This paragraph, though somewhat obscure and diffuse, as is often the case with Knies, expresses a sound idea which other economists have stated somewhat differently, by saying that economic laws are at once provisional and conditional. They are provisional in the sense that the progress of history continually gives rise to new facts of which existing theories do not take sufficient account. Hence the economist finds himself obliged to modify the formulæ with which he has hitherto been quite content. They are conditional in the sense that economic laws are only true so long as other circumstances do not hinder their action. The slightest change in the conditions as ordinarily given might cancel the usual result. Those economists who thought of their theory as a kind of final revelation, or considered that their predictions were absolutely certain, needed reminding of this.
But Knies is hopelessly wrong in thinking that this relativity is enough to separate the laws of economics from the laws of other sciences. Professor Marshall justly remarks that chemical and physical laws likewise undergo transformation whenever new facts render the old formulæ inadequate. All these laws are provisional. They are also hypothetical in the sense that they are true only in the absence of any disturbing cause. Scientists no longer consider these laws as inherent in matter. They are the product of man’s thought and they advance with the development of his intelligence.[827] They are nothing more or less than formulæ which conveniently express the relation of dependence that exists between different phenomena; and between these various laws as they are framed by the human mind there is no difference except a greater or lesser degree of proof which supports them.
What gives to the laws of physics or chemistry that larger amount of fixity and that greater degree of certainty which render them altogether superior to economic law as at present formulated is a greater uniformity in the conditions that give rise to them, and the fact that their action is often measurable in accordance with mathematical principles.[828]
Not only has Knies exaggerated the importance of his doctrine of relativity,[829] but the imputation that his predecessors had failed to realise the need for it was hardly deserved. We shall have to refer to this matter again. Mill’s Principles was already published, and even in the Logic, which appeared for the first time in 1843, and several editions of which had been issued before 1853, the year when Knies writes, we meet with the following sentence:[830] “The motive that suggests the separation of this portion of the social phenomenon from the rest … is that they do mainly depend at least in the first resort on one class of circumstances only; and that even when other circumstances interfere, the ascertainment of the effect due to the one class of circumstances alone is a sufficiently intricate and difficult business to make it expedient to perform it once for all and then allow for the effect of the modifying circumstances.” Consequently sociology, of which political economy is simply a branch, is a science of tendencies and not of positive conclusions. No better expression of the principle of relativity could ever be given.
Notwithstanding all this, modern economists have come to the conclusion that the criticisms of the Historical school are sufficiently well founded to justify them in demanding greater precision so as to avoid those mistakes in the future. Dr. Marshall, for one, adopts Mill’s expression, and defines an economic law as “a statement of economic tendencies.”[831]
Even the founders of pure political economy, although their method is obviously very different from that of the Historians, have taken similar precautions. They expressly declare that the conclusions of the science are based upon a certain number of preliminary hypotheses deliberately chosen, and that the said conclusions are only provisionally true. “Pure economics,” says Walras, “has to borrow its notion of exchange, of demand and supply, of capital and revenue, from actual life, and out of those conceptions it has to build the ideal or abstract type upon which the economist exercises his reasoning powers.”[832] Pure economics studies the effects of competition, not under the imperfect conditions of an actual market, but as it would operate in a hypothetical market where each individual, knowing his own interests, would be able to pursue them quite freely, and in full publicity. The conception of a limited area within which competition is fully operative enables us to study as through a magnifying-glass the results of a hypothesis that really very seldom operates in the economic life of to-day.
We may dispute the advantages of such a method, but we cannot say that the economists ever wished to deny the relativity of a conclusion arrived at in this fashion.
While willing to admit that the Historians have managed to put this characteristic in a clear light just when some economists were in danger of forgetting it, and that it is a universally accepted doctrine to-day, we cannot accept Knies’s contention that it affords a sufficient basis for the distinction between natural and economic laws. And such is the opinion of a large number, if not of the majority, of economists.[833]
The second charge is levelled against the narrowness and insufficiency of the psychology. Adam Smith treated man as a being solely dominated by considerations of self-interest and completely absorbed in the pursuit of gain. But, as the Historians justly point out, personal interest is far from being the sole motive, even in the economic world. The motives here, as elsewhere, are extremely varied: vanity, the desire for glory, pleasure afforded by the work itself, the sense of duty, pity, benevolence, love of kin, or simply custom.[834] To say that man is always and irremediably actuated by purely selfish motives, says Knies, is to deny the existence of any better motive or to regard man as a being having a number of centres of psychical activity, each operating independently of the other.[835]
We cannot deny that the Classical writers believed that “personal interest”—not in the sense of egoism, which is the name given it by Knies, and which somewhat distorts their view—held the key to the significance and origin of economic life. But the claims of the Historians are again immoderate. Being themselves chiefly concerned with concrete reality in all its complexity of being, and with all its distinctive and special features rather than its general import, they forgot that the primary aim of political economy is to study economic phenomena en masse. The Classical economists studied the crowd, not the individual. If we neglect the differences that occasionally arise in special cases, and allow for the personal equation, do we not find that the most constant motive to action is just this personal desire for well-being and profit? This is the opinion of Wagner, who on this question of method is not quite in agreement with other members of the school. In his suggestive study of the different motives that influence economic conduct he definitely states that the only motive that is really constant and permanent in its action is this self-interest. “This consideration,” he says, “does something to explain and to justify the conduct of those writers who took this as the starting-point of their study of economics.”[836]
But having admitted this, we must also recognise, not that they denied the changes occasionally undergone by self-interest under the pressure of other motives, as Knies suggests, but that they have neglected to take sufficient account of such modifications. Sometimes it really seems as if they would “transform political economy into a mere natural history of egoism,” as Hildebrand says.
