An Austrian Perspective on the History of Economic Thought

4.1   The conundrum of Ricardo’s popularity

What accounts for the popularity of Ricardo’s Principles, and for the enduring dominance of the Ricardian system? The marginal utility ‘revolutionary’, W. Stanley Jevons, writing the preface to the second edition of his great Theory of Political Economy in 1879, was forced to complain of the continuing dominance of the Ricardian doctrine, and to lament that ‘when at length a true system of Economics comes to be established, it will be seen that that able but wrong-headed man, David Ricardo, shunted the car of Economic science on to a wrong line...’. Indeed. And Ricardo won the day with a theory that was not only far from self-evident but in many ways bizarre (such as the labour theory of value), and he wrote his work in a crabbed and obscurantist style that would hardly be expected to sweep the field, either among laymen or in those more particularly interested in economics.

Part of the explanation, as Schumpeter pointed out, is that Ricardo was politically in tune with the Zeitgeist. Even though his methodology was so abstract as to be divorced from and to falsify reality, Ricardo’s motivation was not abstract theory but its use in advancing politico-economic conclusions. Ricardo, like Mill, was devoted to free trade and laissez-faire, and, as we shall see, to hard money, and he applied his abstract system like a hammer in their service. This ideology was fast becoming the wave of the future in England, in the circles of businessmen and intellectuals.1

But what of Ricardo’s abysmal writing, in style and in organization? Alexander Gray’s heartfelt critique is on the mark:

As to the form rather than the substance of Ricardo’s writings, it is perhaps sufficient to say that he was no writer. He himself dimly realized that he was a bad writer, but it is doubtful whether he can have known the whole truth. It is undiscerning flattery to regard his chief work, The Principles of Political Economy and Taxation, as a book at all. Rather does it suggest the sweepings of a busy man’s study – chapters of very varying length, which he clearly found it difficult to arrange in the right order, brusque notes and memoranda on points which interested the author. In defence, it may be admitted that Ricardo... did not mean to write a book. These were indeed memoranda written for himself and his friends, published on his friends’ [actually Mill’s] incitement. But this is a poor consolation to the lonely traveller befogged in the Ricardian jungle.2

It is very possible, however, that it was precisely Ricardo’s obscurantism that accounted for his success. For all too many people, laymen and professionals alike, obscurity and bad writing equal profundity. If they can’t understand it, and they hear at every hand that so-and-so is a great man and his theories the current light, their belief in his profundity will be redoubled.3,4 There are great charms to obscurity. Moreover, there are particular charms for the adepts who cluster around the great man, the circle of initiates who claim – probably correctly – that only they can truly understand his work. Only they can penetrate the fog caused by the depth of the great man’s wisdom. Schumpeter notes that ‘quickly his circle developed the attitude – so amusing but also, alas!, so melancholy to behold – of children who have been presented with a new toy. They thought the world of it. To them it was of incalculable value that only he could fail to appreciate who was too stupid to rise to Ricardian heights.’5 Its murkiness and difficulty only heightened the enjoyment and pride of the adepts over their new toy. Nowadays, this effect is considerably heightened by the fact that obscurity gives disciples and critics more to talk and write about, and thus greatly multiplies the career opportunities for scholars in the current age of publish-or-perish.

Another reason for the popularity of Ricardianism was the persistent cadre activity of the indefatigable James Mill. One of Mill’s important actions was to help found the Political Economy Club in London in 1821, a club that quickly became for many years the centre of economic discussion and learning in Great Britain. It is characteristic of the early nineteenth century shift of the locus of economics from Scotland to England that this transfer was one of occupation as well as location. In Scotland, economic thought had centred in the two great universities of Edinburgh and Glasgow, with influence spread through academic, literary and business circles, and members of social clubs in the two cities. In England, on the contrary, there was almost no academic economics in the fossilized university courses of the day. Of the 30 founding members of the Political Economy Club, only one – Thomas Robert Malthus – was an academic, teaching political economy at the East India Company’s College at Haileybury. The other leading English economists in the club included David Ricardo, businessman and financier Thomas Tooke (1774–1858), with Colonel Robert Torrens of the Royal Marines chairing the first meeting. Others were businessmen, publicists, and government officials.

A few years later, academic opportunities began to open up. Mill’s Scottish friend and fellow leading Ricardian, John Ramsay McCulloch, who had been lecturing for several years, became professor of political economy in 1828 at the University College, London, and joined the Political Economy Club shortly thereafter. But after four years of teaching he had to spend the rest of his life as a financial controller. The first economics post at Oxford was a chair founded by the banker and evangelist Henry Drummond in 1825, but the term of the chair was only five years. The first chair-holder was the attorney and important young economist Nassau William Senior (1790–1864), son of an Anglican vicar in Berkshire, who had studied at Oxford and had joined the Political Economy Club two years earlier.6 The new King’s College, London, established in the same year as University College (1828) as a Tory and Anglican haven to offset its non-denominational neighbour, appointed Senior to its own political economy post in 1831. But Senior was kicked out unceremoniously for publishing a pamphlet urging a reduction in the budget of the Anglican establishment in Ireland, and he spent the rest of his career as a real-property attorney and government lawyer, with the exception of another Drummond professorship at Oxford in 1847–52.

Cambridge treated economics with such disdain that its only contribution was to have a young lawyer of no distinction in the field, George Pryme, teach economics without pay and at unpopular hours. Pryme taught under those conditions for over 40 years from 1816 on, remarkably becoming professor of political economy in 1828. Apparently he wrote nothing in economics and contributed to no important discussions.

4.2   The rapid decline of Ricardian economics

Before setting out to explain a problem one must be quite sure that the problem really exists. Surely, a partial answer to the conundrum of Ricardo’s popularity and dominance over English economics is that that dominance was largely a myth. Until recently, the orthodox view in the history of economic thought was that Ricardianism dominated British thought from the date of Ricardo’s Principles through Jevons’s abortive revolution in 1871, and until the 1890s when Alfred Marshall’s neo-Ricardianism supposedly integrated marginal utility into a basically Ricardian framework. One of the last expressions of this orthodoxy came in 1949, when Professor Sydney G. Checkland, from an anti-Ricardian perspective, bewailed the manner in which the two Scotsmen, James Mill and McCulloch, like Ricardo – the Spanish-Portuguese Jew – expatriates from their native culture, and therefore presumably alienated from mainstream English life, used brilliant cadre tactics to acquire their hegemony over English thought. Checkland saw that Mill was the cadre leader of the Ricardians, cleverly advising Ricardo not to give publicity to his critics by deigning to reply to them in the third, 1821 edition of his Principles. Mill wrote his Elements of Political Economy as a Ricardian textbook in 1821, but since it lacked popular appeal, the younger McCulloch, a charismatic, enormously strong, booming, burly, Scotch whisky-drinking figure of a man, took over as the popularizer and propagator of Ricardianism.

The first important revision of the myth of Ricardian triumph came with the Marxist Ronald Meek’s rebuttal of Checkland the following year.7 Checkland, he points out, made the crucial mistake – following J.M. Keynes – of treating Say’s law as equivalent to the Ricardian system. While Ricardo and McCulloch followed Mill in considering Say’s law to be very important, they did not regard it as crucial to the Ricardian system, which actually comprised the Ricardian theories of value and distribution. While Say’s law indeed triumphed early, with only Malthus temporarily opposing it, the Ricardian system proper met a very different fate.

In fact, as he managed to do in other areas of the history of economic thought, John Maynard Keynes, in his General Theory, skewed and distorted Ricardian development. It was only Keynes, in his preoccupation with promoting government deficits and inflationism and attacking Say’s law, who made that law the central feature of the Ricardian system. It was also Keynes who distorted the facts by holding up Malthus as the proto-Keynesian hero, stubbornly calling for an anti-Say and anti-Ricardian alternative to the Ricardian system. On the contrary, Malthus, despite various differences, considered himself a Smithian and was generally friendly to Ricardianism as well as to Ricardo personally. Malthus’s interest in the alleged ‘general glut’ and in denouncing Say’s law, was an ephemeral product of the post-Napoleonic War depression in England. When England’s prosperity returned after 1823, Malthus totally lost interest in the general glut question, and wrote no more about it. Say’s law had triumphed except among a few radical fringe people in the economic underworld; and Malthus steadfastly refused to be drawn into alliance with them. These fringe persons, who continued their worn-out cries of a general glut into the 1830s, included the prolific left Tory statist poet and essayist Robert Southey (1774–1843), who had attacked deflation after the Napoleonic War, and MP, geologist, and authority on volcanoes George Poulett Scrope (1797–1876). Raising the fallacious cry of underconsumption, Scrope, in his Principles of Political Economy (1833), charged that any decline in consumption in favour of a ‘general increase in the propensity to save’ would necessarily and ‘proportionately diminish the demand as compared with the supply, and occasion a general glut’. In this old proto-Keynesian fallacy, savings apparently ‘leak’ out of the economy, and result in permanent?) depression. Apparently, investment, since it is transitional and not ‘final’, is not considered spending at all. And then, as in all varieties of crank economic analysis, the price system, and the relationship of selling prices to costs, is somehow not considered worthy of mention at all.8

George Poulett Scrope was originally named George Thomson, son of John Poulett Thomson, head of a firm of Russia merchants. He took the name Scrope after marrying an heiress of the Scrope family. Born in London, Scrope studied at Oxford and Cambridge, and was a member of the House of Commons for 35 years. A champion of free trade, he wrote so many pamphlets on economic issues (about 70) that he was commonly dubbed ‘Pamphlet Scrope’.

In contrast to the triumph of Say’s law, the Ricardian system proper was rapidly repudiated in the world of English economics. In January 1831, eight years after Ricardo’s death, Colonel Robert Torrens addressed the Political Economy Club that Ricardo had helped to found. Torrens raised the crucial question: how many of the Ricardian principles were still held to be correct? His answer: all the great principles of Ricardian system had been abandoned, especially the critical ones of value, rent and profits. Samuel Bailey, in his great espousal of the utility theory of value in 1825, had smashed the labour theory; Thomas Perronet Thompson had disposed of the Ricardian theory of rent; the theory of profit is unsound because Ricardo ignored the replacement of capital; and the Malthusian subsistence theory of wages had been generally abandoned.

To the Marxian Ronald Meek, this wholesale desertion of Ricardianism comprised a capitalist plot against the labour theory of value, whose socialistic implications had been drawn out during the 1820s by the Ricardian socialists. At any rate, by 1829–31, there were no adherents of the labour theory of value left in mainstream British economics; to Meek, the only exception was McCulloch, who in turn had abandoned Ricardo on many other issues, including the idea of productive vs unproductive labour, the theory of profit, and the theory of class conflict on the market implicit in the Ricardian theory of distribution.9 Only Say’s law, with its strong laissez-faire implications, had survived what Meek laments as ‘the purge’.

