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Full text of "Economic Ideas"

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ECONOMIC IDEAS 
t^L Studv of Historical 'Perspectives 



PRENTICE-HALL ECONOMICS SERIES 
E. A. J. Johnson, Editor 



ECONOMIC IDEAS 



Study of Historical 'Perspectives 



by Ferdinand Zweig 

Department of Economic and Social Studies, the University of Manchester 
Onetime Professor of Political Economy, the University of Cracow 



Yor\ - PRENTICE-HALL, INC. 1950 



Copyright, 1950, by PRENTICE-HALL, INC. All rights re- 
set ved. No part of this bool^ may be reproduced, by mimeo- 
greph or any other means, without permission in writing 
from the publishers. Printed in the United States of America. 



CONTENTS 



L MEN AND IDEAS I 

Interpreting the history, i. Who are the economists? 6. "social Freud- 
ism" n. Are the greatest mtnds attracted to the study of economics? 
16. The principle of selection, ig. The predictions of the economists, 
25. The seeds in the history of doctrines, 33. The method most success- 
fully applied, 37. Legislation and doctrine, 41. 

II. SOME HISTORICAL EXAMPLES 46 

Ricardo and Marx, 46. Lenin and Marx, or the revolt of backward 
countries, 53. Mandeville, forerunner of the naturalists, 74. Marx and 
f^eynes, 80. John Law and John Maynard Kcynes, 87. The EasTlndia 
Company and the rise of British liberalism, 97. Is Malthus still right? 
107. 

III. FOUR STAGES OF ECONOMIC DEVELOPMENT 114 

The dialectical movement, 114. The medieval doctrine.^ny. The mer- 
cantile systemr-121. The laissez-faire doctruif, 126. Ncosociajism, 131. 
After socialism what? 735. 

IV. THE DOCTRINE OF PLANNING 142 

Economic study on three planes, 142. Structural change and survival, 
149. The organic and moral elements in national economy, 154. The 
geographical background of national economy, 756. Circular move- 
ments, 160. The qualitative distinctions, 163. The theory of social costs, 
167. The institutional approach, 770. Target and balance economy, 773. 
The achievement and maintenance of full employment, 776. 

V. THE ECONOMISTS FACING THE FUTURE l8o 

Pocket, head, and heart, 180. Can we reverse the trends? 7#j. What can 
we learn from the history of economic ideas? 188. 



1 

MEN AND IDEAS 



Interpreting the History 

The history of economic thought, like all other history, needs 
to be rewritten for every generation not only because another 
chapter which has enriched our experience needs to be added to 
its books, but because the remainder needs to be interpreted anew. 
Without interpretation history is meaningless. Interpretation 
means adding spirit and life to the mere collection of facts, taking 
part in the issues of the period by understanding them and not 
merely passing sentence on them from the judge's seat. Every 
generation has a deep insight into some epochs and a looser and 
more detached understanding of others. Every generation is in- 
terested in different parts of the immense and infinite wealth of 
material presented by historical experience and will therefore 
choose different criteria for the selection of material. ^ 

The present generation is interested above all else in the rich 
material presented by the mercantilist epoch. We understand bet- 
ter its spirit, its issues, its working ideas, its institutions. That epoch 
practiced the economics of control which is one of the main sub- 
jects of our own studies at the present time. Our planners today 
may be regarded as the grandchildren of that eventful period. Our 



MEN AND IDEAS 

interpretation of mercantilism has long departed from that of the 
liberal epoch, which regarded the mercantilist writers as obscur- 
antists, denied the true light of economic wisdom. We have much 
to learn from the mistakes and trials of that period, from the work- 
ing of its institutions, from the limitations implied in any control. 

For the same reason the canonist school of the Middle Ages with 
its ideas of iustitm prctnim (just price) and w*tum sdarnim (just 
wages) presents much greater interest than in former times. We 
have come to realize that the idea of iiistnm sularium not only is a 
norm of ethical judgment, but represents a short formula of a spe- 
cific behavior which influences the real process of price formation 
more than we supposed. The inquiry made in 1939 by the Oxford 
group of economists revealed that the entrepreneur in fact behaves 
according to his idea of a "just price." He does not act as the eco- 
nomic theorist of the marginal utility school depicted him as act- 
ing trying to get the maximum value for the minimum supply 
but makes a calculation of his total costs, seeking what he regards 
as a just bargain. It may be that six or seven centuries of Christian 
teaching have done more even in economics than we imagined at 
first, inculcating in man a certain pattern of price behavior. We 
grant that this price behavior was much more prevalent in the Mid- 
dle Ages than now, but it still survives, and as a matter of fact is 
being revived and strengthened in the practice of large-scale cor- 
porations much beyond anything experienced in the nineteenth 
century. 

There is also great interest on the part of the modern economist 
in the history of the socialist school, which was once treated as be- 
longing to the field of political and social study but outside the 
temple of pure and objective economic analysis. We now view the 
so-called objectivity with different eyes, and I will have a word or 
two more to say about it later on. 

We know that every theoretical truth is related to a certain set 



MEN AND IDEAS 

of assumptions, and the socialist school, consciously or uncon- 
sciously, has selected a different set of assumptions from those of 
the classical school. Whereas the latter saw national economic ac- 
tivity achieved through the operations of the individual striving for 
wealth and maximum profit, the socialist school selected for con- 
sideration the national interest, i.e., the interest of a nation re- 
garded as a whole, the striving for a maximum national income. 

This assumption makes many socialist tracts verv interesting 
reading at the present time, when attention is being paid to the 
Criterion of maximum real national income. The further contribu- 
tion of the Marxist school to the understanding of a monopolistic 
economy is related to its assumption of the class struggle. For indi- 
viduals striving for individual wealth, the Marxist school has sub- 
stituted social classes striving for the maximum wealth of their 
members, thus throwing additional light on the economic struggle 
under monopolistic conditions. 

The chief interest of the present-day economist is turned to the 
institutionalist and historical school, which stresses the importance 
of institutionalist setting and mass behavior for the study of eco- 
nomics. The modern planner is primarily an institutionalist and 
behaviorist. 

On the other hand the marginal utility and the mathematical 
schools, which began with Jevons, Menger, and Walras in the sev- 
enties of the last century, have lost much of their former interest 
for the economist and have even come to seem antiquated, since 
they are based on assumptions which have lost much of their valid- 
ity for our own age. 

There are two kinds of approach to economic thought. One of 
these may be termed the historical, the other the theoretical. The 
historian regards economic thought as generalization on economic 
conditions and economic policy valid for a given age; the theorist 



MEN AND IDEAS 

regards it as truth valid for all ages, although truth itself is hypo- 
thetical, i.c., based on a certain set of assumptions. Here at this 
point there is a meeting-place for the historian and the theorist. If 
a theoretical truth is valid for a set of assumptions, it is valid for an 
age for which those assumptions are correct. Every age selects its 
own assumptions which have the value of reality, i.e., which coin- 
cide with reality in the highest degree. 

The canonist school of the Middle Ages consciously or uncon- 
sciously chose the assumption that men work to maintain their 
traditional standard of living but not to accumulate indefinite 
riches, and they thus reached the conceptions of iustum pretium 
and iustum salarium. 

The mercantilist writers in the sixteenth and seventeenth cen- 
turies assumed that states, that is, kings and princes, are engaged in 
a never-ending struggle for power and wealth, and arrived at the 
conception of a one-sided balance of trade of an aggressive type. 
The classical school assumed that men as individuals are engaged 
in the struggle for maximum profits under highly competitive con- 
ditions, and arrived at the conception of the division of labor and 
of what is called laissez-faire economics. 

These respective assumptions were related to a given age, and 
had the greatest practical value for their generations. People were 
interested in exploring the avenues opened by these assumptions 
because they presented the best clue for the understanding of their 
world. This interest is the decisive factor in developing certain 
fields of study, as we have to acknowledge in all disciplines and 
sciences. First the writer must be interested in the study, then the 
publisher, then the reader and the body of scholars and scientists 
who call the tune in any given period. It is a fair guess that all these 
classes will be more interested in studies conducted on realistic as- 
sumptions than in others. 

When once I explained that economic theory is a hypothetical 



MEN AND IDEAS 

science based on a given set of assumptions, I was asked by a 
listener: "Well, there must be thousands, if not millions, of com- 
binations of assumptions, and is there any chance that economic 
theory will progress beyond the limits of first approximations? 
There must be an infinite and impenetrable jungle of cases and 
sub-cases, and the whole science must be very casuistical with very 
few general principles." This seemed to me to be a very good point. 

As a matter of fact the present state of economic study resembles 
a jungle with an infinite number of cases and sub-cases. Everyone 
takes up a case of his own, analyzing his own assumptions at will, 
starting his article or study with some such preface as: "We write 
for saving 5, for investment /, for rate of interest /?, and assume 
that . . . Thus we have the following sets of equations." And these 
are afterwards analyzed and commented on in a scholarly and 
mathematical way. 

My answer to my listener's question was: "Our purpose is to 
make only assumptions that are realistic and valid, and not any 
odd assumptions taken from the air; this amounts to the proposi- 
tion that we have to study history, past and present, and trends 
pointing to the future. We have to concentrate on the most inter- 
esting assumptions, because economy must be practiced in eco- 
nomic studies themselves. Our life, our effort, our means are 
all restricted, we have little time, and we must concentrate on 
what seems to us to be most important. And in every generation 
there is fortunately a large measure of agreement among econo- 
mists as to which assumptions are most interesting and what prob- 
lems are most pressing. The theorems based on these solid assump- 
tions, although hypothetical in nature, are regarded by this gener- 
ation as real absolute truth, just as the so-called 'pure theory' of 
the marginal school was so regarded twenty or thirty years ago. 
From these hypothetical truths generalizations are made, which 
penetrate deep into the consciousness of a given generation 



MEN AND IDEAS 

are regarded later on by the historian of the future as its living 
ideas. 

"When the age passes and the assumptions become hollow and 
empty, the generalizations resemble a deserted palace, visited by 
tourists and students of history and culture. The palace may be 
either already fallen into decay or kept in good repair. But we can 
always learn from its structure, architecture, and internal arrange- 
ment. 

"As a matter of fact we can learn from the economic thought of 
past generations much more than we can learn from old palaces 
and houses. The truths revealed in the great ideas of the past are 
eternal in the sense that they are valid for all ages as long as the 
assumptions on which they are based continue to operate. The 
thought of past ages, as much as present economic theory, is 
eternal, and transitional at the same time, so long as it is con- 
sistent, well-developed and logical. It is eternal because it is 
eternally valid in relation to a given set of assumptions; it is tran- 
sitional because the set of assumptions to which it is related is un- 
likely to be repeated in the same combination. But sometimes it 
might come back in its essentials, and it then assumes the impor- 
tance of the reality. 

"The historical thought of past generations resembles an experi- 
ment, if, of course, we take into account all the differences between 
an experience of history and an experiment in the laboratory." 

Who Are the Economists? 

The history of economic thought is concerned mainly with suc- 
cessful writers, although the success need not necessarily be at- 
tained during their lifetime. Success is measured by the amount 
of influence, primarily on contemporaries, but also on future gen- 
erations. Has the writer influenced the legislation and the eco- 



MEN AND IDEAS 

nomic policy of his age, allowing, of course, for a longer or shorter 
time-lag? Has he taken an active part in molding the economic 
climate of his own or a subsequent generation? Has he contributed 
to or orginated social-economic movements? Finally, has he in- 
spired other writers, who have drawn upon his ideas, conceptions, 
or school of thought? The answer to these questions will mark 
the dividing line between the successful and the unsuccessful 
writers. 

In other words the dividing line is the fertility of the writers' 
conceptions in the realm of policy, legislation, movements, or 
in the realm of thought. The economic historian will concentrate 
first on the writers who took part in shaping reality; the historian 
of economic thought on those who took part in shaping the pat- 
tern of subsequent economic thought. Usually the writers who 
shaped the reality are at the same time the writers who shaped 
thought. Adam Smith, Ricardo, John Stuart Mill, Karl Marx be- 
long to both the first and the second category. On the other hand 
there are a number of great writers highly fertile in the domain of 
thought who have little relevance to economic policy, legislation, 
or movement, writers such as Jevons, Menger, Walras, Wieser, or 
Bohm-Bawerk. 

I consider the writers of the former category greater than those 
of the latter, because their heritage is richer and more lasting. 
They are also accorded No. i priority in the history of economic 
thought. 

What of the unsuccessful writers rehabilitated by historians for 
their intellectual value ? Take for instance Richard Cantillon, the 
distinguished author of the Essai sur la nature du commerce en 
general (1755), a book of great theoretical value, original, very 
progressive for his age, who expressed before Adam Smith the 
same ideas to be found in The Wealth of Nations with great, in 
many respects superior, consistency and purity. Jevons considered 



MEN AND IDEAS 

that Cantillon was the true founder of political economy. But Can- 
tillon's work was unsuccessful, it remained obscure, although it 
gave birth to much of what was written by the physiocrats, by 
Adam Smith, and by Malthus. Quesnay, Mirabeau, Turgot, and 
Adam Smith were close students of Cantillon's excellent book. 
But it was obscured by the fame of Adam Smith, and was soon 
forgotten. As a result Cantillon is very lucky if he gets a line or 
two mentioning his name in the history of economic thought, al- 
though even the present-day reader can find in his work much 
of interest. 

Or take Hermann Heinrich Gossen, the great forerunner of the 
marginal and mathematical school, who published in 1854 Ent- 
wict(elung der Gcsctze des menschlichen Ver^ehrs. He regarded 
himself as the Copernicus of modern economics, and many mathe- 
matical economists still uphold his claim. But he was unsuccessful. 
He sold four or five copies of his book and then, discouraged, 
withdrew it from circulation. He was later rediscovered by Pro- 
fessor Adamson of Manchester, and the discovery was made pub- 
lic by Jevons in the preface to the second edition of his The Theory 
of Political Economy (1879), in which he frankly stated that Gos- 
sen "had completely anticipated him as regards the general prin- 
ciples and methods of economics." 

But Gossen had little influence on the development of economic 
thought, while Jevons, a less original thinker, who published his 
work nearly seven years later, became an important figure in the 
domain of economic ideas. It is therefore the success and not the 
originality of thought that counts in according the priority to 
Jevons over Gossen. 

Contrast Karl Rodbertus and Karl Marx. Rodbertus, author of 
Die Forderungen der arbeitenden Klasse (1837) and of Soziale 
Briefe an von Kirchman (1850) is a highly original and profound 
thinker, very logical, consistent, clear and vigorous, who formu- 

8 



MEN AND IDEAS 

lated long before Marx the main theses of "scientific socialism," 
especially the "law of surplus value," the "iron law of wages," and 
the inevitability of the socialist transformation of society. Adolf 
Wagner was right in seeking to bring Rodbertus' name into promi- 
nence, even going so far as to call him the real father of socialist 
theory. But Rodbertus was detached from the socialist movement, 
which in spite of Lassalle's invitation he refused to join, and he 
exercised very little influence on the movements or the legislation 
of his time. His greatest influence was upon Lassalle himself, who 
borrowed from him some of his most potent ideas. Marx knew 
his works, but there is little possibility of proving in what degree 
he drew on them. But whatever the judgment, we pass on the 
works of Marx and Rodbertus in regard to logical and theoretical 
criteria; Marx stands out as a giant compared with Rodbertus be- 
cause of his enormous historical significance. Marx has shaped the 
reality and thought of the last hundred years perhaps more than 
anyone else, and whoever on theoretical or logical grounds re- 
fuses to study him deprives himself of the ability to understand 
some of the most potent movements and transformations of 
modern history. There is no such thing as Rodbertusism, but 
Marxism certainly exists. 

Similarly one may contrast Edgeworth and Marshall. Francis 
Edgeworth, the author of Mathematical Physics (1881) and many 
other original contributions collected in Papers Relating to Politi- 
cal Economy (3 vols.), published by the Royal Economic Society 
in 1925, was a very original, profound thinker with great powers 
of analysis and logic, while Marshall was an eclectic teacher who 
combined Schmoller with Jevons, the historical and institutional 
conception with the idea of marginal utility. Marshall himself ex- 
pressed this position in the preface to the first edition of his Prin- 
ciples of Economics (1890). The substance of his work was af- 
fected by Spencer and the ethico-historical studies of the German 



MEN AND IDEAS 

historical school, the form by the mathematical conceptions of 
continuity as represented in Cournot's Principes Mathcmatiqties 
de la theorie des richesses. 1 Marshall was the best representative of 
the English compromise between the historical and the theoretical 
approaches, and his work was crowned with great success. He was 
the teacher of one or two generations of British and American 
economists, and his textbook is still read today with great interest 
and profit, while Edgeworth's papers were left from the begin- 
ning on the dusty shelves of libraries. Thus the economic historian 
devotes to Marshall's work a chapter by itself, while dismissing 
Edgeworth with a word or two. 

Of the work of contemporaries John Maynard Keyncs's great 
volume, The General Theory of Employment, Interest, and 
Money (1936), will survive in the history of economic thought. 
Keynes is the creator and architect of the doctrine of full employ- 
ment accepted in nearly all English-speaking communities, the 
doctrine of expenditure. The White Paper on Employment 
(1944), the Australian White Paper, and the American recovery 
plans of the thirties are all based on the Keynesian conception that 
to ensure full employment one must maintain an adequate level 
of expenditure on consumption and investment combined. On the 
European continent the doctrine of Keynes never took hold, be- 
cause the continental experience, with its succession of monetary 
and credit upheavals, differing monetary behavior, and lack of 
productive equipment, cannot rely merely on expenditure. Had 
Keynes been born on the Continent, and had he written for the 
French people, for instance, he would have remained in the back- 
ground and could not have assumed his leading position as the 
principal economic thinker of the interwar period. The back- 
ground of Keynesian economics is the interwar economy of Brit- 
ain and the United States, with high propensity to save and small 

1 Paris 1838. 

10 



MEN AND IDEAS 

incentives to invest, with the "vanishing investment opportunities" 
determined by many historical factors in this period. 

Without such a background, Keynes's philosophy and econom- 
ics could never have exerted so powerful an influence as they have 
done on our generation. His greatness consists just in this: that he 
expressed the need of his time, and presented us with a valuable 
technique and weapon for dealing with the problem of unemploy- 
ment. This accounts for the enormous fertility of his thought, 
manifest in the flood of reviews, notes, and studies devoted to or 
based on Keynes. 

The other great source of Keynes's popularity was that the public 
was quick to realize the political and social value of his doctrine 
as the only answer and alternative to that of Marx. Keynes con- 
tended that the weakness and disorder of capitalism is only quanti- 
tative, not qualitative; that whereas it fails to produce full employ- 
ment, it does not misdirect or misuse the national resources. And 
this weakness can be remedied by partial planning confined and 
limited to one segment of national economy, that of investment. 
Partial planning was his answer to the program of total planning 
developed by Marxists and other planners. 

" Social Frcudism" 

Students of the materialist conception of history have over- 
looked the most important fact regarding its origin, namely, that 
it originated in the criticism of the economic doctrine contained 
in Marx's tract Zur Kriti\ dcr politischen Oef(pnomie (1859). 
Marx here contends that the political economy whose theories he 
violently criticizes is a bourgeois or class doctrine, i.e., it is based 
on class interests or class prejudice. Nassau Senior, who in Marx's 
times was the most influential economist in England, was in the 
forefront of the onslaught; against new social legislation, especially 

II 



MEN AND IDEAS 

against the attempts to shorten hours of work. Senior had argued 
(although he later revised his views) that the shortening of work- 
ing hours would be a most deadly weapon against British indus- 
try, because the profit of the entrepreneur is made during the last 
hours employment of the workers, who in the remaining hours 
are working for themselves. The careful study of the whole con- 
troversy over social legislation in England contained in a multi- 
tude of White Papers, evidence and contra-evidence, especially 
the arguments of Senior, probably gave Marx the idea of relative 
and absolute surplus value. Marx's idea that the struggle for a 
standard of working time was the most important part of the 
struggle of the two classes was probably a generalization of the 
conditions prevailing in the middle of the nineteenth century. 

Attacking the political economy of his time, Marx labeled it a 
rationalization of the interests of the ruling class, and then genera- 
lized this contention into a statement that ideas, conceptions, art, 
literature, law, religion are a superstructure built on the basis of 
productive forces. His materialistic conception of history first 
started in his polemic against the Utopians and against those econo- 
mists whose ideology he regarded with suspicion and whose ar- 
guments he considered a facade covering something else. They 
could not be so foolish as to believe all that, he averred; if they had 
open eyes and ears and were willing to use them, they could see 
and hear the real truth. 

Marx first applied to public and scientific consciousness what 
Freud later applied to individual consciousness. What a man thinks 
about himself is often as wrong as what a whole nation thinks 
about itself. Marx contended, not that the bourgeois economist is 
a hypocrite or a humbug, but that the real sources of his ideology, 
as a rule not realized even by himself, lie deeper down, in uncon- 
scious beliefs and myths related to the interests of his class. Marx's 
"Social Freudism" therefore existed before Freud, just as Malthus* 

12 



MEN AND IDEAS 

Darwinism existed before Darwin. Marx said: "Ideology is a 
process accomplished by the so-called thinker consciously, indeed, 
but with a false consciousness. The real motives impelling him 
remain unknown to him, otherwise it would not be an ideological 
process at all. Hence he imagines false or apparent motives." 2 

The materialist or economic conception of history, which re- 
duces ideological categories to economic structure, has nowhere 
greater application than in the realm of economic thought from 
which Marx started. It is doubtful whether we can relate religious 
or artistic ideas to an economic basis with any great measure of 
success, but certainly economic ideas are the direct offshoot of eco- 
nomic conditions, economic policy, and economic interests. They 
are generalizations about economic conditions, justifications of an 
existing policy or postulations of a new economic policy, rational- 
izations of various economic interests. 

Marx was thoroughly conversant with the history of economic 
thought, beginning with the Greek philosophers, Roman jurists, 
and the canonist theologians; and it must have struck him, as it 
strikes the present-day reader of the history of economic thought, 
that the statements of many great minds about economic condi- 
tions and relations are out of proportion to their powers of obser- 
vation and reasoning. How could Aristotle contend that the insti- 
tution of slavery is a necessary one, simply because a household 
economy needs living tools? Distinguishing between "natural" 
and "unnatural" modes of acquiring wealth, Aristotle regarded 
the hunting of either wild animals for their flesh and skins or 
slaves for their services as a "natural" mode. In his ideal Republic 
Plato condoned slavery as consistent with the natural and ideal 
order. Similarly Cato the virtuous gave advice on how to exploit 



2 Letter to Mehring, I4th July 1893, Marx-Engels Correspondence. London: 
Martin Lawrence, Ltd., 1934, p. 511. 

13 



MEN AND IDEAS 

slaves with the utmost rigor and severity, recommending their 
employment even on public holidays, thus transgressing even the 
commands of religion. Varro classed slaves as vocal implements 
among mute and semivocal tools (cattle). And the great Domini- 
can, St. Thomas Aquinas, the Angelic Doctor of the Schools, 
argued that slaves are a necessity, not only because "man needs 
slaves," but because slavery is a consequence of Adam's fall. 

The great powers of observation and reasoning of those writers, 
the high principles of their ethics, and the wide perspectives of 
their philosophy could not save them from the mistake of gener- 
alizing about existing conditions and institutions and taking sides 
with the interests of the ruling class. They were bound up with 
contemporary institutions and could imagine nothing else. 

The student of the history of economic doctrines is often per- 
plexed at finding how much bias and prejudice there is in the 
work of even the most enlightened, the deepest and most powerful 
thinkers. When the physiocrats glorify the divine right of the 
ownership of land, when Malthus accepts poverty as a stimulus 
to the production of wealth and regards it as a natural phenome- 
non not to be cured, when John Stuart Mill in his first period 
(before coming under the influence of Saint-Simon) defends his 
theory of the "wages fund" which served for many years as the 
best weapon against workers' claims for higher wages, when 
Senior enters with great passion upon the fight against shortening 
hours of work, when Jevons discourages and abuses trade-union- 
ism, we realize that even the greatest minds are not wholly free 
from the blight of bias and prejudice. Marx said that their preju- 
dice is to a great extent class prejudice, being mostly a rationaliza- 
tion of the existing interests and institutions. 

We may therefore say that in a certain epoch within a certain 
social group the basic beliefs and dogmas which serve as more or 
less unconscious assumptions of individual doctrines are strikingly 



MEN AND IDEAS 

alike, and they are linked with the basic institutions of a given 
period. The details of doctrine are individual and personal, but 
the structure is collective and historical. A psychologist would say 
that the substance and content of consciousness is individual and 
detailed, expressed in individual lines of thought, but that the sub- 
consciousness is collective, based on the experience of the whole 
group, grounded in the past and present conditions, and expressed 
in the climate of a thought or culture pattern. 

In fact every doctrine has not only its conscious part, its super- 
structure visible to everybody, but also its "subconscious" part hid- 
den behind the surface, its soul and spirit, which need searching 
and penetrating. Has not, for instance, the marginal utility school 
a depth 'of assumption, half consciously or subconsciously made, 
rooted in the whole philosophy of life and the atmosphere of the 
second half of the nineteenth century? What is called "Tiefen 
psychology" (the psychology of depths) has full application to eco- 
nomic and social doctrines, and the collective social subconscious- 
ness hides many treasures for any investigator willing to explore it. 

When Aristotle spoke about the "necessity" of the institution of 
slavery, he was probably not aware of the basic assumptions which 
subconsciously lay behind this conception; in the same way many 
modern economic writers are often unaware of those great forces 
and currents operating in the back of their minds. And here is the 
explanation why many ideas which look erroneous when the su- 
perstructure only is envisaged look different when the collective 
subconsciousness is taken into account. The comparison of the 
two layers of our mind to an iceberg floating in the ocean with 
one-eighth of its bulk visible above the water and seven-eighths 
below holds good also for the analysis of our social-economic doc- 
trines. The great interest shown in the marginal utility school, the 
great enthusiasm with which it was greeted in nearly all centers of 
learning, was, I believe, not for the one-eighth visible above the 



MEN AND IDEAS 

water but for the seven-eighths below. How many times has the 
exposition of the marginal utility school turned by its very nature 
into glorification of the laissez-faire system with all that it im- 
plied? 

Thus it is that doctrines have their secrets as much as individuals 
have theirs, and close scrutiny would substantially promote our 
understanding of economic teaching and give a new insight into 
the foundations of social and economic ideas. 

Are the Greatest Minds Attracted 
to the Study of Economics? 

Is it the greatest minds, or only inferior or average ones, that are 
attracted to economic studies? Alfred Marshall asked this ques- 
tion, and was not very sure of the answer. Many a historian of eco- 
nomic thought has wondered why the Greek scholars had so little 
to say about the economic life of their time, which was quite com- 
plex and in process of great changes. Why did the Roman writers, 
who showed such great powers of abstraction and analysis in legal 
matters, have no comment to make on the problems of interna- 
tional economy of their time, highly developed as it was with com- 
plex and specialized institutions? The argument already stated by 
McCulloch was that the subject of the pursuit of wealth seemed un- 
worthy of the philosopher's quest, since labor, the basis of all 
wealth, was looked upon as degrading. But even in Christian 
times, when labor assumed the dignity of prayer, we do not find 
great minds attracted to the study of wealth. Marshall admitted 
that he himself was at first repelled by the idea that the making of 
wealth could be worthy of scientific study: "Indeed," he said, "a 
science which has wealth for its subject matter is often repugnant 
at first sight to many students; for those who do most to advance 

16 



MEN AND IDEAS 

the boundaries of knowledge, seldom care much about the posses- 
sion of wealth for its own sake." 

The fact remains that the greatest minds, who have made the 
largest contribution to the treasury of economic thought, regarded 
economics only as a side issue among their interests and took up its 
study relatively late in their lives, after devoting much of their ef- 
fort to other subjects. Aristotle and Thomas Aquinas dealt only in- 
cidentally with economic questions. Bodin, Locke, Hume, Bent- 
ham were not economists, although they made contributions to 
economic study. Nicole Oresme, the author of De origine, jure, 
et mutationibus monctarum (c. 1356-1361) was Bishop of Lisieux; 
Nicolas Copernicus, author of the important tract Monete cudende 
ratio (1526) written for King Sigismund I of Poland, was an as- 
tronomer. Francois Quesnay, the founder of the physiocratic doc- 
trine, was physician to Madame de Pompadour and author of the 
Essai physique sur I' economic animale (1736). He first took an in- 
terest in economics when about 56 or 57 years old, and his first eco- 
nomic essays, Fermiers and Grains, were published under a pseu- 
donym. Adam Smith was a moral philosopher and a historian, 
Malthus a moral philosopher and student of population, John 
Stuart Mill a logician and philosopher, David Ricardo a retired, 
wealthy stockbroker; Thornton, Tooke, Newmarch were success- 
ful business men and bank directors; Sismondi was a historian, Le 
Play a social reformer. 

It would never have occurred to Karl Marx to call himself an 
economist. Pareto was an engineer, Rodbertus a landlord and 
farmer. Roscher, Schmoller, Wagner, Brentano, Knies, Biicher, 
Max Weber were primarily historians and sociologists. Frederick 
List was a man of affairs, journalist, and politician. Even Alfred 
Marshall proves the rule, for his studies started with other interests, 
mathematics, ethics, and philosophy, and he very soon dropped his 

17 



MEN AND IDEAS 

interest in economics, writing very little after his first volume, the 
Principles of Economics in 1890. 

What of Lord Keynes? Very little has been published so far on 
the life of Keynes, but when the biographies of him do appear, they 
will show that he also proves the rule. Keynes was a very active 
man of affairs, attracted first to philosophy and mathematics, 
writing on the calculus of probability. Economics hardly formed 
the main center of his life interests. 

If great minds do not take enough interest in economics to de- 
vote their whole life to its study, it is not only because they regard 
the mere pursuit of wealth as an unworthy object of their interests, 
but also, perhaps, because they expect very little scholarly reward 
for their studies. Economic phenomena are so changeable and 
varying that to grasp them is like holding drops of water in one's 
hand. They slip through. To generalize over them is certainly to 
head for failure. On the other hand, to reason in the abstract on 
the basis of a few assumptions is to play a game of little profit and 
less use in real life. The great minds are discouraged, seeing the 
multitude of doctrines, schools, and systems of economics contend- 
ing with each other and making little progress because they lack 
the stable foundations on which to build a progressively expanding 
home. 

The fact remains that the great stimuli to economic thought 
came from outside, whether from new legal conceptions; or from 
medicine, physics, mathematics, statistics, psychology, technology, 
sociology; or from great social reform movements. The enrich- 
ment of economic thought has rarely come from the rank and file 
of professional economists. The so-called professional economist 
has mainly been a bore, a more or less barren bore, who could carry 
on for a time the work entrusted to him by the great outsiders, but 
very soon realized that the soil, unenriched by new fertilizing 
material, becomes exhausted and sterile. 

18 



MEN AND IDEAS 

The Principle of Selection 

The principle of selection is the most powerful and most useful 
tool of the historian and at the same time his greatest drawback. 
The historian presents a picture, not a photograph, of a period. In 
that respect he resembles a painter, who also has to select. His selec- 
tion is based on his interpretation, and here there comes into play 
not only all his theory and knowledge, but also his bias and preju- 
dice. Since he has to select, he must thro w overboard much that may 
be valuable, and even essential. The historian must know what is es- 
sential, but the conception of the essential in itself involves an ap- 
preciation and very often a value judgment. From this it follows 
that all Historiography is deeply rooted in our orientation, i.e., in 
our values and theories, which change with time. It follows also 
that very often when we think that history teaches us a theory or a 
moral, it is only because that theory or that moral was prior to the 
historical description, and guided our hand in the drawing of the 
picture. 

A more important drawback is that the more selective historiog- 
raphy is, the less is it historically true. Everyone knows that a 
highly selective historiography amounts to a theory, and some of 
these selective pictures are very fashionable among economic his- 
torians as for instance that of mercantilism, covering the entire 
period between the Middle Ages and the age of laissez-faire, or the 
highly selective picture of capitalism, or that of the Industrial Revo- 
lution. 

Actually neither mercantilism nor capitalism existed in the 
sense in which a factory or an industry exists. Each concept was a 
product of imagination and selection. We grasp the character- 
istics of a given period or movement in the belief that they are 
essential. We form what Max Weber called an "Ideal type," 
which is the product not merely of abstraction but of the ad- 

19 



MEN AND IDEAS 

dition of certain features and the diminution of others which 
together form a consistent or rather a convincing picture. 

A historian has to choose between forming highly selective 
pictures and merely recording facts. In the former case he is more 
theoretical, in the second more "historical." This means that a 
true historian likes to write exhaustive and voluminous works on 
even the smallest and shortest sectors of historical experience, be- 
cause in such works he can do more justice to the wealth of ma- 
terial. In contrast a short work which covers a huge period must 
be highly selective, and must therefore give only a rough and in 
many respects a false presentation, amounting almost to a his- 
torical theory. 

The same problem of selection faces the historian of economic 
thought, and gives him the greatest headaches. He must deal with 
doctrines, schools, and systems, and these are not presented as 
such in the material available. What is socialism? When does it 
begin, what are its principles and theorems? Which writers can 
be regarded as belonging to that system? Can we regard some 
writers as half or a quarter socialist? Socialism does not exist in 
the same sense as Marx existed. 

What is the classical school? Is it, in the wide sense, the British 
school of thought during the Industrial Revolution, i.e., from 
about 1770 to 1850, starting with Adam Smith and including 
John Stuart Mill? Does it also include Say and Bastiat? Is Senior 
to be included? What are the essential principles and theorems 
of the school? Is it right to include Malthus and Ricardo or Say 
and Ricardo in the same school? Has not John Stuart Mill a 
separate position as a link between liberal and socialist doctrine, 
as a liberal socialist or a socialist liberal? Once again, the classical 
school does not exist in the same sense that Adam Smith or Ri- 
cardo existed. 

Even when we come to a simpler problem, such as that of pre- 
20 



MEN AND IDEAS 

seating the doctrine of Adam Smith or Karl Marx, we are still 
faced all the time with the drawbacks of selection. First of all, 
the same writer develops and changes. Take, for example, Robert 
Malthus. There are two essentially different editions of his Essay 
on the Principle of Population: one first published anonymously 
in 1798, in which the only checks to population are stated to be 
vice and misery, and which comes to harsh or rather hopeless 
conclusions, and the second edition of 1803, which, as the author 
himself says, "in its present shape may be considered as a new 
work with widely different conceptions based on the idea of 
'moral restraint.'" Apart from these two editions we have the 
fifth and sixth editions with new additions and revisions. 

There are many other instances of writers changing their views 
and theories. Ricardo in the third edition of his Principles changed 
his view about the effects of machinery on the interests of the work- 
ers, coming to an opinion opposite to that which he held earlier. 
He was dissatisfied all the time with his labor theory of value, as 
we see from his letters, and he eventually made a new formulation 
of his theory which he presented in the shorthand formula: "La- 
bor and time." John Stuart Mill repudiated the wages-fund theory 
which earlier he had defended most strongly. Moreover, Mill was 
in later years under the influence of St. Simon and Auguste Comte. 
Sismondi, the critic of the classical school, in his earlier days was a 
follower of the classical school. 

Coming to more modern writers, we find that Alfred Marshall 
kept changing his Principles of Economics all the time from one 
to another of the eight editions. To appreciate his teachings we 
have to compare all the editions, which diverge from one another 
in many respects. 

Keynes himself was, so to speak, pre-Keynesian, Keynesian, and 
post-Keynesian. What is called Keynesian doctrine culminated in 
the year 1936 with the publication of the General Theory, while it 

21 



MEN AND IDEAS 

is no secret that in the war years Keynes went much further in ac- 
cepting the principles of planning than in his standard work. 

Secondly, a writer, especially an original one, is rarely consistent. 
He has many sidetracks, many interests; he sees a great many as- 
pects of the problem divergent from his main track, he does not 
always see clearly all the consequences of his theory, sometimes 
taking over the dead weight of his predecessors even when it is in- 
consistent with his own theory. Often he does not dare throw 
overboard all the cherished inheritance of the past. 

Adam Smith illustrates this tendency. Even in his theory of the 
division of labor, the nucleus of his whole doctrine, he is not very 
consistent. He still thinks that agriculture is more productive than 
other forms of industry, that services are unproductive labor. His 
theory of distribution can be interpreted in various ways. He 
wavers between the monopolistic and physiocratic conception of 
the land-rent. In his theory of wages he distinguishes between 
different stages of economic development, taking into account 
different states of society, thus providing the seed for all subse- 
quent theories of wages. He presents a theory of labor productiv- 
ity, a theory of exploitation, an institutionalist theory of bargain- 
ing power, a wages-fund theory, a theory of minimum subsistence, 
and so on. 

He shows little consistency even in his basic conceptions. We can 
contend that he regards labor as the mainspring and source of the 
wealth of nations, but we can equally well contend that he ascribes 
the same role to capital, regarding capital formation as the main 
factor of progress, thus making savers the chief "benefactors of 
society." 

The historian who takes an interest in Adam Smith as Adam 
Smith will point out very clearly his development, his inconsisten- 
cies, and all his sidetracks, but an economic historian who is con- 

22 



MEN AND IDEAS 

earned with the development of economic thought, or with the 
sociological and historical aspects of Smith's teaching, or with 
didactic purpose in the history of economic thought will pay little 
attention to his inconsistencies or his development, but will treat 
his teaching as a fully grown, developed, consistent, and compact 
body of thought. He will prune Adam Smith's teaching as a 
gardener prunes his trees and bushes, giving then an aesthetically 
satisfying shape. A historian gives a doctrinal form to the teach- 
ings of his writers, omitting unessential parts, emphasizing others, 
and bringing the essentials into focus. He reinterprets each writer, 
recreating with him, sometimes, while adding, even correcting 
and revising him; he may say, for instance, "Adam Smith prob- 
ably had so-and-so in mind," or, "in modern language we should 
call this so-and-so." It is an unhistorical method to interpret 
writers of old in the light of our own time, but we cannot help 
doing so. The natural tree is a wild one, spread all over the place, 
with plenty of dead wood, overgrown; the cultivated tree is 
pruned and lopped, selected, shaped according to our ideal type 
for a given species. 

Adam Smith, of course, must be treated in different ways for 
different purposes. An economic historian will emphasize his 
opinions on economic conditions on the eve of the Industrial Revo- 
lution. A historian who is interested in the economic legislation 
of William Pitt's and subsequent governments will emphasize 
the whole of his laissez-faire program. An economist interested in 
the development of economic thought will emphasize all his in- 
consistencies, which served as seeds from which the subsequent 
divergent theories developed. An economic theorist who treats of 
Adam Smith for didactic purposes will present his doctrine of the 
division of labor in its present form. 

It is not sufficiently realized that a historian of economic 

23 



MEN AND IDEAS 

thought forms new material, i.e., a new economic thought. By 
reinterpreting and recreating old writers, he creates new versions 
of old doctrines, he puts "new wine in old bottles." 

For instance, to present the economic views of the canonist 
school as a fully developed and consistent doctrine calls for a great 
deal of recreative effort and reinterpretation. We have to supple- 
ment some links in the chain of arguments, rearrange the argu- 
ments themselves, and draw general principles from the canonists' 
casuistic and casual remarks. We have to do the same with the 
mercantilist schools of thought, which take such divergent forms 
in writers of different nations and centuries. Basically we have to 
do the same with writers of all groups. 

