ex^ange-
value of products; finally, the social relation of the producers
takes the form of a social relationship of products. 2 /The com-
modity reflects the social character of labour. 1 ) The producers do
not see their own social relationship: it seemsnto them as a social
relation of their products. One may say that exchange-value is
nothing but a relation between persons; 'but it is a relation
which is concealed behind things '. 3 fThe social relation of pro-
ducers which, as we have seen, Marx regards as the essence of
the economic structure appears as a relation of commodities.)

The second difficulty inherent in the contradictory character
of the commodity is this^a commodity must have use-value, but
not for its owner; for if it had, it would cease to be a commodity.
For him, it is only the material embodiment of exchange- value:
it is a means of exchange.jfTo acquire use-value the commodity
has to meet the specific want which it can satisfy. There has to
take place a general process of exchange between all commodities
before they can all become use-values. In this process each

1 F. Engels, Herrn Eugen Bullring's Umwalzung der Wissenschaft (1928),

p. 212.

2 Marx, Das Kapital, vol. i, p. 38.

3 Marx, %ur Kritik der poli tischen Okonomie, p. 10.

266

THE LABOUR THEORY OF VALUE

commodity leaves the possessor for whom it has no use-value
and gets into the hands of one for whom it has.\It does not alter its
material qualities, but it alters its relation to man.yin the hand
of the baker, bread is only the carrier of an economic relation' 1
... in that of the customer it becomes use-value, i.e. food.

It is also only in the process of exchange that commodities
become exchange-values. As a quality of the commodity,
exchange-value is only a theoretical concept until the moment
when the commodity changes hands.^We conclude, therefore,
that in the process of exchange commodities become use-values
and exchange- values .\ This means that the relation between
commodities which is^stablished in exchange has to be a double
one: a relation of exchange-values and of use-values! Now, as
exchange- values commodities are all of equal quality, they only
differ in quantity; while as use-values they are all qualitatively
different. One and the same exchange must therefore be an
equivalence of things which are embodiments of the same
quantities of labour time; it must also be a relation of specific
use-values, designed for different wants. Exchange appears as an
equivalence and a non-equivalence. A contradiction is thus
revealed in the process of exchange which must be solved by
that process.

The difficulty is that in order to become exchange- value, . . .
a commodity has to be disposed of as use-value . . . while its dis-
posal as a use-value, pre-supposes its existence as exchange-
value. 5 ^The difficulty is solved by making one commodity into
the universal equivalent. This commodity is given something in
addition to the limited capacity of a specific use-value, namely,
the ability to represent embodied social labour. By excluding
one commodity from the rest and giving it that ability, it
acquires, in addition to its own specific use- value, a new general
one which is the same for everybody. It becomes the carrier of
exchange-value. Once that is done, different commodities (which
are only different amounts of socially necessary labour-time)
appear as different quantities of one and the same commodity.
This universal equivalent is money. 'It is a crystallization of the
exchange-value of commodities which they themselves produce
in the process of exchange.' 3

1 Marx, ^ur Kritik der politischen Okonomie, pp. 20-1.

a ibid., p. 23. 8 ibid., p. 28.

267

MARX

The antithesis inherent in the commodity necessarily results
in the independent representation of its exchange-value in the
shape of money. The more highly developed this antithesis is,
that is, the more production becomes production of commodities,
the more will money develop as the universal equivalent. It
must be remembered that it is not money which makes com-
modities commensurable.^' On the contrary, because as exchange-
values all commodities are embodied human labour and, there-
fore, inevitably commensurable, are they able to measure their
value in the same specific commodity and to transform this
into the common measure of value, money.' l ) In a system of
commodity production, that is, in a system based on private
property and exchange, ' money as a measure of exchange-value
is the form in which the immanent measure of the value of
commodities, labour time, of necessity appears.' 2

So far what Marx has done is to develop a theory of produc-
tion in certain specific social circumstances. (This theory is a
reformulation of the classical labour theory of value.Nlts signifi-
cance lies in the fact that it consistently applies Marx s differen-
tiation between the natural and the social elements in economic
conceptsAHe always goes out from the fundamental facts of the
social structure; and true to his dialectical method he stresses
the contradictory character of economic concepts which reflects
the contradiction inherent in the social relationship that he is
investigating. (Jt illustrates also the place which his method
assigns to abstraction.)

The significance of Marx's theory of value becomes clear
when we compare it with the analysis of economists who have
preceded him. We know, for example, what difficulties the early
mercantilists had with the concept of money, and the physio-
crats with that of productive labour. Even Smith and Ricardo
had not succeeded in developing a labour theory of value which
consistently differentiated between use-value and exchange-
value, and between the labour which was productive of the one
and that which was productive of the other. ^Marx claims that
his theory avoids the difficulties of application which Smith and
Ricardo were unable to overcome. \

1 Marx, Das Kapital, vol. i, p. 59.
8 ibid.

268

THE THEORY OF CAPITALIST COMPETITION

stage at which the time necessary to produce labour power is a
part only of the working day; the latter is absolute in the sense
that it is an increase of the working day above that length which
produces the worker's labour power.

Once capitalist production is established, the difference
between absolute and relative surplus value is important,
because it explains the means for increasing the rate of exploita-
tion which are adopted in different conditions. 1 In one sense,
one might say, surplus value has a natural basis. It appears as
soon as a worker is able to work more than is necessary to support
himself, and can therefore be made to support others. But the
crucial point for Marx is the social arrangement by which ' the
surplus labour of one man becomes the condition of existence of
others'. 2 It is in capitalist production that this occurs; though in
a form which makes it very difficult for those concerned to
understand the real relationship.

In the last sections of his discussion of the capital/labour
relationship, Marx deals in greater detail with the problem of
wages. It is necessary to mention here only one of his points. The
main emphasis is on the fact that wages represent the value of
labour power. Marx maintains that the wage-contract helps
to hide the real nature of the exchange between the cap-
italist and the worker, because wages appear to represent the
value of labour, and not that of labour power; and he develops
this in relation to different methods of wage payment.

(5) The Theory of Capitalist Competition

The above analysis tries to provide an answer to the first two
problems which the labour theory of value has raised: the value
of 'labour' and the origin of surplus value. The next question
concerns the fact that in reality the market-prices of commodi-
ties apparently do not vary according to any changes in the
socially necessary labour time embodied in them. We may couple
with this problem another one which has arisen: what is the rela-
tion of the profit which each individual capitali^makcs..to thL

1 Marx, Das Kapital, vol. i, pp. 482-93. On the question of relative surplus
value see also Marx, ' UnverofFentlichte Manuskripte ', Unter dem Banner
des Marxismus, vol. vii, parts i and ii, pp. 26-7.

8 Marx, Das Kapital, vol. i, p. 476.

277

MARX

surplus value app_ropriated_by_th_e total capital of society? Marx's
answers"to Both these questions are best summarized in conjunc-
tion.

The first step is to draw a distinction^between the rate of
surplus value and the rate of profit.JVVe have seerTfhat the general
ibrmln which money circulates as capital is M C M'. The
individual capitalist employs a sum of capital with the aim of
obtaining an increment. We have already seen Marx's analysis
of the origin of that increment. But what interests the individual
capitalist is not what portion of his total capital is responsible
for the increment. It is true that he can only produce surplus
value with his variable capital, but he is bound to have constant
capital as well^ as a condition of employing labour power with
his variable capital. Both parts of his capital appear to him
indispensable for the creation of surplus value. So what concerns
him is the rate of his increment to his total capital, that is, not

- but . This rate is the rate of profit. The distinction can

1) r. 4- 7) - - - / JT J.

C + V

be illustrated by an example. There are two capitalist factories
A and B. A has a constant capital of 250,000 and a variable
capital of 50,000. Let the proportions in B's case be 150,000
and 50,000. Let the surplus value be 50,000 in both. Then the
rate of surplus value is 100 per cent in either case; but the rate
of profit is 1 6-6 per cent for A and 25 per cent for B. The rate of
profit is thus shown to vary with the proportion in which the
two kinds of capital are united. The ratio of c and v is called the
c organic composition ofcapital ' . We concliicfe thai^thejaigheFflie
organic composition of capital, the lower the rate of profitA

TTl. ~i .-J- --- ---- -- ~~\ ------- 1~~' -- 1 --- ~* ---- T" --- ........ " TTfl

The distinction can be made clear in this way. When the
individual capitalist sells a commodity (at its exchange-value),
he wants to get back what it has cost him to produce, that is, its
share of the constant and variable capital which he employs
(this Marx calls the 'cost price'), plus an increment which is its
share of the surplus value. This he calls 'profit '.^Profit is thus
nothing but surplus value, but 'in a mystified forny; it appeaib
as" 'the offspring of the total capital advanced'.^The rate of
profit is then the form in which the capitalist be.CQjnb& aware of
tfie rate of surplus value.^ut the rate of profit is, as we have seen,
not thsgnmp as? tfrfrratp. nf snrpliiq vaJiif>; though there is a rela-

1 Marx, Das Kapital, vol. iii, part i, p. 1 1 .
278

THE THEORY OF CAPITALIST COMPETITION

tion between them.)This relation can be expressed by the

formula

v
.1 t

* = s c+v

where/?' is the rate of profit and / the rate of surplus value. Thje
rate of jgrofit .is~t h 1 1 s H i rectly, jgropor ;tionaljojLh..rate.Qf expl&UaL-
tion; but inversely proportional to the organic composition of
capital. We shall see presently how Marx develops this conclusion.

One consequence of the above analysis is that the rate of profit
will vary, other things being equal, not in relation to total
capital, as Ricar 3o tEBugfitTburaccording to the organic com-
position of capital. (Marx also makes the rate of profit depend
on the rate of turnover of variable capital, but it is sufficient to
follow his argument through one set of factors only.) It will
differ in different enterprises according to the organic composi-
tion of their capitals. But such difference cannot persist owing
to the competition among capitalists. This will produce a ten-
dency for every capital, regardless of its organic composition, to
earn the average rate of profit. Competition, in other words,
tends tojrnake each capitalist receive^only a prropdrfionJoTtHe
total surplus valuej[pr profit) which is equal to the proportion
of hiTgapital to thfutolal Capital, JBut this tendency involves
something-else^ It means that_every capitalist must sell his jprp-
duct at Jhe same price^ as ^ every pjther_capifaTist in the same
industry. Since capitalists produce, wilk .different organic com-
positions of capital, their products cannot all Tiave The same
exchange-value. The averaging " of the rate of profit, and,
therefore, the reduction of the price charged by every capitalist
to the same level, involves a discrepancy between normal price,
which Marx calls the 'price of production', and value. (The
former is cost price plus average rate of profit.)The latter is the
socially necessary labour time embodied in a commodity.

We can summarize Marx's doctrines on value and price at
this stage as follows. Three concepts must be distinguished:

(i)(Value, which is measured by the amount of socially neces-
sary labour time embodied in the commodity .}lt can be repre-
sented as c + v + s (where c is the commodity's share of the
constant capital, v the paid amount of labour, or variable
capital, and s the unpaid amount, or surplus value) .

(2) Price of production which can be expressed as c + v + p

279

MARX

(where p is the average rate of profit) . 'Q^ maybegreater or
smalleri than c + v + s 9 depending on differences in the organic
composjtiori"6t capitair" ~~"-~ "

(3) FinalTylKere is the market price, which represents short-
period fluctuations round price of production due to the working
of supply and demand within a given branch of production.

Marx distinguished two movements of competition, 1 one
within a particular branch of production, the other between all
branches of production which had become capitalist. (The
former tends to equalize market price with price of production^
The latter, through the averaging of the rate of profit, reduces
values to prices of production. There may be temporary excesses,
therefore, both of the rate of profit of an individual firm in
an industry over the average rate of profit in the industry, as well
as of the average rate of profit in a whole industry over the
general average rate. These excesses give rise to two kinds of
'surplus profit'. The normal tendency of competition is con-
tinually to eliminate these surpluses. If either kind of competi-
tion is impeded, as it is in the case of agricultural production,
surplus profits may continue to exist. We shall shortly see the
application of this line of reasoning to the problem of rent.

We must note again that Marx did not identify price and
value, as Ricardo did. On the contrary, he carefully demon-
strated why they must be different and yet connected. Marx has
often been charged with inconsistency. It was said that he
developed two separate theories which are mutually contra-
dictory: in volume i, the labour theory of value; in volume iii,
the prices of production theory. And it was even hinted that the
theory of volume iii was a last-minute attempt to replace the
labour theory of value, which had been shown to conflict with
the facts of economic life. There is certainly no truth in either
of these charges. The prices of production theory was in Marx's
mind even before the first volume of Capital was published.

Already in La Miser e de la Philosophie (1847) Marx had indi-
cated the relevant factors. 2 In a letter to Engels in 1862, in
which he deals with Ricardo's theory of rent, he gives a sketch
of the whole theory. He points out that Ricardo had been at
fault in identifying exchange- value and price of production; he

1 Marx, Theorien uber den Mehrwert, vol. ii, part i, p. 14.

2 Marx, The Poverty of Philosophy (no date), p. 140.

280

THE THEORY OF CAPITALIST COMPETITION

emphasizes the importance of competition and of differences in
the organic composition of capital; and he states explicitly that
' competition does not, therefore, reduce commodities to their
value , but to their cost price [this standsTiereTof what Marx later
called TKeT "pricie ~o( productionj, which is above^ below or equal to
their value , according to the organic composition of the respective
capitals'. 1 There are many references in volume iof Capital to
the subsequent analysis; and Marx's critique of Smith and
Ricardo, particularly as developed in the Theorien tiber den
Mehrwert, depends to a large extent on his distinction between
exchange- value and price of production. Moreover, his own
theory of rent, which is in marked contrast to that of Ricardo,
is also based on the same distinction.

As for the charge that volumes i and iii contradict each other,
this, where it is made without a background of prejudice, rests
on a misunderstanding of Marx's approach and of the function
of his labour theory of value. Marx explained this point in a
letter to his friend Kugelmann, written in 1868, which has
already been quoted. He points out that exchange-value is the
form in which the division of social labour operates in a society
in which individual labour is transformed into social labour
through the private exchange of products. He goes on to say ' the
science consists precisely in working out how the law of value
operates. So that if one wanted at the very beginning to
"explain" all the phenomena which apparently contradict that
law, one would have to give the science before the science. It is
precisely Ricardo's mistake that in his first chapter on value he
takes as given all possible categories, which have still to be
developed in order to prove their conformity with the law of
value. . . . The actual everyday exchange relations need not be
directly identical with the magnitudes of value. The point of
bourgeois society consists precisely in this, that a priori there is
no conscious social regulation of production. The reasonable and
the necessary in nature asserts itself only as a blindly working
average.' 2

The labour theory of value aims at representing conceptually
the basic facts of production in a particular form of society,
capitalism. The whole theory of prices of production is unthink-

1 Karl Marx and Friedrich Engels, Correspondence) 1846-1895, p. 131.
3 Marx, Letters to Dr. Kugelmann y p. 74.

28l

MARX

able without the labour theory of value as a foundation. It is a
theory which traces the working out*of the fundamental law of
value through certain phenomena of capitalist production:
competition, differences in the organic composition of capital,
averaging of the rate of profit. The total of prices of produc-
tion is equal to the total of exchange-values. But it is only in
special conditions that individual commodities are exchanged
at their values. That is in what Marx termed a society of
simple commodity production: one in which there is private
property and private exchange of products, but in which the
workers own their means of production, and therefore the pro-
ducts. 1 In the more complex forms of capitalist production,
coincidence between price of production and value will only
occur in those enterprises which happen to have an organic
composition of capital equal to the social average. Otherwise
there is only a constant tendency for such a coincidence to be
established. As Engels put it, the law of value, as a concept of
reality, runs like every concept, side by side with reality 'like
two asypaptotes, always approaching each other yet never
meeting 5 . 2

Another difficulty which has been raised is that of explaining
the behaviour of the individual capitalist in relation to the whole
process in which surplus value is created. It is argued that if
variable capital alone produces surplus value, it would be in the
interests of each capitalist, once he has seen through the mysti-
fying form in which surplus value appears, to keep the organic
composition of capital as low as possible. This clearly conflicts
with observed behaviour. The organic composition of the capital
of individual capitalists, and of all capitalists together, is con-
tinually rising. And every capitalist knows that such a rise is not
accompanied by a decline in his profit. The explanation of this
fact can be found in the desire of each individual capitalist to
increase his share of surplus-value. We have already seen how,
under the stimulus of competition, every capitalist tries to be the
first in the field with an improvement in the productivity of
labour, because so long as that improvement has not become
general, his individual relative surplus value will increase. Now,
improvements in the productivity of labour generally involve an

:, Das Kapital, vol. iii, part i, pp. 154-6.
Marx and Friedrich Engels, Correspondence , 1846-1895) p. 527.
282

THE THEORY OF CAPITALIST COMPETITION

increased use of constant capital. They also lower, as we know,
the exchange-value of the product below the social average and
thus increase the individual capitalist's profit.

An example will illustrate this. 1 There are four enterprises
with different organic compositions of capital, but with the
same rate of surplus value. The following table shows their
capitals, the values of their products, and their individual rates
of profits. For the sake of simplicity we assume that the whole of
the constant capital enters into the value of the product at once.

Value of
the product

Rate of profit
per cent

.ffate o/
Surplus Value

per cent

C8o -

|- V20 -

1- Sio =

(2)

C 5 o -

h V 5 o-

1- S2 5 =

125

(3)

Cyo -

h V 3 o -

f- 815 =

J 5

-50

(4)

C 9 o-

f- Vio -

F-S 5 =

105

. ' 50

Capital 400 Profit = 55 "'

Competition will tend to establish a uniform average rate of
profit which wilTEe 13! per cent. The effect of this will be that
the total surplus value will be shared "but among the four capi-
talists in proportion to their share of the total capital. But in
order to achieve this each capitalist will have to sell his product,
not at its value but at its price of production, which is 113!.
Capitalists i and 4 will sell their products above value; while
capitalists 2 and 3 will sell theirs below value.

It is, therefore, clearly to the advantage of the individual
capitalist to increase the organic composition of capital before
any other capitalists have done so. But since every one does so,
the result is a general urge for improving the productivity of
labour and cheapening the products; and thus to a general
increase in the organic composition of capital. We shall have to
discuss the further consequences of this tendency in the dynamics
of the Marxian system.

Only one important point remains in this section. The final
objection raised to the labour theory of value concerned the
origin of the exchange-value of gifts of nature. Marx discusses
this in relation to rent. He points out 2 that there are four possible

1 Karl Marx and Fried rich Engels, Correspondence, 1846-189^ p. 130.

2 Marx, Theorien iiber den Mehrwert, vol. ii, part ii, pp. 2-4.

283

MARX

theories of the rent of land. TJie first he calls a monopoly theory;
it is one which is implied in the views of many critical writers,
such as Proudhon and Sismondi. According to this theory rent
arises from the monopoly price of agricultural products; and
that monopoly price from the existence of landed property. It
means that the law of value does not operate in the case of agri-
cultural products. Their price is always higher than their value,
because their supply is always lower than the demand for them.
The only possible explanation of this constant deficiency of
supply is the theory that agricultural land is continually becoming
less fertile, i.e. it involves the law of diminishing returns in the
form in which it appears in the Ricardian theory of rent.

Ultimately, therefore, the first theory coincides with the
second one, that of differential rent. We have already seen that
this theory involves an identification of price of production and
exchange-value on the marginal land, which Marx rejects. He
^Iso rejects the third theory, which regards rent as identical
with the interest on the capital invested for the improvement of
the land. This theory admits differential elements, but like the
Ricardian one it denies the existence of absolute rent. But it is
incapable of explaining the rent of land in which no capital has
been invested. And Marx characterizes it as an attempt to save
rent from the attack of the Ricardian analysis by making it
identical with a ' legitimate ' capitalist revenue. *

There remains then his own theory, which, Marx claims, joins
with the first theory in saying that private property in land has
something to do with rent; and it allows also for the existence of
differential rent. Its distinguishing features, however, are that it
does not base differential rent on declining fertility and that it
proves the existence of absolute rent. This becomes possible once
the identity of price of production and exchange- value is aban-
doned. It is only because Ricardo identified these that he had to
explain differential rent in the way he did, and that he concluded
that absolute rent could not exist unless agricultural produce
always sold above its value, i.e. unless the law of value was over-
thrown. But we know that in the Marxian system products sell
above or below their value because competition, given different
organic compositions of capital, makes them sell at a uniform
price of production. The existence of rent need not therefore
invalidate the labour theory of value. It becomes only an

284

THE mEDRY OF CAPITALIST COMPETITION

example 0f3Khat Marx called 'surplus-profit', i.e. a surplus
above the average rate of profit, which can arise in two ways.

In the first place, we know that owing to competition the
same price will be paid for the same product, whatever the con-
ditions in which It was produced. If the price of production (cost
price plus average rate of profit) of an individual capitalist is
lower than the average price of production of the product, then
(since it is assumed that demand is high enough to allow him to
participate in the market) he will obtain a surplus over and
above the average rate of profit. The difference depends on the
individual cost price, the average cost price, and the average
rate of profit. Given the average rate of profit, it is therefore
determined by the difference between the productivity of labour
in the individual enterprise and the average productivity of
labour in the whole branch of production. The higher the
individual productivity of labour compared with the average,
the lower is the individual exchange- value; the lower the
individual cost price, the greater, therefore, the individual rate
of profit compared with the average rate.

Differential rent is only a form of this kind of surplus profit.
But there is an important difference from other forms. The
increased productivity which is the cause of surplus profit tends,
normally, to become general. Provided that the source of the
increased productivity is freely available, the competition of
capitalists will tend to cause that source to be generally adopted.
It will continually tend to remove surplus profits by equalizing
market price and price of production. But in the case of certain
gifts of nature, a waterfall or particularly fertile land, for example,
the condition of increased productivity is not available to all
individual entrepreneurs in that branch of production. It is
monopolized; and the surplus profit can be appropriated by
the owner of that monopolized piece of nature in the form of
rent. 1

But the same line of argument can be used to explain absolute
rent. Here, however, we must consider not an individual enter-
prise but a whole branch of production. Competition will tend
to average the rate of profit not only in all enterprises of a
given sphere of production, but also in all spheres of production.
It does this, as we have seen, by transforming the exchange-
1 Marx, Das Kapital, vol. iii, part ii, pp. 184-6.

285

MARX

values of commodities into prices of production. 'Suppose we
have two spheres of production, industry and agriculture, in
which the average organic composition is respectively 8oc + zov
and 6oc + 401;. We assume that the rate of exploitation is the
same, i.e. 50 per cent, so that the value of industrial products
will be 1 10 and the rate of profit 10 per cent; while the value of
agricultural products will be 1 20 and the rate of profit 20 per
cent. We know that competition would normally tend to even
out the difference between the two rates of profit, and to force
all commodities to sell at the price of production. This would
involve forcing agricultural produce to be sold below its value.

In other words, it would force agricultural capital to hand
over a part of its excess of surplus value, so that the total surplus
value of all capital was shared out in proportion to the total
capital employed by each individual capitalist. But in our case
this tendency comes up against a barrier. The existence of
landed property is an obstacle to competition, because it
restricts the free employment of capital in all branches of pro-
duction. It prevents the smoothing out of surplus value to an
average rate of profit, and appropriates a part or all of the
excess, according to supply and demand as well as to the histori-
cal and legal relations between landowner and capitalist. l ' The
landowner intervenes and extracts the difference.' 2 Absolute
rent disappears only when the organic composition of capital in
agriculture is the same as that in industry. When that occurs,
the landowner, though legally able to do so, is economically
unable to extract absolute rent.

There arises from this argument a point which Marx repeatedly
emphasizes: that wages and surplus value are the two basic
revenues in capitalist societyTHis "ahaTysis has shown Tent to- be
footedlrTsufpTus value and appropriated owing to the existence
of certain legal institutions. He also eliminates interest as an
independent revenue and shows it to be a part only of surplus
value. He argues that money is lent as capital in a double sense.
The lender expects it to come back to him with an increment;
and the borrower takes it as a commodity whose use-value con-
sists in its ability to procure surplus value. 3 Money which is lent

1 Marx, Das Kapital, vol. iii, part ii, pp. 292-5.

2 Karl Marx and Friedrich Engels, Correspondence, p. 132.
8 Marx, Das Kapital, vol. iii, part i, p. 328.

286

THE THEORY OF ECONOMIC DEVELOPMENT

as capital has some analogy to the commodity labour power, as
far as the industrial capitalist is concerned, because it is a use-
value which embodies itself in an increased exchange-value. 1
And it is no doubt this formal resemblance which helps to suggest
that capital is productive, equally with labour.

Lender and borrower regard the same sum of money as
capital; but only the borrower the industrial capitalist makes
it function as such. That capital cannot bring in double profit.
Profit is only made once, that is, where the capital is in fact used
as capital. The sum of money can appear as capital to both
parties only if the profit which it makes is shared between them.
The share which the money capitalist gets is interest. It is
expressed as the price of the commodity, money capital; but this
is a misleading expression. Interest is only a part of profit. Its
upper limit is the amount of profit itself; there is no definite
lower limit. With a given relation between industrial and money
capitalists, the rate of interest wilj. be directly proportioned to
the rate of profit. Indeed, there is no qualitative difference
between profit and interest; there only appears to be one owing
to the 'quantitative division of the same piece of surplus value'. 2
The proportions in which surplus value is divided will vary with
a number of circumstances, in particular with the size of the
rentier class (which increases with the progress of the com-
munity) and with the development of different financial forms of
enterprise and of banking and credit. All these developments are
interesting and important; Marx and his disciples, particularly
Lenin, discussed them at length. But they do not affect the main
point, which is the elimination of interest as a qualitatively
separate form of revenue. On analogy with the other 'mystical
appearances ' of essential economic categories which he has
pointed out, \Marx shows that although there is a definite
average rate of profit, and not a 'natural' average rate of
interest, it is in the form of the latter that the former finds
expression.

(6) The Theory of Economic Development

The final part of the Marxian analysis is that which refers to
economic development. It is not specially added to the main

1 Marx, Das Kapital, vol. iii, part i, p. 336. 2 ibid., p. 349.

287

MARX

body of theory, but is an integral part of it. It is impossible to
distinguish static and dynamic Marxian theory because even the
concepts of what might appear as static analysis contain the
germs of movement. They represent, according to Marx, the
real antitheses of the economic structure which are the causes of
change; they can, therefore, be elaborated to show the direction
which actual change will take. The prognosis of the development
of capitalism which inevitably arises from his analytical con-
cepts is perhaps the most spectacular part of Marx's work, but
it is not presented in a self-contained section of his writings.
The main parts, contained in Capital, are the discussion of ac-
cumulation, in volume i, and the theories of the falling tendency
of the rate of profit, and of crises, in volume iii. These must be
supplemented by the more elaborate analysis of crises in volume
ii of the Theorien fiber den Mehrwert. The following is a brief
summary.

The first condition of movement is reproduction. This condi-
tion operates in all forms of society. Social production must
include reproduction; and the particular conditions which
determine the one also determine the other. Capitalist produc-
tion involves, therefore, capitalist reproduction. This means that
the capital which is employed for the purpose of obtaining
surplus value must be re-employed in the same way. The
surplus value increment must appear periodically; it obtains in
this way the form of the capitalist's revenue. If it is entirely con-
sumed by the capitalist there will be simple reproduction.

Accumulation then is transformation of surplus value into
capital. Surplus value exists, in the first place, as a part of the
value of the product. Once the product is sold and its value
realized, surplus value appears as a sum of money, capable of
being used as capital, together with the original sum which was
so used. But to be used in this way (rather than to be entirely
consumed by the capitalist), there have to be available addi-
tional material means of production and additional labour-
power. Both these are produced in the previous process of
production. A part of the surplus value which the capitalist
commands has been employed in producing additional means
of production (including means of subsistence); and, as we
know, wages have to be high enough to enable the labouring
class to multiply. We get a ' spiral ' of increasing reproduction

288

THE THEORY OF ECONOMIC DEVELOPMENT

which is, in fact, what accumulation of capital involves. The
degree of accumulation will depend on a number of factors, the
first of which is the proportions in which surplus value is con-
sumed and transformed into capital. The former Marx calls
revenue (he uses the word in a two-fold sense: to denote the
periodic appearance of surplus value; and that part of surplus
value which is consumed by the capitalist). Given the total
amount of surplus value, and other things being equal, accumu-
lation will be inversely proportioned to revenue. Since it is the
capitalist who determines the proportion, the fiction arises that
he 'saves', thus leading to all the variants of the 'abstinence 5
theories of capital. The capitalist's decision about these propor-
tions does not remain the same at different stages of capitalist
development. In the early stages restriction of consumption is
the rule; in the later, the tendency is to enjoy more revenue. In
any case, there is always a conflict in the capitalist's mind
between the desire for accumulation and that for increased
consumption. 1

Other factors which determine the degree of accumulation
are the rate of exploitation and the productivity of labour. The
former is the chief determinant of the total mass of surplus value.
And longer hours, more intensive use of labour power, and
reduction of wages are all means by which the capitalist may
increase the possibilities of exploitation. These possibilities grow
also with increases in the productivity of labour. Improvements
in the productivity of labour increase the mass of products in
which a given amount of value (and surplus value) is embodied.
The surplus product increases; the capitalist's consumption can
grow without impinging on accumulation. Labour power also
becomes cheaper, and the same amount of variable capital can
set more labour power in motion. Means of production have
also increased; and accumulation can proceed faster than before. 2

What are the results of accumulation? Marx described them
in his celebrated general law of capitalist accumulation. The
most important factor in progressive accumulation is the organic
composition of capital in its double aspect: from the point of
view of value, constant and variable capital; and from that of
substance, the means of production and labour power. Accumu-

1 Marx, Das Kapital, vol. iii, part i, pp. 542-62.

2 ibid., pp. 562-73.

289 K

MARX

lation must involve an absolute increase in variable capital. If
we assume that the organic composition of capital remains
unchanged, accumulation will involve an increased demand for
labour power. The increase in demand may at times surpass the
increase of supply and raise wages. But the important thing is
that enlarged reproduction, i.e. accumulation, involves an
increase of labourers, and an increase in the number or 'size' of
capitalists. In the condition we have assumed (unchanged
organic composition of capital), accumulation brings some
advantages to the working class, though it does not alter the
essentials of the capital/labour relationship.

But the condition we have postulated cannot continue to exist.
An increase in the productivity of labour is one of the most
powerful means of accumulation; and in the course of history
there have been many occasions when there has been a leap
forward in the development of productive powers. An increase
in productivity is an increase in the material means of produc-
tion on which a given amount of human labour-power can be
employed. One part of the increase in the means of production is
a cause, the other a consequence, of increased productivity.
Increased productivity involves a change in the technical com-
position of capital; and this is accompanied by a change in its
organic composition. Variable capital declines relatively as
accumulation progresses. Another consequence of accumulation
which follows from the above is the concentration of capital.
Competition forces capitalists to cheapen their products. This
involves greater productivity and larger capital. (Accumulation
goes hand in hand with the squeezing out of small capitalists.
More and more branches of production are run by large capital.
The development of joint-stock companies and of banking and
credit facilities fosters concentration and enables it to go on
much faster than it otherwise would.

(The relative decline in variable capital results in the creation
01 what Marx termed the 'industrial reserve army '.Accumula-
tion and concentration involve both absolute increase and rela-
tive decline in variable capital. This requires a certain elasticity
in the size of the labouring population./Pppulation has to grow
to keepjp^je^wi^j^imulation; but as different branches of
production adopt Jmpnmjjmetfo^ relatively

their variable capitaj^thekdemaiid/pr labour poweFwill suffer

290

THE THEORY OF ECONOMIC DEVELOPMENT

a relative decline. There is relative over-population. These con-
tinual fluctuations in the demand for labour power result in the
creation of a reservoir from which labour power can be drawn
when needed^ The relative size of this reserve^ armYJncreascs as
capitalism develops. It is available" : when necessary. It exercises
a pressure^nwages m time_s when kss labour power is demanded.
It prevents_wages from risingjonduly when jjie demandjfor
lajyMir pnwpy>nesjijv This function is particularly important
in the ups and downs of capitalist activity which constitute
crises.

The relative over-population which is an essential part of
capitalist development shows itself in the fluctuating employ-
ment of industry, in the relation between industry and agricul-
ture, in the existence of a large mass of casual labourers, and in
the 'submerged' class of paupers. (The higher the degree gf
capitalisJL-deyelopment, the^greatcr the wealth of society the
^i^^^^sjhei^ustrialreserve armyj.n all its bram^jjjnjrgla-
tipn_tojtl>e total rabouririg" population. This is the generaTTaw
of capitalist accumulationTCrTmean^thartlie greater thejvolume
of means, cjjroduction which^society ^ posscsse,.iKGhe greater
rtsj)roducjiye pawer, the m^^grecarious^are the_coriditions of
existence of the ^vorjgjng class. It reveals the fundamental
aj^gqmsm_nj]ijqxn t . i n^capUajj^ljgigduclfcn ^CapTtaT^accumu-
late^wealth increases, and is concentrated in fewer hands, but
overjthejwl^Le^fild,of capitalism^ tlicrc is^also_^n accumulation
^Tmisery. 1

58 ThiTinner contradiction must be resolved. In order to show
how this is done, we must follow its development. One conse-
quence of accumulation is, as we have seen, an increasing organic
composition of capital. Through the force of competition this
increase will gradually appear in all branches of production.
Other things being equalJthe rate of profit is inversely related
to the organic composition of capital.] Accumulation produces,
therefore, an inevitable tendency for the average rate of profit
to decline. [Sutjaccunnilation also^ results in an increase of the
mass of sjurplusjralue and in the mass of]}rofit\Here is another
expression of the contradiction of capitalism: increasing mass
but falling average rate of profit. Marx comes thus to a conclu-
sion which appears similar to that of Ricardo. But whereas
1 Marx, Das Kapital, vol. iii, part i, pp. 576-613.
2QI

MARX

Ricardo's explanation of the falling tendency of the rate of profit
rested ultimately on his belief in the declining fertility of the soil,
Marx claims to develop his theory from conditions inherent in
capitalism. 1

The falling tendency of the rate of profit can be counteracted
and delayed by a number of factors, such as increased degree of
exploitation, reduction of wages below the value of labour power,
cheapening of the materials which constitute constant capital,
increase in the industrial reserve army, foreign trade and more
complex financial organization of capitalist enterprise. Marx
discusses these points somewhat summarily, but gives sufficient
indications for a further development of the theory. 2 Some
indications are also to be found in a fragment of Engels which
he was writing at the time of his death. 3 It is important to
remember, however, that what appears as a rather sketchy
treatment by Marx and Engels of the relation between the falling
tendency of the rate of profit and the counteracting forces, was
due to the practical, historical approach to which the authors
always adhered. This approach made them view the relation of
these opposing tendencies in terms of real conflict, i.e. in terms
of the class struggle. It is sufficient to mention here that the most
important theoretical advance of Marxism since Marx's death
was in the direction of these indications. Lenin's theory of
imperialism, developed mainly in Imperialism, the Highest Stage
of Capitalism, shows in detail the working of the counteracting
influences, particularly in the growth of monopoly and in the
expansion of colonial possessions. He follows the ensuing con-
flicts into the field of imperialist rivalries and war.

Marx discusses the ways in which the contradictions inherent
in the laws of capitalist production and accumulation unfold
themselves.(jhe purpose of capitalist production is the creation
of surplus value and the transformation of a part of it into new
capital.YThis process depends only on the size of the working
population and on the rate of exploitation. But the creation of
surplus value has to be completed by a process in which surplus
value is realized. The product which contains surplus value has

1 Marx, Das Kapital, vol. iii, part i, pp. 191-212.

2 ibid., pp. 212-22.