But the ‘purge’ or abandonment came even earlier, antedating the Ricardian socialists. Professor Frank W. Fetter, in his classic article,10 points out that upon Ricardo’s death in 1823, James Mill wrote despairingly to McCulloch and noted that they were ‘the two and only genuine disciples’ of Ricardo in existence and McCulloch did not stay one for long. Fetter notes that economic opinion in the 1820s was diverse and unsettled, except for a general adherence to free trade. Everyone dismissed the portentous Ricardian conclusion that profits varied inversely to wages, except as a banal arithmetic truism. Furthermore, even Ricardo himself had pointed the way to abandoning his own crucial permanent subsistence theory of wages (which the German socialist Ferdinand Lassalle was later to call ‘the Iron Law of Wages’). Ricardo had adopted the subsistence wage theory, taken from the hard-core Malthusian first edition of Malthus’s Essay on Population (1798). But many of his statements apart from this rigid formal model were really adopted from the much weaker, indeed contradictory, second edition of the Essay (1803). These were qualifications which Marx would correctly note amounted to a desertion of the ‘iron law’. Criticism of Malthusian doctrine prevailed in the journals by the late 1820s. Thus, in early 1826, a writer noted in the Monthly Review that the law of relentless increase in population operates only in poor societies. It moves

in an inverse proportion to the acquisition of wealth;... it is only when people become more luxuriant, when those engagements which form the principal charm in humble life lose their attractions by the substitution of habits of refinement, that the increase [in population] becomes progressively less.11

Finally, in 1829, Nassau W. Senior’s letters to Malthus effectively put the boots to the iron law. In this published exchange of correspondence, following the delivery of his lectures on population (Two Lectures on Population, to which is added A Correspondence between the Author and the Rev. T.R. Malthus (London, 1829)), Senior dealt a devastating blow to the Malthusian doctrine. In the first place, while agreeing that excessive population growth could conceivably one day constitute a problem, Senior in effect stood Malthus on his head by pointing out that while population indeed pressed on the food supply in undeveloped countries, the history of the prosperous countries of the West had been marked by an increase in the food supply outstripping the rise in population. Indeed, this fact is simply demonstrated by the rising living standards of the western countries over the centuries. And this economic growth must be due to a general tendency of agricultural and other productivity to rise, as well as people devoting themselves to safeguarding their higher living standards. As a result, population does not grow enough to reduce the living standards of the public to the subsistence level. And while Malthus would not verbally go so far as Senior in speaking of a general ‘tendency for food to increase faster than population’, it was clear from Malthus’s reply that the mellower Malthus of the second edition had triumphed. That Senior saw the full implications of the changes of the second edition is also demonstrated by his own formulation of the population principle: ‘that the population of the world... is limited only by moral or physical evil, or by fear of the deficiency of those articles of wealth which the habits of individuals of each class of its inhabitants lead them to acquire’. (Italics added.)

But while the iron law of wages was in fact finished de facto, it still continued to reign, as it were, de jure. For Nassau Senior, suffering from excessive piety toward Malthus, lacked the instinct for the jugular that would have stripped the veil of evasions from the grave fallacies of the Malthusian doctrine. Instead, Senior collaborated in the sham, insisting, though he knew better, on continuing to hail the Malthusian principle of population as a cornerstone of economic science. As Joseph Schumpeter, ever alive to the follies of economists, lamented:

[Senior] always treated Malthus with infinite respect – he even called him a benefactor of humanity (sic!) – and did all in his power to minimize his deviation from what he evidently considered to be established doctrine. All the less justification is there for the practice of some later writers who, with nauseating pontificality, treated Senior as a none too intelligent pupil who needed to be set right by Malthus. As a matter of fact, it is perfectly clear that Senior realized the extent to which Malthus’ qualifications ought to have spelled recantation and to what degree his adherence to some of his former opinions spelled contradiction.12

4.3   The theory of rent

The Ricardian theory of rent was effectively demolished by Thomas Perronet Thompson (1783–1869) in his pamphlet, The True Theory of Rent (1826). Thompson weighed in against this fallacious capstone to the Ricardian system: ‘The celebrated Theory of Rent’, Thompson charged, ‘is founded on a fallacy’, for demand is the key to the price of corn and to rent.

The fallacy lies, in assuming to be the cause what in reality is only a consequence... [I]t is the rise in the price of produce... that enables and causes inferior land to be brought into cultivation; and not the cultivation of inferior land that causes the rise of rent.

Thompson goes on to note in wonder that Ricardo perceived the fallacy in the view that corn sells for a high price because rent is paid, and not vice versa, and yet pressed on to adopt a similar cost theory of price. Here Ricardo reversed cause and effect by maintaining that the cultivation of inferior land causes the price of corn to rise, instead of the other way round.

During the same year, Colonel Robert Torrens himself destroyed the Ricardian theory of rent even more effectively, zeroing in on the crucial fallacy of rent-as-a-differential. Characteristically Torrens, who was involved in all the economic controversies of the day and changed his mind significantly on nearly all of them, delivered his coup de grace in the third edition of a work in which he had originally predated Ricardo in the discovery and championing of the theory of differential rent. This work was the Essay on the External Trade, originally published in 1815. But now Torrens honed in on the critical point that the rent of land, A, does not depend on its being more fertile or productive than some other piece of land, B; that, on the contrary, the rent on each land stems from its own productivity, period, in turn partially determined by the scarcity of that particular land and by the demand for its product. The existence of a return on a piece of land is by no means dependent on the existence of inferior lands. As Torrens puts it:

Neither the gradations of soil, nor the successive applications of capital to land, with decreasing returns, are in any way essential to the appearance or the rise of rents. If all soils were of one uniform quality, and if land, after having been adequately stocked, could yield no additional produce... still the rise in the value of raw produce... would cause a portion of the surplus produce of the soil to assume the form of rent.

In the very same year, 1831, that Colonel Torrens was thus pronouncing the death of the Ricardian system, the Rev. Richard Jones (1790–1855), a Cambridge graduate, put the final boots to the Ricardian theory in his discourse ‘On Rent’, in his Essay on the Distribution of Wealth. A Baconian inductivist, historicist, and anti-theorist who paradoxically first succeeded Senior as professor of political economy at King’s College, London, and then followed Malthus as professor at the East India College of Haileybury, Jones stressed the error of Ricardo’s historical dictum that the most fertile lands are always cultivated first in every country, which then moved successively to less and less fertile lands. For Schumpeter and others to dismiss Jones’s case as confusing historical fact with an abstract theoretical model, misses the real point. Fallacious anti-theorist Richard Jones undoubtedly was; but from his own point of view, David Ricardo was not simply setting up an abstract and totally unrealistic theoretical model. Ricardo was interested above all in political applications, and he was deluded enough to believe that his model was spewing forth accurate laws of past and future historical trends. For Ricardo, inexorable rises in rent, crippling future economic development, were a predictable empirical consequence of his own theory. Specific empirical facts cannot give rise to or test theory, but a theoretical law that attempts to predict past and future can be validly countered by examining the course of actual history. Empirical facts can properly be used to refute empirical generalizations.

The various demolitions of Ricardo’s theory of rent, especially that of Perronet Thompson, quickly triumphed in the economic literature. The Thompson critique had been anticipated in the influential journals, in the British Critic as early as 1821, and by Nassau W. Senior in the Quarterly Review in the same year. By the early 1830s, Thompson’s view had triumphed in the journals, including an article by Samuel Mountifort Longfield, the first Irish professor of political economy at Trinity College, Dublin. By the 1840s, the Ricardian theory of rent was dead in the water, and almost beneath discussion; apart from McCulloch, the only one willing to defend it was the ardent and emotional Ricardian, the poet and writer Thomas De Quincey (1785–1859).

David Ricardo, as he himself acknowledged, did not originate his differential theory of rent. It began in 1777, on the publication of An Enquiry into the Nature of the Corn Laws, by the Scottish farmer, James Anderson (1739–1808). An Aberdeenshire farmer, Anderson founded and edited the weekly Bee, and later moved to London, where he edited publications in agricultural science and the arts. Anderson’s theory, however, remained forgotten, until independently replicated by three writers in 1815: Thomas Robert Malthus, in his Inquiry into the Nature and Progress of Rent; Sir Edward West’s (1782–1828), Essay on the Application of Capital to Land; and the first edition of Torrens’s Essay on the External Corn Trade. Malthus did not integrate his theory into anything like the Ricardian system, and, furthermore, he was scarcely an opponent of the landlords or of land rent. To the contrary, Malthus defended the Corn Laws. On the other hand, West, an attorney and fellow of University College, Oxford, who later served as supreme court justice in India and died early of disease, so closely anticipated the Ricardian system that Schumpeter habitually refers to the ‘West-Ricardian’ theory.

The interesting question is: what gave rise, in a very short period of time (1815–17) to such intense concern, or at least attention to, the alleged problems of rising rents? For apart from the relatively unknown James Anderson, attention to rising rents occurs within a very few years shortly after the end of Napoleonic Wars. The answer was brilliantly supplied by the early twentieth century American ‘Austrian’ economist Frank Albert Fetter: the Napoleonic Wars of the first fifteen years of the nineteenth century were marked by high taxation, blockages of food imports, currency inflation, and consequently unprecedentedly high prices for ‘corn’ in England and hence highly inflated agricultural rents. It is surely no accident, as Fetter notes, that ‘the so-called Ricardian doctrine of rent was independently formulated by several other writers – West, Malthus, Torrens and others between 1813 and 1815 – when wheat prices were at their peak’.13

4.4   Colonel Perronet Thompson: anti-Ricardian Benthamite

We must pause a moment to consider the fascinating character of Colonel Perronet Thompson, an ardent Benthamite radical, and a champion of free trade and opponent of the Corn Laws. Thompson, the son of a prosperous merchant and banker from Sussex, and MP for a decade, spent the first part of his adult life in the military, retiring from active service in 1922 at the age of 39 with the rank of lieutenant. Despite this relatively low rank, Thompson had been made the first royal governor of the colony of Sierra Leone in 1808, but got himself recalled quickly by clamouring for the abolition of the slave trade. His removal by the Tory British government over the issue of slavery radicalized young Thompson, whose education in classical liberalism was further advanced by reading Adam Smith and Turgot. After retiring from active service, Thompson was compensated for his low rank in important work over a long military career by being repeatedly promoted while inactive. By the time of his death, Thompson had risen to the rank of full general.

Before going into military service, Thompson had graduated from Queen’s College, Cambridge, and been made a fellow of that college. On retiring from the military life, he joined Bentham’s circle of admirers and plunged into Benthamite utilitarianism and radicalism. Thompson’s first published work appeared in the very first issue of Bentham’s own periodical, the Westminster Review (1824). His True Theory of Rent, designed to uphold Adam Smith’s views on rent as against Ricardo, followed; and the next year, Perronet Thompson published his well-known Catechism on the Corn Laws (1827), generally considered the most important work in the entire anti-Corn Law literature. Later, Thompson became one of the most effective members of the Anti-Corn Law League. In 1829, only half a decade since his plunge into politics, the now Lieutenant Colonel Thomas Perronet Thompson became the sole owner of the Benthamite Westminster Review, and contributed articles to every issue until relinquishing ownership seven years later. After being defeated for Parliament in 1834, Thompson won election a year later, taking his stand with George Grote and the philosophic radicals in Parliament. Losing his seat two years later, he ran several times unsuccessfully, serving in Parliament from 1847 to 1852, and again from 1857 to 1859.

