(4) The Law of Demand and Supply—the law that determines the value of products and of productive services, such as labour, land, and capital—is usually stated in the following terms: Price varies directly with demand, inversely with supply. One of the most important contributions which Mill made to the science was to show that this apparently mathematically precise formula was merely a vicious circle. If it be true that demand and supply cause a variation of price, it is equally true that price causes a variation of demand and supply. Mill corrects the dictum by saying that price is fixed at a margin where the quantity offered is equal to the quantity demanded. All price variations move about this point, just as the beam of a balance oscillates about a point of equilibrium.[765] He thus gave to the law of demand and supply a scientific precision which it formerly lacked, and by substituting the conception of equilibrium for the causal relation he introduced a new principle into economics which was destined to lead to some important modifications.
The law of demand and supply explains the variations of value, but fails to illuminate the conception of value itself. A more fundamental cause must be sought, which can be found in cost of production. Under a régime of free competition the fluctuations in value tend toward this fixed point, just as “the sea tends to a level; but it never is at one exact level.”[766]
A temporary, unstable value dependent upon the variations of demand and supply, a permanent, natural, or normal value regulated by cost of production, such was the Classical law of value. Mill was entirely satisfied with it, as will be seen from the following phrase, which seems rather strange, coming from such a cautious philosopher. “Happily,” says he, “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.”[767]
The law which regulates the value of goods applies also to the value of money. Money also has a temporary value, determined by the quantity in circulation and the demand for it for exchange purposes—the celebrated quantity theory. But it also has a natural value, determined by the cost of production of the precious metals.
(5) The Law of Wages. A similar law determined wages—the price of hand-labour. Here again is a double law. Temporary wages depend upon demand and supply—understanding by supply the quantity of capital available for the upkeep of the workers, the wages fund, and by demand the number of workers in search of employment.[768] This law was more familiarly expressed by Cobden when he said that wages rose whenever two masters ran after the same man, and fell whenever two men ran after the same master.
Natural or subsistence wages in the long run are determined by the cost of production of labour—by the cost of rearing the worker. The oscillations of temporary wages always tend to a position of equilibrium about this point.
This “brazen law,” as Lassalle calls it, well deserves its title. According to it wages depend entirely upon causes extraneous to the worker, and bear no relation either to his need or to the character of his work or his willingness to perform it. He is at the mercy of a fatalistic law, and is as helpless to influence his market as a bale of cotton. And not only is the law independent of him, but no intervention, legal or otherwise, no institution, no system, can alter this state of things without influencing one or other of the two terms of the equation, the quantity of capital employed as wages—the wage fund—or the numbers of the working population in search of work. “Every plan of amelioration which is not founded upon this principle is quite illusory.” Only by encouraging the growth of capital by means of saving, or by discouraging the growth of population and restraining the sexual instinct, can the terms of the equation be favourably modified. Upon final analysis there are only two chances of safety for the workers, and of these the first is beyond their power,[769] while the second means the condemnation to celibacy or onanism of all proletarians, as they are ironically called.
And thus Mill, who formulated the law with greater rigour than any of his predecessors, found himself alarmed at its consequences. He was specially impressed by the courageous but impotent efforts of trade unionism, then at the beginning of its career. Mill and the economists of the Liberal school were as strongly in favour of the removal of the Combination Laws as they were persistent in their demands for the repeal of the Corn Laws; but of what use was the right of association and combination when a higher law frustrated every attempt to raise wages? Just at this time Longe, writing in 1866, and Thornton, in his volume on Labour, began to question the validity of the wage fund theory. They experienced no difficulty in converting John Stuart Mill, who followed with his famous recantation in the pages of the Fortnightly. His defection caused a remarkable stir, and was thought almost an offence against the sacred traditions of the Classical school. The conversion was not quite complete, however, for the last edition of the Principles still contains the passages we have already quoted, as well as others equally discouraging to the working classes, and equally fatal to the hopes which they had reasonably placed in their own efforts.[770]
The wage fund theory, though badly shaken as a result of Mill’s defection, was not abandoned by all the Classical writers, and some recent American publications have attempted a revival of it.[771]
(6) The Law of Rent. The law of competition tends to reduce the selling price until it is equal to the cost of production. But suppose, as is often the case, that there are two costs of production, which of the two will determine the price? The higher will be the determinant, and so there exists a margin for all similar products whose cost of production is less. Ricardo showed that this was the case with agricultural products as well as with certain manufactured goods.[772] Mill included personal ability, and though the conception of rent was thus very considerably extended, it had not the scope which it had with Senior.
(7) The Law of International Exchange. According to the Liberal economists Ricardo and Dunoyer (see p. 346), international trade is subject to the laws regulating individual exchange, and the results in the two cases are almost identical, namely, a saving of labour to both parties. One party exchanges a product which has cost fifteen hours’ labour for another which, had an attempt been made to produce it directly, would have involved a labour of twenty hours. The gain is credited to the importing side, for exportation is merely the means whereby it is obtained. Its measure is the excess of the imported value over the value exported.