We can only repeat the remark which we have already made, namely, that when this criticism was offered it was scarcely justified. Stuart Mill had drawn attention to this point in his Logic ten years previously.[837] “An English political economist, like his countrymen in general, has seldom learned that it is possible that men in conducting the business of selling their goods over the counter should care more about their ease or their vanity than about their pecuniary gain.” For his own part he ventures to say that “there is perhaps no action of a man’s life in which he is neither under the immediate nor under the remote influence of any impulse but the mere desire of wealth.”[838]
It is evident that Mill did not think that self-interest was the one unchangeable and universal human motive. Much less “egoism,” for, as we have seen in the previous chapter, his “egoism” includes a considerable admixture of altruism.
But here again the strictures of the Historians, though somewhat exaggerated, have forced economists of other schools to be more precise in their statements. The economists of to-day, as Marshall remarks, are concerned “with man as he is; not with an abstract or ‘economic’ man, but a man of flesh and blood.”[839] And if the economist, as Marshall points out, pays special attention to the desire for gain among the other motives which influence human beings, this is not because he is anxious to reduce the science to a mere “natural history of egoism,” but because in this world of ours money is the one convenient means of measuring human motive on a large scale.[840] Even the Hedonists, whose economics rest upon a calculus of pleasure and pain, are careful to note that their hypothesis is just a useful simplification of concrete reality, and that such simplification is absolutely necessary in order to carry the analysis of economic phenomena as far as possible. It is an abstraction—imposed by necessity, which is its sole justification, but an abstraction nevertheless.
It is just here that the final reproach comes in, namely, the charge of abusing the employment of abstraction and deduction, and greater stress is laid upon this count than upon either of the other two.
Instead of deduction the new school would substitute induction based upon observation.
Their criticism of the deductive method is closely connected with their attack upon the psychology of the older school. The Classical economists thought, so the Historians tell us, that all economic laws could be deduced by a simple process of reasoning from one fundamental principle. If we consider the multiplicity of motives actually operative in the economic world, the insufficiency of this doctrine becomes immediately apparent. The result is not a faithful picture, but a caricature of reality. Only by patient observation and careful induction can we hope to build up an economic theory that shall take full account of the complexity of economic phenomena. “There is a new future before political economy,” writes Schmoller in 1883, in reply to a letter of Menger, “thanks to the use that will be made of the historical matter, both descriptive and statistical, that is slowly accumulating. It will not come by further distillation of the abstract propositions of the old dogmatism that have already been distilled a hundred times.”[841]
The younger school especially has insisted on this; and Menger has ventured to say that in the opinion of the newer Historical school “the art of abstract thinking, even when distinguished by profundity and originality of the highest order, and when based upon a foundation of wide experience—in a word, the exercise of that gift which has in other sciences resulted in winning the highest honour for the thinkers—seems to be of quite secondary importance, if not absolutely worthless, as compared with some elaborate compilation or other.”[842]
But the criticism of the Historical school confuses two things, namely, the particular use which the Classical writers have made of the abstract deductive method, and the method itself.
No one will deny that the Classical writers often started with insufficient premises. Even when the premises were correct, they were too ready to think and not careful enough to prove that their conclusions were always borne out by the facts. No one can defend their incomplete analysis, their hasty generalisations, or their ambiguous formulæ.[843]
But this is very different from denying the legitimacy of abstraction and deduction. To isolate a whole class of motives with a view to a separate examination of their effects is not to deny either the presence or the action of other motives, any more than a study of the effect of gravitation upon a solid involves the denial of the action of other forces upon it. In a science like political economy, where experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problems so much. Even if the motives chosen were of secondary importance, the procedure would be quite legitimate, although the result would not be of any great moment. But it is of the greatest service and value when the motive chosen is one, like the search for gain or the desire for personal satisfaction, which exercises a preponderant influence upon economic action.[844]
So natural, we may even say so indispensable, is abstraction, if we are to help the mind steer its way amid the complexity of economic phenomena, that the criticism of the Historical school has done nothing to hinder the remarkable development which has resulted from the use of the abstract method during the last thirty years. But, although the Neo-Classical school has succeeded in replacing the old methods in their position of honour once more, it no longer employs those methods in the way the older writers did. A more solid foundation has been given them in a more exact analysis of the needs which personal interest ought to satisfy.[845] And the mechanism of deduction itself has been perfected by a more rigid use of the ordinary logical forms, and by the adoption of mathematical phraseology.
Happily the controversy as to the merits of the rival methods, which was first raised by the Historical school, has no very great interest at the present moment. Most eminent economists consider that both are equally necessary. There seems to be a general agreement among writers of different schools to consider the question of method of secondary importance, and to forget the futile controversies from which the science has gained so little. Before concluding this section it may be worth while to quote the opinion of men who represent very different tendencies, but are entirely agreed with regard to this one subject. “Discussion of method,” says Pareto, “is a pure waste of time. The aim of the science is to discover economic uniformities, and it is always right to follow any path or to pursue any method that is likely to lead to that end.”[846] “For this and other reasons,” says Marshall, “there always has been, and there probably always will be, a need for the existence side by side of workers with different aptitudes and different aims.… All the devices for the discovery of the relations between cause and effect which are described in treatises on scientific method have to be used in their turn by the economist.”[847]
These writers generally employ the abstract method. Let us now hear some of the Historians. Schmoller is the author of that oft-quoted phrase, “Induction and deduction are both necessary for the science, just as the right and left foot are needed for walking.”[848]
More remarkable still, perhaps, is the opinion of Bücher, an author to whom the Historical school is indebted for some of its most valuable contributions. “It is therefore a matter of great satisfaction that, after a period of diligent collection of material, the economic problems of modern commerce have in recent times been zealously taken up again and that an attempt is being made to correct and develop the old system in the same way in which it arose, with the aid, however, of a much larger store of facts. For the only method of investigation which will enable us to approach the complex causes of commercial phenomena is that of abstract isolation and logical deduction. The sole inductive process that can likewise be considered—namely, the statistical—is not sufficiently exact and penetrating for most of the problems that have to be handled here, and can be employed only to supplement or control.”[849]
What made the criticism of the Historians so penetrating was the fact that they held an entirely different view concerning the scope and aim of economics. Behind the criticism lurked the counter-theory. Nothing less than a complete transformation of the science would have satisfied the founders, but the younger school soon discovered that so ambitious a scheme could never be carried out. It is important that we should know something of the view of those older writers on this question, and the way they had intended to give effect to their plans. The positive contribution made by the Historical school to economic study is even more important than its criticisms, for it gives a clue to an entirely different point of view with which we are continually coming into contact in our study of economic doctrines.