Thompson’s writings were prolific, and in many areas. At the age of 59, a six-volume collection of his writings to date was published, Exercises, Political and Others (1842), and he kept writing pamphlets and newspaper articles on democratic reform until the day before his death, at the age of 86. In addition to his widespread political and economic concerns, Thompson wrote and published works on mathematics, the science of acoustics, and the theory of musical harmony. An organ built on the lines of Thompson’s harmonic theory received honourable mention at the Great Exhibition of 1851.

Thompson contributed more to economics than his attack on rent. His first article in the Westminster Review, ‘On the Instrument of Exchange’, followed Bentham’s own inflationist views by advocating an inconvertible paper currency. Another, equally dubious, contribution of Thompson’s in the same essay followed up a hint made ten years before by Malthus. Malthus, who had been trained in mathematics at Cambridge, had observed, in a pamphlet in 1814, that differential calculus might prove useful in the theory of morals, economics and politics, since many questions in these disciplines centre around the pursuit of maxima and minima. By the time of the publication of his Principles of Political Economy in 1820, however, Malthus had wisely grown sceptical of the possibilities of maths in economics as well as in ethics and politics. Thompson, however, also trained in mathematics at Cambridge, had no such scruples, and his 1824 article opened a fateful door by using the differential calculus in defining a maximum gain. The perfect Benthamite, steeped in looking at maxima of pleasure and minima of pain, had struck a fateful chord; Pandora’s Box had been opened.

Thompson’s sympathy for mathematical economics, however, did not keep him from denouncing the Smith-Ricardo search for a fixed and invariable measure of value, which he wisely dismissed as a chimera. Furthermore, in the Westminster Review in 1832, Thompson trenchantly criticized all cost theories of value, pointing out that cost and price almost always differ. And these differences, he added, are not accidental and ephemeral, as Smith and especially Ricardo assumed in their focus on the long-run ‘natural’ price; on the contrary, these ‘short-run’ differences are the essence of the dynamic real world: ‘This perpetual oscillation on both sides of the cost price, instead of being an inconsiderable accident, is in reality the great agent by which the commercial world is kept in motion’.

4.5   Samuel Bailey and the subjective utility theory of value

In 1825, Samuel Bailey (1791–1870), a rising young merchant from Sheffield, published a thorough demolition of Ricardian value theory, in his A Critical Dissertation on the Nature, Measures, and Causes of Value. Bailey at last brought into English economics the subjective utility theory of the French tradition; unfortunately, he was not gracious enough to acknowledge that fact. While his essay was clearly in the Say tradition, for example, his brief and brusque references to Say’s Treatise gave no hints of acknowledging his indebtedness. But in any case, Bailey’s demolition of Ricardo was devastating. Beginning with Ricardo’s definition of value as the relative price, or purchasing power, of particular goods, Bailey went on to show the absurdity and inner contradiction of Ricardo’s claim that each good acquires an absolute and invarying value from the quantity of labour hours embodied in its production. For one thing, if the quantity of labour needed to produce good A remains the same, its value, contra Ricardo, can scarcely be invariable, if the quantity of labour embodied in other goods, B, C, D, etc. has changed. In short, value is strictly relational, a ranking among goods, and therefore cannot be absolute or invariant. Furthermore, Bailey demonstrates that value is not inherent in goods at all, but is rather always a process of subjective evaluation in the minds of individuals. Value, as Bailey pointed out, ‘in its ultimate sense, appears to mean the esteem in which any object is held. It denotes strictly speaking, an effect produced on the mind...’. Value is purely a ‘mental affection’. Furthermore, he profoundly states that value is not only a subjective estimation, but also that valuation is necessarily relative among various goods or objects; value is a matter of relative preference. Thus Bailey:

When we consider objects in themselves, without reference to each other; the emotion or pleasure or satisfaction, with which we regard their utility or beauty, can scarcely take the appellation of value. It is only when objects are considered as subjects of preference or exchange, that the specific feeling of value can arise. When they are so considered, our esteem for one object, or our wish to possess it, may be equal to, or greater or less than our esteem for another...

But if value is subjective and relative (or relational) valuation, it follows that it is absurd for Ricardo to hanker after an invariable measure of value.

In a scintillating and telling passage, Bailey displays the inner contradictions and absurdities of any objective, absolute theory of value, and specifically of the Ricardian quantity of labour variant. The Ricardians had lost sight of

the relative nature of value, and... consider it as something positive and absolute; so that if there were only two commodities in the world, and they should both from some circumstance or other come to be produced by double the quantity of labour, they would both rise in real value, although their relation to each other would be undisturbed. According to this doctrine, everything might at once become more valuable, by requiring at once more labour for its production, a position utterly at variance with the truth, that value denotes the relation in which commodities stand to each other as articles of exchange. Real value, in a word, is on this theory considered as being the independent result of labour; and consequently, if under any circumstances the quantity of labour is increased, the real value is increased. Hence, the paradox, [quoting from the devoted Ricardian Thomas De Quincey] ‘that it is possible for A continually to increase in value – in real value observe – and yet command a continually decreasing quantity of B’; and this though they were the only commodities in existence.

In sum, as Bailey pungently noted, ‘the very term absolute value, implies the same sort of absurdity as absolute distance...’.

Bailey then enters into a penetrating discussion of the theory of measurement, showing the tremendous gulf between genuine measurement of real or physical objects and any concept of ‘measuring’ something as subjective and relative as human valuation. In the case of physical objects, such concepts as length or weight are measured by fixing an invariant physical measure, such as a foot rule, and then comparing the length of other objects in question with such a rule. In human valuation, ‘measurement’ is quite different; it is simply the expression of prices or relative purchasing powers of different goods in terms of one money, or medium of exchange. Here there is no physical operation such as measurement of physical objects. In the case of money there is a ‘common expression or denominator of value’ in money rather than an invariable physical object of comparison. In fact, these prices or quantities are relative and variable, and there is no invariability involved. Indeed, Bailey would have done still better to abandon the term ‘measure’ altogether, and to confine it strictly to the invariant standards used to compare physical objects, simply confining the idea of comparing relative prices in terms of money to the term ‘common expression’ or common denominator’. A great deal of confusion in economic theory might have been avoided.

In the course of demolishing the idea of an invariable measure of value, Bailey took deadly aim at the notion that the value of money is invariant over time, and therefore can be used to compare general prices over time. While the money commodity is not more fixed in value than any other, one of its attributes, and one of the reasons it is chosen as money on the market, is its ‘comparative steadiness of value’, as Bailey sensibly termed it in a later work on money and its value {Money and its Vicissitudes in Value, 1837). But its value is not constant, and therefore there is no way of measuring value over time. But commodities only have value relations to each other at the same time; a commodity has no value relation to itself at different times. As Bailey puts it:

We cannot ascertain the relation of cloth at one time to cloth at another, as we ascertain the relation to cloth in the present day. AH that we can do is to compare the relation in which cloth stood at each period to some other commodity... We cannot say, that a pair of stockings in James the First’s reign would exchange for six pair in our own day; and we therefore cannot say, that a pair in James the First’s reign was equal in value to six pair now, without reference to some other article. Value is a relation between contemporary commodities, because such only admit of being exchanged for each other; and if we compare the value of a commodity at one time with its value at another, it is only a comparison of the relation in which it stood at these different times to some other commodity.

Until recently, historians have believed that Bailey’s work made no impact on the Ricardian world of British economics, and fell into obscurity, only to be resurrected at the end of the nineteenth century by economists looking for forerunners of the marginal utility theory. Actually, we now know that, despite a vicious personal assault (probably by James Mill) on Bailey in the Westminster Review, Bailey’s Critical Dissertation was widely read among economists and virtually swept the field. In his January 1831 funeral rites for the Ricardian system before the Political Economy Club, Colonel Robert Torrens declared that ‘as to value’, Bailey’s Dissertation ‘has settled that question’. Indeed, the year after Bailey’s work was published, Torrens praised it highly in the third edition of his Essay on the External Corn Trade, calling it in his preface ‘a masterly specimen of perspicuous and accurate logic’, spearing ‘that vague and ambiguous language in which some of our most eminent economists have indulged’. And remarkably, the changeable Torrens stuck to that estimate throughout his life. In the lengthy introduction to his The Budget (1844), in which he revised and retracted many of his earlier views, Colonel Torrens went out of his way to affirm that ‘the gifted author of “A Dissertation on the Nature, Causes, and Measures of Value”, has set finally at rest the long agitated question, whether value should be regarded as an absolute or positive quality inhering in commodities, or as a relation existing between them’.

Samuel Bailey wrote an effective reply to the Westminster critic (A Letter to a Political Economist, 1826), but apart from this and his Money tract, most of his numerous writings dealt with philosophy and with political reform. For this prosperous Sheffield merchant, born into a mercantile family, founder and four-time president of the Sheffield Literary and Philosophical Society, was in intellectual matters an ardent Benthamite. He devoted the bulk of his intellectual resources to Benthamite writings on philosophy and on radical reform, and twice ran unsuccessfully on a reform ticket for Parliament. Bailey made a considerable philosophical impact with his first book, his Essay on the Formation and Publication of Public Opinion (1821). The Essay’s emphasis on the utilitarian value of free discussion greatly influenced James Mill, John Stuart Mill’s On Liberty, and Francis Place. In economic matters, Bailey’s Essay grounded economic activity in subjective, mental phenomena, and explicitly rejected the emphasis on British classical economics on physical material objects. The methodology of economics, Bailey maintained, was introspective of one’s empirical surroundings. Bailey saw economics as a ‘science of mind’ rather than as technology. Clearly, his methodology and philosophy of economics were far more ‘Austrian’ than has been realized.14

Bailey’s later works were non-economic, including Essays on the Pursuit of Truth (1844), The Theory of Reasoning (1851, 1852), and three series of Letters on the Philosophy of the Human Mind (1855–62). His final publication was a two-volume book using etymology to rearrange and reinterpret some of Shakespeare’s plays {On the Received Text of Shakespeare’s Dramatic Writings and its Improvement (1862–66)).

Samuel Bailey was the most important and influential subjective value theorist; but he was not the first to bring subjective utility theory to nineteenth century Britain. That honour belongs to the virtually unknown Scotsman, John Craig (c. 1780-c. 1850). All that we know about Craig is that he was a citizen of Glasgow, and was a member of the fellowship of the Royal Society of Edinburgh, and yet nothing else is known about his occupation or background. After writing a three-volume work on the Elements of Political Science (1814), Craig made his striking if unnoticed contribution to economics, in his Remarks on Some Fundamental Doctrines of Political Economy (1821).