It is clear that each party gains by the transaction. It is not quite clear, nor is it altogether probable, that the advantages are equally distributed. But it is generally believed that if any inequality does exist the greater gain goes to the poorer country—to the one that is less gifted by nature or less fitted for industrial life. The latter country by very definition would experience great difficulty in attempting the direct production of the imported goods, and would even, perhaps, find it quite impossible. On this point the English Classical or the Manchester school is in complete agreement with the French school.[773]
It might possibly be pointed out that under a régime of free competition all values would be reduced to the level of cost of production, and products would be exchanged in such a fashion that a given quantity of labour embodied in one commodity would always exchange for an equal quantity embodied in any other. But in such a case where would be the advantage of exchanging? Ricardo had already anticipated this objection, and had shown that if the rule of equal quantity in exchange for equal quantity were true of exchange between individuals, it did not hold of exchange between different countries, for the equalising action of competition no longer operated, because of the difficulty of moving capital and labour from one to the other. A comparison should be made, not of the respective costs of the same product in the two countries, but of the respective costs of the imported and the exported products in the same country. Another buttress to strengthen the theory which measures the advantages of international commerce by the amount of labour economised![774]
But the value of the exchanged product is still undetermined. It lies somewhere between the real cost of production of the goods exported and the virtual cost of production of the goods imported, in such a way that each country gains something. That is all we are able to say. Mill has gone a step farther. He has abandoned the comparison of costs of production, which is purely abstract, and can afford no practical measure of the advantages, preferring to measure the value of the imported product by the value of the product which must be given in exchange for it.[775] We require to find the causes that enable a country like England to obtain a greater or a lesser quantity of wine in exchange for her coal. In other words, the law of international values no longer involves a comparison of costs of production, but is simply the law of demand and supply. The prices of the two goods arrange themselves in such a fashion that the quantities demanded by the respective countries exactly balance. If there is a greater demand for coal in France than there is for wine in England, England will obtain a great quantity of wine in exchange for her coal, and will consequently find herself in a very advantageous position.
Mill’s theory[776] constitutes a real advance as compared with Ricardo’s, for it affords a means of gauging the strength of the foreign demand, and of judging of the circumstances favourable to a good bargain. Mill was of the opinion that a poor country stood to benefit most by the transaction—thus confirming Bastiat’s belief. A rich country will always have to pay more for its goods than a poor one.[777]
Protectionists affect the opposite belief, holding that it is the poor country that is duped. The English trade with Portugal is one of their favourite illustrations. But it is simply an illustration, and it can never take the place of actual proof.
Notwithstanding these divergent views, Mill is more sympathetic to the Protectionists than any other economist of the Liberal school. His theory provides them with at least one excellent argument. Seeing that the advantages of international commerce depend upon demand and supply, a country may make it operate to its own advantage by merely pursuing a different policy. New industries might be developed whenever there is a considerable demand for new products, and that demand might easily be so considerable that the price would be lowered.[778] Mill recognises the justice of merely temporary protection, set up with a view to naturalising a new industry, and considers it logically deducible from his principles.[779]
Although Mill may in this way have done something to lighten the task of the Protectionists, we must never forget that he himself remained an entirely faithful adherent of the Free Trade doctrine and, except in the case of infant industries, vigorously denounced all protective rights. “All is sheer loss.… They prevent the economy of labour and capital, thereby annihilating a general gain to the world which would be shared in some proportion between itself and other countries.”[780]
The Free Trade doctrine has not remained where it was any more than the other special doctrines of the Classical school. It gave birth to one of the most powerful movements in economic history, which led to the famous law of June 25, 1846, abolishing import duty on corn. This law was followed by others, and ended in the complete removal of all tariff barriers. But the eloquence of Cobden, of Bright, and of others was necessary before it was accomplished. A national Anti-Corn League had to be organised, no less than ten Parliamentary defeats had to be endured, the allegiance of Peel and the approval of the Duke of Wellington had to be secured before they were removed. All this even might have proved futile but for the poor harvest of 1845. This glorious campaign did more for the triumph of the Liberal economic school and for the dissemination of its ideas than all the learned demonstrations of the masters. Fourteen years were still to elapse before Cobden and Michel Chevalier were able to sign the treaty of 1860. Even this was due to a personal act of Napoleon III, and Cobden was not far wrong when he declared that nine-tenths of the French nation was opposed to it.
Such were the doctrines taught by the Classical school about the middle of the nineteenth century. The writers in question, however, strongly objected to the term “school,” believing that they themselves were the sole guardians of the sacred truth. And we must admit that their doctrines are admirably interwoven, and present an attractive appearance. On the other hand, it must be confessed that the prospects which they hold out for anyone not a member of the landowning class are far from attractive. For the labourer there is promise of daily toil and bare existence, and at best a wage determined by the quantity of capital or the numbers of the population—causes which are clearly beyond the workers’ influence, and even beyond the assuaging influence of association and combination. And although the latter rights are generously claimed for the workers, the occasional antagonism between masters and men presages the eternal conflict between profits and wages. The possession of land is a passport to the enjoyment of monopolistic privileges, which the right of free exchange can only modify very slightly. Rent—the resultant of all life’s favourable chances—reserved for those who need it least, monopolises a growing proportion of the national revenue. Intervention for the benefit of the worker, whether undertaken by the State or by some other body, is pushed aside as unworthy of the dignity of labour and harmful to its true interests. “Each for himself” is set up as a principle of social action, in the vain hope that it would be spontaneously transformed into the principle of “Each for all.” The search for truth was the dominant interest of the school, and these doctrines were preached, not for the pleasure they yielded, but as the dicta of exact science. Little wonder that men were prepared to fight before they would recognise these as demonstrable truths. And just as it was Mill who so powerfully helped to consolidate and complete the science of economics that Cossa refers to his Principles as the best résumé, the fullest, most complete and most exact exposition of the doctrines of the Classical school that we have,[781] it was Mill also who, in successive editions of his book, and in his other and later writings, pointed out the new vistas opening before the science, freed the doctrine from many errors to which it was attached and set its feet on the paths of Liberal Socialism.
We might say without any suggestion of bias that Mill’s evolution was largely influenced by French ideas.[782] A singularly interesting volume might be written in illustration of this statement. Without referring to the influence of Comte, which Mill was never tired of recognising, and confining our attention only to economics, he has himself acknowledged his debt to the Saint-Simonians for the greater part of his doctrines of heredity and unearned increment, to Sismondi for his sympathy with peasant proprietorship, and to the socialists of 1848 for his faith in co-operative association as a substitute for the wage nexus.