The study of economic phenomena may be approached from two opposite standpoints, which we may designate the mechanical and the organic. The one is the vantage-ground of those thinkers who love generalisations, and who seek to reduce the complexity of the economic world to the compass of a few formulæ; the other of those writers who are attracted by the constant change which concrete reality presents.
The earlier economists for the most part belonged to the former class. Amid all the wealth and variety of economic phenomena they confined their attention almost entirely to those aspects that could be explained on simple mechanical principles. Such were the problems of price fluctuations, the rate of interest, wages, and rent. Production adapting itself to meet variation in demand, with no guide save personal interest, looked for all the world like the intermolecular action of free human beings in competition with one another. The simplicity of the idea was not without a certain grandeur of its own.
But such a conception of economic life is an extremely limited one. A whole mass of economic phenomena of the highest importance and of the greatest interest is left entirely outside. The phenomena of the economic world, as a matter of fact, are extremely varied and changeable. There are institutions and organisations without number, banks and exchanges, associations of masters and unions of men, commercial leagues and co-operative societies. Eternal struggle between the small tradesman and the big manufacturer, between the merchant and the combine, between the peasant proprietor and the great landowner, between classes and individuals, between public and private interests, between town and country, is the common feature of economic life. A state rises to prosperity again to fall to ruin. Competition at one moment makes it superior, at another reduces its lead. A country changes its commercial policy at one period to reintroduce the old régime at another. Economic life fulfils its purposes by employing different organs that are continually modified to meet changing conditions, and are gradually transformed as science progresses and manners and beliefs are revolutionised.
Of all this the mechanical conception tells us nothing. It makes no attempt to explain the economic differences which separate nations and differentiate epochs. Its theory of wages tells us nothing about the different classes of workpeople, or of their well-being during successive periods of history, or about the legal and political conditions upon which that well-being depends. Its theory of interest tells us nothing of the various forms under which interest has appeared at different times, or of the gradual evolution of money, whether metallic or paper. Its theory of profits ignores the changes which industry has undergone, its concentration and expansion, its individualistic nature at one moment, its collective trend at another. No attempt is made to distinguish between profits in industry or commerce and profits in agriculture. The Classical economists were simply in search of those universal and permanent phenomena amid which the homo œconomicus most readily betrayed his character.
The mechanical view is evidently inadequate if we wish to delineate concrete economic life in all its manifold activity. We are simply given certain general results, which afford no clue to the concrete and special character of economic phenomena.
The weakness of the mechanical conception arises out of the fact that it isolates man’s economic activity, but neglects his environment. The economic action of man must influence his surroundings. The character of such action and the effects which follow from it differ according to the physical and social, the political and religious surroundings wherein they are operative. A country’s geographical situation, its natural resources, the scientific and artistic training of its inhabitants, their moral and intellectual character, and even their system of government, must determine the nature of its economic institutions, and the degree of well-being or prosperity enjoyed by its inhabitants. Wealth is produced, distributed, and exchanged in some fashion or other in every stage of social development, but each human society forms a separate organic unit, in which these functions are carried out in a particular way, giving, accordingly, to that society a distinctive character entirely its own. If we want to understand all the different aspects of this life we must make a study of its economic activity, not as it were in vacuo, but in connection with the medium through which it finds expression, and which alone can help us to understand its true nature.[850]
This was the first doctrine on which they laid stress: the other follows immediately. This social environment cannot be regarded as fixed. It is constantly undergoing some change. It is in process of transformation and of evolution. At no two successive moments of its existence is it quite the same. Each successive stage calls for explanation, which history alone can give. Goethe has given utterance to this thought in a memorable phrase which serves as a kind of epigraph to Schmoller’s great work, the Grundriss. “A person who has no knowledge of the three thousand years of history which have gone by must remain content to dwell in obscurity, living a hand-to-mouth existence.” We must have some knowledge of the previous stages of economic development if we are to understand the economic life of the present. Just as naturalists and geologists in their anxiety to understand the present have invented hypotheses to explain the evolution of the globe and of living matter upon it, so must the student of economics return to the distant past if he wants to get hold of the industrial life of to-day. “Man as a social being,” says Hildebrand, “is the child of civilisation and a product of history. His wants, his intellectual outlook, his relation to material objects, and his connection with other human beings have not always been the same. Geography influences them, history modifies them, while the progress of education may entirely transform them.”[851]
The Historians maintained that the earlier economists by paying exclusive attention to those broader conclusions which had something of the generality of physical laws about them had kept the science within too narrow limits. Alongside of theory as they had conceived of it—some Historians would say instead of it—there is room for another study more closely akin to biology, namely, a detailed description and a historical explanation of the constitution of the economic life of each nation. Such is the positive contribution of the school to the study of political economy, and it fairly represents the attitude of the present-day Historians towards the older economists.