Craig not only brought utility into a British economics dominated by discussions of cost and ‘natural price’; for the first time in Great Britain, he brought value theory to the verge of the concept of marginal utility. Starting with the axiom that utility is the basis of all value, Craig proceeds to the influence of supply: ‘relative values of commodities may change, and those persons who happen to be possessed of articles which are produced in larger quantities than formerly, or which from other circumstances becomes less in demand, may find themselves poorer...’. In short, greater quantity leads to a lesser value. More abundance leading to lower value had once been a commonplace of economic thought; but precisely why is this true? Craig first notes that an increased quantity of, say, broadcloth will lower its price. He then goes on to explain, in a truly notable passage, that

All of the broadcloth, that, in the estimation of purchasers, was worth the former price, had been formerly brought to market, and if more is now to be disposed of, it must be to those who did not reckon its utility equivalent to its former cost. New purchasers indeed will appear in proportion to the reduction of price; because at every step of the decline it is brought down to the estimate, which an additional number of persons had formed of its power of producing gratification, or in other words, to their estimate of its value in use.

Thus, John Craig not only explicitly refuted the dominant Smithian view of the separation of value in use from value in exchange, showing that the latter depended strictly on the former. Even more important, Craig had captured the essence of the marginal utility doctrine without the label: showing that as the quantity of a good increases, its price or value must fall in order to tap a new group of purchases whose utility estimate of the good had been too low to allow them to purchase the good at the original higher price for the smaller product. In short, purchasers previously sub-marginal now become marginal for the additional product as the price falls. As Professor Thor Bruce declares,

Craig appears on the very verge of expressing the idea of marginal utility. He broke away from the theory held by his contemporaries, which was based on the cost idea, and became the first exponent of the idea of the connection between utility and value. In thus emphasizing the utility theory he was the forerunner of the Austrian School of the latter half of the nineteenth century.15

Craig doesn’t stop there. If more broadcloth, for example, has been produced and its price has therefore fallen, the previous purchasers now have surplus revenue, which they will use to increase the demand and therefore the price of other products. Hence the fall in value of broadcloth will increase the demand and the price of other goods. Therefore, an increased supply of some goods does not necessarily lead to a fall in general values, but rather to a restructuring of prices and to additional real income to consumers.

Craig concludes from his value analysis that exchange-value not only depends on use-value, but is also an accurate measure of that value. Craig points out in his introduction to the Remarks that only after the body of his tract was written did he come across J.B. Say’s Treatise and see the similarity in approach. He adds, however, that Say’s proper concentration on exchange-value should have been amended to point out that it is also the embodiment or expression of value in use.

Attacking the Ricardian labour or cost theory of value, Craig points out that the value of any good is determined not by its cost of production, but by its demand and supply, the demand varying continually in accordance with consumer desires, and the supply changing according to the scarcity or abundance of its factors of production, as well as the fertility of agriculture. Or, as Craig put it:

even if the cost were ascertained, it would not enable us to judge of the exchangeable value. Exchange value depends entirely on the proportion in the market which the demand for an article may bear to the supply, a proportion ever varying, on the one hand, according to the plenty or scarcity of capital or labour, and the fertility of the season.

If Samuel Bailey was preceded by John Craig, he was succeeded, six years after his Dissertation, by Charles Foster Cotterill, in his an Examination of the Doctrine of Value... (1831). Cotterill not only generally endorsed Bailey’s subjective utility theory; he also pronounced, the same year as Torrens, the demise of the Ricardian movement, noting bemusedly that ‘there are some Ricardians still remaining’.

4.6   Nassau Senior, the Whately connection, and utility theory

During the late 1820s, Nassau W. Senior delivered a series of lectures as Drummond professor at Oxford, some of which were collected in Senior’s only published book, his Outline of the Science of Political Economy (1836). Senior carried forward Bailey’s subjective utility theory; how much he was influenced by Bailey is difficult to say, since, like all too many economists of his era, Senior acknowledged virtually no like-minded colleagues or influences upon his own work.

Senior did acknowledge J.B. Say, however, and began his value analysis by stating that value depends on utility and scarcity, thus returning to the continental tradition. Senior added that utility is relative to human desires and to different persons, and is not intrinsic in objects. Utility, he pointed out:

denotes no intrinsic quality in the things which we call useful; it merely expresses their relations to the pains and pleasures of mankind. And, as the susceptibility of pain and pleasure from particular objects is created and modified by causes innumerable, and constantly varying, we find an endless diversity in the relative utility of different objects to different persons, a diversity which is the motive of all exchanges.

Scarcity, or the natural limitation of supply, was for Senior the main influence on relative utility. In the course of his discussion, Senior virtually came to formulate the law of diminishing marginal utility:

Not only are there limits to the pleasure which the commodities of any given class can afford, but the pleasure diminishes in a rapidly increasing ratio long before those limits are reached. Two articles of the same kind will seldom afford twice the pleasure of one, and still less will ten give five times the pleasure of two.

While he was completing his studies at Oxford, young Senior acquired as his tutor a young man, only three years older than himself, recently appointed as a fellow at Oriel College, from which he had graduated several years earlier. The Rev. Richard Whately (1787–1863), philosopher and theologian, and son of an Anglican minister, was to become Senior’s close and lifelong friend. Even though Senior became an attorney, he remained a central part of the Oriel College circle clustered around the charismatic Whately. The circle engaged in literary studies and pursuits, with Senior publishing several literary articles and launching a short-lived literary and intellectual quarterly, the London Review. Whately published what was to become the standard text on logic, the Elements of Logic (1826), in which Senior included an appendix on ‘Ambiguous Terms Used in Political Economy’. Indeed, Whately was probably responsible for injecting an unfortunate tendency in Senior towards word-chopping and logomachy, which helped dampen the influence of the great Senior in the world of economics. At any rate, Senior learned philosophy and theology from Whately, and the latter economics from Senior.

In Oxford, the Oriel circle was becoming a highly influential centre for Liberal and Whig views within the Anglican Church, a remarkable influence indeed in that traditionally high Tory and High Church university.16 When the Drummond professorship in political economy opened up in 1825, Whately secured the post for Nassau Senior, and when Senior’s term expired five years later, he recommended and obtained the position for Whately as his successor. Whately’s Drummond lectures, the Introductory Lectures on Political Economy (1831, 2nd edition, 1832) continued and expanded the Senior tradition, particularly in value theory.

Indeed, methodologically, Whately went further than Senior. His linguistic and philosophical interests led Whately to see that the concept and terminology of ‘political economy’ tended to confuse and conflate these two distinct fields. This confusion hindered the scientific development of economics; hence Whately proposed substituting a new word, catallactics, the science of exchanges, for political economy. Whately defined man as ‘an animal that makes exchanges’, pointing out that even the animals nearest to human rationality did not have ‘to all appearance, the least notion of bartering, or in any way exchanging one thing for another’. Focusing on human acts of exchange rather than on the things being exchanged, Whately was led almost immediately to a subjective theory of value, since he saw that ‘the same thing is different to different persons’, and that differences in subjective value are the foundation of all exchanges. Moreover, Whately pointed out that ‘labour [is] not essential to value’, and noted that pearls do not ‘fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price’.

Whately saw that the economic realm, and particularly exchange activity on the market, deserved its own sphere of analysis and inquiry. Even if integration later takes place, as analysis is applied to the political realm, there must first be a separation to allow the reasoning process its head.

But after separation and analysis, integration; and Richard Whately understood that the very fact that a separate sphere was secured for catallactic analysis meant all the more that integration with moral and theological analysis was required in order to come to policy conclusions. In his Drummond lectures, Whately was concerned to show, first, that, contrary to Oxford Tories, political economy was not sinful, materialistic, or opposed to Christianity. In the first place, political economy is not to be considered, as had Smith and the classicals, a study of wealth; it is instead a study of human exchanges. But even a study of wealth is not sinful; in the first place, it is not sinful per se to examine the means of increasing wealth. There is no need for the political economist to step beyond his role as a scientist or catallactician, and advocate policy as a means of acquiring wealth or on any other grounds. Indeed, once he does so, he advocates public policy not as a political economist but in some other capacity. Whately also denounced, in their turn, the attempt to monopolize economics by the aggressively atheistic, secular, and ‘anti-Christian’ Ricardian circle. Certainly the latter adjective would not be excessive for people like James Mill and the Benthamite radicals. Whately also believed Ricardian teachings to be dangerous and ‘anti-Christian’ in the sense that they implied inherent class conflict between capital and labour, and between landlords and everyone else, and therefore denied the essential laissez-faire insight of a harmonious social order, an order that testifies to the existence of divine wisdom. In short, for Whately laissez-faire harmony and Christian insight into a divine order meet on a broad integrative level. Thus, while economic analysis is scientific and value-free, and cannot directly imply political conclusions, such analysis will lead to laissez-faire conclusions and, as such, is perfectly consistent with Christian insight into a beneficent divine order.

In addition to his subtle exposition on the nature of and distinctions among positive and normative economics, Whately denounced the naive fact-gathering methodology of the Baconian Cambridge inductivists, led by Richard Jones and William Whewell. The role of fact-gathering, Whately perceptively pointed out, was not in framing theory but in applying it to specific conditions. Looking at facts without the guidance of theory in their selection is virtually impossible. Scientific advances, Whately correctly noted, come not from gathering more data, but from looking at old facts in new ways – an example was modern insight into the nature of the circulation of the blood.

In 1832, Richard Whately left his Drummond chair prematurely on getting a surprise appointment to the high post of Anglican archbishop of Dublin, where he scandalized the evangelical faithful by refusing to be anti-Catholic and by insisting on being joyous on the Sabbath. The position of archbishop carried with it being one of the two ‘visitors’ of Trinity College, Dublin, the two who formed the ultimate appeals court for all intra-College disputes. Whately used his clout at Trinity to drive through, over fierce opposition, the establishment of a new chair of political economy at Trinity, under terms closely modelled on the Drummond chair. For the rest of his life, Whately examined and selected candidates for the post himself, and paid the salary of the professors.

The opposition from the board and the provost of Dublin University was based on a fear of the alleged radicalism of political economy. The provost wanted Whately to guarantee that the holders of the new chair would have ‘sound and safe conservative views’, to which the archbishop indignantly replied that he was ‘appalled at such a suggestion, involving as it did the introduction of party politics into the subject of abstract science...’.

It was a subtle but important distinction that Whately was trying to convey – on an issue that plagues academia to this day. He was saying that it was proper – indeed important – to select a professor with the correct view of the broader implications of his subject as well as of its strictly scientific aspects. Yet it was decidedly not proper to judge the professoriat on the basis of their direct positions on narrow political issues, which Whately lumped together as ‘party politics’. Thus, in gaining agreement on the Whately chair, the archbishop closely quizzed and selected the professors on the basis of their commitment to the Christian-liberal view of the harmony of the universe in general, and of the free market in particular; and to the Senior subjective utility theory of value as against the Ricardian labour theory.