3 F. Engels, 'Supplement to Volume III of Capital', Engels on Capital

pp. 94-9-

292

THE THEORY OF ECONOMIC DEVELOPMENT

to be sold. And if it cannot all be sold or if it can only be sold at
prices which are below the prices of production, the process of
exploitation will be left uncompleted. The capitalist will not
realize his surplus value; he may even lose a part of his capital.
The conditionsfor realizing surplus valueju:e_nQlJthe same as
thos^jbr creatjng"it. The tofme'flfepefrds only on the productive
power of society; the latter on the consuming power of society
and on the proportion between the different spheres of produc-
tion. The consuming power of society is capitalistically deter-
mined: it is based on the (antagonistic) social relationship which
underlies capitalist production. It is limited by the urge for
accumulation which is inevitable in capitalism because of the
continual changes in productivity and the competitive struggle
which forces every capitalist to try and keep pace for fear of
being eliminated from the race altogether. The result is a con- ,
tinual increase in social productive powers which involves a
progressive intensification of the conflict between production
and consumption, between the creation of surplus value and its
realization. 1

Marx's analysis of the conflict between the technical possibili-
ties of production unleashed by capitalism and the social
barriers which this system of production must impose, should
dispose of the charge levelled against Marx by some of his inter-
preters (like Rosa Luxemburg) that he ignored the undercon-
sumption aspect of capitalist crises. On the other hand, it is
important to insist that the line of reasoning summarized above
should not lead one to regard Marx's theory of crises as just
another underconsumption theory. Indeed, Marx strenuously
opposed the idea (propagated in German socialist circles
particularly by Rodbertus) that the essence of capitalism could
be explained in terms of a simple conflict between consumption
and production (jiis ^whole approach should make it clear that
jieu^garded such a_conflict as one aspect of crises, it

s ? like other aspects, a part only of the Jjpjntradictory nature
of thcwhole capitalist system of production^

These other aspects must also" be I5of tie in mind in drawing a
comprehensive picture of capitalist crises, but again they, must
not be given exclusive prominence. The disproportion between
different branches of capitalist production which are revealed in

1 Marx, Das Kapital, vol. iii, part i, pp. 225-6.
293

MARX

crises, the falling rate of profit and the tendencies counteracting
it, these are also only facets of the fundamental contradiction of
capitalism. They must be viewed primarily in terms of struggle
between classes whose interests, because of the quality of the
capitalist system, are in permanent conflict. 1

This contradiction has to be periodically resolved in crises.
Crises are violent solutions of capitalisLconflicts. jThcy re-estab-
Gsh a disturbed equilibrium; but they are only temporarily
effective. They are violent means for establishing a precarious
harmony of social production. The processes of competition try
to establish a 'normal 5 balance between consumption and pro-
duction in individual spheres of production, and between the
different spheres of production. (They aim atestablishing what
Marx calls in one place a c capitalist communism '. 2 )These pro-
cesses are indispensalbTe in a social o^SeFlrTwhrcTi there is no
central direction of production, in which ' everyone works for
himself, and individual labour appears as its opposite: abstract
general labour'. 3 But these processes include accumulation,
rising organic composition of capital, falling rate of profit, and
all their mutually conflicting results. The establishment of the
'normal 5 balance creates, therefore, the conditions for increas-
ing the disturbance of the balance.

Crises are more drastic means for re-establishing harmony.
They annihilate the value of part of existing capital in an effort
to arrest the fall of the rate of profit and to encourage fresh
accumulation.) But they cannot overcome the barriers which
capitalism imposes. In crises the conflict between productive
power and the productive relations which constitute capitalism
is most striking. Marx expresses this conflict in these words:
'The contradiction, in general terms, is this: capitalist produc-
tion contains, on the one hand, a tendency to develop absolutely
the productive powers regardless of value and the surplus value
it contains, regardless also of the social relationship in which
capitalist production takes place. On the other hand, capitalist
production aims at maintaining existing capital values and

1 For a schematic representation of the process of reproduction and
accumulation, cf. in particular Marx, Das Kapital, vol. ii, pp. 483 sqq. For a
brilliant account of Marx's theory of crises, cf. M. Dobb, Political Economy
and Capitalism (1937), ch. iv.

2 Karl Marx and Friedrich Engels, Correspondence, p. 243.
8 Marx, Theorien ilber den Mehrwert, vol. ii, part ii, p. 31 1.

294

THE THEORY OF ECONOMIC DEVELOPMENT

increasing them at a continually growing pace.' 1 The end of
capitalist production is creation and accumulation of surplus
value; the means, continual expansion of the productive powers
of society. The means are bigger than the end. Capitalism is
involved in an insoluble contradiction.

What then is the future of this system? The more capitalism
fulfils its historic task of developing man's mastery over nature,
the less is its social basis capable of carrying its productive
apparatus. The concentration of capital and the increasing
social character of labour become incompatible with the con-
tinuance of individual appropriation of surplus value which
arises from private property in the means of production. Capita-
list production brings about the expropriation of individual pro-
ducers whose private property was based on their own labour.
But if the productive powers of society are to go on developing,
capitalism must in its turn disappear. Capitalist private pro-
perty must be expropriated, and a system of production must be
established which is based on the common ownership of the
means of production. 2

At the end of his economic analysis, Marx returns to the
practical political struggle with, he claims, a new insight. We
are not concerned here with the political conclusions which he
draws, but one point is worth stressing. Marx's prognosis of the
future of the capitalist system has often been understood to
imply a fatalistic view. Marx's own life should be enough to
show that this is not so. Marx did not regard man as the impo-
tent plaything of supernatural forces; but he thought that man
could not ignore the laws of society, just as he could not ignore
the laws of physical nature. History, he claimed, was made by
man; but it was made according to certain laws which social
analysis had to discover. Political economy laid bare the laws of
motion of bourgeois society. By knowing the physical laws one
could not overthrow them, but one could avoid being at their
mercy. Similarly, a knowledge of the social laws enabled one to
take a conscious part in social change.

1 Marx, Das Kapital^ vol. iii, part i, p. 231.

2 ibid., vol. i, pp. 726-9.

295

CHAPTER VII

The Transition

(/) The Classical Heritage

It is proposed in this chapter to discuss the main writers
and ideas in the period of transition from the early classics to
the rise of modern economics in the last quarter of the nineteenth
century. The emphasis is on tendencies rather than on indi-
vidual contributions; so that many writers are dealt with sum-
marily or omitted altogether.

In the last two chapters we have traced the reactionary and
the critical attitude to capitalism and classical political eco-
nomy. The former was not a serious threat to either; the latter
was. As far as economic thought was concerned, it found no
difficulty in surviving the attacks of the romantics. But the
onslaught of the socialists was more formidable. Particularly in
its formulation by the English socialists and by Marx, it assumed
a form which was dangerous to the continued acceptance of the
classical conclusions. For it was based on the classical postulates.
Marx could and did claim to be in the direct line of descent from
Smith and Ricardo. He could show that he built on theoretical
concepts which formed an important part of the classical system.
And he had a very strong case for saying that he had taken the
essence from Smith and Ricardo; that he had ignored only their
errors and confusion; and that he had pushed their analysis to
its logical conclusion. This conclusion was hostile to the capi-
talist system, and, therefore, unacceptable to those economists
who were anxious to preserve the pro-capitalist element of
classicism.

Thus there developed a movement which, starting from the
classics, went in the direction opposite to Marxism. The task of
this movement was to criticize the classical theory in those parts
which offered opportunities for revolutionary interpretation and

296

THE CLASSICAL HERITAGE

to develop a new theoretical analysis which would be a firmer
basis for the main political conclusions of classicism. Revolution-
ary economic analysis had to be shown to be heterodox, an
abuse of classical theory, or, at least, an erroneous interpreta-
tion of it. Classicism had to become the basis for a new ortho-
doxy. Fortunately for this movement, the classical theory did in
fact contain many elements which contradicted those which
Marx and others had taken as their starting-point. It was only
necessary to take these elements which Marx had regarded as
errors and develop their implications. The resulting theory
could then claim to be nothing else but what Smith and Ricardo
had been groping for but had been unable to reach.

The course of this movement during the nineteenth century
was by no means smooth. It assumed various guises (particularly
in different countries) according to the obstacles it had to over-
come. And it was not until towards the end of the century that
a body of doctrines was evolved which, with many minor differ-
ences, has dominated economic thought and teaching to the
present day. What follows is a survey of the fifty years after
Ricardo's Principles which, in retrospect, appear as a period of
transition.

In spite of criticism from right and left, the classical system
remained for a long time supreme in its country of origin. In
England the legacy of Ricardo was considered sacrosanct; and
even as late as 1848 John Stuart Mill regarded himself in matters
of theory as little more than an exponent of pure Ricardianism.
To assess correctly the reasons for the supremacy of classicism,
its extent, and its decline, it is necessary to distinguish carefully
between its theoretical and political content. Once this distinc-
tion is made, a glance at the ideological and political scene in
the England of the first half of the century will suffice to show
that classicism was accepted by the ruling classes, not so much
for its analysis of the economic structure, as for the theory of
economic policy it contained. It was the strength of its case for
laisser faire that gave the classical school its authority. The
analysis on which that case rested somewhat precariously, as
we have seen was accepted as a minor appendix.

The theory of Ricardo had become something like an institu-
tion. It was embodied in dry and dogmatic text-books and popu-
larized in tracts, articles, and stories which pointed an economic

297

THE TRANSITION

moral. Ricardo's first and most faithful disciples, James Mill and
McCulloch, are witnesses to the fact that much of the vigour of
economic speculation had gone. The master's words are repeated
parrotwise; and if his uncertainties have been removed, his
brilliance has disappeared also. In the hands of the disciples the
theories of Ricardo have become 'the faith of a sect'. 1 Both the
elder Mill and McCulloch take as their 'raw material, not
reality, but the new theoretical form in which the master had
epitomized it'. 2 Their writings have little theoretical interest. In
them the contradictions and confusions of Ricardo are either
repeated, glossed over, or left out. Their main function, apart
from the mere popular exposition of Ricardo's doctrines, was to
defend the Ricardian theory of value against the critics who had
fastened on to its inconsistencies. We shall see later in this
chapter that their defence was unsuccessful. When John Stuart
Mill expounded a watered-down version of Ricardo, there was
already in existence both in England and elsewhere a theory
of value which had only the most tenuous connection with that
of the classics.

But these forerunners of a new economic theory did not seri-
ously disturb the harmony of post-Ricardian economics in that
aspect of it which was alone of importance to the world of
affairs: its underlying political philosophy. The disintegration of
the Ricardian theoretical structure was accompanied by the
complete triumph of liberalism. No country and no sphere of
thought or action was free from its impact.

Political practice in particular seemed to be giving expression
to the most important parts of the liberal doctrine. And political
economy, though still divided between the conservative and the
egalitarian interpretations, claimed a utilitarian descent. During
the earlier and longer part of our period of transition the con-
flict between these two tendencies within liberalism itself was
still of small importance. The exact attitude of economists to
these tendencies is a debatable matter. There were, no doubt,
considerable differences of opinion on specific issues of economic
policy. No doubt, also, some economists had transcended the
narrow confines of laisser faire as a philosophy of unrestricted
capitalist expansion. But attempts to portray individual econo-

1 E. Hatevy, The Growth of Philosophic Radicalism (1928), p. 343.
8 Marx, Theorien fiber den Mehrwert, vol. iii, p. 94.

298

THE CLASSICAL HERITAGE

mists, or the whole post-Ricardian school, as social reformers
whose interest in laisserfaire was only that of opponents of mono-
poly and privilege have not succeeded in altering materially the
accepted views.

It may be that James Mill, McCulloch, and others would have
been opposed to capitalist monopolies, had they seen them in
their own day. Senior certainly objected to some of the attempts
at rigging of the market which he had an opportunity of observ-
ing. It may even be that some of the disciples of classicism in
England believed in a distributist society, in a liberalism which
recognized private property, but wanted the state to take posi-
tive measures for preserving competition and for ensuring equal-
ity of opportunity. But this is not the important point at issue.
Historically, the significant fact is that from the economists there
came no serious questioning of the rights of private property.
The economists' most bitter attacks were reserved for the associ-
ations of working men, who were creating 'monopolies' of the
commodity labour power, and for the state when it was interfer-
ing with the free play of economic forces through social legisla-
tion. Capitalist interests were more tenderly treated.

It must, moreover, be remembered that England was the only
country in which one could preach the virtues of economic
liberalism without appearing unrealistic. Opposition to any
restriction of competition, which itself rested on a monopoly of
the world market, could successfully appeal for support to the
great economic laws of the classical school. Everybody could
agree that the greatest happiness of the greatest number was the
ultimate aim of wise government. That individual enterprise
and free competition were the best means of achieving it could
be urged, without much fear of contradiction, only in the con-
tinually expanding English economy. A closely knit theory and
a wealth of practical illustration could be used to demolish
opposition.

No English economist of note ever spoke again of the invisible
hand. But for fifty years, at least, no economist who was not a
socialist denied the beneficence, at least in the sphere of pro-
duction, of liberty in the sense of unrestricted competition.
Ricardo had expressed doubts about the effects of such liberty in
the sphere of distribution. But the gloom which he cast on the
view of the future of the labouring classes was not allowed to

299

THE TRANSITION

interfere with the belief in the harmony of interests which all
liberals retained. It was no longer a providential harmony;
indeed, now and again there is a suspicion that it is a harmony
for the propertied classes only. But the development which inten-
sified the socialist challenge also made England the worskhop
of the world; and a measured optimism based on capitalist
expansion was able to survive the hungry 'forties. It was not
until the later years of John Stuart Mill that the working-class
movement made its converts in the liberal camp and forced
liberalism itself to jettison some of its fundamental tenets.

The special historical circumstances which gave English
liberalism something of a universal appeal, which made it
realistic, and ready in the last resort to compromise, were not,
as we have seen, repeated elsewhere. In France the appearance
of capitalism is marked at once by a strong critical current which
has the recent memory of the Revolution to feed on. The pro-
tectionism of the reaction and, much more so, the socialism of
the revolution were such powerful currents that economic
liberalism had at once to be more intransigent and less realistic
than it had been in its native country. We might recall that the
law of the market, that true and yet most arid conclusion of
classical theory, was born in France and not in England. And
the eagerness for completeness and consistency which had made
Say bowdlerize Smith found its fullest expression in the revival
of a providential harmony by Bastiat. The optimism which is
characteristic of his work has not the solid foundations of
English classicism; nor has his campaign for free trade the firm
historical class-basis which had made Cobden and Bright suc-
cessful. The absurdities to which he reduced all the attempts at
protection may delight present-day liberals exasperated by con-
temporary economic nationalism. They had as little effect on
policy in the France of Bastiat as they have to-day.

Only in one other environment could the almost naive faith
of the early classics in infinite progress and natural harmony
appear with all the intransigence of a Bastiat and yet have a
realistic foundation. But it is significant that Charles Carey, the
American apostle of optimism, was also a strong protectionist.
He combined a labour theory of value with a belief in the con-
tinual improvement of the welfare of the labouring classes.
However feeble his own analytical achievements, he had a sure

300

THE HISTORICAL SCHOOL

enough instinct to see the implications of Ricardo. He rejected
the Ricardian theory of rent, as might be expected of one who
was writing in the days of the pioneering settlers. The problem
of land scarcity did not exist for him: he was not afraid, as were
the witnesses of the industrial revolution in England, of an ever-
increasing tribute exacted by the landowning class. Together
with other parts of the classical doctrine which were unsuitable
to the mid-century American climate, he threw over free trade
and came to conclusions that were akin to those of List, Carey
and Adam Smith, Bastiat and Ricardo: the economic doctrines
of the classical school could clearly be made to mean many
different things.

As for Germany, we have already noted (in chapter v) some
of the conditions which created an unfavourable soil for econo-
mic liberalism. Indeed, although the romantic movement had
soon spent its first force and only remained as a muddy under-
current of anti-rationalism, it was not replaced by Ricardianism.
There was no more attempt from the right to challenge the
inevitable victory of capitalism. But List and the romantics, the
exigencies of national union, the tradition of authoritarian
government, and, underlying all these, the weakness of German
industry compared with that of its rivals made it impossible for
economic liberalism to become the orthodox doctrine. The first
substantial independent contribution of German economic
thought was of a different character. Though no longer of
importance itself, and although chronologically out of place
here, it is best treated immediately after other reactions from
classicism.

(2) The Historical School

The historical school was for nearly forty years the most influ-
ential school of economic thought in German-speaking coun-
tries. Its reign dates from 1843, when Roscher's Grundriss
appeared. It was not successfully attacked until 1883, when Carl
Menger published his Untersuchungen and ousted it from its place
of pre-eminence. The historical school represents a striking
example of the difficulty of survival of the classical school once it
was faced with new economic developments, or, as in this case,
with a different national environment. It is, moreover, interest-

301

THE TRANSITION

ing because it contains the same conflicting interpretations
which we have already met in the immediate reaction to classi-
cism. One part of it is in a line of descent from romanticism: this
gives to the school its anti-individualist tendency. But by the
time the historical school was in full swing, capitalism was
already advancing rapidly and Historismus, therefore, never
became anti-capitalist in a reactionary sense. In fact, one part of
it represented a criticism of capitalism from the left. It was
potentially revolutionary, though it never became so in Ger-
many. It gave rise to a specifically German variety of the social
reform movement, the so-called Kathedersozialismus. When its
influence was later transplanted into other environments the
America of Veblen the revolutionary implication became more
marked. And the earliest representative of a somewhat similar
post-Ricardian tendency in England, Richard Jones, might well
be linked with Thompson, Hodgskin, and Marx.

Thus the historical school is not to be regarded as exemplify-
ing theoretical trends which are essentially different from those
which have already been discussed in chapter v. Its claim to
special consideration rests on the fact that it embodied these
trends in a discussion of a particular problem of economic
inquiry: its method. Concern with economic history was by no
means new. Many theorists had also contributed to historical
scholarship, and some of the most important works of the classi-
cal schools, the Wealth of Nations and Capital, for example,
were distinguished by their use of both historical and theoretical
methods. But what makes writers like Roscher, Knies, Hilde-
brand, and Schmoller into a school is the overwhelming impor-
tance which they assign to history in the study of the economic
process. There is some disagreement among historians of econo-
mic thought about the exact classification of the writers of the
school and about the essence of their ideas. Gide and Rist, in
their Histoire des Doctrines economiques, 1 take the more widely
accepted view that the historical school had an older and a
younger branch: the former represented by Roscher, Knies, and
Hildebrand, the latter by Schmoller. Professor Schumpeter, in
his Epochen der Dogmen- und Methodengeschichte, claims that the
older of these schools is not strictly speaking to be regarded as
historical; the younger school under Schmoller is truly historical
1 C. Gide and G. Rist, Histoire des Doctrines iconomiques^ pp. 450-85.

302

THE HISTORICAL SCHOOL

in its insistence on detailed, realistic, historical research. Men-
ger, however, does not make Schumpeter's distinction (to
which we shall presently return). The opinion of the most deter-
mined and successful opponent of Historismus is of considerable
importance and happens to be more in harmony with the expo-
sition already given here of the antecedents of the historical
school. 1

The first incentive to the formation of this school came from
sources that were related to those from which romanticism had
sprung. Menger draws a distinction between the historical
school of jurisprudence of Savigny, with its conservative political
conclusions, and the school of political historians, who taught at
the end of the eighteenth and the beginning of the nineteenth
centuries at Gottingen and Tubingen, and who were liberals.
To the former, he adds, correspond the romantic economists
(like Miiller) ; to the latter, the historical school. 2 It is quite true
that the members of the historical school in economics were not
medievalists and reactionaries. But this, as has been claimed
above, can be explained by the different stage which the
development of capitalism had reached. The similarity of atti-
tude remains.

The first economist of the historical school was Wilhelm
Roscher (1817-94). He was trained in history and political
science in the tradition of Gottingen. Like his teachers, he
regarded historical empiricism as the foundation of wise politics.
In 1843 he published his Grundriss zu Vorlesungen tiber die Staats-
wirtschaft nach geschichtlicher Metkode. In this work and in his
later writings, notably his System der Volkswirtschaft, he claims to
base himself on the methods of Savigny's school of jurisprudence.
Although he was a liberal and not anxious, as Savigny had been,
to use historical research for the purpose of finding justification
for existing institutions in their past development, Roscher laid
great stress on the need for infusing the historical spirit into
economic inquiry. He did not go so far as to reject Ricardo's <
deduction, but he claimed that empiricism was an essential ,
adjunct to it. He was not quite clear in his own mind about

1 C. Menger, Untersuchungen tiler die Methode der Sozialwissenschqften und der
politischm Oekonomie insbesondere. Collected Works, vol. ii (London School of
Economics Reprint, 1933), pp. 209-31.

2 ibid., pp. 212-3.

THE TRANSITION

methodological issues. Sometimes he gives the impression of
advocating merely the collection of historical material for pur-
poses of illustration and for the inspiration which it can supply
to theoretical study. At other times he regards history as impor-
tant, since it alone can provide the historical sense which
enables statesmen to solve political problems wisely. Sometimes,
again, he seems to suggest that description of economic institu-
tions and conditions exhausts the field of economics. ^J

Much more elaborate and consistent an opposition to classi-
cism comes from the pen of Bruno Hildebrand (1812-78). In
1848 he published Die Nationalokonomie der Gegenwart und Zukunft,
in which he explicitly rejected the claim of the classical school to
have found, or at any rate to be searching for, natural economic
laws which would be valid for all time and for all countries. He
opposed the idea which occasionally appeared in Roscher
that it was possible to discover a c physiology ' of economic life.
He also separated which Roscher had failed to do the prac-
tical questions of economic policy from theoretical analysis, and
concentrated attention on the latter. His great inspiration was
historical philology. What one ought to study, he said in a
programmatic article which he wrote for the first number of his
journal, was the change in the economic experience of mankind.
Economics had to examine carefully the development of indi-
vidual peoples and of mankind as a whole. It had to produce an
economic history of culture; it had to work in close collaboration
with other branches of history and with statistics. 1 There is little
mention in this programme of discovering the great laws of
economic development which Hildebrand had earlier set before
economics. In fact, he never produced the positive work which
he had promised; and on the occasions on which he left criti-
cism for specialized historical statistical study, he seems to have
taken most of the classical conclusions for granted.

The last of the three founders of the school, Karl Knies
(1821-98), was more precise in his formulation of the methodo-
logical issues than were his predecessors. His Die Politische
Oekonomie vom Standpunkte der geschichtlichen Methode (1853), is now
less well known than his Geld und Kredit. The latter, although
containing historical material, has very little trace of Knies's
adherence to the historical school. In the former, however,

1 Jahrbucher fur Nationalokonomie und Statistik (1863), PP J 45 W

304

THE HISTORICAL SCHOOL

Knies appears as a more determined opponent of the classical
school than either Roscher or Hildebrand, both of whom he also ;
opposes. Knies sees Roscher's confusion; he knows that Roscher
was not clear about the relation of the scope, method, and object
of different branches of economic inquiry. He objects to
Roscher's modified approval of the classical method. And he
finds even in Hildebrand an incomplete realization of the mis-
sion of Historismus. He thought that Hildebrand's laws of deve-
lopment were still too much a concession to pure theory. With
complete consistency Knies claims that historical study is the
only legitimate form of economics. It cannot yield laws in the
sense in which the physical sciences can be said to do so. It may
discover certain regularities in the actual sequence of social
development and suggest analogies. The programme which he
sets before economists is to avoid asserting the superiority of the
historical method and to produce works which do, in fact, deal
with economic problems from a historical point of view.

Knies himself did not act up to his own precept. It was the
founder of the younger historical school, Gustav Schmoller, who
really set in motion an active movement of economic historical*,
research. It is interesting to note that, in the hands of Schmoller
and his followers, the original aim of the historical school was
beginning to disappear. They no longer denied the existence of
laws of society. Schmoller, in one of his later works, Grundriss der
Volkswirtschaftslehre (1904), admitted that economic life had its
laws, but he expressed doubt about the ability of the classical
method to discover them. He was more than sceptical about the
laws of human development and he rejected the search for a
philosophy of history. What Schmoller and his disciples in fact
produced was economic history. This, one would have thought,
made the threat of Historismus to theoretical work much less for-
midable. Yet it was not until the 'eighties, when less was heard
of the more ambitious aims of Roscher and Hildebrand, that the
great controversy over method broke out. Since this controversy
was not due to the claims of the historical school, its causes must
be found elsewhere. They are closely connected with the rise
to be discussed in the next chapter of a new theoretical ten-
dency which was itself connected with certain philosophical and
logical currents. The quarrel over method was more a means by
which the new theory sought to clear its own mind than an

305

THE TRANSITION

attack on the historical school. But it was in the form of the latter
that it made its appearance.

The Methodenstreit) as it is called, opened with the publication
in 1883 of Carl Menger's Untersuchungen fiber die Methods der
Sozialwissenschaften und der Politischen Oekonomie insbesondere and
lasted for more than two decades. Menger made an attack on
the claims of the older representatives of Historismus; and com-
bined with it a discussion of method in the social sciences in
general. To understand the exact significance of Menger's posi-
tive attitude, it is necessary to summarize the chief points of the
criticism which the historical school had directed against classi-
cism. They concern the approach of classical economists, their
often implicit social philosophy, their views on the scope of
economic analysis and their method. The historical school
objected, in the first place, to the belief that economic laws, estab-
lished by a development of the implications of a few postulates,
could have universal validity. The laws of Smith and Ricardo,
they argued, could not be regarded as absolute and perpetually
operative either in economic theory or in the practice of econo-
mic policy. Economic laws, even if such could be found, must be
considered as being essentially relative and variable with time
and place. Economic conditions were constantly changing and
developing; the conclusions of economic theory could, there-
fore, never retain their original adequacy.

Although this point was often put in an exaggerated form by
the adherents of the school, it helped to draw attention to an
important difference, at least of degree, between the physical
and the social sciences; it has since been accepted by theorists
and was clearly worked out by Menger. It was agreed by
theoretical economists that even though their conclusions were
not formally different from those of the physical sciences (both
being ideal in the sense that they had reference only within a
framework of assumed circumstances), there was an important
difference in their relation to reality. The conditions within
which the physical laws operate more often exist in practice;
they and the deviations from them are easily measured; and
allowance can be made for divergences from the ideal. Econo-
mic laws operate in a reality which contains an increasing num-
ber of changeable concrete conditions of which the original
analysis has had to make abstraction. These concrete conditions

306

THE HISTORICAL SCHOOL

are, moreover, difficult or impossible to measure; and it is never
easy to discover the exact way in which the tendencies embodied
in economic laws are modified in practice.

The criticism of the classical method is closely connected with
this first point. The historical school was so impressed with the
practical limitations to which economic laws are subject that it
wished to abandon the method of deduction altogether and re-
place it by induction. It had difficulty in distinguishing between
the errors which may be committed by deductive reasoning, or
any other scientific method, and the place which correct deduc-
tion should occupy in a balanced scheme of inquiry. It failed to
see that, even though the classics might have been guilty of a
wrong choice of assumptions, or of faulty or hasty conclusions
from them, the possibility remained of using significant pre-
misses and impeccable logic. It did not see that the two methods
which were contrasted were not mutually exclusive and had
indeed been used together by the greatest of the classics. There
is clearly room for serious disagreement about the choice of pre-
misses; but it is generally admitted that premisses which stand at
the beginning of the deductive process are themselves empirical
in origin. Induction and deduction interpenetrate.

Behind the objection which the historical school made to
classical deduction was a disagreement about premisses. The
classics, said Knics, and many others have said it after him,
started with the assumption that man was moved by self-interest
only. There was no foundation for such an assumption. The
motives of human conduct were numerous and complex; to
isolate one, was bound to lead to wrong conclusions. It should be
emphasized here that this particular criticism had nothing in
common with Marx's charge that the classical school had failed
to see capitalism as a transitory phase of human history; and
that it had taken the conduct of the bourgeois of their own
generation as typical of mankind in all sorts of social environ-
ments. The historical school, in spite of its insistence on relativ-
ism, did not seriously question the survival of the capitalist
system. What it objected to was simply the stress on the motive
of money-making which it detected in Smith and Ricardo. To
this charge economists like Menger could, and did, reply that
the classics were not ignorant of the existence of motives other
than self-interest. Smith himself had taken great pains to study

307

THE TRANSITION

and classify the different springs of action. All that the classics
had done was to take that motive which could be regarded as the
most persistent and to study its effects. Or, as other economists
claimed, the classics had isolated a motive the results of which
were most easily observed and measured. We shall return to this
argument in connection with the rise of the social reform move-
ment and in a discussion of certain problems of modern
economics.

Lastly, the historical school stressed the unity of social life, the
interconnection of individual social processes and the organic,
as against the mechanistic, view of society. Although not moved
by reactionary 'totalitarian' motives, the historical school was
here inspired by considerations similar to those of romanticism.
It began by claiming, as Adam Muller had done, that social
economic life was something more than the sum of economic
activities of individuals. Society, in its totality, had an organic
existence apart from that of its members. This view led to a
desire for a comprehensive discipline which would understand
the entire organism of social life; and it implied depreciation of
the efforts of individual social sciences. But this view soon dis-
appeared and all that remained was an emphasis on the intimate
interaction between the different branches of social life which
made it impossible for one social science to come anywhere near
exhausting the field. There also remained the stimulus to
detailed historical research. The historical school left as legacy
an enhanced desire for a knowledge of concrete reality in all its
individual manifestations through time; and this was productive
of very valuable work. It was a desire which the more enlightened
theorists always understood and appreciated.

In its native country the Methodenstreit gradually petered out
for lack of any substantial points of disagreement. Tacitly, the
indispensability of both branches of economic inquiry, the histori-
cal-realistic and the abstract-analytical, was mutually admitted,
even though there remained a difference of emphasis which is
still present to-day. A version of the Methodenstreit also reached
England; but in the home of classical political economy the con-
troversy somehow never aroused much enthusiasm. In 1857
Cairnes published a methodological work entitled The Character
and Logical Method of Political Economy y in which the significance
of deduction was expounded. This book formed a part of a long

308

JONES

controversy between Mill, Senior and Cairnes over the exact
relation between the scope and method of economics and other
sciences. But this controversy is not important to our present
purpose.

It was not until after the second edition of Cairnes's work had
appeared in 1875 that the classical methodological tradition was
met by the challenge of the adherents of the historical school. In
1879 Cliffe Leslie published his Essays on Political and Moral
Philosophy, in which all the arguments of the Germans found
expression. Others who attempted to influence English econo-
mic thought in the same direction were J. K. Ingram and W. J.
Ashley. They never made any headway as a separate school;
though the historical movement influenced some theoretical
economists, like Marshall, considerably. Their only positive
achievement was to stimulate research in economic history. It
is, however, interesting to note that some of the English expo-
nents of Historismus, notably Ashley, were also closely linked
with the tariff-reform movement. They may be taken as repre-
sentatives of a new trend in English economic policy which is a
reflection of the changing position of England in world markets.

In France the impact of the historical school was even less
marked. It showed itself again mainly in an increase of historical
research; and it found a related trend in the growth of socio-
logical studies which nearly always emphasized the historical
point of view.

(3) Jones

Although he was not a contemporary of the historical school,
nor even a representative of its views, there is one English econo-
mist of the first half of the nineteenth century whom it is best to
mention here. Richard Jones is seldom given much attention in
histories of economic thought. He is gener^]j^r^ei^j^^as_^r^
isolated representative of the historical method jn .England _jn
the^thirties'. 1 Superficially this is true. Jones urged economists
to pay~greater attention to the historical differences between
economic institutions. And he expressed the view that by com-
parative studies alone would the economist be able to advise on
policy. He also stressed the relativity of economic laws. But he
1 M. Bowley, Nassau Senior and Classical Economics, p. 40.
309

THE TRANSITION

did so in a way which made him much more akin to Marx than
to Roscher and Schmoller. He was unfortunately not able to
finish his magnum opus; but the indications of what he was aiming
at are clear enough in the first part of it, which was completed.

In 1831 Richard Jones published An Essay on the Distribution of
Wealth and on the Sources of Taxation. Part I: Rent. Two years later
appeared his An Introductory Lecture on Political Economy, delivered at
King's College, London, February 27, 1833. To which is added a Sylla-
bus of a Course of Lectures on the Wages of Labour; and finally in
1852, his Text-book of Lectures on the Political Economy of Nations.
These three works contain an explicit statement of their author's
ideas on the method of economic analysis, an implicit use of that
method in a discussion of the fundamental problems of the capi-
talist system, and a working out of this method in a more detailed
study of one particular question, rent.

In the long preface to the Essay on Distribution Jones defines
his position vis-d-vis the classical economists. He traces the origin
of political economy in the discussion of mercantilist measures;
notes the great advance contained in Smith; and states his belief
that the problems of distribution have not as yet been treated
satisfactorily. The study of production, he says, has resulted in
the enunciation of important laws of universal validity. But in
the sphere of distribution economists have only succeeded in
stating mutually contradictory opinions. The physiocrats are
condemned because they had mistakenly insisted that agricul-
ture was the only source of a surplus from which all classes of
society derived their revenue. Praise is bestowed on Malthus for
his share in developing the theory of rent and, to a less extent,
the theory Depopulation. But Ricardo and others are blamed for
having built an illegitimate superstructure on these foundations.
Malthus had shown, said Jones, that when capitalist production
has become the dominant mode of production, the cost of pro-
duction of agricultural produce on the worst land tilled will
determine ' the average price of raw produce, while the differ-
ence of quality on the superior lands measures the rents yielded
by them'. 1 But Ricardo had omitted the qualification, which
was of a historical character, and had made the principle into
one of universal validity. Similarly, in the theory of population,

1 R. Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation
(1831), p. vii.

310

JONES

Malthus himself and his followers had overlooked the possibility
of important changes in the factors with which they were deal-
ing and had developed a view of the future of society for which
there was no justification.

Jones rejected the idea of a 'continuous diminution in the
returns to agriculture its assumed effects on the progress of
accumulation and ... a corresponding incapacity in mankind
to provide resources for increasing numbers'. 1 He showed that
rents were, in fact, highest in countries in which agriculture was
very productive and a large population was maintained at a
high standard of living; and that the wealthier countries and the
wealthier classes everywhere multiplied less rapidly than others.
This obvious difference between the theories of the economists
and the facts of experience was, he thought, largely responsible
for the feeling of distrust in the validity of economic laws which
had taken hold of the public. People were beginning to think
that the subject matter of political economy was too complex to
admit of accurate analysis.

Jones did not share the view that it was impossible to discover
economic laws of universal validity. He only emphasized the
importance of basing all such laws on experience. A historical
sense and a wide range of observation (which was now possible to
a far greater extent than ever before) had to be the constant
adjuncts of economic analysis. 'Truth has been missed not
because a steady and comprehensive survey of the story and
condition of mankind would not yield truth, even on this intri-
cate subject, but because those who have been the most promi-
nent in circulating error, have really turned aside from the task
of going through an examination at all: have confined the obser-
vations on which they founded their reasonings, to the small
portion of the earth's surface by which they were immediately
surrounded.' 2

This sounds like a straightforward plea for more empiricism,
such as might be made by any moderate exponent of Historismus.
But a study of the way in which Jones followed his own precept
shows that he was pleading for a specific form of historical obser-
vation. His aim was to study the working of economic principles

1 R. Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation,
p. xiii.

* ibid., p. xxiii.

THE TRANSITION

among bodies of men living in different circumstances 5 . 1 He
was anxious to lay bare the distinction between that which was
common to all social structures and the different forms in which
it appeared as the result of differences in the social structure.
Jones, like Steuart, Turgot, and Marx, distinguished between
the different forms of social production which appeared in the
course of history. He endeavoured to show their difference as
well as their unity. In the Introductory Lecture Jones spoke of that
relation between production and distribution and of different
economic structures in very much the same way as Marx did
nearly two decades later. 'Although', he said, 'some wealth
must be produced before any can be distributed, yet the forms
and modes of distributing the produce of their lands and labour,
adopted in the early stages of a people's progress, exercise an
influence over the character and habits of communities which
can be traced for ages; . . . and this influence must be under-
stood, and allowed for, before we can adequately explain exist-
ing differences in the productive powers and operations of differ-
ent nations.' It is not difficult to trace the different methods of
distribution. Since the earth can yield its cultivator more than
he needs for his own subsistence, the surplus can be appropriated
by another class. 'Hence arises a separation of society into
classes; and the mode in which the distribution of this surplus
takes place, the nature of the class which consumes it, is the first
and most influential cause of the future character and habits of
the community.' 2

The economic structure of society depends on the social forms
of labour: the manner in which the labourer obtains his means
of subsistence and in which the surplus which he produces is
appropriated and accumulated. 'By the economical structure of
nations, I mean those relations between the different classes
which are established in the first instance by the institution of
property in the soil, and by the distribution of its surplus pro-
duce; afterwards modified and changed (to a greater or lesser
extent) by the introduction of capitalists as agents in producing
and exchanging wealth and in feeding and employing the

1 R. Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation,
p. xxiv.

2 The Literary Remains consisting of Lectures and Tracts on Political Economy of
the late Rev. Richard Jones (ed. W. Whewell, 1859), pp. 552-3.

312

JONES

working population.' 1 The whole of the Introductory Lecture is a
definition of the economic structure as a class-relationship, in
terms of property, in means of production and, therefore, of
function in the economic process. And in emphasizing the social
basis of the economic process Jones has also introduced a strong
historical and critical point of view. Capitalism as the social
framework of production appears now as transitory.

Jones uses the concept of the 'labour fund', which involves
both the manner of appropriation of the product by the
labourer and the relation of classes to the means of production.
Although Jones does not distinguish these factors very clearly,
they are definitely implied in his analysis. He divided the labour
fund into three classes: one, in which the revenue is consumed
by its producer; two, in which the revenue belongs to classes
other than the labourers and is used by those classes directly for
the maintenance of labourers; and three, capitalism, in which
there is an accumulation of revenue which is used to obtain a
profit. An example of the first class are peasant proprietors; of
the second, soldiers, sailors, servants, etc.; of the third, modern
capitalism. All three kinds can be observed in actual existence.
In England, all but the third are negligible; in other countries
pre-capitalist forms of production are still important. 2

Jones sees clearly, though he does not always express it clearly,
that the existence of a surplus product and of accumulation is
independent of the particular social forms in which it appears in
different phases of history. Capitalism is only one such form.
When it prevails the labourer is paid out of capital, that is in the
course of the process of capitalist profit-making. In pre-capitalist
production labour is paid out of revenue. Jones thus carries
farther the distinction, made by Smith, between productive and
unproductive labour. 3 In spite of certain inconsistencies, in parti-
cular in regarding the labourer's revenue in non-capitalist pro-
duction as wages, and in insisting on the capitalist's saving as the
activity by which the labour fund is provided under capitalism,
Jones's whole analysis proclaims the purely historical character of
capitalist accumulation. Jones shows that accumulation existed
before capitalism, and before the profit motive; and that it is
only at a certain historical stage that the capitalist being the

1 Literary Remains of Richard Jones, p. 560. 2 ibid., pp. 79 sqq.

3 ibid., pp. 392 sqq.; pp. 414 sqq.