Their aim was a perfectly natural and legitimate one, and at first sight, at least, seemed very attractive. But beneath its apparent simplicity there is some amount of obscurity, and its adversaries have thought that upon close analysis it is really open to serious objections.
In the first place, is it the aim of the science to present us with an exact, realistic picture of society, as the Historians loved to think? On the contrary, do we not find that a study can only aspire to the name of a science in proportion as its propositions become more general in their nature? There is no science without generalisation, according to Aristotle, and concrete description, however indispensable, is only a first step in the constitution of a science. A science must be explanatory rather than descriptive.
Of course Historians are not always content with mere description. Some Historians have attempted explanation and have employed history as their organon. Is the choice a suitable one?
“History,” says Marshall, “tells of sequences and coincidences; but reason alone can interpret and draw lessons from them.”[852]
Moreover, is there a single important historical event whose cause has ceased to be a matter of discussion? It will be a long time before people cease to dispute about the causes of the Reformation or the Revolution, and the relative importance of economic, political, and moral influences in determining the course of those movements has yet to be assigned. The causes that led to the substitution of credit for money or money for barter are equally obscure. Before narrative can become science there must be the preliminary discovery by a number of other sciences of the many diverse laws whose combination gives rise to concrete phenomena.[853] Not history but the sciences give the true explanation. The evolutionary theory has proved fruitful in natural history simply because it took the succession of animal species as an established fact and then discovered that heredity and selection afforded a means of explaining that succession. But history cannot give us any hypothesis that can rival the theory of evolution either in its scientific value or in its simplicity. In other words, history itself is in need of explanation. It gives no clue to reality and it can never take the place of economics.[854]
The earlier Historians claimed a higher mission still for the historical study of political economy. It must not only afford an explanation of concrete economic reality, but it must also formulate the laws of economic development. This idea is only held by a few of them, and even the few are not agreed as to how it should be done. Knies, for example, thinks that it ought to be sufficiently general to include the economic development of all nations. Saint-Simon held somewhat similar views. Others, and among them Roscher, hold that there exist parallelisms in the history of various nations; in other words, that every nation in the course of its economic development passes through certain similar phases or stages. These similarities constitute the laws of economics. If we were to study their movements in the civilisations of the past we might be able to estimate their place in existing societies.[855]
Neither point seems very clear. Even if we admit that there is only one general law of human development we cannot forecast the line of progress, because scientific prediction is only applicable to recurrent phenomena. They fail just when the conditions are new. Of course one can always guess at the nature of the future, but divination is not knowledge. And predictions of this kind are almost always false.[856] Historical parallelism rests on equally shaky foundations. A nation, like any other living organism, passes through the successive stages of youth, maturity, and old age, but we are not justified in thinking that the successive phases through which one nation has passed must be a kind of prototype to which all others must conform. All that we can say is that in two neighbouring countries the same effects are likely to follow from the same causes. Production on a large scale, for example, has been accompanied by similar phenomena in most countries in Western Europe. But this is by no means an inevitable law. It is simply a case of similar effects resulting from similar causes. Such analogies are hardly worthy of the name of laws. The discovery of the law, as Wagner says,[857] may be a task beyond human power; and Schmoller, as we have already seen, is of the same opinion.
One remark before concluding. There is a striking similarity between the ideas just outlined and those of a distinguished philosopher whose name deserves mention here, although his influence upon political economy was practically nil. We refer to Auguste Comte.
It is curious that the earliest representatives of the school should have ignored him altogether, but just as Mill remained unknown to them, so the Cours de Philosophie positive, though published in 1842, remained a sealed book so far as they were concerned. Comte’s ideas are so very much like those of Knies and Hildebrand that some Positivist economists, such as Ingram and Hector Denis, have attempted to connect the Historical tendency in political economy with the Positive philosophy of Comte.[858]
The three fundamental conceptions which formed the basis of the teaching of the Historical school are clearly formulated by Comte. The first is the importance of studying economic phenomena in connection with other social facts. The analysis of the industrial or economic life of society can never be carried on in the “positive” spirit by simply making an abstraction of its intellectual, political, or moral life, whether of the past or of the present.[859] The second is the employment of history as the organon of social science. “Social research,” says he, “must be based upon a sane analysis of the all-round development of the best of mankind up to the present moment, and the growing predilection for historical study in our time augurs well for the regeneration of political economy.” He was fully persuaded that the method would foster scientific prediction—a feature which is bound to fuse all those diverse conditions which will form the basis of Positive politics.
Comte wished to found sociology, of which political economy was to be simply a branch. The Historical school, and especially Knies, regarded economics in the same spirit. Hence the analogies with which Knies had to content himself, but which the younger school refused to recognise. But there was a fundamental difference between their respective points of view, and this will help us to distinguish between them.
Comte was a believer in inevitable natural laws, which, according to the earlier Historians, had wrought such havoc. The Historical method also, as he conceived of it, was something very different from what the older or the newer Historical school took it to be.
Adopting a dictum of Saint-Simon, Comte speaks of the Historical method as an attempt to establish in ascending or descending series the curve of each social institution, and to deduce from its general outlines conclusions as to its probable growth or decline in the future. This is how he himself defines the process: “The essence of this so-called historical spirit, it seems to us, consists in the rational use of what may be called the social series method, or, in other words, in the due appreciation of the successive stages of human development as reflected in a succession of historical facts. Careful study of such facts, whether physical, intellectual, moral, or political, reveals a continuous growth on the one hand and an equally continuous decline on the other. Hence there results the possibility of scientific prophecy concerning the final ascendancy of the former and the complete overthrow of the latter, provided always such conclusion is in conformity with the general laws of human development, the sociological preponderance of which must never be lost sight of.”[860] It was in virtue of this method that Saint-Simon predicted the coming of industrialism and that Comte prophesied the triumph of the positive spirit over the metaphysical and religious.