Whately himself wrote a bit more on economics, reiterating his ideas in his Easy Lessons on Money Matters; for the Use of Young People (1833), an enormously popular work for children, that went into 15 editions in the next 20 years, and was translated into many languages. Remarkably, in this primer Whately hinted at another huge theoretical advance: generalizing the theory of pricing for all factors of production: ‘If you consider attentively what is meant by the words Rent, Hire, and Interest, you will perceive that they all, in reality, signify the same sort of payment.’17 But, unfortunately, Whately did not apply himself further to economics, and insights into value or distribution theory became scattered and fragmentary. From now on, he would have to rely on Whately chair holders to pursue the subjective tradition more systematically.

The first holder of the Whately chair suited the archbishop’s requirements admirably. Samuel Mountifort Longfield (1802–84), the son of an Anglican vicar in County Cork, Ireland, had graduated from Trinity College a decade earlier and had won a gold medal in science for particular excellence in mathematics and physics. Longfield later won a coveted fellowship at Trinity, a post concentrating on mathematics and sciences – areas in which Trinity was far stronger than Oxford and Cambridge, which were just now enlarging their exclusively classical curriculum to enter the modern world. While serving as fellow of the college, Longfield entered Dublin Law School, and, graduating in 1831, became assistant to the Dublin professor of feudal and English law. Not only that: Longfield delivered a series of public lectures on the common law that was highly favourably received.

Mountifort Longfield more than fulfilled Whately’s expectations. Not only did he use the leisure and the stimulus of the chair to hammer out a remarkably complete subjective and even marginalist theory of value and distribution – a genuine alternative to Ricardianism; he also imparted his stamp and the tradition of a subjective value theory alternative on Dublin University, leaving worthy successors to his chair. The brunt of Longfield’s system was presented in his first published series of lectures, Lectures on Political Economy (1834). During the rest of his term, Longfield published two more sets of lectures; in 1836, he left the Whately chair to resume his legal career, becoming Regius professor of feudal and English law at Dublin University. Later he became a member of the Queen’s Council. Longfield was an expert in real estate law, and in 1849 he was appointed as one of the three land commissioners in Ireland. A decade later, he became the prestigious judge of the landed estates court in Ireland. From then on he was known widely in Great Britain as ‘Judge Longfield’ for his efforts on behalf of land reform in Ireland. Aside from a few articles on banking, Longfield had no further leisure to pursue economic studies, and so his remarkable contributions to economics were crammed into his four years in the Whately chair. At the end of his life, Longfield returned to his early interest in mathematics, publishing a mathematical text, An Elementary Treatise on Series, in 1872.

Longfield’s broad perspective of market harmony was quite similar to Whately’s. In his Lectures, he wrote that the ‘laws according to which wealth is created, distributed, and consumed, have been framed by the Great Author of our being, with the same regard to our happiness which is manifested by the laws that govern the material world’. Furthermore, Longfield was disturbed by Ricardo’s pessimistic theory of distribution, and his portrayal of inherent class conflict between workers, capitalists, and landlords, with the former two being doomed by an inevitable rising lion’s share of the product accruing to the unproductive class of landlords.

In value theory, Longfield worked out the subjective theory of value and price more fully than had been accomplished before in Great Britain. He concentrated firmly on market price as the important consideration rather than long-run price, and also showed that both are in any case determined by supply and demand. Longfield broke important new ground in his detailed marginal analysis of demand. Here he worked out the concept of consumer demand as a schedule, related to sets of prices, and even developed the idea of individual falling demand schedules as the fundamental basis of aggregate market demand. Even more fully than John Craig, Longfield showed that market demand curves are constituted by a spectrum of supramarginal, marginal, and submarginal buyers, each with different intensities of demand. Furthermore, ‘the measure of the intensity of any person’s demand for any commodity is the amount which he would be willing and able to give for it, rather than remain without it, or forego the gratification which it is calculated to afford him’. Yet, of course, despite the different intensities of demand, all exchanges will be at the same market price. If, then, ‘the price is attempted to be raised one degree beyond this sum, the demanders, who by the change cease to be purchasers, must be those the intensity of whose demand was precisely measured by the former price... Thus the market price is measured by the demand, which being of the least intensity, yet leads to actual purchases’. In short, the marginal demand becomes a key to the determination of price.

In his analysis of supply, Longfield showed that the supply relevant to the real, day-to-day market price is a previously produced stock of a good now fixed for the immediate present period (in short, what would now be called a vertical supply curve for the immediate market period). Furthermore, Longfield saw clearly, in contrast to Ricardo, that cost of production in no sense determines price; at most, it contributes indirectly to that determination by affecting the extent of supply. His analysis comes close to the later Austrian theory by brilliantly pointing out that the effect of cost on supply comes from the expectations of producers in deciding how much of a good to make and put on the market. Thus the cost of production acts by its influence on the supply, ‘since men will not produce commodities unless with the reasonable expectation of selling them for more than the cost of producing them’.

Professor Laurence Moss, a biographer of Longfield, has deprecated the latter’s contribution to value theory as not a marginal utility theory.18 Moss complains that while Longfield realized that utility was the source of all demand, he did not analyse utility beyond that, and stuck merely to an analysis of marginal demands and the demand schedule. This revisionist view seems merely to quibble over terms; while Longfield did not use the term marginal utility or break ‘utility’ down into individuals or groups, his doing so for demand and the degrees of demand goes most of the way towards a complete utility theory. Professor Moss is in danger of mistaking the term for the substance. It is true, however, that an unfortunate lingering Ricardianism led Longfield to endorse labour as a measure of value, a concept which is every bit as fallacious as the labour theory of value itself.

In Ireland, as we shall see, Mountifort Longfield, aided by Whately, left an important legacy of subjective value theory and anti-Ricardianism to his successors in the Whately chair at Dublin. But, unfortunately, he had no influence in England, where he was ironically well-known as Judge Longfield the Irish land reformer and unknown as an important and challenging economist. Senior, though closest in doctrine, knew of Longfield but only referred to him once on a trivial point and displayed no signs of being influenced by him. This neglect was intensified by the extreme provinciality of English economics in the nineteenth century. Generally, they would not deign to notice foreign writers, especially ‘colonials’ like Irishmen and Americans from whom they might have profited.

But Mountifort Longfield did succeed, at least, in establishing a utility-value tradition in Ireland. His successor in the Whately chair, Isaac Butt (1813–79), proudly called himself a disciple of Longfield, and advised his students to read, above all in economics, Longfield, Say and Senior – a worthy trio indeed. Like Longfield, and even more so, Butt’s economic contributions were confined to the 1836–40 term of his Whately chair, his most important publications, Introductory Lecture (1837) and Rent, Profits, and Labour (1838), consisting of lectures delivered at Trinity. As we shall see below, Butt’s main contribution was generalizing Longfield’s marginal productivity theory of factor pricing and integrating Say’s utility analysis with that theory. In utility theory proper, Butt corrected Longfield’s Smith-like error in referring to consumption per se as ‘unproductive’. Butt also noted that the labour theory of value might be in a sense applicable if labour were the only scarce resource, and if, moreover, it were homogeneous and costlessly mobile between industries. But such conditions are of course impossible.

Isaac Butt began as a precocious classical scholar and translator of Virgil. He was named to the Whately chair at the early age of 23, and, while teaching there, he took his bar examinations. After his term was over, Butt became an eminent attorney, and soon became an alderman of the City of Dublin. Later Isaac Butt denounced British policy during the Irish famine, and went on to became a famous and hard-hitting advocate of Irish home rule. Butt defended leaders of the Irish rising of 1848 in court, as he did the Fenian rebels in the late 1860s. Butt was also the founder, leader and chief organizer of the Home Rule Party, serving for a while in Parliament. His published writings after his Trinity period dealt with the Irish land question, where Butt advocated land reform on behalf of the Irish tenantry. As a tenants’ advocate, Butt took the poorly paid side of these legal disputes, and hence was never well off and was often deeply in debt. His main publications on the Irish question were A Voice for Ireland — the Famine in the Land, What Has Been Done and What is to be Done (1847), and The Irish People and the Irish Land (mi).

Isaac Butt’s successor in the Whately chair, James Anthony Lawson (1817— 87), was also an attorney involved with the Irish question, but he took the opposing route to Butt, becoming a stern advocate of British law and order and suppression of his rebellious countrymen. Lawson also became the holder of the political economy chair at a remarkably early age (24), serving the full term from 1841 to 1846. Lawson entered Parliament, and rose to become solicitor-general and then attorney-general for Ireland, becoming a judge of the Common Pleas in 1868. There he meted out punishment for land rebels and Fenians; while Richard Cantillon remains as the only possibly murdered man in the history of economic thought, Lawson suffered an attempted assassination on the streets of Dublin in 1882.

Lawson’s productivity in economics followed the same restricted path as that of his predecessors. His only published book was his Five Lectures on Political Economy (1844), consisting of some of his Trinity lectures; in later years, he occasionally printed some of his lectures on legal topics, the best-known being on mercantile law in 1855.

Unfortunately, the series of Lawson’s lectures on value have been lost, his only published reference to them being contained in a brief appendix to his Five Lectures. We know enough, however, to see that Lawson was decidedly in the Trinity utility tradition, and even made a distinguished contribution to that doctrine. Thus Lawson declared that it was subjective utility and utility alone that determined the price of all goods. Lawson declared that ‘It is a proposition always true, and of universal application, that the exchangeable value of all articles depends upon their utility, that is, upon their power to gratify the wants and wishes of man’. (Italics in original.) All other attempted explanations of value he saw as only partial. Demand and supply, for example, can only influence price by way of their effect on utility. In dealing with the effect of an increase of supply, Lawson arrived flatly and notably at the law of diminishing marginal utility. Thus, if someone’s supply of a good increased,

this will generally diminish its utility to him, or the degree in which he desires its possession, for as our particular desires are capable of being satisfied, it is obvious that we may have more of an article than we wished to use, therefore retaining the possession of that surplus is less desirable to us.

When coming to the cost-of-production theory of value, Lawson pointed out that the utility of a product, and not its cost, determines how much anyone will pay for it. While price may sometimes equal cost of production, this does not mean that cost determines the price. On the contrary, the coinciding of cost and price, Lawson added, can only come about ‘through the medium of a change in supply and when this cannot be brought about, there is no such coincidence and no tendency toward it’. In that way, Lawson arrived at Stanley Jevons’s newly hacked-out value position of a generation later.

