Jeremy Bentham: From Laissez-Faire to Statism
Jeremy Bentham (1748–1832) began as a devoted Smithian but more consistently attached to laissez-faire. During his relatively brief span of interest in economics, he became more and more statist. His intensified statism was merely one aspect of his major — and highly unfortunate — contribution to economics: his consistent philosophical utilitarianism. This contribution, which opens a broad sluice-gate for state despotism, still remains as Bentham's legacy to contemporary neoclassical economics.
Bentham was born in London the son of a wealthy lawyer, whiled away his youth at Oxford, and was admitted to the bar in 1772. But it soon became clear that Bentham was not interested in a career as an attorney. Rather, he settled down for life with his inherited wealth to become a cloistered philosopher, legal theorist, and "projector" or crank, eternally grinding out schemes for legal and political reform which he urged upon the great and powerful.
Bentham's first and enduring interest was in utilitarianism (which we shall examine further below), and which he launched with his first published work at the age of 28, the Fragment on Government (1776).
Most of his life, Bentham functioned as the Great Man, scribbling chaotically on endless and prolix manuscripts elaborating on his projected reforms and law codes. Most of the manuscripts remained unpublished until long after his death. The affluent Bentham lived in a capacious house surrounded by flunkies and disciples, who copied revision after revision of his illegible prose to get ready for eventual publication. He conversed with his disciples in the same made-up jargon with which he peppered his writings. While a cheery conversationalist, Bentham brooked no argument from his aides and disciples; as his precocious young disciple John Stuart Mill later recalled with kindly understatement Bentham "failed in deriving light from other minds." Because of this trait, Bentham was surrounded not by alert and knowledgeable disciples but by largely uncomprehending aides who, in the perceptive words of Professor William Thomas, "looked on his work with a certain resigned skepticism as if its faults were the result of eccentricities beyond the reach of criticism or remonstrance." As Thomas continues,
The idea that he was surrounded by a band of eager disciples who drew from his system a searching critique of every aspect of contemporary society, which they were later to apply to various institutions in need of reform, is the product of later liberal myth-making. So far as I know, Bentham's circle is quite unlike that of any other great political thinker. It consisted not so much of men who found in his work a compelling explanation of the social world around them and gathered about him to learn more of his thoughts, as of men caught in a sort of expectant bafflement at the progress of a work which they would have liked to help on to completion but which remained maddeningly elusive and obscure.
What Bentham needed desperately were sympathetic and candid editors of his work, but his relationship with his followers precluded that from happening. "For this reason," adds Thomas, "the steadily accumulating mass of manuscripts remained largely a terra incognita, even to the intimate members of our circle." As a result, for example, such a major work in manuscript, Of Laws in General, astonishingly remained unedited, let alone unpublished, until our own day.
If anyone could have played this role, it was Bentham's outstanding follower, James Mill. In many ways, Mill had the capacity and personality to perform the task, but there were two fatal problems: first, Mill refused to abandon his own intellectual work in order to subordinate himself exclusively to aiding the Master. As Thomas writes, "Sooner or later all Bentham's disciples faced the choice of absorption or independence." Though he was a devoted follower of Benthamite utilitarianism, Mill's personality was such that absorption for him was out of the question.
Second, the slipshod and volatile Bentham desperately needed shaping up, and the brisk, systematic, didactic, and hectoring James Mill was just the man to do the shaping. But, unsurprisingly, Bentham, the Great Man, was not about to be shaped up by anyone. The personality clash was too great for their relationship to be anything but arm's length, even at the height of Mill's discipleship, before Mill achieved economic independence from his wealthy patron. Thus, in exasperation, Mill wrote to a close mutual friend about Bentham: "The pain he seems to feel at the very thought of being called upon to give his mind to the subject, you can have but little conception of." At the same time Bentham, even long afterwards, confided his lingering resentment of Mill to his last disciple, John Bowring:
He will never willingly enter into discourse with me. When he differs he is silent.… He expects to subdue everybody by his domineering tone — to convince everybody by his positiveness. His manner of speaking is oppressive and overbearing.
There is no better way to summarize the personality clash between them.
Bentham's first published work, the Fragment on Government (1776), gained young Bentham an entrée into leading political circles, particularly the friends of Lord Shelburne. These included Whig politicians like Lord Camden and William Pitt the younger, and two men who were quickly to become Bentham's close friends and earliest disciples, the Genevan Etienne Dumont and Sir Samuel Romilly. Dumont was to be the main carrier of Benthamite doctrine to the continent of Europe.