It would hardly be true to say that Mill became a convert to socialism, although he showed himself anxious to defend it against every undeserved attack. To those who credit socialism with a desire to destroy personal initiative or to undermine individual liberty he disdainfully points out that “a factory operative has less personal interest in his work than a member of a communist association, since he is not, like him, working for a partnership of which he is himself a member,” and that “the restraints of communism would be freedom in comparison with the present condition of the majority of the human race.”[783] And although he expresses the belief that “communism would even now be practicable among the élite of mankind, and may become so among the rest,” and hopes that one day education, habit, and culture will so alter the character of mankind that digging and weaving for one’s country will be considered as patriotic as to fight for it,[784] still he was far from being a socialist. Free competition, he thought, was an absolute necessity, and there could be no interference with the essential rights of the individual.
The first blow which he dealt at the Classical school was to challenge its belief in the universality and permanence of natural law. He never took up the extreme position of the Marxian and Historical schools, which held that the so-called natural laws were merely attempts at describing the social relations which may exist at certain periods in economic history, but which change their character as time goes on. He draws a distinction between the laws which obtain in the realm of production and those that regulate distribution. Only in the one case can we speak of “natural” laws; in the other they are artificial—created by men—and capable of being changed, should men desire it.[785] Contrary to the opinion of the Classical school, he tries to show that wages, profits, and rent are not determined by immutable laws against which the will of man can never prevail.
The door was thus open for social reform, which was no small triumph. Of course it cannot be said of the Classical school, or even of the Optimists, that they were prepared to deny the possibility or the efficacy of every measure of social reform, but it must be admitted that they were loath to encourage anything beyond private effort, or to advocate the abolition of any but the older laws. Braun, speaking at a conference of Liberal economists at Mayence in 1869, expressed the opinion that “that conference had given rise to much opposition because it upheld the principle that human legislation can never change the eternal laws of nature, which alone regulate every economic action.” Similar declarations abound in the French works of the period. But, thanks to the distinction drawn by Mill, all this was changed. Though the legislator be helpless to modify the laws of production, he is all-powerful in the realm of distribution, which is the real battle-ground of economics.
But, as a matter of fact, Mill’s distinction is open to criticism, especially his method of stating it; and we feel that he is unjust to himself when he regards this as his most important and most original contribution to economic science. Production and distribution cannot be treated as two separate spheres, for the one invariably involves the other. And Mill himself is forced to abandon his own thesis when he advocates the establishment of co-operative associations or peasant proprietorship, for each of these belongs as much to the domain of production as to that of distribution. Rodbertus, at almost the same period, gave a much truer expression to Mill’s thought by emphasising the distinction which exists between economic and legal ties.[786] Even these may mutually involve one another; still we know that the economic laws which regulate exchange value or determine the magnitude of industrial enterprise are not of the same kind as the rules of law which regulate the transfer of property or lay down the lines of procedure for persons bound by agreement concerning wages, interest, or rent. The first may well be designated natural laws, but the latter are the work of a legislative authority.
Stuart Mill, not content with merely opening the door to reform, deliberately enters in, and, in striking contrast to the economists of the older school, outlines a comprehensive programme of social policy, which he formulates thus:[787] “How to unite the greatest individual liberty of action, with a common ownership in the raw material of the globe, and an equal participation of all in the benefits of combined labour.”
We may summarise his proposals as follows:
(1) Abolition of the wage system and the substitution of a co-operative association of producers.
(2) The socialisation of rent by means of a tax on land.
(3) Lessening of the inequalities of wealth by restrictions on the rights of inheritance.
This threefold measure of reform possesses all the desiderata laid down by Mill. Moreover, it does not conflict with the individualistic principle, but would somewhat strengthen it. It involves no personal constraint, but tends to extend the bounds of individual freedom.
Let us briefly review these projects seriatim.
(1) Mill thought that the wages régime was detrimental to individuality because it deprived man of all interest in the product of his labour, with the result that a vast majority of mankind is living under conditions which socialism could not possibly make much worse.
It is necessary to replace this condition of things by “a form of association which, if mankind continue to improve, must be expected in the end to predominate, and is not that which can exist between a capitalist as chief and workpeople without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.”[788] This noble ideal of a co-operative community was borrowed, not from Owen, but from the French socialists. Mill had already eulogised the French movement, even before its brilliant but ephemeral triumph in 1848. He was not the only one to be attracted by the idea of a co-operative community, for the English Christian Socialists drew their inspiration from the same source.
Mill lived long enough to witness the decline of co-operative production in England, and of the Co-operative Consumers’ Union in France, but neither failure seems to have had any influence upon his projects.[789] Whatever the method might be, the object in his ideal was always the same, the self-emancipation of the workers.
(2) The rent of land, which Ricardo and his disciples accepted as a natural if not as a necessary phenomenon, appeared to Mill as an abnormal fact which was as detrimental to individuality as the wage system itself. Its peculiar danger was, of course, not quite the same. What rent did was to secure to certain individuals something which was not the result of their own efforts, whereas individualism always aimed at securing for everyone the fruits of his own labour—suum cuique. On the principle of giving to each what each produced, everything not directly produced by man himself was to be restored to the community. It is immaterial whether this extra product is due to the collaboration of nature, as Smith and the Physiocrats believed, or whether it is the result of the pressure of population, as Ricardo and Malthus thought, or the mere result of chance and favourable circumstance, as Senior put it. Nothing could be easier than to levy a land tax which would gradually absorb rent, and which could be periodically increased as rents advanced. The idea was a brilliant one, and Mill had learned it from his father. It soon became the rallying-cry of a new school of economists closely akin to the socialists.
The movement begot of this idea of confiscation deserves the fuller treatment which will be found in another chapter of this work.
Meanwhile, and until the larger and more revolutionary reform becomes practical, Mill would welcome a modest instalment of emancipation in the shape of peasant proprietorship. Like the co-operative ideal, this also was of French extraction. Admiration of the French peasant had been a fashionable cult in England ever since the days of Arthur Young.[790] Mill thought that among the principal advantages of peasant proprietorship would be a lessening of the injustice of rent, because its benefits would be more widely distributed. The feeling of independence would check the deterioration of the wage-earner, individual initiative would be encouraged, the intelligence of the cultivator developed, and the growth of population checked.