There are two fundamental approaches for the historian of eco- 
nomic thought. One of these may be called the sympathetic, the 
other the antipathetic. There are historians who deal with their 
subject writers with understanding, sympathy, and reverence. 
They seek to do them justice and to put their whole emphasis on 
what is permanent, valuable, and great in their teaching, neglect- 
ing what has proved wrong, biased, and irrelevant in them. They 
try to uncover everything which is potentially there, even if the 
writer was not fully conscious of all the potentialities of his doc- 
trine. If they find some passages that are not clear, they interpret 
them to the best of their ability. Others take the opposite way. 
They try to point out the inconsistencies in the teachings, to lay 
bare all the false previsions and prophecies, and to emphasize all 
the erroneous statements and arguments. In a word, they concen- 
trate on what is petty and mistaken in their author. 

Any writer can give us his full share of the treasures he has col- 
lected or created in his time only if we are willing to profit from 
them and make use of them. We must always get out of any 
writer the best he has to give and judge him by his finest work. 
We can certainly get little profit by the opposite method. 

24 



MEN AND IDEAS 

The Predictions of the Economists 

Are the economists more reliable in the prediction of future 
development or are their opinions on practical issues better than 
those of other men of common sense ? A clue to this question can 
be found by looking backward and consulting the most outstand- 
ing economists of highest authority. 

Let us give a few examples. Adam Smith, in spite of the ac- 
curacy of many of his judgments, set a very limited scope to the 
activity of joint-stock companies. He thought their further devel- 
opment was unlikely since they were suitable only for routine 
work and were generally rather harmful. 

"The only trades which it seems possible for a joint-stock com- 
pany to carry on successfully, without an exclusive privilege, are 
those of which all the operations are capable of being reduced to 
what is called a routine, or to such a uniformity of method as 
admits of little or no variation. Of this kind is, first, the banking 
trade; secondly, the trade of insurance from fire, and from sea 
risk and capture in time of war; thirdly, the trade of making and 
maintaining a navigable cut or canal; and, fourthly, the similar 
trade of bringing water for the supply of a great city." (Adam 
Smith, Tha Wealth of Nations, Book V, Chap, i, Part HI.) 

"The joint stock companies, which are established for the pub- 
lic-spirited purpose of promoting some particular manufacture, 
over and above managing their own affairs ill, to the diminution 
of the general stock of society, can in other respects scarce ever 
fail to do more harm than good." (Ibid.) 

If the similar opinion of the modern economist in regard to 
nationalized enterprises has a similar weight, the nationalizers 
should not be too greatly worried. 

Against any system of equality and poor relief Malthus argued 
that greater welfare would bring an increase in the birth rate, and 

25 



MEN AND IDEAS 

would soon nullify the effects of the rising standard of living by 
producing greater numbers of mouths to be filled. 

"... the inevitable and necessary poverty and misery in which 
every system of equality must shortly terminate from the acknowl- 
edged tendency of the human race to increase faster than means 
of subsistence, unless such increase be prevented by means in- 
finitely more cruel than those which result from laws of private 
property, and the moral obligation imposed on every man by the 
commands of God and nature to support his own children." (Rob- 
ert Malthus, Essay on the Principle of Population, Book HI, Chap. 

3.) 

"That this natural check to early marriages arising from a view 
of the difficulty attending the support of a large family operates 
very widely throughout all classes of society in every civilised 
state, and may be expected to be still more effective, as the lower 
classes of people continue to improve in knowledge and prudence, 
cannot admit of the slightest doubt. But the operation of this na- 
tural check depends exclusively upon the existence of the laws of 
property and succession; and in a state of equality and commu- 
nity of property could only be replaced by some artificial regula- 
tion of a very different stamp, and a much more unnatural char- 
acter." (Ibid.) 

What happened was quite the opposite. We see that larger in- 
comes lead to fewer children, thus depressing the birth rate. 

The woes of the economists regarding any attempt at social 
legislation or poor relief make depressing reading. "Beware, you 
will ruin yourself." 

Again, take Senior's opinion on the project of allowances for 
children and the old during the discussion of the new Poor Law 
in 1834: 

"I said that I thought it would be ruinous; that as to children it 
would legalize head money, the worst form of allowance, and that 

26 



MEN AND IDEAS 

as to the old it would destroy benefit societies, and subject a large 
portion of the population to magisterial interference, to an extent 
even beyond that which now exists." (Nassau Senior, History, pp. 
207-10). 

On the struggle carried on against factory reform in England in 
the middle of the nineteenth century, William Cunningham writes 
in his Growth of English Industry and Commerce in Modern 
Times (p. 789): 

"Each step was gained in the face of strong opposition, for the 
economic experts of the day of whom Mr. Nassau Senior was 
the most effective spokesman were clear that a reduct ion of hours 
would mean such a serious loss to the employers that the trade of 
the country must inevitably suffer, and the mischievous effects 
react on the workmen themselves. It was argued that if the last 
hour of work were cut down, the profit on the capital invested in 
plant would vanish altogether. (Senior, Letter on the Factory Act, 
p. 12.) Strong in the support of such academic authorities, the em- 
ployers felt no scruple in evading the law, when they could; but 
the excuse was a mistaken one." 

Jean-Baptiste Say, the great French economist in the times of 
Napoleon, writes against poor relief, warning against beneficence 
and charity as ruinous to the community: 

"Has the man, who, by his improvidence and idleness, has fallen 
into poverty after having exhausted his means, any claim to help, 
when his very faults deprive the men whose capital supports in- 
dustry, of their resources?" (Jean-Baptiste Say, Treatise on Politi- 
cal Economy, Vol. Ill, Chap. 7.) 

The factory reform became a fact, yet the predicted ruin did not 
come about in spite of the academic authorities. 

Ricardo used his theory of rent to oppose the Corn Laws. The 
constant tendency of land rent to rise with the development of 
population and the accumulation of wealth, he said, speaks in 

27 



MEN AND IDEAS 

favor of the abolition of Corn Laws. In an advancing community 
profits must fall and rents rise, while wages remain the same. It is 
understandable that from this argument the conclusion must be 
drawn that there is no need to stimulate rent, which has a constant 
tendency to rise at the expense of profits, since wage-earners have 
really very little interest in the issue. Ricardo did not foresee that 
shortly after his death agriculture in Europe would undergo a 
century-long depression, the effect of the opening up of new farm 
lands and the cheapening of transport. Facts have disproved also 
two other propositions of Ricardo, that wages will remain sta- 
tionary and that interest will fall in an advancing community, as 
English economic history teaches. 

Sismondi, criticizing the principles of distribution under free 
enterprise, held that no other institutions in that respect are con- 
ceivable. 

"The distribution of the profits of labour between those who co- 
operate in producing them, appears to me vicious; but it seems to 
me almost beyond human power to conceive of a state of owner- 
ship absolutely different from that which experience makes known 
to us." 

But many subsequent writers of the socialist school and the 
subsequent historical development on the European continent 
have shown that to conceive and even maintain other forms of 
ownership is not beyond human power. Sismondi, however, had 
remarkable vision in his conception of social services and social 
legislation which were brought into being many years after his 
death. 

John Stuart Mill said of the theory of value that by it everything 
was solved forever, that nothing could be added to its truth. 

"Happily, there is nothing in the laws of Value which remains 
for the present or any future writer to clear up; the theory of the 
subject is complete; the only difficulty to be overcome is that of 

28 



MEN AND IDEAS 

so stating it as to solve by anticipation the chief perplexities which 
occur in applying it." (J. S. Mill, Principles of Political Economy, 
Vol. I, p. 537, London, 1871.) 

He did not foresee the enormous flood of economic literature on 
the subject of value, which has thrown new light on the problem. 
Nevertheless, the chapters on the "stationary state" and on the 
"probable futurity of the labouring classes" in Mill's Principles of 
Political Economy have a prophetic ring. And when we read the 
passage quoted below, we feel that what he said a hundred years 
ago has attained a full meaning only just now: 

"I confess I am not charmed with the ideal of life held out by 
those who think that the normal state of human beings is that of 
struggling to get on; that the trampling, crushing, elbowing, and 
treading on each other's heels, which form the existing type of 
social life, are the most desirable lot of the phasis of industrial 
progress. It may be a necessary stage in the progress of civilization, 
and those European nations which have hitherto been so fortunate 
as to be preserved from it, may have it yet to undergo." (Vol. II, 
p. 328.) 

And Mill's treatment of problems of property, how modern it 
is with its liberal-socialistic undertone: "Mankind are capable of 
a far greater amount of public spirit than the present age is accus- 
tomed to suppose possible." But he warns against the totalitarian 
consequences of a communistic system of property. 

"The question is, whether there would be any asylum left for 
individuality of character; whether public opinion would not be a 
tyrannical yoke; whether the absolute dependence of each on all, 
and surveillance of each by all, would not grind all down into a 
tame uniformity of thoughts, feelings, and actions." (Vol. I, p. 
263.) 



MEN AND IDEAS 

Among the economists and social students who scored perhaps 
the greatest number of hits in their forecast of future trends I 
should name first of all Saint-Simon. He anticipated the powerful 
growth of industrial machinery and its all embracing power, 
adopting in 1817 the motto: "Everything by industry, everything 
for industry." He predicted the ascendancy of science and tech- 
nology, which assume more and more power, even in spiritual 
and ethical domain. Political power, he said, will be transferred 
from the old classes to the technician, scientist, and administrator, 
since the nation becomes "nothing else but a great industrial so- 
ciety." His whole doctrine, which is a mixture of technocracy and 
socialism, comes near to our present-day experience. His advocacy 
of rationalization of industry is a remarkable feat of sound fore- 
casting. So is his advocacy of internationalism: "Aujourd'hui, il 
doit se former entre les peuples de 1'ouest de PEurope une veritable 
combinaison d'efforts politiques." His true goal is internationalism, 
which, however, should be attained by steps. It was Saint-Simon 
who advocated political and economic union between France and 
Britain as the nucleus of a Western European unity which will at- 
tract other nations, especially Germany. 

The warnings of Carey and N. S. Patten against the dangers of 
the depletion of natural resources of the country have largely come 
true. "The planter," said Carey in his Principles of Social Science, 
"is steadily giving more of his raw materials and receiving less in 
exchange for them," and this results in "exhaustion of the soil." 
Patten too stressed the danger of soil deterioration resulting from 
specialization in production of cotton, wheat, tobacco, and similar 
goods. 

Marx's predictions of the future development of capitalism are 
faulty, but are not on the whole so mistaken as is commonly 
thought. He was a man of great vision. He was basically right in 
contending that capitalist development will lead towards social- 

30 



MEN AND IDEAS 

ism, if by socialism is meant the nationalization of basic indus- 
tries, a process very far advanced in Europe. He was also right in 
his assertion that further development of capitalism if left to itself 
will lead to a sharpening conflict between capital and labor, to an 
increasing amplitude of industrial fluctuations, to a growing re- 
serve army of labor. These predictions are confirmed by the de- 
velopments in the interwar period, especially the figures of unem- 
ployment statistics in Germany, the United States, and Great 
Britain. He was right in foreseeing the process of centralization 
and monopolization of industry. 

But in many other matters he proved to be wrong, in his views 
on the process of concentration of ownership, for example, and 
on the process of proletarianization and pauperization. The social 
pyramid has not assumed the shape he predicted in regard to the 
distribution of income. Wherever sections of the middle class 
have disappeared, they have been replaced in excess by new- 
comers: clerks, officials, engineers, shopkeepers, professional men. 

Marx was basically wrong in foreseeing the growing impoverish- 
ment of the working classes, and this failure led to the theory of 
imperialism developed by the communists, especially Lenin and 
Rosa Luxemburg, thus producing one of the major corrections to 
Marxist theory. The fact that the workers in major countries, such 
as Great Britain, Germany, the United States, became constantly 
better off was explained as owing to their admission as partners in 
the process of exploitation of other workers in colonial and semi- 
colonial countries by way of capital export and foreign trade and 
monopolistic control. And in this connection the term "social pa- 
triotism" was coined for all reform socialism. 

Marx was also fundamentally wrong in predicting that the 
trend towards socialism would be seen most clearly in advanced 
industrial countries, such as Germany, Great Britain, and France. 
Actually the revolutionary changes took place in backward 

31 



MEN AND IDEAS 

countries; we might even say that socialism emerged as a revolu- 
tion of backward countries. Here once more Lenin intervened, 
presenting in his theory of imperialism the other most important 
correction to Marxist theory. The revolutionary change will come, 
he said, from backward countries, because they will be exploited 
to an increasing degree by great powers organizing themselves as 
monopolistic concerns for national exploitation. 

Coming to more recent times, we have a collection of most 
distinguished economists professing their views on planning, con- 
tending that planning means ruin, decline in efficiency and pro- 
ductivity, a decrease in national income. They assert, furthermore, 
that planning would mean complete lack of rational calculation, 
it would perforce involve irrational behavior. We could quote 
at length from a symposium, Collectivism Economic Planning, 
edited by Professor HayekJ in which many famous economists 
took part. But today no serious economist holds this view, not 
even Professor Hayek, although he continues to oppose planning, 
not on economic grounds, but rather on political grounds, alleging 
that it will destroy freedom. He has himself described his Road 
to Serfdom as a political book. 

Let us glance momentarily at the predictions of the most bril- 
liant economist of our generation, the late Lord Keynes. His criti- 
cism of the policy of Bank of England in 1925 was right in fore- 
seeing general misfortune as a result of the Bank's early return 
to the gold standard. He was wrong, however, in his appreciation 
of the economic consequences of the Versailles Treaty, and I need 
not enter here into this subject, which has been treated with great 
clarity by a French writer. 4 

The examples quoted, I think, should prove that economists 



3 London: C. Routledgc & Sons, 1935. 

4 Eticnne Mantoux: The Cartagtniun Peace, or The Economic Consequences of 
Mr. Keynes, etc. London: Oxford University Press, 1946, pp. XVII, 218. 

32 



MEN AND IDEAS 

would be wise to be extremely modest and restrained in giving 
advice on structural changes or in forecasting the future. 

The Seeds in the History of Doctrines 

Seeds in the history of doctrines are ideas from which in the 
course of time fully grown and fairly developed theories emerge. 
Like all other seeds of life, they are scattered through economic 
literature with a most profuse and liberal hand. They count for 
almost nothing, and they are most profuse in the most obscure 
and insignificant writers. Sometimes flashes of deep insight are to 
be found in cranks who in their reasoning or in their premises 
show the greatest defects. Ideas can be obtained cheaply, like seeds 
of even the rarest plants and flowers. What matters is the elabora- 
tion of ideas, the ability to grow a full-size and highly developed 
plant which is able to stand alone, erect, healthy, and strong, 
which can withstand wind and storm, which can impress by its 
beauty and harmony all who meet it. The seed-idea is a promise 
which sometimes is and sometimes is not fulfilled, whereas a plant 
exists, i.e., lives and multiplies, by itself. 

Whosoever is looking for seeds should read the most obscure 
and unknown writers, and he will very often find to his astonish- 
ment highly original ideas which have been fully developed later. 
But we may find in abundance seeds of further development in 
great writers also, though it is sometimes difficult to tell whether 
the doctrines which developed later can be directly related to 
them. 

The seeds of socialism are contained in Plato's Republic, al- 
though his socialism is authoritarian, ethical, aristocratic, idealist. 
He is the protoplast of the profuse Utopian literature which began 
in the sixteenth and seventeenth centuries and reached its peak 
in the early nineteenth century. Constantly growing, it found a 

33 



MEN AND IDEAS 

new and most powerful nourishment derived from other sources 
in a new interpretation of the so-called scientific socialism of 
Marx and Engels. The growth of the powerful and colorful social- 
istic tree with its many offshoots and branches presents a most 
exciting story. 

The seeds of Malthus' doctrine are contained in Plato, Botero, 
Wallace, and Turgot, but they are scattered widely throughout 
the whole of social and economic literature. Meantime Malthus 
himself grows all the time, bringing many offshoots and new 
cuttings into being. He is eternally alive, stimulating comment, 
interpretation, criticism, and violent opposition. 

The seeds of the psychological school in economics are to be 
found in Buridan in the fourteenth century and many other 
Schoolmen, in Say, Senior, and a number of others. 

Adam Smith's liberalism grew from so many sources the seeds 
of its origin were so widely scattered that it is difficult to men- 
tion all the relevant names apart from Cantillon, Hume, Locke, 
Hutchinson. The tracts in defense of East India trade and the 
Consideration of 1701 (which already present a highly developed 
theory of division of labor) must be mentioned. 

In turn, Adam Smith's great work contains a multitude of seeds 
of high quality which served well in the growth of economic 
ideas. Let us take for instance his theory of wages, presented in 
Chapter VlII of Book I, which is related in so many versions to 
different stages of economic and social development. The upper 
limit of wages, Smith says, is determined by the produce of labor, 
which constitutes the national recompense of labor in the original 
state of things. From that seed grew the productivity theory of 
wages. In the stage of advanced civilization, with the appropria- 
tion of land and accumulation of stock, Smith contended, rent 
and profit "make the deduction from the produce of the labor." 
From this version grew the surplus theory of wages. Next comes 

34 



MEN AND IDEAS 

the institutional theory of bargaining power. Smith explains that 
the employers have the advantage in the dispute, since they are 
able to live for a long time on their "stock," besides forming a 
kind of tacit but constant and uniform combination. What, asks 
Smith, is the lowest limit of wage rates? "A man must always 
live by his work, and his wages must be at least sufficient to main- 
tain him," is the answer, and from this hint was developed the 
"iron law of wages." 

But Adam Smith's realistic mind suggests that "there are cer- 
tain circumstances which sometimes give the labourers an ad- 
vantage, and enable them to raise their wages above this rate. 
. . ."In times of "continual increase of the funds which are des- 
tined for the payment of wages," in an upward trend of develop- 
ment, we may expect a rise of wage rates. This is the wages-fund 
theory which was to be .developed in the next century by John 
Stuart Mill and others. 

The seeds of Keynes' theory of full employment are so widely 
scattered in the literature of mercantilist writers, Thomas Mun, 
Josiah Child, John Law, Lafemas, Monchretien, and others, that 
it is difficult to name them all. In more recent times Sismondi, 
Silvio Gesell, Henry George, Major Douglas, Hobson all these 
writers defended the idea of underconsumption. 

Cobden, in his Essay on England, Ireland and America, written 
in 1835, was the forerunner of Max Weber and Werner Sombart 
(or, in Britain, Tawney) in the theory of the close link between 
religion and industrial development, between Protestantism and 
capitalism. "Probably there is no country," writes Cobden, "in 
which the effects of the Catholic and Reformed religions upon 
the temporal career of communities may be more fairly tested 
than in Switzerland. Of twenty-two cantons, ten are, in the ma- 
jority of the population, Catholic; eight Protestant; and the re- 
maining four are mixed in nearly equal proportions of Protes- 

35 



MEN AND IDEAS 

tants and Catholics. Those cantons in which the Catholic faith 
prevails are wholly pastoral in their pursuit, possessing no com- 
merce or manufacturing industry, beyond the rude products of 
domestic labour. Of the mixed cantons, three are engaged in the 
manfacture of cotton; and it is a remarkable feature in the in- 
dustry of these, that the Catholic portion of their population is 
wholly addicted to agricultural, and the Protestant section to com- 
munal pursuits. All the eight Protestant cantons are, more or less, 
engaged in manufactures." And quoting similar facts in France, 
Germany, Italy, Holland, Spain, and Ireland, he concludes: "The 
above facts, then, go far to prove that, in human affairs at least, the 
Reformed faith conduces more than Catholicism to the prosperity 
of nations." 

Here we have more than a seed; we have a small plant of theory 
which was to become a potent element in our present-day view 
of the factors of industrial development. 

If we equate a doctrine with the idea on which it is based, then 
Solomon is right: there is nothing new under the sun. But it is 
false to confound idea and doctrine. Ideas are flashes which show 
themselves again and again only to sink into oblivion. 

The parable of the sower has nowhere a greater application 
than in the realm of social science. Why some seeds of economic 
thought have such an enormous power of growth and multiplica- 
tion we shall never know. In any case, a theory's power of growth 
has little relation to its intellectual value; of this we are fully 
aware. Great intellectual works have very often had little in- 
fluence, while a mixture of vision, analysis, and emotion has 
proved to be a powerful agency in shaping minds and practice in 
social life. Some doctrines, we say, have suited specially well the 
requirements of their age and have therefore caught on, although 
we can hardly define what we really mean by this statement. But 
others have been fully developed much before the time when they 

36 



MEN AND IDEAS 

were adopted in practice, and of this a number of examples can 
be quoted. 

The medieval doctrine presented by Thomas Aquinas and best 
suited to the three centuries after his time had been already for- 
mulated by Aristotle sixteen centuries earlier. John Law lived two 
centuries before the Germans, in 1923, put successfully into prac- 
tice (in the so-called Rentenmark) his idea of a paper currency 
backed by land as security. Fichte's Der Geschlossene Handels- 
staat ("Closed Economic State") of 1800 preceded by more than a 
century the Germanic State of Hitler. Adam Smith set forth his 
doctrine in opposition to the practices and institutions of his time 
long before liberal ideas were actually adopted, and thereby 
helped to shape and mold the historic reality into the new pattern 
his mind had visualized. Ricardo developed his theory of currency 
long before Peel's Act of 1844 made it the system followed by the 
Bank of England. Malthus lived long before neo-Malthusian 
practices took root, and Karl Marx long before the age of plan- 
ning. 

The Method Most Successfully Applied 

What method is most successfully applied in economic litera- 
ture? Let us take a glance at its masterpieces. Two of these are 
outstanding: one is The Wealth of Nations, which was described 
by Sir John Mackintosh as "perhaps the only book which pro- 
duced an immediate, general, and irrevocable change in some of 
the most important parts of the legislation of all civilized nations." 
Bagehot says: "The Wealth of Nations had a wonderful effect. 
The life of almost every one in England perhaps of every one 
is different and better in consequence of it. No other form of 
political philosophy has ever had one thousandth part of the in- 
fluence on us; its teachings have settled down into the common 

37 



MEN AND IDEAS 

sense of the nation, and have become irreversible." And Cun- 
ningham, in his Growth of English Industry and Commerce, re- 
fers to it as "an epoch-making book." Anyway it is the intellectual 
fountain of the great and undying force of economic liberalism. 

The other great masterpiece of economic literature is the Capi- 
tal of Karl Marx, which Engels called the Bible of the working 
class. Be that as it may, it is the inspiration and source of the great 
movement of socialism. For nearly a hundred years Marx more 
than anyone else has been interpreted and reinterpreted by each 
generation in its own way, and the many versions of the doctrines 
to which he has given birth only prove his great fertility and 
productivity. Even his most deadly opponents drew from and fed 
on him. 

What is common to these two great masterpieces is the method 
they apply, namely, the combination of historical and abstract 
analysis. Adam Smith's work is adorned and supplemented by 
many historical digressions and examples given in the text and 
notes of The Wealth of Nations. His book makes interesting read- 
ing just because it is as much historical as theoretical. "Besides 
its other perfections, it is one of the most entertaining of books," 
says Lord Brougham. The book derives its entertaining value 
partly also from its most acute polemic with the mercantilist 
school, to which one-fourth of the whole work is devoted. It is 
clear that Adam Smith's work had a definite purpose in view, to 
provide an instrument for the betterment of economic conditions 
and for reform of the government's policy. 

Exactly the same characteristics are to be found in Karl Marx's 
Capital. This book is partly historical, partly theoretical, partly a 
severe polemic against his opponents. The history of the class 
struggle in France in the Revolutionary movement and the his- 
tory of the class struggle in economic terms for higher wages, 
shorter hours, and better conditions of work are depicted in 

38 



MEN AND IDEAS 

Marx's work with great clarity and intensity. Marx studied first 
of all the multitudes of White Papers and other reports and mem- 
oranda issued during the period of struggle for social legislation 
in England and drew heavily upon them. The violence of his 
attack upon his opponents is hardly surpassed by anything in 
economic literature. He finds it necessary to explain that his 
attacks on the capitalists are impersonal; that he had in mind the 
system, not the persons of its exponents. 

It is clear, and this is confirmed by Marx's utterances about him- 
self, that the book had one overriding purpose, namely, to provide 
the intellectual weapon in the class struggle against the power of 
capital. Marx is at his best when dealing with historical develop- 
ment; his static theorems were weak and unconvincing. He de- 
scribes the laws of capitalist development and generalizes the 
trends of historical change in class relations, finding a formula 
which runs from slavery, villeinage, long-contract labor, free 
and wage labor to trade-unionism and socialism. His visions are 
only a projection into the future of historical trends. 

There are other great books in economics. Malthus' Essay on 
the Principle of Population, Ricardo's Principles of Political Econ- 
omy and Taxation, Sismondi's Nouveaux Principes, Frederick 
List's, Roscher's, and Schmoller's works. 

Malthus was one of the few economists whose name stands for 
a whole movement and school of thought. He has fertilized the 
minds not only of economists but also of naturalists, among 
whom Charles Darwin is the best known. Darwin himself stated: 
"In October 1838, that is fifteen months after I had begun my 
systematic enquiry, I happened to read for amusement Malthus 
on Population, and being well prepared to appreciate the struggle 
for existence which everywhere goes on from long-continued ob- 
servation of the habits of animals and plants, it at once struck me 
that under these circumstances favourable variations would tend 

39 



MEN AND IDEAS 

to be preserved, and unfavourable ones to be destroyed. The re- 
sult of this would be the formation of new species." 5 It gave also 
to Alfred Russel Wallace "the long-sought clue to the effective 
agent in the evolution of organic species." The same influence of 
Malthus was felt by Herbert Spencer, who wrote his famous 
article on The Development Hypothesis in 1852. What is called 
Social Darwinism is really an offshoot of Malthusianism. Malthus 
influenced not only literature but also the sex and marriage be- 
havior of the masses, as witness the neo-Malthusian movement. 
On examining his work we find once more the fine admixture of 
analysis and historical description strengthened in the later edi- 
tions. 

Simonde de Sismondi's Nouveaux Principes 6 stands at the cross- 
roads of three great movements, influencing them enormously: 
the historical school, the Christian reform school of Le Play, and 
the socialist school. He may be regarded as the forerunner of all 
three. Sismondi was primarily a historian, the author of the mon- 
umental Histoire des Franfais, and his book makes great use of 
historical description. "Since my article published in the Edin- 
burgh Review'' he writes, "I have read little of economics but 
studied the historical facts and they have made me alter my views 
formerly expressed." His works make very topical reading today, 
anticipating the economics of national income based on adequate 
consumers' expenditure, the policy of full employment, and social 
welfare. 

Frederick List's Das national? System, 7 which revived the strong 
protectionist movement on the Continent, especially in Germany, 
is much more a historical treatise than a theoretical book. He 



8 The Life and Letters of Charles Darwin. Vol. I, p. 83. 
Nouveaux Pnncipes d' economic poltttque. Paris, 1819. 

7 Das nationale System der pohtischen Oefynomie, Bd. T. Stuttgart & Tubingen, 
1841. 

40 



MEN AND IDEAS 

writes in the same vein as Sismondi: "Since I left Germany, I 
have had little opportunity to study economic books, but I have 
studied the greatest economic book which can be studied in the 
U.S.A., namely the economic life of that great and prosperous 
country." 

But what of Ricardo's Principles ? It is not so great an exception to 
my thesis as appears at first sight. Ricardo's Principles should be 
read in conjunction with his Report on the High Price of Bullion 
(1810), and the Essay on the Influence of a Low Price of Corn 
or the Profits of Stoc^ (a tract against the Corn Laws, written in 
1815). The Principles are the continuation and generalization of 
views already expounded there. But even the Principles considered 
in themselves are not devoid of historical examples and rich prac- 
tical material. They are based on Ricardo's wide practical experi- 
ence as man of affairs, and this experience he has before his mind's 
eye all the time. Especially is his treatment of money, credit, and 
international trade far from being merely abstract and deductive. 
Of more recent economic literature, the great works of Marshall, 
Veblen, and Keynes also prove the rule that the most useful ap- 
proach to economic study is provided by a combination of histori- 
cal description and theory. The modern purists, i.e., the followers 
of so-called "pure economics," which is to say abstract economic 
analysis, have brought this combination into disrepute, asking 
each economist to choose whether he wishes to pursue economic 
history or economic theory. But I believe that they are wrong, and 
that they prove their misconception by the ostensible exhaustion 
of the soil on which they operate. 

Legislation and Doctrine 

The interplay between economic literature and economic legis- 
lation has always been so close that many historians like Ashley 

41 



MEN AND IDEAS 

have treated them together. The two bodies constantly influence 
each other. Economic literature prepares the way for economic 
legislation, as did the economic tracts of the sixteenth and seven- 
teenth centuries in France and in England; similarly, Adam 
Smith's The Wealth of Nations entered the House of Commons 
through William Pitt, Ricardo's High Price of Bullion and Prin- 
ciples were soon translated into Peel's Act of 1844, as Malthus' 
criticism of the Poor Laws found expression in the abolition of 
outdoor relief in 1834, and the Fabian tracts soon brought a rich 
crop of social legislation. 

Economic legislation on the other hand exerts a very great in- 
fluence on economic literature, although this is seldom admitted 
by the economists. As a matter of fact economic legislation some- 
times forms an integral part of economic literature, i.e., the par- 
ticular Acts are pieces of economic writing very often more im- 
portant than economic textbooks, monographs, or articles. The 
Elizabethan Statute of Artificers (1563) was an important piece 
of economic literature from which a whole economic doctrine can 
be deduced. This is also true of Colbert's reglements. The Poor 
Laws of the seventeenth and eighteenth centuries reveal more of 
the ideas prevalent in that age than do the tracts on poor relief 
published at that time. Economic legislation is very often a product 
of profound study and careful examination of conditions, apart 
from being a product of a compromise between very divergent 
interests, and the expression of a dominant opinion revealing the 
true ideas of a given age. 

Legislative acts are very often preceded by reports, studies, and 
rejected and amended projects which are an integral part of this 
legislation in a larger sense, but which occupy a middle position 
between legislation and literature. Gresham's letter to Queen 
Elizabeth is a part of economic literature. The books of Nicolas 
Oresme and Nicolas Copernicus on monetary reform were or- 

42 



MEN AND IDEAS 

dered by Emperors Charles V and Sigismund I. The reports which 
preceded the social legislation of the thirties and forties of the last 
century, the amendment of the Poor Law, the shortening of the 
hours of work are not only highly valuable documents but also 
very interesting contributions to economic thought which were 
used by the socialist writers, especially Marx. In recent times the 
British White Paper on Full Employment and the Beveridge Plan 
for Social Security were more important pieces of economic litera- 
ture than any other economic books which appeared contempo- 
raneously with them. Drawing again from British experience, the 
Macmillan Report on Banking, the Reports on Imperial Prefer- 
ence, and many other such reports not only contain valuable ma- 
terial but are a highly developed body of economic arguments 
which often appear in a most systematic and almost academic 
form. 

In modern times we have also the growing body of official pub- 
lications produced by such international bodies as the League of 
Nations, the International Labour Office, the International Cham- 
ber of Commerce, the International Institute of Agriculture, and 
other international institutions, which have now to a great extent 
been taken over by the United Nations. Some of these publications 
are tracts on pure theory, such as Haberler's book on international 
depressions, or studies on international trade, on population, and 
so on. (As a matter of fact, these studies, conducted with enormous 
resources, on a collective research basis with the help of secretaries, 
technical assistants, and so on, utilizing all available documents 
and records, constitute a marked competition for single individual 
researchers, who are handicapped and frustrated by this rivalry. 
There is no sense in conducting single-handed research on one's 
own meager resources, if one knows that at the same time teams 
of workers in government departments, research institutes, and 
international institutions endowed with practically unlimited re- 

43 



MEN AND IDEAS 

sources are carrying on research continuously on all possible sub- 
jects.) 

Not only modern legislation and its documentation but the eco- 
nomic legislation of all times can be regarded as a kind of official 
literature, generally very brief, but implying doctrines which can 
be easily developed and presented in a more systematic and doc- 
trinal manner. 

This official literature exerts an important influence on the 
writings of economists. It is a boon to them and serves as a point 
of departure for their tracts and studies. The official findings are 
either attacked or defended, and they therefore, provide a canvas 
for the web of the economists' theories. The doctrine implied in 
them is either presented or supplemented, or revised, developed, 
and deepened. Adam Smith wrote because he wanted to prove 
that the ideas which underlay the existing and already obsolescent 
economic legislation of his time were false. Ricardo wrote because 
he wanted to amend the monetary legislation of his day. Malthus 
felt the same about the Poor Laws, Francois Quesnay about the 
agricultural discrimination in mercantilist legislation, and Jean- 
Baptiste Say about Napoleon's legislation. The greatest of the 
socialist writers wrote because they regarded the laws of property 
as harmful to society. 

Many modern writers have taken existing economic legislation 
as the starting point of their investigation. Keynes attacked mone- 
tary legislation and monetary policy, gradually developing the 
ideas underlying his attack by generalizing them and giving them 
a more philosophical framework. Thorstein Veblen attacked the 
credit and property legislation of the United States, preparing the 
way for the technocratic movement in the thirties, but he general- 
ized the implications of his criticism into the doctrine of the insti- 
tutional school. The new economic legislation of Great Britain, 
starting with the Beveridge Report and the White Paper on Full 

44 



MEN AND IDEAS 

Employment, and developed afterwards by the Labour Govern- 
ment in the Social Security Acts, Health Service, Education Act, 
Housing Programme, and Nationalization Acts, is supported by, 
and contains, a new economic doctrine which has not yet been 
presented in economic literature, but which with time will certainly 
develop into a full-dress economic doctrine. 



45 



II 

SOME HISTORICAL EXAMPLES 



Ricardo and Marx 



Among the great giants of political economy, two held key posi- 
tions in its further development and determined decisively the 
course of its progress. I have in mind, of course, primarily David 
Ricardo and Karl Marx. The former determined the course of 
classical political economy, the latter that of socialist thought. 

There are certain strijking^imilaritics between them. Both drew 
freely on British thought. Ricardo was a friend of Hume, of both 
the Mills, of Bentham, and of Malthus; he read and commented 
upon Adam Smith and other British writers. Marx sat for nearly 
twenty years in the library of the British Museum and read the 
works of the English classical school and the English White Papers. 
Marx as a Rhinelander combined three streams of thought: that 
of Germany from Hegel; that of France from the Utopian Social- 
ists, especially Saint-Simon; and that of England from the classical 
economists, especially Ricardo. The Rhineland was always the 
meeting place of three cultures, German, French, and English. 

Another similarity between the two men is the status of each 

4 6 



SOME HISTORICAL EXAMPLES 

as refugee. From his early youth Marx was constantly on the 
move as a revolutionary. Expelled from Germany, he went to 
France; expelled from France, on the instigation of the Prussian 
Government, he moved to Brussels, where he wrote in conjunc- 
tion with Engels the most revolutionary of the world's pamphlets, 
the Communist Manifesto. Then, expelled from Belgium, he went 
to France on the invitation of the Provisional Government, moved 
again into Germany to take part in the revolution of 1848, was 
again expelled from Germany, and went back to France; finally 
he came to hospitable England to settle there for good and to be 
buried there in Highgate Cemetery. In him was repeated the ex- 
perience of the eternal refugee and stranger, constantly on the 
move. 

Ricardo, British by birth, settled down finally as a landlord, buy- 
ing a seat in the House of Commons, respectable and respected; 
but he was the descendant of many generations of refugees, a scion 
of a Spanish-Jewish family expelled by Torquemada from Spain, 
which moved through Italy, France, and the Netherlands, to Brit- 
ain, to which Ricardo's father came. The status of refugee must 
have left its mark on the mind of young David, imparting to him 
the feeling of restlessness and insecurity against which he strug- 
gled all his life. 

But here the similarity between the two men ends. Ricardo 
writes as a retired wealthy businessman; his aim is to give advice 
to the government, to the Chancellor of the Exchequer, to the 
Governor of the Bank of England, to merchants and industrial- 
ists. Marx writes as a revolutionary whose aim it is to forge an 
ideological weapon for the proletariat in its struggle for liberation. 
He writes deliberately for the workers and their representatives, 
not for the businessman or the government. 

47 



SOME HISTORICAL EXAMPLES 

Ricardo's book is an expression of commercialism, of the defense 
which uses money as a weapon against insecurity of position. He 
sees economy as an auction room or as a Chamber of the Stock 
Exchange, where things are sold for the highest bid and all goods 
are transferable and movable. Marx, in contrast, is the expression 
of Messianism, of its search for the salvation of mankind, which is 
to come at the end of our days and to bring mankind out of the 
realm of necessity into that of freedom. As Engels, his friend and 
close collaborator, said : 

"The objective external forces, which have hitherto dominated 
history, will then pass under the control of men themselves. 

"It is only from this point that men, with full consciousness, 
will fashion history. It is only from this point that the social causes 
set in motion by men will have, predominantly and in constantly 
increasing measure, the effects willed by men. It is humanity's 
leap from the realm of necessity to the realm of freedom." 

But the understanding of the position of the underdog and 
sympathy with the oppressed and downtrodden finds full expres- 
sion in both writers. 

It is extraordinary to find that Ricardo, the founder of com- 
mercial laissez-faire economics, could place so invaluable a weapon 
in the hands of the enemies of capitalist economy. The socialist 
movement fed on his heart and brains. The socialist school of 
thought, from William Thompson (the author of the Inquiry 
into Distribution of Wealth Most Conducive to Human Happiness, 
1824), to the Fabians, the Webbs, and Bernard Shaw, was based 
upon Ricardo's labor theory of value. Henry George and the 
land reformers based their theories on Ricardo's theory of rent. 

Ricardo initiated the conception that not the production of 
wealth, as Adam Smith contended, but its distribution forms the 
real object of economic study: "To determine the laws which regu- 



SOME HISTORICAL EXAMPLES 

, late this distribution is the principal problem in Political Econ- 
omy," he writes in the Preface of his Principles. If once we admit 
that the distribution of wealth is the main subject of study, then 
we enter fully into what may be called "social economics" of the 
kind advocated later by the socialist school. We cannot then avoid 
considering the problem of optimum distribution of income, the 
study of the relation of distribution to production and to human 
happiness. 

Ricardo, the landlord, shows the position of the landlord in an 
awkward light. His land-rent increases constantly with the density 
of population or with industrial development and hence the land- 
lord taxes his fellow citizen without contributing to their well-be- 
ing. And what is the position of the wage-earner? His wage is al- 
ways kept at the minimum level of existence, the rest of his labor 
value being divided between capitalist and landlord. We have here 
the first precise formulation of the "iron law of wages," the theory 
of exploitation. 

Ricardo was most eager to revise and correct his original view 
that machines are not harmful to the laborers' interests, stating 
publicly that in this respect he had erred, that machines can really 
lower the gross revenue of society, if one has in mind the workers' 
income. This 'he confirmed the workers' opinion that machines 
compete with hands and lower their share. 

How gloomy is the picture of future development drawn by 
Ricardo! The optimism of Adam Smith has gone, and the pattern 
of distribution assumes the characteric feature of class distribution 
and class exploitation, although the term class is not explicitly 
mentioned. We have only to read Ricardo's work with a sharpened 
eye for reference to social injustice to translate all his theorems into 
socialistic theory. Ricardo, not Marx, was the first to forge the 
theoretical weapons in the struggle of the working classes. 