There is considerable difference between this attitude and the Historical method as we know it,[861] and the attempt at affiliation seems to us altogether unwarranted. But the coincidence between Comte’s views and those of Knies and Hildebrand is none the less remarkable, and it affords a further proof of the existence of that general feeling which prompted certain writers towards the middle of the century to attempt a regeneration of political economy by setting it free from the tyranny of those general laws which had nearly stifled its life.
It seems to us, however, that the Historical school is mistaken if it imagines that history alone can afford an explanation of the present or will ever enable us to discover those special laws which determine the evolution of nations.
On the other hand, it has a perfect right to demand a place beside economic science, and it is undoubtedly destined to occupy a position still more prominent in the study of economic institutions, in statistical investigation, and above all in economic history. Not only is a detailed description of the concrete life of the present of absorbing interest in itself, but it is the condition precedent to all speculations concerning the future. The theorist can never afford to neglect the minute observation of facts unless he wills that his structure shall hang in the void. Most abstract economists feel no hesitation in recognising this. For example, Jevons, writing in 1879,[862] gave it as his opinion that “in any case there must arise a science of the development of economic forces and relations.”
This newer historical conception came to the rescue just when the science was about to give up the ghost, and though they may have failed to give us that synthetic reconstruction which is, after all, within the ability of very few writers, its advocates have succeeded in infusing new life into the study and in stimulating new interest in political economy by bringing it again into touch with contemporary life. They have done this by throwing new light upon the past and by giving us a detailed account of the more interesting and more complex phenomena of the present time.[863] Such work must necessarily be of a fragmentary character. The school has collected a wonderful amount of first-class material, but it has not yet erected that palace of harmonious proportions to which we in our fond imagination had likened the science of the future. Nor has it discovered the clue which can help it to find its way through the chaos of economic life. This is not much to be wondered at when we remember the shortcomings of the method to which we have already had occasion to refer. Indeed, some of the writers of the school seem fully convinced of this. Professor Ashley, in an article contributed to the Economic Journal, employs the following words:[864] “As I have already observed, the criticisms of the Historical school have not led so far to the creation of a new political economy on historical lines: even in Germany it is only within very recent years that some of the larger outlines of such an economics have begun to loom up before us in the great treatise of Gustav Schmoller.”
In view of considerations like these one might have expected that the Historical school would have shown greater indulgence to the attempts made both by the Classical and by the Hedonistic schools to give by a different method expression to the same instinctive desire to simplify matters in order to understand them better.[865]
The nineteenth century opened with a feeling of contempt for government of every kind, and with unbounded confidence on the part of at least every publicist in the virtue of economic liberty and individual initiative. It closed amid the clamour for State intervention in all matters affecting economic or social organisation. In every country the number of public men and of economists who favour an extension of the economic function of government is continually growing, and to-day such men are certainly in the majority. To some writers this change of opinion has seemed sufficiently important to warrant special treatment as a new doctrine, variously known as State Socialism or “the Socialism of the Chair” in Germany and Interventionism in France.
Really it is not an economic question at all, but a question of practical politics upon which writers of various shades of economic opinion may agree despite extreme differences in their theoretical preconceptions. The problem of defining the limits of governmental action in the matter of producing and distributing wealth is one of the most important in the whole realm of political economy, but it can hardly be considered a fundamental scientific question upon which economic opinion is hopelessly divided. It is clear that the solution of the problem must depend not merely upon purely economic factors, but also on social and political considerations, upon the peculiar conception of general interest which the individual has formed for himself and the amount of confidence which he can place in the character and ability of Governments.[866] The problem is always changing, and whenever a new kind of society is created or a new Government is established a fresh solution is required to meet the changed conditions.
How is it, then, that this question has assumed such extravagant proportions at certain periods of our history?
Had the issue been confined to the limits laid down by Smith it is probable that such passionate controversies would have been avoided. Smith’s arguments in favour of laissez-faire were largely economic. Gradually, however, under the growing influence of individual and political liberty, a kind of contempt for all State action took the place of the more careful reasoning of the earlier theory, and the superiority of individual action in matters non-economic became an accepted axiom with every publicist.
This method of looking at the problem is very characteristic of Bastiat. The one feature of government that interested him was not the fact that it represented the general interest of the citizens, but that whenever it took any action it had to employ force,[867] whereas individual action is always free. Every substitution of State for individual action meant victory for force and the defeat of liberty. Such substitution must consequently be condemned. Smith’s point of view is totally different. To appreciate this difference we need only compare their treatment of State action. In addition to protecting the citizens from invasion and from interference with their individual rights, Smith adds that the sovereign should undertake “the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”[868] The scope is sufficiently wide, at any rate. If we turn to Bastiat, on the other hand, we find that the Government has only two functions to perform, namely, “to guard public security and to administer the common land.”[869] Viewed in this light, the problem of governmental intervention, instead of remaining purely economic, becomes a question of determining the nature, aims, and functions of the State, and individual temperament and social traditions play a much more important part than either the operation of economic phenomena or any amount of economic reasoning. It is not surprising that some writers thought that the one aim of economics was to defend the liberty and the rights of the individual!