Mill inspired a regard for the frugal French peasantry in the English Radical party. To his influence are due the various Small Holdings Acts which have resulted in the establishment of small islets of peasant tillers amid the vast territories of the English aristocracy.
(3) Mill was equally shocked at our antiquated inheritance law, which permits people to possess wealth which they have never helped to produce. To Senior inheritance ranked with the inequality of rent, and he placed both in the same category. To Mill it appeared to be not merely antagonistic to individual liberty, but a source of danger to free competition, because it placed competitors in positions of unequal advantage. In this matter Mill was under the influence of the Saint-Simonians, and he made no attempt to hide his contempt for the “accident of birth.”
This right of bequest, he felt, was a very difficult problem, for the right of free disposal of one’s property even after death constituted one of the most glorious attributes of individuality. It implied a kind of survival or persistence of the human will. Mill showed considerable ingenuity in extricating himself from this difficult position. He would respect the right of the proprietor to dispose of his goods, but would limit the right of inheritance by making it illegal to inherit more than a certain sum. The testator would still enjoy the right of bequeathing his property as he wished, but no one who already possessed a certain amount of wealth could inherit it. Of all the solutions of this problem that have been proposed, Mill’s is the most socialistic. He puts it forward, however, not as a definite project, but as a mere suggestion.[791]
Mill might well have been given a place among the Pessimists, especially as he inherits their tendency to see the darker side of things. Not only did the law of population fill him with terror, but the law of diminishing returns seemed to him the most important proposition in the whole of economic science; and all his works abound with melancholy reflections upon the futility of progress. There is, for instance, the frequently quoted “It is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.”[792] In his vision of the future of society he prophesies that the river of human life will eventually be lost in the sea of stagnation.
It is worth while dwelling for a moment on this idea of a stationary state. Though the conception is an old one, it is very characteristic of Mill’s work, and he feels himself forced to the belief that only by reverting to the stationary state can we hope for a solution of the social question.
Economists, especially Ricardo, had insisted upon the tendency of profits to a minimum as a correlative of the law of diminishing returns. This tendency, it was believed, would continue until profits had wholly disappeared and the formation of new capital was arrested.[793] Mill took up the theory where Ricardo had left it, and arrived at the conclusion that industry would thus be brought to a standstill, seeing that the magnitude of industry is dependent upon the amount of available capital. Population must then become stationary, and all economic movement must cease. Though alarmed at the economic significance of this prospect, Mill acquiesced in its ethical import. On the whole he thinks that such a state would be a very considerable improvement on our present condition. With economic activity brought to a standstill the current of human life would simply change its course and turn to other fields.[794] The decay of Mammon-worship and the thirst for wealth would simply mean an opportunity for pursuing worthier objects. He hoped that the arrest of economic progress would result in a real moral advance, and in the appeasement of human desires he looked for a solution and for the final disappearance of the social problem. And as far as we can see the reformers of to-day have nothing better to offer us.
Mill’s influence was universal, though, properly speaking, he had no disciples. This was, no doubt, partly because writers like Toynbee, who would naturally have become disciples, were already enrolled in the service of the Historical school.
The Classical school failed to follow his socialistic lead. It still preached the old doctrines, but with waning authority, and no new work was produced which is at all comparable with the works which we have already studied. We will mention a few of the later writings, however, for, though belonging to the second class, they are in some respects excellent.
In the first place we have several books written by Cairnes,[795] notably Some Leading Principles of Political Economy (1874). Cairnes is generally regarded as a disciple of Mill, though as a matter of fact he was nothing of the kind. Cairnes was purely Classic, and shared the Classical preference for the deductive method, which he thought the only method for political economy. His preference for that method sometimes resulted in his abusing it, and he was curiously indifferent to all social iniquities. He accepted laissez-faire, not as the basis of a scientific doctrine, but simply as a safe and practical rule of conduct.[796] The old wage fund theory has in him a champion who attempted to defend it against Stuart Mill. It cannot be said that he made any new contribution to the science, unless we except his teaching concerning competition. He pointed out that competition has not the general scope that is usually attributed to it. It only obtains between individuals placed in exactly similar circumstances. In other words, it operates within small areas, and is inoperative as between one area and another. This theory of non-competing groups helps to throw some light upon the persistent inequality shown by wages and profits.
In France the most prominent representative of political economy during the Second Empire was Michel Chevalier, a disciple of Saint-Simon. He nevertheless remained faithful to the Classical tradition of Say and Rossi,[797] his predecessors at the Collège de France. He waged battle with the socialists of 1848, made war upon Protection, and had the good fortune to be victorious in both cases, sharing with Cobden the honour of being a signatory to the famous commercial treaty of 1860. He realised the important place that railways would some day occupy in national economy, and the great possibilities of an engineering feat like the Suez Canal. He was also alive to the importance of credit institutions, which were only at the commencement of their useful career just then.[798] Although connected with the Liberal school, he was not indifferent to the teaching of the Saint-Simonians on the importance of the authority and functions of the State, and he impressed upon the Government the necessity of paying attention to labour questions—a matter to which Napoleon III was naturally somewhat averse. Every subject which he handles is given scholarly and eloquent treatment.
About the same time Courcelle-Seneuil published a treatise on political economy which was for a long time regarded as a standard work. Seneuil was a champion of pure science—or “plutology,” as he called it, in order to distinguish it from applied science, to which he gave the name “ergonomy.” For a long time he was regarded as a kind of pontiff, and the pages of the Journal des Économistes bear evidence of the chastisement which he bestowed upon any of the younger writers who tried to shake off his authority. This was the time when Maurice Block was meting out the same treatment to the new German school in those bitterly critical articles which appeared in the same journal.