49 



SOME HISTORICAL EXAMPLES 

On reading Ricardo one wonders Was he really a sincere be- 
liever in capitalism or laissez-faire economics, or did he merely 
pretend to be so, smuggling in ideas which were to be taken over 
and developed by his successors who did not have the inhibitions 
of a wealthy merchant and a landlord? 

Modern historians of economic thought are unanimous in agree- 
ing that without Ricardo there would have been no Marx, that 
there is a direct line of succession from the one to the other. Marx, 
who thought highly of Ricardo in contradistinction to the other 
economists, quotes with approval in the Preface to the second edi- 
tion of his Capital the opinion of Professor A. Siebert, of the Uni- 
versity of Kiev, that Marx's theory of value "is a necessary sequel 
to the teaching of Smith and Ricardo." 

There are so many similarities between Ricardo's and Marx's 
theories of value that it is worth while examining them more 
closely, in order to see their points of convergence and divergence. 

The principle of One-ness, the cornerstone of Judaism, is ex- 
pressed in the work of both men. Each looks for the permanent 
and highest principles which underlie all the changeable move- 
ments and varieties of phenomena. This is illustrated by what 
Ricardo wrote to Malthus: 

"My object was to elucidate principles, and to do this I imagined 
strong cases, that I might show the operation of these principles. 

"You haVe always in mind the immediate and temporary effects 
of particular changes, whereas I put these immediate and tempo- 
rary effects quite aside, and fix my whole attention on the per- 
manent state of things which will result from them." 

Marx thinks in the same way, even overreaching himself to such 
an extent that real prices are put aside, regarded merely as a transi- 
tory and unimportant phenomenon of the permanent laws of 
, value. The problem of value is one thing, while the exchange rela- 
tions are another thing, and both orders coincide only as an aver- 

50 



SOME HISTORICAL EXAMPLES 

age in an over-all framework. Appearance speaks against Marx's 
law of value, but behind the appearance there is a deeper signifi- 
cance. 

"The vulgar economist has not the faintest idea that 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 regula- 
tion of production. The reasonable and the necessary in nature 
aserts itself only as a blindly working average. And then the vul- 
gar economist thinks he has made a great discovery when, as 
against the disclosures of the inner connection, he proudly claims 
that in appearance things look different. In fact, he is boasting 
that he holds fast to the appearance and takes it for the last word." 1 

Both Ricardo and Marx struggled throughout their whole life 
with their respective theories of value, defending them before 
themselves and others, not very satisfied with their results, and 
constantly revising them. And each regarded his theory of value 
as the foundation on which his whole doctrine stands or falls. 

Let us now glance at the similarities and differences in these 
theories of value. Both regard the value of a commodity as being 
determined and measured "almost exclusively" by the labor-time 
or the "comparative quantity of labor expended on each." But here 
the similarity virtually ends. Ricardo treats his theory of value as 
a natural law valid for all stages of civilization, while Marx treats 
his only as the law of capitalist production, i.e., as valid historically 
for a certain phase of economic development. 

Ricardo regards the marginal labor bestowed upon production 
of commodities as the determining factor, i.e., labor "expended 
in the most unfavorable conditions" necessary to "carry on the 
production." Marx, however, considers the "socially necessary 



x Marx in his letter to Kugclman, July 1868. Karl Marx and Friedrich Engels, 
Selected Correspondence, p. 247. London: Martin Lawrence, Ltd., 1934. 

51 



SOME HISTORICAL EXAMPLES 

labour-time" as the determinant, i.e., that required under normal 
conditions, which may be interpreted as the average labor-time 
in the industry or labor-time in the representative firm, but not as 
marginal labor-time. 

Ricardo regards all labor as a value-determining factor; Marx, 
only labor expended in the process of production labor expended 
in the process of circulation, such as the labor of transport workers 
or merchantmen, retailers, advertisers, and others, is excluded in 
the formation of value. 

Ricardo solved his difficulties connected with the existence of 
capital and its different composition in time (constant and circulat- 
ing capital) by the introduction of several cases in which excep- 
tions to the rule are treated, and which led him to a higher for- 
mula: "labor and time" of production as determining factors. 
Marx solved the same difficulties by introducing an unexpected 
mechanism the pooling of all the different rates in the organic 
composition of capital i.e., by disposing of all differences and 
restoring an average organic composition of an artificial nature. 

Ricardo, needless to say, is more realistic than Marx and far 
superior to him in his treatment of the complex phenomena of 
value. His casuistics display an ideal simplicity and are child's play 
compared to the casuistics of Marx, which have an air of scholastic 
or Talmudic tradition. 

But the intellectual endeavors and achievements of both are 
extremely high. They sought to pierce the complex and changing 
surface of the troubled waters of economic life in order to reach 
the deep currents of life, giving expression in their cool manner, 
through figures and measures, to the deeper aspirations of man in 
order to base exchange relations upon labor relations, and in order 
to introduce value judgments into the field of economics, even 
though, it may be, they were not always conscious of these en- 
deavors in their theoretical work. 

52 



SOME HISTORICAL EXAMPLES 

Lenin and Marx, or the Revolt 
of Backward Countries 

We seldom find a more perfect example than Lenin of the great 
disciple of a great master who is entirely devoted to the interpre- 
tation, development, and perfecting of his teacher's doctrine, en- 
tirely absorbed by one thought, one idea, one enthusiasm, one love : 
to be worthy of his master, to act as he would wish him to act, to 
defend the purity of his doctrine from debasement and defilement, 
and to see it established on earth in its most perfect form. Lenin 
regarded himself primarily as the inheritor and executor of Marx- 
ist thought. He was the St. Paul of the Marxist Church. If Lenin, 
then, was the father of the October Revolution, Marx deserves to 
be called its grandfather. 

Lenin was only thirteen when Marx died. The two never met in 
the relationship of master-and-disciple; Lenin's apprenticeship in 
the craft of revolution was established through the most careful 
and sympathetic study of Marx's writings. His first contribution 
to public life in Moscow in 1893 took the form of an exercise book, 
On Markets, written in order to clarify Marxist thought as then 
presented by a Petersburg Marxist. How often did Lenin rever- 
ently visit the cemetery in Highgate! His wife Krupskaya in her 
Memoirs of Lenin records how, "We also liked going to Primrose 
Hill because it was near the cemetery where Karl Marx was 
buried." 

Lenin made a lifelong study of Marx, reading his works again 
and again, consulting his teaching on every subject in a spirit of 
complete we might say mystical unity with him, often, and at 
every stage of the Revolution, deriving from him guidance for 
further action. 

Nicolas Lenin and Karl Marx had many points of physical re- 
semblance. Both had the same Socratic forehead, the same stub- 

53 



SOME HISTORICAL EXAMPLES 

born and self-willed expression, though the face of one was that 
of a Russian noble with Mongoloid traits, the face of the other that 
of a Jewish Rabbi but also with some Mongoloid characteristics. 
Both had undoubtedly an oriental strain. Rosa Luxemburg de- 
scribed Lenin as having "a real Russian peasant's head with a few 
faintly Asiatic lines." 

Both were active against a background of hostility and hate, 
both lived a long way from their native land, both were refugees, 
for a while even in the same city. But Marx died an alien in Lon- 
don; Lenin was buried by his own countrymen in a splendid 
mausoleum with innumerable laurel wreaths. 

Both believed in the same thesis: "He who is not with us is 
against us," and both had a strong tendency to heresy-hunting. 
Both were good haters, terrible against all, even those nearest to 
them, who seemed to them to deviate from the straight line as they 
themselves traced it. 

Both devoted their whole life to the struggle for the emanci- 
pation of the working class, and this devotion was marked by 
the utmost self-abnegation. Both show a unique consistency in 
their multitude of books, pamphlets, speeches, articles, and notes. 
With both, one basic idea is developed and presented from dif- 
ferent aspects or in different applications. 

Marx once splayed a game with his daughters, which consisted 
of giving spontaneous answers to questions. Each player had to 
answer at once all the questions put to him. Marx's own answers 
to the questions asked of him were as follows : 

Your most beloved virtue: Simplicity. 

Your most beloved virtue in man: Strength. 

Your most beloved virtue in women: Weakness. 

Your most characteristic feature : Serving one idea. 

Your idea of happiness: To fight. 

54 



SOME HISTORICAL EXAMPLES 

Your idea o unhappiness: Subjection. 

The quality you hate the most: Servility. 

Your most beloved occupation : Being a bookworm* 

This game is quite revealing; and most of these qualities re- 
vealed apply also to Lenin. Marx was a bookworm making a revo- 
lution. He presented a unique combination of a bookish man and 
a man of action. But he never regarded study as an object in itself. 
It was for him an instrument, or rather a weapon, in the fight for 
the emancipation of the working class. He regarded his theory as 
merely the forging of weapons; hence his materialistic conception 
of science and learning. Both Marx and Lenin were fighters and 
thinkers, but Marx was primarily a thinker and but for his books 
would remain in obscurity; while Lenin was primarily a fighter 
who but for his political struggles would probably be passed over 
by the historian with a casual remark. But both believed in the 
revolutionary theory as the basis and source of the revolutionary 
movement. "Without a revolutionary theory," said Lenin, "there 
can be no revolutionary movement." 

But Marx had no alternative to sitting in the British Museum li- 
brary, for the German Revolution in which he took an active part 
was a failure. Lenin did the same in his long period of exile, study- 
ing philosophy, history, sociology, and economics, and writing 
philosophical dissertations such as Materialism and Empirio-Criti- 
cism: critical notes concerning a reactionary philosophy (1909), 
when it was necessary to defend historical materialism from the 
"poisonous venom" of the "Machian traitors." 

"There is nothing I would like so much, there is nothing that I 
have hoped so much as an opportunity to write for the workers," 
wrote Lenin to Axelrod from his exile in Siberia in 1897. And 
Lenin always found time for writing, which he regarded as the 
most important weapon in the revolutionary struggle, in making 

55 



SOME HISTORICAL EXAMPLES 

communism accessible and understandable to the masses. Even in 
the midst of his busiest revolutionary period in November 1918, 
when he was already the leader of Russia, he found time to write 
a polemical book against the Second International under the title 
The Proletarian Revolution and Kauts\y the Renegade. 

Both Marx and Lenin organized a party, Marx the First Inter- 
national, Lenin the Bolshevist Party and the Third International; 
but in this regard Lenin was much more successful, founding his 
Bolshevik Party on a professional basis and reducing and suppress- 
ing the intellectuals in the Party committees. Of course the Inter- 
national with all its wings organized by Marx could not achieve so 
great a unity and striking power as a purely Russian party organ- 
ized by Lenin on a professional basis for particular and well-de- 
fined purposes. 

Both had boundless faith in their cause, never wavering, never 
losing their conviction that it would triumph, even in their own 
day. 

Lenin regarded as his primary task the preservation of the Marx- 
ian heritage pure and undefiled. Beginning with his fight against 
the Second International, against "social opportunism," social pa- 
triotism," and "social idealism," his basic aim was to stamp out the 
chauvinist, the idealist, the liberal, the opportunist and the "petty 
bourgeois," the intellectual variety of socialism. Lenin did not 
fight against conservatism, liberalism, or nationalism in their pure 
form; he did not fight against the capitalist theory of society. That 
Marx had done, and he refused to duplicate his work. His objective 
was to exterminate what he considered the weeds in the Marxist 
garden the Mensheviks, the revisionists, Kautskyists, Vander- 
veldists, Fabians, and all kinds of evolutionary collectivists by all 
powers at his command. 

He wrote in 1915: "... The working class cannot attain its 

56 



SOME HISTORICAL EXAMPLES 

world-revolutionary object without waging a ruthless war against 
such apostasy, such backbonelessness, such subserviency to oppor- 
tunism, and such unparalleled vulgarisation of Marxism. 1 * 2 

He continues in the same pamphlet: "By means of obvious soph- 
ism the living revolutionary soul is ripped out of Marxism, in 
which everything is accepted except the revolutionary methods of 
struggle, their propaganda and preparation, and the education of 
the masses for that purpose." To preserve this revolutionary soul 
in Marxism was his historical task. "Kautsky has turned Marx into 
a liberal," he argues; that is what must be prevented. 

But it would be wrong to say that Lenin interpreted Marx, as a 
schoolman would do, in a literary fashion. He quotes with approval 
the statement of Engels that "our doctrine is not a dogma but a 
guide to action" namely, to revolutionary action. Marx must be 
interpreted in a revolutionary spirit; every other way of interpre- 
tation would be false. And his exhortations to his party comrades 
always have the same refrain: "By all means a more revolutionary 
programme and more revolutionary tactics." 

If we can speak of Leninism, its substance can be seen first of all 
in a systematic attempt to "study new situations and problems in 
the light of the experience of the revolutionary struggle of the 
world proletariat, to apply Marxist method to the analysis of new 
concrete situations," and Marx's writings were for Lenin only the 
most perfect way of teaching this method. 

Marx's analysis in Lenin's view consisted in providing sweeping 
over-all pictures of the world situation, "a general context of polit- 
ical and economic relations," through the analysis of class relations. 
Marxist dialectic enabled Lenin to see the whole and all its details 



2 Against the Stream. A collection of articles. 1918. All quotations from Lenin 
in this chapter are from Collected Wor^s of V. 1. Lenin, authorized by the Lenin 
Institute in Moscow. London: Martin Lawrence, Ltd., 1929-1945. 

57 



SOME HISTORICAL EXAMPLES 

in their proper context, while "one of the principal mistakes bour- 
geois economists make is that they tear particular facts, small de- 
tails and figures from the general context of political and economic 
relations." 3 And he ends his first great work, The Development of 
Capitalism in Russia, by making this criticism of the economist 
(which he will afterwards repeat in relation to many of his other 
adversaries) : "The bourgeois economist is overwhelmed by the 
mass of raw material and utterly incapable of appreciating its 
meaning and importance." He "copies the superficial, the fortui- 
tous, the chaotic," he "counts the separate trees without seeing the 
wood." Only through Marxism, through the analysis of class re- 
lations can one grasp the totality, the pattern of social and eco- 
nomic movement as a whole. 

The Marxist doctrine, says Lenin, 4 is omnipotent, complete and 
harmonious, and provides men with an integral world conception. 
"... Its strength consists of providing a Weltanschauung, guid- 
ance to action, and pattern of social economic development of one 
over-all conception. . . . The main thing in the doctrine of Marx 
is that it brings out the historic role of the proletariat as the builder 
of a Socialist society." And Lenin makes the following statement 
and prediction: "Each of the three great periods of world history 
since the appearance of Marxism (I: 1848-71; II: 1872-1904; III: 
1904 up to the time of writing in 1913) has brought Marxism new 
confirmation and new triumphs. But a still greater triumph awaits 
Marxism as the doctrine of the proletariat in the period of history 
that is now opening." Lenin not only predicted this, but made it 
come true. 

Lenin's preoccupation was always with how to grasp the future, 
because he was always concerned about the future, not about the 
present or the past. And he found only one clue as to how to grasp 

3 New Data on the IMWS of Development of Capitalism in Agriculture. 

4 The Three Sources and Three Component Parts of Marxism, 1913. 

58 



SOME HISTORICAL EXAMPLES 

the problems of the future: the Marxist dialectic, which in his view 
was "the doctrine of development in its fullest and deepest form, 
free from one-sidedness. The doctrine of the relativity of human 
knowledge which provides us with a reflection of eternally devel- 
oping matter." 5 Again, Lenin said that dialectic is "a living many- 
sided knowledge (with the number of sides eternally increasing) 
with an infinite number of shadings of every sort of approach and 
approximation to reality" (On Dialectics, 1915). Not prophecies, 
not even the prophecies of Marx, could help him, but one thing 
was invaluable in Marxist armor: the revolutionary dialectic 
which expressed the manifold age-long experiences "of the revolu- 
tionary struggle of the world proletariat." 

Lenin paid the greatest attention to the tactics of the class strug- 
gle of the proletariat conceived on the principles of comprehensive 
dialectical and materialistic philosophy. This tactic he sums up in 
a sentence derived from the Communist Manifesto, which reads as 
follows : 

"The Communists fight for the attainment of the immediate 
aims, for the enforcement of the momentary interests of the work- 
ing class, but in the movement of the present, they also represent 
and take care of the future of that movement." 

There are two important economic works of Lenin: The 
Development of Capitalism in Russia (1899), which he began in 
prison and completed in Siberia, an "analysis of the social and eco- 
nomic system, and consequently of the class-structure of Russia in 
its pre-revolutionary days," and Imperialism, the Highest Stage of 
Capitalism, written at Zurich in 1916, which attempts to present "a 
complete picture of world capitalist economy and its international 
relations at the beginning of the twentieth century, on the eve of 
the first world imperialistic war." Both works are nothing else but 



5 Marx defined it as "the science of the general laws of motion both of the ex- 
ternal world and of human thought" (Ludwig Feuerbach) . 

59 



SOME HISTORICAL EXAMPLES 

"translations of Marxism into the language of Russian life," a kind 
of application of Marxism for the East. 

Lenin conceived his life-task as not only to keep Marx pure and 
undefiled and to bring his dialectic to fulfillment, but also to bring 
Marx into contact with Russian life, to graft him on the Russian 
tree, to assimilate him into Russian thought and action. And al- 
ready in his early youth Lenin started his greatest book on eco- 
nomics The Development of Capitalism in Russia, an erudite 
work on economic history, based on Marxist method, containing 
a great wealth of statistical material presented in Marxist fashion. 
In this book Lenin tries to show that capitalism is not a Western 
system merely, but has its full counterpart in Russian life. The 
whole book seems to say to the Russians: De te jabula narratur. 
Capitalism and its dialectical antithesis, socialism, are not West- 
ern inventions; they have a deep historical meaning for Russia. 

In that sense he speaks in his last chapter of "The Mission of 
Capitalism," i.e., "its historical role in the economic development of 
Russia." "To admit that this role is a progressive one is quite com- 
patible . . . with the fullest admission of the negative and gloomy 
sides of capitalism, with the fullest admission of the inevitable, pro- 
found and all-sided social antagonism which are a feature of capi- 
talism and which reveal the historically transitional character of 
this economic system." He makes the same contentions as does 
Marx as to the constant transformations and contradictions 
brought about by capitalism, i.e., centralization, concentration, pro- 
letarianization, monopolization, expropriation and pauperization. 
And he concludes that the Marxian analysis holds good also for 
Russia and sheds light on the questions of Russian development. 
The rate of growth of Russian capitalism, concludes Lenin, is slow, 
but the slowness is due to specific Tsarist institutions devised to re- 
tard it. 

The study of agriculture and the problems of the Russian peasan- 

60 



SOME HISTORICAL EXAMPLES 

try were the real starting-point of what is called Leninism. Has a 
revolutionary proletarian movement a chance in a peasant coun- 
try ? Is it true, as the critics of Marxism contended, that the laws of 
capitalist development do not hold good for agriculture, while agri- 
culture does not diminish its share in the national economy? A 
mass of books, articles, speeches, and notes is devoted to this theme, 
and they seek to show on the basis of statistical material from all 
progressive countries the validity of Marxist laws in agriculture. 
Lenin puts forward the contention, 6 which he repeated afterwards 7 
for the United States of America, that even Denmark, "the ideal 
country from the point of view of the opponents of Marxism on the 
agrarian question, reveals very clearly the capitalist agrarian system, 
the sharply expressed capitalist contradictions in agriculture and 
live-stock farming, the growing concentration of agricultural pro- 
duction, the elimination of small production by large-scale produc- 
tion, and the proletarianization and impoverishment of the over- 
whelming majority of the rural population." 

"We observe," said Lenin, "a remarkable uniformity of evolu- 
tion. . . . 8 Small production is being eliminated by large-scale pro- 
duction . . . The expropriation of small farming is proceeding." 

Lenin understood from the outset the need for securing the sup- 
port of the poor peasants in the revolutionary struggle and estab- 
lishing a close "alliance between the workers and the toiling and 
exploited peasants." Time and again he labored hard in order to 
show the peasants that "there is no salvation for them except by 
joining in the proletarian struggle," and the workers that they 
should not underestimate the importance of the peasantry in Revo- 
lution. In 1905 he wrote these words, which had a prophetic ring of 
truth: "There is hardly another country in the world where the 



8 Agrarian Question and Critics of Mat x. 

7 In New Data on the Laws of Development of Capitalism in Agriculture. 

*lbid. 

61 



SOME HISTORICAL EXAMPLES 

peasantry is experiencing such suffering, such oppression and deg- 
radation as in Russia. The more gloomy this oppression of the 
peasantry has been, the more powerful will now be its awakening, 
the more invincible its revolutionary onslaught. It is the business of 
the class-conscious revolutionary proletariat to support this on- 
slaught with all its might." The agrarian question was the weakest 
point in the Marxist armor, especially as to Russia, and Lenin 
always tried to overcome the weaknesses of Marxism. 

But Lenin's contribution to Marxism was much more funda- 
mental than mere polemics or the putting up of a system of defence 
for Marxism. Conceiving Marxism not "as a lifeless dogma, not a 
final, finished and ready-made doctrine, but a living guide to ac- 
tion," he realized that because of its very nature 9 Marxism "was 
bound to reflect the astonishing abrupt change in the conditions of 
social life. A reflection of the change was a profound disintegration 
and disunity, vacillation of all kinds, in a word, a very serious in- 
ternal crisis of Marxism." 

Lenin realized "the profundity of the crisis through which Marx- 
ism is passing, regarding its connection with the whole social and 
economic situation in the present period." 10 In his view: "The ques- 
tion raised by this crisis cannot be brushed aside. Nothing can be 
more pernicious or unprincipled than the attempt to dismiss them 
by phrasemongering." 11 

Moreover, this profound crisis of Marxism was a challenge to 
Lenin. He did not dismiss the facts contained in modern statistics, 
which asserted in a clear voice that the Marxist laws of pauperiza- 
tion and proletarianization and the Marxist forecasts of the constant 
drift towards economic catastrophe, the deepening economic and 



Historical Development of Marxism, 191 1. 
11 Ibid. 

62 



SOME HISTORICAL EXAMPLES 

social contradictions, and the constant sharpening of economic cri- 
ses are not proved by experience in Western life. The Fabians in 
England, Bernstein and his revisionists in Germany, the "social 
patriots" and "syndicalists" of George Sorel in France all these 
contended that the catastrophic revolutionary program of Marxism 
was not borne out by actual facts, that the theory of capitalist de- 
velopment simply does not fit the facts. One book had to go: either 
the Bible of the working classes, or the Book of Life. 

Kautsky tried to give an answer to this challenge by brushing the 
facts aside, explaining them away in an unconvincing and incon- 
sistent way which only deepened the already profound crisis. At 
this point Lenin took up the challenge, trying to kill three birds 
with one stone: (i) to save revolutionary Marxism, (2) to anni- 
hilate the "opportunists," and (3) to provide a truly Russian or 
Eastern version of socialism. 

He did this in his theory of imperialism, which is the crowning 
achievement of his study, and which in a way opens up a new chap- 
ter in European history one which, as Stalin said, may be called 
Leninism; "Leninism is Marxism in the epoch of imperialism and 
proletarian revolution." 

The theory of imperialism grew out of a study of two books, 
Hobson's Imperialism (1902) and Rudolf Helferding's Finanz- 
Kapitalismtis (1910); but the main idea had already been pre- 
sented in mice in the Marx-Engels correspondence and the views 
expressed there on colonial questions. The influence of Helferding 
can be seen in the constantly repeated term "finance capitalism" or 
in the basic contention, "Monopoly has sprung from the banks" 
(Chapter X), or, "Finance capital does not want liberty, it wants 
domination" (quotation from Helferding). 

In 1858 Engels wrote to Marx: "... The English proletariat is 
becoming more and more bourgeois, so that this most bourgeois 

63 



SOME HISTORICAL EXAMPLES 

of all nations is apparently aiming ultimately at the possession of a 
bourgeois aristocracy and a bourgeois proletariat as well as a bour- 
geoisie. For a nation which exploits the whole world this is of 
course to a certain extent justifiable." In 1882 Engels wrote in the 
same vein to Kautsky: "You asked me what the English workers 
think about colonial policy. . . . The workers gaily share the feast 
of England's monopoly of the world market and the colonies." 

But there was another source of imperialist theory, and that, 
strangely enough, was provided by Cecil Rhodes' pronouncements 
in 1895, which are quoted in Lenin's Imperialism: 

"I was in the East End of London yesterday," said Rhodes, "and 
attended a meeting of the unemployed. I listened to the wild 
speeches which were just a cry for 'bread, bread, bread,' and on my 
way home I pondered over the scene and I became more than ever 
convinced of the importance of imperialism. . . . My cherished 
idea is a solution for the social problem, i.e., in order to save the 
40,000,000 inhabitants of the United Kingdom from a bloody civil 
war, we colonial statesmen must acquire new lands for settling the 
surplus population, to provide new markets for the goods produced 
in the factories and mines. The Empire, as I have always said, is a 
bread and butter question. If you want to avoid civil war, you must 
become imperialists." 

The outline of Lenin's theory of imperialism can be presented in 
a few sentences: "Monopoly arose from the concentration of pro- 
duction at a very advanced stage of development. New and power- 
ful monopolistic forms spread widely: combines, trusts and syn- 
dicates. Add to this a powerful development of banks. They also 
have turned into 'the monopolists of finance capital/ The monopo- 
lists have 'captured the most important sources of raw materials 
and divided the market.' Add to this the monopolies of colonial 
policies. To the numerous 'old' motives of colonial policy, finance 

6 4 



SOME HISTORICAL EXAMPLES 

capital has added the struggle for the sources of raw materials, for 
the export of capital, for 'spheres of influence, 1 i.e., for spheres of 
good business, concessions of monopolist profits, and so on; in 
fine for economic territory in general." 

"Naturally," said Lenin, "finance finds it most convenient to pro- 
ceed with political conquest, because it is able to extract the greatest 
profit from a subordination which involves the loss of the political 
independence of the subjected countries and peoples. Colonial pos- 
session alone gives complete guarantee of success to the monopolies 
against all the risks of the struggle with competition, including the 
risk that the latter will defend themselves by means of a law 
establishing a state monopoly. First it was possible simply to 'grab* 
new territories, yet free, but when the whole world has been shared 
out, there was inevitably ushered in a period of colonial monopoly, 
and consequently a period of intense struggle for the partition and 
repartition of the world." 

"The time of the definite victory of world finance capital" is the 
beginning of imperialist wars, and Lenin speaks of the war of 
1914-1918 already at the time he wrote (1917) as "the first imperi- 
alist war." "The struggle of world imperialism is becoming aggra- 
vated. . . . The more capitalism develops, the more the need for 
raw materials arises, the more bitter competition becomes and the 
more feverishly the hunt for raw materials proceeds all over the 
world, the more desperate becomes the struggle for the acquisition 
of colonies. 

"Monopolies, oligarchy, the striving for domination instead of 
the striving for liberty, the exploitation of an increasing number of 
small or weak nations by an extremely small group of richest or 
most powerful nations all these have given birth to those distinc- 
tive features of imperialism which compel us to define it as para- 
sitic or decaying capitalism. More and more there emerges, as one 

65 



SOME HISTORICAL EXAMPLES 

of the tendencies of imperialism, the creation of the 'bondholding' 
(rentier) state, the usurer state, in which the bourgeoisie lives on 
the proceeds of capital exports and by 'clipping coupons.' " 12 

Now note that the phrase "the usurer state" means that the 
whole community can live as a usurer, as an exploiter of other na- 
tions, its bourgeoisie not only living at the expense of the workers 
of other nations but corrupting their own workers with the pro- 
ceeds of their "super-profits." 

The imperialism of the beginning of the twentieth century com- 
pleted the partition of the world among a very few states, each of 
which today exploits (i.e., draws super-profits from) a part of the 
world. . . . "Each of them, by means of trusts, cartels, finance 
capital, and debtor and creditor relations, occupies a monopoly 
position on the world market. ..." 

Embryonic imperialism, said Lenin, has grown into a dominant 
system; capitalist monopolies occupy first place in economics and 
politics; the division of the world has been completed. On the other 
hand, instead of an undisputed monopoly by Great Britain, we see 
a few imperialist powers disputing among themselves for the right 
to share in this monopoly, and this struggle is characteristic of the 
whole period of the beginning of the twentieth century. 13 

What follows from all this? First of all, if the Marxist laws of 
capitalist development did not come true, it is because the great 
industrial powers entered on a new stage in capitalist development, 
the stage of imperialism, which is "a stage of monopolistic and 
parasitic capitalism," living and expanding at the expense of other 
nations. The great powers exploit other countries of colonial or 
semicolonial character, or simply economically backward, and they 
admit their workers to a share in this exploitation. The working 
class of the imperialistic powers therefore get a higher level of wa- 



12 Imperialism, the Highest Stage of Capitalism, 1917, Ch 10. 

13 Ibid., Ch. 8. 

66 



SOME HISTORICAL EXAMPLES 

ges and employment than would be justified by the laws of surplus 
value operating at home. This produces a deviation of trends of 
development away from the lines sketched by Marx. 

Secondly, and this is another facet of the theory of imperialism, 
Lenin explains that "social patriotism" is nothing but the reflection 
in thought of the new changes in real life. Imperialism created a 
rich soil for the growth of proletarian weeds in Marxism. There 
is a close "bond between imperialism and opportunism," and this 
bond is first and most clearly revealed in England "owing to the 
fact that certain features of imperialist development were observ- 
able there much sooner than in other countries." The workers are 
bribed subconsciously into the position of social opportunism, "re- 
ceiving crumbs of super-profits," especially in those countries hav- 
ing a higher percentage of skilled workers than oppressed nations. 
"A privileged upper stratum of the proletariat in the imperialist 
countries lives partly at the expense of hundreds of millions of 
members of uncivilized nations." 14 

But this situation is only transitional because, with the inevitable 
breakdown of that monopoly, the working classes of those imperi- 
alistic powers will also lose their privileged position. The workers 
of these imperialistic powers have only a "respite" (Schonungs- 
zeit) which must soon come to an end when the mass of foreign 
exploitation is finished and the colonial workers impoverished, and 
when imperialism, leading to annexation, to increased national 
oppression, and consequently also to increased resistance, leads the 
world to destruction. 

Therefore, concluded Lenin, it is our duty, if we wish to remain 
Socialists, "to go down lower and deeper, to the real masses," and 
not to remain on the surface with the leaders of the upper stratum 
of the working class; and also to get in touch with those members 
of the "uncivilized" and backward nations which form the hard 



14 Imperialism and the Split in Socialism, 1916. 

67 



SOME HISTORICAL EXAMPLES 

core of exploited workers, where national exploitation is added to 
social exploitation. This is the third and most important bird 
caught by the great hunter from the Russian steppes. 

We see then how Leninism became the Eastern version of social- 
ism, the version of socialism for backward, agricultural, semi- 
colonial, and colonial countries. Here we see how Lenin combined 
his fundamental interpretation of Marxism in his time with his 
Russian aspirations, how he became the supreme theorist, the 
leader and organizer of the revolt of the backward countries. 

Not the nationalists and Fascists, but Lenin was the first to take 
up and develop "the idea of dividing nations into oppressing and 
oppressed," and he admits in a Report 15 written in 1920 that this 
"thesis appeared first over his name." The characteristic feature of 
imperialism, he writes, is that the whole world is at present divided 
into a large number of oppressed nations and an insignificant num- 
ber of oppressing nations possessing colossal wealth and power- 
ful military forces. The overwhelming majority of the population 
of the world, numbering more than a thousand millions, in all 
probability 1,250 millions, if we take the total population of the 
world then to be 1,750 millions, i.e., about 70 per cent of the popu- 
lation of the world, belongs to the "oppressed nations," which are 
either in a state of direct colonial dependence; or belong to the out- 
lying colonial states, such as Persia, Turkey, and China; or else, 
after being conquered by the armies of a big imperialist power, 
have been forced "into dependence upon it by treaties." And writ- 
ing later in 1920 in his Preliminary Theses on national colonial 
questions he pens the following words: 

" . . . It is necessary steadily to explain to and expose among the 
broad masses of the toilers of all countries, and particularly of 
backward countries, the deception which the imperialist powers 



10 Report of the Commission on the National and Colonial Questions at the Second 
Congress of the Comtntiirikt International, July 26, 1920. 

68 



SOME HISTORICAL EXAMPLES 

systematically practise by creating, in the guise of politically inde- 
pendent states, states which are absolutely dependent upon them 
economically, financially and militarily. ..." The age Jong op- 
pression by the imperialist powers "has imbued the toiling masses 
of the oppressed countries, not only with anger, but also with dis- 
trust towards the oppressing nations in general, including the pro- 
letariat of those nations." 

From this it follows logically that the great proletarian revolu- 
tion would come, not, as Marx predicted, in the West as the logical 
outcome of ripened capitalist development, but in the East, where 
foreign capitalism adds imperialism and accumulates misery, ex- 
ploitation, and proletarianization in the oppressed nations. But 
Lenin never regarded this as a contradiction of the dialectic materi- 
alism of Marx condensed in the following passage: 

"No social formation ever disappeared," says Marx, "before all 
the productive forces are developed for which it has room, and 
new higher relations of production never appear before the ma- 
terial conditions of their existence are matured in the womb of the 
old society. . . . The organisation of the revolutionary elements 
as a class presupposes the finished existence of all the productive 
forces which are developed in the bosom of the old society. . . . 
Law can never be on a higher level than the economic conditions 
and the degree of social civilization corresponding to it. ... The 
industrially more developed country reveals to the less developed 
the image of its own future." 

Lenin admitted that Marx had seen "the birth of the new so- 
ciety from the old, the forms of transition from the latter to the 
former as a natural historical process," but he represented himself 
as correcting Marx in this respect, that whereas Marx studied the 
laws of capitalism, as they then existed, while he, Lenin, presents 
the laws of imperialism, which is a new stage of development. He 
says expressly that "imperialism is progressive as compared with 

6 9 



SOME HISTORICAL EXAMPLES 

pre-monopoly capitalism" as much as "capitalism is progressive 
compared with feudalism." 10 It is not capitalism but imperialism 
that leads to socialism. It does so through the struggle of revolu- 
tionary nations and strata, and those are the ones oppressed by im- 
perialism. Where the famine and ruin are greatest, there the capi- 
talist domination is most likely to be overthrown and a new phase 
established. Thus imperialism hastens the coming of the socialist 
revolution by famine, anarchy, destruction. This is the correction 
of Marx contributed by Lenin, and this correction may be regarded 
as the essence of Leninism. 

There is more voluntarism and less determinism in Lenin than 
in Marx, greater reliance upon professional revolutionists than 
upon automatic development and rise of the masses. Marx pro- 
vided a theory for the West; Lenin for the East. Marx believed 
in the ripening of capitalism; Lenin in squashing it prematurely, 
primarily as a foreign importation of a weak and sickly nature. 
Marx believed in the masses; Lenin in the Party, in the class-con- 
scious minority which leads and guides; Marx believed basically in 
democracy; Lenin in the dictatorship of the proletariat, i.e., the 
dictatorship of its organized and class-conscious minority. The 
belief m dictatorship was nothing but a consequence o'f the re- 
jection of the doctrine of the ripeness of capitalism. If we do not 
wait for the ripe fruits of capitalist development, we cannot expect 
a socialist majority for the revolution, and Lenin was eager to show 
that the socialist majority in imperialistic countries may never 
come about, owing to the crumbs falling from the rich table of im- 
perialist oppression. 

Lenin's single motto, repeated time and again, was that it was 
necessary to create a "revolutionary situation," i.e., not to wait for 
the ripening of capitalism but to do something to hasten the ripen- 
ing of imperialism, with its inevitable results of the destruction of 

16 Caricature of Marxism and Imperialist Economism. Collected Worlds, Vol. 5. 

70 



SOME HISTORICAL EXAMPLES 

goods but also of social relations and positions of social power. 

What would Lenin say now if he were to consider a possible war 
between the West and Soviet Russia? I can imagine him giving 
the following answers in a purely imaginary conversation : 

Q. Would you not be afraid that Soviet Russia would lose the 
war and communism be extinguished? 

Lenin: No, because whatever happens a third imperialistic war 
on such a scale and with such destructive weapons as now are 
available would certainly bring about the climax of a revolution- 
ary situation, and socialism would triumph all the world over, 
whether it be called communism, socialism, sovietism, or anything 
else. Soviet Russia might lose the war, but communism would 
win. These are the laws of capitalistic development as described 
by Marx with my supplement in Imperialism. 

Q. Do you not think that socialist building is more important 
than creating the climax of a "revolutionary situation"? 

Lenin: No, for socialist building may create a new form of 
opportunism, patriotism, and even imperialism, and may drive 
the Russian workers into the same privileged position as was 
formerly enjoyed by other imperialistic countries. Socialist build- 
ing in a great communist empire will ultimately lead to new 
forms of imperialism, while world communism can only be estab- 
lished through creation of a world-wide, "revolutionary situation." 
Socialist building would mean the end of the socialist revolution, 
and I proclaimed "a permanent revolution." The revolution is 
not yet complete. We had the chance to start our revolution be- 
cause the capitalists were stupid enough to wage their first great 
imperialist war. Stalin was able to score new triumphs because 
the capitalists were foolish enough to lead a second imperialist 
war. Now we could expect further triumphs from a third imper- 
ialist war. It would be a heaven-sent gift from the imperialists if 
they were to attack Soviet Russia, for then it would make our task 

71 



SOME HISTORICAL EXAMPLES 

incomparably easier; but if they were unwilling to help us, I be- 
lieve Russia should do it, although she might lose the war. But 
Russia doesn't count; it was not our aim to make Russia great. 
We are not petty-bourgeois chauvinists and patriots. We work 
for world salvation. 

Q. Do you still believe that your theory of imperialism holds 
good, and for how long? 

Lenin: Your contemporaries are very stupid. They have com- 
pletely lost the power to think for themselves, and keep on repeat- 
ing the same phrases. I taught that according to Marx every doc- 
trine is only a reflection of existing social relations; but these social 
relations change constantly, and it is your duty to think out for 
yourself a new doctrine related to the changed conditions of your 
life. I think the doctrine of imperialism still holds good to a cer- 
tain extent, but there is a new factor which I have not taken into 
account in my theory of imperialism, the emergence of Soviet 
Russia in the fight of imperialism. This makes a great deal of 
difference in the historical dialectic, but it is for you to think out 
all the implications of this fact. 

Q. Do you mean to say that you are afraid that Soviet Russia will 
grow into an imperialist power instead of a socialist one? 

Lenin: I started the theory of imperialism with a new fact, 
which I had to explain: Why the majority of free people under 
the Western democracies in my time did not care for revolution- 
ary socialism. And I have given my answer in my book Imperial- 
ism. If I were alive now, I should start my inquiry with a new 
fact, which is likewise very startling: Why it is that the Eastern 
peoples, the permanent object of Western imperialism, who are 
now liberated by the Soviet Union, do not like to be liberated; 
what it is that makes them reject communism? Is it simply ig- 
norance, prejudice, the effect of centuries-long propaganda, or 
something else? 

72 



SOME HISTORICAL EXAMPLES 

Q. Perhaps the Western imperialists give better terms to the op- 
pressed nations than the Eastern imperialists do. You said yourself 
in your book on imperialism that the imperialist powers, in order 
to exploit these countries effectively, have to construct railways, 
to build factories, and to establish commercial and industrial 
centers in them. And now they even have to carry food and raw 
materials and other aid into those countries. But Soviet Russia 
does not do that; she removes stores of goods and productive equip- 
ment and concludes agreements that are not very beneficial for 
the oppressed nations, perhaps because she is poor herself and 
desires to become stronger and more prosperous. 