THE TRANSITION

one who appropriates the surplus and who initiates production
also carries out the function of accumulation. ' Capital, or
accumulated stock, after performing various other functions in
the production of wealth, only takes up late that of advancing to
the laborer his wages. ' l

Jones underlines repeatedly the historical quality of capita-
lism. Here is a typical example: ' A state of things may hereafter
exist, and parts of the world may be approaching to it, under
which the laborers and the owners of accumulated stock, may be
identical; but in the progress of nations, which we are now
observing, this has never yet been the case, and to trace and
understand that progress, we must observe the laborers gradually
transferred from the hands of a body of customers, who pay
them out of their revenues, to those of a body of employers, who
pay them by advances of capital out of the returns to which the
owners aim at realizing a distinct revenue. This may not be as
desirable a state of things as that in which laborers and capitalist
are identified; but we must still accept it as a stage in the march
of industry, which has hitherto marked the progress of advancing
nations.' 2

This historical point of view underlies Jones's interest in, and
treatment of, rent. For Jones, Marx said, rent is the 'first social
form in which surplus value appears and this is the hidden
view which underlies Physiocracy'. 3 In the 'Syllabus' which he
added to his Introductory Lecture, Jones approached the question
from the point of view of different social forms of labour.
Property was the reflection of these forms. But in his earlier and
larger work the procedure is reversed. In the Essay Jones starts
from the different forms of landed property which can be found
in various countries, or which have existed at different times.
The origin of all rent he ascribes to ' the power of the earth to
yield even to the rudest labors of mankind, more than is neces-
sary for the subsistence of the cultivator himself'. 4 And this
power, once land has passed into private ownership, enables the
cultivator to pay to the owner a tribute. Unlike Ricardo, he
believes in the existence of absolute rent, quite apart from
differences in rent due to differences in the fertility of the soil.

1 Literary Remains of Richard Jones, p. 457. 2 ibid., p. 445.

3 Marx, Theorien tiber den Mehrwert, vol. iii, p. 519.

4 R. Jones, Essay, p. 4.

314

JONES

'In the actual progress of human society, rent has usually origi-
nated in the appropriation of the soil, at a time when the bulk
of the people must cultivate it on such terms as they can obtain,
or starve. . . . The necessity which compels them to pay a rent
... is wholly independent of any difference in the quality of the
ground they occupy.' 1

Jones then traces the actual forms of rent under different
systems of land tenure until its final appearance in a capitalist
system. He shows that capitalism begins in manufacture and
later extends to agriculture. Its characteristic is the possibility
'of moving at pleasure the labor and capital employed in agri-
culture, to other occupations . . . and unless as much can be
obtained by employing the working class on the land, as from
their exertions in various other employments . . . the business of
cultivation will be abandoned. Rent, in such a case, necessarily
consists merely of surplus profits' 2 This definition is akin to that of
Marx; but Jones does not examine the conditions on which the
equalization or non-equalization of the rate of profit in agricul-
ture depends. For him rent on the worst soil (the existence of
which he admits) is simply due to the existence of private pro-
perty in a scarce gift of nature land.

Jones is more concerned with elucidating differential rent and
its changes and with controverting Ricardo's explanation. Jones
distinguishes three causes which may make rent increase. ' First,
an increase of the produce from the accumulation of larger
quantities of capital in its cultivation; secondly, the more effi-
cient application of capital already employed; thirdly (the
capital and produce remaining the same), the diminution of the
share of the producing classes in that produce, and a corres-
ponding increase of the share of the landlord.' 3 Ricardo had
only been concerned with the third factor; but Jones shows
quite clearly that once rent exists it can rise without any change
in the fertility of different pieces of land. (This, Ricardo would
probably have admitted.) Reliance on diminishing returns to
explain a rise in rent becomes unnecessary. Jones also shows
that improvement of agricultural production was not necessarily
against the interests of the landowners. It could only be so
where it was more rapid than the increase in population and
demand for produce. Progress in general is slow: as improve-

1 R. Jones, Essay, p. 1 1. 2 ibid., p. 188. 3 ibid., p. 189.

315

THE TRANSITION

ments are introduced, 'every increase of produce occasioned by
the general application to old soils of more capital, acting upon
them with unequal effect according to the differences of their
original fertility raises rents '. l

Jones's great achievement in the theory of rent was that he
brought out clearly the social basis which underlay Ricardo's
theory. In doing so he was able to point out Ricardo's mistaken
belief in a progressive deterioration of the soil, and to develop a
theory of rent which, in formal results, is akin to both the
Marxian theory and to the Marshallian analysis. But his merit
goes beyond this. His insistence on the historical character of
different economic structures, and his extraordinarily penetrat-
ing distinction between the universal categories of economic
activity and their transient social expressions, would have made
a considerable difference to economic thought had it exerted in
its day the influence which it deserved. It is only with difficulty
that this influence can be revived.

(4) The Break Up of the Labour Theory of Value

(a) France. Emphasis on the class basis of the economic struc-
ture was the essence of socialist criticism of classical political
economy; but it passed, if not unnoticed, certainly without any
lasting positive influence on the development of economic
thought. Its influence was negative. The pressure of the prob-
lems associated with the rise of the working class, and their
theoretical expressions in the writings of socialists and others was
strong enough to lead to a profound modification of the classical
doctrine. By a slow and subtle process the classical analysis was
purged of those parts which offered an opportunity for attack on
the political implications of liberal economic theory. This pro-
cess starts from the difficulties involved in the formulation of the
theory of value by Adam Smith. Instead of continuing the
attempts made by Ricardo (and later by Marx) to preserve the
labour theory through the complications of a developed capitalist
system, a number of economists in France, Germany, and
England chose a different path. They did not try to show that,

1 R. Jones, Essay, p. 212.
316

BREAK UP OF LABOUR THEORY OF VALUE

in spite of certain modifications, the labour theory of value held
good, even where large capital equipment was used in produc-
tion; nor did they continue to use the time-honoured concept of
the surplus in the explanation of the capitalist's profit. They
gradually abandoned the labour theory of value in favour of a
different principle of explanation which allowed them to elimi-
nate the idea of the surplus.

In technical terms this involved the development of a utility
theory of value and, as a corollary to it, the admission of the
productivity of capital. It was by no means a continuous process.
But whatever the forms which it took at the time, it can now be
seen to have had the same aim: to rescue the underlying philo-
sophy of social harmony, to preserve as much as possible of the
theory of laisserfaire, and to avoid the theory of exploitation to
which Ricardianism was capable of leading.

The beginning of this process is most obvious in one who was
an immediate and most faithful disciple of Smith. Jean Baptiste
Say (1767-1832) always regarded himself as an interpreter of
Adam Smith. His Traite d' Economic politique, first published in
1803, claimed to be little more than a systematic exposition of
Smith's main ideas. But it was much more (and much less) than
that. In the process of selecting and refining Say gave to Smith's
doctrines a twist which was, in effect, an alternative to the
development which they had obtained at the hands of Ricardo.
Say's own contribution apart from his already noted develop-
ment of the theory of the market consists in his emphasis on
utility as the determinant of value. From this sprang his theory
of the value of the factors of production, his critique of physio-
cracy, and his theory of the functions of the entrepreneur.

Say's utility theory of value had a certain tradition to rest
on. There had been a number of eighteenth-century Italian
economists who had emphasized utility. And in 1776 the
Abbe Condillac had published a book, entitled Le Commerce et
le Gouvernement consideres relativement Vun d Vautre^ which contains
one of the earliest statements of the utility theory. Condillac
regards value as the central problem of political economy.
The source of value, he says, is utility, but not in the ordinary
sense of the word. With Condillac, as with the modern sub-
jective theory of value, utility as an economic concept is no
longer a physical quality of goods; it is the significance which

317

THE TRANSITION

an individual attaches to a good for the purposes of want-
satisfaction. Utility is, therefore, a relation; it rises and falls
with want. Condillac appreciated the importance of explaining
the effect of varying quantity on the value of goods, and he tried
unsuccessfully to connect utility and quantity. He said that,
while value rose and fell as the result of scarcity and abundance,
it could only do so because utility was also present. He added
that a more highly felt want would give goods a greater value
than a less-felt want, and that, 'therefore 5 , value rose with
scarcity and diminished with abundance. 1 But it was left to
later economists to give that therefore ' substance by the mar-
ginal analysis.

Condillac applied the utility theory fairly consistently to the
problems of exchange, price, and distribution. The utility
approach was clearly incompatible with the physiocratic ideas
on productive and sterile labour. These ideas necessarily involved
a denial that value could be created in the process of exchange.
If the value already inherent in commodities was increased in
exchange, this could not be due to anything more than a fortui-
tous and temporary cheating of one party by the other. Condillac
claimed that both parties to the exchange gained, since they
exchanged only if their judgements of the values of the com-
modities to them differed. In effect, each party gave up some-
thing which had less utility for something which had more
utility. It followed, therefore, that all activity agriculture,
industry, and trade which adapted the resources of nature to
the satisfaction of wants was creative of utility and was produc-
tive. Agriculture was dethroned from its physiocratic pre-
eminence. Land, capital, and labour were regarded as partners
in the productive process. Their revenues were prices, deter-
mined, like those of other goods, by supply and demand; and
these prices represented their shares of the co-operative product.
In spite of obscurities and inconsistencies, Condillac must be
regarded as one of the most definite forerunners of the modern
subjective school. His influence made itself felt indirectly
through Say. The tradition of Condillac and the still existing
need to eliminate what remained of physiocracy account for the
peculiar interpretation which Say gave to Smith's doctrines.

1 E. B. de Condillac, Le Commerce et le Gouvernement considires relativement Vun
a Vautre (1776), part i, ch. i.

318

BREAK UP OF LABOUR THEORY OF VALUE

Say completed the emancipation from physiocracy by a radical
application of the utility principle.

The details of Say's analysis of value and price are not of great
importance. He started from Condillac's principle that value
depended on scarcity and utility. Value in exchange was an
expression of subjective estimates of utilities in terms of quanti-
ties. Cost of production influenced price only through changes
of supply. It formed a lower limit above which utility was the
determinant. Say thus laid the foundation for the functional
relationship between cost, price, and consumer's preference
which we shall find as a characteristic feature of all variants of
the modern subjective theory. What was of immediate impor-
tance was the use to which Say put his theory of value in
developing a theory of distribution. ^

In the first place, he rejected entirely Smith's distinction
between productive and unproductive labour. But he did so by
considering exclusively the material criterion which Smith had
used occasionally, and by ignoring the more fundamental
distinction between labour which was productive of surplus
value and that which was not. This made it easy for him to show
that, since value depended on utility, the productivity of labour
must be judged by utility standards and not by reference to the
material or non-material nature of the product.

It was thus possible to regard as productive all activities which
create utilities as evidenced by their ability to command a price
in the market. Logically, this was a more satisfactory position
than the * material' criterion. But in the process of avoiding
what later economists have sometimes regarded as Smith's
scholasticism, Say also eliminated unobtrusively the preoccupa-
tion with the surplus; he also removed the historical basis of the
revenues of the different classes of the community which, expli-
citly or implicitly, had been the chief feature of English and
French classical political economy. The meagre hints of Condillac
on the connection between distribution and value are fully
developed by Say. It is clear that, once the search for the origin
of the surplus is abandoned and this follows from the elimina-
tion of the labour theory of value Condillac's notion of produc-
tion as a co-operative process in which all factors have equal
status, though varying shares, is the only logical alternative.
This, in fact, is what Say's theory of distribution states.

319

THE TRANSITION

The central features of this theory are the concepts of the
'productive services' and of the 'entrepreneur'. Labour, natural
resources, and capital have value because they supply produc-
tive services, i.e. means for creating utilities. As one of the first
of a long line of economists, Say stated the principle that the
value of the factors of production was derived from the value of
their products. All factors possessed both qualities necessary for
the creation of value: scarcity and an indirect utility. How is the
connection between the value of products and the derived value
of factors established? Say did not give a complete answer to this
question; but he gave the first indications of it. The entrepreneurs
provide the connecting link between product and factor markets.
They are 'the intermediaries who demand the productive
services required for any product in relation to the demand for
the product'. 1 The factors of production, actuated by a variety
of motives, offer their productive services; a market is estab-
lished and a price, fluctuating with supply and demand, results.
Say did not agree with Ricardo in assigning a special place to
rent, at any rate in the short run. He regarded the prices of all
factors as dependent upon the prices of their products, thus
ultimately on consumers' demands. Although he did not, per-
haps, express it very clearly, Say seems to have had in mind the
sort of functional connection between cost, price, wages, rent,
interest, and profit which was to be developed later by the equi-
librium school.

Say's groping after an equilibrium analysis of the economic
process is even more in evidence in his methodological views.
He was one of the first economists to emphasize the positive
element of economic method. He objected to the pre-classical
concern with practical policy; and he thought that even Adam
Smith had been too ready to regard economic science as destined
to supply guidance for the statesman. In Say's view, economics
established the broad principles inherent in economic activity.
It described the manner in which wealth was produced, distri-
buted, and consumed, not by amassing facts that was the
function of statistics but by discovering the laws which governed
the relations of these facts. These laws were inherent ' in the
nature of things; one does not decree, but discover them; they

1 J. B. Say, TraiM d y Economic politique (6th edition, 1841), p. 349.

320

BREAK UP OF LABOUR THEORY OF VALUE

govern legislators and princes, and they are never violated with
impunity'. 1

To discover these laws one had to apply the Baconian method,
which had been so successful in other sciences. The essence of
this method was 'to admit as true only those facts which by
observation and experiment have been shown to possess reality,
and to admit as constant truths only those conclusions which
can naturally be drawn from these facts'. 2 Economics was akin
to physics. It aimed not at a complete collection of facts, but at
the discovery of the cause and effect relationship between them.
Physicists could employ experiment; economists could not. Say
was not clear about the way in which this discrepancy was to be
overcome. He never seems to have quite abandoned the idea
that economics was similar to the physical sciences, even though
it could not use the experimental method. But his actual sugges-
tions amounted to just such an abandonment.

What Say was pleading for was that economists should start
only from premisses which were general arid complete. One had
to take 'essential and truly influential facts'; one had to draw
correct conclusions from them; and one had to be 'assured that
the effect ascribed to them was really due to them and not to
other causes'. 3 Given correct deduction, the extent of the vali-
dity of conclusions depended on the completeness of the
premisses. In the methodological controversy between Malthus
and Ricardo, Say took Malthus's side. He believed that in ignor-
ing certain aspects of reality Ricardo had left out, not minor
modifying influences, but indispensable portions of the necessary
premisses. Say did not, however, agree with Malthus in applying
this methodological difference to the question of accumulation
and gluts. He was too successful an entrepreneur himself not to
see the social significance of Malthus's advocacy of unproductive
consumption. But he did apply it to the problem of rent.

In England over-population and increase in the cost of subsis-
tence seemed real dangers which might militate against con-
tinued industrial advance. In France they did not. And Say was
able to wave aside Ricardo's theory of rent as having no signifi-
cance in the short run, even though it might be logically valid
in the distant long run.

1 J. B. Say, Traite d y Economic politique, p. 13. 2 ibid., p. 3.

3 ibid., p. 10.

321 L

THE TRANSITION

The importance of Say's work is this: he was the first econo-
mist to cut loose entirely from the labour theory of value and all
that it involved in the theory of distribution; he was also the
first to stress the positive approach in economics. Say can, there-
fore, be regarded as one of the chief founders -of the formalist,
equilibrium analysis which is the essence of present-day econo-
mic theory.

Say was not alone, however. In France, as well as in Germany
and in England, there appeared a number of writers who, partly
under the influence of Say, partly independently, were develop-
ing a utility theory of value and a productivity theory of capital.
In his native country Say had an almost immediate influence in
setting up a tradition. No important French economist after him
returned to the Ricardian theory of value. The utility theory
remained as one part of the foundation; the theories of capital
developed in England partly under Say's influence were
another. If space permitted, some of these writers would de-
serve to be dealt with. One of them, Jules Dupuit, must be
named here as an important pioneer of the utility theory and of
the geometrical method. His discussion of price discrimination,
in particular, must be regarded as one of the lasting contri-
butions to the theory of monopoly. His most important writings
are now available in an excellent French edition. 1

Among the individual French writers who carried on Say's
tradition one is so important that he must be mentioned sepa-
rately. Augustin Cournot (1801-77) was not a direct descendant
of Say's school; nor has he secured a place among the most
important founders of modern economics by any contribution to
the utility theory of value as such. Cournot did not inquire into
the causes of value at all. In his Recherches sur les principes mathe-
matiques de la theorie des richesses (1838) he concentrated attention
on exchange-value, which he regarded as the sole foundation of
wealth in the economic sense of the term. He refused to discuss
the relation between exchange-value and utility for which he
thought there was no fixed standard though he did not imply
that the utility assigned to different things by different people
had nothing to do with the formation of exchange-value. 2 But

1 Jules Dupuit, De FUtilite" et de sa Mesure (ed. Marie de Bernardi, Torino,

1933).

2 A. Cournot, The Mathematical Principles of the Theory of Wealth (ed. I.
Fisher, 1927), pp. 10-11.

322

BREAK UP OF LABOUR THEORY OF VALUE

being a mathematician, he saw that relations in the market
could be regarded as purely formal relations; that certain cate-
gories, demand, price, supply, could be regarded as functions of
one another; that it was possible, therefore, to express the rela-
tions of the market in a series of functional equations; and that
economic laws could be formulated in mathematical language.

Earlier economists, said Cournot, had shrunk from the use of
mathematical symbols. 'They imagined that the use of symbols
and formulas could only lead to numerical calculations, and as it
was clearly perceived that the subject was not suited to such
numerical determination . . . the conclusion was drawn that the
mathematical apparatus . . . was at least idle and pedantic.' 1
But mathematical symbols, he pointed out, could be used to
express the relations between magnitudes without giving these
magnitudes numerical values. Exchange-value was essentially a
relative concept: it implied 'the idea of a ratio between two
terms'. 2 It was therefore a natural field for the application of the
calculus.

The results of Cournot's mathematical treatrhent of the prob-
lems of price in conditions of competition, monopoly, and what
is now known as duopoly, remained completely neglected for a
long time. It was only in the 'seventies, when writers like Jevons
and Walras were summing up, refining, and adding to the
accumulated volume of post-classical theory, that Cournot's
work was resurrected. Something will be said later about the
details of that work in connection with the modern school, from
whom Cournot is separated only through the accident of history.
But it is interesting to point out the relation between Say's
and Cournot's parts in the destruction of the labour theory of
value.

Superficially, the difference in their approaches is striking.
Cournot was concerned only with a functional theory of price;
Say with a causal-genetic theory of value. Cournot did not
inquire into the factors which lay behind the behaviour of indivi-
duals in the market as expressed in offers and demands. His
starting-points were not what he called the 'moral causes'
(utility, habits, etc.), but only the conduct to which they gave
rise. He had a fairly clear idea of the 'limited prices' 3 in the

1 A. Cournot, The Mathematical Principles of the Theory of Wealth, p. 3.

2 ibid., p. 24. 3 ibid., p. 47.

323

THE TRANSITION

minds of the parties to exchange, which were the quantitative
expressions of moral causes, and which were the proximate
determinants of market behaviour. In other words, Cournot
laid the foundation for behaviourist schools of economics which
have operated with Walras's concepts of 'reserve prices', with
Pareto's 'indifference curves', and, to-day, with the 'marginal
rate of substitution'.

Say, on the other hand, goes a stage further back in his
analysis. Indeed, he is almost entirely concerned with the force
which, in the last resort, determines the behaviour of buyers and
sellers. This, to his mind, is utility. He does not examine in detail
the problem of price-formation to which that behaviour gives
rise. This difference between Say and Cournot is repeated in our
day in the differences between the utility school and the 'value-
less' mathematical schools. Cournot regarded his approach as
opposed to the traditional method of Smith and Say. To-day
also polemics between the two schools are not infrequent.

But much more fundamental than the difference is the resem-
blance between these two post-classical currents. \t has recently
been said that the development of the mathematical school in
France was largely due to the existence of a tradition of a utility
theory of value. 1 This is indeed true in this sense: the break-
away from the classical search for the causes which create
wealth in the specific social conditions of capitalist production
led to an emphasis on the conduct of the individual who was
tied to other individuals by no ties but those of competition.
Both the utility school and the mathematical schools involve
such an emphasis. Compared with what divides both of them
from the classical economists, the points of disagreement between
them are negligible. They are both positive and formalist; they
both avoid all explicit reference to a specific social order; they
both claim, first by implication, then explicitly, that the validity
of their conclusions is not bounded by the existence or non-
existence of what Richard Jones called a particular 'economical
structure'. These characteristics of post-classical theory have
continued to exist to the present day and their implications are of
great importance. We shall discuss them again in the next chapter.

(b) Germany. Qermany experienced a development of a similar
1 M. Bowley, Nassau Senior and Classical Economics, p. 80.

324

BREAK UP OF LABOUR THEORY OF VALUE

kind. But none of the authors who were responsible for it were
of the stature of Say or Cournot. A number of them attempted
to develop Smith's doctrines in the direction of a subjective
utility theory. The first, Soden, went so far as to ignore value in
exchange entirely and to deal exclusively with utility. In his Die
Nationalokonomie (1804) he distinguished between positive and
comparative value. The latter the equivalent of exchange-value
was not, according to Soden, value at all. Value was positive
value, i.e. the ability of goods to satisfy human wants. It under-
lay comparative value; but this was also based on other con-
siderations, such as scarcity. It was, therefore, not to be regarded
as value.

The next to work on similar lines was Lotz. In his Revision der
Grundbegriffe der Nationalwirtschaftslehre (1811) and in his Hand-
buck der Staatswirtschaftslehre (1820) he accepted Soden's defini-
tion of positive value, but made comparative value result from
a comparison of two positive values. Exchange, or comparative
value, depended on two factors: an inner one the ability of a
good to satisfy the want of some one other than its owner; and
an external one its scarcity. If a good possessed utility for more
than one person and if the acquisition of it involved some sacri-
fice, then, and only then, would the good have exchange-value.
Lotz went even farther in distinguishing (positive) value and
price. He showed that they were connected in the sense that a
good which had no value could have no price and that a good
with a high value commonly had a high price. But there the
connection ceased. Value was the expression of intangibles,
human wants; price that of the concrete obstacles to be over-
come in the creation of goods.

Hufeland's Neue Grundlegung der Staatswirtschaftskunst (i 807-1 3) ,
von Hermann's Staatswirtschaftliche Untersuchungen (1832), and
Rau's Lehrbuch der politischen Okonomie (1826) may be mentioned
among the fairly large number of other German works of the
first half of the century which helped to evolve a subjective
theory of value. There was a considerable agreement of opinion
among German theorists on the approach to this central econo-
mic problem. Exposition was generally based on Lotz's distinc-
tion between value and price. A connection between the two was
admitted to exist, but its nature was not developed in any detail.
This was probably due to the fact that the main concern of

3 2 5

THE TRANSITION

German writers was to elaborate the new concept of subjective
value and to show up as clearly as possible how much it differed
from the concept of price by which they understood what Smith
had called exchange-value. The employment of a concept of
exchange-value, as distinct from both use-value and price, was
one of the main results of early nineteenth-century German
thought. If use-value was based on ability to satisfy wants (i.e.
utility), exchange-value was based on ability to exchange. Use-
value arose when goods were considered from the point of view
of consumption. Exchange-value was the quality which goods
had when they were examined for the purpose of exchange.
Price was connected with them, but not in a way that made it
possible to say that price in any particular instance was deter-
mined by them.

It is not important to pursue here the further development of
this line of reasoning. Lotz's dichotomy did not satisfy the
requirements of a theory of value and his followers gradually
departed from it. The separate categories of value persisted (they
even appear in the elaborate structure of the early Austrian
theory), but they were increasingly regarded as closely related.
The tendency was to make the psychological explanation of
value less limited in scope to show that utility was also the
ultimate determinant of price. It was one of the leaders of the
historical school who first made this attempt. Hildebrand tried
to show 1 that utility in the economic sense was a function of
quantity and that this provided a connection between subjective
value and price. Knies also took this view, which must be
regarded as a link between the earlier and the later utility
schools. Its further development in Germany (largely indepen-
dent of what had gone before and ignored for a long time by
subsequent authors) was due to Gossen. But his work belongs
properly to the next chapter.

One other German author of the period deserves to be men-
tioned here: Johann Heinrich von Thtinen. Der Isolierte Staat
(first part, 1826; second part, 1850) is the product of a practical
interest. As a descendant of an old landowning family and
himself an agriculturist, Thiinen was above all concerned with
problems of agricultural economics. But his approach to them

1 B. Hildebrand, Die Nationalokonomie der Gegenwart und %ukunft (1848),
pp. 314*??.

326

BREAK UP OF LABOUR THEORY OF VALUE

was rigidly theoretical. He was a firm believer in the use of
mathematical methods, thought not entirely in Cournot's sense.
Thunen used the numerical example more than the calculus.
Yet his procedure had something in common with that of
Cournot, for even when his arguments were expressed in words,
they were mathematical in substance. He was most careful to
set out his postulates, to define the validity of his conclusions in
conformity with his initial abstractions, and to indicate the way
which led back from his simplified assumptions to the complexi-
ties of reality.

Thiincn said nothing about value or about causes of price.
His place is nevertheless with the early utility theorists for two
reasons. In the first place, Thlinen generally took the existence
of a certain market price for granted, and he endeavoured to
develop a set of conclusions relating particularly to distribution
on the basis of an assumed price. That procedure does not in
itself suggest that Thunen held a subjective theory of value and
price. But it is a procedure which is perfectly compatible with
the utility theories which were widely current in, Germany at the
time. Thunen repeatedly said that he regarded Adam Smith as
his teacher in economic matters. And it must be remembered
that Adam Smith's doctrines were then being expounded in
Germany by adherents of the utility school. In the absence of
any explicit statement by Thunen himself, it is not unreasonable
to suppose that he had no quarrel with the prevailing trend in
the theory of value.

But what is even more important is that Thlinen's contribu-
tions to the theories of production and distribution were very
much in line with similar work of the utility theorists elsewhere,
particularly in England. His use of the marginal analysis and
his acceptance of the productivity of capital make of his work an
important contributory element in the formation of modern
economics.

Thtinen's ideas can be briefly summarized as follows. In the
first part of his book he aimed at discovering the effects upon
agriculture and rent of the price of agricultural produce, of the
situation of the land in relation to the market, and of taxes. For
this purpose he constructed first an isolated state which had
these characteristics: a very large town is situated in the
middle of a fertile plain which has neither canals nor navigable

3 2 7

THE TRANSITION

rivers. At a considerable distance, the plain ends in an unculti-
vated wilderness. The town draws its produce from the plain, to
which it supplies manufactured products. How in the circum-
stances will the agriculture of the plain be arranged? 1

The answer, though obvious, was worked out by Thiinen in
so careful a manner that he is rightly regarded as a forerunner
of the modern theory of the location of industry. He showed
that certain products (like strawberries, salads, milk, etc.),
which were difficult to transport or could be sold only fresh and
in small quantities, would be produced nearest the town. There
would follow other forms of cultivation arranged in concentric
circles round the town in accordance with the price of their pro-
ducts and the cost of transport. Anticipating the modern oppor-
tunity cost principle, Thiinen pointed out that the price of milk
would have to be such that the land on which it was produced
could not be used any more profitably for any other product.
This he applied to other produce, too. The price for grain, for
example, would have to be high enough ' to replace at least the
cost of production and transport of the most distant producer,
whose output the town still requires.' 2 This price will of course
be a uniform price ruling throughout the market of the town.
But of that price each circle of cultivation will have to deduct a
sum equivalent to the cost of bringing the grain to the market.
That cost increases with distance from the market; and it is easy
to see that, given a price, the cost of transport will, after a certain
point, swallow up the whole price. After that point, cultivation
would cease, even if corn could be produced at no cost. In fact,
it will cease at some time before that point is reached. Here then
it is a statement about the connection between cost and price
which is a part of most modern cost theories. Given a certain
demand for a product, output will be increased to the point at
which price just covers cost of production.

From this a theory of rent follows naturally. Thiinen distin-
guishes between the rent of land and the payments which are
generally added to it and which are in the nature of interest on
invested capital. The former is rent in the proper sense of the
term, and it arises in this way. Price must be high enough to
compensate the least favourably placed producer. In Thlinen's

1 J. H. V. Thunen, Der Isolierte Staat (ed. H. Waentig, 1930), pp. 11-12.
2 ibid., p. 226.

328

BREAK UP OF LABOUR THEORY OF VALUE

words, c the price of corn must be high enough to prevent rent
from falling below zero on that farm which has the highest cost
in producing and delivering to the market, but whose output is
still required in order to satisfy the demand for corn.' 1 Since
other producers have lower costs, they obtain a surplus which
measures the rent yielded by their land.

Thiinen's theory is not substantially different from Ricardo's
doctrine of differential rent. Although he speaks of difference in
fertility, Thunen does not use this as a factor in his analysis, but
elaborates the whole concept in terms of differences in situation
and transport cost only. The significance of this method lies in
the fact that it leads to a pure 'producer's surplus' concept of
rent, which made it much easier for subsequent economists to
extend the concept to factors of production other than land. In
addition, Thunen uses the concept of the margin even more than
Ricardo had done, which again makes possible the linking of
rent with the general theory of the remuneration of factors of
production.

Thunen himself took the first step in this direction. In the
second part of Der Isolierte Staat, he applied essentially the same
technique to wages and capital. In almost complete anticipation
of the marginal productivity theory, Thunen argued that the
use of additional doses of capital and labour would increase the
yield of agriculture, but would also increase cost. On the analogy
of the distance from the market to which cultivation would be
pushed, it could be said that the labour or capital employed
would be increased up to the point at which their increased cost
was equal to the increased yield which they produced. In
Thiinen's own words, the increase in labourers 'must be con-
tinued to the point at which the extra yield obtained through
the last labourer employed equals in value the wage which he
receives '. 2 c The value of the labour of the last employed labourer
is also his value.' 3 'And the wage which the last employed
labourer receives must form the norm for all labourers of the
same skill and ability; since for the same services it is impossible
to pay unequal wages.' 4 The same holds true for capital, which
Thunen defines as 'accumulated product of labour'. 5 Its yield
c is determined by the yield of the last particle of capital

1 J. H. V. Thunen, Der Isolierte Staat (ed. H. Waentig, 1930), p. 226.
2 ibid., p. 415. 3 ibid., p. 576. 4 ibid., p. 577. 6 ibid., p. 423.

329

THE TRANSITION

employed', 1 and all borrowed capital will be paid for at this
uniform rate.

Even these few quotations show that Thunen had a clear idea
of the fundamentals of the marginal productivity theory. The
whole of part ii of Der Isolierte Staat is a detailed examination of
the implications of that theory, including even a consideration
of the effects upon the remuneration of each factor of an increase
in the quantity of the other. It contains also one other idea,
which Thunen regarded as his most important contribution, the
doctrine of the natural wage. With the aid of a complicated
calculation (including the use of the differential calculus),
Thiinen claims to prove that the natural wage depends upon
the necessities of the labourer and the product of his labour
(both expressed either in kind or in money), and that if these
two factors are a and p respectively, the formula ^/~ap represents
the natural wage. 2 Thunen thought sufficiently highly of this
formula to have it engraved on his tombstone. But to those
among subsequent economists who have come under his influence
he will remain noteworthy for his statement of the marginal pro-
ductivity theory.

(c) Britain. England, as befitted the home of Ricardianism,
was much slower in abandoning the labour theory of value.
However, signs were not lacking even in Ricardo's day of a
different approach to the problems of value and distribution.
The starting-points of this development were the vacillations of
Smith in the formulation of the theory of value and Ricardo's
attempt to cut free from the contradictions which these vacilla-
tions created. Ricardo's solution rested on the admission of
exceptions to the labour theory. These exceptions due to
different capital structures and different periods of capital
turnover were, as Malthus pointed out, the rule. And, as we
have seen, Malthus used this weakness in the Ricardian struc-
ture to go back to the inconsistencies of Adam Smith's theory
of value, which he then used to attack Ricardo's theory of
accumulation.

Ricardo's followers were naturally perturbed by the weakness
in the labour theory which had been bequeathed to them; and

1 J. H. V. Thunen, Der Isolierte Staat (ed. H. Waentig, 1930), p. 498.
8 ibid., p. 542-9.

BREAK UP OF LABOUR THEORY OF VALUE

for some ten years after the publication of the third edition of the
Principles there was keen discussion on this problem. Robert
Torrens laid stress on it in An Essay on the Production of Wealth
(1821). He took for granted the existence of a uniform rate of
profit (though he did not show how it arose) and concluded that
capitals of equal size put into motion different quantities of
current labour, without causing their products to be of different
values. 1 He thus stated Ricardo's exception in terms which
made it clear that, in conditions of capitalist production,
appearances, at any rate, contradicted the labour theory of
value. Torrens did not explain this contradiction; instead, he
reformulated it. The labour theory, he said, applies to that
stage of social development in which there has not as yet arisen
a capitalist class. But once capitalists exist, it is no longer the
quantity of current, but that of accumulated labour, which
determines exchange- value. 2 This in effect is a return to a posi-
tion taken up by Adam Smith.

The same difficulty troubled James Mill. In his Elements of
Political Economy (1821) he endeavoured to revise the labour
theory of value by insisting that capital was only accumulated
labour. Profits were thus a reward for hoarded labour. 3 In this
way Mill thought to have solved both the problem of the origin
of profits and of the ; exceptions ' to the labour theory. But he
had clearly done nothing of the sort. He had admitted that
capital was productive and that it was one of the determinants
of exchange-value, but he thought that this made no difference
to the labour theory since capital could ultimately be resolved
into labour. This attitude of certainty (which contrasts strongly
with Ricardo's doubts) involved Mill in many absurdities. He
tried, for example, to get over the embarrassing example of the
wine which, when left in the cellar, increased in value with the
mere lapse of time. Those who had pressed this example had
done so in order to weaken Ricardo's theory and to get him to
admit, as he eventually did, that the turnover of capital had an
influence on value, thus creating an exception to the labour
theory. Not so James Mill. 'Time', he repeated after McCulloch,
'does nothing. How then can it create value?' 4 Normally, Mill

1 R. Torrens, An Essay on the Production of Wealth (1821), pp. 28 sqq.

2 ibid., p. 39. 3 J. Mill, Elements of Political Economy, pp. 70 sqq.
4 ibid., p. 99.

33 1

THE TRANSITION

said, when we say that time has added to value, we mean that a
certain portion of capital which was nothing but hoarded
labour was expended. Therefore, he concluded that 'if the
wine which is put in the cellar is increased in value one-tenth by
being kept a year, one-tenth more of labour may be correctly
considered as having been expended upon it 5 . 1 This was clearly
absurd. As Samuel Bailey, one of the most vigorous critics of
Ricardo said, 'in the instance adduced, no human being by the
terms of the supposition has approached the wine, or spent upon
it a moment or a single motion of his muscles'. 2 Mill was only
trying to explain something by calling it by a different name.

McCulloch took a similar line. The subterfuges to which he
resorted in order to present the Ricardian theory in perfect
formal consistency only resulted in an indiscriminate mixture of
ideas, which shows a complete misunderstanding of Ricardo's
real problem. McCulloch followed Mill in regarding capital
as hoarded labour. In The Principles of Political Economy, first pub-
lished 1825, he more or less reproduced Mill's defence of the
wine-in-the-cellar case. 3 His statements on value are, to put it
mildly, eclectic. He distinguished between real value (defined
according to the labour theory) and relative or exchange-value
(which arises in the exchange of two commodities) . Real value
and exchange-value may be equal. Normally, any exchange will
be an exchange of equivalent real values. This holds true for
exchange between the capitalist and the labourer. To explain
the origin of the surplus in spite of this, McCulloch simply falls
back on Smith's and Malthus's doctrine that the value of a com-
modity is determined by the amount of labour which it can
command. This is as a rule greater than the real value of the
commodity and the discrepancy is profit. Unless such a dis-
crepancy existed, ' a capitalist would have no motive to lay out
stock on the employment of labour ; for his profit depends on his
getting back the produce of a greater quantity of labour than he
advances.' This, superficially, sounds almost as consistent a de-
duction from Ricardo as Marx's theory of surplus value. Indeed,
McCulloch goes on to say, ' when he [the capitalist] buys labour,

1 J. Mill, Elements of Political Economy, pp. 97-8.

2 S. Bailey, A Critical Dissertation on the Nature, Measures, and Causes of
Value, etc. (1825), (London School of Economics Reprint, 1931), pp. 219-20.