While utilitarian political and legal reform continued to be his main interest throughout his life, Bentham read and absorbed The Wealth of Nations in the late 1770s or early 1780s, quickly becoming a devoted disciple. Although Bentham praised practically no other author, he habitually referred to Adam Smith as "the father of political economy," a "great master," and a "writer of consummate genius." In the early 1780s, Bentham's brother Samuel, a wealthy engineer, was engaged by the Empress Catherine the Great to organize various industrial projects. Samuel invited Jeremy to stay with him in Russia, which he did from the mid-1780s to the end of 1787, with a view to presenting an "all-comprehensive [legal] code" to enable that despot to govern her realm more efficiently.
Bentham characteristically never completed the code for Catherine, but, while in Russia he learned — falsely, as it turned out — that William Pitt, now prime minister, was preparing to urge a reduction in the legal maximum rate of interest from 5 to 4 percent. Agitated, Bentham wrote and soon published, in 1787, his first, and only well-known work on economics: the scintillating and hard-hitting Defence of Usury. Trying to bring more consistency into Smithian laissez-faire, Bentham argued against all usury laws whatever. He grounded his view squarely on the concept of freedom of contract, declaring that "no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered … from making such a bargain, in the way of obtaining money, as he thinks fit." The presumption, in any situation, is for freedom of contract: "You, who fetter contracts; you, who lay restraints on the liberty of man, it is for you … to assign a reason for your doing so." Furthermore, how can "usury" be a crime when it is exchange by mutual consent of lender and borrower? "Usury," Bentham concludes,
if it must be an offence, is an offence committed with consent, that is, with the consent of the party supposed to be injured, cannot merit a place in the catalogue of offences, unless the consent were either unfairly obtained or unfreely: in the first case, it coincides with defraudment; in the other, with extortion.
In his appendix to the Defence of Usury, Bentham restates and sharpens the Turgot-Smith defense of savings. Savings results in capital accumulation: "Whoever saves money, as the phrase is, adds proportionately to the general mass of capital.… The world can augment its capital in only one way: viz by parsimony." This insight leads to the principle that "capital limits trade," that the extent of trade or production is limited by the amount of capital that has been accumulated. In short: "the trade of every nation is limited by the quantity of capital."
The laissez-faire implication, as Bentham saw, is that government action or spending cannot increase the total amount of capital in society; it can only divert capital from free market to less productive uses. As a result, "no regulations nor any efforts whatsoever, either on the part of subjects or governors, can raise the quantity of wealth produced during a given period to an amount beyond what the productive powers of the quantity of capital in hand … are capable of producing."
Defence of Usury had a great impact in Britain and elsewhere. Dr Thomas Reid, the distinguished Scottish "common-sense" philosopher who succeeded Adam Smith to the chair of moral philosophy at Glasgow, strongly endorsed the book. The great Comte de Mirabeau, the leading force in the early stages of the French Revolution, had the work translated into French. And in the United States, the tract went into several editions, and it inspired several states to repeal their laws against usury.
In the course of the Defence, there are hints of valuable analysis. Lending is defined as "exchanging present money for future," and other intimations of time-preference or waiting as a key to saving include such phrases as the saver having "the resolution to sacrifice the present to [the] future." Bentham also intimates that part of interest charged includes a risk premium, a kind of insurance premium for the risk of loss incurred by the lender.
During the 1780s, Bentham was also writing his "Essay on Reward," published only a half-century later as the Rationale of Reward. In it, Bentham expounded enthusiastically on "Competition as rewards," and hailed the "advantages resulting from the most unlimited freedom of competition." It was on this principle of free competition and opposition to governmental monopolies that "the father of political economy" had, in Bentham's over-enthusiastic words, "created a new science."
In his next economic work, the unpublished "Manual of Political Economy" (1795), Bentham continued the laissez-faire theme of "No more trade than capital." The government, he emphasized, can only divert investment funds from the private sector; it cannot raise the total level of investment. "Whatever is given to any one branch, is so much taken from the rest.… Every statesman who thinks by regulation to increase the sum of trade, is the child whose eye is bigger than his belly." Towards the end of the same work, however, a cloud no bigger than a man's hand appeared that would eventually take charge of Bentham's economic analysis. For Bentham began his rapid slide down the inflationist chute. In a kind of appendix to the work, he states that government paper money could increase capital if resources were not "fully employed." There is no analysis, as of course there never is in the inflationist canon, of why these resources were "unemployed" in the first place, i.e., why their owners withheld them from use. The answer must be: because the resource owner demanded an excessively high price or wage: inflation is therefore a means of fooling resource-owners into lowering their real demands.