Lenin: The cause of all this may be the corruption brought 
about by the machinery of the state and of a great Power. You 
know how I fought all my life against social patriotism, social 
chauvinism, or opportunism. Now I see all these things revived 
in the Soviet Union. The trouble is that all peoples prefer the 
benefit of their own country to the benefit of other countries. But 
this is a capitalistic or imperialistic principle. They ought to pre- 
fer the good of the cause of world socialism. If world socialism 
can gain by providing countries in the Russian zone of influence 
with tractors, raw materials, and industrial equipment, Russia 
should send these things to those countries and not keep them for 
herself. This would not be an act of abnegation or altruism, but 
practical international socialism, and a better act of communist 
propaganda than all the speeches of Molotov and Vyshinsky. But 
all the Soviet leaders have become petty bourgeois. I have always 
shown how power corrupts whole sections of the working class, 
especially its upper stratum, and now I find another striking con- 
firmation in the communist leaders. I think socialism must again 
try to descend into the sphere of the lower strata, either into this 
handicapped stratum of underpaid workers in the imperialist 
countries or into the working class of oppressed nations. They will 

73 



SOME HISTORICAL EXAMPLES 

be the future bearers of the triumphant colors of international 
socialism. Only those who suffer can bring a renewal of socialism; 
nothing can be expected from those who rule and misrule. 
Such is our imaginary conversation with Lenin. 

Mandeville, Forerunner of the 'Naturalists 

The duality nature-nurture, or nature-morality and culture 
the realm of things and realm of values has its full counterpart 
in the flow of economic thought. There have been economists 
who were entirely absorbed by the facts of life and nature the 
so-called naturalists or realists; and others who were entirely 
absorbed by values, ideas, and ideals the reformers, the idealists 
or believers in perfectibility. 

The motto of the naturalists was: It was meant to be like that, 
the "Invisible Hand" has so decreed. The pursuit of self-interest 
and individual gain is part of the great scheme of nature. Nature 
is the field of struggle, and the fittest survives. It is not a discov- 
ery by Malthus, but the age-long experience of all naturalists, of 
all observers of the ways of nature, that one species preys on an- 
other; every gardener or farmer knows that space is limited, that 
you must constantly choose between one plant and another, be- 
tween breeding one animal or another, and that there is no 
equality, peace, or justice in nature. The naturalist accepts in- 
equality, struggle, and even cruelty as necessary ingredients of 
life, devised to secure its permanence and even perfection, and 
regards himself as free from the cheap sentimentality of the re- 
former. He accepts life as it is and studies its laws reverently. He 
invariably appeals to the facts. Facts, facts, facts they alone gov- 
ern; everything else is a Utopia, an illusion! The naturalist invari- 
ably says : Take man as he really is, not as he should be. Individual 
or class, regional or even national disadvantages do not matter; 

74 



SOME HISTORICAL EXAMPLES 

the totality of life derives advantage from the struggle because 
the fittest survives, the community gets service for the lowest 
price, and improvement is constantly brought about by sheer 
force of self-interest and utility. Man "intends only his own gain, 
and he is in this as in many other cases, led by an invisible hand 
to promote an end which was no part of his intention," says 
Adam Smith. 17 

"To the laws of property and marriage," says Malthus, "and to 
the apparently narrow principle of self-interest which prompts 
each individual to exert himself in bettering his condition, we are 
indebted for all the noblest exertion of human genius, for every- 
thing that distinguishes the civilised from the savage state." 18 

It is interesting to note that the thesis is common to all natural- 
ist economists, whether old or new, of the classical, psychological, 
mathematical, or neoclassical school, and we can find it even in 
Marshall, who stresses the law of substitution as the central law 
of economics, regarding that principle as an expression of a gen- 
eral law of the survival of the fittest. 

All liberals are naturalists, whether they actually use mechanical 
(physical) or organic (biological) analogies. They are naturalists 
in the sense that they regard competition based on utility and self- 
interest as the expression of a general fight for survival and 
betterment. Thus Marshall, who as a mathematician used the 
formulas of mechanical equilibrium, nevertheless often used bio- 
logical analogies, as for instance in Chapter VIII of his Principles, 
where, studying the competition of old and new firms, he ex- 
pounds at great length the law of the survival of "the fittest" in 
the struggle for existence. 

In modern economic literature devoted to the themes of plan- 
ning, control, and socialism, we can also find the same exposition 

17 The Wealth of Nations, Book IV, Chap. II. 

18 Essay on the Pnnciple of Population, Book IV, Chap. XIV. 

75 



SOME HISTORICAL EXAMPLES 

of the naturalist's conviction that utility, self-interest, competition, 
and struggle are part of nature's design for the survival of the 
fittest and betterment, and that too much control, protection, sub- 
sidy, or charity weakens man's energy and his drive towards 
betterment. 

It is interesting to seek out the roots of this thesis in economics, 
even though we cannot assign a precise or definite date for its 
appearance, because the doctrine has behind it an age-long ex- 
perience based on the quite common view that "good springs from 
evil," that man rises to the heights of moral perfection when con- 
fronted with evil, or that what is evil for one may be good for the 
community. 

"Nothing was more instrumental in forwarding the Reforma- 
tion than the Sloth and Stupidity of the Roman clergy," says 
Mandeville, and John Law writes in his Proposals and Reasons 
for constituting a Council of Trade (Glasgow 1700), "... we 
see that in times, and with men who had a much more immediate 
hand of the Almighty upon them, even to such as Joseph, Moses, 
Gideon, David and many others, the exercise of trouble, disap- 
pointments, and afflictions were found to be indispensably neces- 
sary." 

Mandeville was of course not the first who upheld this Milto- 
nian 19 truth, but he gave it very forceful expression, and by his 
systematic exposition, vigorous style, and real acuteness enor- 
mously impressed the radicals and liberals, who in the age of the 
coming Industrial Revolution were well prepared for his Credo. 

The roots of economic naturalism can therefore be clearly seen 
in the writings of Bernard Mandeville (i67o[?]-i733), a Dutch- 
born British writer. Two things of interest may be noted about 
Mandeville. Firstly, he was, like Francois Quesnay, the first great 
representative and exponent of naturalism in economics, a doctor 

19 "Without evil there can be no good." 

76 



SOME HISTORICAL EXAMPLES 

of medicine, which proves his interest in nature-study. Secondly, 
he is "said to have been hijed by the distillers to write in favour of 
spirituous liquors." The Dictionary of National Biography records 
that Mandeville "was probably little respected outside distilling 
circles." 

The elements of the naturalists' creed may be found in Mande- 
ville's Fable, the first and shortest version of which was published 
in 1705 in a doggerel poem called The Grumbling Hive or Knaves 
Turned Honest, and then twice expanded, once in 1714, again in 
1724. 

"One of the greatest Reasons why so few people understand 
themselves," said Mandeville, "is that most writers are always 
teaching Men what they should be, and hardly ever trouble their 
heads with telling them what they really arc." 20 For Mandeville 
man is "a compound of various Passions, that all of them, as they 
are provoked and come uppermost, govern him by turns, whether 
he will or no." And Mandevillc's object is to show that "these 
qualifications, which we all pretend to be asham'd of, are the great 
support of a flourishing Society. ..." 

Mandeville's approach to man is like his approach to a cat or a 
fox or a wolf. The animal was meant to be the animal he is, he 
was fashioned in that way, and it is foolish to wish him to be an 
angel. "It is as possible that cats, instead of killing rats and mice, 
should feed them and go about the house to suckle and nurse their 
young ones; or that a kite should call the hens to their meal, as 
the cock does, and sit brooding over their chickens instead of de- 
vouring 'em; but if they should do so they would cease to be cats 
and kites; it is inconsistent with their natures and the species of 
creatures which now we mean, when we name cats and kites, 
would be extinct as soon as this could come to pass." 

"The first desirable Blessing for any Society of Men is a fertile 



77 



SOME HISTORICAL EXAMPLES 

Soil and a happy Climate, a mild Government, and more Land 
than People." But in such a state "you need not fear great Vices, 
so you must not expect any considerable Virtues. Man never ex- 
erts himself but when he is rous'd by his Desires. ..." 

"Would you render a Society of Men strong and powerful, you 
must touch their Passions. . . . Divide the Land, tho* there be 
never so much to spare, and their Possessions will make them 
Covetous: Rouse them, tho' but in Jest, from their Idleness with 
Praises, and Pride will set them to work in earnest. Teach them 
Trades and Handicrafts, and you'll bring Envy and Emulation 
among them. . . . Teach 'em Commerce with Foreign Countries, 
and if possible get into the Sea, which so compass spare no Labour 
nor Industry, and let no difficulty deter you from it: Then pro- 
mote Navigation, cherish the Merchant, and encourage Trade in 
every Branch of it; this will bring Riches, and where they are, Arts 
and Sciences will soon follow. ..." 
And in another context Mandeville writes: 
"The great Art ... to make a Nation happy and what we call 
flourishing, consists in giving everybody an Opportunity of being 
employed; which to compass, let a Government's first care be to 
promote as great a variety of Manufactures, Arts and Handicrafts, 
as Human Wit can invent; and the second to encourage Agricul- 
ture and Fishery in all their Branches, that the whole Earth may 
be forc'd to exert itself as well as Man; for as the one is an infal- 
lible Maxim to draw vast multitude of People into a Nation, so 
the other is the only Method to maintain them. 

"It is this Policy, and not the trifling Regulations of Lavishness 
and Frugality . . . that the Greatness and Felicity of Nations 
must be expected; for let the value of Gold and Silver either rise or 
fall, the Enjoyment of all Societies will ever depend upon the 
Fruits of the Earth, and the Labour of the People; both which 
joyn'd together are a more certain, a more inexhaustible and a 

78 



SOME HISTORICAL EXAMPLES 

more real Treasure than the Gold of Brazil, or the Silver of Potosi. 

"Diligence and Industry are often used promiscuously, to signify 
the same thing . . .", but "Industry implies besides the other 
qualities a thirst after gain, and an Indefatigable desire of meliorat- 
ing our Condition." 

Mandeville stresses the point that mass poverty is a natural phe- 
nomenon, beneficial to society as a whole, which must be kept in 
being permanently, warning before Malthus did against poor laws 
and the charity system. Men in his view are "more prone to Ease 
and Pleasure than they are to Labour, when they are not prompted 
by Pride or Avarice, and those that get their Living by their daily 
Labour, are seldom influenced by either: so that they have nothing 
to stir them up to be serviceable but their wants which it is Pru- 
dence to relieve, but Folly to cure. The only thing then that can 
render Man industrious, is a moderate quantity of Money; for as 
too little will, according as his Temper is, either dispirit or make 
him Desperate, so too much will make him Insolent and Lazy." 

Mandeville advises keeping the poor in poverty, because "it 
would be easier, where Property was well secured, to live without 
Money than without Poor; for who would do the work? For this 
reason the quantity of circulating Coin in a country ought always 
to be proportioned to the number of Hands that are employ 'd; and 
the wages of Labourers to the price of Provisions." 

These are the beliefs which are roots of the classical doctrine. 
Both Adam Smith, who devoted a whole chapter to Mandeville 
under the title "Of Licentious Systems," and Malthus, who like- 
wise does not approve of Mandeville 21 do in fact put Mandeville's 
wine into new bottles with new, more systematic and "scientific" 
labels. 



21 "Let me not be supposed to give the slightest sanction to the system of morals 
inculcated in the Fable of Bees, a system which I consider as absolutely false." (Essay 
on the Principle of Population, 4th ed., p. 492, note.) 

79 



SOME HISTORICAL EXAMPLES 

Marx and Keynes 

Perhaps the most striking differences between the doctrines of 
Marx and those of Keynes consist in the ways each approaches 
the subject. Marx would call his own method dialectical; Keynes's 
method is rationalistic and analytical. Marx detects contradictions 
inherent in the capitalist system which must lead to a next and 
higher stage in economic organization, whereas the flaws Keynes 
sees can be remedied within the same system. Keynes is a doctor 
of capitalism; Marx is its gravedigger. 

Keynes deals basically with the more static forces of economics 
and small changes; Marx with the dynamic forces, big changes, 
transformations, and developments. Keynes's General Theory, in 
its way of exposition, resembles the great Marshallian textbook 
because it was meant to be a polemic against the Marshallian 
school, while Das Kapital is similar to the great historical and 
sociological treatises of the socialist thinkers regarded by Marx 
as his rivals. Keynes avoids value judgments and broad structural 
issues and moves within the existing institutional framework, 
whereas Marx enters the broader system of values, and his analysis 
often transcends the framework of existing institutions. Both aim 
at a certain economic philosophy, but Marx aims at it directly, 
leading the assult on the basic system of values on a broad front, 
while Keynes aims at it only indirectly. In fact more was done in 
that respect by his followers than by himself, so that the gap be- 
tween Keynes and the Keynesians was perhaps even greater than 
the gap between Marx and the Marxists. Marx presents an antithe- 
sis to capitalism, while Keynes aims at synthesis between capitalism 
and socialism in a Cambridge version of welfare economics, in 
many ways already orginated by Marshall. 

In spite of these dramatically opposed ways of approach adopted 
by Marx and Keynes there are some astonishing similarities in the 
treatment of the same subject, the critical analysis of capitalist 

80 



SOME HISTORICAL EXAMPLES 

production. For both Keynes and Marx attacked the same prob- 
lem the deficiency of purchasing power and the failure of the 
economy to provide employment for people anxious to work, a 
situation leading to accompanying wastage, destitution, and 
misery. 

Marx presents his "critical analysis of captitalist production" 
under the formula, M(oney): C(ommodity): M(oney). The 
capitalist, the central figure in his Capital, invests money in pro- 
ducing commodities in order to get more money. He is singled 
out in the process of circulation of values, placed outside the equa- 
tion of exchange, one side of which is his purchase price, the other 
his selling price. The capitalist pays out a certain amount of value 
in his process of production and claims more value on the market. 
The difference is his profit or profit-like income in the form of 
rents and interest, all of which is covered under the term "surplus 
value." But whence comes this surplus value? Marx tries to show 
that it cannot arise in the process of circulation (among the capi- 
talists themselves) but must arise in the process of production, 
springing from the fact that the price of labor (equivalent to the 
value of the means of subsistence of the worker) is below its use 
value, which is the product of the worker's labor. 22 

But how can capitalists as a class extract more money than they 
pay out? Here is the basic cause of the disequilibrium of the capi- 
talist system, the roots of its contradictions. It is the source of a 
basic deficiency in effective demand, since income generated by 
the capitalist for the services he enlists is below the selling value 
which he must extract for his output. 



22 Marx, Capital, Vol. I, p. 145. "In order to be able to extract value from the 
Consumption of a commodity, our friend, Moneybags, must be so lucky as to find, 
within the sphere of circulation, in the market, a commodity, whose use value 
possesses the peculiar property of being a source of value, whose actual consump- 
tion therefore, is itself an embodiment of labor, and, consequently, a creation of 
value." 

81 



SOME HISTORICAL EXAMPLES 

The system might work in two ways: one unrealistic way, 
covered by the "formula of simple reproduction" the capitalist 
consumes his entire profits (at zero investment rate) ; the other 
realistic way, covered by the "formula of extended reproduction" 
the capitalist pays out the difference between his profit and his 
consumption in the form of investment ("reproduction on a pro- 
gressively increasing scale"). The capitalist equilibrates the de- 
ficiency of effective demand dynamically by injecting more money 
into his investments. The accumulation of real capital, or of for- 
eign investment (the theory of imperialism), or of gold makes 
the whole system workable. Therefore the motto of the capitalist 
system is: "Accumulate, accumulate!" "Reconvert the greatest 
possible portion of surplus value, or surplus product into capital." 

Investments equilibrate the system dynamically, but only over a 
short period, and the whole analysis of Marx is designed to show 
that this fever of investment leads the whole system to a catastro- 
phic end, because the cause of disequilibrium is not removed but 
delayed, while the disequilibrium is growing all the time through 
the effect of investment on productivity of labour. 

"The mass of the surplus increases." "Hand in hand with the 
increasing productivity of labor goes . . . the cheapening of the 
worker, therefore a higher rate of surplus value" and constant re- 
placement of labor by the machine (the growth of the industrial 
reserve arttiy). 

The movement by which the system can be kept working must 
become even more speedy, until it becomes delirious and breaks 
down. The cause of the final breakdown is the constant growth 
of the relative surplus value, 23 which widens the gap between po- 

23 It is surplus value growing with productivity of labor. "The surplus-value pro- 
duced by prolongation of the working day I call absolute surplus- value. On the 
other hand, the surplus-value arising from curtailment of the necessary labour- 
time and from the corresponding alteration in the respective lengths of the two 
components of the working day I call relative surplus-value." Capital, Vol. I, Part 4, 
Ch. 10. 

82 



SOME HISTORICAL EXAMPLES 

tential and actual production and which must be bridged by new 
investments with all their destructive force on the labor market. 

The existence of profit makes the whole system unworkable; 
without it any potential output could be sold fully to the con- 
sumers without need for investments for their own sake, because 
then output would equal wage, value would equal consumers' 
expenditure. 

Lord Keynes's approach to the same problem of deficiency of 
effective demand is basically different from Marx's in that it does 
not single out the entrepreneur in the formula of circulation of 
values. Profits are treated in the same way as "factor costs," i.e., 
"amounts paid by the entrepreneur to the factors of production 
(exclusive of other entrepreneurs) for their current services." The 
problem of whence comes the entrepreneur's profit is at once 
droppe^ as nonexistent. This profit is part of income as is anything 
else, ractor cost plus entrepreneur's profit is the total income re- 
sulting from employment given by the entrepreneur, and the 
aggregate sum of total income is equivalent to the value of na- 
tional output. This value by definition provides an effective de- 
mand exactly equal to the value of output, provided that the whole 
income is spent on goods and services. There is no deficiency in 
the process of production as alleged by Marx; the deficiency arises 
in the sphere of circulation when part of income for one reason 
or another is not spent on goods and services. The deficiency is 
created by voluntarily withholding part of total income from 
spending on goods and services, i.e., by saving which is not offset 
by investment. The whole output of a country can be sold to the 
"market" at the factor cost plus profit because the employment 
has generated income sufficient for this transaction. Saving, not 
profit, is the cause of disequilibrium, but in Marx's as well as in 
Keynes's system the workability of the system is dependent on the 
offsetting of the deficiency by investment. Even in a socialist so- 

83 



SOME HISTORICAL EXAMPLES 

cicty, according to Keynes, deficiency of effective demand could 
arise if saving were not offset by investment. It may be remarked 
that for Marx saving was organically linked with profits; in his 
time small savings were practically nonexistent, and his theory of 
surplus value, which determines the price of labor by the value of 
the worker's means of subsistence, excludes from the outset any 
emergence of workers' savings. 

In Keynes's view the disequilibrium arises not only out of greed 
as in Marx's system, but out of fear, out of expectations and antici- 
pations of individuals who wish to secure their positions by 
holding cash or bank deposits or other claims against members of 
the community, or generally by withholding purchasing power, 
i.e., simply by nonspending, whether on consumption or on in- 
vestment. It is not the fever of investment which brings about the 
disequilibrium of the system but the anxiety of the savers (or the 
mistrust of the investors). The savers are not always the "bene- 
factors" of the community as in Adam Smith's conception; they 
are certainly not the benefactors whenever they choose to save in 
excess of the existing investment possibilities. 

Any surplus of claims of the savers as expressed in the "propen- 
sity to save" over the value of investment cannot materialize, be- 
cause there is no counterpart in real wealth. The savers can only 
appropriate the difference from the accumulated wealth by caus- 
ing dissavings of others. This means that not all individual savings 
are materialized for the community. What is not turned into in- 
vestment is not materialized. And what is not materialized van- 
ishes for the community, a situation that amounts to a loss of 
national output and unemployment. 

Individuals are free to save more or less as they choose, but all 
individuals put together are not able to save more than they invest. 
The flow of individual saving and investment must be equili- 
brated in such a way that there is no leakage of expenditure, so 



SOME HISTORICAL EXAMPLES 

that the whole income is spent on goods and services in the two 
segments consumption and investment. 

Whenever the "propensity to save" exceeds the inducement to 
invest, we face a lack of purchasing power which makes impos- 
sible the sale of the total produce of the community to consumers 
and investors at its factor cost, and it is this impossibility which 
leads to the lowering of output and employment. Thus the form- 
ula is simple: "The propensity to save must be offset by invest- 
ment." 

In Lord Keynes's conception the capitalist system is not basically 
wrong and could be easily put right. "It is in determining the vol- 
ume, not the direction of national employment that the existing 
system has broken down." The volume of employment can be 
easily brought to the potential maximum by more expenditure on 
consumption or investment. The control of the rate of investment 
is the remedy, and the method of conservative planning for re- 
stricted goals (the socialization of investment) is advocated. 
"Whilst, therefore the enlargement of the functions of govern- 
ment, involved in the task of adjusting to one another the pro- 
pensity to consume and the inducement to invest, would seem to 
a nineteenth century publicist or to a contemporary American 
financier to be a terrific encroachment on individualism, I defend 
it, on the contrary, both as the only practicable means of avoiding 
the destruction of existing economic forms in their entirety and 
as the condition of the successful functioning of individual initia- 
tive." 24 

Lord Keynes shares with Karl Marx the view that the deficiency 
in effective demand is growing with time, because the propensity 
to save increases with the rise of national income. But whereas 
Marx, in consequence of his theory, provided a long-term analy- 
sis showing where all this development leads to, Lord Keynes 

24 J. M. Keynes, The General Theory of Employment, Interest and Money, p. 380. 

85 



SOME HISTORICAL EXAMPLES 

confined himself to the short-period aspect, not bothering about 
the structural changes which will be brought about if the de- 
ficiency is constantly covered by new investments on an ever 
extending scale. 

Marx did not deny that the capitalist system can work in a short 
period, holding only that in the long run the whole system is 
headed for a breakdown. Lord Keynes, showing that the capital- 
ist system can work over a short period, does not say anything 
about the long-period aspect. The problem of achieving full em- 
ployment has been solved theoretically and practically many 
times, whereas the problem of maintaining full employment in 
the long run has been solved neither theoretically nor practically. 
The problem is really how to maintain full employment, not how 
to achieve it. 

Lord Keynes has shown that there is a monetary answer to the 
problem of unemployment, but the problem has much more than 
a monetary aspect it has also its technical, social, and institutional 
aspect in the long run. 

If the share of public investment needed to offset the widening 
gap steadily increases, will not this bring about a complete struc- 
tural change as envisaged by Marx, the collectivization of the 
means of production on an ever larger scale ? 

How much public control will be needed for the maintenance 
of full employment in the later stages? How will permanent full 
employment affect the relation between capital and labor? How 
will it affect the price and wage structure ? What will be its im- 
pact on the balance of trade and the balance of payments ? These 
are only a few questions among many others that call for treat- 
ment from the long-period aspect. 

The vastness, complexity, and extreme dynamism of full em- 
ployment is not presented in the Keynesian system, nor are its full 
implications in social and structural terms in the long run. It is 

86 



SOME HISTORICAL EXAMPLES 

perhaps here that we find the greatest contrast between Marx's 
and Keynes's treatment. The long-term analysis in the Kcynesian 
system is still to be elaborated. It is long overdue and badly needed. 

John Law and John Maynard Keynes 

The parallel between John Law of Lawriston (1671-1729), con- 
troller-general of French finance, a Scottish gentleman descended 
from an ancient Edinburgh family, and John Maynard Keynes 
(1883-1946) goes so deep and covers so wide a ground, even touch- 
ing some aspects of their personal life, that a spiritualist might say 
that Keynes was a reincarnation of Law after two centuries. 

Both were early remarkable for their proficiency in mathematics. 
Mr. Budgell, a contemporary of Law, writes of him: "His talents 
and genius lay particularly in Figures," while Keynes also had a 
mathematical mind, winning a scholarship to King's College, Cam- 
bridge, in mathematics and classics, and becoming twelfth wran- 
gler in the mathematical tripos. He published a remarkable work 
of mathematical philosophy, the Treatise on Probability (1921). 

Both had many interests, and were masters of a variety of other 
subjects apart from their main specialty. In A Full and Impartial 
Account of the Company of Mississippi, published in 1721, we read 
of Law: "Has not the world always said of him 'that he had a su- 
perior Genius, and fit for every thing'? Besides the Arts and Sci- 
ences, to which he all his life devoted himself, he is a perfect master 
of Accounts." The role of Lord Keynes as a promoter of the arts, 
theater, music, and ballet is very well known. He organized the 
Camargo Ballet, built and opened the Arts Theatre in Cambridge, 
and became Chairman of the Arts Council in 1945. 

Both had a charming personality, of "polished and agreeable 
manners and of much conventional talents." 25 A contemporary of 



25 Dictionary of National Biography. 

87 



SOME HISTORICAL EXAMPLES 

Law already mentioned described him thus: "His Person and Ad- 
dress were graceful and easy, his way of thinking strong and ner- 
vous, he spoke our tongue perfectly well, and is said to have had a 
peculiar Happiness in conveying his own Notions in their full 
strength to those with whom he conversed." 26 And in the obituary 
of Lord Keynes in The (London) Times* 7 we find a similar de- 
scription of Keynes as "radiant, brilliant, effervescent, gay, full of 
impish jokes. His entry into the loom invariably raised the spirits 
of the company. . . . The brilliant wit, the wisdom and the range 
of his private conversation . . . would have made him a valued 
member of any intellectual salon or coterie in the great ages of 
polished discussion." 

The same contemporary of Law quoted above describes him as 
"the Author of the greatest and most surprising Events," one of 
those persons who "naturally draw the Eyes and Attention of Man- 
kind upon them." Lord Keynes was not so widely famous as was 
Law in his time, but he attained the greatest fame among the econo- 
mists of his day, having a world-wide influence both on thought 
and action. 

Both were men of action as well as of thought, and both were 
active in the same fields. Both made concrete proposals for tax re- 
forms, Lord Keynes proposing a scheme for deferred credits in the 
pamphlet How to Pay for the War (1940). Both took an active part 
in finance and banking, Law as the founder of great banks and 
trading companies, Keynes as a member of the Royal Commission 
on Indian Currency and Finance, a member of the Macmillan 
Committee on Finance and Industry, and a director of the Bank of 
England, being nominated, two months before his death, first 
Governor of the International Monetary Fund and of the Inter- 
national Bank for Reconstruction and Development. 



28 Letter of MacLaw upon his Arrival in Great Britain, 1721. 
27 The Times, April 22, 1946. 



SOME HISTORICAL EXAMPLES 

Both advocated bold and unorthodox methods in banking. Both 
had the same craving for adventure, although in its second incar- 
nation, Keynes, this spirit of adventure proceeded more cautiously, 
after having met with a disastrous failure in a fantastic career dur- 
ing its first incarnation, Law. 

Both Law and Keynes were sworn enemies of a gold currency, or 
the gold standard, and both advocated a managed paper currency, 
Law in internal, Keynes in international, economy. Law presented 
his plan of paper money backed by land-values, while Keynes pre- 
sented the so-called Keynes's plan of "bancor" backed by the flow 
of trade and the international store of raw materials. 

Both were regarded as defenders of state socialism, Law as its 
precursor, Keynes as a man who presented a new version of it in 
his conception of socialization of investment. Both were very origi- 
nal thinkers who shocked their respective generations. Both were 
fond of writing letters, notes, and memoranda, in which much 
valuable material is found. Finally, both died prematurely, in ef- 
fect from exceptionally heavy and prolonged strain, Law at 58, 
Keynes at 63. 

Are you serious in suggesting, the astonished reader may ask, 
that Keynes was the John Law of the twentieth century? I do not 
know, but on reading Law after Keynes it struck me that there is 
here a case of a perfect renewal on a higher level of the same doc- 
trine, not only in its major features but also in smaller details. 

Let us now consider the similarities, or in many points the iden- 
tity, of their two doctrines as expounded in their writings. Both 
present a unique mixture of mercantilism, socialism, and liberal- 
ism, more or less the same in its composition. Keynes is neomer- 
cantilist, neoliberal, and neosocialist. Why neomercantilist? Be- 
cause he defends the active balance of trade, regarding it as foreign 
investment which provides employment and a multiplication of 
income (foreign trade multiplier). Law holds exactly the same 



SOME HISTORICAL EXAMPLES 

view. Even the idea of the foreign trade multiplier is expounded 
in Law's writings. In his Proposals and Reasons for Constituting a 
Council of Trade in Scotland, published about 1700, he writes: 

"... Nationally speaking, and all things considered, every 
penny gotten by the Kingdom in foreign trade, may justly be 
reckoned worth three by any other home improvement: and that 
commonly where any particular man gets a penny, the nation in 
general may get seven or eight; since besides the influence the in- 
crease of our foreign trade must needs have on all our home indus- 
try. . . ." 

This is exactly the idea of a foreign trade multiplier and a multi- 
plier in general presented in nuce. Apart from the original increase 
we have to reckon also the derivative, the secondary increase of em- 
ployment and income by reason of the influence on home trade. 
But neither Law nor Keynes is in favor of mere restrictions and 
controls. Rather both are at heart liberals with qualifications. 

Keynes, in advocating his scheme for socialization of investment 
through control of the flow of money, says that he wanted to save 
the system of free enterprise, not to destroy it. What is wrong is 
the quantitative aspect of capitalism, the failure to employ all hands. 
And Law develops more or less the same views. When he advocates 
his cheap money policy, he says, "but not by restraints"; when he 
advocates full employment and relief of the poor, he adds, but "not 
by charity"; when he advocates the active balance of trade, he stipu- 
lates, "not by tariffs" but by full employment. 

What of their socialism? Keynes is what we may call an invest- 
ment, money, and credit socialist, but can we say the same of Law ? 
The likeness between Marx and Keynes is very well known, and I 
speak of it in another chapter. But in what sense can we speak of 
Law's socialism? 

Many basic theses of socialism are contained in Law's doctrine, 
and Law's ideas were popular at the time of the great Revolution 

90 



SOME HISTORICAL EXAMPLES 

in 1789, which drew heavily on his ideas, just as the socialists of 
1848 drew on those of Louis Blanc and Proudhon. 

The great socialist Louis Blanc writes o Law that he wanted to 
create "une banque qui aurait pour mission de verifier les prom- 
esses de Thomme pauvre. . . ."; that his idea was "permettre au 
cultivateur de reprendre courage, au pauvre de respirer." 28 The 
French socialists of 1848 regarded Law as a forerunner of socialism, 
as a socialist, according to Alphonse Jobet, writing against Law in 
1848 in Une Preface au Socialisme ou le systeme de Law et la chasse 
aux Capitaliste. There is undoubtedly a socialist undertone in Law's 
writings. 

Law writes in his Proposals in 1700: "In matters of trade, the 
interest of particular men and that of their country is so far from 
being always the same, that they are ofttimes directly opposite to 
one another, 'tis the true interest of a country that the many should 
rather get every one a little, than a few should get much, because; 
the more diffusive and universal the gain, the more it will naturally 
contribute to the growth and progress of industry; whereas on the 
contrary, the more 'tis limited and restrained, the more it tends to 
the clogging and cramping thereof. ..." 

Keynes could subscribe to this statement. His whole theory of 
saving and consumption is an elaboration of this theme. By con- 
centration of wealth the propensity to save is increased, with harm- 
ful effects. 

Again and again in all Law's proposals there is one constantly 
recurring refrain: the employment and relief of the poor, based 
rather on economic reasons of maximization of national output 
("our yearly value") than on humanitarian reasons. We read again 
in the Proposals: 

" . . .in all societies, whether great or small, those who bear rule, 



28 Histoire de la Revolution franfaise, VI, pp. 278-280. 



SOME HISTORICAL EXAMPLES 

are highly obliged, and deeply concerned, both in justice and inter- 
est to provide convenient and sufficient work, and subsistence for 
those committed to their care ..." and Law went on to say that if 
his monetary proposals for full employment were accepted, then 
"... these people who are now the greatest burthen to the industry 
of the Kingdom may be made its principal support: and those who 
are now the great and principal means of our poverty, may become 
the chiefest cause of our wealth, for these are the hands that must 
put all that we have before spoken of in motion, and it is only in 
proportion to their number of capacities, that things can be under- 
taken and done, and therefore as before this constitution be intro- 
duced, it might properly enough be said, we have too many people, 
yet then we shall be found to have too few." Law rightly foresaw 
the scarcity of manpower in a fully employed economy. 

In his advocacy of full employment Law uses the same oppor- 
tunity-cost principle applied to the society as a whole as docs 
Kcynes. Even if the employer actually incurs a loss for his firm, the 
society as a whole may gain, because for society it is the national in- 
come that counts, not the net income of the employer. Law's reason- 
ing in this regard is much superior to that of Ricardo, who saw 
only profit, rent, and interest as the net income of the community. 

In his Money and Trade Considered (Edinburgh, 1705) Law 
writes as follows: 

"An acldition to the Money adds to the value of the Country. So 
long as Money gives Interest, it is imployed; and Money imployed 
brings Profite, tho' the Imployer loses. If 50 Men are set to Work, 
to whom 25 Shillings is payed per day, and the Improvement made 
by their Labour be only equal to, or worth 15 sh. Yet by so much 
the Value of the Country is increased. But as it is reasonable to 
suppose their Labour equal to 40 sh. So much is added to the value 
of the Country, of which the Imployer gains 15 sh. 15 may be sup- 

92 



SOME HISTORICAL EXAMPLES 

posed to equal the Consumption of the Labourers, who before 
lived on Charity, and 10 sh. remains to them over their Consump- 
tion" (Chap. II). 

And in another connection: 

"A Nation may gain where the Merchant loses, but wherever 
the Merchant gains, the Nation gains equal, and so much more, 
as the Maintenance and Wages of the People employed and th~ 
Duty on the Goods amounts to. 

"As Trade depends on Money, so the encrease or decrease of the 
People depends on Trade. If they have Employment at Home, 
they are kept at Home: And if the Trade is greater then serves to 
Employ the People, it brings more from places where they are not 
Employed. Sir William Petty values a Man at 20 years Purchase, 
by that Computation a Seaman whose wages is 40 shil. a Month, is 
valued 480 Lib." 

Now let us consider some of Law's specific suggestions. His pro- 
gram, set forth in 1700 in the Proposals, consists of seven points and 
contains inter alia the following demands : 

"i. The imploying and relieving the poor, and the repressing of 
idleness and sloth, 

"2. The reducing the interest of money to three per cent per an- 
num or less, not by force or restraint, but by easy and effectual 
means. 

"3. The effectual carrying on, countenancing, protecting and 
supporting the foreign trade. 

"4. Erecting of national granarys and stores of corn, so as thai 
the industry of this Kingdom may not as hitherto be at any time 
clogged by extream cheapness, now crusht by the extream dearth of 
grain." 

The three other proposals advocate the undertaking of great phy- 
sical investments. 

93 



SOME HISTORICAL EXAMPLES 

The strange thing about this program is that all the points, in- 
cluding the plea for national granaries and stores and physical in- 
vestment, were actually advocated by Keynes. They are not only in 
accordance with the spirit of his doctrine, but with its letter. It is 
very interesting to read the arguments by which Law advocated a 
cheap money policy. He argues with his adversaries in a way simi- 
lar to that in which Dr. Dalton, Keynes's disciple, when Chancellor 
of the Exchequer in the British Labour Government, argued with 
the members of the Opposition. 

"It may be objected . . . that this lowering of interest, may not 
only be a prejudice to them, but to several widows, orphans and 
other weak people, who live only, or for the most part on their 
money; but to this it may be answered, that . . . they are not one 
in two hundred to the rest of mankind; and how unaccountable 
would it be for a country, either to make or keep up laws to en- 
courage and indulge one in two hundred of their people, not only 
to live idle themselves, but by the influence of their usurys and ex- 
tortion as well as example, to crush the industry of others. . . . 
Besides all this it ought to be considered that by fall of the interest, 
the ways of gaining, would be so multiplyed, and such comfortable 
and creditable methods for maintenance and supports would of 
course be provided for such as really could not live or subsist of 
themselves, as would be much more than capable of compensating 
the real loss of any, who in such a case could in the least deserve the 
public care or commiseration." (Here we have also the germ of 
Kaldor-Hick's idea of measuring the effects of social welfare policy 
by the test of whether the loss of those people who are adversely af- 
fected by any measure could be compensated by the gain of those 
people who are better off as a result of the same measure.) 

And Law recapitulates his policy of cheap money by adding a 
new argument: 

94 



SOME HISTORICAL EXAMPLES 

"It is only by our home industry that we can be best enabled to 
raise ships, vessels, materials for navigation and proper commodi- 
ties for foreign vent," and this will be facilitated by "the due and 
orderly imployment of the poor, the moderate and regular rates of 
corn and other provisions," as also of "materials for manufacture 
and interest of money." 

We see the same zeal in protesting against the original sin of 
deflation in both Law and Keynes. Law writes in this connection 
in his Proposals: 

"There is no doubt but extream plenty and cheapness contribute 
exceedingly to extream dearth and want, and that like other ex- 
tremities, they produce one another; it was observed, that for sev- 
eral years, before the last five, corn was extream cheap and low even 
so as to discourage both the raiser and heretor, and to indulge the 
poor in idleness and sloth contracted by plenty . . . was doubtless 
none of the least causes of the late grievous famine." 

In one of his many letters Law writes : 

"La banque est, par rapport aux finances, le coeur du royaume, 
ou tout 1'argent doit revenir pour recommencer la circulation. Ceux 
qui veulent Tamasser et le retenir sont comme des parties ou des 
extremites du corps humain qui voudraient arreter au passage le 
sang qui les arrose et qui les nourrit; elles detruiraient bientot le 
principe de la vie dans le coeur, dans toutes les autres parties du 
corps et enfin dans elles-memes." 

("The bank is, in respect to finance, the heart of the realm, where 
all money should return to recommence circulation. Those who 
wish to hoard and keep it are like parts or extremities of the body 
that should desire to check the flow of the blood that irrigates and 
nourishes them; soon they would destroy the life force in the 
heart, in all the other parts of the body, and finally in themselves.") 

It was Keynes J s idea also that the circulation of money and credit 

95 



SOME HISTORICAL EXAMPLES 

is the heart of national economy, and that the whole planning can 
be performed by manipulating and controlling money and credit. 
And all those who want to secure themselves by their excessive pro- 
pensity to save harm and upset the national economy, finally de- 
stroying themselves. 

Law always advocated balancing the budget, not by more taxa- 
tion, but by a general increase of national income, or what he calls 
the "yearly value" of the country. He believed that the adoption of 
his scheme of a cheap money policy should make it possible to take 
off several taxes. In the Full and Impartial Account of the Com- 
pany of Mississippi, he boasted that "the Regent has taken off 
several taxes in Paris and the Provinces; so that all France partakes 
of the Advantages of his happy Administration." This view of the 
budget was always that of Lord Keynes as well. 