Such exaggerated views were bound to beget a reaction, and the defence of State action assumes equally absurd proportions with some of the writers of the opposite school. Even as far back as 1856 Dupont-White, a French writer, had uttered a protest against this persistent depreciation of the State, in a short work entitled L’Individu et l’État. His ideas are so closely akin to those of the German State Socialists that they have often been confused with them, and it is simpler to give an exposition of both at the same time. But he was a voice crying in the wilderness. Public opinion under the Second Empire was very little disposed to listen to an individual who, though a Liberal in politics, was yet anxious to strengthen the power and to add to the economic prerogative of the Crown. More favourable circumstances were necessary if there was to be a change of public opinion on the matter. The times had ripened by the last quarter of the century, and the elements proved propitious, especially in Germany, where the reaction first showed itself.
The reaction took the form not so much of the creation of a new doctrine as of a fusion of two older currents, which must first be examined.
During the course of the nineteenth century we find a number of economists who, while accepting Smith’s fundamental conception, gradually limit the application of his principle of laissez-faire. They thought that the superiority of laissez-faire could not be scientifically demonstrated and that in the great majority of cases some form of State intervention was necessary.
On the other hand, we meet with a number of socialists who prove themselves to be more opportunistic than their comrades, and though equally hostile to private property and freedom of production, yet never hesitate to address their appeals on behalf of the workers to existing Governments.
State Socialism represents the fusion of these two currents. It surpasses the one in its faith in the wisdom of Governments, and is distinguished from the other by its greater attachment to the rights of private property; but both of them contribute some items to its programme. In the first place we must try to discover the source of these separate tendencies, and in the second place watch their amalgamation.
The doctrine of absolute laissez-faire was not long allowed to go unchallenged. From the time of Smith onward there is an uninterrupted sequence of writers—all of them by no means socialists—who ventured to attack the fundamental propositions of the great Scotsman and who attempted to show that his practical conclusions were not always borne out by the facts.
Smith based his advocacy of laissez-faire upon the supposed identification of public and private interests. He showed how competition reduced prices to the level of cost of production, how supply adapted itself to meet demand in a perfectly automatic fashion, and how capital in an equally natural way flowed into the most remunerative occupations.
This principle of identity of interests was, however, rudely shaken by the teachings of Malthus and Ricardo, although both of them remained strong adherents of the doctrine of individual liberty.
Sismondi, who was the next to intervene, laid stress upon the evils of competition, and showed how social inequality necessitated the submission of the weak to the will of the strong. His whole book was simply a refutation of Smith’s providential optimism.
In Germany even, as early as 1832, that brilliant economist Hermann was already proceeding with his critical analysis of the Classical theories; and after demonstrating how frequently individual interest comes into conflict with public welfare, and how inadequate is the contribution which it can possibly make to the general well-being, he declares his inability to subscribe to the doctrine laid down by most of Smith’s followers, namely, that individual activity moved by personal interest is sufficient to meet all the demands of national economy. Within the bounds of this national economy[870] he thinks there ought to be room for what he calls the civic spirit (Gemeinsinn) as well.
The next critic, List, bases his whole case upon the opposition between immediate interests, which guide the individual, and the permanent interests of the nation, of which the Government alone can take account.
Stuart Mill, in the famous fifth book of the Principles, refuses even to discuss the doctrine of identity of interests, believing it to be quite untenable. On the question of non-intervention he admits the validity of one economic argument only, namely, the superiority of self-interest as an economic motive. But he is quick to recognise its shortcomings and the exceptions to its universal operation—in the natural incapacity of children and of the weak-minded, the ignorance of consumers, the difficulty of achieving it, even when clearly perceived, without the help of society as a whole, as in the case of the Factory Acts. Mill also points out how this motive is frequently wanting in modern industrial organisation, where, for example, we have joint stock companies acting through the medium of a paid agency, or charitable work undertaken by an individual who has to consider, not his own interests, but those of other people. Private interest is also frequently antagonistic to public interest, as in the case of the public supply of gas or water, where the individual entrepreneur is influenced by the thought of a maximum profit rather than by considerations of general interest. In matters of that kind Stuart Mill was inclined to favour State intervention.[871]
M. Chevalier, from his professorial chair in the Collège de France, extended his congratulations to Mill upon his successful restoration of the legitimate duties of Governments.[872] Chevalier thought that those who believed that the economic order could be set up simply by the aid of competition acting through personal interest were either illogical in their arguments or irrational in their aims. Government was simply the manager of the national organisation, and its duty was to intervene whenever the general interest was endangered. But the duties and privileges of government are not exactly those of the village policeman.[873] Applying this principle to public works, he points out that they are more or less State matters, and the guarantee for good work is quite as great when the State itself undertakes to perform it as when it is entrusted to a private individual.
In 1863 Cournot, whose reputation was unequal to either Mill’s or Chevalier’s, but whose penetrating thought, despite its small immediate influence, is quite important in the history of economic doctrines, treats of the same problem in his Principes de la Théorie des Richesses. Going straight to the heart of the problem, he asks whether it is possible to give a clear definition of this general interest—the economic optimum which we are anxious to realise—and whether the system of free competition is clearly superior to every other. He justly remarks that the problem is insoluble. Production is determined by demand, which depends both upon the preliminary distribution of wealth and also upon the tastes of consumers. But if this be the case, it is impossible to outline an ideal system of distribution or to fix upon the kind of tastes that will prove most favourable for the development of society. A step farther and Cournot must have hit upon the distinction so neatly made by Pareto between maximum utility, which is a variable, undefined notion, and maximum ophelimity, “the investigation of which constitutes a clearly defined problem wholly within the realm of economics.”[874]
But Cournot does not therefore conclude that we ought to abstain from passing any judgment in the realm of political economy and abandon all thought of social amelioration. Though the absolutely best cannot be defined, it does not follow that we cannot determine the relatively good. “Improvement or amelioration is possible,” says he, “by introducing a change which operates upon one part of the economic system, provided there are no indirect effects which damage the other parts of the system.”[875] Such progress is not necessarily the result of private effort. Following Sismondi, he quotes several instances in which the interests of the individual collide with those of the public and in which State intervention might prove useful.