It is to be regretted that we cannot credit France with the Précis de la Science économique et de ses Principales Applications, which appeared in 1862. Cherbuliez, the author, was a Swiss, and was professor first at Geneva and then at Zurich. Cossa, in his Histoire, speaks of it as “undoubtedly the best treatise on the subject published in France,” and as being “possibly superior even to Stuart Mill’s.” Cherbuliez belonged to the Classical school. He was opposed to socialism, and wrote pamphlets à la Bastiat in support of Liberal doctrines and the deductive method. But, like the Mills before him, and Walras, Spencer, Laveleye, Henry George, and many others who came after, he found it hard to reconcile private property with the individualistic doctrine, “To each the product of his labour.” He reconciles himself to this position merely because he thinks that it is possibly a lesser evil than collective property.
The Liberal school had still a few adherents in Germany, although a serious rival was soon to make its appearance. Prince Smith (of English extraction) undertook the defence of Free Trade, pointing out “the absurdity of regarding it as a social question,” and “how much more absurd it is to think that it can ever be solved other than by the logic of facts.” Less a doctrinaire than a reformer, Schulze-Delitzsch, about 1850, inaugurated that movement which, notwithstanding the gibes of Lassalle, has made magnificent progress, and to-day includes thousands of credit societies; though up to the present it has not benefited anyone beyond the lower middle classes—the small shopkeeper, the well-to-do artisan, and the peasant proprietor.
With Bastiat economic Liberalism, threatened by socialism, sought precarious refuge in Optimism. With Mill the older doctrines found new expression in language scientific in its precision and classical in its beauty.
It really seemed as if political economy had reached its final stage and that there could be no further excuse for prolonging our survey.
But just when Liberalism seemed most triumphant and the principles of the science appeared definitely settled there sprang up a feeling of general dissatisfaction. Criticism, which had suffered a temporary check after 1848, now reasserted its claims, and with a determination not to tolerate any further interruption of its task.
The reaction showed itself most prominently in Germany, where the new Historical school refused to recognise the boundaries of the science as laid down by the English and French economists. The atmosphere of abstractions and generalisations to which they had confined it was altogether too stifling. It demanded new contact with life—with the life of the past no less than that of the present. It was weary of the empty framework of general terms. It was athirst for facts and the exercise of the powers of observation. With all the ardour of youth it was prepared to challenge all the traditional conclusions and to reformulate the science from its very base.
So much for the doctrine. But there was one thing which was thought more objectionable than even the Classical doctrine itself, and that was the Liberal policy with which the science had foolishly become implicated, and which must certainly be removed.
In addition to such critics as the above there are also the writers who drew their inspiration from Christianity, and in the name of charity, of morality, or of religion itself, uttered their protest against optimism and laissez-faire. Intervention again, so tentatively proposed by Sismondi, makes a bold demand for wider scope in view of the pressure of social problems, and under the name of State Socialism becomes a definitely formulated doctrine.
Socialism, which Reybaud believed dead after 1848, revived in its turn. Marx’s Kapital, published in 1867, is the completest and most powerful exposition of socialism that we have. It is no longer a pious aspiration, but a new and a scientific doctrine ready to do battle with the champions of the Classical school, and to confute them out of their own mouths.
None of these currents is entirely new. Book II has shown us where they originated, and their beginnings can be traced to the earlier critical writers.
But we must not forget the striking difference between the ill-fated doctrines of the pre-1848 period and the striking success achieved by the present school. Despite the sympathy shown for the earlier critics, they remained on the whole somewhat isolated figures. Their protests were always individualistic—Sismondi’s no less than Saint-Simon’s, Fourier’s no less than Owen’s. Proudhon and List never seriously shook the public confidence in Liberalism. Now, on the contrary, Liberalism finds itself deserted, and sees the attention of public opinion turning more and more in the direction of the new school.
The triumph, of course, was not immediate. Many of the doctrines were formulated between 1850 and 1875, but victory was deferred until the last quarter of the century. But when it did come it was decisive. In Germany history monopolised the functions of economics, at least for a time. Intervention has only become universal since 1880. Since then, also, collectivism has won over the majority of the workers in all industrial countries, and has exercised very considerable influence upon politics, while Christian Socialism has discovered a way of combining all its most fervent adherents, of whatever persuasion, in one common faith.
The advance of this new school meant the decline of the Classical doctrine and the waning of Liberalism. Public interest gravitated away from the teaching of the founders. But in the absence of a new and a definite creed, what we find is a kind of general dispersion of economic thought, accompanied by a feeling of doubt as to the validity of theory in general and of theoretical political economy in particular. The old feeling of security gave place to uncertainty. Instead of the comparative unanimity of the early days we have a complete diversity of opinions, amid which the science sets out on a new career.
In the last Book we shall find that certain eminent writers have succeeded in renewing the scientific tradition of the founders. But every connection with practical politics had to be removed and a new body of closely knit doctrines had to be created before social thinkers could have this new point of view from which to co-operate.
The second half of the nineteenth century is dominated by Historical ideas, though their final triumph was not fully established until the last quarter of the century. The rise of these ideas, however, belongs to a still earlier period, and dates from 1843, when there appeared a small volume by Roscher entitled Grundriss. We shall have to return to that date if we wish to understand the ideas of the school and to appreciate their criticisms.