We thus see the truely astonishing range of similarities, which 
may better be called identity of views qualified only by dif- 
ferences of time and the progress of economic analysis, between 
Law and Keynes. The reason for this similarity is to a great extent 
the recurrence of the same historic experience: catastrophic unem- 
ployment, especially in Scotland and France, the ruin of the no- 
bility in Law's time and of English industry in Keynes's in the in- 
terwar period, the disastrous fall of prices and too strict adherence 
to the rules of a specie currency wholly inadequate to the needs of 
expanding trade. In his Letter to Mr. Law upon His Arrival in 
Great Britain, Budgell, already quoted, writes: "You will find our 
Trade lost, our Credit ruined, our Money in the Hands of the 
basest Men among us, and the Innocent and Deluded still groaning 
under the Oppression of the Wicked and the Insatiable." 

But the strangest thing is that Keynes never quoted Law, not 
even in the "Note on Mercantilism" in his General Theory, where 
he cites Mandeville and many other minor writers, including so- 
called "cranks." 

96 



SOME HISTORICAL EXAMPLES 

The East India Company and the Rise of 
British Liberalism 

Perhaps the clearest and most interesting example of strict rela- 
tion between a doctrine and powerful interests was the part played 
by the East India Company in the rise of British economic liberal- 
ism. Of course the rise of British liberalism has various sources, be- 
ing the outcome of many strictly interrelated factors which form 
the changing historical pattern of life, and this problem has been 
analyzed by many writers. The economists tend to a purely logical 
and ideological analysis, while the historians concentrate more on 
the political or social aspect of the problem. Without contesting that 
all those aspects are relevant and important, let us try here to con- 
centrate solely on the influence exercised by the powerful group 
of interests which constituted the East India Company. I am not 
contending that this influence was the most potent factor in the rise 
of British liberalism, but I am sure that the role of the Company in 
the development of British liberal economic thought would be a 
most exciting and fruitful subject for a deep, searching historical 
study. My treatment here, however, is confined merely to setting 
up signposts to such a study. 

The East India Company had to defend itself as an exporter of 
bullion and as an importer of silk and spices and of precious car- 
goes, mostly luxuries of the time, not only against the criticism of 
nationalists and crude mercantilists, but first of all against the Tur- 
key Company and the opposition of home industry. India herself 
absorbed enormous quantities of the precious metals, which dis- 
appeared into hoards without any trace, as is basically true of 
India up to the present time. But the Company brought back from 
India riches, jewels, silk, spices, and above all cheap printed cottons 
and calicoes, which competed with home woolens and silks, and re- 
exported them at a great profit to other countries. How great were 

97 



SOME HISTORICAL EXAMPLES 

the profits of the world's biggest Company can be shown from its 
huge dividends, which in the first years of its existence reached 
100 per cent, and later, when the principle of self-investment was 
adopted, varied from 6 to 12/2 per cent. The Company maintained 
its private armies and navies (by 1735 it had seven large warships 
and many smaller vessels) with their stations and fortifications; had 
its own merchant navy; conducted wars with French companies; 
administered huge foreign territories; exercised legislative and 
judicial powers; possessed its own educational establishments, in- 
cluding later on its own college; had its forts, settlements, docks, 
and depots; granted loans and gifts to the Treasury; and produced 
also its array of political and economic writers. 

The English weavers and spinners asked for protection from this 
competition, and obtained it through a series of Calico Acts, the 
last of which in 1721 prohibited the use or sale of printed, flowered, 
or dyed calico in England. (The English cotton manufacturers who 
imitated Indian cotton goods obtained exemption fourteen years 
later from these prohibitions.) The controversy over protection v. 
freedom of trade raged throughout almost the whole century with 
varying success. The East India trade not only revolutionized the 
English textile industry, thus paving the way for the Industrial 
Revolution, but also revolutionized the economic ideas of the age 
by battering constantly at the cruder forms of balance-of-trade ar- 
guments. It provided all the theoretical weapons afterwards used 
so splendidly by Adam Smith, being melted down into a new and 
refined, consistent and sweeping theory. The main arguments of 
the economic liberalism of the late seventeenth and early eighteenth 
century were freely supplied, vigorously defended, and highly de- 
veloped by the the managers, officials, and writers of and for the 
East India Company. These arguments were deeply rooted in the 
Company's vested interests, which, however, proved to be the in- 



SOME HISTORICAL EXAMPLES 

terest of the growth, development, and prosperity of the whole 
country. 

But the great historians of the seventeenth and eighteenth cen- 
turies, who record only impersonal ideas and theories without both- 
ering about the deeper personal motives of writers who defended 
and expounded them, very often have great difficulty in describing 
and grasping the true ideological atmosphere and the theoretical 
conception of the epoch. Eli F. Heckscher, the historian of the age 
of mercantilism, writes: "This is not to deny that advanced laissez- 
faire arguments also occurred here and there even before the end 
of the i7th century, and this, indeed, even in authors who in other 
respects were purely mercantilists. And this is not unnatural . . . 
[here follows a most involved explanation of this phenomenon on 
a purely logical ground] . . . for however clearly it could be 
shown that social causation and state interference could go to- 
gether, it was still but a small step from the conception of an exist- 
ing social causal interdependence and a mastery over nature in 
social matters to the conception that such interdependence had an 
inherent rationality which ought not be disturbed. The general 
dominance of the idea of natural right was calculated to add fuel 
to such arguments." 20 

Not ttie "dominance of the idea" added fuel to the laissez-faire 
ideas, but the dominance of the East India Company, whose shares 
were owned by most eminent personalities including the Court. 
And the advanced laissez-faire arguments occurred not here and 
there, but in a great stream. If, however, they occurred "in authors 
who in other respects were purely mercantilists," it was because 
most writers who professed them defended quite openly the in- 
terests of the East India Company, which were partly based on ex- 



29 Eli F. Hecksctier; Mercantilism, tr. from the German by Mendel Shapiro. Lon- 
don: Allen and Unwm, Ltd., 1935. (First published in Sweden in 1931.) 

99 



SOME HISTORICAL EXAMPLES 

elusive mercantilistic privileges and partly on a free trade, i.e., anti- 
protectionist, antibullionist and antistate interference policy. 

Thomas Mun (1571-1641), author of A Discourse of Trade 
(1621) and England's Treasure by Forraign Trade (1630) was a 
director of the East India Company. Josiah Child (1630-1699), 
author of the Discourse of Trade (final edition, 1690) was director 
and later Governor of the East India Company. And both, as is 
well known, expounded the most enlightened and progressive 
ideas, on which the liberal economists drew freely a hundred years 
later. 

The whole weight of Mun's treatise lies really in Chapter IV of 
England's Treasure, which states briefly, to quote the title, that 
"The exportation of our Moneys in Trade of Merchandize is a 
means to increase our Treasure." Mun gives as illustration of this 
thesis the East India trade, contending "this profit will be far 
greater when wee trade in remote Countreys, as for example, if 
wee send one hundred pounds into the East Indies to buy Pepper 
there, and bring it hither, and from hence send it for Italy or Tur- 
key, it must yield seven hundred thousand pounds at least in those 
places, in regard to excessive charge which the Marchant dis- 
burserh in those long voyages in Shipping, Wages, Victuals, In- 
surance, Interest, Customes, Imports and the like, all which not- 
withstanding the King and the Kingdom gets." He generalizes 
his thesis into a theory which turns against the Merchant Adven- 
turers' Company, Turkey Company, and many other rivals, and 
which reads as follows: "Where the voyages are short and the 
wares rich, which therefore will not employ much Shipping, the 
profit [i.e., for the country] will be far less." This theory has a 
quite clear meaning. 

Sir Josiah Child, in his book, defends the interests of his Com- 
pany, showing that it: 

i. "Constantly employs twenty five to thirty Sail of the most 

100 



SOME HISTORICAL EXAMPLES 

Warlike Ships in England with Sixty to a Hundred Men in each 
ship. 

2. "Supplies the Nation constantly and fully with that (in this 
Age) necessary material of Salt-Petre. 

3. "Employs the Nation for its Consumption with Pepper, In- 
dico, Calicoes and several useful Drugs. 

4. "Furnishes us with Pepper, Cowryes, Long-Cloth and other 
Calicoes and painted Stuffs, proper for the Trade of Turkey, Italy, 
Spain, France and Guiny . . . and these Goods exported to produce 
in foreign parts, to be returned to England, six times the Treasure 
in Specie, that the Company exports from hence." 

Or take Charles Davenant, who writes his Essay on the East 
India Trade (1696) in the form of a letter to the Marquis of Nor- 
manby, who had asked him for an opinion on this matter. In this 
Essay he has "endeavour'd to show . . . first, that this trade is bene- 
ficial to the Kingdom, secondly that 'tis not prejudicial to the Gen- 
eral Wollen Manufacture of England, thirdly that it does not so 
interfere with our Silk and Linnen Manufactures, as to hurt the 
Publick, fourthly, that the intended Prohibitions may probably 
occasion an utter Loss of the whole Traffic." The whole work is so 
conceived that there is no doubt that the whole tract was written 
for the benefit of the East India Company, if not to its order. Again, 
Davenant writes on the same subject in a more detailed way, argu- 
ing with Pollexfen in his Discourses on the Public Revenues and 
the Trade of England. His basic idea, which could be subscribed 
to by Adam Smith, is contained in the following excerpt: 

"Gold and silver are indeed the measure of trade, but the spring 
and original of it in all nations, is the natural or artificial product 
of the country; that is to say, what their land, or what their labour 
and industry produces. And this is so true that a nation may be 
supposed by some accident, quite without the species of money, 
and yet, if the people are numerous, industrous, versed in traffic, 

101 



SOME HISTORICAL EXAMPLES 

skilled in sea affairs, and if they have good ports, and a soil fertile 
in variety of commodties, such a people will have trade and gather 
wealth, and they shall quickly get among them a plenty of gold 
and silver; so that the real and effective riches of a country is its 
native product." 30 

"Money is at bottom no more than the counters, with which men 
in their dealings, have been accustomed to reckon . . . this natural 
or artificial product being most of it the result of the people's labour 
and industry. ..." 

Davenant also proposes a "scheme for setting the Poor to work," 
urging, a hundred years before Malthus, that "all the laws made 
for the provision of the poor, and for punishing idle vagrant per- 
sons, be repeated. . . . " In his Reflections upon the Constitution 
and Management of the African Trade, he upholds the Royal Afri- 
can Company's claim for the "exclusive privileges in trade with 
Africa" with twelve far-fetched and very doubtful arguments, 
among which is the argument that the natives, "a very cunning as 
well as deceitful people, never missed catching hold of the advan- 
tages which they saw naturally arising to themselves from our sepa- 
rate interests, as well as different methods of management," by 
"raising the price of negroes, gold, elephant teeth" and by "beating 
down the value of all woolen and other British manufactures." 
The competing merchants sell the Negroes at exorbitant prices to 
the planters, who in turn raise the price of sugar and other colonial 
articles. There is no doubt that the whole tract was written for the 
benefit and to the order of the Company in a subservient way. 

Another staunch defender of laissez-faire principles is Edward 
Misselden (1608-1654), author of Free Trade, or the meanes To 
Ma\e Trade Flourish and the Circle of Commerce (1623). He was 
deputy-governor of the Merchant Adventurers' Company at Delft 

30 Charles Davenant: Discourses on the Public Revenues and the Trade of Eng- 
land. Discourse I. 

102 



SOME HISTORICAL EXAMPLES 

for ten years and was also employed by the East India Company, 
for which he acted as a Commissioner at Amsterdam in the treaty 
negotiations with the Dutch. In his first discourse he defends his 
own Company, but he also has warm words to say about the East 
India Company. "This Great and Noble Societie . . . " is " . . .far 
beyond any other Company of this Kingdom." He strives hard to 
reconcile the principle of exclusive trade privileges, which he calls 
the principle of "Government and order in Trade/' with the de- 
fense of free trade. "... The name and nature of Monopoly, is 
more talk't of, then well understood of many; and some thinke 
that the reducing of trade into Order and Government, is a kinde 
of Monopolizing and restraint of trade. . . ." 31 

His second treatise, the Circle of Commerce, is a polemic against 
Malynes' defense of the home woolen market. He tries to show that 
the roots of the bad economic conditions lie not in the organization 
of trade and the conduct of trade companies, but in unemployment, 
which goes with poverty and luxury or excess. 

Now let us look at the anonymous tracts published by and for the 
East India Company. They make most interesting reading. They 
are very enlightened economic treatises on the subject of freedom 
of trade, international division of labor, the real nature and sub- 
stance of wealth; and they put forward most cogent arguments 
against the prejudice of the favorable balance of trade, against an 
over-all protection and the bullionist conception of wealth. 

In one of these tracts, 32 printed in 1677, the East India Company 
says: "This Rule [the active balance of trade] seems to be taken 
from the consideration of the whole Kingdom as to its Trade with 
foreign pacts, under the notion of a single person possessing and 
managing an Estate or Farm. . . . Yet not withstanding, the said 



31 Edward Missclden, Free Trade, or The Meanes to Makje Trade Flourish (1651 
edition), p. 54. 

32 The East India Trade, a Most Profitable Trade to the Kingdom, etc. 



SOME HISTORICAL EXAMPLES 

Rule as it is ... is not an adequate Rule to measure the whole ex- 
tent of Foreign Trade by; for it supposseth only a Trading in Com- 
modities, and makes Money, i.e. Gold and Silver, to be fixed Stock 
and Riches of the Kingdom; and n<# improvable in the Trade, but 
encreased or diminished, as it surolys only to answer the Balance 
of the Trade of Commodities. Jwhereas in Truth the Stock and 
Riches of the Kingdom, cannotiproperly be confined to Money, nor 
ought Gold and Silver to be qkcluded from being Merchandise, to 
be Traded with, as well as antf other sort of goods. 

"It is true that usually tfte measure of Stock or Riches is ac- 
counted by Money; but that is rather in imagination than reality; 
A man is said to be worth Ten thousand pounds, when possibly he 
hath not One hundred pounds in ready Money; but his Estate, if 
he be a Farmer, consists in Land, Corn or Cattel and Husbandry 
implements: If a Merchant, in Goods and Merchandise at home or 
Adventures abroad, or in Shipping; in like manner the Stock or 
Riches of the Kingdom doth not only consist in our Money, but 
also in our Commodities and Ships for Trade, and in our Ships of 
War, and Magazines furnished with all necessary Materials. . . . 

"It is a great mistake, though a common one, to think that it is 
the plenty or scarcity of Money that is the cause of a good or a bad 
Trade; It is true, when the Trade is quick and good, Money is 
more seen, and changeth hands ten times for what it doth when the 
Trade is dull and dead, so that One hundred pounds in a time of 
quick Trading, makes as great an appearance as one Thousand 
pounds in a time of dead Trading. It is not so much the Money 
that influenceth the Trade, as it is the Trade that discovers the 
Money, which otherwise would lie hid. ..." 

It is impossible not to see here the basic textures of Adam Smith's 
arguments in his The Wealth of Nations, written 100 years later. 
The East India writers who defended their Company against the 
protectionist arguments of the home industry always started their 

104 



SOME HISTORICAL EXAMPLES 

tracts with a general exposition of the principles of trade and 
economy. They would say invariably, as modern propagandists do: 
"Give me leave in the first place to say something of trade in gen- 
eral, which may throw some light on our special problem related to 
the India trade"; and in doing so they expounded, defended, and 
enlarged the laissez-faire doctrine in economics, much before the 
independent thinkers and students did, giving the latter material 
to think and work upon. 

Let us take another tract of the East India Company, called a 
"Triatise" with a very long title in five points ("wherein is Demon- 
strated I. that the East India Trade is the most National of all For- 
eign Trades, II ..." and so on through point V), printed at Lon- 
don in 1681. We have here at first the same general observations 
about the role, function, and usefulness of trade in general and for- 
eign trade in particular, and then the defense of liberty of trade and 
production. It is worth while to record here some of its specific 
statements: 

"All Domestic or Foreign Trade . . . increase (s) the value of our 
English Lands. . . . 

"All Monopolies, of what Nature or kind soever, are Destructive 
to Trade," even those which (if any) are granted to the East India 
Company. 

"Domestic and Foreign Trade wax and wane together. . . . 

"Silver and Gold ... are no less a Commodity than Wine, Oyl, 
Tobacco, Cloth or stuffs. 

"No Nation ever was or will be considerable in Trade, that pro- 
hibits the Exportation of Bullion. 

"Whatever Nation hath the lowest Interest, will certainly have 
their lands in highest esteem and price." 

Again the same theme, the same arguments, and the same doc- 
trine of free trade was presented. 

There is another small tract of two pages published by the East 

105 



SOME HISTORICAL EXAMPLES 

India Company anonymously. It has no date, but was most prob- 
ably written at the same period as the last-mentioned tract. It re- 
futes very thoroughly all the basic arguments of economic policy 
used by the Company's adversaries in other companies, small mer- 
chants, and weavers and spinners in the struggle against it. It is 
called Remarks on the Complaints Against the Trade to East India 
as Prejudicial to this Nation. The main arguments against the 
Company, says the tract, are based on its action in: 
I. "Carrying out great quantities of Silver," 
II. "Bringing in large supplies of wrought Silks," 

HI. "Hindring the English Manufacturers and Expence of 
Wool." 

Then comes the refutation of those arguments, with this conclu- 
sion : 

"It is the interest of England that all its Manufactures be kept 
up to a due Standard of Goodness, and at such reasonable prices, as 
our neighbours may not be able to under-work us, but by the Good- 
ness and Cheapness of ours, they may be induced to take them, and 
be kept from contriving the same or the like sorts of Manufac- 
tures." 

How is the distress of the woolen industry to be remedied? Only 
by measures which improve the actual condition of woolen manu- 
facturers, says the tract, for "Restraints and Contrivances to force 
Trade, as they are rarely found to have the desired success, have 
generally proved pernicious to our Selves, and to have had evil con- 
sequences in being improved against us by our Neighbours." 

On the whole, the tract is a very good and reasonable account of 
a laissez-faire doctrine, which embraces all its basic elements, but 
one, also, which is dictated, with certain exceptions, by self-interest. 

* * * 

It has been said that "ideas have legs." They certainly have, but 
they also have hearts and pockets. Some writers defend or expound 

106 



SOME HISTORICAL EXAMPLES 

certain ideas because they are at heart in agreement with certain 
interests; others defend them because they serve as rationalizations 
of the writers' material interests. 

There is a human element in every doctrine, because the writer is 
not an abstraction but a human being, not only with a brain, but 
with a heart. Moreover, there are his many institutional and social 
links to be considered. 

A historian who considers only the intellectual or ideological 
content of a certain doctrine or its finely political aspect sees it in 
one or two dimensions only; but the world of ideas is three-dimen- 
sional. It would be wrong to say that economic doctrines are purely 
a kind of rationalization of certain interests, whether those of work- 
ers, merchants, financiers, industrialists, or farmers, but they are 
such to a great extent. There is nothing astonishing in that asser- 
tion. There is no imputation of hypocrisy to economic writers. 
Whatever social economic doctrine I profess, be it protectionist, 
nationalist, liberal, or socialist, in its pure or mixed form, that doc- 
trine, in one way or another, directly or by implication, serves some 
interests and offends the others. The intellectual or logical side of 
any doctrine is one thing; its ideological side, which springs rather 
from the heart than from the head and is linked up with religious, 
philosophical, and social ideas, is another. The concrete economic 
business and other material interests in various forms make the 
third dimension of an economic doctrine. 

If Malthus Still Right? 

The pendulum of opinion in population matters swings be- 
tween two extremes: one emphasizing the danger of overpopu- 
lation, the other that of underpopulation. These two opposites are 
obviously related to two different trends in population movement. 
Communities with a rapidly growing population and limited 

107 



SOME HISTORICAL EXAMPLES 

resources are disturbed by the imaginary or real perils arising 
from a population which is becoming too large, while those with a 
declining rate of growth are disquieted by the menace of their 
population becoming too small. At present we are inclined to 
overstate the peril of underpopulation and the benefits connected 
with a rapid growth. Rapid growth, as has always been affirmed 
by the American economists since Carey, facilitates transition to 
mass-production methods, accelerates the progress of technology, 
and stimulates capital formation through the influence of rising 
consumption upon investment (the so-called Acceleration Princi- 
ple). Rapid population growth is the basic outlet for investment. 

On the other hand European economists, living in old and 
overcrowded communities with no openings in new territories, 
were inclined to follow the more static conception of Malthus 
that the rapid growth of population has its limitations in natural 
resources bound up with space, that space is the limiting factor 
for population growth. The stimulus that comes from a growing 
population, these economists say, can be replaced by that from ris- 
ing standards of living. There is no inherent advantage of a rising 
consumption via increased numbers over that via better standards 
of nutrition or housing. 

Historical experience shows that both contentions are true in 
different situations, for we can find many examples to illustrate 
the correlation between the rapid growth of population and prog- 
ress, and, vice versa, that between population growth and decay. 
The prodigious and unique growth of population in the nineteenth 
century in Britain, the United States, Germany, and many other 
countries is typical of the first relation, while India or China today 
illustrates the second. On the other hand, we also have examples 
of the correlation of a declining population with progress, or, vice 
versa, with decay and misery. The economic consequences of the 
Black Death in England may be regarded on the whole as a stimu- 

108 



SOME HISTORICAL EXAMPLES 

lus to progress, since wage rates increased considerably, agriculture 
changed over from arable land to pasture, and the liquidation of 
the medieval system of cultivation was hastened. 

In more recent times French prosperity in the nineteenth cen- 
tury was based primarily on the low birth-rate combined with a 
high propensity to save and invest. But we have also a number of 
examples in more recent times of a declining population associated 
with decay, in depressed areas and in poverty-stricken countries 
where disease and misery go hand in hand. 

The truth is that in actual life no one single factor can be made 
responsible for progress or decay. The growth of population may 
be a great vehicle of progress if, for instance, technical progress 
and capital formation really take place, or if this growth coincides 
with the opening-up of new territories and foreign trade, or if 
better social and economic institutions supervene. In East Central 
Europe the growth of population was a vehicle of retrogression, 
contributing to the misery and undernourishment of men, animals, 
and plants, to ignorance and disinvestment. 

The concept of optimum population is vague and rather ill- 
defined. Optimum for whom? Since "man is the measure of all 
things," where are we to find the criterion for optimum popula- 
tion? If it were true that thirty million people living in the British 
Isles might have a much higher real income per head than forty- 
seven million, would this mean that thirty million is the optimum 
population for Great Britain? Or if it were true that fifty-five mil- 
lion people could live in Britain in conditions of fair comfort 
judged by basic standards of nutrition, housing, and education, 
would this be the optimum population? 

Optimum population means optimum for a given space, the 
concept itself being derived from biology. Tomatoes, carrots, or 
peas have a certain optimum space, which varies with the richness 
of soil, climatic conditions, and the intensity of cultivation. If we 

109 



SOME HISTORICAL EXAMPLES 

fought weeds or insects and parasites more successfully, the opti- 
mum space could be in some cases reduced. In this connection the 
optimum space means optimum for growing a good quality 
plant, i.e., one with all those potential qualities which we appre- 
ciate. Analogously, the optimum population would mean the 
optimum space required for bringing up good-quality men. But 
what qualities have we in mind? Here the matter becomes one for 
philosophers rather than for economists. But even if the answer is 
agreed on, by analogy with plants we should find that optimum 
space depends on the extent of natural riches, climatic conditions, 
the pattern of wants, the stage of technical development, the level 
of education, the level of capital investment and propensities to 
save, the pattern of distribution of income and all other institu- 
tional arrangements, and, finally, on international relations. By 
analogy with plants, if we fought more successfully disease, crimi- 
nality, or social parasitism in our midst, the optimum space could 
be reduced. 

We can ask from a static standpoint what the optimum popu- 
lation would be if all other things remained unaltered, but there 
is little sense in this question, since with change in the population, 
almost everything else changes too. Changes in numbers of the 
population are accompanied by changes in its composition, in the 
amount and composition of manpower, in the propensity to con- 
sume different commodities and services, in the propensity to 
save and the inducement to invest, and by changes in the division 
of labor and general productivity. Since man is the measure of 
all things, everything else changes with man. 

But does this mean that Malthus' ideas have lost their meaning 
for the present generation and belong to the waste material of 
history? Not at all. In the second edition of the Essay on the 
Principle of Population (1803), Malthus formulated his basic 
propositions so widely that they can still be accepted as valid 

110 



SOME HISTORICAL EXAMPLES 

valid, as a matter of fact, for all times and for all nations. And this 
is really their weakness. 

Let us quote here the two basic propositions of Malthus, which 
read as follows: 

1. "Population invariably increases where the means of sub- 
sistence increase, unless prevented by some very powerful and ob- 
vious checks." 

2. "These checks, and the checks which repress the superior 
power of population, and keep its effects on a level with the means 
of subsistence, are all resolvable into moral restraint, vice, and 
misery." 

These propositions are still valid, with only the slight amend- 
ment that, for moral restraint, we may read birth-control, and to 
the positive checks we may add ignorance, since ignorance is as 
great a factor in mortality as vice and misery. 

Nations as well as social strata can be divided into two large 
classes: 

1. Low-income countries or strata, in which the positive checks 
(vice, misery, and ignorance) still operate fairly strongly, while 
birth-control plays only a minor part. To this class belong such 
countries as India, China, and most of the East European coun- 
tries, apart from colonial or semicolonial countries. 

2. High-income countries or strata, in which birth-control is 
the main check, while positive checks in peacetime play a minor 
role (wars and civil strife are placed among the positive checks). 
To this class belong all high-income countries, such as Britain and 
the United States and the countries of Western Europe. But even 
in high-income countries, positive checks are still in operation, as 
can be seen from the differential rates of mortality, especially in 
regard to children. 

We can formulate a general proposition that wherever positive 
checks are in decline, preventive checks seem to grow stronger. 

Ill 



SOME HISTORICAL EXAMPLES 

They are never in operation simultaneously in similar strength. 
The positive checks operate in low-income groups or countries; 
the preventive checks mainly in high-income groups or coun- 
tries. Therefore the level and the distribution of income will prima- 
rily determine the distribution of positive and preventive checks 
in their numerical strength. And this fact seems to confirm Sis- 
mondi's and Karl Marx's thesis that every economic system has 
its own law of population -i.e., that every economic system has 
its own pattern of distribution of positive and preventive checks 
based on the level and distribution of income and the whole pat- 
tern of culture linked with the economic life. Both kinds of checks 
are mutually interdependent, both are dependent on the level 
and distribution of income, and, finally, the preventive checks 
determined by motives are linked with the whole sphere of social 
and economic motives. 

The "law of overpopulation" described by Malthus in the first 
edition of his Essay on the Principle of Population was the law of 
early capitalism, and is still valid for such countries as India and 
China, which could profit greatly by following Malthus' advice. 
The early capitalist development went hand in hand with the 
free expansion of manpower and markets. The factory system in 
the early nineteenth century, with its great opportunities for child 
labor, gave encouragement to high fertility rates and at the same 
time to the full working of positive checks. 

The population trends in latter-day capitalism are being quite re- 
versed, so that they can be brought under the name of the law of 
underpopulation. We see the slowing down of the annual in- 
crease of the population with a simultaneous ageing caused by 
the increase of natality, which is only partly offset by the decrease 
of mortality. The preventive checks are operating on such a scale 
that they seem after a certain time to endanger the survival of a 
nation. They are no longer fully offset by the decline of the positive 

112 



SOME HISTORICAL EXAMPLES 

checks. High-income countries and strata are in constant ebb, 
with far-reaching effects for the future pattern of civilization. 

The economists in their abstract treatises very often confuse the 
position of low-income countries with that of a full, mature in- 
dustrial economy. But there is a world of difference between 
them, not only in matters of population but in all other basic 
issues, such as the problem of saving and investment, distribution 
of income, and degrees and ways of planning. There is a different 
economic problem for the two categories which justifies different 
sets of economic propositions. 



"3 



HI 

THE FOUR STAGES OF THE DEVELOP- 
MENT OF ECONOMIC DOCTRINES 



The Dialectical Movement 



It is worth while to review the history of economic thought 
from a distant point, just as we review large stretches of landscape 
from a high mountain top or from a high-flying aircraft. We then 
see, not the small details, but rather a kind of plastic map with 
main curves, contours, and belts. If we investigate the history of 
doctrines close at hand, we get an amazing and confusing wealth 
of details and peculiarities, a real turmoil and tumult of ideas 
where everything is contradicted by everything else, is circum- 
scribed and disallowed. But if we climb higher and take a general 
view of a large span, in our case of one or more centuries, we get 
a clearer and more consistent picture of distinctive phases of a 
doctrinal development. In that case, of course, we have to be 
highly selective and to pick out only those doctrines and writers 
who gave the tone to a given epoch, expounding ideas by which 
an age lived and worked, which were ruling in the sense of being 
the accepted scale of values. Those doctrines inspired the country's 
economic policy, its institutions and organization. 

The fact of selection, of course, gives our work an air of pre- 

114 



DEVELOPMENT OF ECONOMIC DOCTRINES 

meditation. We have an idea beforehand and we select our facts 
in a way designed to give the idea force by additional arguments 
which are pseudo-scientific and not historical. Probably the same 
argument could be used against our visual selection of lines and 
curves seen from an aircraft. All that we see and think is deeply 
rooted in our memories and human values; therefore, a mind 
intellectually untrained and new to history would perhaps present 
a more objective picture than an economist or historian, as the man 
blind from birth who suddenly gained his sight in the air would 
present a more objective picture than the man who has already 
formed a picture before he goes up in an aircraft. 

Still it seems basically true that, looking at the long stretches of 
the ruling economic teachings from a high plane, we see four 
basic doctrines which are not economic only, but are also political 
and social, and in a way philosophical, corresponding fundamen- 
tally to four distinct phases of economic, social, and political de- 
velopment and to the development of whole styles of life. 

If we review the doctrines that have ruled since the Middle Ages 
in Western Europe, we find four distinct phases in the develop- 
ment of economic thought :f the medieval doctrine of the School-)' 
men, corresponding to the feudal and corporate society and to the 
town economy; /the mercantilist doctrine,) corresponding to the 
mercantile system of the absolute and the new territorial national 
state ;/the liberal classical or neoclassical doctrincj corresponding to 
liberal democracy based on world trade ;/and the socialist doctrine! 
which corresponds to the ever growing importance of the principle 
of national planning in its multifarious though not wholly dispa- 
rate forms. 

This development of economic thought is seen most clearly in 
England, because the transition from mercantilist to liberal and 
now to the new social economics in thought and policy is here 
most clearly marked. In other countries liberal thought was in- 

"5 



DEVELOPMENT OF ECONOMIC DOCTRINES 

t^rrupted and deformed by the intrusion of nationalistic thought 
and neomercantilist practice, and in the latest period by full-scale 
planning for power politics. 

Another feature which hardly can be disputed is the dialectical 
movement in the development of economic ideas and institutions. 
Indeed the dialectical movement is most clearly seen in the de- 
velopment of economic thought. The coming doctrine is in violent 
opposition to the doctrine it is to replace in all its basic ideas. The 
mercantilist school was in violent antagonism to medieval thought; 
similarly, Adam Smith devotes one-fourth of his book to refuting 
the "erroneous speculations" of mercantilist political economy. 
And the school of today starts once more with very violent, and 
admittedly sometimes unjustified, criticism of the laissez-faire doc- 
trine. 

We may contend generally that every ruling doctrine of a given 
age can best be understood in the light of its predecessor. As long 
as it holds the reins, it has the air of an absolute which has a perma- 
nent value for all generations to come, and all else is regarded as 
ignorance or error. But when its time comes to pass away, its true 
nature is better revealed by its limitations, which are linked with 
its assumptions rooted in a given historical context. Therefore 
every doctrine is really better understood in historical perspective 
then in its own times. There is nowhere to be found more ortho- 
doxy than among economists. They often swear that the ruling 
doctrine is the only permanently valid doctrine, applicable to all 
ages, the only one true to reason and nature. Still they too are 
gnawed by the tooth of time and constantly yield ground. 

Probably this dialectical movement has something to do with 
the process of constant disillusionment which is going on both 
on the institutional and psychological plane in addition to con- 
stant changes of technique and situation. The institutions wear 
out, and what we received and experienced also loses its attraction, 

116 



DEVELOPMENT OF ECONOMIC DOCTRINES 

becoming stale and boring; we want to experience something new. 
The attraction of novelty plays a great part in the development of 
both institutions and ideas, but an even greater one, perhaps, in 
the realm of ideas than in that of institutions. We have to remem- 
ber that there are some basic values difficult to combine or to keep 
in their right proportion, such as security and progress, or free- 
dom and equality, or welfare and leisure, so that in the phase fol- 
lowing that in which one of the pair is dominant, we are attracted 
by its opposite. This dialectical movement is a matter of specula- 
tion for philosophical and historical minds, presenting an oppor- 
tunity for a wealth of interpretation, technical, institutional, psy- 
chological, and social; but the fact itself cannot be disputed. 

Let us now cursorily survey the basic working ideas and con- 
cepts of these four stages of economic thought, ideas by which 
people lived and worked in ages when they were respectively 
dominant. 

The Medieval Doctrine 

The first socio-economic doctrine which governed the Western 
world for nearly four centuries is the scholastic one, best embodied 
in the teaching of St. Thomas Aquinas. His concept of "distributive 
justice" (iustitia distributiva) , as applied to the relations of per- 
sons with one another and based on "geometrical equality" which 
distributes goods and rewards according to rank, merits and birth, 
is the best expression of the feudal institutions. Every estate has 
its own rights and duties. Arithmetical equality between men of 
differing rank and merits would be the greatest injustice. Suum 
cuique is the motto of the traditional society. Aquinas' concep- 
tion of a society as an organic moral body which comes before the 
individual and is bound to strict allocation of different functions 
and tasks, the idea of holism, is the best expression of the ordered 
society of his time. 

117 



DEVELOPMENT OF ECONOMIC DOCTRINES 

The idea of moderation which permeates all the socio-economic 
structure 'dominated not by the "economic man" but by the man de- 
sirous of maintaining his traditional standard of living according 
to the estate in which he was born is put forth. The "lust for profit" 
(cupiditas lucri) is condemned. The endless drive for money 
(terminum nescit sed in infinitum tendii)* is the main source of 
social and moral evil. It is not maximum production which counts. 
Augere pecuniam in infinitum is a sinful action. Production 
should have certain limits in the needs and wants of family life. 
Economic activity has its proper limits (mensura debitd) in the 
traditional standard of living proper to each estate (ad domus 
suae sustentationem) . 

Work is not only an economic activity, but has many noneco- 
nomic, moral, and religious values. It is a duty towards the family 
(ad vtctum quaerenduni), towards the society (officium), towards 
one's own salvation and moral well-being (ad tollendum otium ex 
quo multa mala oriuntur). It is also a form of prayer; therefore its 
artistic perfection is of great importance. 

Since the profit motive is rejected, as well as the drive towards 
maximum output, there is no need for free competition, but 
rather for arrangements which support the limitations on eco- 
nomic activity, for rules and regulations which ensure the right 
relations of persons, their quality of performance, and their right 
behavior. 

The supreme rules are embodied in the conception of justice in 
exchange (iustitia commutativa) based on arithmetical equality, 
on strict objective equivalence of value (quod in iustitia commuta- 
tiva consideratur principaliter aequalitas ret). From this concep- 
tion spring the rules of iustum prctium, which should cover the 
cost incurred and the effort of the craftsman or the merchant 



1 All Latin quotations arc from St. Thomas Aquinas, Summa Theologica. 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

(labores et expensae) according to his traditional standard of liv- 
ing. And the idea of iustum solarium, coming from the same 
source, states the rule that every laborer has the right to ask a wage 
sufficient to ensure the sustenance of his family according to the 
traditional standard of living (ius naturale habet, quod homo vivat 
de labore suo). It is not the minimum standard of living for all 
strata which is here meant, not the necessarium vitae but the neces- 
sarium personae, which differs according to the stratum to which 
that person belongs (secundum conditionem et statitm propriae 
personae et aliarum personarum, quarum cura ei incumbit). 

The rules and regulations are not state rules imposed above, but 
codes of behavior emanating from self-governing bodies which 
look upon themselves not only as professional associations but as 
social and religious organizations. The strict rules of iustum pre- 
tium must be judged against the background of merchants and 
craft guilds, with their strongly entrenched monopolistic position, 
which could be easily exploited unless strict rules of behavior were 
imposed. 

(The ideas of iustum pretium and iustum salarium, however, 
are not only rules, but have a theoretical value, explaining de facto 
the settlement of prices and wages in the age in which those ideas 
were operative as guiding principles of price fixation in guilds and 
corporations.) 

The negative attitude towards profits was expressed in the 
theory of the barrenness of money and credit. The main function 
of money is to serve as a medium of exchange (pecunia princi- 
paliter est inventa ad commutationes faciendas), and as a source of 
value it is essentially barren (res quae non fructificat) , being a con- 
sumption good, which is destined for expenditure (cum pecuniae 
usus f sit illius ret consumptio, ac distractio f iniustum et illicitum 
est t pro eius usu aliquid accipere). The use of money therefore is 

119 



DEVELOPMENT OF ECONOMIC DOCTRINES 

inseparably connected with its consumption (proprius et princi- 
palis pecuniae usus est ipsius consumptio sive distractio). 

Consequently the substance of money and its use cannot be dis- 
posed of separately, as can be done in the case of a house, or a piece 
of ground, of which the substance may be sold separately from its 
use. While it is possible to rent a house, to lease a plot of land, or to 
hire out the work of a horse, and still retain the ownership of those 
commodities, the use of a consumable commodity such as wine or 
bread cannot be sold separately from its substance; to sell the use 
apart from the matter would be to sell what does not exist. 

It is easy to see that this theory of the sterility of money and 
credit was related to consumers' credit, which was then used on a 
large scale and as a rule proved ruinous to the borrower; pro- 
ducers' credit was scarcely known. Exceptions to the theory were 
made as soon as it came into contact with the phenomenon of pro- 
ducers' credit. Even St. Thomas Aquinas allows the charging of in- 
terest in cases where the money is employed, broadly speaking, for 
productive purposes. These are just the cases that clearly reflect 
the economic source of the general theory of the sterility of money 
in the precapitalist epoch. 2 

The theory of the unproductivity of foreign trade, with a nega- 
tive attitude especially towards exports, was the best expression of 
a self-sufficing manor economy concerned mainly with abundance 
and cheapness of supply, in which foreign trade supplied mainly 
luxuries. 

The scholastic school represents the theological and ethical stage 



2 Summa Thcologica, Quacst. 78, Art. 2. Of the seven cases in which the taking 
of interest is permissible, the following three deserve special attention: A. If the 
creditor incurred a loss and the debtor obtained an advantage, the former could 
claim indemnification. B. If the lender entrusted the money to a trader or an artisan, 
he could demand a share in the profit. C. If the security taken for the loan yields a 
profit, e.g., a house or a piece of land. 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

of economic thought, based on one universally recognized code 
of morality 8 and the rule of the Roman Catholic Church. 

The Mercantile System 

The next stage is the mercantile system, covering the epoch of 
economic history and thought which lies between the medieval 
and the liberal economy (the sixteenth, seventeenth, and most of 
the eighteenth centuries, in Great Britain). Here the close cor- 
relation between ideas and economic life appears in almost per- 
fect form, producing a vast variety of schools. 

In Europe we can distinguish five main versions of that prodigi- 
ous current of mercantilist thought: 

1. The Anglo-Dutch schools, tending towards freer forms of 
production and trade, with emphasis rather on the balance of pay- 
ments than merely the balance of trade, and addressing itself to 
merchants and businessmen rather than to kings and princes. 