In his Five Lectures, Lawson also developed the Whatelyan idea of economics as catallactics, as the study of exchanging man. In his first lecture, Lawson declared that economics views man ‘in connection with his fellow-man, having reference solely to those relations which are the consequences of a particular act, to which his nature leads him, namely, the act of making exchange’. In his second lecture, Lawson failed to continue this line, and fell back on older discussions of political economy as the study of ‘wealth’.19

The next holder of the Whately chair, William Neilson Hancock (1820–88), a student of Whately at Oxford, taught at Trinity from 1846 to 1851, and was also an attorney. He was a particularly scholarly lawyer, and in the last two years of his Trinity term he simultaneously held the chairs of jurisprudence and political economy at the new Queen’s College, Belfast. Afterwards, Hancock was a secretary to many government commissions on land and education matters, and held posts as court clerk, ending his career as clerk of the Crown and Hanaper in Dublin. He was the principal founder of the Statistical Society of Ireland in 1847, and the Social Inquiry Society of Belfast four years later.

In contrast to the other Trinity chair holders, Hancock was interested in statistics and empirical work; he had graduated from Trinity in 1842 with a first in mathematics. He published a host of articles and pamphlets on empirical questions. Several dealt, almost inevitably, with the Irish land question, where, like Longfield and Butt but unlike Lawson, he championed the rights of the Irish tenantry and deplored the effect upon their condition of the British-imposed system of land tenure: e.g., The Tenant-right of Ulster (1845); Impediments to the Prosperity of Ireland (1850); and Two Reports for the Irish Government on the History of the Landlord and Tenant Question in Ireland (1859, 1866). Other pamphlets dealt with taxation and local government, in which he advocated a single tax on income, including the inheritance of wealth. A third group of articles advocated stricter control and supervision of the savings banks. Hancock’s statistical work was done under the influence and guidance of Thomas Larcom, a land surveyor and statistician who filled many government posts, becoming under-secretary for Ireland in the 1850s.

While better known for applied economics, Hancock did publish a valuable theoretical work consisting of his Introductory Lecture on Political Economy, 1848 (1849) delivered at Trinity College. He began by noting the ambiguity that had pervaded the use of the word ‘value’, and made clear that ‘the word “price” is fortunately free from all ambiguity, and always means the exchangeable value of a commodity, estimated in the money of the country where the exchange takes place’. He proposed, then, to use the word price exclusively instead of exchange value. Price, furthermore, can change either ‘from the side of things’, or ‘from the side of money’. Treating the former, he notes that such changes can only take place as a result of one or both of the following causes: ‘either a change in the degree in which its possession is desired, or in its desirability; or a change in the force of the causes by which its supply is limited, or, in other words, by which it is made scarce’. Turning to demand, Hancock added that ‘the degree in which the possession of a commodity is desired, is measured by the number of persons able and willing to purchase at each amount of price’. Hancock’s utility, or quasi-marginal utility, analysis, emphasized a slightly different aspect than did that of his predecessors: namely, another aspect of what we would now call the falling demand curve. For he noted that ‘it is observed that for commodities in general, their desirability increases very rapidly as their prices fall’.

On supply, Hancock again stressed limitations of supply rather than cost; and the limitations, or scarcities, of supply are dependent on the scarcities of the various factors of production. He implied that the returns to these factors is a question of their prices, and that any explanation of the prices of the factors must treat them uniformly, in accordance with the influences upon their demand and supply, i.e., ‘by the application of the laws already stated with regard to other prices’.

But while Hancock was clearly in the Trinity utility tradition, we see already a falling-back, a loss of interest and a greater vagueness in the discussion of value or, indeed, of theory in general. And indeed, William Neilson Hancock was destined to be the last of the distinguished line of Irish subjective utility theorists at Trinity College.

4.7   William Forster Lloyd and utility theory in England

Just because Mountifort Longfield and the Trinity connection had no influence in England does not mean that the utility theory of value died out with such prominent economists as Bailey and Senior. Indeed, Nassau Senior’s successor in the Drummond chair at Oxford was also a distinguished utility theorist. William Forster Lloyd (1794–1852) was the son of an Anglican rector from Gloucestershire. Lloyd went to Christ Church, Oxford, where he took a first in mathematics and a second in classics. Lloyd was a reader in Greek and then a lecturer in mathematics at Christ Church, and was also ordained as an Anglican minister, but never served a parish. Lloyd held the Drummond chair from 1832 to 1837, and seems to have done little at all after that. A sickly man, Lloyd retired to his county and displayed little interest in economics, in writing, or in politics before dying in middle age.

But for Lloyd as for the other Drummond and Whately chair holders, his term as professor provided him both opportunity and stimulus to compose, deliver and publish lectures in economics. His various lectures, including one delivered on value in 1833, were all published separately, and then collected and republished as Lectures on Population, Value, Poor-Laws, and Rent (1837).

One does not have to agree in politics to have similar views of economic theory. We have seen, for example, James Lawson’s hard-core attitude against the peasantry. While William Lloyd was a utility theorist, he was far from a Whatelyan at Oxford; on the contrary, at Oxford Lloyd belonged to the high Tory circle at Christ Church that was the main counterweight to the Liberals at Oriel. Leader of the Christ Church Tories was William’s elder brother, Charles Lloyd (1774–1829), who tutored future Prime Minister Sir Robert Peel at Christ Church, and soon became a close friend and adviser to Peel. At his untimely death in 1829, Charles Lloyd was Regius professor of divinity and canon of Christ Church, as well as serving as bishop of Oxford. He was widely known as ‘the most influential Oxford Professor of his day’. Even though Lloyd taught and inspired many of the leaders of the future ultra-Tory, proto-Catholic Oxford movement, he himself, as well as William Lloyd, was a moderate, Peelite Tory, both theologically and politically. The influence of Peel and of his late brother Charles undoubtedly secured the Drummond chair for William Lloyd.

Most of Lloyd’s lectures were devoted to his quasi-statist and paternalistic views on public policy. Of particular interest, however, was his lecture on value. There Lloyd, stumbling through the literature, thinks he discovers in the Wealth of Nations inspiration for a subjective theory of value. Value, Lloyd asserts, is ‘a feeling of the mind’. It can be understood as belonging to a single object, he added, where the feeling reveals itself ‘at the margin of separation between the satisfied and unsatisfied wants’. But value, or even utility, cannot be intrinsic to any object. Utility, points out E.R.A. Seligman of Lloyd’s theory, ‘is predicated of an object with reference to the wants of mankind. Ice is useful in summer, useless in winter. Still the intrinsic qualities of ice are at all times and in all places the same’.20

After treading what was by now familiar ground about an increase in the supply of an object diminishing and eventually satiating demand, William Lloyd suddenly arrives at a great light – a remarkably clear portrayal of the law of diminishing marginal utility. Lloyd points out:

Let us suppose the case of a hungry man having one ounce, and only one ounce of food at his command. To him this ounce is obviously of very great importance. Suppose him now to have two ounces. These are still of great importance; but the importance of the second is not equal to that of the single ounce. In other words he would not suffer so much from parting with one of his two ounces... as he would suffer, when he had only one ounce, by parting with that one, and retaining none. The importance of a third ounce is still less than that of the second; so likewise of a fourth, until at length, in the continual increase of the number of ounces, we come to a point when... the appetite is entirely... lost; with respect to a single ounce, it is a matter of indifference whether it is parted with or retained. Thus, while he is scantily supplied with food, he holds a given portion of it in great esteem, in other words, he sets a great value on it; when his supply is increased, his esteem for a given quantity is lessened, or, in other words, he sets a less value on it.

Similarly, Lloyd goes on, the utilities of different goods compared with one another and each of their values falls with increase in supply; so a good that may be more valuable than another in an absolute philosophic sense, in the sense of a class of the commodity, can be worth very little if its supply is abundant. Thus, ‘Water is more wanted by a man almost dying with thirst than by another who has quenched his thirst, and desires only to wash himself. It is on want, thus estimated, that value depends’. More specifically,

If, to a man who has already half a dozen coats, you should offer to give another, he might probably reply that he would have no use for it. Here, however, he would speak, not of the abstract utility of the coat, but of its special utility to him under the circumstances of his want of coats being already so far supplied. This, though not quite the same thing as value, approaches very near to it. The coat would be of no use to him; therefore, were he to have it, it would not be valuable in his estimation... But this is very different from the utility of the coat in the general sense of utility...21

William Lloyd was also clear that value, being subjective, could not be measured. In a passage reminiscent of and going beyond Bailey, he writes trenchantly that

It would indeed be difficult to discover any accurate test, by which to measure either the absolute utility of a single object, or the exact ratio of the comparative utilities of different objects. Still it doesn’t follow, that the notion of utility has no foundation in the nature of things. It does not follow, that because a thing is incapable of measurement, therefore it has no real existence. The existence of heat was no less undeniable before thermometers were invented, than at present.

Lloyd goes on to point out, quite correctly, that value or valuation is anterior to exchange, and that such valuations also take place in the case of an isolated Robinson Crusoe economy. Unfortunately, Lloyd was so enamoured of the distinction between value and exchange, and of Smith’s faulty split between use- and exchange-values, that he failed to complete the task of the theory of demand and link up marginal utility analysis with consumer demand and the determination of market pricing. Such men as Butt, Longfield, Lloyd and Bailey had hammered out many of the building blocks of the marginal utility theory of pricing and even of the marginal productivity theory of factor prices; it required the Austrians, however, to put the pieces together and set forth an integrated whole.

If Lloyd’s value theory seems to have had little or no influence in England, the eminent Nassau Senior’s utility theory was picked up and lauded a decade after the publication of his Lectures. Thomas C. Banfield (c. 1800–60), had spent many years in Germany, and in his 1844 lectures at Cambridge, Banfield brought to England the good news that economic theory on the Continent was not blighted by any Ricardian miasma; instead, he noted that a flexible form of Smithianism was dominant in Europe. In addition to basing his doctrines on Say, von Storch, and Senior, Banfield was the first English economist to refer to the marginal theorist Heinrich von Thünen, and to the advanced Smithian Friedrich von Hermann. In the preface to his lectures, published as The Organization of Industry (1845), Thomas Banfield pointed to the enormous changes that had been made in economic theory during the past two decades by the subjective theory of value, ‘which demands of producers at least as much attention to the physical and mental improvement of their consuming fellow-citizens as to the mechanical operations’ or production. Wages, he noted, will depend on the productivity of labour, i.e., ‘the utility of the instrument of which a man understands the use’. In his lectures, Banfield emphasized the relativity and degree of intensity of wants as the function of economic science.

It certainly seems that economics in England, by the later 1840s, was poised for a mighty ‘Austrian’ breakthrough, for an integrated system elaborating the effect of human purposes and values and their interaction with the scarcity of resources. Yet something happened; and economics, poised for a great breakthrough, sank back into the slough of fallacies constituting the Ricardian system. And the important body of pre-Austrian or anti-Ricardian thought was forgotten as if it never existed, only to be resurrected either a generation later or as late as the twentieth century. How this unfortunate retrogression came about will be treated below.