Every one of these authors—in varying degrees, of course—admits the legitimacy of State intervention in matters economic. Liberty doubtless is still the fundamental principle. Sismondi was content with mere aspiration, so great did the difficulties of intervention appear to him. Stuart Mill thought that the onus probandi should rest with the innovator. Cournot considered liberty as being still the most natural and simple method, and should the State find it necessary to intervene it could only be in those instances in which science has clearly defined the aim in view and demonstrated the efficacy of the methods proposed. Every one of them has abandoned liberty as a scientific principle. To Cournot it was an axiom of practical wisdom;[876] Stuart Mill upheld it for political reasons as providing the best method of developing initiative and responsibility among the citizens. They all agree that the State, far from being a pis aller, has a legitimate sphere of action. The difficulty is just to define this.[877] This was the task to which Walras addressed himself with remarkable success in his lectures on the theory of the State, delivered in Paris in 1867-68.[878]
And so we find that the progress of thought since the days of Adam Smith had led to important modifications of the old doctrines concerning the economic functions of the State. The publicists, however, were not immediately converted. Even when the century was waning they still remained faithful to the optimistic individualism of the earlier period. The organon of State Socialism merely consists of these analyses incorporated into a system. The authors just mentioned must consequently be regarded, if not as the precursors of State Socialism, at any rate as unconsciously contributing to the theory.
State Socialism is not an economic doctrine merely. It has a social and moral basis, and is built upon a certain ideal of justice and a particular conception of the function of society and of the State. This ideal and this conception it received, not from the economists, but from the Socialists, especially Rodbertus and Lassalle. The aim of these two writers was to effect a kind of compromise between the society of the present and that of the future, using the powers of the modern State simply as a lever.
The idea of a compromise of this kind was not altogether new. A faint suggestion of it may be detected more than once in the course of the century, and an experiment of the kind was mooted in France towards the end of the July Monarchy. At that time we find men like Louis Blanc and Vidal—who were at least socialists in their general outlook—writing to demand State intervention not merely with a view to repairing the injustice of the present society, but also with a view to preparation for the society of the future with as little break with the past as possible. Louis Blanc was in this sense the first to anticipate the programme of the State Socialists. But its more immediate inspirers were Rodbertus and Lassalle, both of whom belonged to that country in which its effects were most clearly seen.
Their influence upon German State Socialism cannot be exactly measured by the amount of direct borrowing that took place. They were linked by ties of closest friendship to the men who were responsible for creating and popularising the new ideas, and it is important that we should appreciate the personal influence which they wielded. Rodbertus formed the centre of the group, and during the two years 1862-64 he carried on an active correspondence with Lassalle. They were brought together by the good offices of a common friend, Lothar Bucher, an old democrat of 1848 who had succeeded in becoming the confidant of Bismarck. Strangely enough, Bismarck kept up his friendship with Lassalle even when the latter was most busily engaged with his propaganda work.[879] Wagner, also, the most eminent representative of State Socialism, was in frequent communication with Rodbertus, and he never failed to recognise his great indebtedness to him. Wagner himself was on more than one occasion consulted by Bismarck.
But apart altogether from their connection with State Socialism, Rodbertus and Lassalle would deserve a place in our history. Rodbertus is a theoretical writer of considerable vigour and eloquence, and his thoughts are extraordinarily suggestive. Lassalle was an agitator and propagandist rather than an original thinker, but he has left a lasting impression upon the German labour movement. Hence our determination to give a somewhat detailed exposition of their work, especially of that of Rodbertus, and to spare no effort in trying to realise the importance of the contribution made by both of them.
In a history of doctrines Rodbertus has a place peculiarly his own. He forms, as it were, a channel through which the ideas first preached by Sismondi and the Saint-Simonians were transmitted to the writers who belong to the last quarter of the century. His intellectual horizon—largely determined for him by his knowledge of these French sources[880]—was fixed as early as 1837, when he produced his Forderungen, which the Gazette universelle d’Augsburg refused to publish. His first work appeared in 1842,[881] and the earliest of the Soziale Briefe[882] belong to 1850 and 1851. At the time these passed almost unnoticed. It was only when Lassalle in his treatise in 1862 referred to him as the greatest of German economists, and when conservative writers like Rudolf Meyer and Wagner drew attention to his work, that his books received the notice which they deserved. The German economists of the last thirty years have been greatly influenced by him. His ideas, it is true, are largely those of the earliest French socialists, who wrote before the movement had lost its purely intellectual tone and become involved in the struggle of the July Monarchy, but his clear logic and his systematic method, coupled with his knowledge of economics, which is in every way superior to that of his predecessors, gives to these ideas a degree of permanence which they had never enjoyed before. This “Ricardo of socialism,” as Wagner[883] calls him, did for his predecessors’ doctrines what Ricardo had succeeded in doing for those of Malthus and Smith. He magnified the good results of their work and emphasised their fundamental postulates.