2. The French school, tending towards industrially minded state 
socialism (Colbertism). 

3. The Italian-Spanish schools, with their interests centered 
around monetary problems and burdened with ecclesiastical 
thought and medieval tradition. 

4. The German schools, with their interests centered around 
administrative and fiscal questions (Polizeiwirtschajt and Kame- 
ralistic) . 

In all countries we see three phases of mercantilism: emergence, 
development, and decline, and those periods in every country are 
again different for practice and theory. Mercantilist practice con- 
tinued for a long time after mercantilist theory was moribund. 

8 "The application of ethics to economic transactions was rendered possible by 
the existence of one universally recognised code of morality, and the presence of 
one universally accepted moral teacher." 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

After making those reservations, let us proceed to a brief outline 
of the main features of the great, powerful, and changing stream 
which we call mercantilism in the realm of ideas. 

First of all we see a close union between economics and politics 
which has never before or since been attained in any other histori- 
cal stages. In fact we see the domination of economics by politics 
and it was at this stage that economics receives the name "political 
economy" when Montchretien in 1615 named his Traitc 
d'economie pohtique. The economy is regarded as means to 
political power. It is not wealth which is sought but power. Mont- 
chretien explains very well his preoccupation with economics 
when in his study he proceeds with the successive steps in the 
order of their importance. The state needs an army, an army needs 
munitions and provisions, it needs to be paid, that means that good 
tax yields must be secured, and that in turn means that sufficient 
income must be provided for its inhabitants. The wealth of the 
country is only a means to power and grandeur of the state. 

The mercantilists were all busy devising new means of acquir- 
ing and multiplying wealth. They were the planners on a larger 
or smaller scale. They were full of organizing drive and zest. Here 
we can see the full contrast to the preceding phase. Unlike the 
Schoolmen, the mercantilist writers were rationalists, they were 
firm believers in the power of reason. They did not believe in tradi- 
tion, in traditional institutions and organizations. The unrest of 
the great age of the Renaissance and the quest for the great riches 
which were to be had by adventure, by great overseas trade, by 
organization and planning find here full expression. One country 
sees the great riches accumulated by others and wants to get them. 
Things are moving fast and everyone is unwilling to be outdis- 
tanced by the others. The idea of moderation which permeated the 
whole thinking of the Schoolmen was entirely replaced by its op- 
posite the quest for riches. 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

The mercantilists shared with the Schoolmen the conception of 
organization of production, but the Schoolmen had in mind the 
traditional corporate organization of small organic entities, while 
the mercantilists envisaged state organization by new institutions 
created for the purpose. The state is the center of economic power 
and control, and its interests and regards should be predominant. 
The scholastic doctrine centered around the conception of the 
local government and local autonomy, while the mercantilist doc- 
trine moved along the lines of centralism. It is really the doctrine of 
absolute monarchy and the newly developed national state. 

The medieval doctrine was universal; the mercantilist doctrine 
was national. The splitting of the Catholic Church into national 
churches had a full counterpart in economics. Nicolo Machiavelli 
can be regarded as the best early representative of the whole trend 
of ideas. This trend was toward a small nationalism, i.e., national- 
ism on a small scale but with a definite aggressive taint. In a way 
Voltaire's dictum: "It is clear that one country cannot gain without 
another losing,"* is the motto of the mercantilist writers. 

The Schoolmen believed in international harmony and the 
brotherhood of men; not so the mercantilists, who saw the national 
conflicts of interest as the background of economics. The scholastic 
doctrine was general and abstract, based on deduction from a few 
generalities, while the mercantilist doctrine was descriptive and 
immensely practical. Yet mercantilism was really a kind of gen- 
eralization on specific policies and institutions. It had few general 
truths to profess, and its theoretical edifice was poor and insuffi- 
cient. Its merit consists really in asking questions rather than in 
answering them. Mercantilist writers were primarily concerned 
with description and analysis of existing or proposed institutions 
and with collecting facts. In this period falls the school of "Political 



4 In his article "Patrie" in the Dictionnairc philosophique (1764). 

123 



DEVELOPMENT OF ECONOMIC DOCTRINES 

Arithmetik" in England with its emphasis on statistics and demog- 
raphy. 

In contrast to the Schoolmen, who believed in essential sterility 
and barrenness of money, the mercantilist writers were fascinated 
by the stream of precious metals and by the great fertilizing effect 
of money. Money for them was not merely a medium of exchange 
but the means to full production and full employment, the main 
source of wealth and power of the state. Shortage of money was re- 
garded as the main cause of poverty, unemployment, and general 
backwardness. John Law's speculations on money and credit are the 
best illustration of that current of thought. But this emphasis on 
money should not be regarded as mere bias and ignorance. It was 
an expression of a real need for money arising out of the transition 
from a natural to a money economy and the requirements of young 
territorial states which wefe organizing their administration and 
their armies. 

Money can be acquired primarily by the development of foreign 
trade. Its advantages in the new age were obvious and overwhelm- 
ing. It brought not only wealth but the organization of new terri- 
tories, giving scope for full development of maritime power. "Eng- 
land Treasure by Foreign Trade, or the Balance by Foreign Trade 
is the Rule of Our Treasure" (1664) this title of Thomas Mun's 
work best expresses the main preoccupation of the mercantilist 
writers. The balance of trade is for them the pivot of the whole 
system, because by an active balance of trade a country increases its 
stock of money and its productive power. This idea has a national- 
istic color and is based on the conviction that the volume of trade is 
limited, so that when one nation increases its share the shares of 
other nations are lowered. 

The mercantilist writers defend the producers and merchants, 
not the consumers, as the liberal school later did. They disregard 
the consumers* interests and identify the interests of producers 

124 



DEVELOPMENT OF ECONOMIC DOCTRINES 

with that of the country. Spending is regarded as the source of 
wealth and progress; saving does not find that praise which will 
be encountered in the writings of the liberal school. More expendi- 
ture is said to bring more income; extravagance and luxury are en- 
couraged; and a program of magnificent buildings and public 
works is continually planned. In a way Mandeville's thesis that a 
"private vice" may be a "public benefit" expresses the view of the 
age. 

Ideas on population center around encouragement for the 
growth of population. The danger of overpopulation does not oc- 
cur to the mercantilist writers in an age when wars, civil disease, 
and poverty wrought such havoc among the population. To in- 
crease the numbers of the population was alleged to increase power 
and wealth; thus the German mercantilist V. L. von Seckendorff 
in his work Der deutsche Ftirstenstaat (1655) writes: "The great- 
est treasure of the country consists in numbers of well-nourished 
people," and the saying of another German mercantilist, J. H. G. 
von Justi (1771), that "a State can never be overpopulated" is well 
known. A century later this statement was to be regarded as a 
strange one. 

The basic conception of "power through national wealth" was 
interpreted in a plutocratic way, wealth being taken to mean 
wealth for the monopolists and for those privileged by charters and 
exclusive rights. The conception of popular welfare was absent. 
The wage level, it was thought, must be kept low for the sake of 
the balance of trade, because this situation would favor competition 
on the market with other countries. One of the objects of the Poor 
Laws was to enable manufacturers to employ wage-earners as 
cheaply as possible, low wages being partially made good by con- 
tributions from the parishes. 

The second stage in economic doctrine, then, was the political 
stage, with economics subservient to politics. 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

The Laissez-Faire Doctrine 

The third stage of economic thought covers the period of ap- 
proximately 150 years which begins with Adam Smith's The 
Wealth of Nations (1776). Its most outstanding early representa- 
tives are Adam Smith and David Ricardo. Its central idea is wealth 
for its own sake as expressed in the rule of maximization of net 
profit. 

The physiocratic idea that only the net product (produit net) 
(from agriculture) counts as a source of the wealth of nations and 
as a vehicle of progress develops into a similar conception that the 
source of wealth and progress is net income, including net profits, 
interest, and rent, while wages serve only for the reproduction of 
the human agents of production. The best and most frank expres- 
sion of this idea is to be found in Ricardo's Principles (Book 2, 
Chap. XXVI), which reads as follows : 

"Provided its net real income, its rent and profits be the same, 
it is of no importance whether the nation consists of ten or twelve 
millions of inhabitants. Its power of supporting fleets and armies, 
and all species of unproductive labour, must be in proportion to 
its net, and not in proportion to its gross income. If five millions 
of men could produce as much food and clothing as was necessary 
for ten millions, food and clothing for five millions would be the 
net revenue. Would it be of any advantage to the country, that to 
produce this same net revenue, seven millions of men should be re- 
quired, that is to say, that seven millions should be employed to 
produce food and clothing sufficient for twelve millions? The food 
and clothing of five millions would enable us neither to add a man 
to our army and navy, nor to contribute one guinea more in taxes." 

The main emphasis was laid on the accumulation of capital by 
the saving of net profits (interest and rents). Capital is the ruler 
and the benefactor of society. It brings more employment and 

126 



DEVELOPMENT OF ECONOMIC DOCTRINES 

higher efficiency, promoting the division of labor and a higher 
standard of living. The road to prosperity leads therefore through 
maximum savings of maximum profits. Adam Smith in The 
Wealth of Nations (Book IV, Chap. 2) writes: "The industry of 
the society can augment only in proportion as its capital augments, 
and its capital only in proportion to what can be gradually saved 
out of its revenue." And elsewhere (Book II, Chap. 3) : "By what 
a frugal man annually saves, he not only affords maintenance to 
an additional number of productive hands, for that or the ensuing 
year, but, like the founder of a public workshouse, he establishes, 
as it were, a perpetual fund for the maintenance of an equal num- 
ber in all times to come. . . . The frugal is the public bene- 
factor." 

The economic theory oE that age is the theory of profit, saving, 
and capital. Liberal thought is the doctrine of self-interest which 
is in providential harmony with the interests of the society. "By 
preferring the support of domestic to that of foreign industry, he 
[the enterpreneur] intends only his own security; and by direct- 
ing that industry in such a manner as its produce may be of the 
greatest value, he intends only his own gain, and he is in this, as 
in many other cases, led by an invisible hand to promote an end 
which was no part of his intention. By pursuing his own interest 
he frequently promotes that of the society more effectually than 
when he really intends to promote it." The glorification of self- 
interest finds its highest expression in Malthus' doctrine, which 
condemns social services as harmful to the society. To Malthus 
self-interest is the will of God: "He has enjoined every man to 
pursue as his primary object his own safety and happiness and the 
safety and happiness of those immediately connected with him, 
and it is highly instructive to observe, that in proportion as the 
sphere contracts and the power of giving effectual assistance in- 
creases, the desire increases at the same time. ... By this wise pro- 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

vision the most ignorant are led to promote the general happiness, 
an end which they would totally fail to attain if the moving prin- 
ciple of conduct had been benevolence." 5 

Seventy years later, writing in the same climate of thought, 
Stanley Jevons describes the subject-matter of his work as "the 
mechanics of utility and self-interest." 6 And the laissez-faire doc- 
trine ends in the attempts of the psychological and mathematical 
school to establish an exact calculus of pleasure and pain for the 
individual: "Pleasure and pain are undoubtedly the ultimate ob- 
jects of the Calculus of Economics. . . ."In other words, to "maxi- 
mise pleasure is the problem of Economics," writes Jevons. 

The glorification of natural impulses turns into a glorification 
of liberty and the belief that liberty is the practical, almost magi- 
cal, answer to all social problems, however difficult they may be. 
The physiocrats, and after them the classical school, discovered 
the existence of a "natural order" (prdre nature!) of society gov- 
erned by an "Invisible Hand" and based on the rights to liberty, 
self-interest, and property. Restraint, compulsion, or controls are 
unnatural, being a violation of these natural rights and opposed 
to the eternal economic laws based on these principles. 7 

The eternal laws of economics are market laws which can be 
discovered by pure analysis on the basis of some few concepts 
properly understood and handled. Pure theory of value and prices, 
pure theory of wages and profits, pure theory of capital and inter- 
est are the lines of investigation into the unchanging mechanism 
of the market economy based on the eternal principles of liberty, 
self-interest, and property. 

Every one of the factors of production receives "the natural rec- 



5 An Essay on the Principle of Population, seventh edition. London, 1872. 

6 Theory of Political Economy, Introduction. 

7 The same line of thought is still defended today in Professor Hayek's Road to 
Serfdom (1944). 

128 



DEVELOPMENT OF ECONOMIC DOCTRINES 

ompense," the natural reward due to it according to its contribu- 
tion to the product. The laws of distribution are not social or insti- 
tutional or historical laws, they are natural laws similar to the laws 
of the physical world. 

The "Invisible Hand" which rules the economic world is the 
market mechanism. It keeps demand and supply in equilibrium, 
and in the long run equilibrates the production and consumption 
of various goods, ensuring the optimum size of different indus- 
tries and employments. The governing factor is market price, 
which is in short-term equilibrium when supply is equal to de- 
mand, and in long-term equilibrium when the market price equals 
cost price (natural price), which is another way of saying that all 
marginal returns tend to be equal. To discover the position of equi- 
librium and to formulate the laws ol a static and automatic econ- 
omy was thought to be the main task of economic theory. And 
economic theory finally turned into a theory of equilibrium in 
close analogy to a mechanistic conception. Small changes were in- 
vestigated, and the movements of margins were related to move- 
ments of prices and returns on the assumption of optimum satis- 
faction of consumers and optimum profits of producers, while the 
greater changes related to income levels were neglected. 

The functional, not the structural, side was the object of study, 
and on the functional side one aspect was in the foreground, the 
theory of value. 

Economics in that age was primarily a theory of value; it was 
conceived as price-economics. The objects of its study were pro- 
duction and distribution of values, the problems of wages, interest, 
rents, and profits being treated as the problems of the prices of la- 
bor, capital, land, and enterprise; the problem of money and 
credit as the problem of circulation of values; the problem of the 
economic cycle as the problem of fluctuation or disturbance in 
the structure and circuit of values. All problems were stated in re- 

I2 9 



DEVELOPMENT OF ECONOMIC DOCTRINES 

lation to price; everything was treated as dependent solely on 
prices, not on income levels. Thus the theory of value was the 
foundation-stone of the whole edifice of economics. 

It may be said that the economists of that era consciously or un- 
consciously adopted the attitude of businessmen striving for profits 
and markets, for the accumulation of capital and wealth by means 
of free pricing. The objective of businessmen was money-making; 
this they regarded as the essence of economic life. It is natural 
that economists should have made the process of money-making 
through free pricing the main subject of their study. As pricing 
was the principal weapon in the struggle for profits and markets, 
the problem of pricing in all its manifold aspects attracted the 
main attention of students of economics. 

The nation as a whole did not participate in this struggle so long 
as national aims, objectives, and policies could only vaguely be 
seen and defined. In economic life the individual was presumably 
the ruler, and all resources were at his command, while group 
actions, institutions, and aggregates were treated essentially as 
noneconomic forces, as disturbances of the circuit of values. 

It is not surprising that the activities of trade unions, or of state 
regulations, were treated as a form of political or economic power 
which deformed the process of natural pricing, and the most strik- 
ing attitude in this respect may be found in Boehm-Bawerk's study 
Control or Economic Law (Mac/it oder oJ^onomisches Gesctz)? 
The change of structure was not acknowledged; the structural 
pattern of economic forces was either overlooked or reasoned away 
as nonexistent or as belonging, not to economics, but to sociology. 
Collective bodies, groups, institutions of national economy were 
dissolved into their atoms, being regarded as collections of indi- 
viduals or abstract aggregates. 

There are many variations and shades of this body of doctrine re- 

8 Translated by I. R. Mcz. Eugene, Ore., 1931. 

130 



DEVELOPMENT OF ECONOMIC DOCTRINES 

lated to the actual practice and policy of the period. It was not of 
course the only doctrine, but it was the ruling doctrine of the age. 
The doctrine itself has undergone a substantial transformation in 
its theoretical formulation. The classical school with its objective 
theory of value was succeeded by the psychological and mathemati- 
cal school with its subjective theory of value and finally by the neo- 
classical school (Marshall), which combines the two versions, 
being really a transition between the third and fourth stage. Bui 
the main thread was maintained in these various schools the com- 
mercial version of economics suited to the needs of the commercial 
society. 

Neosocialism 

The ruling doctrine of our age in European countries can, I 
think, best he described as socialism, and it exists in two basic 
versions; an Eastern, strongly orthodox, Marxian version for the 
forcible and energetic development of backward countries through 
very intensive capital expansion and stringent command of all 
resources; the other, the Western doctrine, for the full use of pro- 
ductive resources for the benefit of the community. The emphasis 
in the Eastern version is on capital development at the cost of 
standards of living to bridge the widening gap between low- and 
high-income countries; that in the Western version is on full em- 
ployment and the raising of the standard of living. 

The dilution of socialism into neosocialism is strictly related to 
the country's economic standard. Low-income countries have a 
very strong dose of socialism, high-income countries a very weak 
one. Accordingly, countries which now occupy a medium posi- 
tion between low- and high income levels, such as Great Britain, 
have also a medium dilution of socialism. I would venture to de- 
scribe socialism in the Western version, as seen for instance in 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

British contemporary trends of thought, as neosocialism, in the 
following summary portrait: 

The central idea of the Western version is planning. A national 
economy must be subjected to planning, i.e., to an over-all control 
of national resources to be utilized as a whole and in the interest 
of the community. 

The idea of planning is closely bound up, not only with the in- 
creasing moral and political cohesion of the nation in modern 
times, but also with changes in the structure of national economy, 
in technology, defense, and the pattern of international relations. 
The speed of technical progress, monopolization, and concen- 
tration, the ever growing field of scientific resources, political 
emergency, the demand for social security and full employment 
all these forces contribute to the drive towards planning. The 
widening gap between potential and actual income which has 
been observed in the period between the two wars and the fear of 
its return in still more acute forms play a great part in the drive 
towards planning. The full utilization of the nation's resources is 
a main preoccupation, and since under a laissez-faire system full 
use of these resources is uncertain, this aim is one of the basic 
arguments for adopting the technique of planning. 

The ambition of economists and statesmen is therefore to de- 
vise methods of planning with a minimum of controls and with 
minimum cost to the society as a whole, using especially controls 
designed to prevent the waste of national resources. Public advice, 
guidance, example, inducement, co-operation are preferred to com- 
pulsion and prohibition. The controls are brought into operation 
principally where an evident and appreciable gap occurs between 
social and private costs, between potential and actual income, be- 
tween the national interest and private interest. 

An attempt is made to bring the private interest more and more 
into harmony with the interest of the nation as a whole, and to 

132 



DEVELOPMENT OF ECONOMIC DOCTRINES 

think in terms of the whole, seeking to subordinate the parts to 
the requirements of the whole. Over-all agencies are established 
which are designed to view every economic issue in terms of the 
cost accruing to the community as a whole, that is, not in terms 
of financial expenditure (transfer expenditure), but in terms of 
real expenditure to the whole community, or in other words, in 
terms of employment, productivity, and welfare. 

The fullest and best utilization of the national resources is the 
general criterion of all economic institutions and arrangements. 
The monetary system, the flow of savings and investment, the bal- 
ance of trade, the distribution of income, the movement of prices 
and wages, the budget all are subjected to the test of whether 
chey help to achieve the fullest and best utilization of national re- 
sources. Responsibility for the fullest and best utilization of re- 
sources rests primarily with the public authorities, and the mecha- 
nism to insure it is called planning. Until full employment is 
reached, the first criterion is rise in employment; thereafter, rise 
in productivity. The best expression of this general test is found 
in the concept of national income in real terms, made up of goods 
and services, including public services. Everything is subjected to 
the general test: Does it help to increase the national income in 
terms of welfare, employment, and efficiency? 

In this system the self-interest of the economic man is not glori- 
fied as in former times. It still has a useful function to perform, 
but as a motive it must be supplemented by a new motive, that of 
making the maximum contribution to the national income. A new 
form of competition which is now coming to the fore, group com- 
petition, as seen in savings campaigns or in wartime production 
drives, may be as powerful a stimulus towards improvement as was 
self-interest in the old pattern. 

Accordingly, it is argued that industries are to be divided into 
three groups: 

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DEVELOPMENT OF ECONOMIC DOCTRINES 

The first group of basic industries should be socialized, but only 
so far as the institution of national ownership in a given industry 
proves superior to that of private property. 

The second group should be privately owned, but under control 
so far as controls are necessary for achieving nationally important 
objectives. 

The third group of industries of minor importance may be left 
privately owned and altogether free. 

All arrangements in this respect are a mere question of com- 
parative advantage. The division into these three groups must be 
kept fluid, depending on changing conditions. The scope of so- 
cialization must be strictly related to the question of monopoly, 
capital investment, and higher productivity of both institutions, 
and the scope and the intensity of controls are strictly subordinate 
to the scope of national objectives. 

But industry, although under private ownership, is not merely 
a private but a national asset, and should therefore be used for the 
common good, especially as regards its full utilization and highest 
productivity. The idea of planning requires a reformulation of 
property rights, a new ethos of ownership, and this is actually in 
process of formation. Private property is no longer the invulner- 
able sacred right of Roman law; it is becoming once more, as in 
medieval thought, ius procurandi et dispcnsandi (the right of get- 
ting and spending) instead of ius utendi, fruendi, ac abutendi (the 
right of using, enjoying, and abusing). New forms of amphibian 
property, property under public control, are coming into existence. 

The concept of national income applied as a general test has 
the most revolutionary effects in relation to an economic approach. 
From it follows the idea of national waste, which embraces ele- 
ments never hitherto regarded as waste, for instance, waste in pop- 
ulation (through premature death or sickness), in undereducation, 
in undernourishment. It also leads to the distinction between in- 

134 



DEVELOPMENT OF ECONOMIC DOCTRINES 

come-crcating and other expenditure. The expansion of public 
services, especially of social, educational, or research services, or of 
public investment, is in many cases equivalent to an expansion of 
national income. The line of demarcation between national ex- 
penditure in real terms and national income is dropped; they are 
only two sides of the same thing. More expenditure in real terms 
is equivalent to more income in real terms, and vice versa. All 
that matters is that the expenditure shall be of the right kind, 
namely that it shall help to achieve the maximum output of the 
community. 

The limiting factors in achieving the maximum income are only 
national resources in size and pattern (composition in kind), capi- 
tal and human resources as well as the balance of payment, i.e., 
resources which can be supplemented by way of export, credit, and 
investment from outside. Therefore first consideration must be 
paid to those resources which are at a minimum and to the removal 
of all the bottlenecks which are a hindrance to full employment 
and full productivity. The most important bottlenecks are of 
course those in the necessary imports, such as food and raw materi- 
als. 

It is exactly at this point that socialism penetrates the field of in- 
ternational relations, demanding extension beyond the national 
state. 

After Socialism What? 

Probably some of the noblest inspirations of mankind are cen- 
tered around what is called socialism. But there is much wishful 
thinking in socialism which may bring about its downfall even 
more quickly than economic liberalism fell. Liberalism proved un- 
workable because it assumed as real what was only hypothetical. 
It believed in an economic man, in the inherent justice of free 

135 



DEVELOPMENT .OF ECONOMIC DOCTRINES 

bargaining between capital and labor, in the automatic adjustment 
of economic forces. 

The assumptions of socialism are also to a great extent hypo- 
thetical. The social man assumed by socialism does not yet exist 
in reality, any more than the economic man existed. The social 
man is a man moved by the national interest, who is willing to 
make sacrifices for the community in his work and leisure when- 
ever the community shall ask for it. If less spending on consumers' 
goods is required, the social man will act accordingly, putting away 
greater savings. If greater productivity is required, he will work 
harder or longer. Socialism requires for its smooth working the 
real operation of a national-interest motive as a general incentive, 
besides the old incentives to a great extent replaced or diminished. 
The old incentives, based mostly on fear and want, above all on 
fear of unemployment, disappear in a fully employed welfare 
economy. And positive incentives (the carrot) are not always 
strong enough to replace the stick. The establishment of mini- 
mum wage rates, which become the rates of the trade, the tend- 
ency to peg wages and prices, together with excessive taxation, pro- 
duce a certain sluggish atmosphere, especially in countries with a 
traditional psychology and a traditional standard of living. 

The problem of economic incentives in a planned economy has 
assumed dimensions never dreamed of before. The liberal econo- 
mist rarely , investigated that problem, which was regarded as 
largely nonexistent. Of course a man had a strong incentive to 
"get on" in his work, because otherwise he would have to "get 
out," and outside the gates there were plenty of men waiting for 
his job. But as the "stick" is being removed and the "carrot" is 
being offered more and more liberally in social and welfare serv- 
ices, the problem of incentives comes to the forefront. 

The educational work in bringing home to the worker the need 
for higher productivity and close co-operation with management, 

136 



DEVELOPMENT OF ECONOMIC DOCTRINES 

the institution of joint production councils and other forms of joint 
consultation, the change over to piecework, new ways of super- 
vision and foremanship and new ways of discipline through work- 
men's representatives may bring a solution to the problem of in- 
centives. But no one can contend that this problem has already been 
solved and that the socialist economy has resolved its contradic- 
tion, the contradiction of developing collective institutions under 
individual psychology. There is no doubt that a certain amount of 
altruism, i.e., the operation of national interest as an incentive, is 
needed to make free socialism work in practice. 

Another big problem not yet solved is the status and role of the 
trade unions in a neosocialist economy. Their bargaining power 
is being enormously strengthened by full employment and by ac- 
cession to power. Indeed under socialism they almost reach the 
highest peak in their power and status. But that raises great issues. 
Will this rise in status and power be accompanied by a sense of 
responsibility and self -discipline? And will the trade unions be 
able to sell their policy, if unpopular, to their members? 

The problem is not so much whether trade unions will state the 
right policy, but whether they will be able to apply it against pas- 
sive resistance from those on whom they depend for support. 
Unions are by their nature sectional organizations for protecting 
sectional interests of their members, who regard them as their rep- 
resentatives to do their bidding. The workers would like to re- 
tain the functions of the unions as "watchdogs" of their particular 
interests both in the offensive and defensive sphere. But the field 
of both offensive and defensive action in a socialist economy is 
narrowing, and the unions have to accept more and more responsi- 
bility for keeping industrial peace and discipline. 

The problem arises, Can the sectional interests be turned into 
nationalist interests? or, to put the issue in a nutshell, Will trade 
unions abstain from pressing their claims for higher wages, shorter 

137 



DEVELOPMENT OF ECONOMIC DOCTRINES 

hours, or other benefits in working conditions, if these demands 
do n<ft conform with the national interest? 

"Many writers have envisaged the necessity of the reform of the 
inner organization and structure of trade unions under the impact 
of planning and full employment. Unions would have to develop 
into unions of industrial discipline seeking a rise in productivity 
and efficiency. Their membership would mean something more 
than the payment of subscriptions and the duty to join in strikes; 
it would mean active co-operation in the task of establishing so- 
cial democracy, in making free socialism work in practice. The as- 
sumption that the task of trade unions is to restrict hours of work, 
to raise wage-rates, to reduce the supply of manpower from out- 
side, and to lower the effort of the worker would have to be re- 
placed by the contrary principle that the unions must see that 
everyone does his bit to the full, making the greatest contribution 
towards the common product in accordance with the share he has 
a right to expect. The union would be a watchdog of the national 
interest as well as that of its own members. 

It is a common experience of many democratic countries that 
planning in times of emergency is relatively easy and runs 
smoothly, while planning for prosperity in peacetime encounters 
extraordinary difficulties. The reason for this is that in any schemes 
of planning for prosperity there arise from the start so many 
claims and demands from various pressure groups for economic 
benefits and advantages, which, in the atmosphere of a drive for 
prosperity, are extremely hard to refuse. And those claims often 
end in wrecking the schemes. 

There is another limitation of neosocialist planning, one re- 
siding in international relations. Full employment at fair wages 
means a substantial rise of propensity to import food, raw mate- 
rials, and other necessities and comforts. The increased imports 

138 



DEVELOPMENT OF ECONOMIC DOCTRINES 

must be paid for by exports. But the capacity to export depends 
on the propensity of other nations to import. This in turn depends 
on full employment in other countries, practising a relatively free 
international trade. But what if that assumption LOO fails in prac- 
tice? 

Many writers have contended that socialism in one country is 
just a dream, that socialism needs for its full working a firmly es- 
tablished international framework. And we can now see in the 
light of experience how far they were right. Socialist planning 
needs a high degree of international unity in the supply of neces- 
sities of life, a federation or confederation of states with a concerted 
policy in regard to money, credit, investment, and employment. 
By a concerted policy we mean such a policy as will raise the pro- 
pensity to import more or less in a harmonious measure. 

Last but not least we come to another unresolved paradox which 
the new nationalized industries have revealed quite clearly, 
namely, to the human factor in industrial relations. Socialism was 
a protest, not only against the material exploitation of the worker, 
with his chronic anxiety of unemployment and destitution, but 
also against the disregard of human values in industrial produc- 
tion, against the subjection of man to the dictates of profits. The 
personality of the worker, his satisfaction, dignity, self-esteem, his 
mental and spiritual balance were often crushed by the imper- 
sonal industrial machine. But the first steps of socialist action 
prove that there is no remedy in this respect in the nationalized 
industries, where often strict bureaucratization takes on a specially 
discouraging aspect. Common experience seems to prove that na- 
tionalization makes little difference to the status of the worker, or 
to his contentment. The nationalized industries appear to be 
susceptible to grievances to no small extent. 

There is a certain weakness in nationalized industries, in their 

139 



DEVELOPMENT OF ECONOMIC DOCTRINES 

tendency toward centralization and bureaucratization, which has 
not been checked and counteracted. Here again only experience 
can show whether those tendencies are inherent in the system or 
whether they can be removed by certain compensatory institutions. 

But there is certain justification for the growing belief that the 
coming age will be the age of a psychological rather than a purely 
economic revolution, and that more and more emphasis will be 
laid upon the psychological aspect of human contentment and 
happiness. When the basic economic needs of families are being 
more and more satisfied, yet the people are frustrated and dis- 
contented, it is clear that something must be done in purely human 
terms to remedy the position. There is a definite need for "hu- 
manizing" industry, for more humanism and humaneness not 
only in public but also in private corporations, for permeating the 
whole industrial machine with an atmosphere of friendliness and 
ease, and for better understanding of the needs, desires, and aspira- 
tions of the larger masses. 

Thus we see that full socialism is so far not a fact but an aspira- 
tion. Whether it can withstand the storms of our age has not yet 
been tested. There is a great deal of wishful thinking and illusion 
about its working, its possibilities and realities, which make the 
position still worse. Aspirations and desires, ideas and ideals are 
mistaken for realities, and the general assumption is made that it 
is enough to put the issues clearly before people in order to make 
them accept what is best for the common good. A new doctrine 
of social harmony is preached and developed, and the socialists 
forget that the theory of socialism grew up as the theory of con- 
flicts. Life is harmony only on its highest plane; on its lower planes 
it is all conflict, with more conflicts within a conflict. It is really a 
tangle of conflicts; that is why it is so difficult to understand and 
handle. Therefore no logical system can do it justice. No "ism," 

140 



DEVELOPMENT OF ECONOMIC DOCTRINES 

even the most noble and the most realistic, can embrace the whole 
stream of life, which goes on breaking out in all directions, trans- 
forming, changing, and rising. 

The "isms" can express the main aspirations of a given age, they 
can be its guiding light for a while, but they can hardly organize 
all the creative forces, which are far more than any "ism" can em- 
brace. 



141 



IV 
THE DOCTRINE OF PLANNING 



Economic Study on Three Planes 



Economic study can be conducted on three planes, or from three 
points of view: 

1. That of an individual striving for wealth. 

2. That of a group, such as a trust, ring, cartel, "community of 
interest," trade union, or other trade association, striving for 
wealth and security on behalf of the whole group. 

3. That of society as a whole, as represented by the state, which 
has its own objectives, these being more and more oriented 
towards obtaining the highest real national income. 

The three points of view cover more or less three sectors : 

1. The competitive sector (or market system) based on the auto- 
matic working of the market. This sector also covers the imperfect 
competition of single firms, so long as they appear on the market 
as separate entities. 

2. The sector of monopolistic formations or group activities rep- 
resented by the network of monopolistic organizations which 
make their own long-term schemes, sometimes of a restrictive na- 
ture, sometimes of expansion and betterment, but always on be- 
half of sectional interests. This sector covers only group regulations 

142 



THE DOCTRINE OF PLANNING 

or group arrangements, and is not equivalent to monopoly as 
such (monopolistic positions). Alfred Marshall, who dealt with 
the theory of monopolies, explained 1 why he left out the group 
activities of trusts or ''communities of interest," regarding them 
as a "superstructure" on the first sector. Monopoly can appear in 
all sectors. 

3. Finally, the sector of planning represented by the general 
framework as expressed in the national objectives and the controls 
imposed to achieve those objectives. 

There is no sharp line of division between the three sectors, 
which "shade into one another by continuous gradation," to use 
the phrase of Marshall, to whom economists are greatly indebted 
inter alia for his exposition of the working of "the great principle 
of Continuity" and gradation. 2 The three sectors do not work 
independently; one overlaps the other. They are three layers, the 
highest trying to overrule those below it, and all of them in con- 
flict with one another. The sectors assume varying degrees of im- 
portance at different stages of historical development and in dif- 
ferent countries. 

In the first sector the main forces are competition, whether per- 
fect or imperfect, and the individual's desire for wealth; and eco- 
nomic phenomena are studied under these basic assumptions. It 
is the field of competition between individuals, in which the chief 
actor is the individual. 

In the second sector the main force is the search for wealth and 
security on the part of the whole group and through the group- 
action of sectional interests. Its main tendency is to counteract 
forces emanating from the first or third sector (that of competition 
and individual desire for wealth or of public controls) by activities 



1 In his preface to the eighth edition of his Principles of Economics. 

2 "The motto: Natura non jactt saltum is specially appropriate to a volume on 
Economic Foundation" Ibid. 



THE DOCTRINE OF PLANNING 

directed at strengthening or stabilizing the favorable positions of 
certain groups and safeguarding their long-term interests. It is the 
field of co-operation within the group and of rivalries among 
groups. Here the main actor is the group. 

In the third sector the main driving force becomes more and 
more the maximization of national income, and its basic assump- 
tion is that there is some authority which has a controlling influ- 
ence or power of advice and guidance over the whole field of na- 
tional economy. It is the field of national solidarity in internal re- 
lations and of state rivalry in external relations. Here the main ac- 
tor is the state, which seeks to overcome all hindrances emanating 
from the first and second sector. 

The classical economists concentrated their study on the first sec- 
tor, basing it on the assumption of competition and individual de- 
sire for wealth. As John Stuart Mill put it in his System of Logic: 

"Political Economy concerns itself only with such social states 
as take place in consequence of the pursuit of wealth, except those 
which may be regarded as perpetually antagonising principles to 
the desire of wealth, namely aversion to labour, and desire of the 
present enjoyment of costly indulgences. Political Economy con- 
siders mankind as occupied solely in acquiring and consuming 
wealth; and aims at showing what is the course of action if man- 
kind, living in a state of society, would be impelled, if that motive, 
except in the degree in which it is checked by the two perpetual 
counter-motives above adverted to, were absolute ruler of all their 
actions." 

The theory of group rivalries for wealth and its most important 
chapter, the theory of class struggle, belong to economic study in 
the second sector. The individual's desire for wealth on the part of 
the whole group is tuned down by the collective desire for wealth, 
although the most powerful members of the group assume a lead- 
ing part in defining the interests of the whole, shaping its policy 

144 



THE DOCTRINE OF PLANNING 

according to their own individual interests. In any case, what is 
sought is not the optimum of particular individuals but the long- 
term optimum of the whole group. 

Marx, for instance, who neglected the first sector, concentrated 
his whole interest in the field of group livalries, regarding the 
whole economy as the manifestation of the class struggle. For him 
the capitalist or worker appeared on the market primarily as repre- 
sentatives of their respective classes, interested in exploitation or in 
repelling the bent to exploit. For Marx the institutional arrange- 
ments in a society were such that the capitalist and the worker had 
to assume this role of exploiter and object of exploitation, willy 
nilly, being entangled in the net of social economic institutions, 
which forced them to behave in a special way. 

The classical school did not see the class relations as embodied 
in institutions; while the Marxian school did not see the individual 
relations; but both are important for the appraisal of the economic 
forces of any society. The socialist writers have done much to bring 
into relief the institutional arrangements responsible for group 
rivalries and class relations, for the collective behavior of social 
strata molded by law, custom, statutes, or tacit consensus into cer- 
tain patterns intended to protect their own interest against the in- 
terests of other groups. But Adam Smith spoke about the tacit con- 
spiracy of the employers against the workers, and we can read 
more about it in Rodbertus, Marx, or the Webbs. 

The third sector was completely neglected both by the classical 
and socialist school. Marx analyzed the "laws of capitalistic pro- 
duction"; he refused to subject to scientific analysis something 
which does not exist and which has not developed its own laws. He 
regarded all investigations about a planned economy as premature 
and "unscientific" with good reason, but with the result that when 
his followers took over the government in Soviet Russia, they had 
little to rely upon either in methodology or in substance. They had 

145 



THE DOCTRINE OF PLANNING 

to try to find their way through the darkness completely unpre- 
pared. "Trial and error" were proclaimed as the most competent 
teachers. We agree that they are great teachers, but everybody 
knows how expensive they are. In fact very little economic theory 
has been developed in Soviet Russia, and the planning sector still 
stands as the Cinderella of economic studies. 

In the meantime the need for developing the study of this sector 
has greatly increased. We have today a number of planned econo- 
mies, with different shades and gradations, and with a variety of 
structural arrangements, beginning with full private ownership of 
the means of production and ending with complete state owner- 
ship. Great Britain stands on one border of planning, forming a 
half-planned economy with yet a predominant private industry and 
full respect for the rights of private citizens; at the other extremity 
stands Soviet Russia, a fully planned economy where the contra- 
diction between the interests of the individuals and that of society 
has been solved unilaterally by neglecting the rights of the indi- 
viduals. In the middle we have a whole range of patterns of plan- 
ning, starting with France in the West and Czechoslovakia and 
Poland in the East. Thus more than ever is a study needed which 
sets out deliberately to investigate systematically in their institu- 
tional setting the economic relations in the third sector. 

What are the assumptions made here? 

We assume firstly that the basic motive working in a planned 
economy is the maximization of real national income, i.e., that the 
community prefers a greater real income to a smaller. 

Secondly, we assume the existence of such social controls as are 
necessary to ensure this maximum national income whether these 
controls are advice, guidance, example, inducement, direct or in- 
direct control. Thus we assume that the state has developed certain 
institutions for looking after maximum national income, either 
special economic boards, or socialized trusts, or public utilities, 

146 



THE DOCTRINE OF PLANNING 

or treasury agencies, or any other agency which is concerned with 
devising means for maximization of national income in various 
fields as well as in toto. 

Planning in the sense used in this study means that the managers 
of enterprises look for guidance in their major acts of policy, not to 
the shareholders (who are concerned with maximization of their 
profits), not to the representatives of cartels, combines, and trusts 
(who are concerned with the maximization of profits of the re- 
spective groups), but to the public corporations, public hoards, or 
public trusts, which are concerned with the maximization of net 
output of the industries; and they, in turn, look for a guidance to 
the supreme planning authority concerned with the maximization 
of the output of the country as a whole. 