It did not take long for Jeremy Bentham to slide down the slippery slope from Adam Smith and what would be Say's law back to mercantilism and inflationism. Shortly afterwards, in an unpublished "Proposal for the Circulation of a [New] Species of Paper Currency" (1796), Bentham happily wedded his "projecting" and constructivist spirit to his newfound inflationism. Instead of floating bonds and paying interest on them, the government, he proposed, should simply monopolize all issue of paper notes in the kingdom. It could then issue the notes, preferably non-interest bearing, ad libitum and save itself the interest.
Bentham was scarcely at his best answering the question of what limit there might be to this government paper issue. The limit, he answered, would obviously be "the amount of paper currency in the country." Bentham's modern editor is properly scornful of this patent claptrap: "It is like saying "the sky's the limit" when we do not know how high the sky may be."
In his later writings on the subject, Bentham searched for some limits to paper issue, if unsuccessfully. But his commitment to a broadly inflationist course deepened further. In his unfinished "Circulating Annuities" (1800), he developed his government paper scheme further, and hailed the serviceability of inflation in wartime. Indeed, Bentham makes an all-out assault on the Turgot-Smith-Say insights and actually declares that employment of labor is directly proportional to the quantity of money: "No addition is ever made to the quantity of labor in any place, but by an addition made to the quantity of money in that place.… In this point of view, then, money, it should seem, is the cause, and the cause sine qua non, of labor and general wealth." Quantity of money is all; so much for Smithian doctrine! In fact, Bentham went further in Circulating Annuities, heaping scorn on his alleged mentor for denouncing the mercantilist preoccupation with the state's piling up of gold and silver and with a "favorable" balance of trade. There is no absurdity, averred Bentham,
in the exultation testified by public men at observing how [great] a degree of what is called the balance of trade is in favour of this country.… Seduced by the pride of discovery, Adam Smith, by taking his words from the kitchen, has attempted to throw an ill-grounded ridicule on the preference given to gold and silver.
After once again calling for the elimination of bank paper for the benefit of a government monopoly of paper issue (in the fragmentary "Paper Mischief Exposed," 1801), Bentham reached the acme of inflationism in his "The True Alarm (1801). In this unpublished work, Bentham not only continued the full-employment motif, but also grumbled about the allegedly dire effects of hoarding, of money saved from consumption that went into hoards instead of investment. In that case, disaster: a fall in prices, profits and production. Nowhere does Bentham recognize that hoarding and a general fall in prices also means a fall in costs, and no necessary reduction in investment or production. Indeed, Bentham worked around to the Mandeville fallacy about the beneficial and uniquely energizing effects of luxurious spending. In the mercantilist and proto-Keynesian manner, saving is evil hoarding while luxury consumption animates production. How capital can be maintained, much less increased, without saving is not explained in this bizarre model.
James Mill and David Ricardo have been considered loyal Benthamites, and this they were in utilitarian philosophy and in a belief in political democracy. In economics, however, it was a far different story, and Mill and Ricardo, sound as a rock on Say's law and the Turgot-Smith analysis, were firm in successfully discouraging the publication of the "The True Alarm." Ricardo scoffed at almost all of later Benthamite economics and, in the case of money and production, asked the proper questions: "Why should the mere increase of money have any other effect than to lower its value? How would it cause any increase in the production of commodities.… Money cannot call forth goods … but goods can call forth money." Bentham's major theme — "that money is the cause of riches" — Ricardo rejected firmly and flatly.
In his penultimate work of importance on economics, Jeremy Bentham came full circle. He had launched the economic part of his career with a hard-hitting attack on usury laws; he ended it by defending maximum price control on bread. Why? Because the mass of the public would favor cheap bread (assuredly so!), and so there would then be a "rational" and "determinate standard" for the good and moral price of bread, a standard which apparently free contract and free markets cannot set. What would such a standard be? Showing that for Bentham his ad hoc utilitarianism and cost-benefit analysis had totally driven any sound economics out of his purview, he answered that it would have to be empirical and ad hoc. Casting economic logic to the winds, Bentham maintained that the authorities should set a "moderate" maximum price, which would weigh the costs and benefits, the advantages and disadvantages, of each possible price. And Bentham assured his readers of his moderation: he did "not mean it [his proposal] as a whip or scorpion for the punishment of the growers or vendors of corn." But that would be the inevitable result.