3 J. R. McCulloch, The Principles of Political Economy (1849), pp. 372-3.

332

BREAK UP OF LABOUR THEORY OF VALUE

he gives the produce of that which has been performed for that
which is to be performed'. 1 And this exchange between 'living'
and 'embodied' labour (or between labour and capital) had the
peculiar quality of giving rise to a surplus. But this is only a
superficial resemblance. For with Ricardo, and even more with
Marx, the problem was to explain the surplus within a unified
theory of value. With McCulloch, however, the attempt to pro-
vide such an explanation was abandoned. The surplus was little
more than the mercantilist 'profit upon alienation'.

These difficulties of the post-Ricardians were due to their
inability to work out the relation between the phenomena of the
market in conditions of capitalist production and the labour
theory of value. Ultimately, this inability was due to two closely
related factors: a reluctance to adopt a surplus value doctrine
as a corollary of the labour theory (which would have admitted
exploitation as an integral part of the capitalist system) ; and a
failure to analyse the effects of competition (i.e. the levelling
of the rate of profit earned by individual capitals regardless of
their organic composition). In short, the only way to rescue the
labour theory of value was that chosen by Marx. For obvious
reasons, it was not a way open to the majority of the post-
Ricardians. Instead, the attacks upon the labour theory derived
additional strength from the ineffective defences of such writers
as Torrens, James Mill, and McCulloch.

Perhaps the strongest attack at the time was that of Samuel
Bailey. A Critical Dissertation on the Nature, Measure and Causes of
Value, published in 1825, was written, as the sub-title informs us,
c Chiefly in Reference to the Writings of Mr. Ricardo and his
Followers'. Bailey was able to uncover many of Ricardo's
mistakes, and so to discredit the labour theory of value. He did
not himself replace it by another theory of value; but he made
the beginnings of an approach that was to be adopted later.

Adam Smith had elucidated the significance of the labour
theory by concentrating attention on the origin of the pheno-
menon of exchange-value. He had, however, failed to push the
analysis of the concept to its logical conclusions. jRicardo went
to the other extreme. He neglected to discuss the historical bases
of the phenomenon and the social quality of the concept. His
interest was mainly in the variations in exchange-value, that is in
1 J. R. McCulloch, The Principles of Political Economy, p. 320.

333

THE TRANSITION

its relative aspect. He did not make clear the distinction between
the quality of exchange-value as such a concept which repre-
sents an historically determined reality the size of the exchange-
value and the relation between the exchange- values of different
commodities.

Here Bailey's criticism sets in. He sees that exchange-value
appears as a quantitative relation between two things, and he
refuses to go any farther. For him the whole problem of value is
solved by the statement that exchange-value involves, in prac-
tice, a relation. In an ultimate sense, he says, value denotes 'the
esteem in which any object is held '. 1 It reflects a state of mind of
the subject and not a quality possessed by the object. This
esteem cannot arise when objects arc viewed in isolation. It has
its origin in a comparison of two things. The relative esteem to
which a comparison gives rise 'can be denoted only by quan-
tity'. 2 Bailey adopts, therefore, the more superficial of Adam
Smith's definitions which identified value with purchasing
power.

Two thoughts continue to run side by side in Bailey's book.
The more important one is that which makes value into a rela-
tion and nothing more. 'As we cannot speak of the distance of
any object without implying some other object, between which
and the former this relation exists, so we cannot speak of the
value of a commodity but in reference to another commodity
compared with it. A thing cannot be valuable in itself without
reference to another thing.' 3 This relativism was clearly incom-
patible with the labour theory of value; and consistent expo-
nents of the labour theory, like Marx, were bound to regard it
as superficial. 4

On the other hand, Bailey himself seems to have regarded the
purely relative conception of value as insufficient. His mention
of esteem and utility at the beginning of his discussion (which
seems to have been due to the influence of Say) shows that he
was trying to link up the functional relations which appear in
the market with some fundamental causative influence: that he
was trying to find a constant. He did not succeed and subsequent
utility theorists have criticized him for his failure to trace the

1 S. Bailey, A Critical Dissertation, p. i .

2 ibid., p. 3. 3 ibid., p. 5.

4 Marx, Theorien uber den Mehrwert, vol. iii, pp. 146-76.

334

BREAK UP OF LABOUR THEORY OF VALUE

connection between utility and exchange- value. 1 Bailey states, it
is true, that c an inquiry into the causes of value is, in reality, an
inquiry into those external circumstances, which operate so
steadily upon the minds of men, in the interchange of the neces-
saries, comforts and conveniences of life, as to be subjects of
inference and calculation'. 2 But he does not proceed to discuss
the implications of subjective valuation. Indeed, he agrees in
the end that in the class of commodities which can be increased
at will, and in the production of which there is no restriction of
competition, cost of production is the determinant of value. The
cost of production 'may be cither labour or capital, or both'. 3
In other cases, such as monopolies and goods produced under
conditions of diminishing returns (for example those requiring
the factor land), the analysis must be that of monopoly price.

Bailey's criticism of Ricardo derived from the latter's search
for an invariable measure of value. This, in Ricardo, was merely
a confused way of seeking an explanation of the phenomenon of
value as such. But it gave Bailey an opportunity for saying some
very pertinent things on the question of the measurement of
value. Here, his relativism had some significance: it helped to
show up the difference between measure of value in the sense of
the inherent cause and substance of value (with which Bailey
would have nothing to do), and measure of value in the sense
of a quantitative relation between two goods, in particular,
between a good and money. This latter conception leads Bailey
to show that changes in value must affect both commodities
that arc compared. The search for an invariable measure of
value is, therefore, illusory. Bailey shows 4 that money fulfils
adequately the function of an external measure of value,
although it follows from his definition that it cannot itself be
of constant value. He uses this point as an argument for severely
circumscribing the validity of price comparisons in time. The
modern theory of index numbers has taken a similar line. 5
Bailey's object, however, was to show that, once the problem of
finding an invariable measure of value had disappeared, the
problem of discovering the determinants of value as something

1 Cf., for example, R. Zuckerkandl, ^ur Theorie des Preises, pp. 72-4.

2 S, Bailey, A Critical Dissertation, p. 180.

3 ibid., p. 205. 4 ibid., chs. v, vi, vii.
6 Cf., for example, Q. Haberler, Dcr Sinn der Indexzahlen (1927).

335

THE TRANSITION

separate from price had gone too. He thought that he had put
another nail into the coffin of the labour theory of value.

In addition to these frontal attacks, the development of alterna-
tive approaches to the value problem helped to destroy the
Ricardian structure. Already in 1804 the Earl of Lauderdale, in
An Inquiry into the Nature and origin of Public Wealth, and into the
Means and Causes of its Increase, had expressed views which closely
resembled those of Say. Lauderdale also based himself on
Gondillac and infused a utility element into his interpretation
of Adam Smith's theory of value. Wealth, he said, is everything
that possesses utility; but individual riches possess utility and
scarcity. These two elements determine value. They find expres-
sion in demand and supply; and an alteration of either will
affect value. Lauderdale examined the effects of increases and
decreases of demand and supply upon value in something like
the same way in which modern economists analyse the elasticity
of demand. He rejected the distinction between productive and
unproductive labour, and adapted Say's views on the factors of
production. He applied his theories in an eccentric way to prob-
lems of public finance; but his main claim to notice in the
development of English economic doctrine is definitely his kin-
ship with Say.

The subsequent development of the utility analysis seems to
have been due to a number of economists who remained
neglected for a long time. In 1903, Professor Seligmann directed
attention to some of them, 1 and since then their part in
the history of doctrine has become widely recognized. The
assignment of paternity of ideas among these writers is a matter
of some dispute; and the sequence in which some of them are
here mentioned is not necessarily to be taken as the correct
chronological order in which the ideas represented were born.

Richard Whately, who later became Archbishop of Dublin,
had occasion to occupy himself with economics during his short
tenure (as second occupant) of the Drummond Chair of Political
Economy at Oxford, 1830-1. The conditions of the Chair
included one which required the publication of at least one
lecture a year. The result of this provision was the publication in

1 E. R. A. Seligmann, 'On Some Neglected British Economists', Economic
Journal, vol. xiii, 1903, pp. 335 sqq. and pp. 51 1 sqq\ reprinted in Essays in
Economics (1925), ch. iii.

33 6

BREAK UP OF LABOUR THEORY OF VALUE

1831 of Whately's Introductory Lectures on Political Economy. Prior
to that, Whately had come into contact with Nassau Senior,
who had preceded him in the Drummond Chair and who had
written the economic section of an Appendix on 'Ambiguous
Terms' in Whately's Elements of Logic, first published in 1826.
It is difficult to say whether Whately was expressing original
views or voicing those which he had heard from others, particu-
larly Senior. At any rate, the Introductory Lectures are noteworthy
for their emphasis on utility and for a slight but influential
reference to the relation between cost and value.

Whately reveals his approach at once by suggesting that the
best name for economic science would be Catallactics, or the
science of exchanges, since c man might be defined as "An
animal that makes Exchanges": no other, even of those animals
which in other points make the nearest approach to rationality,
having, to all appearances, the least notion of bartering, or in
any way exchanging one thing for another.' l For Whately utility
and wealth were relative and subjective. And modern subjec-
tivists have often adopted Whately's term, 'catallactics', in
order to stress the fact that they regard choice as the essence of
the economic problem.

Whately did not develop a subjective theory of value to any
extent. He rejected, however, the idea that labour was essential
to create value; and in a passage which has been quoted many
times he expressed what he thought to be the real relation
between cost and price. 'It is not', he said, 'that pearls fetch a
high price because men have dived for them; but on the contrary,
men dive for them because they fetch a high price.'- It has also
been suggested recently that Whately was one of those who, in
company with Nassau Senior, extended the rent analysis by
making rent arise from immobilities in the factors of produc-
tion. 3 Otherwise Whately cannot be said to have contributed
much.

Whately's successor at Oxford, W. F. Lloyd, was also a repre-
sentative of the utility school. Again, it is impossible to say
whether, as has been suggested, 4 Lloyd was repeating views

1 R. Whately, Introductory Lectures on Political Economy (1832), pp. 6-7.

2 ibid., p. 253.

3 M. Bowley, Nassau Senior and Classical Economics, pp. 106, 131-2.

4 ibid., p. 1 08.

337

THE TRANSITION

acquired from Senior. But Lloyd was certainly in the same tradi-
tion. Like Bailey, he describes value as being ultimately a 'feel-
ing of the mind'; but he adds the important point that this
feeling will show itself ' at the margin of separation between
satisfied and unsatisfied wants'. To this clear anticipation of a
formulation made famous by the marginalist school, Lloyd added
a statement on the connection between quantity and utility
which is of a piece with it. For ' an increase in quantity', he said,
'will at length exhaust, or satisfy to the utmost, the demand for
any specific object of desire'. 1

An even fuller anticipation of marginal utility doctrine is to
be found in the Lectures on Political Economy (1834) of Mountifort
Longfield, the first holder of the Chair of Political Economy at
Trinity College, Dublin, endowed by Whately after his appoint-
ment to the archbishopric. Clearly, the tradition was spreading.
Utility, according to Longfield, is the power which an article
has c of satisfying one or more of the various wants or desires of
mankind'; a definition which, as he rightly points out, gives the
word a wider meaning than that which it has in everyday
language. Value, he says, implies utility; for each article they
are both proportional to each other, as far as a single individual
is concerned. Exchange ensures that a person shall have that
combination of goods which 'in proportion to their value be of
the greatest utility to him'. In exchange 'each party to it has
gained something, by receiving for the article he disposed some-
thing which is, relative to him, of more utility. . . '. As for the
measure of value, Longfield shares Bailey's relativism; he
admits that labour is often the best measure. 2

Later, Longfield examines value in detail. Exchange arises
because a definite quantity of a particular commodity is suffi-
cient to satisfy the want for it. People are, therefore, induced to
part with their surpluses for those of others. Everybody will be
anxious to buy as cheaply and to sell as dearly as possible. Com-
petition which Longfield describes in detail will ensure an
equality between supply and demand. Cost of production will
influence price through its effect on supply/' 1

1 W. F. Lloyd, Lecture on the Notion of Value (1834), pp. 16 and 9, quoted in
M. Bowley, Nassau Senior and Classical Economics, p. 108.

2 M. Longfield, Lectures on Political Economy (1834), (London School of
Economics Reprint, 1931), pp. 25-8.

3 ibid., pp. 44-63.

338

BREAK UP OF LABOUR THEORY OF VALUE

In his sixth lecture he amplifies his statements on value in such
a way as to include a reference to the margin. He repeats the
statement that price is determined by supply and demand
(behind the one is cost of production, behind the other utility),
and that it will be an amount which equates supply with effec-
tual demand, that is, demand backed by purchasing power.
Then he examines further the influence of demand on price.
' The measure of the intensity of any person's demand for any
commodity is the amount which he would be willing and able
to give for it, rather than remain without it.' Now while there
may be demands which cannot lead to a purchase, they have
nevertheless an influence on price. ' Of this an example is, the
demand of those who will not purchase at the existing prices,
but who would come into the market and purchase, if a slight
reduction should take place. Such a demand always does exist,
and has an effect in keeping up prices, exactly similar to the
bidding at an auction of the person who is next in amount to
that of the actual purchaser.' 1

This leads to the further point that, although intensities of
demand differ between different purchasers, they all buy at a
uniform market price which equates supply and demand. From
this Longfield's most important statement follows. If the price is
raised only slightly above the market price, 'the demanders,
who by the change will cease to be purchasers, must be those
the intensity of whose demand was precisely measured by the
former price. Before the change was made, the demand, which
was less intense, did not lead to a purchase, and after the change
is made, the demand, which is more intense, will lead to a pur-
chase still. Thus the market price is measured by that demand,
which being of the least intensity, yet leads to actual purchases.' 2
No modern exponent of the marginal utility theory could object
to this formulation.

Applying the doctrine to wages, Longfield set up what is
another anticipation of the marginal productivity theory. He
rejected the subsistence theory; and contended that the wages of
the labourer depended ' upon the value of his labour, and not
upon his wants, whether natural or acquired . . . '. The level of

1 M. Longfield, Lectures on Political Economy (1834), (London School of
Economics Reprint, 1931), pp. 11-12.

2 ibid., p. 113.

339

THE TRANSITION

subsistence had only influence on population. 1 (Longfield here
takes the opportunity to distinguish carefully between short and
long run movements, or what he calls 'primary or immediate
causes . . . and those whose influence is remote and secondary'. 2 )
Wages depend on supply and demand. The former is the 'exist-
ing race of labourers'. Demand depends on 'the utility or value
of the work which they (the labourers) are capable of perform-
ing'. To ascertain the wages of labourers one has to apply the
principles which so Longfield specifically mentions have
already been stated. 3 'The share of the article which each
labourer will receive, is found by computing how much of the
entire value consists of labour, and how much of profit, and then
dividing the former share among the labourers, in proportion to
the quantity and value of each man's labour.' l

This principle is applied to capital with greater clarity. 5
Capital is useful because it advances wages to the workers before
the consumer has bought the product. It also helps to make
labour more productive. The profits on capital, given its supply,
will depend on the demand, that is, on its productiveness. Again,
however, competition establishes a uniform rate which ' will be
regulated by that portion of it [capital] which is obliged to be
employed with the least efficiency in assisting labour. . . . This
extends to the profits of capital that principle of an equality
between the supply and the effectual demand which in all cases
regulates value.' 6

(5) Senior

Of all the forerunners of the utility analysis, Nassau William
Senior has suffered least from neglect. But even he has had to
wait until quite recently for a definitive study. Senior was not
quite so striking an exponent of the subjective theory of value as
some of the writers already mentioned. In particular, his account
of the marginal utility analysis is not nearly so elaborate as that
of Longfield. Although Senior was influenced by ay_and by
German writers, his theory of value and distributidBBBip^d less

^^^^Vj' \*v

1 M. Longfield, Lectures on Political Economy (1834), (London School of
Economics Reprint, 1931)* P- 2O ^'

2 ibid., p. 207. 8 ibid., pp. 209-10. 4 ibid., pp. 211-12.
6 ibid., Lecture IX. 6 ibid., p. 193.

340

SENIOR

at providing an alternative to that of Ricardo than at recon-
ciling it with the new current of thought. Senior may therefore
be regarded as the first important representative of the tendency
to compromise which has been a characteristic feature of that
tradition of English economic thought which is expressed by
John Stuart Mill and Alfred Marshall. Senior's attitude to prob-
lems of economic and social policy is also of interest on account
of the influence which it had on his views of the scope and method
of economics.

Nassau William Senior (1790-1864) was of a type which
became more common after his time: that of the economist who
takes an important advisory part in the affairs of government.
He was twice Professor of Political Economy at Oxford (once as
the first holder of the Drummond Chair in 1825-30 and again
in 1847-52) and, for a short time. Professor at King's College,
London. Most of the rest of his life was occupied with the study
of many social and economic questions as a member of govern-
ment commissions and in other ways. His theoretical views were,
therefore, developed in close contact with his experience of
practical affairs and against the background of his political
attitude. From the ample information about his work which is
now available the clear impression results that Senior can claim
to share with John Stuart Mill the distinction of having laid the
foundation for the theoretical and political compromise whicfi
is the legacy of neo-classical English economics. But while Senior
may even claim priority, he was not only a much smaller and less
influential figure than Mill, but his writings do not reflect so
acutely the problems which the position of compromise involves.

In regard to the theories of value and distribution, Senior
endeavoured to reconcile Say and Ricardo. In what is the most
complete statement of his theoretical work, An Outline of the
Science of Political Economy (first published in 1836 as an article in
the Encyclopaedia Metropolitana) , he defines wealth as everything
which is susceptible of exchange or which possesses value. Three
qualities are necessary to this end: 'transferability/~ relative
scarcity, ancfutility. The last is defined in the wide sense, already
common atTJiaf time, as the power to give gratification of any
kind. It i an, indispensable constituent of value; but as it is
modified by innumerable causes Senior implies that relative
scarcity is, in practice, the most important determinant of value.

THE TRANSITION

This limitation of supply is purely relative: that is in comparison
with want. Transferability means that the utility of the good in
question can be appropriated permanently or for a time. The
inclusion of this quality aims at destroying the material criterion
which was a legacy from Adam Smith. 1

This preliminary account of the determinants of value (and of
wealth) is noteworthy for the inclusion of a reference to diminish-
ing utility which, although it is not as elaborate as that of some
other forerunners of the doctrine, is quite explicit. 'Our desires',
said Senior, ' do not aim so much at quantity as at diversity. Not
only are there limits to the pleasure which commodities of any
given class can afford, but the pleasure diminishes in a rapidly
increasing 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. In pro-
portion, therefore, as any article is abundant, the number of
those who are provided with it, and do not wish, or wish but
little, to increase their provision, is likely to be great; and so far
as they are concerned, the additional supply loses all, or nearly
all, its utility.' 2

In the more detailed examination of value, utility is not expli-
citly given a prominent position. This no doubt accounts for the
fact that Senior's theory has generally been regarded as an
extension of the cost-of-production theory into which the post-
Ricardians had transformed the labour theory. Under the head-
ing of 'Value' Senior does little more than state that relative
utility and relative scarcity will determine the ratio in which one
commodity will exchange for another. It is only under ' Distribu-
tion' that he analyses the determination of price as he by then
calls it more closely. He points out that 'comparative limita-
tion of supply . . . though not sufficient to constitute value, is by
far its most important element; utility, or, in other words,
demand, being mainly dependent on it.' Supply is affected by
three instruments of production? 'jiuman Labour and Absti-
nence and the Spontaneous agency of naturg.' Senior takes this
classification as a Basic datum before proceeding to examine
'the obstacles which limit the supply of all that is produced, and

1 N. W. Senior, An Outline of the Science of Political Economy (1836; offprint
from Encyclopaedia Metropolitan), pp. 131-2.

2 ibid., p. 133.

342

SENIOR

the mode in which those obstacles affect the reciprocal values of
the different subjectsj^f exchange 5 . 1

This examination turns entirely on the relation between cost
and price. In it Senior did two things with the theory of value as
he fourfd it. In the first place, he eliminated Ricardo's excep-
tions from the labour theory of value by rejecting the idea that
the labour embodied in a commodity was thg" source and
measure of its value; and he adopted a definition of cost of
production which admitted the productivity of capital under
the term 'abstinence'. This represents an attempted solution
of the~^post-Ricardian dilemma of explaining profits while pre-
serving _iHe_l^bqur theory. In the second place, Senior limited
the influence of cost of production, even as he had defined it,
and stressed the influence of demand or utility. This second line
of thought represents the influence of Say and of other utility
theorists^

Senior begins by stating that 'the obstacle to the supply of,
those commodities which are produced by labour and absti-
nence, with that assistance only from nature which every one
can command, consists solely in the difficulty of finding persons
ready to submit to the labour and abstinence necessary to their
production. In other words, their supply is limited by their cost
of production.' 2 The latter is defined as 'the sum of the labour
and abstinence necessary to production'. 3 The inclusion of
abstinence aimed at overcoming the difficulty of James Mill,
McCulloch, Torrens, and others who did not know how to make
profits a part of the value of commodities. It avoided Mill's
absurdity in the wine-in-the-cellar case which made time
equivalent to labour; and while it avoided the inclusion of
profits as such, it added 'that conduct which is repaid by
profits V that is, something which Senior clearly meant to be on
the same level as the exertion which was termed labour.

But this cost of production determined price only in the case
of those commodities in the production of which, as stated above,
the assistance from nature is one 'which every one can com-
mand'; in other words, in which the factors of production are
freely accessible to all, in which, therefore, there is free competi-
tion. But even in these conditions cost of production is only 'the

1 N. W. Senior, An Outline of the Science of Political Economy, p. 168.
3 ibid., p. 169. 3 ibid., p. 170. 4 ibid.

343

THE TRANSITION

regulator of price ', because in actual fact the adjustment of
supply which brings about equality of cost and price takes some
time.

In other situations which were monopolistic, the importance
of cost of production was even smaller. Senior distinguished
four such cases of monopoly. In the first, 'the monopolist has not
the exclusive power of producing, but only certain exclusive
facilities as a producer, and can increase, with undiminished, or
even increased facility, the amount of his produce*. 1 Here the
power of the monopolist (the owner of a patent, for example) is
limited. He cannot charge a price higher than the cost of pro-
duction that would be incurred by those who do not possess his
special facility. On the other hand, since he will probably have
economies of large-scale production, his price will tend to fall
in order to stimulate a wider demand. Although he will still
make a large profit, his own interest and that of the public will
coincide. 2

In the second case the monopolist is in complete control of the
output, but the size of that output cannot be varied. Cost of
production must still form a lower limit to price. But there is no
upper limit: price will be determined by demand. The third
case is intermediate between the two. The monopolist 'is the
only producer, but, by the application of additional labour and
abstinence, can indefinitely increase his production'. Here there
is again no upper limit; but otherwise the conditions will be
those of the first case. 3

Finally, there is the situation in which c the monopolist is not
the only producer, but has peculiar facilities which diminish and
ultimately disappear as he increases the amount of his produce'. 4
This is a situation in which a factor of production of varying
quality is used and in which returns diminish. It applies par-
ticularly to land; and it gives rise to rent. Senior calls this case
one of 'unequal competition'. Price 'has a constant tendency to
coincide with the cost of production of that portion which is
continued to be produced at the greatest expense'. 5 Those who
produce at a lower cost will reap an additional profit.

'So far Senior's theory of value is only a consistent develop-
ment of an already existing tendency. It is a supply-and-demand

1 N. W. Senior, An Outline of the Science of Political Economy, ch. xx, p. 171.

2 ibid., p. 172. 3 ibid. 4 ibid., p. 175. 6 ibid., p. 176.

344

SENIOR

theory, and cost of production is assigned its place in the deter-
mination pf__supply. On the face of it, the influence of utility is
not very marked. Demand is taken for granted and no attempt
is made to go into the causes that determine it. There is not the
approach that characterizes the writings of the contemporaneous
German economists or even of Longfield and Lloyd. The method
is that of Bailey, that is, a conscious development on a Ricardian
basis but away from Ricardian implications.

In his discussion of distribution Senior shows a little more
clearly the influence of the subjectivist current. The derivation
of the value of the factors from the value of their products was
more in the tradition of Say and the Germans. With regard to
rent, Senior admitted in the first place that rent would exist so
long as a scarce factor of production (for example land) was used,
even if every portion of it was equally productive. 1 In the second
place consistently with this view of rent he extended the
application of the concept to factors of production other than
land, for example fixed capital and natural talents. 2

His treatment of wages is somewhat obscure. He did not
develop a cost-of-production theory of wages, presumably
because in this connection the break with the labour theory of
value would have appeared less striking and he excluded
population almost entirely from his analysis of wages. On the
whole, he seems to have inclined to a productivity theory in
harmony with the approach of Say and Longfield; but he cast
it in the form of the wage-fund doctrine which remained a some-
what troublesome feature of economic theory for some time.
The notion that there was a fund designed to be laid out in
wages was not new but had been used by Smith and Ricardo.
Senior stated the perfectly obvious proposition that, on the
average, the real wages obtained by the worker during a year
must ~be the ratio between the amount of commodities set aside
during that year for the maintenance of the working population
and the size of that population. 3 This, however, he described as
the proximate cause of wages; the fund set aside for wages had
to be determined next. Senior did not get very far with this

1 N. W. Senior, An Outline of the Science of Political Economy, p. 178.
8 E.g., ibid., pp. 166-7; cf. also M. Bowley, Nassau Senior and Classical
Economics, part i, ch. iii.

3 N. W. Senior, An Outline of the Science of Political Economy, p. 193.

345

THE TRANSITION

problem, but he did indicate the elements of a solution. The
first was the productivity of labour, the determinants of which
he analysed at some length. 1 The second (which Senior compli-
cated by the addition of others) was the relation of wages and
profits. 2 In other words, Senior made the theory of wages abtit
on the theory of capital.

The striking feature of Senior's theory was the admission of
the productivity of capital and the introduction of the term
abstinence. The latter, he defined as c that agent, distinct from
labour and the agency of nature, the concurrence of which is
necessary to capital, and which stands in the same relation to
profit as labour does to wages 5 . 3

Senior did not say much about the determinants of abstinence;
although those who wish to do so may see in some of his remarks
the beginnings of a theory of time-preference, which was later to
be developed by the Austrians. * But he examined at somewhat
greater length the cause at the back of the demand for capital,
namely its ability to make labour more productive. The account
of the place of capital goods (for the creation of which abstinence
was an indispensable agent) in the process of production 5 can
justly be regarded as a forerunner of the Austrian theory of
roundabout production.When read in the light of his treatment
of capital, Senior's statement of the wage-fund doctrine is also
seen to be more akin to its modern versions than to the truism
which was justly rejected by later economists.

The question as to the weight to be assigned to the different
ingredients which went to make up Senior's economic theory is
futile, and in a sense based on a misconception. The traditional
view expressed, for example, by Cannan and Bohm-Bawerk, 6
regards Senior's contributions as mere emendations of Ricar-
dianism still based on a * real cost ' concept, which had become
more elaborate than that expressed in the labour theory of
value. Senior's latest interpreter, Miss Bowley, is at pains to

1 N. W. Senior, An Outline of the Science of Political Economy, pp. 201-4.

2 ibid., p. 206. 3 ibid., p. 153.

4 ibid., pp. 153, 187. Miss Bowley (Nassau Senior and Classical Economics,
pp. 148 sqq.) admits that Senior did not really develop a time-disagio theory
of the supply of capital, but she claims that he was on the way to doing so.

6 N. W. Senior, An Outline of the Science of Political Economy, pp. 153 sqq.

6 E. Cannan, Theories of Production and Distribution (1924), pp. 213-4; anc ^
A Review of Economic Theory (1929), p. 187. E. V. Bohm-Bawerk, Capital and
Interest (1922), Book IV, ch. ii.

34$

SENIOR

show that he had moved farther away from Ricardo than has
hitherto been admitted, and that he was working towards a
formal equilibrium theory with a strong subjective element
of the modern kind. 1 Both views contain elements of truth. The
discussion of cost of production, for example, with the introduc-
tion of the concept of abstinence, and the analysis of rent bear
the obvious marks of the post-Ricardian controversies between
Bailey, Malthus, Torrens, Mill, and McCulloch. On the other
hand, it is true to say that Senior's theory of capital amounts 'to
saying that the equilibrium rate of profits, or interest, is deter-
mined by the equalization of demand, depending on the pro-
ductivity of capital, and supply at a level just sufficient to pay for
the sacrifice involved in saving'; a theory which is similar to that
of Marshall. 2

But there need be no quarrel between the two interpretations.
What is important is not whether Senior was closer to the Con-
tinental school or to the English post-Ricardians, but how far he
had moved from Ricardo himself. Senior's predecessors in
England, no less than the Continental authors, had effectively
broken with Ricardo before Senior added his contribution.
They did so in somewhat different ways, though these ways
ultimately coalesced (a coalescence which is already obvious in
Senior) ; but characteristic of both ways is the abandonment of
the search for an objective * real-cost' concept. The one school
did it by stressing utility and by deriving from it the notion of
productive services; the other by developing a cost-of-produc-
tion theory in which the productivity of capital is admitted. And
once it had done that, it is only natural that it should have incor-
porated the utility approach. The purpose is the same: to avoid
the concept of the 'surplus'; for it is only in relation to such a
concept that a * real-cost' theory of value has significance. True,
the cost-of-production theory in Senior's formulation still con-
tains a 'real cost' (with abstinence now allied to labour); but
this is quite different from Ricardo's doctrine, because it is now
made subjective. In this, and as we shall see, in later English
versions of the same theory, the inclusion of profit and interest in
cost of production and of its source (under some name or other)

1 M. Bowley, Nassau Senior and Classical Economics, particularly section i,
chs. ii and iv.

2 ibid., p. 103.

347

THE TRANSITION

in the factors creative of value, destroys the basis of the classical
theory of value.

It is difficult not to see in this change a reflection of the altered
position of industrial capitalism. The main factor was now, not
hostility from the landowners (hence Senior's generalization of
rent, as against Ricardo's treatment of it as a very special form
of income), though that had not disappeared, but the challenge
of the working class. The theoretical necessity was to remove the
antithesis between the two classes of income: profits and wages;
that is to remove the labour theory of value. Capital had to be
made as legitimate a source of income as labour; and whatever
attenuations Senior's 'abstinence' suffered at the hands of later
economists, he clearly meant the term to carry a special moral
significance. With the acceptance of his theory the debate was
moved from the ground of class conflict to that of justice. The
question was now what should be the proportionate shares of
the product of industry that became profits and wages. Occa-
sional monopoly and avoidable exploitation rather than capi-
talist property became the objects that the working class might
justly attack.

It is not surprising that economic policy should have become
an important field of discussion. With the economic structure of
society taken for granted, attention was concentrated on the
problem of making capitalism work smoothly. Senior's writings
show clearly that the concern with this problem was increasing.
It now seems that, on the general question of the scope of
government action, he held less rigid views than was at one
time supposed. On the allied question of the scope of economics,
his views seem to have fluctuated largely in accordance with his
own experience of specific problems of policy.

It has recently been shown 1 that Senior was not an uncom-
promising advocate of laisser faire. In his earliest statements he
limited the sphere of government action to the traditional
'police' duties. But he soon found significantly, as the result
of dealing with social problems of the more backward economy
of Ireland that distress might exist in spite of the tendency of
the economic process to create an output and a distribution in
accordance with the workers' own exertion and foresight. Such
distress was properly a matter for government action. It was not
1 M. Bowley, Nassau Senior and Classical Economics, section ii, ch. i.

348

SENIOR

only a right, but even 'the imperious duty of Government 1 to
alleviate it. But an overriding consideration for all social services
was the maintenance of 'industry, forethought, and charity'. 1
In one place. Senior went so far as to advocate the advance of
public money ' to facilitate emigration, and for the formation of
roads, canals, and harbours', together with measures designed
to rid Ireland of feudal survivals. 2 The public works were
intended to raise the productivity of Irish labour and so to
obviate the necessity for the introduction of poor relief. But the
fact that these measures were suggested for a pre-capitalist
country like Ireland, and that Senior never made similar sugges-
tions for England, should have made his interpreter beware of
claiming them as evidence of Senior's departure from the liberal
path. 3 What they show is rather that Senior recognized the
practical necessities of the new colonial system.

There were many English social problems on which Senior
advised either as a member of government commissions or in a
private capacity. The three best-known instances are the Poor
Law Reform of 1834, the discussion of the Factory Act in 1837,
and the inquiry Into the condition of the hand-loom weavers in
1841. It is not necessary to go into the details of Senior's argu-
ments in all these cases. He did not always appear as a doctri-
naire upholder of non-interventionism. In fact, one may readily
grant that he was prepared to advocate government action so
long as he did not regard it as interfering unduly with the free
working of economic laws. He opposed the Factory Act with the
notorious argument (dissected by Marx 1 ) that the last two hours
of the day's labour alone constituted the capitalist's profit.
Instead of a limitation of the hours of labour to ten (which
would have injured the industrialist), he suggested the improve-
ment of housing conditions (the burden being placed on the
landlord) .

The Report of the Commission on the Condition of Hand-loom
Weavers (1841) is not very dogmatic. It accepts, however, the
relative decline in the demand for the products of the hand-

1 N. W. Senior, Letter to Lord Howick on a legal provision for the Irish Poor
(1831), pp. 11-12.

2 ibid., pp. 45-6.

3 M. Bowley, Nassau Senior and Classical Economics, pp. 247-8.

4 Marx, Das Kapital, vol. i, pp. 185 sqq. Theorien liber den Mehrwert, vol.
iii, p. 566.

349

THE TRANSITION

loom weavers as a consequence of competition, and it resigns
itself to the doctrine of the impotence of the State to prevent it.
Education, the prohibition of trade unions, limitation on entry
into different trades, better housing (again at the expense of
landlord and builder), and the abolition of some import duties
Which raised the cost of living, were advocated as palliatives.

On the Poor Law, Senior's views were perhaps more definitely
coloured by the radical belief in the virtues of free competition.
He did nevertheless agree with the necessity of relieving the
able-bodied poor, provided a system of administration could be
devised which would avoid the evils of the old Poor Law and
would not interfere with the free labour market. The principle
of 'less eligibility' and the workhouse test represented the com-
promise between the anxiety not to hamper competition and the
necessity to relieve destitution.

Altogether, Senior appears to have been more ready to com-
promise than has generally been believed. But while this readi-
ness was due to the absence of a dogmatic faith in non-interven-
tion as a principle of politics, it was not the result of any clearly
thought-out theory of the relation between economic theory and
policy. It has been shown that Senior's views on this relation
fluctuated. 1 His earliest position was the traditional one which
recognized the existence of a science and an art of economics
which were closely connected. But his experiences in practical
affairs seem to have led to a much more formal view of the
results of theoretical inquiry. In the Political Economy (1836) the
function of the economist was conceived as purely positive and
analytical. The economist might not advise even though he was
elucidating principles which the legislator and the statesman
would probably have to take into account. The problems of
human welfare are solved by reference to many other considera-
tions besides, and even to the exclusion of, economic ones.
Finally, during his second tenure of the Drummond Chair,
Senior once again distinguished between the science of econo-
mics and two economic arts concerned with a study of institu-
tions and of the relation between wealth and welfare. Science
and art were closely connected. But since the science was not yet
perfected, one could speak on practical issues only orilthe basis

1 M. Bowley, Nassau Senior and Classical Economics, section i, ch. i and
section ii.

350

MILL

of one's own interpretation of the conclusions of the science. And
in any case, decisions are made by men not qua economists, but
qua statesmen.

This general attitude, indeterminate as it was, was well suited
to the practical issues on which Senior and other economists
were then being asked to advise. The attack on certain pheno-
mena of capitalism and on capitalism itself, particularly from
the working class, was already powerful enough to make it im-
possible for the defenders of the system to resort to a priori non-
interventionism. The view outlined by Senior gave the defence a
free hand to make the best of any individual case. That this best
was conceived in terms of the interest of the industrialist, that it
was, therefore, no different in aim from the earlier, more in-
transigent, laisser faire, is demonstrated clearly by Senior's con-
clusions in every single instance. And nothing throws more light
on his fundamental beliefs than his violent opposition to trade
unionism. x

(6) MilL

(a) Political Philosophy. No writer was ever more carefully
trained to carry on a tradition than was John Stuart Mill
(1806-73). H G was intended to be an uncompromising exponent
of pure classical economic theory and of liberal philosophy.
To-day, we can see more clearly that his summing up of the
economic and political discussions of half a century was neces-
sary to complete the process of disintegration of doctrines which
changing economic conditions had made inadequate. Estimates
of Mill's position have tended to two extremes. To many genera-
tions of students, his Principles were the undisputed bible of eco-
nomic doctrine. They represented the final synthesis of classical
theory and of the refinements introduced by post-Ricardian
writers. They were comprehensive, systematic; and, with few
exceptions, they presented their theorems with the conciliatory
air of assurance which strengthened the impression of unques-
tioned authority.