Paraphrasing Mill's sentence already quoted (page 144), we 
might say that the theory of a planned economy concerns itself with 
such phenomena of the social state as take place in consequence of 
the pursuit of maximum national real income, except those prin- 
ciples which may be regarded as sometime antagonistic to the 
maximum national income, namely the desire of wealth on the part 
of individual and group interests. In order to make the study realis- 
tic we must investigate the full effects of the national interest 
against the background of the two other fields, the competitive 
segment and that of monopolistic formations, the motive of maxi- 
mum national income struggling with the individuals' and groups' 
desires for wealth and hampered by them. 

There are no compartments of economic life in which the motive 
of national interest does not operate, but some compartments are 
more imbued with that motive than are others. The compartments 
in which it operates with the greatest strength are what we call stra- 
tegic factors of the economy: basic industries and public utilities, 
the field of investment in general, money and credit and foreign 
trade. The national interest may be regarded here as exercising the 



THE DOCTRINE OF PLANNING 

strongest influence. In explanation or prediction of real events, 
however, a correct allowance must be made for the degree of in- 
fluence exercised by other motives. 

The modern trend is to restrict the competitive sector, and to 
enlarge the two other sectors, the second sector being made subser- 
vient to a plan by means of public controls. The planned economy 
is characterized first of all by the development of the general social 
framework within which the two other sectors move. They are 
free to move in such directions as are consistent with the wider re- 
quirements of a plan, which is basically a plan for development 
and betterment; if not, they are overruled by the mechanism of the 
plan. 

The first two sectors have been much studied and examined, the 
free market sector having been a subject of continuous study for 
some 170 years; the monopolistic area since Marx's time, and 
especially in more recent years. Much less is known about the third 
sector, which has become an object of study only in very recent 
times; we might say in the last decade. 

The chief interest of economists has now shifted to this third 
sector, i.e., to the study of arrangements devised for the achieve- 
ment of national objectives, primarily for maximization of real 
national income, because, whatever objectives are pursued, the 
maximum output, in general, helps to achieve them. 

I do not say that the laws of competitive economy, as described 
by the classical economists, are invalidated or false in our present- 
day economy; I say only that their validity is restricted to one sector 
of national economy, which has become a relatively declining one. 
And the same is true of the laws of a monopolistic economy gov- 
erned by the institutions of group rivalries and class struggle. The 
forces of the third sector, which have come to the fore at the present 
time, are complementary to the former ones, and they are operat- 
ing in a rapidly developing field. Thus in the parallelogram of 

148 



THE DOCTRINE OF PLANNING 

economic forces the latter will have to be accounted for at a rising 
index. 

Let us assume for the sake of illustration that the ratio of the 
competitive sector in the British economy in the middle of the 
nineteenth century was 90 per cent of the total economy, i.e., that 90 
per cent of total income was produced under competitive con- 
ditions, the remaining 10 per cent under monopoly regulation, 
while a planning machinery devised for maximum total income 
was hardly existent. The index of the first sector has dropped now 
considerably, while both other sectors have developed enormously, 
especially sector No. 3. 

I must warn the reader that the sectors are not closed, concrete 
entities but must be conceived rather as abstractions, i.e., as abstract 
fields in which the forces described are in operation. In real life the 
competitive forces, the group monopolistic forces, and the forces of 
social control are constantly corrected by one another partly by con- 
flict, partly by co-operation, or by the neutrality of one sector. Any 
real economic phenomenon is the outcome of the three sets of 
forces. 

Structural Change and Survived 

It is difficult to compare different economic structures in their 
working and to pass judgment on their relative efficiency. The 
term economic structure or system is a very complex one, combin- 
ing elements of socio-economic organization, industrial technique, 
and economic motivation (the rules of conduct). Roughly speak- 
ing, the socio-economic organization of the medieval society was 
the manor, guilds, and corporations, guided by the traditional ideas 
of distributive justice, iustum pretium and iustum solarium ; that 
of mercantilist times, the manufactures in their original meaning, 
the exclusive monopolistic companies, and the state regulations, 
guided by the idea of favorable balance of trade; that of the liberal 

149 



THE DOCTRINE OF PLANNING 

epoch, free enterprise in a laissez-faire economy, which, however, 
later became more and more monopolistic; that of planned 
economy, the new amphibian forms of property centrally con- 
trolled by planning boards guided by the concept of maximization 
of national income rightly distributed. 

The technique in all these stages was different. The hand-mill 
and the water-driven corn-mill was the technical instrument of the 
Middle Ages; and advance in the manual division of labor was 
made in the early manufactures under the mercantile system. The 
first Industrial Revolution was the starting-point of the liberal 
economy; and the second Industrial Revolution of our own age, 
with its immense scope for application of scientific research and 
with its new technique of central control, is the starting point of 
the planned economy. Economic motivation in the medieval society 
was the traditional desire to cover the needs of the traditional 
standards of living of the different estates; in the mercantilist times, 
the quest for maximum power through national wealth appear^ 
in the forefront. The liberal economy was governed by the desire 
of abstract book profits; in a planned economy there appears a 
new motive beside the old ones, still undeveloped, that of the 
greatest contribution to national income. 

The changes from one structure to another are not abrupt. It is 
difficult to say at one exact time in a given country one structure 
was replaced by another. The structural changes were effected by 
the accumulation of numerous small differences in the structural 
pattern, which after a certain time presented really a complete new 
picture. The most marked differences aic to be seen rather in the 
economic thought, the forerunner and the best expression of the 
changes impending. 

Can we say then that new structure is superior to the former, in 
terms of efficiency? In a certain sense, yes, but the source of superi- 

150 



THE DOCTRINE OF PLANNING 

ority is to be found above all else in the technical progress which is 
the main driving factor of change. All the other factors, however, 
especially socio-economic organization, play their part also. All that 
we could say on the ground of historical experience is that if a 
country based on the medieval structure were competing or fight- 
ing with a mercantile country, it could not survive; and the wars 
of the eighteenth century provide many examples of the superiority 
of the mercantilist state of Prussia over her neighbors. In turn, the 
French Revolution, victorious over mercantile states, and the Pax 
Britannica were also proof that the liberal economy was for a time 
superior to that of the mercantile system. 

In judging the relative efficiency of various systems we should in 
theory compare them at their best, in their most efficient pattern at 
the creative stage; but in real life the alternative is in reality not be- 
tween systems at their best, but between a decadent, worn-out sys- 
tem and a new system in its creative stage. The medieval guild 
society in France or England in the fifteenth century, with its 
monopolistic practices and exclusive rights, was not so efficient as it 
had been at its height in the thirteenth century or thereabouts. The 
mercantile system, creative and dynamic in its best stage, was in 
Western Europe ossified and decadent in the eighteenth century, 
and had become an obstacle to progress and development. The 
liberal economy in the period between the two World Wars, with 
its high level of unemployment and its large quantity of unutilized 
equipment, with monopolistic practices on the part of both capital 
and labor and restrictive schemes of production, showed a high de- 
gree of national waste unknown in the nineteenth century. 

The main problem which confronts the nations in our age is 
this: Is a planned economy more efficient than a liberal economy in 
its present shape? For this is the decisive point in the historical ap- 
proach to the problem of national survival. Certainly in one regard 



THE DOCTRINE OF PLANNING 

society resembles an organism. The evolutionary mechanism, or 
the principle of selection, works also in the realm of societies, but 
in its own way. 

A social pattern is developed by the interplay (i) between man 
and society, (2) between different types of society in the community 
of nations, and (3) between society and environmental conditions, 
while national selection takes place first of all in the struggle for 
survival in the society of nations as a whole. The evolutionary 
mechanism of societies works, not through the power of repro- 
duction, but primarily through man's creative powers combined 
with the struggle for survival in the frame of international life. 
The selective advantage or disadvantage of any social pattern in 
the ensemble of international life determines the natural selection 
of economic organizations. 

If we accept the argument that a planned economy is more 
efficient and productive than the present liberal-monopolistic 
economy from the point of view both of defense and of prosperity 
(national output), the death sentence would be passed on the latter, 
since a nation adhering to it would have a selective disadvantage in 
the interplay of international forces. 

The superiority of the technique of planning over a liberal- 
monopolistic economy is in one respect undoubted. It can achieve 
full utilization of the national resources, including manpower, and 
this achievement means a higher national income. The question 
whether planning can achieve higher industrial productivity per 
head was until lately mostly answered in the negative. But in war 
planning in the United States and Great Britain and peacetime 
planning in some European countries after the war, we have seen 
some instances of a considerable rise of efficiency. We can now 
prove by analysis that planning does not necessarily mean a drop in 
efficiency. The value of initiative and enterprise is undoubtedly 

152 



THE DOCTRINE OF PLANNING 

very great, but it can be increased by supplementing it with public 
initiative and enterprise, by the technique of mass investment and 
bulk purchases, by the pooling of scientific and technical knowl- 
edge, by the dovetailing of industries and the co-ordination of their 
efforts, and by the leadership, guidance, and advice of public 
authorities. 

It would of course be wrong to believe that the technique of plan- 
ning is all that matters; that to secure the effective working of the 
technique it is enough to find the right way of development and 
progress. If any one country could choose between planning and 
additional raw materials, or an additional stream of technical in- 
ventions and discoveries, or additional safeguards for internal sta- 
bility and national security, or additional capital formation, or an 
additional rise in education and skill, or better commercial agree- 
ments and larger overseas markets, the answer might be in abey- 
ance, and probably in the end the choice would fall on raw ma- 
terials, capital, technique, and market. 

The fact remains, however, that the technique of planning is 
more needed whenever the drawbacks of a national economy are 
greater, compared with those of another economy, so that an effort 
must be made to overcome them by conscious readjustment. The 
technique of planning is less needed in countries that have a great 
industrial superiority over low-income countries with an inade- 
quate industrial efficiency. The technique of planning which serves 
the low-income classes handicapped in the conditions of laissez- 
faire in domestic economy serves also the low-income nations 
which are handicapped in the laissez-faire international system. 
The technique of planning is in reality only the completion of the 
modern industrial technique. It is involved in the second Industrial 
Revolution, just as was the laissez-faire system in the first Indus- 
trial Revolution. 

153 



THE DOCTRINE OF PLANNING 

The Organic and Moral Elements in 
the National Economy 

The age of planning stresses the part played by the clement of 
creation, i.e., of a new and purposeful shaping of national 
economy. But it would be wrong to regard national economy merely 
as "made," as something resembling a building, or, still worse, a 
machine. National economy is a living structure like man himself, 
because it is composed of living beings. There is no inconsistency 
between stressing the purposeful part in national economy intro- 
duced by planning and the organic part imposed by the texture of 
social life. We should never forget the two sides of social life which 
correspond to the two sides of man's personality. As Bcrgson" has 
put it: "The essence of man lies in his power of creation, both ma- 
terial and moral. Materially he is a maker of things; morally, a 
maker of himself. Homo jaber is therefore our definition of man." 

Man is created, but he is also made by himself; and the same 
statement applies to a society, which to a certain extent is a product 
of its own making, but is also the product of organic creation. 
National economy is something more than an aggregate of 
quantities of a number of institutions and activities packed to- 
gether and surrounded by a customs boundary. Economy was 
rightly called "economic life," since its working and progress is 
really due to our labor and exertions and constitutes part of our 
life. Its progress is part of our own development as well as the re- 
sult of change in our environment. 

A human society is an organic unity, since it is composed of men, 
women, and children with their biological characteristics. It ex- 
hibits a living design, although this design changes with historic 
periods. It molds the individual born in the society or accepted into 

"* Hcnn Rergson, La Pensee et le Motwant. 

154 



THE DOCTRINE OF PLANNING 

it according to a certain pattern. It is a functional unity, since its 
parts are adapted to the whole. The interdependence between the 
parts is not mechanical, but organic in the sense of mutual qualita- 
tive interplay, the changes in one sector being accompanied by 
simultaneous changes in other sectors. These changes are sup- 
ported by one another and have a wide functional character they 
are a correlated process with parallel phenomena. 

When we study changes in the monetary and financial structure, 
or in foreign trade, or in the price and wage structure, or n indus- 
trial organization, the supervening changes are not the product of 
a single cause, but are the result of organic growth, mutation, and 
transformation. 

National economy displays self-regulating and self-regenerating 
characteristics, a dynamic equilibrium tending to counteract any 
misdirection in the flow of human energy, unlike machines, which 
show a static self-repeating equilibrium. It adapts itself constantly 
to the environment, to the land, water, and natural resources, as 
well as to international life. It shows growth and evolution, being 
subjected to the test of survival and development in the great ex- 
periment of Nature. 

In a way modern developments strengthen the organic elements 
in human society. The integration ot a national economy is ever 
increasing. Many factors are responsible for this, some of them 
technical, some of them political and moral in character. 

The enormous increase of means of communication in a wider 
sense, the lines of supply of power and light, banking, insurance, 
and service trades, all this gives impetus to the process of integra- 
tion. Next comes the enormous growth of functional units of pro- 
duction, of large-scale factories and plants which bring together 
hundreds of thousands of men in their work, integrating them into 
larger structures. The enormous development of social control, of 

155 



THE DOCTRINE OF PLANNING 

control of the mind of the people by radio, books, newspap 
movies, phonographs, news services, is another very important f 
tor of integration. 

Political and psychological changes have also to be taken ii 
account. Wars and emergencies bring the people of a country clo 
together, and the emergence of social and political man, who 
part substitutes for the pleasure of exclusive possession of goods i 
pleasure of participation in national life, contributes also to i 
same development. 

But human society contains not only mechanical and organic 
also contains moral, elements. It has always been known as a mo 
body. Its bases are social valuations, moral, aesthetic, and scienti 
of fundamental importance in molding the socio-economic pattc 
and in the operation of natural selection in human societies. Sir 
society is partly a product of deliberate creation, it is to the sai 
extent a product of moral forces. These moral elements operate 
the age of planning with an ever increasing vigor. 

An organic body, a machine, a moral body, all these definitic 
of human society cover some of its aspects, being supplementa 
not contradictory, to one another. All three aspects of human sc 
ety should be kept in mind when dealing with social probler 

A scheme advocated by a planner will be an utter failure if 
contradicts the organic or moral forces of a nation. The organi: 
tion theoretically most efficient may, within a given environme 
and with the moral and mental characteristics of a given natk 
prove an utter failure. 

The Geographical Background of National Economy 

Geographical factors have hitherto been regarded as econon 
data heaven-sent and unalterable. We have never thought of 
fluencing them deliberately and taking them into account wh 

156 



THE DOCTRINE OF PLANNING 

drawing up a balance-sheet of gain and loss of our economic activi- 
ties. But the universalistic approach to national economy imposed 
by the technique of national planning reminds us that economic 
activities must be judged, not only on their own merits, but also by 
their effects on the geographical background. The geography of a 
nation may be compared to the home of an individual. The home 
influences the individual's life and work, but at the same time his 
ways of living and working react on the home and alter its pattern. 

The spatial control of investments plays an important part in 
planning, since long-term planning is conceived first ol all as ar- 
rangement in space, distribution of an area into zones of invest- 
ment. Planning has a strong geographical background. Space con- 
sciousness, particularly regional consciousness, is one of the out- 
standing features of our time. It is a paradoxical one. As space 
"shrinks," we are forced closer and closer into the melting-pot of 
world economy. But the more we are absorbed in this huge unit, 
the more anxious we are to retain our local individuality and per- 
sonality. There is an apparent but not a real contradiction in these 
two outlooks, international and local. They are really supplemen- 
tary to one another, and essential to the complete functioning of 
both international and local development. Each is a necessary 
check on the other. 

Regional consciousness consists in the belief that people living 
in a certain area belong to that area and can, in and through it, 
contribute most to the community; that man's activities must be 
related to the special features of his environment; that every area, 
with its special climatic conditions, soils, vegetation, density of 
population, industries, and occupations, has its own individuality, 
which must be fostered and developed. The emergence of regional 
consciousness has been to a great extent strengthened by the lack of 
balance and the distress in special areas brought about by indus- 
trial concentration and overcrowding. And this new regional feel- 

157 



THE DOCTRINE OF PLANNING 

ing is helping to spread the idea of planning, from which regional 
reconstruction is expected. 

Our geographical environment is constantly, though slowly, 
changing with us. We must see that it changes for the better. The 
changes can be controlled and mastered in order to bring about the 
pattern we desire so as to make an environment suitable for man to 
live and work in. 

There are five kinds of geography which together make up our 
national background, and all are influenced in some measure by 
our activities. 

T. Physical geography. On the surface this seems entirely inde- 
pendent of man. Yet it is in part a product of economic develop- 
ment. It is enough to recall here a few of the changes which may 
take place, viz., the influence of deforestation, or soil exhaustion, 
or of great drainage works to overcome climatic disadvantages, 
changes in the distribution of type and composition of soil by culti- 
vation, and changes in the deposits of fuels and minerals by mining 
and industry. 

2. Biological geography (the distribution of plants and animals). 
This type is even more influenced by our economic activities, since 
changes in this field depend largely on the cultivation and breeding 
of plants and animals in agriculture, horticulture, fisheries, and 
hunting. 

3. Human geography (the numbers, distribution, sex and age 
composition of a population, the skill, health and educational stand- 
ard of a nation). This type is the outcome of a number of factors, 
among which our economic, political, and cultural activities play 
an important part. Wars, migration, and the distribution of in- 
come are among the chief factors. We have learned to influence hu- 
man geography in many ways, and our economic activities are 
primarily judged by their influence, on population. 

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THE DOCTRINE OF PLANNING 

4. Political geography. This type includes the boundaries, struc- 
ture, and administrative divisions of the state and other public 
bodies. The fabric of our national economy is to a large extent in- 
fluenced by the requirements of defense, and by the size of the 
economy. Economic activities, on the other hand, have a direct 
bearing upon political geography, and upon political power in the 
conduct of the national economy. We must always remember this 
influence and take it into account when drawing up a balancr-shect 
of gain and loss in our economic activities. 

5. Economic geography. This type is determined by the net- 
work of roads, railways, canals, airfields, ports; the location pat- 
tern of industries; the pattern of the sizes of plants, factories, and 
farms; the location of towns and villages: and is primarily the out- 
come of investment and employment. 

Together, these five geographies constitute the geographical en- 
semble in which a nation lives. They might be called the national 
home, and they show a close network of interrelated factors. They 
are the "ground plan" for the economic activities of a nation. The 
economic activities have hitherto been dealt with separately on their 
own merits, without taking into account their influence on the 
national background. Activities in agriculture and forestry took 
place without thought of their influence on physical, biological, hu- 
man, or political geography. Industry was located without thought 
for the preservation of regional balance and without reference to 
defense requirements. Similarly, the pattern of the sizes of factories 
and plants took shape with respect only to the needs of the opti- 
mum size of single firms, and without regard to its influence on 
the welfare of the nation as a whole or on human geography. There 
was no relation between the distribution of income and health and 
nutrition standards. 

The comprehensive geographical approach to the national 

159 



THE DOCTRINE OF PLANNING 

economy tends to assess human activities, not only on their own 
merits, but also in relation to their full influence upon the com- 
posite national geography: on its beauty, its harmony, its in- 
tegrity, its comfort, and the security of all its inhabitants. 

The preservation and development of the national background 
in this new approach are no longer side-issues, but basic considera- 
tions. On the other hand, extraordinary investments needed for 
full employment provide ample opportunities for the develop- 
ment of geographical background and regional reintegration. 
Since investments for ordinary consumers' goods are of less im- 
portance in saturated, well-equipped countries, we can attempt to 
turn our geographical background into the most useful regionally 
integrated and beautiful home. We can accumulate large reserves 
in long-range assets, such as human, political, physical, or biologi- 
cal geography. 

Circular Movements 

The idea of circular movements in national economy is an old 
one which first came from the field of biological science. The idea 
was given great prominence in physiocratic thought, namely, in 
the circulation of the produit net presented in the tableau eco- 
nomique. It shows how the froduit net produced by farmers makes 
a full circle jn the process of distribution between three classes, 
coming back to the same farmers, like movement of blood from 
and to the heart. The physiocrats hailed this idea as the greatest 
discovery of their age, comparing it with only two other "dis- 
coveries": those of money and printing. 

In physiocratic thought there was another presentation of these 
circular movements in the writings of Dupont de Nemours 
(1739-1817), who says that "nothing stands alone and every- 

160 



THE DOCTRINE OF PLANNING 

thing holds together" in the realm of wealth, population, and cul- 
ture. 1 

Sismondi has suggested another circular movement between 
annual income and annual expenditure, being convinced that the 
national income of one year determines the national expenditure of 
the next year. The annual income is spent, and the expenditure 
should be always of such magnitude as to absorb the whole annual 
produce. Income flows in expenditure, and the latter flows again 
in income. 

Marx saw circular movements in the process of circulation of 
commodities. His formulas C(ommodity)-M(oney)-C(ommod- 
ity), or M-C-M are circles; however, the last formula he conceived 
as a "spiral," since money is exchanged tor commodities in order 
to get more money, from which arises a question of fundamental 
issue: from whence comes the increment of money? His formula 
of simple reproduction, where capital is simply reproduced by 
gross income, the rest of which is consumed, i* another instance of 
a perfect circle between capital and income. The formula of ex- 
tended reproduction (capital accumulation), however, is a "spiral" 
which produces "contradictions" in the process of "the capitalist 
production." 

Another instance of a circular movement is labor power-in- 
come-labor power. Labor power produces income, which by way 
of consumption is again converted into labor power. 

We see that the processes of income-expenditure, production- 
consumption, capital-income, labor power-income, commodity- 
money, investment-saving are circular movements of different 
duration intertwined and intermingled. The economic process is 



4 "From wealth springs culture; culture increases wealth; this growth of wealth 
increases population; the increase of population keeps up the value of wealth 
itself" (1770. 

161 



THE DOCTRINE OF PLANNING 

so complex just because of the main circular movements, which 
interpenetrate one another and which are in constant transforma- 
tion. Some of them have a long duration, and some of them are 
nearly simultaneous. The circle of income and expenditure is in 
its individualistic aspect a succession, in its social aspect a simul- 
taneous process; the circulation regarded from one side being in- 
come; from another, expenditure. From the point of view of na- 
tional economy as a whole, income is equivalent to expenditure and 
expenditure to income. We cannot say that national income deter- 
mines national expenditure or that national expenditure deter- 
mines national income, because these arc equivalent. We can say, 
however, that the expenditure of some people produces the income* 
of other people. 

The circular movement: production-consumption is in its in- 
dividualistic aspect a succession, but in its social aspect a simul- 
taneous process. There is very often a perfect simultaneity, as in 
the case of services. In one act goods are produced and consumed 
at the same time, e.g., health-educational or recreational services 
are consumed at the same moment that they are produced. They 
flow into income and expenditure at the same moment. We can 
count expenditure on health services as part of national income of 
the same period. 

The circular movements can be divided into two classes: circles 
and ondules with changing amplitudes and mean values, or other 
closed figures, and here lies the distinction between statics and 
dynamics. A static process is a circle or other closed figure, whereas, 
for instance, business cycle fluctuations or secular movements 
present ondules with changing amplitudes along varying paths. 
Economic life is a tangle of simultaneous movements of all the 
bodies which form the national economy. 

The study of circular movements is very much encouraged by 
the theory of national income, because the latter is really a theory 

162 



THE DOCTRINE OF PLANNING 

of the process of utilization of wealth and labor conceived as a 
circle or spiral. The national income flowing from capital and 
labor services is again transformed into capital and labor. A part 
of national capital, namely, its annual value, is used up and rr- 
placed by consumption, and may be augmented by the increase ol 
the population and its efficiency; this in turn may be increased by 
expenditure on education, training, or health services. The using 
of part of the national capital for the purpose of increasing effi- 
ciency and welfare does not mean the diminution of we.ilth, but 
the transformation of material agents into human agents of pro- 
duction. 

The study of circular movements contains still many hidden 
treasures, and many of the obscurities which loom in economic 
life could be removed if substantial progress were made in this 
domain. 

Qualitative Distinctions 

Distinctions between goods and services, or between industries, 
made on the basis of their physical, technical, or welfare charac- 
teristics were always rejected by the liberal economists on the 
ground that ethical or technical judgments foreign to the economic 
domain arc thus introduced. Increments in the production or con- 
sumption of goods harmful to efficiency, welfare, or employment, 
and therefore to real national income, were treated in exactly the 
same way as were goods that promoted all these factors, so long as 
they were money- (and profit-) making. An increment in the pro- 
duction (and consumption) of a useful drug worth, say, $300,000 
may raise the national output by saving life and promoting health 
and efficiency; while an increment in the production (and con- 
sumption) of harmful drugs or spirits by the same amount may 
cause a loss of national output by causing accidents, loss of work, 
and loss of efficiency; yet such differing increments were treated 



THE DOCTRINE OF PLANNING 

in exactly the same way by economists, who replied to all objec- 
tions: "In economics we are not concerned with the ethical as- 
pects." To emphasize this neutral attitude, the term "utility" was 
replaced by ophelimite, which means, simply, preference in indi- 
vidual choice. 

The liberal economists were primarily concerned with the 
volume of certain abstract aggregate quantities classed together 
under their monetary aspect, such as investment, saving, consump- 
tion, production, import or export, employment, and their mar- 
ginal yields in utilities or profits; they paid no attention to changes 
in the composition of those quantities from the point of view of 
their technical and welfare characteristics. 

In the age of planning these matters will play a much more im- 
portant part than hitherto, because on them the public controls will 
be based. The choice between activities based on surplus in mar- 
ginal utilities or profits will be corrected by the public choice, 
which will weigh the effects of those activities on efficiency, wel- 
fare, and employment. It may be admitted, however, that the 
selective principle will play a much greater part in low-income 
countries in more rigid schemes of planning in case of shortages 
than in high-income and well-equipped countries. 

Investment of the same amount in luxury apartments, or in 
munition factories, or in communications and transport, or in elec- 
tricity or gas rnight have the same marginal efficiency of capital 
and give the same yield in profits, while bringing about different 
results in national output owing to specific technical or welfare 
characteristics. The effect of these on employment, welfare, and 
efficiency both in the short and in the long run may be different, 
owing to the different industries involved, a consideration which 
has little to do with the marginal efficiency of capital. 

The effects of increments of imports on real national income will 
depend on the physical characteristics of the goods imported more 

164 



THE DOCTRINE OF PLANNING 

than on any other factor. These effects will be different according 
to what is imported, whether luxuries, comforts, necessities, tools 
and machines, or raw materials. 

When studying the effects of the destruction of war on a na- 
tional economy, it is not enough to say that 10 or 20 per cent of the 
national capital has been destroyed, and that therefore the country 
will be poorer and its productive capacity smaller. It makes a basic 
difference whether the destruction was of houses, or of factories 
and plants. Only in the second case would the productive capacity 
be greatly impaired. Again, we must study the destruction by in- 
dustries, since the destruction of some industries may impair 
productive capacity more seriously than that of others, owing to 
their technical effects. The position would also be different if the 
destruction were concentrated on one industry, as contrasted with 
what it would be if it were more or less evenly distributed over all 
industries. 

The theory of bottlenecks assumes great importance in a planned 
economy. A shortage of a small margin of tools and implements 
or of power may prove harmful to national output out of all pro- 
portion to the monetary value involved, as was seen in the fuel 
emergency of Great Britain in 1946-47. 

A planning economist will make more use than his forerunners 
did of physical units, bushels, yards, pounds, ton-miles, hours of 
work, standards of efficiency, accident rate, labor turnover. He will 
seek as much as possible to remove the money veil from things, 
and he will supplement and check the monetary units by compari- 
son with physical units. He will seek to avoid as much as possible 
aggregate abstract quantities deprived of their technical, physical, 
and welfare characteristics (such as consumers', or producers', or 
investment goods), and will group the goods according to the 
functions they perform in a national economy, as raw materials, 
tools, machines, semimanufactured goods, transport materials; or 

165 



THE DOCTRINE OF PLANNING 

necessities, comforts, luxuries; or again in more concrete terms as 
food, drink, clothing, fuel, housing, furniture, roads and railways, 
hospitals and schools, leisure goods, and so on. 

Such studies as the Economics of Food, or the Economics of 
Housing, the Economics of Textiles, of Transport, of Electricity, 
of Mining, of Iron and Steel, and so on in which the technical and 
welfare and employment aspect is combined with the monetary 
aspect will be elaborated and developed more than before. The 
economist will work in close touch with the technician, the two 
consulting, correcting, and checking each other constantly. 

A planning economist will be more than ever aware that the 
direction of the flow of money is not a substitute for physical plan- 
hing, for the management and direction of physical resources by 
technical methods. Physical planning is as important as, if not 
more important than, planning in monetary terms. The limiting 
factors appear mostly at the physical or technical levels of economic 
activities. To allocate money funds or credits and to ensure the 
profitability of certain investments are measures very often not 
sufficient to bring about the investments in time, if the technical 
problems are not solved. The preparation of investment plans in 
advance, the training of skilled workers, the ordering of scarce 
machinery whose production requires a length of time, the provi- 
sion of transport facilities, hitherto lacking, or the removal of 
other technical bottlenecks are very often more effective in bring- 
ing about the investment in view than financial measures are. 

The liberal economist had a preference for monetary measures. 
If he was concerned about the improvement in agriculture, he 
tried to alleviate the burden of taxation and to insure a low rate 
of interest, good prices, and abundant markets, whereas in the' 
same situation the planning economist will be concerned, apart 
from financial measures, with questions at the physical and techni- 
cal level. He will deal with educational and research problems; 

166 



THE DOCTRINE OF PLANNING 

with the efficient utilization of land and the improvement of the 
land-tenure system; with the proper use of fertilizers, fungicides, 
insecticides, veterinary drugs; with the improvement of equip- 
ment and machinery, and the adoption of improved varieties of 
crops and strains of livestock; with the adaptation of crops to con- 
sumption needs; with the removal or alleviation of the physical 
and biological limitations, imposed by soil and climate, by irriga- 
tion works or drainage or erosion control; with the improvement 
of transport facilities or of sanitation and the health of farmers. 
The physical and technical side of agriculture was Liken for 
granted by the liberal economist; whereas to the planning econo- 
mist it becomes the most important part. 

The Theory of Social Costs 

The theory of social costs marks the diflercncc between the new 
and the old economics. It serves as the foundation of the new 
economic theory. The modern economist thinks more and more 
in terms of social cost in the choice between different investments. 
He tries to grasp, through the intricate and complex values of 
financial cost (private cost), the magnitude of real cost incurred 
on the part of the society as a whole. Thus a social cost calculus 
similar to the cost calculus in a single firm has to provide the tools 
for the problem of social choice. 

The science of social accounting is still in its infancy. Valuable 
contributions have been made to it by Marshall (theory of the 
representative firm), by Pigou (theory of external economies and 
diseconomies), by Wieser (theory of opportunity costs), and Lord 
Keynes (theory of user cost), but no technique has been devised 
for the measurements of social costs. 

Generally speaking, we can define the social cost of any article 
as the expense of its production incurred on the part of the society 

167 



THE DOCTRINE OF PLANNING 

as a whole, irrespective of who in the community has borne it. In 
order to know the answer to the question, what are the social costs, 
we must bear in mind what the cost would be if the community 
were a single firm which could dispose of its resources freely with- 
out any restrictions. If anyone in the community can produce an 
article cheaper, if not hindered by monopolies, restrictive rights, or 
ignorance, the social costs would be reduced to that level. 

The best approach to the problem of social accounting is the op- 
portunity cost principle, the opportunity cost of a given good or 
service being defined as the amount of goods which must be for- 
gone by its not being applied to its best alternative use. The social 
costs of armaments arc the consumers' goods and/or leisure, for- 
eign assets, depreciation of capital equipment which must be for- 
gone to produce them. The social cost of providing coal for war 
factories is the cold suffered by the consumers, the loss of labor effi- 
ciency caused thereby, and the loss of output in consumers' goods 
industries caused by the shortage of coal. 

Therefore, wherever the community as a whole loses nothing by 
expenditure, no social cost is involved. Thus we have to distinguish 
sharply between income-producing and all other expenditure. In- 
come-producing expenditure generally involves no cost to the com- 
munity as a whole. Investment or consumption expenditure borne 
by the Treasury in order to employ idle resources which would 
otherwise remain unemployed is of a financial character, but docs 
not entail social costs, if we make abstraction from the user cost of 
equipment. 

Furthermore we have to distinguish between expenditure for 
using real goods and services and expenditure for compensation 
of rents, rights, and monopolies, which represents merely transfer 
payment. If we pay for goods and services, this means that they 
cannot be used for other purposes (i.e., at full employment we 
must forgo some other produce). On the other hand if we pay for 

168 



THE DOCTRINE OF PLANNING 

rents, rights, and monopolies, we merely distribute transfer pay- 
ments; we are not forgoing anything. The social cost of decon- 
gestion of roads or of clearance of slums does not include compen- 
sation for land values equivalent to the capitalized rents which 
will be shifted from one place to another. However, we must 
reckon with that part of the rent which will not be shifted else- 
where. The cost of a site on which it is intended to form a public 
park is not equivalent to the capitalized house rent, because the 
house rent will merely be shifted to another place in the city or its 
suburbs; it is equivalent to the value of the goods which could be 
produced alternatively on the land if it were put to its best use for 
the community as a whole, after deducting other costs of produc- 
tion; for instance, the rent of farm land. When considering the 
cost of using capital equipment, we have to reckon the user cost, 
i.e., the difference between the cost of using the equipment and the 
cost of its maintenance and depreciation. 

If we have to do with a specific factor of production, i.e., with a 
very specialized factor which cannot be used alternatively in the 
realm of national economy, the social cost of its use becomes zero, 
for if it were not used in this special production it would be idle 
and useless. Applying the same principle to labor, we find that its 
social cost in the state of mass unemployment is nil, for if labor 
were not employed in this particular service the alternative would 
be merely to waste it. 

Expenditure on full employment is a financial expenditure, but 
it involves no social cost; on the contrary it is an income-producing 
expenditure i.e., a community pursuing a policy of full employ- 
ment will be better off than one that does not. Expenditure for 
relief which raises the standards of consumption of the poor as 
long as there are idle resources in the community is a financial 
expenditure, because no social costs are involved. This sort of ex- 
penditure is really an income-producing expenditure, because 

169 



THE DOCTRINE OF PLANNING 

some people will be better off, while no one will be worse off, than 
before. 

Thus it is clear that we have to distinguish sharply between the 
state of full employment and that of partial employment, a state 
of partial employment providing ample opportunities for con- 
ducting the battle against poverty without social costs. After full 
employment is reached, we have to reckon the social costs of fight- 
ing poverty in terms of goods and services which must be forgone 
by the community that uses resources for relief measures. 

Any expenditure incurred for raising health and eiliciency and 
improving the skill standards of the population must be treated as 
a social investment which will find expression in the rise of na- 
tional income. The counterpart of investment in machines is in- 
vestment in men; very often the latter brings greater and more 
durable yields in national income than investment in machines. 
Investment in machines is based on the expectation of profits. If a 
poor man has no resources to invest in himself, the only interested 
party is the community as a whole, which can expect an increase 
in national real income from its investment. 

To sum up, we can say that no social costs are involved in fight- 
ing poverty, if, as a result of the measures involved, some will be 
better off, while no one in the community need be worse off. To 
find such measures is the highest prize any social student can at- 
tain, because these measures mean an increase in real national in- 
come. 

The Institutional Approach 

Planning stresses the institutional side of economic phenomena, 
since institutions are purposeful social arrangements, whether 
they are based on law, practice, organization, or policy. Planning 
means pursuing some objectives and calling into existence insti- 
tutions which help to attain these objectives. The economy be- 

170 



THE DOCTRINE OF PLANNING 

comes purposeful and therefore more institutional. Social arrange- 
ments are made for most segments of national economy. Money 
and banking, saving and investment, foreign trade and internal 
trade, wages, profits and rents, prices and costs all these are sub- 
jected to certain social arrangements, all have a certain institutional 
and organizational setting. 

The institutional setting was of course always existent, although 
neglected by the classical school. In the age of planning the insti- 
tutional setting becomes more striking and visible because i is 
subject to deliberate changes in relatively short periods. 

The planning economist is an institutionalist and behaviorist. 
He studies mass behavior in order to control it with the least ef- 
fort. Any excess of control above the necessary minimum is a waste 
of resources, and his success in effective control is first of all meas- 
ured by its economy. This implies a thorough knowledge of mass 
behavior in its psychological and organizational setting. 

The economist studies institutions in order to perfect them and 
make them subserve the objectives for which he plans. The most 
general criterion is the maximization of national income. This is 
the most general purpose for any economic institution. Money, 
foreign trade, wages, investment, or saving have to assure such 
an institutional setting as will enable the society to put all its pro- 
ductive forces to the fullest and best use. 

When Marx stated that in the eternal clash between the "pro- 
ductive forces" (Productions Krafte) and the institutions (Pro- 
duktionsverhaltnisse)) the productive forces are eventually always 
victorious, whereas the institutional obstacles to the full and best 
utilization of resources are always being removed, he expressed his 
optimism in the evolutional process and his belief in eternal prog- 
ress. In a way a planning economist who serves the requirements 
of a planned economy can justify this optimism, because the basic 
orientation is to remove all institutional obstacles and thereby to 

171 



THE DOCTRINE OF PLANNING 

free the productive forces of the community. The basic preoccupa- 
tion of the planning economist is to make arrangements such that 
the clash between the productive forces and institutions is resolved 
as quickly as possible. 

In studying institutions the planning economist is first of all 
confronted with the problem of interdependence of institutions, a 
problem very much neglected by the classical school. The classical 
economist treated institutions as quite independent variables. The 
question whether a gold standard is preferable to paper money, 
whether multilateral is better than bilateral trade, or whether free 
wages are superior to collective bargaining was posed in an abstract 
way, in isolation from its institutional setting, as if one institution 
could be severed from the whole set of institutions to which it 
belonged. 

Actually, a single institution is not an individual item in an un- 
organized collection, but a part, strictly linked with the whole 
pattern of structural setting and subservient to it in its functions. 
There is no sense in asking the question whether the gold stand- 
ard is preferable to a paper currency, since the gold standard can 
only work effectively in conjunction with other institutions such 
as free trade and free enterprise; where such institutions are lack- 
ing, the gold standard cannot work. Under a monopolistically or 
collectively controlled trade, the gold standard could not work. 
There is no sense in asking whether free Wages are preferable to 
union wages, or collective bargaining to public arbitration, since 
the institution of free wages was strictly linked with other free 
institutions, i.e., with the working of certain motives and pattern 
of behavior which belong mostly to the past. 

The study of interlinks and interactions between institutions is 
an exciting field of investigation which will carry the greatest 
weight in our dynamic age. We do not yet know really what are, 
in the long run, the interlinks between full employment and wage 

172 



THE DOCTRINE OF PLANNING 

systems, or between a trade system and monetary institutions, or 
between a controlled wage system and private property. 

We must investigate what is the substance and what are only the 
modes, i.e., what are the primary and necessary and what are the 
secondary and accidental features in any institution. What is es- 
sential in the discharge of the basic function of this institution, and 
what is accidental, which can be removed or altered? Sometimes 
what we regard as accidental occupies the most essential key po- 
sition, and by removing it we endanger the future of the whole set 
of institutions. 

Finally, we must study the secular trends of institutions in order 
to see in what direction they are moving. By demonstrating the 
trend of changes of an institution, we can figure out the direction 
in which it will move in the future. Thus the institutional side, so 
long neglected by the economists, comes to the fore in our study, 
and a closer link is established between economics and sociology 
and between economics and social pyschology. 