Ad hoc empiricism was now rampant in Bentham. Admitting that all previous attempts at maximum price control were disasters, like any later institutionalist or historicist Bentham denied any relevance, since the circumstances of each particular time and place are necessarily different. In short, Bentham denied economics altogether — that is, denied the possibility of laws abstracting from particular circumstances and applying to all exchanges or actions everywhere.
In arguing against the opponents of price control, Bentham often used reasoning that was tortuous and even absurd. For example, to the charge that maximum price control would lead to attempted consumption exceeding supply (one of the greatest problems with price control), Bentham insisted that this could not happen in Britain, where the Poor Law ensured welfare payment to the poor with an increase in the price of bread. The opinion that, at some time or other, the demand curve can be vertical and not falling is in every century the hallmark of an economic ignoramus, and Bentham now passed that test. For centuries, writers and theorists knew that demand increased as price fell, and Bentham was now writing as if economics had never existed — and could never exist.
Since consistency was the realm of despised deductive logic, Bentham denied that his opposition to usury laws had any relation to his defense of price control on bread. But while he still maintained that his earlier analysis had been correct, he now offered a crucial revision: he had overlooked that a notable advantage of a usury law is that the government can then borrow more cheaply (at the expense, of course, of squeezing out marginal private borrowers). And he went on to admit that he now found this "advantage" decisive, so that now he would place usury laws on the governmental agenda: "I should expect to find the advantages of it in this respect predominate over its disadvantages in all others." In short, Bentham, the alleged "individualist" and exponent of laissez-faire, finds that advantage to government outweighs all private disadvantage!
Again treating his earlier views on usury, Bentham denied that he had ever believed in any self-adjusting and equilibrating tendencies of the market, or that interest rates properly adjust saving and investment. He went on in a revealing diatribe against laissez-faire and natural rights, to demonstrate to one and all the incompatibility between utilitarianism on the one hand and laissez-faire or property rights on the other:
I have not, I never had, nor shall have, any horror, sentimental or anarchical, of the hand of government. I leave it to Adam Smith, and the champions of the rights of man … to talk of invasions of natural liberty, and to give as a special argument against this or that law, an argument the effect of which would be to put a negative upon all laws. The interference of government, as often as in my jumbled view of the matter the smallest balance on the side of advantage is the result, is an event I witness with altogether as much satisfaction as I should its forbearance, and with much more than I should its negligence.
One wonders by what mystical standard the "scientific" Bentham managed to weigh the advantages and disadvantages of every particular law.
Three years later, in 1804, Jeremy Bentham lost interest in economics, a fact for which we must be forever grateful. It is only unfortunate that this waning of zeal had not occurred a half-decade before. The case of Jeremy Bentham, however, should be instructive to that host of economists that attempt to weld utilitarian philosophy with free market economics.
One would think that the master of utilitarianism would have contributed to utility analysis in economics, but oddly enough Bentham proved to be interested only in the "macro" realms of economic thought. The only exception came in the largely unfortunate True Alarm (1801), in which Bentham not only declared that "all value is founded on utility," but also enters into a cogent critique of Adam Smith's alleged "value paradox." Water, Bentham noted, can and does have economic value, while diamonds do have value in use as a foundation of its economic value. Continuing on, Bentham approaches the marginalist refutation of the value paradox:
The reason why water is found not to have any value with a view to exchange is that it is equally devoid of value with a view to use. If the whole quantity required is available, the surplus has no kind of value. It would be the same in the case of wine, grain, and everything else. Water, furnished as it is by nature without any human exertion, is more likely to be found in that abundance which renders it superfluous; but there are many circumstances in which it has a value in exchange superior to that of wine.
 William E.C. Thomas, The Philosophic Radicals: Nine Studies in Theory and Practice 1817–1841 (Oxford: The Clarendon Press, 1979), p. 25.
 See, ibid., pp. 35–6.
 Werner Stark, "Introduction," in Stark (ed.), Jeremy Bentham's Economic Writings (London: George Allen & Unwin, 1951), II, 18–19.
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