4.8   A utility theorist in Kentucky

If the Trinity College contributions to subjective utility theory remained unknown outside Ireland, still more obscure was an isolated and amazing contribution in the course of several articles in a Kentucky newspaper. Written by the youngish but influential editor of the Frankfort (Ky) Argus, Amos Kendall (1789–1869), later to become a leading brain-truster of Andrew Jackson in his battle against fractional-reserve banking and particularly against the Bank of the United States, the articles remained unread and unknown even in the United States until exhumed by historians in the twentieth century.22 And yet especially considering that they were written in 1820, antedating Bailey and even Craig, they were phenomenal. Not only did they champion subjective value; they were the first expression of the law of diminishing marginal utility.

Kendall was moved to explore the question of economic value by a fierce dispute in Kentucky during the catastrophic Panic of 1819 on whether or not debtors should receive relief at the hands of the state government. While Kendall was not opposed to all relief measures, he was disturbed by proposals that would have repudiated all existing debt. To explore the subject in depth, Kendall published three articles in the Argus, beginning on 27 April, examining the problems of money and more fundamentally, the nature of value. Unfortunately, in his autobiography, arranged and edited posthumously by his son-in-law, Kendall gives no hint on which economists might have inspired his advanced views.

In his first article, Kendall went straight to the basics and examined the question of value per se. He begins by saying that there have been many erroneous explanations of value: labour expended, price, even demand. But, he points out,

All these notions are erroneous. Things have value, not because they are produced by labor, nor because they are in general demand, nor because they will sell or exchange for a certain number of dollars, but simply because men desire to possess them. Desirableness is value. In exact proportion that a thing is desirable it is valuable. (Italics in original.)

Kendall went on, in dismissing the ‘value paradox’, to say that water and air have little or no value because of their abundance: ‘Were meat and bread as common as air and light they would possess no more value; they would not create desire.’ In the Garden of Eden, land, being superabundant, possessed no value. Labour, Kendall went on, conferred no value, for:

With regard to the produce of labor, value is generally antecedent to the labor of production. It springs from our desire to possess that which labor may produce. Were labor to fix value upon its products, everything on which much has been spent would be very valuable. This notoriously is not the fact... But labor could not make a thing valuable which was not desirable. Labor may be wasted. It may be applied to the production of that which nobody desires, which has no value.

And Kendall sparkingly concludes: ‘Things do not become valuable because men spend labor upon them, but men spend their labor upon them because they are valuable.’

The demand for a product, furthermore, stems from men’s desire to obtain it. The desire is primary: ‘Demand is not, therefore, the cause of value... A thing becomes desirable or valuable before there is a demand for it. The demand follows... But when the desire to possess it cease, it has value no longer, and is no longer in demand.’

The next step, for Kendall, is that desires, being subjective and evanescent, cannot be measured, and that therefore neither can value:

What standard can be invented for the desires of men? Can the necessities, the comforts, the pleasures, the fashions, the opinions, and the caprices of man be reduced to any standard? Are they not ever changing like the winds of heaven? Measure never varies. A yard is always equal to the length with which it is compared... These lengths, surfaces, and quantities never vary or change. Therefore they may be reduced to a standard which shall be uniform and last forever. But does value never vary? Will that which is now worth a dollar always be worth just the same sum?

Tastes and desires are ever-changing, and so therefore is value; hence it can have no measure or standard. Kendall then concludes his devastating critique – one that we might wish Ricardo and his epigones had read and understood:

To make a standard of value you must first make every acre of ground, every bushel of wheat, and any given quantity of any other article, at all times, in all situations and under all circumstances, sell for precisely the same amount. There must be no such thing as profit or loss, or buying or selling.

We have said enough to show the utter impossibility of a standard of value, and that to talk seriously of any such thing is simply ridiculous. We may as well talk of a standard of hunger, thirst, opinion, fashion, caprice, and all those wants... which make things desirable.

4.9   Wages and profits

In addition to the labour theory of value, another vital cornerstone of the Ricardian system – the alleged inverse relation of wages and profits – was also riddled quickly by British economists. We have already seen the disappearance of the hard-core Malthus of the first edition of the Essay on Population, so necessary to the conclusions of Ricardian theory.

Even more than the explicit rejection of Malthusianism, the periodicals vehemently attacked the Ricardian view that wages and profits move inversely to each other. The British Critic denounced this thesis as early as October 1817, and two years later another writer zeroed in on the methodology of what would later be called the ‘Ricardian Vice’ with proper scorn:

taking for granted, as usual, that money never changes in value and the proportion between the supply and demand of any given commodity never alters (which is as if the astronomer were to assume as the basis of his calculations, that all the planets stand still and that they all stand still to all eternity), he assigns a specific sum to be divided between the master and the workman, as the unalterable price of the goods which they produce; from which adaptation of hypothetical conditions, it naturally follows, that, if the workmen get more, the master-manufacturer must receive less, there being only a certain sum to divide between them.23

Other writers, including Malthus in 1824, made similar critiques, and also noted that, empirically, wages and profits generally increase or decrease in the same direction. Thus, John Craig pointed out that historically wages and profits moved not inversely but together: ‘It is rather a startling circumstance attending this theory, that what it represents as the necessary effect produced by high wages upon profits in all branches of industry, is directly contrary to the experience in each particular trade.’ Craig went on to explain that ‘a new demand for a commodity at first enriched those, who, being in possession of this commodity, are enabled to raise the price; the desire to participate in their gains soon directs new capital to its production, and a rise in wages speedily ensures’.

Once again, it is not legitimate for Ricardian apologists to dismiss this critique as historical rather than analytical in nature, for empirical generalizations meant to apply directly to reality as in the Ricardian system are properly open to empirical rebuttal. Such rebuttal may challenge the conclusions as well as the more familiarly ‘theoretical’ procedure of challenging the realism of the theory’s premises.

By the 1840s, the idea of an inverse relation between wages and profits had been completely discarded. But if the Malthusian subsistence theory did not determine wages themselves, then what did? Not many wandered into this unknown territory. But as early as 1821 the unknown but remarkable Scotsman John Craig emphasized that wages are determined by the supply and demand for labour, and not in any sense by the price of food. Two elements in the demand for labour were stated though not analysed in full: the ‘capital from which wages are advanced to the workman’, and the ‘demand for the produce of his labour’. Craig, by the way, neatly demolished Adam Smith’s spurious distinction between ‘productive’ and ‘unproductive’ labour. He cogently concluded that ‘wealth may consist in whatever be the object of man’s desire, and every employment which multiplies those objects of desire, or which adds to their property of yielding enjoyment is productive’.

The next important step in the theory of wages came from Samuel Bailey who, in the course of his definitive critique of Ricardian value theory in 1825, pointed to the crucial role of the productivity of labour in determining wages:

the value of labour does not entirely depend on the proportion of the whole produce which is given to the labourers in exchange for their labour, but also on the productiveness of labour... The proposition, that when labour rises profits must fall, is true only when its rise is not owing to an increase in its productive powers... If the productive power of labour be augmented, that is, if the same labour produce more commodities in the same time, labour may rise in value without a fall, nay, even with a rise of profits.

One of the critical problems in developing the productivity theory of wages was the Ricardian insistence on emphasizing the alleged laws of aggregate distribution, of ‘wages’ as a whole and as a total share of national product and income, rather than as wage rates of individual units of labour. J.B. Say had presented a productivity theory of wages, but had not analysed the determination of particular wage rates in any detail. Nassau Senior, in the early 1830s, while confused on the topic of wages, came out for the productivity theory. He also managed to demolish Adam Smith’s ‘productive’ vs ‘unproductive’ labour doctrine, stressing, as had J.B. Say, ‘production’ as the flow of services, which emanate both from material and immaterial products.

The truly revolutionary step forward in the theory of wages – indeed in the theory of all factor pricing – came with Mountifort Longfield, in his Lectures on Political Economy. As we have seen, Longfield was concerned to show, in contrast to the Ricardian class-conflict theory of income distribution, that workers benefit from capitalist development. (Ironically, Longfield’s laissez-faire Harmonielehre was replaced by a far more statist attitude in later life.) In the course of doing so, Longfield took J.B. Say’s correct but vague productivity theory of factor incomes, and worked out, for the first time, a remarkable marginal productivity theory of the rental prices (i.e. prices per unit time) of capital goods (which Longfield oddly called ‘profits’, in a typical confusion of returns on capital with the pricing of capital goods that has plagued economics since the early nineteenth century). Working out the specifics, Longfield showed that the price of each machine will tend to equal the marginal productivity of the machine, i.e. the productive value (in terms of value of their products) of the least productive machine which it pays to keep employed on the market, i.e. the marginal machine.

Thus, for the first time, in an unknowing echo of Turgot, Longfield used the proper ceteris paribus method of analysing productive returns, holding one factor or class of factors constant, varying another set of factors, and analysing the result.

Longfield stopped there in his brilliant pre-Austrian contribution, applying marginal productivity analysis only to capital goods. He was content that the analysis showed that wages – the residual labour income left over after payment to capital – rose as the marginal productivity of capital goods fell with each increase in the amount of capital. In short, the accumulation of capital led to an increase in wages. Furthermore, Longfield demolished any Malthusian fears totally. Not only was hard-core malthusianism long in the discard, but even the soft-core emphasis on the workers’ customary level of wages as determining the supply of labour had the causal chain reversed. Instead, custom, he sensibly pointed out, is guided by the actual prevailing market wage rather than the other way round. As an anonymous Irish follower wrote in the Dublin University Magazine a decade later (July 1845), custom will render it suitable to be paid whatever the prevailing wage rate may be, while it would be considered disgraceful to be paid below that norm. Hence the demand for labour, rather than its supply, will dominate the determination of the market wage.

Longfield’s further demolition of even soft-core Malthusianism pointed out that population growth can have a favourable effect by widening the market for manufactured goods, thereby raising the marginal productivity of capital goods across the board. Hence population can grow, capital can develop, and both capitalists and workers will benefit – a far more realistic picture of capitalist development than the Ricardian.

Longfield’s successor and disciple Isaac Butt, however, was not content to stop there, and he provided an outstanding development of the Longfieldian analysis. In the first place, Butt took the crucial step of seeing that Longfield’s marginal productivity analysis could be generalized from capital goods to all factors of production: to wages, and to land rent. Each of these classes of factors could be analysed in terms of marginal productivity, and the result would be that each of them would obtain the return, or price, of the least productive factor profitable to be employed on the market (the marginal labourer or acre of land). Thus, whatever kernel of sense there was to the Ricardian differential return theory of land rent, was isolated and incorporated into Butt’s brilliant pioneering generalized theory of marginal factor pricing.

Not only that: Butt also built on Say’s utility analysis and correct but vague productivity analysis, and integrated it at least in outline, with generalized Longfieldian marginal productivity theory. In short, in a prefiguring of the Austrian Menger-Böhm-Bawerk insight, the value of consumer goods, determined by the subjective utility of the goods to consumers, is imputed back on the market to the values of the various factors of production, which will be set equal to the marginal value productivity of each factor. Thus the unit price of every type of factor will tend to be equal to its marginal value productivity as imputed back through the competitive market process from the subjective utility of the final products.