Rodbertus’s upbringing decreed that he should not become involved in that democratic and radical socialism which was begotten of popular agitation, and whose best-known representative is Marx. Marx considered socialism and revolution, economic theory and political action, as being indissolubly one.[884] Rodbertus, on the other hand, was a great liberal landowner who sat on the Left Centre in the Prussian National Assembly of 1848, and his political faith is summed up in the two phrases “constitutional government” and “national unity.”[885] The success won by the Bismarckian policy gradually drew him nearer the monarchy, especially towards the end of his life.[886] His ideal was a socialist party renouncing all political action and confining its attention solely to social questions. Although personally favourably inclined towards universal suffrage, he refused to join Lassalle’s Arbeiterverein because Lassalle had insisted upon placing this article of political reform on his programme.[887] The party of the future, he thought, would be at once monarchical, national, and socialistic, or at any rate conservative and socialistic.[888] At the same time we must remember that “in so far as the Social Democratic party was aiming at economic reforms he was with it heart and soul.”[889]
Despite his belief in the possibility of reconciling the monarchical policy with his socialistic programme, he carefully avoided the economic teachings of the socialists. His too logical mind could never appreciate their position, and he had the greatest contempt for the Socialists of the Chair. He would be the first to admit that in practice socialism must content itself with temporary expedients, although he cannot bring himself to believe that such compromise constitutes the whole of the socialistic doctrine. He refers to the Socialists of the Chair as the “sweetened water thinkers,”[890] and he refused to join them at the Eisenach Congress of 1872—the “bog of Eisenach,” as he calls it somewhere. He regarded the whole thing as a first-class comedy. Even labour legislation, he thought, was merely a caprice of the humanitarians and socialists.[891] So that whenever we find him summing up his programme in some such sonorous phrase as Staat gegen Staatslosigkeit[892] (“the State as against the No-State”) we must be careful to distinguish it from the hazy doctrines of the State Socialists.[893] Despite himself, however, he proved one of the most influential precursors of the school, and therein lies his real significance.
Rodbertus’s whole theory rests upon the conception of society as an organism created by division of labour. Adam Smith, as he points out, had caught a faint glimmer of the significant fact that all men are linked together by an inevitable law of solidarity which takes them out of their isolation and transforms an aggregate of individuals into a real community having no frontiers and no limits save such as division of labour imposes, and sufficiently wide in scope to include the whole universe.[894] As soon as an individual becomes a part of economic society his well-being no longer depends upon himself and the use which he makes of the natural medium to which he applies himself, but upon the activity of his fellow-producers. The execution of certain social functions, which Rodbertus enumerates as follows, and which he borrows partly from Saint-Simon, henceforth become the determining factors: (1) The adaptation of production to meet demand; (2) the maintenance of production at least up to the standard of the existing resources; (3) the just distribution of the common produce among the producers.
Should society be allowed to work out these projects spontaneously, or should it endeavour to carry out a preconceived plan? To Rodbertus this was the great problem which society had to consider. The economists of Smith’s school treated the social organism as a living thing. The free play of natural laws must have the same beneficial effects upon it as the free circulation of the blood has upon the human body. Every social function would be regularly discharged provided “liberty” only was secured. Rodbertus thought this was a mistake. “No State,” says he, “is sufficiently lucky or perhaps unfortunate enough to have the natural needs of the community satisfied by natural law without any conscious effort on the part of anyone. The State is an historical organism, and the particular kind of organisation which it possesses must be determined for it by the members of the State itself. Each State must pass its own laws and develop its own organisation. The organs of the State do not grow up spontaneously. They must be fostered, strengthened, and controlled by the State.”[895] Hence, after 1837 we find Rodbertus proposing the substitution of a system of State direction[896] for the system of natural liberty, and his whole work is an attempt to justify the introduction of such a system. Let us examine his thesis and review the various economic functions which we defined above. Let us also watch their operation at the present day and see how differently these functions would be discharged in a better organised community.
1. It is hardly correct to speak of production adapting itself to social need under existing conditions, because production only adapts itself to the effective demand, i.e. to the demand when expressed in terms of money. This fact had been hinted at by Smith, and Sismondi had laid considerable stress upon it; but Rodbertus was the earliest to point out that this really meant that only those people who already possess something can have their wants satisfied.[897] Those who have nothing to offer except their labour, and find that there is no demand for that labour, have no share in the social product. On the other hand, the individual who draws an income, even though he never did any work for it, is able to make effective his demand for the objects of his desire. The result is that many of the more necessitous persons must needs go unsatisfied, while others wallow in luxury.
Truer word was never spoken. Rodbertus had a perfect right to insist on the fundamental fallacy lurking within a system which could treat unemployment—that modern form of famine—as simply an over-production of goods, and which found itself unable to modify it except through public or private charity. His remedy consisted of a proposal to set up production for social need as a substitute for production for demand. The first thing to be done was to find out the time which each individual would be willing to give to productive work, making a note of the character and quantity of goods required at the same time.[898] He thought that “the wants of men in general form an even series, and that the kind and number of objects required can easily be calculated.”[899] Knowing the time which society could afford to give to production, there would be no great difficulty in distributing the products among the various producers.
This is to go to work a little too precipitately and to shun the greatest difficulty of all. The uniform series of wants of which Rodbertus speaks exist only in the imagination. What we really find is a small number of collective needs combined with a great variety of individual needs. Social need is merely a vague term used to designate both kinds of wants at once. The slightest reflection shows that every individual possesses quite a unique series of needs and tastes. To base production upon social need is to suppress liberty of demand and consumption. It implies the establishment of an arbitrary scale of needs which must be satisfied and which is to be imposed upon every individual. The remedy would be worse than the evil.
But the opposition between social need and effective demand by no means disposes of his argument. The opposition needs some proving, and some explanation of the producers’ preference for demand rather than need ought to be offered. The explanation must be sought in the fact that the capitalistic producer of to-day manages his business in accordance with the dictates of personal interest, and personal interest compels him to apply his instruments to produce whatever will yield him the largest net product. He is more concerned about the amount of profit made than about the amount of produce raised. He produces, not with a view to satisfying any social need, but simply because it yields him rent or profit.[900]