Two influences helped to undermine that authority. The first,
and less extensive one, partly inspired by Marxian criticism, was
the exposure of the wide divergence between the supposed
1 Sidney and Beatrice Webb, History of Trade Unionism (1926), pp. 139-41.

35 1

THE TRANSITION

Ricardianism of Mill and the essential content of classical poli-
tical economy. It showed Mill to have been one of many nine-
teenth-century economists who were busy transforming the cen-
tral propositions of classicism, such as value, capital, and profits;
but also that he was not by any means pre-eminent among them.
To those who welcomed this development, Mill's merit seemed
consequently small. And to those who, like Marx, deplored the
decline of Ricardianism, Mill appeared no more guilty than
many others.

It was, however, the rise of the marginal school in the last
quarter of the century which finally dislodged Mill. From being
an indispensable text-book, the Principles became an object of
purely historical interest. Mill's part in laying the foundations of
the new economics was regarded as comparatively insignificant,
and his usefulness to modern students as almost negligible. From
the point of view of the history of economic theory, interest has
moved away from Mill to earlier and more obscure writers.

This change of judgement was reinforced by consideration of
Mill's position in the development of political philosophy. To
opponents of government intervention, to believers in pure Ben-
thamism, Mill's abandonment of doctrinaire laisserfaire was not
only an act of apostasy, but it diminished also his significance as
a representative of early nineteenth-century liberalism. And to
present-day opponents of laisserfaire whether they are defen-
ders or enemies of capitalism Mill's compromise is not accep-
table as a basic social philosophy. In short, his economic theory
lacks the logical rigour and his social philosophy the unflinching
consistency which are nowadays demanded.

But although he was not original as an economist, and
although he did not leave behind one of the great systems of
political philosophy, Mill is not to be dismissed as unimportant.
His significance lies precisely in the fact that he was able to make
eclecticism in theory and compromise in politics into something
like a generally accepted system. His authority was admittedly
temporary. And although the approach of Mill, both to pure
economics and to the problems of polic$* became a character-
istic of the academic English tradition, the influence of that tra-
dition has now greatly diminished. Mill remains symbolical of
an age which could afford the luxury of eclecticism and com-
promise. He, more than any other English econoitiist, reflects

352

MILL

the time in which early competitive capitalism accompanied
by English leadership in world markets attained its zenith. But
he also reflects the fact that new problems were clamouring for
notice. In particular, his work can only be understood against
the background of the increasing challenge of socialism.

In his Autobiography Mill describes the amazing process of edu-
cation to which he was subjected by his father. It is clear from it
that the son was meant to carry on the joint tradition of Ricar-
dian economic theory in the form in which it appeared in the
elder Mill's Elements, and the utilitarian social philosophy of
which Bentham was the greatest exponent. But in the course of
his experience of the world shaken as it was by Chartism, trade
unionism, and the ubiquitous attack of socialist theory he soon
found himself face to face with the dilemma of the critical and
the conservative interpretations of economic liberalism. Mill
became aware of the necessity of choosing between them, mainly
in the realm of political theory and practice. He describes the
mental crisis which accompanied his emancipation from the
rigours of the Benthamite view of self-interest as the main
motive of human conduct, with its corollary of the eternal search
for individual happiness. 1 Through the influence both of the
romantic and the socialist critics of utilitarianism, he acquired
regard for the historical approach, an appreciation of the com-
plexity of social phenomena, and a doubt about the perpetual
beneficence of the free play of the forces of self-interest. Although
he never abandoned the harmony theory of utilitarianism, or
even a general belief in the superiority of competitive capitalism
over other economic systems, he was, from that time, prepared to
consider and advocate reforms of existing institutions, even if
these involved government interference with the rights of private
property.

In his essay on Bentham (written in 1838) he gives an interpre-
tation which begins by stressing the revolutionary implication of
Bentham's scepticism. He calls him 'the great subversive, or, in
the language of Continental philosophers, the great critical
thinker of his age and country.' 2 But he goes on to reject
Bentham's picture of human nature. He regards as too narrow
Bentham's belief that human beings are actuated in their con-

1 J. S. Mill, Autobiography (1873), ch - v -

2 J. S. Mill, * Bentham ' in Dissertations and Disquisitions (1867), vol. i, p. 334

353 M

THE TRANSITION

duct by nothing more than 'either self-love or love or hatred
towards other sentient beings.' 1 He charges Bentham with the
neglect of motives which involve the search for perfection,
honour and other ends entirely for their own sakes. He con-
cludes, therefore, that Bentham's philosophy can only ' teach the
means of organizing and regulating the merely business part of
the social arrangements.' 2 But Mill thought that with all his
greatness in this respect a greatness particularly evident in his
continual exposure of self-interest behind the more pretentious
guises in which it often presented itself Bentham was not cap-
able of showing how the means for regulating the material side
of life might best be adapted to the task of improving the national
character.

This criticism of Bentham was inspired to a large extent by
Mill's regard for Coleridge, the other of c the two great seminal
minds of England of their age'. 3 Mill admired what the
reactionary school achieved when it was as in the hands of
Coleridge not a partisan movement but a philosophy. He
found in it the beginnings of a philosophy of history the only
form in which he thought a philosophy of society was yet pos-
sible a just emphasis on education, a feeling of loyalty and
national cohesion. He regarded conservative philosophy as an
essential adjunct to reform. It should, he felt, provide an acid
test for every reform proposal by elucidating the good purposes
for which existing institutions were first intended. ' What mode',
he argued, 'is there of determining whether a thing is fit to exist,
without first considering what purposes it exists for, and whether
it be still capable of fulfilling them?' 4 Rightly or wrongly,
Mill saw in Coleridge's conservatism a powerful critical weapon.
It pronounced, he thought, the severest satire upon existing
evils, and it was more akin in aim to the reform movement than
to the political Toryism to which it was thought to belong.

Mill agreed also with Coleridge's strictures on the principle of
laisser faire. The 'let-alone doctrine, or the theory that govern-
ments can do no better than to do nothing', he considered to be
due to the c manifest selfishness and incompetence of modern
European governments'. As a general theory, however, he

1 J. S. Mill, ( Bentham ' in Dissertations and Disquisitions, vol. i, p. 354.
2 ibid., p. 366. 3 ibid., p. 331.

4 J. S. Mill, 'Coleridge* in Dissertations and Disquisitions , p. 438.

354

MILL

thought that e one-half of it is true, and the other half false 5 . 1 He
was still sceptical of the beneficence of government intervention
when it attempted c to chain up the free agency of individuals'.
But he agreed with Coleridge that, having fulfilled its police
duties, government could do much to help directly and indirectly,
to improve the material well-being of the people, and to ensure
that the faculties essential to their moral existence are fully
developed. 2

Mill also approves of Coleridge's objection to the commercial-
ization of landed property. Mill believes that ownership of land
is in the nature of a trust; that it gives a great power to the
owner, which it is the duty of the state to control. Whether in
this, as in other matters, Mill was right in claiming the
authority of Coleridge, is doubtful. Possibly Coleridge would
have disliked as much to be associated with utilitarianism as
with political Toryism. It is significant that Mill picked out from
conservative doctrine those elements which could be interpreted
as critical of existing practices and which did at the same time
allow for government action in appropriate cases. There is no
doubt that Mill did not accept what was truly reactionary in
Coleridge. He never allowed romantic criticism to touch the
citadel of industrial capitalism its economic theory. ' In poli-
tical economy especially,' he said of Coleridge, 'he writes like an
arrant driveller, and it would have been well for his reputation
had he never meddled with the subject.' 3

Another influence on Mill, similar to that of Coleridge, was
that of Comte, the founder of positivism. Although he was a
disciple of Saint-Simon, Comte was strongly influenced by the
romantic reaction to the practical revolutionary results of
eighteenth-century philosophy. Reform had, he thought, over-
shot the mark. He too wanted to reform human society entirely,
but he took over from the romantics the dislike of extreme
individualism and the respect for authority; instead of medieval
theology, however, positive science was to be enthroned as the
guiding force. We are not concerned here with the details and
often fantastic practical consequences of Comte's philosophy.
But it is clear that its apparent mixture of rationalism and
romanticism was likely to impress Mill at the time when he was

1 J. S. Mill, * Coleridge* in Dissertations and Disquisitions, pp. 453-4.
2 ibid., pp. 454-5. 8 ibid., p. 452.

355

THE TRANSITION

becoming dissatisfied with Benthamism. Comte's philosophy led
directly to the desire for a new general science of society, and
this involved the establishment of a philosophy of history: with
both aims Mill sympathized.

Mill's departure from Benthamism was, however, only partly
due to the romantic and pseudo-traditionalist influences of
Coleridge and Comte. Mill knew the early English and French
Utopian socialists and seems to have been impressed by their
attacks on the evils of early capitalism. His discussion in the Prin-
ciples of their critique of property is generally sympathetic. In
the second edition of this work he pointed out that ' attacks on
the institution of property' would continue 'until the laws of
property are freed from whatever portion of injustice they con-
tain'. 1 In all his discussions of problems of social policy, he
takes from the natural law philosophy, which is his background,
its potentially revolutionary element. But he makes a criticism
of institutions (also made by the early socialists) compatible with
the principle of freedom derived from utilitarianism and natural
law. The result is a combination of liberal principles with social
reform. Before we attempt to trace the consequences of this atti-
tude in his economic doctrines it is worth looking a little more
closely at its theoretical and practical results in Mill's political
outlook.

In the first place, Mill did not give up the general principles
of individual liberty and free competition which he had learnt
from his father. His most explicit theoretical statement is that
contained in his essay On Liberty (1859). The absolute principle
that should govern the relations between society and its indivi-
dual members is here stated in strongly liberal terms. 'That
principle is, that the sole end for which mankind are warranted,
individually or collectively, in interfering with the liberty of
action of any of their number, is self-protection. That the only
purpose for which power can be rightfully exercised over any
member of a civilized community, against his will, is to prevent
harm to others. His own good, either physical or moral, is not a
sufficient warrant.' 2 But Mill's attitude on practical issues was
not really determined by the principle contained in this pro-
grammatic declaration. He excepted certain matters from his

1 J. S. Mill, Principles of Political Economy (ed. Ashley, 1923), p. 203.
2 J. S. Mill, On Liberty (ed. Fawcett, World's Classics, 1924), p. 15.

356

MILL

general rule of non-interference. He regarded children, for
example, as incapable of judging of their own best interests;
education and legislation relating to the employment of children
were, therefore, proper matters for government action. Other
problems, like prostitution, which concerned adults, were also
excepted; though clearly there was a possible conflict here
between the utilitarian maxim of the supremacy of individual
judgement and conventional ideas of right and wrong, useful
and harmful.

In economic matters the principle stated in On Liberty was
even more difficult to maintain consistently with Mill's desire
for reform born of a sympathy with the weak and exploited.
Logically, one could say either that no economic action was a
matter for private judgement, or that no exceptions whatever
to the rule of unfettered individual liberty should be allowed.
The latter was apparently Mill's own theoretical position. And
it led him into difficulties when he tried to reconcile it with his
desire to justify certain restrictions of competition. Mill's attitude
to trade unions is an outstanding example. Earlier utilitarians
had opposed the combination laws because they did not regard
state restriction of the right to form trade unions as necessary.
Mill sought to strengthen his defence of trade unions not by
denying their possible monopoly effects, but by an appeal to the
principle oflaisserfaire itself. To prevent the formation of corpor-
ate unions was, he thought, to interfere with a right obviously
included in the general rule of freedom of contract. 1

This piece of casuistry was made inevitable by the inconsis-
tency of Mill's general attitude on laisser faire. Mill's inconsis-
tency is further illustrated by his defence of the state support for
one type of voluntary association which aimed at altering the
terms of contract which would result in a free market. Among
the exceptions to the laisser faire rule which he enumerates in the
Principles there is the celebrated case of the reduction of hours of
labour. If, says Mill, the labourers wanted to reduce hours from
ten to nine (and if such reduction did not materially alter their
earnings), it is not possible for the reduction to be adopted,
unless the labourers combine in order to enforce it. If a volun-
tary association could be sure of adequate power, all would be
well. But it is very likely that in the circumstances assumed no
1 J. S. Mill, Principles, pp. 933-9.

357

THE TRANSITION

voluntary association could succeed in binding the great majority
of the labourers concerned. The only remedy, therefore, is to
enforce the reduction in hours by legislation. 1

In truth, Mill's theoretical vacillations are untenable. They
merely show his search for and inability to reach a theory
which would enable him to keep the laisserfaire principle and
make just those exceptions which he himself regarded as desir-
able. For Mill had an emotional sympathy with the incipient
working-class movement which made him anxious to make con-
cessions. He often spoke of socialism with respect. 'It is not to be
expected 3 , he said, 'that the division of the human race into two
hereditary classes, employers and employed, can be permanently
maintained.' 2 'There can be little doubt . . . that the relation
of masters and workpeople will be gradually superseded by part-
nership in one of two forms: in some cases, association of the
labourers with the capitalist; in others, and perhaps finally in
all, association of labourers among themselves.' 3 Again, in his
celebrated discussion of communism, he did not hesitate to say
that if ' the choice were to be made between Communism with
all its chances, and the present [1852] state of society with all its
sufferings and injustices; if the institution of private property
necessarily carried with it as a consequence, that the produce of
labour should be apportioned as we now see it, almost in an
inverse ratio to the labour ... if this or communism were the
alternative, all the difficulties, great or small, of Communism
would be but as dust in the balance.' 4

But against these and similar statements which appear to
favour socialism, must be set many others which show that, fun-
damentally, Mill was a faithful adherent of the capitalist system.
He tempered his remarks on the probability of a future collecti-
vist system with disquisitions on the desirability of the capitalists
treating their workpeople fairly in their own interests as well
as in those of the workers. He did not fail to stress his hostility to
one of the socialists' central doctrines: ' I utterly dissent from the
most conspicuous and vehement part of their teaching, their
declamations against competition.' 5 Nor must it be forgotten
that he urged that communism should be compared not with
the existing unregenerate state of private property, but with a

1 J. S. Mill, Principles, pp. 963-5. 2 ibid., p. 761.

3 ibid., p. 764. 4 ibid., p. 209. 5 ibid., p. 792.

358

MILL

social order which contained only the best features of capitalism.
In other words, he envisaged a state of society in which the exist-
ing distribution of property, due to past conquest and violence,
had been eliminated, in which inequality of opportunity had
been reduced to a minimum, in which legislation was designed
to favour the diffusion of wealth, in which there was universal
education, and in which population was limited. In such a
society c the principle of private property' would be found 'to
have no necessary connection with the physical and social evils
which almost all Socialist writers assume to be inseparable from
it'. 1

Mill was thus a radical and a social reformer: the first distin-
guished liberal with 'Fabian' leanings. He maintained close
contacts with the Chartists; and it was with the help of his
working-class followers that he secured a seat in Parliament. He
relied on restriction of inheritance, spread of co-operation, ex-
tension of peasant proprietorship, education, and similar mea-
sures to remove the evils of capitalism without sacrificing its
basis. If Malthus was urging on the industrial capitalist conces-
sions in favour of a disappearing class, Mill was pleading for
similar concessions to a rising class. The appearance of his par-
ticular blend of political theory is a symptom of the strength
which the working class had attained. The success of his advo-
cacy of reform is a reflection of the degree of economic develop-
ment which made it possible for concessions to be granted.
Capitalism in England was sufficiently advanced to allow the
working class (though only as a result of continual pressure) a
rising standard of living and increasing political influence. It is
significant that, as an important factor in social reform, this
movement of which Mill is the symbol began much earlier in
England than elsewhere. Its equivalent in Germany for example,
Kathedersozialismus, arose later; though when it arrived after the
advance of German industrial capitalism it showed much resem-
blance to its English counterpart.

(b) Economics. It is difficult to trace in detail the same process
of compromise in Mill's economic theory. As a type, Mill's im-
portance lies more in the field of political thought. The main
work of adapting classical economic doctrine so as to make it
1 J. S. Mill, Principles, p. 209.
359

THE TRANSITION

more capable of resisting the new attacks had already been done
before him. Senior, who was much less involved in political
theory and practice than Mill, illustrates much better the trans-
formation which Ricardianism was undergoing. One cannot find
in Mill's theory many propositions that have a direct relevance
to his political difficulties. It is rather in a general eclecticism
that his compromise is reflected. Nevertheless, some of his
theorems, including the changes they underwent in the course of
time, show his appreciation of the need to provide an economics
in harmony with his political philosophy. *

There are, in the first place, Mill's ideas on the scope and
method of the science. He was not ready to abandon the body of
doctrine which he had inherited; but in deference to Comte's
striving for a comprehensive social science, he was ready to
redefine the scope of abstract economics. He regarded political
economy as only one department of the sociology which was still
to be created. It was to be supplemented by ethology, the science
of character, and political ethology its application to the prob-
lems of nations and epochs. He maintained that the method of
the science was hypothetical; and in a celebrated passage in his
first book on economic matters, Essays on Some Unsettled Qiiestions
in Political Economy (1844), he described the nature of the prin-
cipal hypothesis which economics makes. This is the abstraction
of the ' economic man'. Political economy, he says, does not treat
* of the whole conduct of man in society. It is concerned with him
solely as a being who desires to possess wealth, and who is cap-
able of judging of the comparative efficacy of means for obtain-
ing that end. It predicts only such of the phenomena of the
social state as take place in consequence of the pursuit of wealth.
It makes entire abstraction of every other human passion or
motive. . . . Political Economy considers mankind as occupied
solely in acquiring and consuming wealth. . . . Not that any
political economist was ever so absurd as to suppose that man-
kind are really thus constituted, but because this is the mode in
which science must necessarily proceed. . . . The political eco-
nomist inquires, what are the actions which would be produced
by this desire, if ... it were unimpeded by others.' 1

Mill himself did not keep to this rigid limitation. Indeed, he

1 J. S. Mill, Essays on Some Unsettled Questions of Political Economy (1874),
pp. 137-40.

360

MILL

made it clear by the very sub-title of his main work that he was
dealing with economics in a wider context. In 1848 he pub-
lished his Principles of Political Economy with some of their applica-
tions to Social Philosophy ; and in this work there are not only con-
tinual references to factors which modify the working of the
forces of competition, but also many discussions which use argu-
ments of a normative character. One of its most interesting
chapters is that on 'Competition and Custom' (Book II, chap-
ter iv), in which competition is shown as a comparatively new
social force, restricted in its operation by tradition. Indeed, it
would appear that the rigid definition to be found in the earlier
essay was used precisely for the purpose of allowing ethical con-
siderations to be taken into account, even though this meant
studying not political economy but social philosophy.

Most characteristic of Mill's political position is his attitude to
the different branches of economic inquiry. Senior had already
drawn a distinction between the quality of the laws of production
and exchange and those of distribution. Mill emphasizes that
distinction. 'The laws and conditions of the Production of
wealth partake of the character of physical truths. There is
nothing optional or arbitrary in them. ... It is not so with the
Distribution of Wealth. That is a matter of human institution
solely. The things once there, mankind, individually or collec-
tively, can do with them as they like. . . . The Distribution of
Wealth, therefore, depends on the laws and customs of society.' 1
This proposition makes it possible for Mill to plead for the
maintenance of free competition in the sphere of production and
exchange, and to advocate reforms which would redistribute
property and income. He did not see that distribution was closely
connected with production and that interference with one in-
volved interference with the other.

The central propositions of Mill's theory those relating to

value and to production show his endeavour to prove them

immutable laws of nature and to cast them in such terms that

they have no connection with the laws of distribution. In the

sphere of value, this again meant a weakening of the real cost

analysis, since a real cost theory (at any rate, an objective one)

necessarily involved certain propositions with regard to matters

that are generally treated under distribution. It led to some

1 J. S. Mill, Principles^ pp. 199-200.

361

THE TRANSITION

differentiation between factors of production and sources of
income; and this was followed by the concept of the surplus. We
find, therefore, that Mill adopts, without substantial modifica-
tions, the sort of theory that was expounded by Senior. He
accepts utility as an upper limit to value. He repeats the theory
of cost of production which includes 'abstinence', and he adds
the capitalist's risk as a further factor. He distinguishes between
goods produced under constant returns and perfect competition
(where cost and price tended to equality) and different cases of
monopoly (in which supply and demand determined market
price) . Though Mill still admitted a cost element into his theory,
his emphasis was much more on the market phenomena of
supply and demand. His attention was mainly directed to the
working of competition in causing and smoothing out the differ-
ences between market values and natural value, which was
either a monopoly value or one determined by the cost of pro-
duction.

As for the cost element, Mill's analysis is inconsistent. He
sometimes speaks of labour and abstinence in terms of a subjec-
tive real cost theory; that is, he uses them to denote the actual
amount of effort and abstinence embodied in the product. But
more often he defines cost in terms of remuneration paid
to labourers and suppliers of capital. This, of course, means
approaching the problem from the angle of the entrepreneur;
and in spite of vacillations Mill seems to have given a great
impetus to this way of looking at cost. His confusion was
particularly marked in his inclusion of permanent differences in
wage rates or profits as factors which affect value. He saw that
such cases did exist and that they had some influence on market
price. But he did not realize that this made a considerable
difference to the subjective real cost concept, because such
differences in remuneration need clearly have no connection
with the relative amount of effort and abstinence which they
called forth. Cairnes pointed this out, and included the problem
in the theory of non-competing groups.

Mill's theory of production is noteworthy for its emphasis on
the Malthusian theory of population and for the basis on which
this theory is made to rest. In Mill, the connection between the
theory of population and the law of diminishing returns is made
complete. 'It is the law of production from the land', he said,

362

MILL

' that in any given state of agricultural skill and knowledge, J>y
increasing the labour, the produce is not increased in the same
degree.' And this he regarded as c the most important proposi-
tion in political economy'. 1 From it the danger of over-popula-
tion inevitably followed. Nature was niggardly; and even
though every fresh mouth to feed brought two hands, these
hands could not produce as much as the old ones. 2 Mill thought
that in the populous and developed countries the danger of over-
population was a serious one. And although unjust distribution
might be responsible for making the evils of over-population felt
early, and although these evils might be mitigated by emigra-
tion and the free importation of food, the real hope of improve-
ment for the masses of the people lay in restriction of numbers.

This gloomy view was closely related to Mill's acceptance of
the wage-fund doctrine. The proposition that the average level
of wages was determined by supply and demand was not new,
but in his Principles Mill gave it a more complete formulation
than it had previously had, and made it into the exclusive
explanation of wages. From the point of view of the subsequent
development of the productivity theory of wages and capital,
Senior's statement of the wage-fund doctrine was more advanced
than Mill's. The latter's position is summarized in the following
passage. 'Wages, then, depend mainly upon the demand and
supply of labour; or, as it is often expressed, on the proportion
between population and capital. By population is here meant
the number only of the labouring class, or rather of those who
work for hire; and by capital only circulating and not even the
whole of that, but the part which is expended in the direct
purchase of labour. . . . Wages not only depend upon the rela-
tive amount of capital and population, but cannot, under the
rule of competition, be affected by anything else. Wages (mean-
ing of course, the general rate) cannot rise, but by an increase of
the aggregate funds employed in hiring labourers, or a diminu-
tion in the number of the competitors for hire; nor fall, except,
by a diminution of the funds devoted to paying labour, or by an
increase in the number of the labourers to be paid.' 3

Following Senior, Mill adds to this statement an analysis of
the objections which might be made to it. But he does not
examine in detail the causes which determine the size of the

1 J. S. Mill, PrincipleSy p. 177. a ibid., p. 191. 3 ibid., pp. 343-4.

363

THE TRANSITION

fund set aside for the payment of wages. The chief use to which
Mill put this doctrine was to buttress the case for the limitation
of numbers and to urge that the capitalists should devote an
increasing proportion of their means in advances to labourers.
It was this latter desire which led Mill to state, as corollaries of
the wage-fund doctrine, the propositions that the portion of
capital which is destined to the maintenance of labourers may
be 'indefinitely increased without creating an impossibility of
finding employment', 1 and that ' demand for commodities is not
demand for labour ' . 2

But the wage-fund doctrine was generally used to show that
attempts by the workers to raise their wages were futile; and
this use made it incompatible with Mill's support for reforms
and for trade unionism. It is not surprising, therefore, that Mill
should have abandoned the doctrine in later life. His famous
recantation, contained in a review of a book by Thornton in the
Fortnightly Review (May 1869), was undoubtedly dictated by a
desire to oppose the idea that the efforts of trade unions were
doomed to failure by the working of economic laws. He now said
that although the amount to be spent on wages could not exceed
'the aggregate means of the employing classes' and that it could
not 'come up to those means; for the employers have to main-
tain themselves and their families', the amount was not fixed.
The whole of the capitalist's means was potentially capital (in
the Ricardian sense of advances to labourers) ; and the amount
that actually became capital depended on the capitalist's per-
sonal expenditure. 3

But as later developments showed, this recantation was no
more (and possibly less) satisfactory than the original position.
For not only did Mill fail to analyse the factors behind the supply
and demand of capital (in the classical, or Marxian, sense, or in
the sense of the utility and productivity theorists), he still clung
to the notion of capital as ' advances ' and did not distinguish
between constant and variable capital. Nor did he pay atten-
tion to the differences between the money streams of saving and
investing, and the streams of different types of production and
consumption goods. When the wage-fund doctrine was later
revived by Taussig and the Austrians these considerations were
taken into account in elaborating a new version.

1 J. S. Mill, Principles^ pp. 66. 2 ibid., p. 79. 3 ibid., pp. 992-3.

3 6 4

MILL

In conclusion, a word may be said about Mill's view of the
future of society. On the whole, his dynamic follows that of
Ricardo. But he added to it his famous chapter, Of the
Stationary State'. 1 The increase of wealth, Mill thought, must
sometime come to an end and society must enter upon a
stationary condition. Improvements in technique, the law of
diminishing returns, tjbe accumulation of capital, and the work-
ing of competition combine to produce declining profits, rising
rents, and, if population is restrained from rising unduly, an
improvement in the condition of the working classes. But
although advances in technique and the export of capital might
ensure a continuance of progress even in highly developed
countries, the arrival of the stationary state cannot ultimately
be postponed. Mill looks complacently upon this state of blissful
equilibrium, in which the competitive struggle has disappeared,
in which wealth is more evenly divided as the result both of
individual prudence and frugality and of legislation. But this
vision serves again as an argument for the desirability of restrict-
ing population here and now.

The net effect of Mill's economic writings is to counterbalance
much of the impression that he was sympathetic to the progres-
sive cause. His search for a compromise in the field of economic
theory was even less successful than in the field of policy. It led
to a logical inconsistency; but his own generation, faced with
less acute social problems than later ones, was not compelled to
expose it.

1 J. S. Mill, Principles, pp. 746-51.

365

CHAPTER VIII

Modern Economics

(/) The Quality of Present-day Economic Thought

1 he subject-matter of this chapter is less the present state than
the immediate past of modern economics. We limit ourselves to
the body of doctrines which was developed in the last few
decades of the last, and the first few decades of the present
century. Even so, we shall find ourselves uncomfortably near
to the problems which are the subjects of current controversy.
The ideas which form our immediate background are still in
ferment. And in order to avoid intruding unduly into contem-
porary theoretical activity (to which this book is an introduc-
tion), we shall have to confine ourselves even more than
hitherto to tendencies in preference to detail. We are faced with
a very large number of writers whose relative significance
cannot as yet be fully assessed. They are too near to us to have
gone through the sieve of history. The selection which follows
must, therefore, be regarded as tentative. In particular, it
should be noted that this chapter deals with the main body of
pure economic theory and that it ignores almost entirely many
important developments, such as the critical school of J. A.
Hobson in England and the institutionalists in America.

It has been customary to regard the changes made in the
apparatus of economic analysis in the 'seventies as marking a
substantial revolution in economics. 'Classicism, it was said 3
emphasized production, supply, and cost; modern theory is
mainly concerned with consumption, demand, and utility. The
marginal utility concept was introduced to effect this shift of
emphasis and has since dominated academic thought with
almost unchallenged authority) It has, however; been looked
upon ? ,not only as an addition to the economic c tool-box 5 , but also
^as a vital innovation in the method of approach of the science..

PRESENT-DAY ECONOMIC THOUGHT

; Compared with the classical theory of Ricardo the marginal
utility schools certainly exhibit marked differences of kind. But
the origin of these differences should not be dated from the
appearance of the marginal utility concept in the works of
Jevons, Menger, and Walras,' As has been shown in the last
chapter, (the technical development which culminated in the
work of these writers started with Ricardo's successorsj The
essential elements of the modern technique the emphasis on
demand and on utility and the recognition of diminishing
utility were developed by a number of early nineteenth-century
authors..,Their work is now more widely known; and the conti-
nuity of thought from their time to ours is beginning to be
recognized.,

If these technical developments involve a significant change
of emphasis and approach, it is McCulloch, Say, Bailey, and
Senior, rather than Jevons and the Austrians, who are respon-
sible for it. But whatever its date, the change from classicism is
real enough. Before we trace the more recent progress of the
utility school it is worth while to glance at the chief characteris-
tics of modern economics and to contrast them with those of the
classical system.

The first thing which confronts the economic theorist is an
economic reality which, since the days of the classics, has, in
spite of all its complexity, been at once reducible to a network of
exchange transactions in the market. The surface phenomena
are those of supply, demand, and price. Comparatively little
reflection is needed to recognize these factors in all the markets
which are the theatre of modern economic aftivity. In regard to
the goods and services which individuals require directly for the
satisfaction of their wants, the general purchase-and-sale
character of individual behaviour is easy to recognize. But even
the transactions that pertain to the productive process are seen
to resolve themselves into the purchase and sale of raw materials,
capital goods, money capital, and labour power. If, then, we
regard the economic system as an enormous conglomeration ofj
interdependent markets, the central problem of economic
inquiry becomes the explanation of the exchange process, or,
more particularly, the explanation of the formation of price.

It is not in this wa^ that the classical economists approached
their problem. They stood at the threshold of modern capi-

367

MODERN ECONOMICS

talism; and with the theory and practice of the immediate past
behind them they did not begin their analysis with the surface
appearance of economic activity, an appearance which capi-
talism was to make increasingly difficult to penetrate. They
began, not with exchange, but with production. But to begin
with production, that is with the organization of society for the
purpose of producing its means of livelihood; meant beginning
with what Richard Jones called the * economical structure ' of
society. It meant beginning with a social fact which was histori-
cally conditioned.

Not that the classical economists neglected the more obvious
phenomena of the market: some of Adam Smith's most success-
ful analyses were precisely those concerned with the effects of
competition in the market. But in all the works of the classics
there is evident a recognition of the fact that the mechanism of
the market required ultimately to be explained with the aid of
categories which are appropriate to a given social structure.
Hence the supply-and-demand explanations had to be under-
pinned by a theory of exchange- value which was of a particular
type, that is an objective real-cost theory. The original labour
theory of value, and particularly its logical refinement by Marx,
is the reflection of the aim to provide a more fundamental
explanation of the economic process than can be extracted from
a supply-and-demand theory alone,,

We have seen that among the post-classical economists, the
labour theory of value was first significantly altered and finally
abandoned. There was still felt the need for an explanation
which would go behind the appearances of supply and demand;
and the result was the addition of a psychological substructure
which made the post-Ricardian theory of value into a subjective
real-cost theory. The introduction of the psychological element
is seen in the new emphasis on utility and in the changed view
of labour as a determinant of value. Instead of an expenditure
of effort measurable in time-units which it had tended to be
in Ricardo, labour, in the later cost of production theories,
became expressive of a subjective sacrifice. Adam Smith's 'toil
and trouble' was here the inspiration.

The significance of the new theory was this: it showed the
continued necessity of something more far-reaching than a
theory of price; but by the transition from the objective to the

368

PRESENT-DAY ECONOMIC THOUGHT

subjective approach it brought about the abandonment of the
social-historical basis of classical doctrine. In place of the clear
view of the structure of social classes which underlay and deter-
mined the whole economic process there was put a view ofl
society as an agglomeration of individuals. The subjective
theory of value (even in its earlier cost-of-production form)
is only compatible with an atomistic view of society. It
makes it possible to distinguish forms of sacrifice other than
labour such as abstinence and thus to unite more firmly
the 'harmony 5 postulate of utilitarian philosophy with economic
doctrine.

In a formal sense, the classical and the subjective theories of
value show a certain resemblance. As has been pointed out, they
both aim at a fundamental explanation of the exchange process.
The one does it by going into the sphere of production and the
social relationship which it involves; the other by inquiring
into the working of individuals' minds, that is into the psycho-!
logical processes which result in a certain behaviour in the
market. The latter course leads ultimately to the modern mar-
ginal utility school, which takes consumption as its starting points
Another resemblance lies in the fact that both schools claim
to have developed a universally valid theory. Both the labour
and the utility theories of value start from assumptions which
can be claimed to be relevant to all social systems! the one from
the disposition of resources, on which every sociefy must decide;
the other from the subjective valuations of individuals, which
must always precede or accompany supply and demand.

The difference is, however, this. The classical theory did not
ignore the existence and historical development of their own
society which they knew (and frequently expressed) to be a
society divided into social classes. Their 'universality' was due
to their implied acceptance of that society as valid for all future
time; The apologia for industrial capitalism which is implicit in
nearly all classical theory is the result of the belief that, with the
creation of this particular economic order, history had finished
its work.

The utility schools claim universal validity and thisj as we
shall see, is especially true of its most modern versions^because
they ignore the economic relationship which is the foundation
of capitalism. They claim that they develop a theory of value

369

MODERN ECONOMICS

which is independent of any specific social order^ Nevertheless
it cannot be doubted that there is a certain apologetic strain in
modern theory. In its origins the utility school was strongly
influenced by a desire to strengthen the potentially apologetic
character of economics. ^The classical theory was not strong
enough to withstand the attacks of the growing working-class
movement^ The claim that a certain social structure whose
antithetical character had become quite apparent in the work
of Ricardo should be regarded as the end of history could not
be logically defended. The retreat from the objective labour
theory of value was a retreat from this position. It was effected
by the introduction of a subjectivism which absolved economists
from concerning themselves with the social order at all.
Characteristically, the first use to which the new doctrine was
put was to strengthen the idea of the productivity of capital by
the introduction of the concept of abstinence. From making no
reference to social structure, it was only a step to taking the
existing social order for granted. Theorems which had been
developed on a basis of equal individuals undertaking absti-
nence and toil and trouble could have nothing to say about the
real social differentiation of these individuals. But more often
they were excellently suited to defending (by a trick often
practised by systems of thought which derived from the philo-
sophy of natural law) an existing reality far removed from the
abstract assumptions.

(The subjective real-cost theory was, however, inherently
weak. It continued to regard labour as a determinant of value
an idea which it had taken over from a different system of
thought. It was difficult to make this concept fully psychological,
particularly if the purpose was to have a uniform system of sacri-
fice that included 'abstinence'. The equation of the abstinence
of the capitalist with the labour of the worker was notoriously
difficult to achieve Chough, as we shall see, 'it was attempted
once again by Marshall. The tendency arose, therefore, to
abandon the cost (and labour) approach more completely than
had yet been done and to replace it by a more fully developed
utility analysis* The rise of the marginal utility school does,
therefore, represent some break with its immediate past, in the
sense that it draws the logical conclusion from the abandonment
of the labour theory of value.

370

MARGINAL UTILITY

There is one feature of the more recent development of theory
which is also worthy of notice at this stage, that is the increase
in the number and importance of non-English contributions.
Classical political economy had been an almost exclusively
English science. It was developed in the most advanced ^capi-
talist envirenmeut^at^^ encT of the
nineteenmcentury, however, England was no longer the only
industrial capitalist country in the world; indeed, the forces
which were ultimately to undermine her pre-eminence were
already at work. And although the earliest complete statement
of the new doctrine comes from an English economist, its
formulation in terms which were more significant for further
development was the work of Continental writers. Jcvons was
still influenced by utilitarian philosophy. But Menger, the
founder of the Austrian school, gave the new theory a non-
utilitarian interpretation and provided it with its methodolo-
gical credentials.

(2) Marginal Utility

(a) Hermann Heinrich Gossen. The first generation of modern
marginal-utility theorists consists of the celebrated trinity,
William StanleyJWons, Carl Menger, and Leon Walras. But
th-ercrisTftTeast one other author whom one is obliged to mention
in company with them. Gossen was not dealt with in the last
chapter, because he is an anticipator rather than a forerunner.
He exercised.no influence in his own lifetime. His book, Entwick-
lung der Gesetze des menschlichen Verkehrs und der daraus fliessenden
RegetnfUr menschliches Handeln, remained completely ignored for
many years. Its first edition of "1854 sold very few copies and the
embittered author had the book withdrawn. Only after its
rediscovery in the 'seventies, and the praise which it subsequently
earned from Jevons and Walras, was it reissued in 1889. Since
then Gossen has not only been recognized as a pioneer, but his
flieoreiflts "have* influenced economic thought after their basic
i3eas had been made known by others.