Target and Balance Economy 

There are two conceptions of a planned economy. One of them 
can be termed a balance economy, the other a target economy. The 
balance economy is aimed at stabilization of employment at a high 
level and the avoidance of booms and slumps. There are no other 
objectives apart from regularity of employment. The business 
cycle is carefully watched by an economic intelligence service, and 
wherever signs of slackening activity appear the planning authori- 
ties take early action to avoid unemployment. The authorities plan 
ahead in order to balance the failure in effective demand, either by 
extraordinary investment works or by release of extraordinary 
consumers' demand. The public authorities have to provide the 
balance between the value of national output at stabilized prices 

173 



THE DOCTRINE OF PLANNING 

and the aggregate of the effective demand in such a way that the 
market can absorb the whole output produced by the whole work- 
ing population. The national economy is more watched than 
regulated by the planning authorities, who intervene only in case 
of expected boom or slump. 

The balance economy is subject to an "antibusiness cycle plan- 
ning," and some economists are very keen in pointing out that it 
is an ideal solution because it combines the virtues of a liberal with 
that of a planning world. We must confess to not sharing the be- 
liefs or rather illusions of this group of economists, for economic 
as well as for social psychological reasons. The achievement of 
full employment is a much easier task than the maintenance of 
full employment, which is a much bigger proposition, requiring a 
great many standing controls. Apart from that, the need for plan- 
ning exceeds the objective of full employment, arising out of the 
whole pattern of modern life. Planning requires also a whole- 
hearted co-operation on the part of the public, and no enthusiasm 
can be expected for the job of the economic intelligence service and 
for a formal unchanging objective fixed forever, such as full em- 
ployment. 

A very great drawback of this thermostatic planning, based on 
watching the status of employment, is the great time lag between 
investment decisions and employment. The time lag for the pre- 
war German programs of investments was estimated to be be- 
tween nine to eighteen months, 5 from the time funds were allotted 
to the time they were finally spent. Another estimate of time lag, 
made by Tinbergen for American experience during the depres- 
sion, 8 asserts that between eight to sixteen months elapse between 
investment expenditure and the maximum employment due to it. 



5 Sec Leo Greblcr, "Work Creation Policy in Germany," Int. l^ab Review, 
March 1937. 

6 Revue de I'lnstitut International de la statisttquc, 1936, p. 173. 



THE DOCTRINE OF PLANNING 

The total time lag between the allotment of investment funds and 
the peak employment resulting from it amounts in some cases 
to three years. We sec how difficult it is to plan full employment 
thermostatically, even if investment decisions are made instantane- 
ously, as the thermometer falls. 

A target economy is a different type of a planned economy. It is 
an economy aimed at achievement of certain definite targets in 
national investments. The objective is not full employment as 
such; rather, full employment appears here as a necessary by-prod- 
uct of a national objective, whether this national objective is a war 
effort, reconstruction, development of depressed areas, a large 
housing program, development of transportation and shipping, 
development of agriculture or export trades, or, in backward 
countries, industrialization at large. The targets in national invest- 
ments are planned ahead in such a volume that they are able to 
absorb the whole labor force. The measure of controls needed is 
related and subordinated to the objectives, i.e., they are imposed to 
such an extent as is necessary to carry out the program of invest- 
ments. If, however, the targets cannot be achieved without an 
overstrain, i.e., when full employment is surpassed, the targets can 
be reduced. The targets change with time (three-, four-, five-year 
plans), with the position of the national economy, the needs and 
wants of the population being related first of all to the international 
situation. 

A target economy provides a much sounder basis for a planned 
economy which must be centered in national objectives than does 
a balance economy. The national objectives can arouse enthusiasm 
and a spirit of service and sacrifice for the community which a bal- 
ance economy cannot call forth. A balance economy is conceived 
as a static economy; a target economy is a dynamic economy on 
the march towards certain goals. A balance economy is conceived 
as an insurance economy; a target economy is conceived as develop- 

'75 



THE DOCTRINE OF PLANNING 

ment economy. A balance economy is conceived as an instrument 
for rescuing the citizen from the oppression and fear of unemploy- 
ment; a target economy enlists him in a national service for objec- 
tives which transcend the field of his own interests. 

The measure of controls in a target economy depends on the 
scope of the national objectives; if these are not excessive, but are 
modest and reasonable, the controls can be the same. 

The Achievement and Maintenance of 
Full Employment 

The problem of how to achieve full employment has been 
widely discussed, and there is a great deal of agreement about it 
among economists. There are many alternative methods to secur- 
ing full employment by fiscal policies or by controls over private 
investment and saving; some of them have been investigated by 
Nicholas Kaldor in his Appendix to the Beveridge Report on Full 
Employment 7 or in the British White Paper on Employment. 8 

The common ground covered by all the alternative methods is 
the doctrine of effective demand. The flow of total outlay must 
remain high and stable. Such an increase in the total outlay of the 
community on home-produced goods and services must be secured 
as is sufficient to absorb the unemployed resources. 

Fluctuations of private investment or consumption expenditure 
should be prevented by controls or inducements, and/or offset by 
public outlay on investment and consumption. The additional 
public spending is the greatest weapon in the armory of full em- 
ployment. This may be regarded as the English-American doctrine 
of employment. 

7 "The Quantitative Aspects of Full Employment in Britain." 

8 See also the statement of the Australian Government, Full Employment tn 
Australia. 

176 



THE DOCTRINE OF PLANNING 

There are certain tacit or explicit assumptions underlying this 
doctrine. One of them is that the additional spending will not be 
used to raise prices and wages. If it were, the task would be more 
difficult, and still more spending would be required. 

Another assumption is that the capital equipment of the country 
is adequate to employ all hands in that country. If it were not, full 
industrial capacity might not go hand in hand with full employ- 
ment. To achieve full employment for a country insufficiently 
equipped industrially is much more difficult, for it involves a much 
higher rate of investment, which is very often accompanied by a 
rise in marginal costs of production. For a country like prewar 
Poland, with overpopulation in the villages amounting to more 
than a fourth of the rural population, more spending is not enough 
to ensure full employment. Full employment in these countries 
could not be achieved by spending either on consumption or in- 
vestment, but only by spending on investment at the cost of con- 
sumption standards. And even spending on investment must be 
safeguarded by the physical and technical possibilities of invest- 
ment. If a country has no capital equipment for carrying out 
physical investments on a scale sufficient to employ the whole 
population, spending on investment cannot achieve full employ- 
ment, unless more or less useless works are carried out. 

The third assumption is that the pattern of additional spending 
will coincide with the pattern of idle capacity by industries, and 
that a state of over-employment in some industries will not occur 
before general full employment is reached. If full and over-em- 
ployment occurs in some sectors before general full employment 
is reached, we have bottlenecks which hamper the achievement of 
general full employment. We may then have to reckon with a 
trend towards a sectional rise of prices and wages which by organic 
links with other sections may lead to a general rise of prices and 
wages. Sectional full employment within a condition of general 

177 



THE DOCTRINE OF PLANNING 

underemployment is not a rare phenomenon, and it provides the 
most important correction to the theory of expenditure as the 
single key to full employment. The deficiency of effective demand 
must be offset industry by industry, which means that we must 
also take into account shifts in demand and the problems of 
technological unemployment. 

The fourth assumption is that if the additional expenditure is 
used for additional imports, it will be possible to cover these im- 
ports by additional exports. If not, the whole program of full em- 
ployment would break down owing to the bottleneck of restrictive 
foreign trade. Countries with large coefficients of imports, or 
debtor countries, are in a more difficult position in regard to the 
policy of full employment than are other countries. 

The fifth assumption is that the additional expenditure will not 
be used to any great extent for paying off debts or for savings, but 
will be used for actual consumption and investments. If debts are 
paid off or savings made to a greater extent, this must be made 
good by additional spending on a still larger scale. 

We see that the achievement of full employment is conditioned 
by this set of assumptions, and that public controls are needed to 
ensure that the reality conforms to the assumptions. The achieve- 
ment of full employment presents a task of varying magnitude in 
different countries according to the relative amount of unemploy- 
ment (open or disguised) and to the range of inequality in the 
distribution of income, on the one hand, and the capacity of capital 
equipment to absorb the whole reserve army of unemployed, on 
the other. Full employment in major industrial countries, such as 
Germany or the United States or Great Britain, has never been 
achieved in the last three decades in peacetime for a long stretch of 
time; and in wartime full employment is only apparent, since mil- 
lions are serving in the armed forces and in civil defense. 

But the task of achieving full employment is much easier than 

178 



THE DOCTRINE OF PLANNING 

that of maintaining full employment once achieved. The achieve- 
ment of full employment generates many forces which tend to 
overthrow it. The strongest among them is the rise of wages and 
prices. The workers have a better bargaining position and can ask 
for higher wages, and the entrepreneurs have a better market and 
can ask for higher prices. There is also pressure in the foreign ex- 
change market leading to a worsening of the balance of trade. The 
increased volume of imports necessary to maintain full employ- 
ment must be safeguarded by raising exports. Productivity stand- 
ards in some industries where dissatisfying jobs prevail are ad- 
versely affected by full employment, i.e., by a seller's market for 
labor. Thus the whole economy is overloaded, and is far from 
being balanced. The whole economy shows signs of inflation, 
working under excessive strain and stress; and new controls are 
necessary to offset the effects of inflation. 

We sec then that whereas full employment can be achieved with 
relatively few controls, its maintenance is a much bigger task, re- 
quiring a much greater measure of control, especially price and 
wage control, and planning in general. Moreover, the longer full 
employment is in operation, the greater is the measure of planning 
necessary for its maintenance. 

The achievement of full employment is one thing, the mainte- 
nance or rather perpetuation of full employment is another, alto- 
gether different, thing. The Keynesian school has done much in 
elucidating the problem of achieving full employment, but it has 
done very little in solving that of the maintenance of full employ- 
ment. 



179 



THE ECONOMISTS FACING 
THE FUTURE 



Pocket, Head, and Heart 



Some economic writers think with their pockets, i.e., they con- 
sciously defend certain interests although they are aware that those 
interests do not merit that defense. These are the small fry among 
economic writers, moved by fear, greed, or vanity, or simply by 
the necessities of life, and their performance is forgotten as soon as 
the ink has dried on their script. In every epoch we have a pro- 
fusion of such writers, who are more or less insincere, but who 
find it convenient to move with the interest of the ruling class or 
clique against the exigencies of a broader stream of life or against 
what they themselves regard as just I mean those writers who act 
against their own lights, disobeying their own inner selves, speak- 
ing only half the truth. In a way all writers know that they have 
but rarely the opportunity of speaking the whole truth and noth- 
ing but the truth, as they see it. After all, writers too have to pay 
tribute to the great force of social hypocrisy which operates in 
every society by observing the conventions of life and by respecting 
the rule of habits and of powerful interests which would otherwise 
crush them. 

180 



FACING THE FUTURE 

The distinction between the category of writers with which I 
am now dealing and all others is rather one of degree than of sub- 
stance, but the distinction of degree is important enough to blot 
them out from the records of economic science on its highest plane. 

Certain other economic writers think only with their heads, 
using their brains to solve certain economic problems in an aca- 
demic way, i.e., in a way logically or methodologically sound, but 
one not based upon their personal experience. They are often at- 
tracted to the most abstract problems, getting drowned in the 
deepest currents of methodology, classification, and verbal dis- 
putes about abstract notions and concepts deprived of practical or 
moral meaning. They are the intellectuals who very often excel 
in registering and filing facts, in sifting and classifying them, and 
in logical analysis. The "pure economists" belong to this category. 
They have contributed greatly to the advance of the science by 
their clearness, consistency, and intellectual power. They were the 
authors of systems neatly planned down to the last detail. But in 
spite, or perhaps because, of this, the systematizers were never 
among the great lights in the history of economic doctrines. They 
have not left a great imprint on economic history or the history of 
ideas. One of them was Rodbertus, whose socialism was of an in- 
tellectual or logical kind, and whose heart was unmoved by the 
suffering of the masses and their aspirations. Here belong too all 
the economists of the marginal or psychological school, whose 
analyses are often brilliant but make no distinctions in regard to 
economic programs or policy, being based entirely on hypothetical 
assumptions. In a way Nietzsche was right when he said: "I dis- 
trust all systematizers and avoid them. The will to a system shows 
lack of honesty." And what is more precious in a writer than 
honesty ? 

There are yet other economic writers who think only with their 
hearts. These are the cranks and quacks whose writing is full of 

181 



FACING THE FUTURE 

wishful thinking. They have little sense of reality, being busy in 
building castles in the air, giving the rein to their fancy. They are 
the high-fliers and the enthusiasts, who lack the real stuff of vision- 
aries and seers. Their imaginations are not tempered by a cool 
brain, sharp wit, and shrewdness of perception. To this category 
most Utopians belong. They are never among the stars of the first 
magnitude, although their imprint in history is sometimes even 
greater than that of the writers of the former category. Saint 
Simon, Fourier, Louis Blanc, Proudhon, Robert Owen may be 
named as belonging to this group. 

Finally we come to the writers of the highest order, to the shin- 
ing stars in the firmament of doctrines. These think with their 
'heads, but the thoughts are accompanied by the beating of their 
hearts. Their ideas are rooted in the heart, but they come to full 
bloom only by virtue of head-work, by deep and hard pondering, 
reflection, and minute examination. The ideas of these writers are 
always personal, in the sense that they are based on the writers' 
own experience, which brings up forcefully one side of what life 
has taught them. Their ideas are the product not only of abstract 
speculation, but of meditation and contemplation as well, in which 
love and inspiration arc involved. Their ideas have been experi- 
enced, not merely thought out. In a way they were fed by their 
heart's blood. Their ideas have become part of their being, as the 
armor and home of the spider is part of its being, woven from the 
sap of its own body. St. Thomas Aquinas, Francois Quesnay, 
Adam Smith, Malthus, Ricardo, Marx belong to this category. The 
difference between Marx and Rodbertus, between Adam Smith 
and Cantillon, is the essence of the distinction between the mem- 
bers of this category and others. 

And here we can answer the question put forward many times 
by the present generation: Why do the economic writers of the 
present time, without any exception, seem to be second-rate, far 

182 



FACING THE FUTURE 

removed from the first rank ? The answer : Because they have ex- 
cluded their hearts from the study of man. Economics after all is 
and will remain the study of man, and a study of man of vital im- 
portance, of great possibilities, and with a great future before 
it. No study of man can succeed unless the heart has a part in it. 
I hear the cry of the purists : "No heart should be allowed to enter 
the study of man; it will only obscure the basic facts, and befog 
the vital problems and issues." This is simply not true: quite the 
contrary. The heart gives us a deeper insight into the reality than 
the mere intellect can. The men with big hearts have always had 
the clearest heads, an unfailing sense of realities, and a sharp 
scalpel for analysis and examination. The heart provides only a 
pathfinder, a light or guide in the deep and complex regions where 
the best head without this guidance is lost. "To have a heart of 
fire and a brain of ice" is certainly a most exceptional gift, but it is 
truly necessary equipment for every great writer or researcher, and 
the economist is no exception to the rule. 

Therefore my advice to my fellow economists, if I may proffer 
it unasked, is: "Do not be ashamed of the beating of your heart; 
not only are you allowed to use it, it is also your duty to do so. If 
your head is in harmony with the rhythm of your heart, then and 
only then, will you reach the highest regions reserved for the 
eagles." 

Can We Reverse the Trends? 

Economists can be divided into three classes. One group looks 
only at the present and sees only things as they are; to them the 
present reality alone counts, all else is utopianism. The "pure 
scientists" preserve their "pureness" by regarding and studying 
only what exists. To study the future is to indulge in prophecy; 
and no respectable scientist will do that, he leaves it to the quacks. 
This group keeps repeating: "This or that cannot be done, it would 

183 



FACING THE FUTURE 

bring ruin to all concerned," and I have produced evidence enough 
of that attitude on the part of many prominent economic writers 
in the past and present. They are the conservatives, and to this 
category belong the greater number of the so-called "pure" theo- 
rists. 

The second group looks constantly at the past, enchanted by old 
institutions, laws, and customs, thinking them "natural," "genu- 
ine," "organic," or God-sent. Institutions which endured for cen- 
turies or millennia are to be preferred to existing ones only recently 
established, because they are based on age-long experience. To this 
group only the past is real, and the sooner we return to it the 
better. No small number of economic historians belong to this 
category, which may be called "reactionary" in the literary sense. 

The third group looks upon the future as the "real" reality. 
Reality is what may be called "becoming" (werderi) not what 
exists now (sein). Change is the real essence of reality: everything 
is in flux and in constant motion. The substance of matter is itself 
nothing but motion. Thus we have to study the laws of motion of 
our institutions and structure. Since reality is motion, the study of 
the goals and targets of the motions is not prophecy, but a piece of 
scientific analysis, although it is sometimes clothed in a form of a 
forecast. The greatest economists, I think, belonged to this cate- 
gory. They were the reformers who showed the way to further 
development, and who by their work quickened that development. 

In saying that future development can be foreseen "scientifi- 
cally," i.e., by the system of exploration and verification open to 
all men versed in the study of the subject, do I mean that I believe 
in historic determinism ? In a way yes, but only in a way. When I 
see a train leaving New York for Chicago, I know that with the 
greatest probability, perhaps 99.99 per cent, it will arrive at Chi- 
cago. I know that when a piece of work has been started in a fac- 
tory it will be finished and will reach the market. I know that if a 

184 



FACING THE FUTURE 

new invention has been introduced and proved a success, it will 
be improved and it will go on being improved. I know that if a 
road is being repaired, sooner or later it will be opened for the 
public use. In all these cases I can see the goal of certain move- 
ments, and I know that these movements will not cease until that 
goal is reached. Superior and external forces alone can prevent 
them from reaching their target. 

Let us see what an economist can safely say about the future. 
He can safely foresee, for instance, that the future will bring more 
and better machines. Observance of the trend for two hundred 
years causes him to state that every year or every decade has 
brought more and better machines in industry, and there is no 
reason to suppose that this trend will come to a standstill in 1950 
or 1960 unless some new force hitherto unsuspected comes into 
operation. The forecast of further mechanization is a safe fore- 
cast. Take another example: Observing the trend for the last hun- 
dred years, we can see that every decade has brought a constantly 
increasing share of the government and other public bodies in 
national income. This trend is manifest in all countries. It suffers 
small relapses over a couple of years or even over a decade, but on 
the whole it manifests itself as a strong and obvious tendency. We 
can foresee that this trend will not be reversed unless a new and 
unforeseen force suddenly comes into operation. 

What of planning? Over fifty years at least we have seen the 
field of government interference widening, more and more con- 
trols being put into operation, and the area of economic freedom 
restricted. Technical, social, political, and security reasons are 
responsible for this trend, which is a deep and constant one. Look- 
ing backwards we see more and more controls added nearly every 
day. I have dealt with this problem elsewhere 1 and I need not 
dwell on it here. Can we really expect the reversal of this process, 

1 The Planning of Free Societies. London: Seeker and Warburg, 1942. p. 267. 

185 



FACING THE FUTURE 

unless some great new force comes into operation which we can- 
not now foresee ? 

What of money ? Looking back over three thousand years' de- 
velopment of the monetary system, we can see a constant trend 
towards the dematerialization of money. Simple commodities 
serving as money; standardized and later signed commodities; 
legal com in copper, nickel, silver, and gold; then a gold-standard 
circulating in the form of a banknote, first convertible in specie, 
then in gold bullion; next a gold-exchange standard, a managed 
gold standard, using paper money and checks. The trend is un- 
mistakable, and we can hardly expect its reversal, short of the ap- 
pearance of some hitherto unforeseen force. 

Or take the shortening of hours of work, which is of course 
closely connected with the process of continual mechanization. 
Can we expect a reversal of this trend, which has been operating 
for at least a hundred and twenty years? The antideterminists say: 
"If we wish, we can reverse this trend." I agree; the only objection 
I would raise is that we do not wish and will not wish sufficiently 
strongly and as a majority to reverse it. Our wishes and desires are 
part of the mechanism of this trend. And when we speak of "our" 
wishes and desires, we speak of those of the great masses of which 
we form part. 

Our wishes and desires are perhaps the most important factors 
in the operation of any social-economic trend, but they form an 
integral part in its functioning. In certain circumstances, for in- 
stance in circumstances of cumulative and progressive mechani- 
zation and growing technicality of life and labor, the great masses 
of people have specific wishes and desires closely knit up with their 
whole pattern of life, and there are in fact no real alternatives to 
their wishes and desires. Of course, if any of us could impart new 
wishes and desires to them, we should then become a historical 
force of the first order. Did Marx, Engels, or Lasalle impart new 

186 



FACING THE FUTURE 

wishes and desires to the great masses in Europe, or did they only 
express existing wishes and desires, organize them and give them 
new forms and a new life ? The fact remains that these men moved 
in the direction of those trends, they followed the wishes and de- 
sires of the great masses. They did not reverse the trend of develop- 
ment; they only quickened it. If they had attempted to reverse 
these trends, they would probably have nullified their own influ- 
ence and would have remained nonentities, in spite of the great 
force of their personality and expression. 

Marx, who was a historical force of the first order in Eastern 
Europe, is a force of lesser order in Western Europe, and is of little 
significance in the United States. It is not Marx who made the 
revolution; the revolution made Marx. Men become great only if 
they can be woven into the whole pattern of life, if the current of 
life carries them onward, while they themselves do the utmost to 
co-operate with the movement by swimming with all their 
strength. 

Great men are characterized, not by the fact that they bump their 
heads against the wall, but that they give vent to the wishes and 
desires of the people, quickening or lightening and ennobling 
the genuine trend of development, and, from available alterna- 
tives, choosing those which best suit their ideals and programs, 
while still moving with the stream of events. All of them move 
with the stream of events; the most powerful of men cannot 
change it. If they swim against the stream, they can hardly move; 
if with the stream, they move quickly; but they have an alterna- 
tive, to swim across in a diagonal line, less quickly but at a good 
speed. The stream of events is the historical forces moved and 
molded by the Invisible Hand. 

It is the noblest task of the economist to study the currents of 
life, not to see life, as most do, as a stagnant pool; to present al- 
ternatives to the public, pointing out those which are most con- 

187 



FACING THE FUTURE 

sistent with the "good life" of a society as he sees it. But most 
economists of the present age are bumping their heads against the 
wall, with the result that their heads ache and their labors remain 
unproductive and are despised by the great masses of people. 

What Can We Learn from the History of 
Economic Ideas? 

First of all, humility. Economic truths are not invested with any 
hallmark of revelation or wisdom. We have seen how much bias 
and prejudice there were even in the greatest minds, even in those 
of the luminaries of our science, and we can reckon that there are 
at least as much prejudice and bias in every one of us today. Men 
always live under a thick fog created by the heat of their small in- 
terests, passions, and desires, and it is difficult for them to see clearly 
even a little way ahead. 

We have recorded the slips and errors of even the greatest minds, 
how they failed in their diagnoses and predictions. How many 
more must be the slips of all of us today, who find ourselves in the 
heat of the greatest ideological battle which has been fought for 
many centuries. Probably all narrow-visioned specialists are wrong 
in their diagnoses, and still more in their predictions, because life 
is a totality and a complexity of factors, while the specialists know 
and tend to estimate factors of one order only. 

Much of what the economists thought to be eternal is only transi- 
tory. Ideas are like plants; they grow and then soon wither away 
and most of them serve only as a fertilizing material for other 
plants. Thus the moral is: "You shouldn't be too cocksure about 
imposing your own ideas on others." Truth is relative to a certain 
range of assumptions, therefore to a certain stream of events and 
conditions of life. All doctrines contain a grain of truth which, 
under certain conditions of life, becomes the only valid truth. All 

188 



FACING THE FUTURE 

doctrines are valid and true up to a point. This validity "up to a 
point" is the most common, but in fact the most important, truth 
in our lives! Everything is right up to a point, and from this point 
onwards everything is wrong. The doctrine of the medieval school, 
with its universal application to all mankind and its moderation 
as expressed in iustum pretium and iustum solarium, and with its 
emphasis on ethical discipline, is undoubtedly true "up to a point." 
The mercantilist doctrine with its emphasis on national interest 
and defense, on the balance of payments and balance of trade, is 
also right up to a point. So also is the laissez-faire school, with its 
emphasis on the benefits of individual competition and incentives, 
true up to a point. The socialist doctrine of purposeful co-opera- 
tional planning for the good of society is also true up to a point, al- 
though at the present moment it seems more valid than any other 
single doctrine. 

Democracy exalts freedom, but it often forgets about the de- 
lights of human fellowship, which can sweeten even the hardships 
and perils of war. The thrill of living in comradeship and fellow- 
ship with other men, the thrill of sacrifice, these have delights 
often not recognized by democracies, which put their whole em- 
phasis on formal freedom. The neosocialistic ideas supply correc- 
tions to this system of formal freedom. 

The right conduct of human affairs is difficult because we have 
no fixed, rigid principles to hold on to, but have to use our common 
sense in applying all these principles in the right proportion. Any, 
even the best principle, can go wrong if pursued to its bitter end. 
Hence the beneficial effect of tolerance. What you regard as wrong 
today may be regarded as right tomorrow; in fact it might be 
right, under changed conditions, and "change is the essence of 
life." 

In the development of economic ideas we see certain patterns of 
change which make sense and have a certain meaning. We see 



FACING THE FUTURE 

great diversity, but it is diversity in unity. There are definite pat- 
terns of thought which are valid in a certain age and which can be 
covered by one of the great "isms," but even in that unity we see 
an enormous diversity corresponding to individual gifts, talents, 
interests, propensities, and different aspects of life. Unity should 
not be expressed rigidly as uniformity; it is only a thin (but 
strong) thread provided by the problems of time and the standards 
of culture, which permeate all representative doctrines of a given 
age. 

The other thing history teaches us is that economic ideas are not 
an autonomous field of human endeavor, but are strictly related 
to the whole pattern of life. Economics is not the center of the 
solar system of man's thought; rather, it is a small planet revolving 
around a star of a much higher order. 

The economic ideas of the Schoolmen or the economic ideas of 
mercantilism, or of liberalism, or of socialism were not conceived 
independently as a result of research in scientists' studies or li- 
braries; they were closely woven into the warp of the whole tex- 
ture of life, out of the outlook and social and moral values of their 
time. They supported the economic, political, and moral fabric of 
the community; they were part and parcel of the whole cycle of 
values; they were fed by those values, while, at the same time, they 
were feeding them from their own substance. It was giving and 
taking all the tirhe. None of the great doctrines could survive as a 
whole if they were taken out of the whole context of their time, 
even as a fish could not live if taken out of the water. Each doc- 
trine, like each institution, has a certain ecological environment in 
which it is rooted and into which it fits. We have not yet begun 
to understand the role of ecology in the breeding, development, 
and decay of certain ideas. There are flora of ideas which move and 
shift with time and place as much as real flora and fauna move 
and shift. Our own brains work in a certain framework, and are 

IQO 



FACING THE FUTURE 

allowed to move within a given range of ideas by the whole pattern 
of life. Here we have the answer to the question why the same 
ideas are suddenly developed independently in distant places at 
the same time when the pattern of life demands their emergence. 
It looks as if we were all small cells in the same collective giant 
brain of civilized mankind. 

But if economics is only a branch of a big tree, it follows that on 
purely economic grounds we can never go deep enough to uncover 
the roots of the problem. Economic analysis remains on the sur- 
face of any great problem of life and cannot bring us its real solu- 
tion, because the roots are deeper, lying as they do on a different 
plane, religious, moral, social, and political. And we have to par- 
ticipate in life on real issues, not on the issues presented in economic 
analysis or academic speculations. 

The issues presented in economic doctrines are very often 
blurred and fogged by irrelevant sidelines, and only after a long 
time can we see what they are all about. It is really difficult to pene- 
trate into the substance of any great issue and to the core of reality. 
We are often misinformed about the real facts of life, and we are 
often out of touch with the most important issues of our time. 
There are primary issues solved on their own merits, and secondary 
and tertiary issues which are only solved on the merits of the 
issues to which they are related. We may call the first central issues; 
planetary issues are those which revolve around other issues like 
planets around the sun. 

From clan to tribe, from tribe to city-state, from city-state to na- 
tion-state, empire, continent, and probably global organization 
that has been and seems to be the main line of development. The 
medieval doctrine was related to a city-state, the mercantilist doc- 
trine to a nation-state, the liberal doctrine to an empire-state ad- 
vancing further; probably now we are in process of developing a 
new doctrine related to the requirements of a continental and even 

191 



FACING THE FUTURE 

a global organization. I believe that doctrine which suits the re- 
quirements of a global organization will survive. The global or- 
ganization is the primary thing, not the social or economic contents 
themselves. Not such and such a social or economic philosophy is 
the primary importance but the requirements of a global organiza- 
tion. I believe that the main issue of our time is to obviate national 
strife. The immense destructive forces revealed in the present epoch 
make international organization and human brotherhood neces- 
sary and imperative. No longer is pacifism mere talk and wishful 
thinking among a handful of friends. It has become the issue of our 
time, the "to be or not to be" of our civilization. Either men will 
succeed in bringing about a wider and broader allegiance to hu- 
manity at large or they will perish. It is no longer academic to talk 
about the decline and decay of our civilization; this decline is a real 
cosmic threat in which everything man stands for is involved. 
In what form, or in what way, an effective international organi- 
zation will be brought about no one knows. But it will have to 
come. It is my belief that ultimately that doctrine will win which 
can bring about international understanding and human brother- 
hood. Thus every doctrine has to be scrutinized very closely not 
only on its own merit but also on its effect on the crucial issue: 
whether it will help or hinder in creating the stable and sound 
international framework which is necessary for the survival of 
man. 

Economic and social issues are very important, but to our 
present generation they are merely sidetracks of secondary impor- 
tance. They will once more become important when international 
organization becomes an actual fact; until that time they are 
merely satellites of the great, we might say cataclysmic, issue which 
demands, "unite or perish." We do not know whether interna- 
tional organization can come about without war, or whether it 
will follow the most destructive struggle that has ever threatened 

192 



FACING THE FUTURE 

mankind, but there is no doubt that the supreme historic forces are 
definitely moving in one direction to achieve the protection of the 
human fabric of society from the blast of the great destructive 
forces of science. These destructive forces have not been revealed 
for nought; they have a definite task to fulfill to compel men to 
live in a planetary political system revolving around a fixed center, 
so that peace and security can be kept. 

In his Leviathan 2 Hobbes said: "During the time men live with- 
out a common Power to keep them all in awe, they are in that con- 
dition which is called Warre; and such a warre, as is of every man 
against man." Substitute in this sentence of Hobbes "states" for 
"men" and you have the position at our present day. 

A new and greater horizon has been revealed before our very 
eyes. The defective and inert constructions built by national 
sovereignties will be destroyed and removed, and a new making 
and unmaking of states and empires will take place to accomplish 
the gigantic and crucial task for which our times so arduously 
labor. It is well for us to understand the message of our times, be- 
cause only in that way can we escape bitter disappointments and 
avoid waste of energy. Only in that way shall we be able to build 
up a new stable framework for our civilization and culture. 

Those doctrines, those movements, those states, those parties, 
those men who make the ideas of international and human brother- 
hood their own will win the day, while those who oppose this aim 
must decay and perish, unless we envisage a complete downfall 
of our civilization, a leap into chaos and barbarism. 

It is remarkable that the two most recent economic doctrines or 
really three out of four paid homage to the ideals of international 
co-operation, but in practice none of them brought about this co- 
operation. Neither liberalism nor socialism today is very successful 



2 London, 1651, p. 62. 



FACING THE FUTURE 

in promoting peace and international co-operation, and probably 
we shall have to witness new movements, with the sole emphasis on 
the paramount needs of our time. The economist can play a very 
useful part in serving those needs, because his whole training, both 
in the past and the present, has been permeated with the ideals of 
internationalism, a circumstance for which he was often reproached 
by leading industrialists and statesmen. 



194 



INDEX 



Adamson, 8 

Agrarian question, 59-62 

Aquinas, St. Thomas, 14, 17, 37, 

117, 120, 182 
Aristotle, 13, 17, 37 
Ashley, 41 
Assumptions in economics, 4-6, 15, 

177, 188-9 
Axelrod, 55 

B 
Backward countries, 53-74, 113* 

131, 153, 177 
Bagehot, 37 

Balance economy, 173-6 
Bentham, 17, 46 
Bergson, 154 
Bernstein, 63 
Beveridge, 43-4, 176 
Blanc, Louis, 91, 182 
Bodin, 17 
Botero, 34 

Bohm-Bawerk, 7, 130 
Brentano, 17 
Brougham, 38 
Bucher, 17 
Budgell, 87, 96 
Buridan, 34 



Canonist school, 2, 4, 13, 24, 117- 

20, 123-4, 189, 190 
Cantillon, 7-8, 34 
Carey, 30, 108 



Cato, 13 

Child, Josiah, 35, 100 

Circular movements, 160-3 

Classical school, 4, 20, 126-131, 

144-145 
Cobden, 35 
Colbert, 42 
Comte, 21 
Copernicus, 17, 42 
Cournot, 10 
Cunningham, 27, 38 



Dal ton, 94 

Darwin, 13/39-40 

Da\enant, Charles, 100, 102 

Dialectic, 57-9, 114-7 

Douglas, 35 

Dupont du Nemours, 160 



East India Company, 97-107 
Edgeworth, Francis, 9-10 
Elizabethan Statute of Artificers, 

42 
Engels, 38, 46, 48, 51, 57, 63, 64, 186 

F 

Feuerbach, 59 
Fichte, 37 
Fourier, 182 
Freud, 12 

Full employment, 86, 90, 173-5, 
176-9 



195 



INDEX 



Geographical factors, 156-160 
George, Henry, 35, 48 
Gesell, Silvio, 35 
Gossen, 8 
Grebler, Leo, 174 
Gresham, 42 

H 

Haberler, 43 

Hayek, 32, 128 

Heckscher, 99 

Hegel, 46 

Helferding, 63 

Hicks, 94 

Historiography, 19-24 

Hofcbes, 193 

Hobson, 35, 63 

Hume, 17, 34, 46 

Human factors, 136-140, 154-6 

Hutchmson, 34 

I 

"Ideal type," 19, 115 
Imperialism, 59, 63-70 
Internationalism, 139, 191, 193 
Interpretation of history, 1-6, 114-7 
Institutions, 170-3 
lustitia distributiva, commutativa, 
117, 118 

J 

Jevons, 3, 7-8, 14, 128 
Jobet, Alphonse, 91 
Justi, von, 125 

Jus turn pretium, solarium, 2, 4, 
117-9, 189 

K 

Kaldor, 94, 176 

Kautsky, 57, 63, 64 

Keynes, 10-11, 18, 21, 22, 32, 34, 41, 
44, 80, 81, 83, 84, 85, 86, 87, 88, 
89, 90, 91, 92, 94, 95, 96, 167 

Knies, 17 

Kugelman, 51 



Lafemas, 35 

Laissez-faire, 4, 19, 26-31, 167, 189 

Lassalle, 9, 186 

Law, John, 35, 37, 76, 87, 88, 89, 

9, 92, 93, 94, 95, 96, 124 
Lenin, 31-2, 54-74 
LePlay, 17 
List, 17, 39 
Locke, 17, 34 
Luxemburg, Rosa, 31, 54 



M 

Machiavelli, 123 

Mackintosh, 37 

Macmillan, 43, 88 

Malthus, 8, 13-14, 17, 20, 21, 25-26, 
34. 37, 39, 42, 44, 46, 58, 74, 75, 
79, 102, 107-108, 110-112, 127, 

182 

Mantoux, 32 

Mandeville, 74, 76, 79, 96, 125 
Marginal utility school, 15-16, 131 
Marshall, Alfred, 9-10, 16, 17, 21, 

41, 75, 80, 131, 143, 167 
Marx, 7-9, 11-14, *7 30-32, 37< 39, 

46-48, 50-52, 54-61, 63, 67, 69, 

70, 72, 80-86, 90, ii2, 145, 148, 

161, 171, 182, 186, 187 
Materialistic conception of history, 

11-13 

McCulloch, 16 
Medieval doctrine (See Canonist 

school) 
Mercantilism, i, 4, 19-20, 121-125, 

189 

Mengcr, 3, 7 
Mill, John Stuart, 7, 14, 17, 20-21, 

28-29, 34-46, 144-147 
Mirabeau, 8 
Misselden, Edward, 102 
Monopoly, 3, 63-68, 142-149, 151, 

168-9 

Montchretien, 35, 122 
Mun, Thomas, 35, 100, 124 



196 



INDEX 



N 
National income, 91, 96, 132-5, 

142-7, 152, 161, 168 
Nationalization, 134, 139-140 
Naturalists, 74-79 
Neo-socialism, 135-141 
Ncwmarch, 17 
Nietzsche, 181 



Oresme, Nicolas, 17, 42 

Owen, 182 

Oxford group of economists, 2 



Pareto, 17 

Patten, 30 

Peel's Act, 37, 42 

Petty, Sir William, 93 

Physiocrats, 8, 17, 34, 44, 76, 128, 

160, 182 
Pigou, 167 
Pitt, 42 
Planning, 3, 142-9, 151-3, 155, 

157, 164-6, 170, 173-6, 185 
Plato, 13, 33, 34, 
"Political Arithmetik," 123-4 
Poor Law, poor relief, 14, 26-27, 42, 

79, 92-3, 125 

Population, 107-113, 125 
Predictions of the economists, 25-33 
Principle of selection, 19-24 
Proudhon, 91, 182 
Psychology in economics, 15, 17, 

*07 135-140 

Q 

Qualitative distinctions, 163-167 
Quesnay, Francois, 8, 17, 44, 76, 182 

R 

Revisionists, 56, 57, 63 

Rhodes, Cecil, 64 

Ricardo, 7, 17, 20, 21, 27-28, 37, 

39, 41-42, 44, 46-52, 92, 126 
Rodbertus, 8-9, 17, 145, 181, 182 
Roscher, 17, 39 



Say, 20, 27 

Saint-Simon, 14, 21, 30, 46, 182 

Schmoller, 17, 39 

Schoolmen (See Canonist school) 

Seckendorff, 125 

Selection, historical, 19-24, 114-115 

Senior, 11-12, 14, 20, 26-27 

Shaw, Bernard, 48 

Siebert, 50 

Sismondi, 17, 21, 28, 35, 39, 40, 161 

Smith, 7-8, 17, 20, 22-23, 25, 34-35, 

37-38, 42, 44, 46, 49, 50, 75, 79, 

84, 98, 101, 104, 113, 126, 127, 

145, 182 

Social costs, 167-170 
Social Darwinism, 12, 74-79 
Social Freudism, 11-16 
Socialism, 2-3, 9, 30-31, 33, 39. 53> 

67, 81-86, 115, 131-141. I45 l8l 

186, 189, 193 
Sombart, 35 
Sorel, 63 
Spencer, 40 
Stalin, 63, 71 
Subconsciousness, collective, 15-16 



Target economy, 173-176 
Tawney, 35 

Thompson, William, 48 
Thornton, 17 
Tinbergen, 174 
Tooke, 17 

Trade unions, 14, 137-138 
Turgot, 8, 34 



Varro, 14 
Veblen, 41, 44 
Voltaire, 123 



W 



Wagner, 9, 17 
Wallace, 34, 40 
Walras, 3, 7 
Webbs, 48, 145 
Weber, Max, 17, 19, 35 
Wieser, 7, 167 



197