The successors of J. B. Say and Ricardo gave a new fillip to the abstract tendency of the science by reducing its tenets to a small number of theoretical propositions. The problems of international exchange, of the rate of profits, wages, and rent, were treated simply as a number of such propositions, expressed with almost mathematical precision. Admitting their exactness, we must also recognise that they are far from being adequate, and could not possibly afford an explanation of the different varieties of economic phenomena or help the solution of the many practical problems which the development of industry presents to the statesman. But McCulloch, Senior, Storch, Rau, Garnier,[799] and Rossi, the immediate successors of Ricardo and Say in England and France, repeated the old formulæ without making any important additions to them. The new system of political economy thus consisted of a small number of quite obvious truths, having only the remotest connection with economic life. It is true that Mill is an exception. But the Principles dates from 1848, which is subsequent to the foundation of the Historical school. With this exception we may say, in the words of Schmoller, that after the days of Adam Smith political economy seems to have suffered from an attack of anæmia.[800]
Toynbee gives admirable expression to this belief in his article on Ricardo and the Old Political Economy:[801] “A logical artifice became the accepted picture of the real world. Not that Ricardo himself, a benevolent and kind-hearted man, could have wished or supposed, had he asked himself the question, that the world of his treatise actually was the world he lived in; but he unconsciously fell into the habit of regarding laws which were those only of that society which he had created in his study for purposes of analysis as applicable to the complex society really existing around him. And the confusion was aggravated by some of his followers and intensified in ignorant popular versions of his doctrines.” In other words, there was a striking divergence between economic theory and concrete economic reality, a divergence that was becoming wider every day, as new problems arose and new classes were being formed. But the extent of the gap was best realised when an attempt was made to apply the principles of the science to countries where the economic conditions were entirely different from those existing either in England or in France.
This divergence between theory and reality might conceivably be narrowed in one of two ways. A more harmonious and a more comprehensive theory might be formulated, a task which Menger, Jevons, and Walras attempted about 1870. A still more radical suggestion was to get rid of all abstract theory altogether and to confine the science to a simple description of economic phenomena. This was the method of procedure that was attempted first, and it is the one followed by the Historical school.
Long before this time certain writers had pointed out the dangers of a too rigid adherence to abstraction. Sismondi—an essentially historical writer—treated political economy as a branch of moral science whose separation from the main trunk is only partial, and insisted upon studying economic phenomena in connection with their proper environment. He criticised the general conclusions of Ricardo and pleaded for a closer observation of facts.[802] List showed himself a still more violent critic, and, not content with the condemnation of Ricardian economics, he ventured to extend his strictures even to Smith. Taking nationality for the basis of his system, he applied the comparative method, upon which the Historical school has so often insisted,[803] to the commercial policy of the Classical school; but history was still employed merely for the purpose of illustration. Finally, socialists, especially the Saint-Simonians, whose entire system is simply one vast philosophy of history, had shown the impossibility of isolating economic from political and juridical phenomena, with which they are always intermingled.
But no author as yet had deliberately sought either in history or in the observation of contemporary facts a means of reconstructing the science as a whole. It is just here that the originality of the German school lies.
Its work is at once critical and constructive. On the critical side we have a profound and suggestive, though not always a just, analysis of the principles and methods of the older economists, while its constructive efforts gave new scope to the science, extended the range of its observations, and added to the complexity of its problems.
Generally speaking, it is not a difficult task to give an exposition of the critical ideas of the school, as we find them set forth in several books and articles, but it is by no means easy to delineate the conceptions underlying the positive work. Though implicit in all their writings, these conceptions are nowhere explicitly stated; whenever they have tried to define them it has always been, as their disciples willingly admit, in a vague and contradictory fashion.[804] To add further to the difficulty, each author defines them after his own fashion, but claims that his definition represents the ideas of the whole school.
In order to avoid useless repetitions and discussions without number we shall begin with a rapid survey of the outward development of the school, following with a résumé of its critical work, attempting, finally, to seize hold of its conception of the nature and object of political economy. From our point of view the last-named object is by far the most interesting.
The honour of founding the school undoubtedly belongs to Wilhelm Roscher, a Göttingen professor, who published a book entitled Grundriss zu Vorlesungen über die Staatswirtschaft nach geschichtlicher Methode in 1843. In the preface to that small volume he mentions some of the leading ideas which inspired him to undertake the work, which reached fruition in the celebrated System der Volkswirtschaft (1st ed., 1854). He makes no pretence to anything beyond a study of economic history. “Our aim,” says he, “is simply to describe what people have wished for and felt in matters economic, to describe the aims they have followed and the successes they achieved—as well as to give the reasons why such aims were chosen and such triumphs won. Such research can only be accomplished if we keep in close touch with the other sciences of national life, with legal and political history, as well as with the history of civilisation.”[805] Almost in the same breath he justifies an attack upon the Ricardian school. He recognises that he is far from thinking that his is the only or even the quickest way of attaining the truth, but thinks that it will lead into pleasant and fruitful quests, which once undertaken will never be abandoned.
What Roscher proposed to do was to try to complete the current theory by adding a study of contemporary facts and opinions, and, as a matter of fact, in the series of volumes which constitute the System, every instalment of which was received with growing appreciation by the German world of letters, Roscher was merely content to punctuate his exposition of the Classical doctrines with many an erudite excursus in the domain of economic facts and ideas.[806]
Roscher referred to his experiment as an attempt to apply the historical method which Savigny had been instrumental in introducing with such fruitful results into the study of jurisprudence.[807] But, as Karl Menger[808] has well pointed out, the similarity is only superficial. Savigny employed history in the hope of obtaining some light upon the organic nature and the spontaneous origin of existing institutions. His avowed object was to prove their legitimacy despite the radical pretensions of the Rationalist reformers of the eighteenth century. Roscher had no such aim in view. He was himself a Liberal, and fully shared in their reforming zeal. History with him served merely to illustrate theory, to supply rules for the guidance of the statesman or to foster the growth of what he called the political sense.