Gossen's analysis of the laws of human commerce(ar^ charac-
terized by these features: determined utilitarianism, a consumf)-
tioirapprdach^ anHnfRStbemanticaT friethod. With Fegarajojthe
last, Gossen declares in his preface that economics is concerned

'371

MODERN ECONOMICS

with results produced Jay a combination of forces and that it is
impossible to determine suchTesutts wTthouTtKe^Sg'^of^a^e"
matics. 1 Qossen begins by statirijg that tfie aim jrf jidl human
conducjt js _to_ maximize enj pymehtTT^m this the approach
follows. It is necessary to examine the manner in which enjoy-
ment proceeds. From everyday observation Gossen derive?
certain laws of human enjoyment of which two, now knowajas
Gossen's first and secpndlaws, are the most imortant v _

tTossen's first law states in explicit form the principle of
dimmlshjng, utility' The amount of one and the same enjoy-
ment diminishes continuously as we proceed wttfr that enjoy-
ment without interruption, until satiety is reached.' 2 6osseh
tlTiisTrates this idea of the satfaT5ility"7>f wants with well-known
examples, such as~the declining enjoyment of successive, bite& of
food. But it was left to later marginalists to expound tliis
principle in more relative terms. Go^iijs..spnd law refers to

the manner in which the maximum of all enjoyments can be

-- . .,.,,...-* -^--L..,- -~ ** M*> "

achieved. 'In order to obtain the maximum sum of enjoyment^
arf individual who has a choice between a number of enjoy-
ffrems,tnltimilfficient timeto procure all compIetely^Ts^TigeH^
however much the absolute amount of individual enjoyments
may differ, to p'rocure all partially^ even before he'has c'ompTeted
EEFgreatest of them. The relation between them must be such
that, at tlie moment when they are discontinued, the amounts of
all enjoyments are equal.' 3 In this cumbersome way Gossen
stated the principle that maximum pleasure will result from" a
uniform level of want-satisfaction. The second law follows from
tEe first^nd from the additional postulate that it is impossible to
obtain full satisfaction of all wants. We shall see presently what
part these laws now play in economic theory.

The jest of Gossen's work is an elabora^Qa.pflbj^Jaws. The
value of ajfcjiirig is to be reckoned entirely in terms of the enjoy-
ment which it can procure. 4 Owing to the operation of the
first law, :j|iclividual units of the same good will Have different
values according to the quantity possessed; beyond a certain
Quantity a single unit will cease to have value at all. 5 Value must
be conceived of only in relative terms. 'Nothing in the external

1 H. H. Gossen, Entwicklung der Gesetze des menschlichen Verkehrs und der
daraus fliessenden Regelnfur menschliches Handeln (1889), pp. vi and vii.

2 ibid., pp. 4-5. 3 ibid., p. 12. 4 ibid., p. 24. 6 ibid., p. 31.

372

MARGINAL UTILITY

world possesses absolute value 5 ; value jdepends ^entirely ^
relation between the object aifd theTubject. 1 The objects
may possess value "can "Be classified into consumption goods,
tfiosejvhich ^^imffiejfia^ supplying enjoyment ;

goods 'of the second jclass', which are jointly necessary for
enjoyment (what are now called complementary goods); and
^goods oFthe third class ', which are those used in the production
pfoEITer goods. 2 Labour which creates means of enjoyment Is
also accompanied by 'pain' (or 'disutility')- It follows that we
can increase our enjoyment by labour so long as the enjoyment
which results is esteemed more highly than the pain of the
labour involved. 3 . Exchange must also follow the two laws.
Exchange remains of advantage to an individual ' until the values
of the last units of the two commodities in his possession have
become equal.' 4 Thus Gossen's book contains the main elements
of the Jevonian and the Austrian theory. Even the geometric
and algebraic apparatus is there. But the conditions of the time
were not ripe for so determined a use of the subjective approach,
With Jevons, a new reign begins.

(V)' William Stanley Jevons (1835-82) . jevons jdJdjnuch work in
fields other than pur. theory. The Investigations in Currency ana
finance, published posthumousjy in 188^, contain a number of
papers on problems of applied economi^sjwhich show Jevons to
Frave "l^KpliHrcuIarly interesteH and often successful in the
Unking of statistical J^vestigation^ar^tTieQfetrcal analysis. Jn
oBSfof these papers,T>ne of his earliest literary^efforts, TT^e$ous
TalTTin the Value jo Go/d^hs. traced the_effect onprices of the
\ncrease in the supply*' bfgold_; and in this ancFother papers he
act^anced ^cgirisjderably the study pfjndex jiumbeys. The Coal
'^ffisfwn (1865) is an elaborate attempt to use statistical informa-
tion to prove the probability pf an early exhaustion of Britain's
coal resources. Though not wholly successful in its more remote
conclusions; it has certainly drawn attention to a factor which is
still operative. On the other hand, Jeyons's effort to construct a
theory of crises on the basis of empirical material was a failure,
^e 'sun-spot' theory 3 which jestablished a CQnnjection'^etjve^
the^jrhythm of Ixai^QSts and trade (the former Joeing traced to
periodic meteorological fluctuations), is now abandqnedjjthough

1 H. H. Gossen, Entwicklwg der Gcsetze des menschlichen Verkehrs, pp. 46-7.

2 ibid., pp. 24-8. 8 ibid., p. 38. 4 ibid., p. 84.

373

MODERN ECONOMICS

somewhat akin to it is Prqfegapr Moore's theory of generating
economic cycles.

[Jevons's work extended, however, beyond the limits of econo-
mics, pure of ^applied. Miic!TTh6ugh Tie^ may have desired tq
iteejTto the narrow path of academic impartiality, he was drawn
into discussion of the problems of policy. His contribution is
small in volume; his one programmatic statement "Is contained
m Tfie State in Delation to LappuL ( I ^?l'V-tt * s ^ c nideahle
interest because it shows the continiiance and intensification of
the'difficulties of the laisserfaire doctrine which we have already
encountered in Mill. ftevons's generafposition apears atjirst tu
Be Based on the carry utilitarian '"pHnHg^^
tHcTught that ' we can lay down no hard and fast rules, but must
treat every case in detail oh its merits. Specific experience is our
best guide or even express experiment where possible, but the real
difficulty consists in the interpretation of experience. We are
reduced to Balance coriflictii^j^babilitLes,QC,g^

n . L^ e same place, of a 'proposed

.
act must be taken into account^.

\yith . this qualification Jevqns's position must, appear
unsatisfactory to JL liberal economist whg believesin the exis-
tence of an economic argument for laisserfaire as the general rule
of policy. And indeed Jevons himself seems to have been aware
of itslansatisfactory nature, because he specifically excepted pro-
tection against foreign competition frpmjthe general principle^
judging each case on its merits. He calls himself 'a thorough-
going advocate of Free Trade* and implies that he does not
regard~thls doctrine as inconsistent with those measures of inter-
vention at home which he was prepared to support.^) But
fundamental inconsistency there clearly was. And its presence
reveals the extent to which the claims of the working class were
pressing and forcing concessions which had to be defended on
theoretical grounds. In the field of foreign trade laisserfaire was
still the most advantageous policy tor Britain; there was,Ttefe
fore, no neecTTo abandon it in theory. Thus Jevons "greatly
widened the breach already made by Mill; and we shall later
have occasion to refer to the way in which it was further
widened by Jevons's successor.

1 W. S. Jevons, The State in Relation to Labour (1882), pp. v and vi.

2 ibid.

374

MARGINAL UTILITY

Whatever Jevons's merit as a statistician or his significance in
the development of political thought, his claim to notice rests
mainly on his contribution to purejheory. It was he who made
the scattered fragments of earlier utility analysis into a ompre-

- IT rfri^^ i , ,. , i,,.iij., ...I.., n*,^..^, ............. . , -T. -~- l .M.^!aK'^''' yr "' S,

hensivejhepry of yalue, exchange and dis tributJQn . j Already in
TS&^aJjn a paper read to Sectiofi'F of the BntisF^Association,
Jevons hacTrevealed the trend of his thought. In this sketch of a
' J^^rartfTatEcS Poll tical EcoiSmY'^nie showed

both his belief t^hat the la\vs of economics could be reduced to a
few principles" c; as tin mathematical terms^and that these prin-
ciples had to be derived from c the great springs of human action
the feelings of pleasure and pain'. 2 And in his main work, The
Theory of Political Economy first published in 1871, the vindica-
tion of abstraction and of the mathematical method, together
with the explicit reference to hedonism, is repeated and amplified.
Jevons, himself a statistician, did not deny that empirical
studies were an essential part oflhe tbOT'oreconomic studies;
but he urged that the ultimate laws of economics were of so
general a character that they could rightly be compared with
the laws of th physical sciences^ wEIcK 'Have their basis more

qr^Tess obviously in the general principles ~ r * ! : ~~' 3

laiog

Economics was closely apaiogoiis * t^ jh^^science_ Statical
Mechanics^ 4 This analogy extended to method. Economics Had
to be ^"mathematical in character as the physical sciences. The
reasons for~This are given in terms reminiscent of Cournot
(whose work Jevons did not know at the time). 'To me it seems
that our science must be mathematical, simply because it deals with
<7flw/eVi^^Wherever the things treated are capable of being
greater or less, there the laws and relations must be mathematical
in nature. . . . Economists cannot alter their nature by denying
them the name. . . . Whether the mathematical laws of Econo-
mics are stated in words, or in the usual symbols, #,7, ,/?, q, etc.
is an accident, or a matter of mere convenience.' 5
This view of the character of economics did not lead Jevons,

confine himself to the enunciation of

ra]^ principles of Uiejrelatiom teween dfemand^ .
and price^ He criticized Cournot for his exclusive interest in the

1 Reprinted as Appendix III of W. S. Jevons, The Theory of Political
Economy (1924).

2 ibid., p. 304. 3 ibid., p. xvii. 4 ibid., p. vii. 6 ibid., p. 3 and 4.

375

MODERN ECONOMICS

system of functional interdependence between these quantities
observed in the market. 'Cournot', he said, 'did not frame any
ultimate theory of the ground and nature of utility and value. V
and, again, < Cournot does not recede to any theory of utility, but
commences with the phenomenal laws of supply and demand 'J
It was Jevons's aim to provide both a mathematical exposition of
the laws of the market as well as an c ultimate^ theory of value on
wKfcKTie considered that these laws rested.

The_ central principle of this theory jsjthe statement that
* value depends entirely u^on utility ? . 3 Adherence to this central
principle appeared to Jevons to mark an innovation in economic
thought. It was only in later years that he realized the extent to
which he had been anticipated by earlier writers. But when he
first expounded his views, theJFUcardian tradition in its dis-
torted form, it_is true was still strong enough to make him
]^ard_hirmdfasjeyo|utionary.

His innovation was substantial enough. The classics and their
followers had not ignored utility; Adam Smith^ in particular,
had stressed its importance. But utility had never been regarded
as a proper basisjor an explanation of exchange-vain^ because
of^^lamgjdi^re|mncies between thejn.The classical theory of
value was objective, that is, it referred to the total social process
6F^ecqi5mnic activity . This being the approach, it was natural
that the classics should ignore individual, subjective factors* ft
is in this respect that Jevons effected an important change which
made iTpossibleTor tKe first time to formulate a theory of value
"Based on utility as an alternative to the^classical theoryr^His
starting-point was tKe individual and his wants. And for the
study of individual conduct he found ready at hand a complete
philosophy whose aim was precisely the establishment of the
principles of human action JHedonist philosophy was, moreover,
cast in alarm that seemed to"" make it particularly suitable to
mathematical methods.

Accordingly Jcyons begins wjlJlaLJl^or^^
b^^onJBentham's A Table of the Sjbrin^s^of^ctian. Man is here
regarded as a plea^feTniacKIne; his aim is to maximize pleasure.
Dtili ty J^thej^defined as the quality possessed by an object of
producing pleasure or preventing pain,^ provided that the~ \vill

1 W. S. Jevons, The Theory of Political Economy, p. xxix.
8 ibid., p. xxxi. 8 ibid., p. i.

376

MARGINAL UTILITY

or inclination of the person immediately concerned is taken as
the sole criterion for the time, of what is or is not useful'. 1
Utility, in other words, is not an intrinsic quality; it expresses a
relation Jbctween^ai^object and a subject. Utility, however j can
olily become a, significant^concqgT in gtlieory o f value if the
total utility of a commodity is jcarefully distmguisKed fronftfie
utilTtywiich an IndmSualj at a given time, attaches to a por-
tion of that commodity/ In a^ way remimsceiiT of Gosseri,
Jevons examines the effect'of changes in the total quantity of a
commodity on the utility to an individual of portions of that
commodity, and concludes that successive increments reduce
lEe utility of every unit. Total utility is thus distinguished from
degree of utility at any point; and from this the concept of
"^filial degree of utility' results. This term denotes 'tlie degree of
utility of the last addition, or the next possible addition, of a
very small, or infinitely small, quantity of the existing stock', 2
aun^ij^^come^thc fundamental .cpncj^t^j:i[ljeycyas!s theory of
exchange and distribution.

Tile essence of Jevons 7 s explanation of the formation of
exchange-value and price is to be found in his adaptation of the
second law of Gossen. In harmony with that law Jevons argues
that, when a commodity is capable of ^aUsfjdjig wants in^a
fftrmber ordiffefentSes7 it will be distributed over these uses in
sttefTa wayTEaFitTTTnal degree of utility is the same in every
use. From this he passes on, by somewHaf clumsy means which
had to*be refined later, to the conclusion that, when two indivi-
duals exchange two commodities, the ratio of exchange c will be
the reciprocal of the ratio. of the final degrees of utility of the
quantities of commodity available fq consumption after the
exchange is completed '. 3 In other words an equilibrium, that is in
a position in which neither party can obtain any further advan-
tage by continuing the exchange, jnargin.al utility for each parti-
cipant will be proportionate~'fojpnce^ From this it followsthat
c Sfpe fi so > nUist HtmFesTils Income in suclfa way as to equalize the
utility of the" final increments of all commodities consumed 5 . 4
(TEis "formulation, it 'might be noted", would not be accepted
to-day.)

In the detaj]^ wqrJkii^^

1 W. S. Jevons, T/ie Theory of Political Economy >, p. 39.

2 ibid., p. 51. 8 ibid., p. 95. 4 ibid., p. 140.

377

MODERN ECONOMICS

It was left to later theorists to produce a,.

more jplausible argument to connect the

individuals with thejorrpation of jnarket_2riccs. It has been
argued that Jevons himself in spite of his strong emphasis on
utility abandoned half-way his attempt to give an explanation
of the origin of value in terms of utility, in favour of a purely
1 functional' theory. He jgggrded market l^^^^J^Y^L^^
only ^^cribed_itj]e^tion to quantities an^^^
utility when equilibrium had already beenjreached.^

----- _*_.. _ . /^~.j .,,>. .... ------ . ------ ____ _______ ___ . x . _ ...... ,., ,~-~- ' -y

But even Jevons's statement of this relation has tfeen shown to
be defective/To elaborate the notion of the subjective valuations
oT Individuals and their attempts to maximize satisfaction
(including exchange) into a theory which was valid for social
exchange, Jevons employed two very clumsy concepts. These
are the 'law of indifference ' and the 'trading body'. Different
prices, Jevons^^argues, must be Hue to^ different preferences*
Since it must clearly be a matter ofindifference'to a person
whether he obtains this or that portion of a perfectly homo-
geneous commodity, there cannot be twp_prices in a^market for
the same article at the same time. As was shown by later econo-
misfs^"particularly by~Wa!ras, Ectgeworth, Marshall, and Wick-
sell, this law of indifference only expressesand clumsily at
that fthe assumption of perfect competition.

The concept of the trading body is even more open to
objection. By this Jevons means any body of buyers or sellers
ranging from a single individual to the sum total of inhabi-
tants in a country. Jevons, without modification, applies his
theory of exchange between two individuals to the case of
exchange between a multitude of buyers and sellers. But this
procedure was unjustified. It completely obscured the problem
of competition. As Wicksell rightly pointed in out, Jevons's treat-
ment, competitive exchange is no different from isolated
exchange (i.e. exchange between two individuals);* And in this
situation, which again Jevons did not fully analys^a number of
prices could fulfil the conditions of equilibrium. Edgeworth
charitably assumed that Jevons's trading bodies were in some

1 Hans Mayer, ' Der Erkenntniswert der funktionellen Preistheorien ', Die
Wirtschaftstheorie der Gegenwart, vol. ii (1932), pp. 181-2.

3 K. Wicksell, Vber Wert, Kapital und Rente (1893. London School of
Economics Reprints, 1933), p. 48.

378

MARGINAL UTILITY

typical dealers. 1 But Jevons clearly meant them to repre-
sent the aggregate body of buyers and sellers operating in condi-
tions of perfect competition. It was for this situation that his
equations of exchange were devised. He represented the equili-
brium of exchange in this way:

fr (a-*) _ y _ 2 (*)

ty\(f) x ^ (b-y)

where a and b are the total quantities of the two goods, x andy
the respective quantities which have changed hands (;, there-
fore, the price) and the different functions, the final degrees of
utilities. But he nowhere explained how these collective marginal
utilities were determined. In fact, what he was considering was a
case of isolated exchange, in which the utility function is now
admitted to be arbitrary. It was left to Walras and others to
show the connection between marginal utility, demand, and
price under competitive conditions; and their analysisTs now an
accepted part,ofjhe price^ explanation of the subjective theory
of value.

'However much Jevons may have fallen short of giving a com-
plete subjective theory, his abandonment of the labour theory is
clear cut. Hejjcmcdjhat laboujncQjaldJb^ rrfrarHpH a* the source

of value. The labour spent on thej)roduction of a commodity
was 'gone and lostjor evexVLIt could have no influence on the
plrlce wfnclfan article would fetcH when brought to th^markgt.
I^^everTReTess, Jevons admitted mat since the final degree of
utility (on which value depended) could be altered by varia-
tions in supply, labour could affect value indirectly. The rela-
tion was: 'Cost^ of production determines^ supply; ^Supply
determines final degree^Tutillty; Final degreeoFutllity deter-
mines. value.'/"

Labour was defined by Jevons in purely subjective terms; and
on the analogy of his theory of utility he built up a theory of
disutility- which is similar to that of Marshall. The English
rrretrginal utility school after Jevons has generally tended to pre-
serve the concept of the disutility of labour, claiming that it
helped to determine value through its influence on the supply of

1 F. Y. Edgeworth, Mathematical Psychics (1881. London School of Econo-
mics Reprints, 1932), p. 109.

2 W. S. Jevons, The Theory of Political Economy, p. 164. 3 ibid., p. 165.

379

MODERN ECONOMICS

labour. In other words, Jevons and his English followers were
evidently anxious not to cut adrift entirely from the post-
classical tradition. Jevons merely added utility to the already
existing apparatus of explanation.. The equilibrium relation
between labour and utility was one in which c the increments of
utility from the several employments (of labour) ' were equal.
To make equilibrium fully determinate another relation was
required. This was given in the statement that 'Labour will be
carried on until the increment of utility from any of the employ-
ments just balances the increment of pain 5 . 1 As Edgeworth put
it, futility and disutility are independent variables in that
expression, the maximum qf^ whiQ.5. determines economic
equilibrium'. 2

JeyosgLdid J5PJL wo f k out a comprehensive theory ofjdistribu-
tion. It was his Austrian" contemporary who attempted to follow
up the implications of thejutility theory of value in the sphere o
distribution. Jevons adopted without much modification JtJie
classical theory of rent; and this almost led him to .^productivity
tKeory of wage^.. Every worker, he said, c seeks the work in which
his peculiar faculties are most productive of utility, as measured
by what other people are willing^ tojsay for their produce. (Thus
Wages are clearly the effect not the cause of the value pthe pra-
ducc_.*^ ;But he never worked this up into a marginal^groduc-
tivity theory.^Indeed, when he came to deal specifically with
wages, he abandoned the above explanation in favour of another
onet He pointed out that the wage-fund theory was merely a
truism; and he also rejected the_c]as$ical subsistence theory Bj
Instead, he concluded that 'the wages of a working man .are
Ultimately coi^idgftt^with whatJbc.pxoduces after^he deduction
pFrent, taxes, and the interest of capital'. 4 Thus_w,age&-arc
defined as" the residual share of the total product^ The wage-
^ come into its own as- an explana-

tion of the sliort-run mechanism of the determination of wages.
The capitalistsTnvesl["capital and buy labour according to tKe
estimates the^ form of markets. JThey 'sustain labour before the
result is~accomplished ' and if the result is above their expecta-
tjpns, they will make large profits. But competition will increase

1 W. S. Jevons, The Theory of Political Economy, pp. 184-5.

2 F. Y. Edgeworth, Papers relating to Political Economy (1925), vol. iii, p. 32.

3 W. S. Jevons, The Theory of Political Economy, p. 1. 4 ibid., p. 270.

3 8o

MARGINAL UTILITY

and bring these profits down to th.e. average, the previous excess
&emgnErow appropriated ^ither_by the:workers In JiigTier wages
or by the consumers in lower prices j or shared by both. l

Jevons's theory of capital Kas a more modern flavour. It is
somewhat obscurely expressed, in the Thewy.offyJ,ify
but the essence of the theory resembles that of the Austrians.
According to" Jevons, the function of capital is to enable us c to
make a great outlay in providing tools, machines^r other pre-
riminar^work^ which have for their sole object the production
of some impoftantTommodity^ an9|^iich will greatly facilitate
production wHen we enteFupon it'. Capital enables us to sur-
mount the *time elapsing between the beginning and end of
work'. 2 Arid 'whatever improvements in the supply of com-
modities lengthen the average interval between the moment
when labour is exerted and its ultimate result or purpose accom-
plished/such improvements depend upon the use of capital/^
The greater productivity of processe^^n^QJlyiag^a lapse ofjime
wharBSKm-Bawieirk^was later to call 'roundabout' processes
can only be obtained by the use of capital' (which ultimately
consists 'of those commodities which are required for sustaining
labourer? ' 4 ) li^uTydjdi^ rate of increase of

(occa

(occasioned by lengthening tRe period of produc-
tion) divided Jby the whole produce'. 5 Needless to say, Jevons
preserves the abstiiience"eremerrt. " BuTthe relation between the
sacrifice of abstinence and the productivity of capital as deter-
nunants of the rate of interest is not worked out. Jevons can be
$aid tojhave stoppe Jpn^jjig threshold of the jnarginal-produc-
tlidiy theory *. .-

Tn conclusion, it may be worth while referring again to Jevons's
failure in the theory of exchange. The primitive and obviously
faiflfy <fevice of tKe trading bo3ies was an attempt to proceed
from the subjff twe^valuations of individuals to the formation of
price" in competitive ^conditions. With this technical aim was
connected^ another: the desire to give an economic justification
for free competition and laisserjaire. Jevons denied, as explicitly
as did Wicksfeed after him, that the subjective valuations of brie
individual can be compared with those of another. e I see no
means', he said, 'by which such comparison can be accom-

1 W. S. Jevons, The Theory of Political Economy, p. 271. 2 ibid., p. 224.
3 ibid., pp. 228-9. * ibid., p. 223. 5 ibid., p. 246.

MODERN ECONOMICS

plished.) . . . But even if we could compare the feelings of
different minds^ we should not need to do so; for bne mind only
affects another indirectly^ Every event in the outward world is
represented in the mind by a corresponding motive, and it is by
the balance of these that the will is swayed. . . . Each person is
to other persons a portion of the outward world. . . . Thus
motives in the mind of A mayjjive rise to phenomena which
may be represented by motives in the mind of B; but between
X~~arfd B~ there is a gulf. Hence the weighing of motives must
always be confined to the bosom of the individual.^

And yet Jevons was unable to free himself erturely from his
utilitarian tradition. In spite of his extreme individualist
hedonism, he did operate with a concept IKe trading body
which implied an aggregate {or average) of many individual
scales of subjective values: This operation not only allowed
Jevons to skate over the 'difficult technical problem, as men-
tioned before, it also introduced (by implication rather than
explicitly}, the idea that(free competition maximized satisfaction
all rpundi If exchange^ between two individuals proceeded
according to the second law of Gossen until maximum satisfac-
tioff'for both was reached,(Jeyqns's Satement of competitive
exchange implied a social maximization* With the exposure of
tKe error in the technical analysis one might have expected that
the" Implication was destroyed. "But it had become too firmly
implanted. Moreover, later economisf^artKough 'they had to
use a more refined technical apparatus, still clung to a similar
implication whenever questions of policy were involved.

(c) Can ivienger (1040-1921). Though more important from the
point of view of present-day theory than Jevons] Menger can be
more briefly dealt with. For.his work exhibits just that quality
which Jevons's lacked: aTngli 'degree of consistency) Whatever
one's judgement of the development for which Menger stood,
his own contribution to it was marked by a high regard for the
requirements of a comprehensive system. And the chronicler
has a& easy task in summarizing his work.^

\Menger's contributions to economics fall into three main
classes: metfiocL money, and ( pure theory) The first of these has
already been deajt with in connection with the historical school.

*0>*v*V <>> , " - - -.

1 W. S. Jevons, The Theory of Political Economy, p. 14.

382

MARGINAL UTILITY

It is sufficient to add only a word or two about the connection
bctWeerTMenger's methoctoKglcaF position and his analytical
work. In his Untersuchungen Menger insists that ecgnp H iniQ,methpd
must rest on an individualist foundation. He argues that the
economic^phenomena of society are not the direct expression of
some social force, but are only the resultants of the conduct of
individuals, of wirtschaftende Menschen (men engaged in economic
activity), as he calls them. In order to understand the total
eetmomic process one has to analyse its elements, the behaviour
of individuals. 1 Like Jevons and Gossen, 'Menger puts the indivi-
dual into the centre of the picture^ But he does so in a way
quite different from these writers or from other post-classical
authors who had been influenced by hedonist philosophy.
Menger claims that the ' atomistic * approach is a methodological
necessity, and that it has no ethical or social-philosophical impli-
cations. He was ffifis the first to attempt to build a subjective
theory of value wESch should be free from any hedonist assump-
tion.^

Menger's work in the field of money can -be little more than
mentioned here. He wrote a number of articles and memoranda
in connection with the Austrian currency reform which have
remained important contributions to the applied tfre'ory of
money. His main statement of pure monetary theory is con-
tained in a long article, Geld,, first published in the Handworter-
buch der Staatswissenschaften in'iSgs.'fThe chief importance of this
work lies in the fact that it is the first application of the subjec-
tive theory of value to ^ej^qblemsj^.monfiy^It has served as
the basis for much modern work on monetary theory; "arid it
contains^one of the best short explanations, on purely subjective
lines,* of the function of money in the process of exchange and in
the formation of price.\

It is on his subjective theory of value, however, that Menger^s
claim to notice rests; This theory is developed in his first book,
Grundsatze der Volkswirtschaftslehre y published in 1871, the same
year as Jevons's theory. Menger begins with what he evidently

1 Carl Monger, Collected Works, vol. ii: Untersuchungen tiber die Methode
der Sodalwissenschaften und der Politischen Oekonomie insbesondere (London
School of Economics Reprint, 1933), pp. 82-8.

2 This, together with his other monetary writings, forms volume iv
(Schriften iiber Geldtheorie und Wahrungspolitik) of the London School of Econo-
mics issue of Menger's collected works (1936).

383

MODERN ECONOMICS

regarded as the two poles of economic activity: human wants and
Ihfe means of satisfying them. He defines utility in a relative sense*,
that is as thejabijitjkof a thing to be put into a causal relation-
ship with a want. Things which have this ability become^oo3s
when the want is "present, when the causal relationship is recog-
nized by the individual experiencing the want and when that
individual has the power to apply the thing to the satisfaction of
the want. These goods may be classified on-technical grounds^
goods of the first and of the second^ third, and 'higirer orders.
The former (for example bread) are "those which immediately
serve to satisfy wants; the latter (for example flour, the mill,
wheat, etc.) only satisfy wants indirectly: they are jointly
required to produce the goods of the first ordeh Their property
of being goods at all depends on our ability to dispose at one
and the same time of all the (complementary) goods required
for a particular purpose. ~ "" ~~

The aim of this classification is to bring out the technical con-
ditions of production' (which later acquire importance in the
theory of production and capital) and to establish at once^ a
relationship between the value of goods of the first order (those
of immediate importance to the wirtschaftende Menscti) and the
value of production goods of all kinds. When he comes to deal
with this problem Menger is able to elaborate the productivity
view of the factors of production which Say and others had tried
to introduce.

The next classification of goods is based on their quantitative
relation to wants. Of all the possible relations the most impor-
tant is that in which the quantity of goods is less than the,>vant
for them. These goods are economic goods; the individuaJLhas
to economize them, since he is aware that no^ portion pf.thfifll
can be lost or given up without causing a sacrifice of want-
satisfaction vTWs dividing Kne betwge;ji. ^ economic . and^uoa-:
economic goods is not a permanent one; goods may move from
the category of economic goods, to that of non-economic .gQQds^
a"n9 vice versa] with changes in wants, supplies of goods, tech-
nique, etc'. When they are in the economic class, goods may be
said to possess 'scarcity', a term which earlier English writers
had never fully ; assimilated into the system^ Auguste Walras, the
father of Lon, had used rar^frin^somietEinglike tEe Mierigerian
sense.(But Menger was the first, without using the word, to

384

MARGINAL UTILITY

express precisely this quantitative relation between ends and
means to which the word is now applied.

Menger's theory of value follows from his discussion of econo-
mic goods. The realization by an individual of the economic
quality oFa good gives rise to a judgement in his mind which we
CalTvalue. In Menger's own words, c value is the significance
wffich concrete goods or quantities of goods obtain for us from
the fact that we are aware that the satisfaction of our wants is
dependent _upon our disposing of these goods'. 1 Value arises
fronTthe limitation of goods in relation to wantsj and it is this
which .gives to these goods their economic character. Free goods
cannot possess value; for no want-satisfaction is dependent upon
ffieTavailability to us of any portions of then;.
T! ow is this subjective value determined? We know, says
Menger, that we experience different wants with different inten-
sity: some, those on which our very existence depends, are very
intense* others, of a more refined character, are less urgent.
But even the same kind of want appears in units of different
urgency. Each concrete act of satisfaction has a different signifi-
cance for us according to the degree of satisfaction that we have
already reached,\Menger gives numerical illustrations for this
argument (which is really a more formal statement .of Gossen's
first law), but insists on the purely 'ordinal' nature of his com-
parison of the intensity of successive want-manifestations.

He proceeds to argue that if for each concrete want there were
a single good suited exclusively to that want, the determination
of tEe subjective Value of that good would be a simple matter. It
WOlild be equal to the significance of that want. But in reality
tKe matter is complicated by the fact that we generally deal with
a ~q~u&r*tity~ of goods accompanied by a complex of concrete
wan&^^^jre^ult^jndiyiduaj portions of the good will appear to
have different significance according to the wants to which they
are^applied, .The individual will use these portions to supply his
\vants in a descending order of urgency, the last available por-
tion satisfying the least intense want; To discover the value of
a portion, we have only to ask ourselves what satisfaction would
have to be foregone if that portion were deducted from the total
quantity. The answer must be: the satisfaction of the least inten-

1 C. Menger, Collected Works, vol. i: Grundsdtze der Volkswirtschaftslehre
(London School of Economics Reprint, 1934), p. 78.

3 8 5 N

MODERN ECONOMICS

sive want. Menger concludes, therefore, that the value to the
individual of any portion of the available quantity of goods is
equal to the significance attached to the least satisfaction macfe
possible by a single portion of the total available quantity. 1 Tljisi
is the same as Jevons's c final degree of utility'. Menger himself
never used that kind of phrase; it was Marshall and Wieser who
introduced the term 'marginal utility* (though the former made
it apply to a slightly different concept).

This subjective value has now to be used as a b^isjfor the
determination of price, Menger denies Smithes dictum that
exchange is due to a human propensity to trucky. It is merely a
part of the general activity "Of economy which is Designed to
supply maximum satisfaction with available means. And it^is;
simply due to the existence of differences in relative subjective
valuations of the same goods by different individuals, 1 'Whenever
either on account of differences in quantity or for other reasons
A values a unit of X more highly than one of Y and B values
a limit of Y more highly than one of X, exchange will be possible.
When A and B actually exchange portions of X and Y, the rela-
tion between the subjective values of the two goods to each
individual will alter until this relation is the same for both A and
B. At this point exchange will stop, since there will be no incen-
tive to continue.' In other words,in equilibrium, the ratio of the
marginal utilities of the two goods will be the same for both
parties;

Subjective values will thus determine the limits of exchange
and the limits of price. Each individual will, when the occasion
for exchange arises, formulate some quantitatively determinate
ratio in which he is willing to exchange. This ratio will reflect
the ratio of his subjective values; but the subjective values them-
selves cannot be conceived of as determinate quantities. This,
according to Menger and his successors, is the relation between
the supply-and-demand theory of the market price and the
'ultimate' theory of subjective values. In the further elabora-
tion of his theory of price Menger examines in turn different
situations ranging from isolated exchange, where there are only
two parties, to perfect competition. His treatment in this respect
has not been modified to any considerable extent by subsequent

1 C. Mengcr, Collected Works, vol. i: Grundsatze der Volkswirtschaflslehre,

P- 99-

386

MARGINAL UTILITY

writers, such as Wieser and Bohm-Bawerk, who adopted a similar
approach.

He showed that in isolated exchange, price would be within
the limits set by the buyer's and seller's maximum and minimum
exchange ratios; and would tend given equal desire to achieve
a maximum advantage and equal bargaining ability to the
average of these ratios. Later economists have generally regard-
ed price as indeterminate within these limits; and although
Menger did not say this himself, he did say that variations
from the average, due to differences in bargaining strength,
would be of a non-economic character. As regards monopoly,
Menger concluded that if only one unit was on offer, the
limits of price would be set by the offer of the 'strongest',
and that of the next strongest (the extra-marginal) buyer; and
that within these limits it would be fixed according to the laws
of isolated exchange. If more than one unit is offered, the price
is fixed again by the offer of the marginal and the first extra-
marginal buyer; and all those whose 'bids' are above the mar-
ginal acquire their units at that price. Or the monopolist may
discriminate, that is make a separate bargain with each buyer.
Menger's analysis of the factors which will determine the choice
of policy is little different from that to be found in any text-book
to-day. In competition, discrimination is impossible; nor can any
individual seller have an incentive to withhold any portion of
the supply. Price is again fixed by marginal demands and offers;
but this time there are what Bohm-Bawerk later called ' marginal
pairs' of buyers and sellers.

After a general summary of changes in the relation of subjec-
tive value and price, Menger goes on to discuss the origin of
money. His account in the Grundsatze and in the article Geld
begins with the inconveniences of barter, due to the different
degrees of Marktgdngigkeit (saleability, or acceptability) of
different goods. Money gradually becomes the most marktgdngig
of all goods, the universal medium of exchange. In fulfilling this
function it also facilitates the 'quantification' of subjective
values: it acts as a price index, as the medium in which the
equivalence of exchange is expressed. Menger examines the
problems to which the existence of a unit of account gives rise;
and much of the contemporary 'Austrian 5 theory on the ques-
tion of monetary policy in relation to prices derives from him.

387

MODERN ECONOMICS

In the theory of distribution Menger is responsible for posing
what is known as the problem of imputation; that is the pro-
blem of the value of goods of a higher order. Having adopted a
subjective approach, Menger is forced to assert that the value
of goods of a higher order (including the factors of production) is
'conditioned by the anticipated value of those goods of a lower
order for the production of which they serve'. 1 Menger 's own
solution of the problem of how the shares of the co-operating
productive goods in the value of the product are to be deter-
mined is not quite clear. He says that the share of any individual
factor is to be determined by the loss in value which the product
would suffer if that factor were withdrawn from the co-opera-
tive combination. 2 But it is only fair to interpret this by inserting
'at the margin'; that is to think of Menger as having held a mar-
ginal productivity theory, even if it was of a primitive kind. This
view is strengthened by the fact that Menger applied the same
analysis to land, labour, and capital. Like Jevons, however, he
did not manage to assimilate the problem of cost into his
system, though his theory of distribution leads him to the brink
of the law of cost, or opportunity-cost principle, which was to be
enunciated by his disciple, Friedrich Wieser.

(d) Leon Walras (1837-1910). As the last of the founders. ofjiie
marginal utility school, Walras stands somewhere between Jevons
and Menger. Like the former, he bases himself on hedonism;
and he uses the mathematical method even more thoroughly
than Jevons. Like the latter, he avoids some of Jevons's errors in
the translation of subjective values into the prices of a competi-
tive market. Because of this, and in spite of his hedonism,
Walras's influence on the modern mathematical school has been*
more considerable than that of Jevons. Walras was influenced
by Cournot, and it was probably this influence which enabled
him to combine a utility theory of value with a mathematically
precise theory of market equilibriugi.

In 1874, ^ree years after Jevons and Menger, but indepen-
dently of them, Walras enunciated the marginal-utility doctrine
in his Elements d* Economic politique pure. This work falls into two

1 C. Menger, Collected Works, vol. i: Grundsdtze der Volkswirtschaftslehre,
p. 124.

2 ibid., p. 142.