Schmoller thinks that Roscher’s work might justly be regarded as an attempt to connect the teaching of political economy with the “Cameralist” tradition of seventeenth- and eighteenth-century Germany.[809] These Cameralists were engaged in teaching the principles of administration and finance to students who were to spend their lives in administrative work of one kind or another, and they naturally took good care to keep as near actual facts as possible. Even in England and France political economy soon got involved in certain practical problems concerning taxation and commercial legislation. But in a country like Germany, which was industrially much more backward than either England or France, these problems wore a very different aspect, and some correction of the Classical doctrines was absolutely necessary if they were to bear any relation to the realities of economic life. Roscher’s innovation was the outcome of a pedagogic rather than of a purely scientific demand, and he was instrumental in reviving a university tradition rather than in creating a new scientific movement.
In 1848 another German professor, Bruno Hildebrand, put forward a much more ambitious programme, and his Die Nationalökonomie der Gegenwart und Zukunft shows a much more fundamental opposition to the Classical school. History, he thought, would not merely vitalise and perfect the science, but might even help to recreate it altogether. Hildebrand points to the success of the method when applied to the science of language. Henceforth economics was to become the science of national development.[810]
In the prospectus of the Jahrbücher für Nationalökonomie und Statistik, founded by him in 1863, Hildebrand goes a step farther. He challenges the teaching of the Classical economists, especially on the question of national economic laws, and he even blames Roscher because he had ventured to recognise their existence.[811] He did not seem to realise that a denial of that kind involved the undoing of all economic science and the complete overthrow of those “laws of development” which he believed were henceforth to be the basis of the science.
But Hildebrand’s absolutism had no more influence than Roscher’s eclecticism, unless we make an exception of his generalisation concerning the three phases of economic development, which he differentiates as follows: the period of natural economy, that of money economy, and finally that of credit. Beyond that he merely contented himself with publishing a number of fragmentary studies on special questions of statistics or history, without, for the most part, making any attempt to modify the Classical theory of production and distribution.
The critical study of 1848 hinted at a sequel which was to embody the principles of the new method. But the sequel never appeared, and the difficult task of carrying the subject farther was entrusted to Karl Knies, another professor, who in 1853 published a bulky treatise bearing the title of Political Economy from the Historical Point of View.[812] But there is as much divergence between his views and those of his predecessors as there is between Roscher’s and Hildebrand’s. He not only questions the existence of natural laws, but even doubts whether there are any laws of development at all—a point Hildebrand never had any doubts about—and thinks that all we can say is that there are certain analogies presented by the development of different countries. Knies cannot share in the belief of either Hildebrand or Roscher, nor does he hold with the Classical school. He thinks that political economy is simply a history of ideas concerning the economic development of a nation at different periods of its growth.
Knies’s work passed almost unnoticed, ignored by historians and economists alike, until the younger Historical school called attention to his book, of which a new edition appeared in 1883. Knies makes frequent complaints of Roscher’s neglect to consider his ideas.
Such heroic professions naturally lead us to expect that Knies would spare no effort to show the superiority of the new method. But his subsequent works dealing with money and credit, upon which his real reputation rests, bear scarcely a trace of the Historical spirit.
The three founders of the science devoted a great deal of time to a criticism of the Classical method, but failed to agree as to the aim and scope of the science and left to others the task of applying their principles.
This task was attempted by the newer Historical school, which sprang up around Schmoller towards the end of 1870. This new school possesses two distinctive characteristics.
(1) The useless controversy concerning economic laws which Hildebrand and Knies had raised is abandoned. The members of the school are careful not to deny the existence of natural social laws or uniformities, and they considered that the search for these was the chief object of the science. In reality they are economic determinists. “We know now,” says Schmoller,[813] “that psychical causation is something other than mechanical, but it bears the same stamp of necessity.” What they do deny is that these laws are discoverable by Classical methods, and on this point they agree with every criticism made by their predecessors.
As to the possibility of formulating “the laws of development” upon which Hildebrand laid such stress, they professed themselves very sceptical. “We have no knowledge of the laws of history, although we sometimes speak of economic and statistical laws,”[814] writes Schmoller. “We cannot,” he regretfully says later, “even say whether the economic life of humanity possesses any element of unity or shows any traces of uniform development, or whether it is making for progress at all.”[815] This very characteristic passage from Schmoller was written in 1904,[816] and forms the conclusion of the great synthetic treatise. All attempts at a philosophy of history are treated with the same disdain.[817]
(2) The newer Historical school, not content merely with advocating the use of the Historical method, hastened to put theory into practice. Since about 1860 German economists have shown a disposition to turn away from economic theory and to devote their entire energy to practical problems, sociological studies and historical or realistic research. The number of economic monographs has increased enormously. The institutions of the Middle Ages and of antiquity, the economic doctrines of the ancients, statistics, the economic organisation of the present day, these are some of the topics discussed. Political economy is lost in the maze of realistic studies, whether of the present day or of the past.
Although the Historical school has done an enormous amount of work we must not forget that historical monographs were printed before their time, and that certain socialistic treatises, such as Marx’s Kapital, are really attempts at historical synthesis. The special merit of the school consists in the impulse it gave to systematic study of this description. The result has been a renewed interest in history and in the development of economic institutions. We cannot attempt an account of all these works and their varied contents. We must remain satisfied if we can catch the spirit of the movement. The names of Schmoller, Brentano, Held, Bücher, and Sombart are known to every student of economic history. Marshall, the greatest of modern theorists, has on more than one occasion paid them a glowing tribute.[818]
The movement soon left Germany, and it was speedily realised that conditions abroad were equally favourable for its work.
By the end of 1870 practical Liberalism had spent its force. But new problems were coming to the front, especially the labour question, which demanded immediate attention.[819] Classical economists had no solution to offer, and the new study of economic institutions, of social organisation, and of the life of the masses seemed to be the only hopeful method of gaining light upon the question. Comparison with the past was expected to lead to a better understanding of the present. The Historical method seemed to social reformers to be the one instrument of progress, and a strong desire for some practical result fostered belief in it. When we remember the prestige which German science has enjoyed since 1871, and the success of the Germans in combining historical research with the advocacy of State Socialism, we can understand the enthusiasm with which the method was greeted abroad.
Even in England, the stronghold of Ricardian economics, the influence of the school becomes quite plain after 1870.
Here, as elsewhere, a controversy as to the method employed manifests itself. Cairnes in his work The Character and Logical Method of Political Economy (1875[820]), writing quite in the spirit of the old Classical authors, strongly advocates the employment of the deductive method. In 1879 Cliffe Leslie, in his Essays on Political and Moral Philosophy, enters the lists against Cairnes and makes use of the new weapons to drive home his arguments. The use of induction rather than deduction, the constant necessity for keeping economics in living touch with other social sciences, the relative character of economic laws, and the employment of history as a means of interpreting economic phenomena, are among the arguments adopted and developed by Leslie. Toynbee, in his Lectures on the Industrial Revolution, gave utterance to similar views, but showed much greater moderation. While recognising the claims of deduction, he thought that history and observation would give new life and lend a practical interest to economics. The remoteness and unreality of the Ricardian school constituted its greatest weakness, and social reform would in his opinion greatly benefit by the introduction of new methods. Toynbee would undoubtedly have exercised tremendous influence; but his life, full of the brightest hopes, was cut short at thirty.
The lead had been given; the study of economic institutions and classes was henceforth to occupy a permanent position in English economic writings, and the remarkable works which have since been published, such as Cunningham’s Growth of English Industry and Commerce, Ashley’s Economic History, the Webbs’ Trade Unionism and Industrial Democracy, Booth’s Life and Labour of the People, bear witness to the profound influence exerted by the new ideas.
In France the success of the movement has not been quite so pronounced, although the need for it was as keenly felt there. Although it did not result in the founding of a French school of economic historians, the new current of ideas has influenced French economic thought in a thousand ways. In 1878 political economy became a recognised subject in the various curricula of the Facultés de Droit. The intimate connection between economic study and the study of law has given an entirely new significance to political economy, and the science has been entirely transformed by the infusion of the historical spirit. At the same time professional historians have become more and more interested in problems of economic history, thus bringing a spirit of healthy rivalry into the study of economic institutions. Several Liberal economists also, without breaking with the Classical tradition, have devoted their energies to the close observation of contemporary facts or to historical research.[821]
Finally, we have a new group of workers in the sociologists. Sociology is interested in the origin and growth of social institutions of all kinds and in the influence which they have exerted upon one another. After studying institutions of a religious, legal, political, or social character it is only natural that they should ask that the study of economic institutions should be carried on in the same spirit and with the help of the same method. This object has been enthusiastically pursued for some time. The mechanism and the organisation of the economic system at different periods have been closely examined by the aid of observation and history. Abstraction has been laid aside and a preference shown for minute observation, and for induction rather than deduction.[822]
Among so many writers whose works cover such a long period of time we can hardly expect to find absolute unanimity, and we have already had occasion to note some of the more important divergencies between them, especially those separating the newer from the older writers of the Historical school. We cannot here enter into a full discussion of all these various shades of opinion, and we must be content to mention the more important features upon which they are almost entirely at one, noticing some of the principal individual doctrines by the way.
The German Historical school made its début with a criticism of Classical economics, and we cannot better begin than with a study of its critical ideas.[823]
Although these ideas had already found expression in the writings of Knies, Hildebrand, and Roscher, there was nothing like the discussion which was provoked by them when the newer Historical school, at a much later period, again brought them to public notice. The publication of Karl Menger’s work, Untersuchungen über die Methode der Socialwissenschaften, in 1883—a classic both in style and matter—ushered in a new era of active polemics. This remarkable work, in which the author undertakes the defence of pure political economy against the attacks of the German Historical school, was received with some amount of ill-feeling by the members of that school,[824] and it caused a general searching of hearts during the next few years. We must try to bring out the essential elements in the discussion, and contrast the arguments advanced by the Historians with the replies offered by their critics.
Broadly speaking, three charges are levelled at the Classical writers. (i) It is pointed out that their belief in the universality of their doctrines is not easily justified. (ii) Their psychology is said to be too crude, based as it is simply upon egoism. (iii) Their use, or rather abuse, of the deductive method is said to be wholly unjustifiable. We will review these charges seriatim.
The Historians held that the greatest sin committed by Smith and his followers was the inordinate stress which they laid upon the universality of their doctrines. Hildebrand applies the term “universalism” to this feature of their teaching, while Knies refers to it as “absolutism” or “perpetualism.” The belief of the Anglo-French school, according to their version of it, was that the economic laws which they had formulated were operative everywhere and at all times, and that the system of political economy founded upon them was universal in its application. The Historians, on the other hand, maintained that these laws, so far from being categorically imperative, should be regarded always as being subject to change in both theory and practice.
First with regard to practice. A uniform code of economic legislation cannot be indifferently applied to all countries at all epochs of their history. An attempt must be made to adapt it to the varied conditions of time and place. The statesman’s art consists in adapting principles to meet new demands and in inventing solutions for new problems. But, as Menger points out, this obvious principle, which was by no means a new one, would have met with the approval of Smith and Say, and even of Ricardo himself;[825] although they occasionally forgot it, perhaps, especially when judging the institutions of the past or when advocating the universal adoption of laissez-faire.
The second idea, namely, that economic theory and economic laws have only a relative value, is treated with even greater emphasis, and this was another point on which the older economists had gone wrong. Economic laws, unlike the laws of physics and chemistry, with which the Classical writers were never tired of comparing them, have neither the universality nor the inevitability of the latter. Knies has laid special stress on this point. “The conditions of economic life determine the form and character of economic theory. Both the process of argument employed and the results arrived at are products of historical development. The arguments are based upon the facts of concrete economic life and the results bear all the marks of historical solutions. The generalisations of economics are simply historical explanations and progressive manifestations of truth. Each step is a generalisation of the truth as it is known at that particular stage of development. No single formula and no collection of such formulæ can ever claim to be final.”[826]