3 88

MARGINAL UTILITY

parts: one dealing with the theory of exchange, the other (pub-
lished in 1877) with the theory of production. ~ ~~" ~

Walras operatrs"witfr*essentially the same concepts as Jevons,
but he searches continually for solutions of the most general
character. Like Jevons and Menger, he bases exchange-value on
utility and limitation of quantity. Following his father, he uses the
term rarete, which he defines as the 'derivee de Putilite effective
paFrapport a la quantity possedee'. 1 In other words, rareteh the
"same as marginal utility. The desire to equalize marginal utilities
(according to Gossen's second law) will lead to exchange. And
this desire, together with the stocks of goods possessed by each
individual, will give a determinate demand or supply for each
individual. This can be represented by a functional equation or
l>y a curve.

Equilibrium in a competitive market will be achieved when
the price is such that supply and demand are equal. Walras uses
a special device for showing how this price results from competi-
tion. This is the notion of the prix me a price called out by an
auctioneer. If at this price supply and demand are not equal, a
new price will be called out; and this procedure will go on until
equality is established. So, by tatonnements^ the equilibrium price
will be achieved. 2 There is little here that is new as compared
with other statements of the relation between supply and
demand, except the insistence on their functional interdepen-
dence with price and on their ultimate determination by rarete.
Walras did not, however, make clear whether he conceived of
deals being concluded at the non-equilibrium prices or not. If
they are, then clearly the marginal- utility ratios of the partici-
pants are changed and so are their demands and supplies. Con-
sequently, the equilibrium price will be different from what it
otherwise would have been. If no transactions take place,
Walras's equilibrium will arise. But to include this condition in
the assumptions one would have to suppose, with Edgeworth,
that there is continual 'recontracting', each deal prior to the
establishment of equilibrium, being provisional only. 3
^jOnce we have these equations of supply and demand at equi-
librium prices for each good, we can proceed, as Walras did,
tcPthe problem of general exchange equilibrium. Here again

1 L. WalraSj tLUrwnts d*conomie politique pure (1926), p. 103.

2 ibid., pp. 34-71. 8 F. Y. Edgeworth, Papers (1925), vol. ii, p. 31 1.

389

MODERN ECONOMICS

Walras used a special device of his own, that of the numeraire.
This is one good which is used as a standard of reckoning. It is
not, however, money in the ordinary sense of the word, because
Walras assumes that it is merely an accounting unit and that
there is no demand except that which is bound up with its non-
monetary qualities. The use of this device enablesjis to say that
if there are n goods, we have n i equations of supply and
demand (the one for the numeraire is derived from the others)
and n i unknown prices to determine. This means that there is
a determinate solution for the problem of general equilibrium. 1
Walras's method of analysis gives a picture of the general system
of the interdependence of prices, demands, and supplies; but it
is weakened by the already mentioned obscurity in his method
oTconnecIingit with marginal utilities.

That Walras was very anxious to preserve this link, on account
of the implications which it might be said to have for policy, is
clear. Wicksell reports that Walras was led to his economic
analysis J)y .a desire to build up a strong case in favour oflaisser
faire, in answer to an attack by a follower of Saint-Simon. 2 As a
result, Walras gives another series of equations which reverse
Jevons's procedure and take prices, rather than quantities
exchanged,, as independent variables. Walras shows that, given
certain prices, eachjndividual will proceed to exchange until
the ratio of the marginal utilities of the two goods is to him equal
to their ratio of exchange. This gives us determinate supply and
demand functions, a number of equations equal to the number
of unknowns, and thus determinate equilibrium. 3 It has recently
been Urged against this reasoning that, like that of Jevons, it
really abandons the causal-genetic problem, that is, the problem
of the origin of price from its subjective value roots. 4 The whole
modern trend is to abandon this search for the origin of value
(even though lip-service may still be paid to it) in favour of a
purely formal theory of functional interdependence, and we
shall have to examine the significance of this trend.

Another criticism of Walras's theory is directed against the
conclusions which he draws from it. Like Jevons, he was inclined

1 L. Walras, Elements d' Economic politique pure, pp. 109-33.

2 K. Wicksell, Lectures on Political Economy, vol. i (1937), pp. 73~4-

3 L. Walras, Elements d* Economic politique pure, pp. 72-106.

4 H. Mayer, 'Der Erkenntriiswert der funktionellen Preistheorien', Die
Wirtschaftstheorie der Gegenwart, vol. ii, pp. 188-99.

390

THE SECOND GENERATION

to argue that free competition resulted in a maximization of
utility. 1 But as later writers proved, the fact that at a price other
than one fixed by competition some parties might wish to con-
tinue to exchange, while others would not, does not entitle us to
say that on balance there is a sacrifice of satisfaction. We have
no standard of comparison by which this could be scientifically
established. But common sense supports WickselPs view that
since changes in the distribution of property might clearly be to
the advantage of some people (in some cases, of a majority of
the people), intervention in competition which alters price
and, therefore, the distribution of property, might also produce
an advantage to a majority. 2

Walras's theory of production is an attempt to apply his
general equilibrium analysis to the problem of the pricing of
factors. It is, therefore, only a special case of his theory of value.
By a different path (the details of which are not important to
our present purpose) he reached a position not unlike that of the
later Austrians. His solution was one of the earliest statements of
the opportunity-cost principle and of the modern marginal-
productivity theory.

(3) The Second Generation ;

(a) Alfred Marshall. -After the .passmgjpf its founders, the
marginal ujdUty_.analyis becomes the accepted Easis of economic
theory. What follows is almost entirely a process of refinement;
and this is~still going on. Some of the writers who have been
responsible for this process during the last fifty years might
almost be counted among the founders; while the work of others
is "a part of the raw material ""of the theorists of to-day. It is
inevitable, therefore, that this section should be little more than
a brief list of authors with sketches only of their work.

In what might be called the^second generation of the marginal-
utility school three broad groups may be distinguished: the
EnglfsE^ the Austrian, and that of Lausanne. They represent three
versions oT a Common doctrine rather than three separate
schools of thought. From a technical point of view the differences

1 L. Walras, Elements d'ficonomie politique pure, p. 99.

2 K. Wicksell, Lectures on Political Economy , pp. 77-8.

391

MODERN ECONOMICS

between them are notjiegligi^le. But seen in a wider historical
perspective their agreements are their more obvious features.
They all begin with Menger's wirtschaftende Mensch; they all
accept Gossen's laws as the fundamental characteristics of
individual conduct; they all think in terms of infinitesimal incre-
ments and decrements; that is they all accept the concept of the
margin; and they all analyse the conditions which are required
to satisfy an equilibrium situation. What differences remain
relate to formulation and emphasis.

The English school is represented by the work of Alfred
Marshall (1842-1924). In one way Marshall belongs to the first
generation. He began his economic studies after a mathe-
matical training and the awakening of an interest in meta-
physical and ethical problems in 1867, that is at a time when
Mill was still alive and when Menger, Jevons 2 and Walras were
not yet on the scene. It is known that by iS^J^ the year in which
Jevons's Theory and Menger's Grundsdtze were published, Marshall
had already developed a similar approach. Under the influence
of Cournot, von Thiinen and Bentham, and of his own mathe-
matical background, Marshall was beginning to translate many
of the theorems of Ricardo and Mill into diagrammatic
language. He adopted the utility view of value; and he seems to
have reached the conclusion that ' our observations of nature
. . . relate not so much to aggregate quantities, as to increments
of quantities 5 , 1 independently of Jevons. But his first substantial
contributions to economic theory were not published until a few
years after those of Jevons. The two papers on the Pure Theory
of Foreign Trade and the Pure^ Theory of Domestic Values^jmd the
Elements of Economics of Industry, in which he had collaborated
with Mrs. Marshall, were published in 1879. His chief work, the
Principles of Economics, appeared in 1890.

It is not easy to give a brief summary ofMarshall's ideas. But
the"loIT6wing may be mentioned as special characteristics of his
system of thought. Compared with the Austrian and the pure
mHtftFmaTical economists, Marshall's break with theJEnglish
t7a3Iifon is muchjess markecTTHe was himself a mathematician
who~coufd, and did, employ the algebraic or geometrical tech-
nique to show the precise relationship between different vari-

1 A. Marshall, Principles of Economics, Preface to the first edition (8th
edition, 1927), p. x.

392

THE SECOND GENERATION

ables in certain well-defined situations. But there can be little
doubt that Marshall was never fully satisfied with the study of
the pure mechanics of abstract forces working in isolation. His.
Principles might well have carried a sub-title similar to that of
Mill's treatise. For Marshall was^aTrealist, keenly aware of the
complexity of economic life, anxiousTto use to the full any scien-
tific apparatus ^ which he could develop, but convinced that
there must remain a residuum of fact which could not, as yet, be
satisfactorily assimilated by that apparatus. He was also anxious
to expound the results of scientific inquiry in terms which could
be generally understood. For he was^^above everything, deter-
mined tojsee that ^orK)irdcs-XQiiidn]ued_tq be regarded as pro-
ductiyje of fruit: fts g^le. to gjyejnoiinsd and to influence policy ._
His apparatus of analysis was. designed to preserve this contact
between theory and policy.

Compared with the work of many of his contemporaries,
Marshall's system appears eclectic, or even lacking in internal
consistency. But this is an impression produced by the very
elaborate quality of his system. Marshall was not averse to
formal analysis. But he aimed at preserving and linking up a
series of formal analyses, each on a different level of abstraction
and each containing a different set of real tendencies. As a con-
nected whole they would, he thought, present a true and fairly
detailed picture of economic reality. Marshall's formulation of
the theories of value and distribution, together with a host, of
subsidiary theories, which impress one by their eclecticism^ all
involve a technique (based on the use of a special time element)
which is derived from three closely connected aims; comprer
hensiveness, realism, and significance for economic policy.

Marshall's central_dpctrines of value and distribution reflect
these aims. They combine marginal utility jwith subjective real
cost. The forces behind botlT supply and demand^ according to
Marshall, determine value. They are to be conceived of as the
two blades ofaTpair of scissors: it is useless to ask which does the
cutting. Behind demand is marginal utility, reflected in the
demand prices of buyers_j(the price at which given quantities will
Be demanded); behind, supply. is.in^i^inal-efibrt. and .sacrifice,
reflected in the supply prices (the prices at which given quanti-
ties will be forthcoming).

The novelty of this view, compared with the Austrian version,

MODERN ECONOMICS

is that cost of production comes into its own once more as a
(determinant of valueTMarshall distinguishes between real cost
of production and expenses of production, though he does not
always adhere strictly to the latter termT 1 The former consists
of the disutility of labour, together with the sacrifice involved in
providing the necessary, capital. Marshall aJbandons Senior's
term abstinence, which was too suggestive of an apologetic
intention, infavour of the term c waiting', that is the mere absten-
tion from consumption in the present. But since he also speaks
of it as the postponement of gratifications which involved sacri-
fice and for which interest was the reward, 2 he clearly had in
mind something similar in kind to the toil and trouble of labour.
Both elements which made up real cost were thus subjective.

Marshall guarded himself against the suggestion that if the
money costs of production of two commodities were the same,
their real costs were the same also. ' If it be given ', he said, c that
twenty minutes' work by a physician, or two days' work by a
watchmaker, or four days' work by a carpenter, or a fortnight's
work by an agricultural labourer, can be bought in a given
market for a guinea, and that the sacrifice involved in the loan
of twenty guineas for a year can be bought by a guinea, then
these several efforts and this abstinence are equivalent to one
another for the purposes of the machinery of exchange. . . .' But
when we speak of the ratio of the cost of production of two com-
modities, we must remember c that one aggregate of diverse
efforts and abstinences docs not bear a ratio to another'. We are,
therefore, forced to assume the existence of 'an artificial mode of
measuring them in terms of som^gmmor^unit^and J^fcrlo .the
ratio between, their measures 5 . 3 'These various efforts and
$%tioJ3LCS--. v are certainly not equal to one another. But they
would air^&ert an equal" influence upon value; because their
economic measures, the expenses which would have to be incurred by
anyone who would purchase them, are all equal.' 4

feh^sarne caution is evident in Marshall's, view of the relation

1 A. Marshall, Principles of Economics, p. 339.

2 ibid., p. 587.

3 A. Marshall, * Mill's Theory of Value' in Memorials of Alfred Marshall
(ed. A. C. Pigou, 1925), p. 125.

4 A. and M. P. Marshall, The Economics of Industry (2nd edition, 1881),
p. 97, quoted by C. Guillebaud, * Davenport on the Economics of Alfred
Marshall', Economic Journal, March 1937, p. 26.

394

THE SECOND GENERATION

^ demands and marginal^utility. He did not go

the way of jGoupK&jaiJLh^^

severjhe Jink .between subjectivejstates (wants and their satis-
faction) and the objective phenomena of demands in the market.
But he seems to have been aware of some of the difficulties
involved in maintaining this connection. On the analogy of the
relation between real and jnpney cost, he said that * it cannot
be^too much insisted that to measure. directly, orperse, either
desires or the satisfaction_which results from their fulfilment is
impossible, if not inconceivable. If we could, we should have
two accounts to make up. . . . And the two might differ con-
siderably. . . . But as neither of them is possible, we fall back on
the measurement which economics supplies, of the motive or
moving force to action: and we make it serve, with all its faults,
both for the desires which prompt activities and for the satisfac-
tions that result from them.' 1

One of the most characteristic Marshallian concepts, that of
Consumer's, surplusl, follows from the above view. This term
expresses the surplus satisfaction derived by a consumer when-
ever he can~Buy a good at a lower price than that which he
would be willing to pay rather than go without the particular
good. The notiolfi follows directly from the difference between
total and marginal utility. This is not the place to examine it in
detail, ^ince it is still a "matter of current debate. But it may be
said that those who have attacked the concept have urged that
no me^juremgntjc^he surplus satisfaction implied in consumer'^
surplus Is possibleT^^^Hall never suggested f harilrwas; except
orTtlie very abstract assumption that the marginal utility of
njoney w^constant. The concept was used by him rather as a
counterweight to the more usual analysis of producer's surplus.
He used it to demonstrate the effects., of taxes. ^rL^pmraodities.
witli^ elastic _and inelastic demands. With it he tried to show
which kind of government intervention was desirable. The whole
field 6r T \veKafg~econuiiiic:s Vef-whtdl Marshall's disciple and
successor, Professor Pigou, is^the founder, really rests on Con-
siderations oFwhich the consumer's surplus doctrine is the^piri-
tual father. ^~~

Apart from his formulation of the connection between utility
and demand and disutility and cost, Marshall's special con-
1 A. Marshall, Principles , pp. 92-3 (footnote).
395

MODERN ECONOMICS

jtribution to the problem of value and price lies in his analysis pf
the equilibrium between supply and demand. This is based on
his distinction between the different periods of time over which
the forces tending to establish equilibrium are conceived to be
operating, Marshall distinguishes four cases. First, there are the
market values equating supply and demand, when supply is
assumed to be fixed. Secondly and thirdly, there are the normal
values, which may relate to short periods or long periods. In the
former category we conceive of supply as the amount which can
be produced at the given price with existing equipment and
labour; in the latter, supply means 'what can be produced by
plant which itself can be remuneratively produced and applied
within the given time 5 . Lastly, we can widen our field of vision
so as to include the changes in the economic ' data ' : population,
tastes, technique, capital and organization; we shall then be
having in mind the slow, ^secular changes in normal values. L

Marshall's apparatus is elaborate because of the purpose for
which it is devised. By making possible the distinction of
different degrees of adjustment, it becomes capable of applica-
tion to concrete problems. This 'step by step' or 'partial equili-
brium* method was not perhaps "different in kind from the
general equilibrium analysis of Walras. But it was designed for
different, more realistic aims. Ifjyas also a method which was
well adapted to the task of generalizing the propositions of the
theory of value. In Marshall's treatment, the principle of substi-
tution at the margin became the operative principle of economic
equilibrium. Like the equations of Cournot and Walras, it was
used to make clear the functional relationship of all economic
categories. The special place given to the distinction between
adjustments over different periods of time also helped to join
together the problems of supply, demand, and price of goods
with those of the supply, demand, and price of the factors of
production. Exchange, production, and distribution became
thus closely interrelated; and it depended on the period of
time taken into account whether the tracing out of the path to
equilibrium involved the factors appropriate to one or more of
them.

Long-period equilibrium, though still a partial equilibrium
(in me~sense that it does not imply a position of equilibrium as
1 A. Marshall, Principles, pp. 378-9.
396

THE SECOND GENERATION

between the industry examined and all others) , tended to bring
about prices proportional to the expenses of production. In this
position, ' the earnings of each agent are, as a rule, sufficient
only to recompense at their marginal rates the sum- total of the
efforts and sacrifices required to produce them'., 1 But Marshall
was careful to point out that even in the long run the earning&-of
tHeTactors of production were not identical with their real costs of
production. That could only be true when general equilibrium
hasTbeen reached, that is in the unreal world of the 'stationary
state'. The forces making for equilibrium in the long run must
be conceived of as continually tending towards the position
implied in the stationary-state concept. But in the real world
this position could never be reached.

This particular form of equilibrium analysis was productive
of many concepts which are now in general use. The notion of
' ejjis deity of demand', for instance, has become an accepted
part of the theory of exchange. The distinction between 'prime'
and 'supplementary' costs has been an important aid in the
theory of production. Other concepts, however, such as that of
tfie 'representative firm' and of 'external' and 'internal econo-
mies '*T!ave^E>eenToirfi(i less clear-cut and usefinTl^T~MarshalI
took them to be. They have, ftevertheless, helped to clarify the
conditions of equilibrium. And the recent developments of the
theory of imperfect_comptitin have been inspired to a con-
siderable extent by the problems posed in these Marshallian
concepts.

We have noticed that the Marshallian analysis of the equili-
brium of value already includes a theory of distribution, since it
establishes a series of relations between the earnings, the supplies
of, and the demands for, factors and the prices of their products.
These relations differ according to whether we assume stocks of
goods to be fixed, stocks of factors to be fixed, stocks of factors to
be variable but change to occur, or general equilibrium to pre-
vail. Marshall's use othe time factor^enabled him toj^istinguish
betw^en^foctor-incomes that are price determining and_ those
that arejjrice determined. He showed that this distinction was
noTan absolute one (except in the case of the rent of land which
is always price-determined), but that it ^depended _on_the : period
of time one hadjMjmmdj In the short run, thejncomes of many
1 A. Marshall, Principles, p. 832.
397

MODERN ECONOMICS

factors are in the nature of rent; they are what Marshall called
* quasi-rent*.

Apart from these considerations, Marshall applied his long-
period normal value both to labour and capital. In the long run,
MarsTTall argued, there would be a tendency for the earnings of
factors to equal tfcteir marginal real cost: interest would tend to
be identical with the marginal sacrifice involved in saving, wages
with the marginal disutility of effort. Marshall did not discard
the marginal productivity doctrine of wages and interest. But
he argued that this should be regarded as a part only of a com-
plete theory of distribution that which related to the forces
governing the earnings of factors on the demand side. 1

In other words, as in the theory of exchange, so also in that
of distribution, Marshall was anxious to preserve the dual
character of the ' pair of scissors '. The emphasis on real cost was
vital for the dynamic purposes of the theory. With its aid, the
repercussions of changes in one quantity on all the others could
be brought out. As Mr. Guillebaud has recently pointed out,
'the significance of real cost lies in the fact that, whenever
important divergences occur between the trend of actual
realized values and the long-period trend of normal value
(behind which in turn are real cost elements which influence
normal values), then economic forces will be set in motion
which will alter the trend of actual values the change being
in the direction of the long-period equilibrium 5 . 2 It was because
Marshall realized that an ultimate cost analysis was an indis-
pensable part of a theory of value that he was always anxious to
defend Ricardo against Jevons and his followers. _At the same
timeTMarshall took a subjective version of Ricardo as the true
confehf of classical theory. It follows that all the objections that
can be made to earlier subjective cost theories apply Xo that of
Marshall.

' Indeed, Marshall was so cautious in his formulation that
almost in spite of himself he shows with particular force the
unsatisfactory character of the theory. For .the subjective cost
iactor must^always remain quajatitively imprecise. And 'wait-
ings' and 'efforts' do not run well in double harness. For this

1 A. Marshall, Principles, p. 518.

2 C. Guillebaud, * Davenport on the Economics of Alfred Marshall',
Economic Journal, March 1937, p. 30.

398

THE SECOND GENERATION

very reason Marshall often speaks of _real r jeogt irt terms which
seem to exclude any reference to ultimate psychological states.
His theory then becomes purely^ ' behaviouristic ': Jthe 'sacri-
fices 5 of abstinence meaning nothing more fundamental than
the desire to demand, and the ability to obtairj, a reward jbr a
particular act of choice^This is very much akin to the oppor-
tunity-cost principle first enunciated, by Wieser. The only
difference is that the Austrians, in their formulation of the
theory, assumed either that the quantity of the factors of produc-
tion was given or, at any rate, that it was an independent vari-
able. Marshall, on the other hand, allowed the suppliesof
factors to be variable and to be injgart dtmined by price, so
as to make his apparatus more suitable to dynamic problems..

There remains then a fundamental dichotomy in Marshall's
great system. Real cost is preserved. But not only is it given a
subjective character, it is often robbed of any substantial mean-
ing by the way in which it is formulated. On the demand side,
desires and satisfactions are preserved, though they too are
hedged round with overwhelming qualifications. The reason for
this dichotomy is Marshall's spiritual kinship with Mill. In spite
ofhis disclaimer of any utilitarian bias, Marshall was essentially
a Jatter-day utilitarian, that is a hberal social reformer. Though
anxious not to abandon any arguments which modern economics
could offer in favour of capitalism, he was also reluctant to close
the door on all reform proposals. His political compromise was
no less uneasy than Mill's. But his analytical genius enabled him
toHbuild a theory sufficiently comprehensive to be acceptable to
the greatest variety of political opinion which that compromise
could attract.

(c) Wieser and Bohm-Bawerk. Compared with Marshall's
achievement, the work of the later Austrians, though more
rigorous in appearance, is both more narrow in scope and
more arid in conception. Menger had two great disciples,
Friedrich von Wieser (1851-1926) and Eugen von Bohm-
Bawerk (1851-1914). Though both are better known than
Menger, their writings do not contain any fundamental changes
of the views of their master. In the pure theory of value they
merely refine the subjective approach originated by Menger.
The individual and his wants is still the beginning and end of

399

MODERN. ECONOMICS

the analysis. Utility is still conceived of in the sense of 'signifi-
cance for conduct'. Wieser and Bohm-Bawerk seem to stress the
purely formal character of subjective valuation even more than
did Menger. Among innovations in this field may be men-
tioned Wieser's introduction of the term Grenznutzen (marginal
utility) in his Ursprung und Hauptgesetze des wirtschaftlichen Wertes
(1884), and Bohm-Bawerk's more precise statement of the forma-
tion of market prices by the bidding of c marginal pairs ' in his
Grundzuge einer Theorie des wirtschaftlichen Guterwertes ( 1 886) .

Both Wieser and Bohm-Bawerk were, however, responsible
for certain additions to the body of Austrian theory which have
given their work a characteristic imprint. Wieser's achievement
lies in the theory of cost and distribution; Bohm-Bawerk's in the
theory of capital and interest. The early Austrian theory of
exchange-value had a gap of which Menger himself was con-
scious. This consisted of an omission to deal with cost. Here
Wieser set in with an analysis which brings him nearly to the
Marshallian position. In the Ursprung he almost appears to make
value depend on both utility and cost. But in reality his solution
is different from that of Marshall. Wieser, and all the other
Austrians after him, do not use a real-cost concept. Disutility
and other sacrifices in the traditional English sense have no
place in their theory. Utility alone is the cause of value. And if
utility is conceived of in a purely formal sense, that is as relative
preference inferred from observed acts of choice, disutility is
merely an unnecessary duplication. All choice can be said to
involve sacrifice, in the sense that to choose A involves fore-
going B. The disutility of labour and the sacrifice of waiting can,
therefore, be adequately explained in terms of preference for
income or leisure, and for present or future goods.

In Wieser's view, the formation of value is a circular process.
Like Menger, he regards the value of goods of a higher order as
being derived from the value of their products. This derived
value then becomes the cost element. Once formed, this may be
accepted as given; but it is logically secondary. The actions of
the entrepreneur are responsible for the continual tendency
towards equality at the margin between cost and price. They
exercise a demand for raw materials, capital goods, and labour
in the respective markets, according to the existing or anticipated
demands for the products. Errors are inevitable; but the forces

400

THE SECOND GENERATION

of supply and demand will continually tend to correct errors
made in the past. 'Wieser's law of cost' or the opportunity-cost
principle, as it was later called, amounts to this: given the
quantity of the factors of production, competition for factors in
the different lines of employment will distribute them in such a
way that the values of their different products allow them to
earn the same total amount in every alternative use.

This theory really involved abandoning the search for real
cost, which, for reasons already stated, the classical and post-
classical economists had regarded as desirable. But it was a
theory of great elegance which seemed to make the whole
marginal-utility analysis at any rate in its more formal guise
as a theory of choice comprehensive and self-consistent. With
minor variations, it was widely accepted and propagated by econ-
omists like Davenport and Wicksteed; and it became one form
in which the marginal productivity theory could be stated.
Moreover, as was noted above, some of Marshall's formulations
of the real cost doctrine removed much of the conflict with the
opportunity-cost theory, leaving only the formal difference relat-
ing to the assumption about the supplies of factors. But this was
not a substantial difference: Walras, for example, succeeded in
formulating the theory of opportunity-cost on the assumption
of variability of factor supply in a way similar to the English
real-cost theorists.

Another point worthy of notice in Wieser is his doctrine of
natural value which appears in Der Natiirliche Wert (1889) and in
Theorie der gesellschaftlichen Wirtschaft (1914). The indirect signifi-
cance of this concept is considerable. Wieser had perhaps done
more than any other economist to complete the transition from
the social approach of the classical theory of value to the
individualism of the marginal utility school. His law of cost
effected the final breach with the objective real-cost theories.
Yet he himself seems to have realized some of the shortcomings
of pure subjectivism. He knew that economics was concerned
with a social process, that it had, therefore, to be based on the
concept of a social economy. More honest than some economists,
he saw that this concept involved certain institutional assump-
tions which, if slurred over, would give the subsequent theory
an apologetic character. He proceeded, therefore, to make his
assumptions explicit. 'Most theorists/ he argued, 'particularly

401

MODERN ECONOMICS

those of the classical school, have tacitly made the same abstrac-
tion. In particular, those opinions which regard price as a social
value judgement are designed to abstract from individual
differences of purchasing power which make price deviate from
natural value. Thus, many a theorist has written the theory of
value of communism without knowing it. . . . n Natural value is
the value which would result in a communist state. Here, owing
to the absence of individual selfishness, errors, inequalities of
wealth and the presence of a strong communal purpose, the
theoretical analysis of the acts of choice of an individual would
be applicable to the economy of the community as a whole.
Value would be the resultant of the available quantity of goods
and of utilities. In the real world, however, natural value is only
one element in the formation of price. Distribution of purchasing
power together with error, fraud, and compulsion is the other.

Natural value, Wieser claims, is a completely neutral pheno-
menon. Although it would be present in a collective economy,
this does not mean that the natural values of interest and rent,
for example, need give a right to an income. Whether they do or
not depends entirely on the institutional structure of the state.
Wieser succeeds to some extent in emancipating himself from
the common error of tacitly identifying an implied institutional
framework with reality. But he does not remove the political
norm. He implies an identity between his system of natural
values and the social maximization of utility of hedonist philo-
sophy. Although analytically superior to similar attempts (for
example of the American economist J. B. Clark), Wieser's doc-
trine rests on the assumption common to them all that it is
possible to conceive of a subjective social value. Such a concept,
it is clear, must be self-contradictory.

Bohm-Bawerk's special contribution lies in his theory of
capital. In 1889 he published his Geschichte und Kritik der
Kapitalzinstheorien, in which he criticized somewhat ungenerously
all earlier interest theories. Four years later appeared the
Positive Theorie des Kapitalzinses in which his own theory was
expounded and in which he gave a version of his general theory
of value similar to that contained in the Grundziige. A number of
influences contributed towards Bohm-Bawerk's theory of capital.
The first was the desire to apply more consistently the theory of
1 F. v. Wieser, Der Naturliche Wert (1889), p. 60,
4O2

THE SECOND GENERATION

marginal utility to the problem of interest. The second derived
from the later neo-classical English and German productivity
and wage-fund theories. The third as an incentive, perhaps
the most important was Bohm-Bawerk's anxiety to destroy
the influence of Marx, which was rapidly growing on the
Continent.

Briefly, the existence of interest and its size are explained on
three grounds the famous drei Grunde. These reasons combine
both subjective and objective (technical) factors; a combination
which was clearly designed to overcome the difficulties of the
abstinence theory and the subjective real-cost theory in general.
Bohm-Bawerk's doctrine had, however, this in common with the
others, that it started from a consideration of the significance of
time in relation both to consumption and production.

The first two grounds are psychological and relate to consump-
tion. Bohm-Bawerk argues that individuals faced with the choice
between present and future goods normally overestimate future
resources and underestimate future wants. Hope is the cause of
the former, lack of imagination and weakness of will are those of
the latter, peculiarity of choices which involve the lapse of time.
These two causes operate to increase the marginal utility of
goods in the present compared with their marginal utility in the
future. They create an agio; and to call forth a supply of present
in return for future goods, that agio has to be paid.

The third factor is of a technical character; it affects produc-
tion, and it accounts for the existence of a demand price for
present, in terms of future, goods. It is a fact of experience that
if the original factors of production, labour and natural re-
sources, are to be more productive of consumable goods, they
have to be used in an increasingly indirect manner. The whole
progress of civilization on its technical side consists, according
to Bohm-Bawerk, in the adoption of more 'roundabout' methods
of production. From the making of simple tools and instruments
to the production of the most elaborate modern machines, pro-
gress has meant embarking on Produktionsumwege, on the inter-
polation of more intermediate stages between the original factors
and the finished consumption goods.

Roundabout production creates a demand for capital. Means
of subsistence are required (either directly or in a monetary
form) to maintain the owners of the factors during the time

403

MODERN ECONOMICS

which must elapse before fresh (and more abundant) consum-
able goods are available. And the great productivity of these
'capitalistic' methods of production enables a price to be offered
in order to overcome the time discount between present and
future goods. Here, then, was an explanation why interest had to
be paid and why it could be paid. And it was put forward to
prove that interest was a 'natural 5 phenomenon a necessity
from which not even a socialist economy could escape. 1 This
explanation depended in the last resort on the general marginal-
utility theory of value. Although Bohm-Bawerk claimed that
any one of his three grounds was alone sufficient to explain the
presence of interest, it is clear that the subjective factors were the
ones which really created that scarcity of means in relation to
ends without which, according to the Austrians, value could not
arise. Against these subjective factors a number of objections can
be urged. Not only can the existence of this time-preference be
questioned; even if it exists, it can be argued both that it has no
quantitatively precise significance and, what is more important,
that it need not continue to exist outside the capitalist system.
Above all, it must be clear that the time-preference as indeed
all so-called consumers' preferences are conditioned by a par-
ticular social framework. If, therefore, there is an agio, it is due in
its concrete form, not to human nature, but to social factors such
as class divisions and income distribution. Anything like a
'natural right' to an income from capital could not be deduced
from the theory without the usual apologetic slurring over of
thyspecific facts of the social structure.

(c) Vilfredo Pareto. The last of the great writers of the second
generation is Pareto (1848-1923), who continued Walras's work
at Lausanne and with whom the growth of a 'Lausanne school'
really begins. One part of Pareto's achievement consists in his
logical application of the Walrasian apparatus. In his first large
work, Cours d' Economic politique (1896-7), he developed more pre-
cisely the mathematical conditions of general equilibrium. He
stressed the general complementarity of goods and the simul-
taneous character of the equations which represented the rela-
tionships of equilibrium.

More significant, however, for later developments, was

1 E. v. Bohm-Bawerk, The Positive Theory of Capital (1923), pp. 365-7.

404

THE SECOND GENERATION

Pareto's uneasiness over the utility concept. Already, in the
Cours, there is evident a certain tendency to ignore the psycho-
logical premiss and to concentrate attention on the empirical
fact of choice. Value, it is true, was still represented as an essen-
tially subjective phenomenon; equilibrium as the result of the
interplay between ' desires ' and the ' obstacles ' to their satisfac-
tion. But being keenly aware of the confusion to which the term
'utility' might lead, Pareto suggested that it should be replaced
by a word which had no special associations. Ophelimite, the
word which he chose, did not succeed in ousting utility, for the
simple reason that Pareto's treatment remained fundamentally
the same as that of the utility theorists. Indeed, in the Cours
Pareto is less clear than Menger had been on the question of the
measurement of utility: he still seems to think of it as a 'cardinal'
magnitude. It is also interesting to note that the more traditional
treatment of value in the Cours goes hand in hand with a strong
belief in laisserfaire, and that the development of a new approach
to the value problem takes place concomitantly with a certain
withdrawal from liberalism.

An indication of this new approach is given in Pareto's short
paper, Anwendungen der Mathematik auf Nationalokonomie (1902);
but its most complete statement is to be found in the Manuale di
Economia Politica (1906; French translation, 1909). It has been
suggested by many of his followers that in this work Pareto dis-
cards the value theory altogether in favour of a theory of price
unrelated to subjective factors. 1 Whether this is quite true is a
matter for some debate. What is certainly true is that the theory
of the manual is marked by an entirely new view of utility which
seems to push to its farthest logical limits the purely formal
quality of the modern theory of value.

The innovation consists in stating that utility was not measur-
able, but that a purely 'ordinal' conception of utility sufficed for
the formulation of a theory of choice. In technical terms, a scale
of preferences can be deduced for each individual without the
assumption of determinate utility functions. The scale of pre-
ferences as exhibited in conduct is the only determinate pheno-
menon; any number of utility functions could fit it. Actually
this change in outlook had been foreshadowed before, not only

1 For example, A. Osorio, Thforie mathematique de Vtchange (191 3), p. 302;
and P. Boven, Les Applications mathhnaliques d I 'faonotnie politique ( 1 9 1 2), p. 1 74.

405

MODERN ECONOMICS

in the work of Cournot but also in the writings of some of
Pareto's contemporaries, like Irving Fisher (Mathematical Inves-
tigations into the Theory of Value and Prices, 1892) and Gustav
Cassel (Grundriss einer elementaren Preislehre, 1899). But Pareto's
exposition was the one which achieved the greatest attention.

Pareto did not work out a complete theoretical apparatus
based on the new view of choice. But he made an important
start. He adopted the concept of ' indifference curves', first used
by the English economist, F. Y. Edgeworth, in Mathematical
Physics (1881), to show the possibility of constructing a theory on
the basis of scales of preference only. Pareto takes two goods and
shows that a number of quantitative combinations of these
goods will all be equally desired by the individual. All these can
be arranged on an indifference curve to which an index can be
assigned. Other combinations of the same goods, being either
more or less desirable, can also be arranged on curves to which
higher or lower indices will be given. An individual's system of
preferences with respect to these two goods can be represented by
an 'indifference map', which will show, on the analogy of a
contour map, different levels of satisfaction. It is then possible
to write a number of differential equations which will represent
an equilibrium system in terms of indifference rather than of
utility functions.

This increasing formalism did not lead directly to a break
with the utilitarian justification for laisser faire. At first, Pareto
seems to try to buttress this case by the way in which he defines
the collective maximum of ophelimite. This, he says, will be
reached at a point from which no departure giving a gain of
ophelimite to all participants is possible. 1 As Wicksell pointed
out, 2 this is equivalent to saying that perfect competition, given
its assumptions, will produce such a collective maximum. But
although Pareto gets dangerously near in this place to the sub-
jective social value concept mentioned earlier, he proceeds to
examine the possibilities of a collective economy and ends up
with a perfectly 'neutral' conclusion. 'Pure economies', he says,
' gives us no truly decisive criterion for choosing between a social
order based on private property and socialism. This problem
can only be solved by taking into account phenomena of a

1 V. Pareto, Manuel d Economic politique (and edition, 1927), p. 354.
3 K. Wicksell, Lectures on Political Economy, pp. 82-3.

406

THE SECOND GENERATION

different character.' 1 On many particular points (notably in the
theory of international trade), Pareto went farther than this: he
opposed policies based on the principles of economic liberalism.
And as if to strengthen his conclusion about the 'neutrality' of
pure economics, his interest turned increasingly to general social
problems. His last substantial work was his voluminous Traite de
sociologie generate (1917-19). In this, he supplemented the neutral
and formal analysis of equilibrium economics with social-psycho-
logical theorems which have made him known as a theoretical
forerunner of Fascism.

1 V. Pareto, Manuel d'econornie politique, p. 364.

407

Conclusion

1 he work of Marshall, the Austrians, and the Lausanne school
is the immediate heritage left to the present generation of
economists. It has been tended and enlarged by many writers
whom one can no longer easily divide into separate groups. In
recent years there has been a coalescence across both national
and theoretical frontiers. For example, the refinement of the
theory of choice, of subjective valuation, and of opportunity-
cost has not been left entirely to the disciples of the Vienna
school. Some of the most complete statements on these aspects of
economic theory can be found in the writings of an Englishman,
P. H. Wicksteed, 1 and an American, F. H. Knight. 2 But to
prove the increase of eclecticism it may be pointed out that the
former has also contributed to the advancement of mathe-
matical economics and the latter to the development of the
Marshallian value analysis.

Again, the most important development of Pareto's system of
indifference curves is the work of two English economists, J. R.
Hicks and R. G. D. Allen; 3 while from Vienna has recently
come some support for the (American and English) attempts at
statistical studies of demand. 4 Detailed contributions to the
marginal utility theory came from many countries in the first
decades of the present century. And it is perhaps symbolical of
the international supremacy which the new doctrines soon

1 The Commonsense of Political Economy (1933); Co-ordination of the Laws of
Distribution and Exchange (London School of Economics Reprint, 1932).

2 Risk. Uncertainty and Profit (London School of Economics Reprint, 1933);
The Ethics of Competition (1935).

3 'A Reconsideration of the Theory of Value', Econornica, 1934, pp. 52-76,
196-219.

4 H. Mayer, 'Der Erkenntniswert der funktionellen Preistheorien ', Die
Wirtshaftstheorie der Gegenwart, vol. ii (1932), pp. 2390; and 23 1.

408

CONCLUSION

achieved that one of the best treatises based on it (and one of the
most successfully eclectic) was the work of a Swedish economist
WickselPs Lectures in Political Economy ( i go i -6) .

This is not to say that there were not serious disagreements.
On points of detail controversies among the early adherents of
the three great schools were frequent. Moreover, there was still
much opposition to the central principles common to all three.
In Germany, survivals of the historical school and the strong
theoretical, Marxist, foundation of the working-class movement
were formidable barriers in the way of the new subjectivism.
There arose at the same time in America a number of schools
opposed to marginalism. There were those who objected to
extreme abstraction and who urged a greater use of quantitative,
inductive studies (the 'historical' approach to contemporary
problems). And there were others who were aware of the danger
involved in the new theory which made it either politically
irrelevant or an apologetic for the existing social order. These
formed the institutionalist school, of which Thorstein Veblen
was the chief exponent.

But these external attacks seemed slowly to lose their force.
The 'tone' of academic economic thought was set by the new
schools; and the overwhelming majority of the accepted text-
books were written on marginal-utility lines. There remained
certain differences of formulation. In England the real cost and
disutility concepts were still expounded; though it is doubtful
whether they were ever used much. There also remained in
English teaching a certain utilitarian tradition both of a
laisser-faire and of a social reform character which, combined
with an ineradicable, though often deprecated, liking for ethical
postulates, has given English economics a characteristic flavour.
The greatest development here is that embodied in Professor
Pigou's Economics of Welfare (1920). Although the theoretical
concepts which it develops have not been used very extensively,
the general approach of this work has had a lasting influence in
preserving the link between economics and semi-socialist reform
policy.

In Austria, on the other hand, the opposite tendency has been
noticeable. Disutility was definitely rejected, and so was the
suggestion of hedonist influence. Possibly under the influence of
Lausanne, though on this score Menger had not been behind-

409

CONCLUSION

hand, a greater degree of formalism and political 'neutrality 5
developed. The Austrians never went so far as to discard utility
altogether. But they continued to emasculate it until there
remained little difference between their theory of choice and
that of Lausanne. Contact with the new Wissenschaftslehre, based
on neo-Kantian philosophy, and developed by writers like
Heinrich Rickert and Max Weber, also helped to define the
relation between economic science and its material in a way
which strengthened the formal quality of theoretical results. It
was perhaps not unnaturally in the home of Menger that the
significance of the new methodological development was first
realized. As its manifesto can be regarded Weber's essay Die
Objektivitdt sozialwissenschaftlicher und sozialpolitischer Erkenntnis
(1904), in which not 'the material relations between things, but
the intellectual connection between problems ' is made the criter-
ion by which the fields of the sciences are defined. 1 According
to Weber, the function of social science is to provide ' concepts
and judgements which are not empirical reality, nor pictures of
it; but which allow us to arrange it intellectually in a valid
manner 5 . 2

Between Vienna and Lausanne the barriers certainly tended
to disappear in recent years. Between them and England there
remained a methodological conflict. But since there was in the
birthplace of classical political economy a disinclination to
worry unduly about methodology, there was little difficulty in
co-operating in day-to-day theoretical activity. The general
notions of equilibrium both in the Marshallian and the
Paretian version were common parts of everybody's equip-
ment; even though each group retained some specialized
apparatus. A recent writer of the Vienna school had little diffi-
culty in making out a good case for the contention that there
was only one subjective theory of value expounded in three
slightly different ways. 'In the last analysis 5 , said Dr. Morgen-
stern, ' all variants melt into a unity. 53

At first sight this tendency of unification would be expected to

1 M. Weber, 'Die Objektivitat sozialwissenschaftlicher und sozialpoli-
tischer Erkenntnis 5 , Gewmmelte Aufsdtze zur Wissenschaftslehre (1922), p. 166.

2 ibid., p. 113.

3 O. Morgenstern, 'Die Drei Grundtypen der Theorie des subjektiven
Wertes*, Probleme der Wertlehre (ed. L. Mises and A. SpiethofF 1931), vol. i,

P. 38.

410

CONCLUSION

lead to a consolidation of the power and influence of modern
economics which would clearly be a matter of satisfaction to all
economists. But the quiet on the theoretical front is deceptive.
There is ample evidence that, in spite of their sway over academic
thought, present-day economists of the leading school wield less
influence in the world of affairs than their nineteenth-century
predecessors. This decline in their authority is creating an
uneasiness among economists which is seldom made explicit, but
which is reflected in a number of quite recent theoretical develop-
ments. The problem with which the theoretical technique of
modern economics has not been able to grapple and which, one
may confidently predict, will be a source of greater 'internal'
disagreement in the future, is the problem of the relation between
economics and politics. It may not be inappropriate to conclude
this book with a few remarks on some recent theoretical develop-
ments and their relevance to this problem.

It is well to begin by recalling the liberal element contained in
the tradition of economics. It is true that in the course of time
the basis of the 'natural harmony 5 has been changed. But the
social fact of the competitive market mechanism continued to
yield the same practical conclusions as Smith's 'invisible hand'.
Even the more formal concept of equilibrium which was later
introduced to describe the relationship which the market forces
would tend to establish continued to have some political signifi-
cance. It was only a small step which led to the identification of
the idealized, self-adjusting mechanism contemplated in theory
with complex reality. And it has always been tempting to those
economists who could not free themselves from a liberal bias to
take not only that step, but also the somewhat longer one of
identifying equilibrium with some kind of social 'optimum'.

The often invisible heritage of economics was, then, a double
belief: the economic system is self-adjusting; and the social
results of self-adjustment are the most beneficent which can be
obtained. Laisser faire was generally regarded as the best policy,
although it was not always advocated in the same terms. Some
argued that it brought maximum output, maximum freedom of
individual choice, and maximum satisfaction. Some economists,
however, aware of Marshall's warning, did not dare to identify
desire and satisfaction; but they still tended to imply that the
prices formed in a free market were somehow socially desirable.

411

CONCLUSION

Others, impressed by the criticism that there could be little
sanctity about the results of a free market, the participants of
which were subject to very great inequality of wealth and oppor-
tunity, advocated the removal of these inequalities. Laisser faire,
they said, was the best policy only in the ideal state. Others,
finally, have gone even farther. 'There is no penumbra of
approbation', they say, ' round the theory of equilibrium. Equi-
librium is just equilibrium.' 1 On their showing, the 'maximiza-
tion ' argument of laisser faire would amount to nothing more
than saying that when individual bargaining is unrestricted, the
freedom of individuals to bargain will be maximized!

But somehow there has always been a certain apologetic strain
in even the most formal and positive of expositions: apologetic,
either in the sense of advocating a laisser-faire policy, or of claim-
ing some ultimate sanction for the capitalist system, at any rate,
in some reformed state. It is significant that the opponents of
privilege and the believers in equal opportunity have always
made their strongest attack on trade-union action and ameliora-
tive social legislation. And one of the main applications of the
'ordinal' conception of utility has been an attack on the theory
of progressive taxation.

That the alliance between liberalism and economics was
becoming embarrassing is proved by the increasing disclaimer
that such an alliance existed. Most of the recent methodological
studies stress the absolute 'neutrality' of economics. And it is an
irony of history that marginal utility which with its offspring,
marginal productivity was at one time claimed as a complete
answer to all practical problems, should now be said to prove
nothing. When this new formalism was first propagated a few
years ago in the happy-go-lucky English atmosphere it met with
considerable opposition. Because of that opposition, expressed
by those reared in the tradition of welfare economics, it was
often overlooked that the advocates of neutrality were no more
ready than their opponents to discard the remnants of the
economist's influence on practical affairs. If they spoke on
political problems qua citizens rather than qua economists, the
knowledge that they were expert in economics (a subject now
grown more formal, more scientifically 'precise', and more

1 L. Robbins, The Nature and Significance of Economic Science (2nd edition,
P- H3-

412

CONCLUSION

difficult for the layman to apprehend), helped to buttress their
case in spite of their modesty. They still used 'consumers'
sovereignty' as the criterion by which to judge policy. And it
was only in methodological discussions with their fellow practi-
tioners that they admitted the very slender link of that concept
with any factor of importance in the real world.

Lately, the continuance of the old alliance has been made
more difficult. The impact of events, both on the problem of
policy within capitalism and on the problem of capitalism itself,
was formidable. But it has been rather the immanent necessity
of theoretical development itself which has tended to undermine
the political-philosophical foundations of economics. This is not
the place for a detailed consideration of these theoretical develop-
ments. But it may be said that the two most important of them,
the theory of monopoly and imperfect competition and the
theory of crises, have weakened both the belief in the existence
of a self-adjusting mechanism and in the special beneficence of
any situation which the market may create. We know now that
there are market situations in which a stable equilibrium is
unlikely, or in which it can only be achieved in a way that
destroys the 'maximization' argument. The equilibria of imper-
fect competition (the most likely ones in modern capitalism) are
seen to involve lower output, higher prices, and lower payments
to labour than the classical competitive equilibrium. And the
'contrived' variety of products on which these equilibria are
built, rob the concept of consumers' sovereignty of the last traces
of significance.

In the theory of crises (which is so specialized that hardly any-
thing has been said about it in this book), the belief in self-
adjustment has always been put to its severest test. The latest
work in this field, Mr. Keynes's The General Theory of Employment,
Interest^ and Money (1936) goes back to much of the criticism of
certain aspects of capitalism contained in the writings of Malthus,
Sismondi, and Proudhon, and makes an attack on lamer fair e as
an integral part of its doctrines.

There can be no doubt that some of these developments are
salutary if they make it impossible to maintain, even disguisedly,
the pretence that there is an economic case either for a policy of
laisser faire within capitalism or for capitalism itself. But there is
also no doubt that these new tendencies create serious problems.

413

CONCLUSION

Robbed of a foundation of political philosophy on which (how-
ever illegitimately) it had based itself, economics is in great
danger of becoming a plaything of demagogy. The asceticism
preached by the formalists is not likely to satisfy economists for
long. And it is significant that many of the younger economists
are turning once again to a deliberately normative theory,
directly applicable to problems of social reform. Their main
theoretical guides are the theories of imperfect competition and
of crises. But these same theories (though not always in the same
version), are being used by German and Italian economists to
justify Fascist policy. And some slight signs of that tendency are
not lacking even in the liberal atmosphere of English and
American economics.

The danger here arises from a lack of clear perception of the
social premisses of economics and a consequent ignorance of the
relation between the science of economics, the theory of the
state, and the philosophy of society. But these causes arc of course
intimately related to the subjective, individualist approach
which became dominant in economics in the post-Ricardian
era. Its so-called 'universal' character, which is sometimes put
forward as a justification for subjectivism, is, at best, really
nothing more than lack of relevance to the problems of a par-
ticular social structure. From the point of view of the practical
problems which it is called upon to answer, this new approach
is seen to involve insignificant abstractions from reality. And it
is no accident that the one most quickly to succumb to dema-
gogic abuse has been the mathematical version which repre-
sents the logical extreme of the modern theory.

To plead for a greater concern with social philosophy while
the foundation of the theoretical apparatus remains unchanged
is of little use. The two must be organically related. And for that
purpose political economy must begin with abstractions that
represent basic social data the 'economical structure 5 , as
Richard Jones called it and build its theoretical system on
these. Only then can it hope to make sure that even its most
recondite theoretical conclusions will easily find their way back
to the reality which they are designed to explain and to serve.
But it is impossible to prophesy that such a change will come
about in the near future. Meanwhile, although alliances in the
field of theory are less easy to achieve than in the field of politics,

414

CONCLUSION

there may yet be room for a limited and temporary alliance
between those who do, and those who do not, believe in the
desirability of a far-reaching change. The basis of such a union
would be a combined resistance to those forces which would
abuse modern economic theory by turning it to reactionary
purposes, which would enthrone the omnipotent state, itself a
creature of sectional privilege, under cover of a 'neutral' econo-
mics. Such a union could not overcome fundamental differences
of theory; and it could not last very long. But it might last long
enough to prevent the destruction of all that both contending
parties claim to hold dear.

415

Bibliography

1 he following is a short list of writings which I think may be
useful for further reading. It consists of books and articles about
the authors and theories dealt with in this book, but does not, as
a rule, include the authors' own works. The general section
includes not only complete histories of economic thought but
also writings which cover a substantial part of the subject-
matter of the present book.

GENERAL

Blanqui, A., Histoire de V economic politique en Europe (1845).
Bousquct, G.-H., Essai sur U evolution de la pensee economique (1927).
Cannan, E., Theories of Production and Distribution from ijjGto 1848

^1924) ; A Review of Economic Theory (1929).
Dobb, M. H., Political Economy and Capitalism ( 1937) ; An Introduc-

tion to Economics (1932); Capitalist Enterprise and Social Progress

Diihring, E., Kritische Geschichte der Nationaloekonomie unddes Social-

ismus (1874).

Engels, F., Anti-Diihring (no date), part ii, ch. x.
Espinas, A., Histoire des doctrines economiques ( 1 892) .
Gide, C., and Rist, C. 3 A History of Economic Doctrines (1927).
Gonnard, R., Histoire des doctrines economiques (1930).
(^ray , A. , The Development of Economic Doctrine (1931).
Hancy, L. H., History of Economic Thought (1927).
Ingram, J. K., A History of Political Economy (1923).
Laski, H. J., The Rise of European Liberalism ( 1 936) .
Marx, K., %ur Kritik der politischen Oekonomie (1930); Theorien Uber

den Mehrwert (1921).

McCulloch,J. R., The Literature of Political Economy (1845).

417 o

BIBLIOGRAPHY

Myrdal, G., Das politische Element in der nationalokonomischen

Doktrinbildung (1932).

Schumpeter, J., Epochen der Dogmen und Methodengeschichte (1925).
Zuckerkandl, R., %ur Theorie des Preises (1936).

CHAPTER I

Ashley, W. J., An Introduction to Economic History and Theory (1913).
Brentano, L., Ethik und Volkwirtschaft in der Geschichte ( 1 90 1 ) .
Brodrick, The Economic Morals of the Jesuits ( 1 934) .
Grossman, R. H. S., Plato To-Day (1937).
Engels, F., The Origin of the Family, Private Property and the State

(1902).

Heitland, W. E., Agricola (1921).

O'Brien, G., An Essay on Medieval Economic Thinking (1920).
Robertson, H. M., Aspects of the Rise of Economic Individualism

(I933)-

Tawney, R. H., Religion and the Rise of Capitalism (1929).
Walker, P. C. G., 'Capitalism and the Reformation', Economic

History Review,, November 1937.
Weber, M., Die protestantische Ethik und der Geist des Kapitalismus

(1904-5).

CHAPTERS II AND III

Clark, G. N.. Science and Social Welfare in the Age of Newton (1937).

Fitzmaurice, Lord E., Life of Sir William Petty (1895).

Hayek, F. A. v., Introduction to R. Cantillon, Abhandlung fiber
die Natur des Handels im Allgemcinen (1931).

Hekscher, E. F., Mercantilism (1931).

Hessen, ' Economic and Social Roots of Newton's Principia ' in
Science at the Cross Roads (ed. Bukharin, 1931).

Higgs, H., The Physiocrats (1897).

Higgs, H., and Jevons, W. S., articles on Cantillon, in R. Can-
tillon, Essai sur la Nature du Commerce en General ( 193 1 ) .

Hull, C. H., Introduction to The Economic Writings of Sir William
Petty (1893).

Johnson, E. A. J., Predecessors of Adam Smith (1937).

Jones, R., 'Primitive Political Economy in England', Edinburgh
Review, 1847.

418

BIBLIOGRAPHY

Oncken, A., Geschichte der Nationaloekonomie, Die ^eit vor Adam
Smith (1902).

Viner, J., Studies in the Theory of International Trade (1937), chs. i.
and ii.

Ware, N. J., ' The Physiocrats, A Study in Economic Rationalisa-
tion', American Economic Review, vol. xxi.

CHAPTER IV

Bonar, J., Malthus and his Work (1924).

Bowley, M., Nassau Senior and Classical Economics (1937).

Gintzburg, S., The House of Adam Smith (1934).

Marshall, A., 'Ricardo's Theory of Value', Appendix I in

Principles of Economics (8th edition).
Patten, S., 'The Interpretation of Ricardo 3 , Qiiarteih Journal of

Economics, 1893.

Price, L. L., Political Economy in England (1927).
Rae, J., Life of Adam Smith (1895).
Scott, W. R., Adam Smith as Student and Professor ( 1 937).
Stewart, D., Biographical Memoir of Adam Smith ( 1 8 1 1 ) .

CHAPTER V

Beales, H. L., The Early English Socialists (1932).

Beer, M., A History of British Socialism (1929).

Brogan, D. W., Proudhon (1933).

Cuvillier, A., Proudhon (1937); 'Marx et Proudhon 5 , A la lumiere

du Marx is me (1937), vol. ii.

Halevy, E., The Growth of Philosophic Radicalism (1928).
Hollander, J. H., Introduction to Ricardo's Notes on Malthus

(1928).

Keynes, J. M., 'Robert Malthus', Essays in Biography (1933).
Laski, H. J., Political Thought from Locke to Bentham (1920).
Marx, K., Die Deutsche Ideologic (1932); The Poverty of Philosophy

(no date).
Menger, A., The Right to the Whole Produce of Labour (ed. Foxwell,

1899).
Palyi, M., 'Die romantische Geldtheorie', Archivfur Sozialwissen-

schaft und Sozialpolitik, vol. xlii.
Plekhanov, G., Studies in the History of Materialism (1934).

BIBLIOGRAPHY

Roscher, W. 3 ' Die romantische Schule der Nationaloekonomik in
Deutschland', ^eitschrift fur die gesammte Staatswissenschaft
(1870).

CHAPTER VI

Engels on Capital ( 1 938) .

Lenin, V. I., The Teachings of Karl Marx (no date).
Mayer, G., Friedrich Engels (1936).
Mehring, F., Karl Marx, His Life and Work (1936).
Ryazanov, D., Karl Marx and Friedrich Engels (no date).
Strachey, J., The Theory and Practice of Socialism (1936); The
Nature of Capitalist Crises ( 1 935) .

CHAPTER VII

Bohm-Bawerk, E. V., Capital and Interest (1922).

Bowley, M., Nassau Senior and Classical Economics (1937).

Hamilton, M. A., John Stuart Mill (1932).

Hutt, W. H. , Economists and the Public ( 1 936) .

Marshall, A., 'Mr. Mill's Theory of Value', Memorials of Alfred
Marshall (ed. A. C. Pigou, 1925).

Menger, C., Untersuchungen uber die Methode der Sozialwissenschaften
und der Politischen Oekonomie insbesondere, vol. ii of Collected
Works (1933); 'Die Irrthumer des Historismus', in vol. iii of
Collected Works (1935); 'John Stuart Mill' in vol. iii of
Collected Works (1935).

Mill, J. S., Autobiography (1873).

Seligmann, E. A. R., Essays in Economics (1925), ch. v.

CHAPTER VIII

Bukharin, N., The Economic Theory of the Leisure Class (no date).
Hayek, F. A. v., 'Carl Menger' in Menger C., Collected Works,

vol. i( 1934).

Hicks, J. R., c Lon Walras' in Econometrica (1934).
Keynes, J. M., 'Alfred Marshall, 1842-1924', Memorials of Alfred

Marshall (ed. A. C. Pigou, 1925).
Mayer, H., 'Der Erkenntniswert der funktionellen Preistheo-

rien', Die Wirtschaftstheorie der Gegenwart, vol. ii (1932).

420

BIBLIOGRAPHY

Menger, C., c Eugen von Bohm-Bawerk', in Menger, C.,
Collected Works , vol. iii (1935).

Morgenstern, O., 'Die Drei Grundtypen der Theorie des subjekt-
iven Wertes', Probleme der Wertlehre (ed. L. Mises and A.
Spiethoff) , vol. i ( 1 93 1 ) .

Osorio, A., Theorie mathematique de Vechange (1913).

Robbins, L., An Essay on the Nature and Significance of Economic

^Science (1935); 'The Place of Jevons in the History of Econo-
mic Thought', The Manchester School, vol. vii.

Wicksell, K., Vber Wert, Kapital und Rente (1933).

Young, A. A., 'Jevons' Theory of Political Economy', Economic
Problems Old and New (1928).

421

Index

Abstinence, 342-3, 346-8, 362, 369,

370, 394

accumulation, 122-3, 169-72, 187-
JT"T 1 99-209, 247-8, 288-95,

313-4
agriculture, 27, 38-9, 57, 131-2,

!37-8, 156, 171, 228, 310-1,

326-8

Albertus Magnus, 48
Allen, R. G. D., 408
anarchism, 238, 241, 248
Antonio, St., 49
Aquinas, St. Thomas, 47-53
Aristotle, 15, 32, 33-7, 40, 41, 42,

47-**> 5 X 53, ioi
Ashley, W. J., 13, 51, 309
Athens, 28-32
Augustine, St., 48
Austrian school, 305, 326, 346, 364,

3 6 7> 37 ^ 3 8 7> 39 1 * 392, 393>

400, 408, 409-10
autarky, 218, 222
Aylesbury, Richard, 72

Bacon, Sir F., 76, 91, 92, 145, 231

'balance of bargains', 84

'balance of tradeV^6, 77, 79, 84-7,

120 Vx**^

general and particular, 83-4
Barbon, N., 68
barter, 35, 157
Bailey, S., 180, 332, 333~ 6 > 33 8 >

345> 347 3 6 7
Bastiat, F., 300, 301
Becher,J.J., 68
Bentham, J., 199, 244, 253-4, 37^,

392

Bible, 24-27, 29, 239
bimetallism, 54
Board of Trade, 60, 84

Bodin,J., 60, 61-2, 63, 80, 89, 90, 92
Bohm-Bawerk, E. v., 346, 381, 387,

399-400, 402-4
Boisguillcbert, P.-P.A., 101
Boulton, M., 97, 140
bourgeoisie, 98

bourgeois society, 257-8, 261, 264-5
Bo\vley, M., 346-7
Bray, F., 232, 243, 244, 246
Brentano, L., 89
Bright, J., 300
bullion, 66-7, ;2~5, 77-8, 79, 82,

84, 1 1 2

committee, 192, 216
bullionism, 63, 71-8, 84, 1 1 1, 261
Buridan, J., 53
Burke, E., 213-4, 215, 216
business class, 152

Cairnes, J. E., 308-9, 362

Calvin, 53

cambio sicco, 74-5

-fictitio^ 74-5

cameralists, 103

Cannan, E., 63, 145, 346

canonists, 40, 46-3, 54-5, 60, 63,

69, 101, 152, 241
Cantillon, R., 114, 120, 123-7, 128,

129, 130, 141, 147, 156, 158,

159, i 66
capital, 22, 35-6, 57, 69, 80, 101,

158, 163-72, 180-2, 184, 191,

222, 236, 241, 247-8, 269-77,

288, 312-4, 317, 318, 320,

329-3o> 33!-2, 340, 347,
3 6 3-4 3 8 - J 5 4' 42-4
- accumulation of c., 122-3, l ^9~
'72, 187-91, 199-202, 247-8,
288-95, 311, 313-4
concentration of c., 290, 295

423

INDEX

Capital continued

constant c., 274, 278-9, 290, 292

organic composition of c., 278-9,

282-7, 290, 291-4

productivity of c., 164, 184,

247-8, 320, 327, 346, 347-9

variable c., 272, 278-9, 290
riapitalism, 22, 129

commercial c., Ch. II, 43, 55

industrial c., 66, 91, 93, 94-100,

122-3, 203-4, 208-9, 227-9,
230-1, 257-8, 307, 313-6,
353, 358-9, 348, 351, 411-2

capitalist production, 22, 101, 131-2,
165, 235, 264-5, 273-7,
281-2, 292, 310, 333, 403-4

Carey, H. C., 300-1

Cassel, G., 406

caste system, 30-1, 33-4

Chartism, 353, 359

Child, Sir J., 60, 68, 70-1, 84, 85-6,
122

choice, theory of, 372, 384-5, 405,

4*3

Christianity, 26-7, 35, 40-2, 46-7
church, 42, 45-6, 48-53, 54-5, 56-7,

64, 88-9, 90, 91, 98, 213
Cicero, 145
city state, 27-30
C&k,J.B., 4 o2
pfessicism, economic, 142-4, 197-9,

251, 296-7, 306-8, 310, 324,
/ 35 2 J 355> 359-60, 336-71
glasses, 25-6, 27-8, 30-3, 38-9, 42,

235, 258, 294, 312-3, 348
Cleisthenes, 28
Cliffe Leslie, T. E., 309
Cobden, R., 300
Cockayne, 59

Coleridge, S. T., 210, 354-6
collegia, 45
coloni, 44

colonies, 42, 59, 85-6, 213
Columbus, 67
Columella, 39
commenda, 52

'commodity fetishism', 266
communism, 30-1, 33, 237-8, 35 8 ~9>

401-2
competition, 122, 135, 161-81, 236,

269, 276, 277-87, 299-300,

324, 356-9, 361, 378-9, 289

imperfect c., 397, 413

complementarity, 384, 404
Comte, A., 355-6
Condillac, E. B. de, 317-9, 336
Condorcet, A.-N. de, 194
conservatism, 354-6
consumable goods, 24, 384
consumers' sovereignty, 413
consumer's surplus, 395
consumptibles, 51
consumption, 203, 235-8

unproductive c., 206-9, 258-60,

293, 366

contractus trinus, 52-3
corn laws, 190
cost, law of, 400-1
cost of production, 48-9, 135, 158-9,

164, 185, 337, 338, 343~5>

347-8, 362, 366, 368-9,

378-80, 394, 400-1
Cournot, A., 322-4, 325, 327,

375-6, 388, 392, 396, 406

290
190-1, 235, 236-7, 288,

293-5, 373-4. 4 T 3
Grossman, R. H. S., 32
Culpepper, Sir Thomas, 70, 122

Damnum emergens, 52
Davanzati, B., IOT
D'Avenant, C., 68, 85, 86
Davenport, H. J., 401
debasement, 54, 61-2, 82, 115, 117
deduction, 260-1, 307
demand, 22, 49-50, 77, 100, 117,
125-6, 128, 158-60, 164-5,

l82, 200-2, 236-7, 280, 318,

S3 6 , 338-9> 344> 347> 3 6 2,
366, 368, 379-80, 389-90, 396

effective d., 206-9

elasticity of d., 336, 397
democracy, 27-32, 213-4
dialectical materialism, 255, 257^-8
diminishing returns, 189, 194, 196,

311,315,362-3
Dion, ai , 33

distribution, 163-72, 184-5, 256-7,

/ 258-60, 299, 310, 329-30,

^/ 345-6, 361-4* 380-1, 388,

393-9

disutility, 373>379~8o, 394, 395-6,409
division of labour, 24, 27, 29-30,

1 06, 156-8, 1 60, 161, 262-3
Diihring, .,13

424

Duns Scotus, 50, 52
Dupuit, J., 322
Dionysius, 29

INDEX

Fabianism, 359
factory act, 349
factory system, 58, 97
* Fascism, 407, 414
East India Company, 59, 60, 72-3, Fathers, Early, 46-8, 50
76, 78-9, 80, 83, 95 'fear of goods', 68-9, 96

Eastland Company, 59, 95 feudalism, 42-6, 50, 56-7, 64, 91,

Eck, 53 v r 208, 222, 263-4

economic development, 187-91, 238, Fichte, J. G., 32, 212, 214-5, 217-9,

222, 223
Fisher, I., 406
forestalling, 49
Fourier, Ch., 232

287-95,310-1,365
economic method, 102-3, 2O 4> 234,
258-61, 306-9, 311-2, 320-1,
360-1, 371-2, 375-6, 382-3,

39 2 -4
economic policy, 348-50, 352-9,

374, 390, 392-3, 399, 49
economics, modern, 366-71, 416-7

scope of, 21-2, 34, 55, 249-50,

306-9, 31 1-2, 320-1, 348-50,

393> 360-1, 371-2
Edgeworth, F. Y., 378, 380, 406
elite, 31, 32
enclosures, 57, 62
Engels, F., 30, 235, 253, 254, 280,

282, 292
engrossing, 49
entrepot trade, 59
entrepreneur, 320
Epicureans, 145
Epictetus, 145
equilibrium theory, 320, 322, 347,

379-8o, 389-91, 396-9, 44~7
Evelyn, J., 102
exchange, 22, 24, 30, 34-7, 51, 130,

135, H9-50, J56-7, 246,

258-60, 266-8, 270-2, 318,

332, 337, 367-9> 377-8o,

381-2, 386-7

foreign e., 73-5, 77, 81, 106, 1 1 1,

124, 192
exchange-value, 34-7, 48-50, 101,

1 i 6, 129, 159-62, 265-8,
278-83, 322-4, 333~ 6

exploitation, 25-6, 27, 41, 42, 97-9,
235, 240, 242, 244, 274, 289,

292, 317, 34 8
exports, 62, 80, 85

surplus, 68-9, 75-6, 77-8, 80, 84,

117, 119, 124

Factors of production, 164, 222, 318,
319-20, 329-30, 332-3, 345,
348, 398

France, 143, 200, 233-43, 309,

316-24 \^S
Franklin, B., 101
fungibles, 51

Galiani, F., 101

Gentz, F., 214, 215-7, 219

Germany, 94, 143, 144, 210-29,

301-8, 324-30, 359
Gide, C., 13, 302
Godwin, W., 194
gold, 39, 53-4, 6 1 -2, 66-7, 7 2 ~5>

77-8, 162

goods, classification of, 383-5, 403
Gospels, 41-2
Gossen, H. H., 326, 37i~3> 377> 382,

383, 3.89, 392 e
government intervention, 64-6, 72-

3, 87, 94-100, 148-55, * 68,

348-5, 353, 356-9
Gray, A., 15, 176
Gray, J., 232, 243, 244, 245-6
Greek economics, 27-37
Gresham's law, 54, 73
guilds, 45, 95-6, 99
Guillebaud, C., 398

Hales, J., 60, 61, 62-3, 67, 73, 80,

82,85
harmony, theory of, 154-5, 198-9,

235, 299-301
Hebrew Society, 24-7
Heckscher, E. F., 64, 68, 76, 85
hedonism, 375-7, 382, 383, 401-20
Hegel, J. G., 234, 255
Hicks, J.R., 408

Hildebrand, B., 302, 304, 305, 326
historical school, 301-9, 311, 382
Hobbes, Th., 90-3, 103, 104, 145,

231

425

INDEX

Hobson, J. A., 366

Hodgskin, Th., 232, 243, 244, 247-8,

302

Hornick, Ph. W.v., 64
Hufeland, J., 325
Hume, D., 114, 119-23, 124, 127,

129, 146, 194
Hutcheson, F., 145

Ideology, 30-2, 64-5, 153-5, J 9 8
imperialism, 292
imports, 68, 72, 80, 85
imputation, 388
Indifference curves, 324, 406
indifference, law of, 378
individualism, 45, 88-94, 148, 217,

35 6 ~9

induction, 260-1, 307, 31 1 f

industrial reserve army, 290, 292 \/
industrial revolution, 95-6, 140
inflation, 62
Ingram, J. K., 309
institutionalists, 366, 409
interest, 35, 50-53, 69-71, 106,

101-1, 115, 121-2, 166, 240,

241-2, 284, 286-7, 347-8,

400, 402-4
invention, 238, 241
investment, 50, 51-2
Isaiah, 40
ius gentium, 40

James I, 59

Jerome, St., 47

Jesus, 40-1

Jeyons, W. S., 123, 323, 367, 371,

/ 373-82, 383, 388, 390, 392,

398

Jews, 26, 50, 1 76, 250
joint stock company, 59-60
Jones, R., 84, 302, 309-16, 324, 368,

414

jubilee, 25

just price, 37, 48-50, 52, 53, 218
justice, 36-7, 48-50, 239-41, 348

Kant, L, 239

Kathedersozialismus, 302, 359 *
Kautsky, K., 254 /

Keynes, J. M., 121, 413 > x
Knapp, G. F., 36, 216
Knies, K., 302, 34-~5> 37> 326
Knight, F. H., 408

Kugelmann, L., 281

Labour, 48, 68, 100-1, 105-9, * 1 5~7>
125-8, 135, 156-62, 180-1,
198, 205, 222, 238, 242, 245,
246, 247-8, 260-1, 262-4,
318, 362, 373

fund, 313-4

power, 184, 272-4, 287, 290-1

productive and unproductive 1.,

131, 136, 156, 169, 170-2,
202-3, 206, 208, 313-4, 318,

3'9. .

productivity of L, 250, 258,

274-7, 282-3, 289-90

stored 1., 180-1, 247-8

theory of value; see value

value of 1., 162, 1634, J 83, 205,

265-6, 269
laisserfaire, 137-9, 148-55, 222, 228,

233, 237, 297, 298, 317, 348,

35 ! > 352, 354-9. 381-2, 39-

2, 409, 411-5

land, 164, 222, 318, 319-20, 329-30,
x 342-3, 345, 348, 398; see also

landed property, rent
landed property, 43-4, 57, 81, 98,

118, 122, 123, 137-9. I5 1 *

1 86, 189, 222, 286, 313-4,

348, 355

Laski, H. J., 64, 88, 90
latifundia, 38-9, 44
Lauderdale, Lord J. M., 336
Lausanne school, 391, 404-7, 409-10
Law,J., 114, 118-9
Lenin, N., 287, 292
Lessing, G. E., 91
liberalism, 88-94, 212-4, 216, 225,

231, 298-301, 351, 352,406-

7,411-5 ^

List, F., 212, 225-9, 3 OI Xf^^
Lloyd, W. F., 337-8, 345^
Locke, J., 93-4, 114-8, 120, 122,

124, 125, 128, 145, 146, 158,

198, 213, 231

Longfield, M., 338-40, 345
Lotz, J. E., 325-6
lucrum cessans, 52
Luther, 52, 67
Luxemburg, R., 293

Machiavelli, 89-90, 91, 92,
machinery, 238, 241
Malthus, D., 194

426

231

INDEX

Malthus, T. R., 15, 124, 143, 168,
182, 189, 191, 193-6, 199-
209, 210, 229, 230, 232, 234,
235, 236, 237, 243, 271, 310,
311, 321, 330, 332, 347, 359,

413
Malynes, G., 67, 68, 69-70, 71-6,

8 1, 83, in, 117
Manley, T., 70
manor, 44
marginalism, 327, 325, 337~4> 352,

" 368-71
marginal^roductivity, 329-30, 339-

^o> 3#8, 391, 400-1
marginal utility, 158, 338-40, 371-

<i,394

market, 22, 96, 100, 157, 200, 272,
362, 367-9; see also: ex-
change, value, price, capita-
lism, competition

law of, 199-203, 300

Marshall^-A., 261, 309, 341, 347,
-T7, 37 8 > 379, 3^6, 391-9,
400, 40 1 , 411

Marshall, Mrs., 392

Marx, K., Ch. Vi; 13, 22, 30, 68,
i35> J 55> r 59> l6l > l6 5> l8 2,

184, 185, 187, 190, 197, 202,

#^9, 235, 237, 238, 239, 243,
244, 245, 246, 247, 248, 296,
302, 307, 310, 312, 314, 316,
332. 333> 334> 349, 3^8,
. 403

Marxism, 18, 193, 296, 351, 409

Masone, Sir J., 65

materialism, 90

dialectical rn., 255-8

mathematical school, 322-4, 327,

37 i ~3, 315-6, 388-91, 392,

404-7

Mayronis, F. de, 52, 53
McGulloch, J. R., 184, 298, 299,

33 i, 332-3, 343> 347, 367
medium of exchange, 35-7, 51,

157-8

,Melanchthon, 60

Menger, C., 301, 303, 306-7, 367,
371, 382-8, 392, 399, 405,

42?, 4 J
mercaiyffism, Ch. II; 63-71, 101,

156, 165, 170, 171, 172, 261,

271
merchant, 57, 58, 63, 98, 101, 151;

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