Unfortunately, this excellent Say-Longfield-Butt tradition of productivity theory had no influence and no successors. Although Senior, as a fellow Whatelyan, certainly knew Longfield’s work, he never referred to him or to Butt, and even Longfield’s Irish successors at Trinity College, Dublin, while continuing the utility theory of value, neglected the corollary theory of imputation and productivity.

It is true that Longfield’s marginal productivity analysis gained one faithful follower in England, Joseph Salway Eisdell, whose two-volume work, A Treatise of the Industry of Nations (1839), propounded a sophisticated version of the Longfieldian theory. The book by the unknown Eisdell, however, sank without trace, gaining no reviews in the journals, or citations anywhere else.

But if factor pricing had been analysed, what of profits? If profits could not be explained simply as a residual, then they had to be explained directly, and so some economists began to search for a satisfactory theory of what would determine long-run profits or what would later be called long-run interest return. For one thing, it was pointed out that Ricardo erred greatly in assuming instantaneous and total mobility of capital, and there was a harkening back to the more realistic outlook of Adam Smith. A writer in Monthly Review, in 1822, for example, stressed ‘the impracticability of transferring capital and the personal acquirements of skill from one business to another’.

But if profits were only uniform as a long-run tendency, what explained them? Malthus moved closer to the correct view, in the Quarterly Review in 1824, by stressing that whereas rents are determined by productivity, profit, for example, that is earned in keeping wine and selling it when it matures, is due to ‘waiting’, and the longer the waiting the greater the margin of profit.

A particularly important contribution to the journal literature pointed to the eventually correct theories of profit and interest. This was an article by William Ellis (1794–1872) in the Benthamite Westminster Review for January 1826. In a highly sophisticated analysis of saving and investment, Ellis pointed out that saving is induced by ‘the expectation of greater enjoyment from deferred than immediate consumption’, while, on the other hand, investment is called forth by the expectation of profit. In the course of analysing investment, Ellis, with great perceptiveness, distinguished between profit as a return to risk taking as against interest as a return on savings that may also carry a risk premium.

Particularly interesting was Ellis’s pioneering risk theory of profits. ‘The largeness of the profit’, he maintained, ‘must be proportioned to the risk incurred in drawing treasure from the hoard and employing it in production’. He also keenly stressed the importance of a large expected profit for undertaking technological innovation. New technology is ‘untried’ and its introduction must overcome ‘the loss of superseded machinery, the want of skill and practice, in workmen and the uncertainty of the result, all unite in preventing the adoption and application of that which is untried’. Chiding previous writers for ignoring innovation and its problems, Ellis pointed out that its difficulties ‘are only conquered... by the prospect of the great additional profit, with which the adopted invention is expected to be accompanied’.

Ellis also introduced separating out the elements of ‘gross profit’ in a business firm, and distinguishing them from long-run normal interest. Where an entrepreneur uses his own capital exclusively, his gross profit, Ellis perceptively pointed out, can be broken down into premium for risk, remuneration for the entrepreneur’s labour and supervision, and, finally the ‘remuneration for the productive employment of his savings, which is called interest’. Productive loans in business tend to comprise the interest part of gross business profit.

Who was William Ellis who contributed such a startlingly perceptive and advanced article to one of Britain’s distinguished journals? Apparently this was Ellis’s sole foray into economics. Born in London, Ellis became a nonconformist missionary, and spent his life working and travelling for the London Missionary Society. Sent to Polynesia from 1816 to 1824, Ellis, who had worked as a gardener in his boyhood, acclimatized many tropical fruits and plants in Polynesia, and also set up the first printing press in the South Seas. The fruits of this labour appeared in his two-volume Polynesian Researches (1829). His interest in the theory of profits soon upon his return from his first Polynesian sojourn appears to have been a sport in Ellis’s busy missionary career.

While he was not as perceptive as Ellis, a similar analytic division of gross and net profits was contributed by the Scottish philosopher Sir George Ramsay (1800–71), in an unknown and unremarked work, An Essay on the Distribution of Wealth (1836). While much of the book was Ricardian, Ramsay adopted the concept of entrepreneur from the French, and he too broke down the gross profits of capital into interest on the use of capital, and the ‘profits of enterprise’, which was in turn divided into wages of management and superintendence, and payment for the risk incurred by the ‘masters’, or entrepreneurs. Ramsay pointed out that, analytically, entrepreneurs receive the profits of enterprise, while capitalists receive interest or ‘profits’ on capital. In practice, however, the two returns are generally combined as the gross profits of capitalist entrepreneurs.

Ramsay was also the first Briton to adopt Destutt de Tracy’s analysis of the process of production as either change of the form of matter, or the geographical place, to which Ramsay added, a change in time.

4.10   Abstinence and time in the theory of profits

If profit were perhaps related to risk, what then accounts for the long-run ‘interest’ component of business profits? The dominant explanation for long-run interest in British economics soon became the abstinence theory of interest.

The first presentation of time as the determinant of interest came from a theory related but superior to abstinence: Samuel Bailey’s pioneering time-preference theory. Bailey’s discussion came in the course of his brilliant demolition of Ricardo’s labour theory of value and his championing of an alternative utility theory. Bailey begins his discussion of time and value by noting that if one commodity takes more time than another for its production, even using the same amount of capital and labour, its value will be greater. While Ricardo admits a problem here, James Mill in his Elements of Political Economy indefatigably asserts that time, being ‘a mere abstract word’, could not possibly add to anything’s value.

Rebutting Mill, Bailey points out that ‘every creation of value’ implies a ‘mental operation’ – in short, a subjective analysis of value. Given a particular pleasure, Bailey went on, ‘We generally prefer a present pleasure or enjoyment to a distant one’ – in short, the omnipresent fact of time-preference for human life. Thus:

We are willing, even at some sacrifice of property, to possess ourselves of what would otherwise require time, to procure it, without waiting during the operation... If any article were offered to us, not otherwise attainable, except after the expiration of a year, we should be willing to give something to enter upon present enjoyment.

Considerations of time-discount influence buyers, sellers and capitalists, as well as both parties who realize, for example, that wine gains value by being kept for longer periods of time. Bailey, interested in rebutting labour and other objective theories of value rather than explaining interest per se, did not press on to explain time-preference as the basis of interest nor to discuss the time-discount rate. But his analysis clearly paved the way for the later Austrian time-preference theory, although Böhm-Bawerk, the creator of the theory, remained unaware of Bailey’s insights.24

Six years later, G. Poulett Scrope – despite his unfortunate fringe views on Say’s law – made an important contribution to profit (or interest) theory, by pioneering an abstinence theory of interest. Writing in the Quarterly Review for January 1831, Scrope deplored the absence of any genuine theory of profit in Ricardo, and proceeded to set forth an abstinence theory.

Despite Böhm-Bawerk’s uncharitable strictures on the more highly developed abstinence theory of Nassau Senior, there is not a great deal of difference between the abstinence view and the later, and more sophisticated, Austrian theory of time-preference. Profit, said Scrope, was ‘the compensation for abstinence from immediate gratification’ involved in saving and investing rather than consuming. But Scrope did not stop at outlining an abstinence theory; much of profit, he pointed out, is the narrow form of profit identical with interest. What is vulgarly called ‘profit’, as Scrope called it, is identical with Ellis’s ‘gross profit’. This consists, Scrope went on, of interest on capital + insurance against the risks of business + wages for the superintendence labour of the capitalist. Scrope also added monopoly rent, in which he lumped the possession of superior soil or location along with the gains from patented inventions or processes.

But the locus classicus of the abstinence theory was the lectures of Nassau W. Senior. It is true that they were not published until 1836, when they were published as the Outline of the Science of Political Economy (and also as the article on ‘Political Economy’ for the Encyclopedia Metropolitana), but they were delivered earlier as lectures at Oxford in 1827–28.

Senior pointed out that savings and the creation of capital necessarily involve a painful present sacrifice, an abstinence from immediate consumption, which would only be incurred in expectation of an offsetting reward. Unfortunately, Senior lacked the concept of time-preference, so he was fuzzy about the specific motivation that would lead people to prefer present to future consumption. But he came to very similar conclusions, relating the degree of abstinence-pain (or, as the Austrians would later put it, time-preference for the present over the future) to ‘the least civilized’ peoples and the ‘worst educated’ classes, who are generally ‘the most improvident, and consequently the least abstinent’.

Even more interesting and valuable than Senior’s abstinence theory was his developed theory of capital, which strongly anticipated the Austrian doctrine. For Senior saw that factors of production could be divided into two classes: the original, primary ones: land (or natural resources) and labour; and all the secondary, intermediate goods which are produced by the joint efforts of the primary factors (as well as pre-existing intermediate factors). Eventually, the intermediate factors are transformed into consumer goods that are able to satisfy the wants of the consumers. It might be thought that ultimately the intermediate factors, or capital goods, might be reduced to nature and labour, but this cannot be done, because another element is needed to combine the primary factors into more and more capital: abstinence. For again anticipating the Austrians, Senior saw that a crucial aspect of this process of production is that it must take time, and therefore an act of abstinence, ‘a term’ added Senior, ‘by which we express the conduct of a person who either abstains..., or designedly prefers the production of remote to that of immediate results’.

Capital, or capital goods, then, taking time, are the result of the combination of land, labour and abstinence, and consists of the application of present resources to future production. Capital goods are produced rather than primary, factors of production. And the way in which production and living standards may increase indefinitely is by using the products of labour and nature, ‘as the means of further Production’. Capital, Senior sums up,

is not a simple productive instrument: it is in most cases the result of all the three productive instruments combined. Some natural agent must have afforded the material, some delay of enjoyment must in general have reserved it from unproductive use, and some labour must in general have been employed to prepare and preserve it.

Senior, then, does not simply have a naive productivity theory of profit or interest. While all factors earn their productivity, and therefore labour earns wages, and land or natural agents earn rent, capital goods are not simple productive agents but complex products of other factors; and so, peeling away the influence of land and labour, the ultimate, distinct productive contribution of capital, is interest – the return to abstinence. While not fully arriving at it, Senior was here groping for a distinction between the gross return of capital goods, whose productivity is reflected in their market prices, and their net return (after deducting from the wages, rents, and prices of other intermediate goods in their production), which equals the rate of interest and is payment for abstinence or time-preference.

In his discussion of how increasing provision of capital funds can allow ever increasing extensions of the division of labour and the production of consumer goods, Nassau Senior captured the essence of the Austrian insight that capital, and eventually production, expands with increased saving because of the superior physical productivity of many longer, or more ‘roundabout’, processes of production. Since it takes more time to invest in these longer processes and intermediate factors, there must be greater willingness to invest in future as opposed to present enjoyment.

Meanwhile, Senior’s fellow Whatelyan, Mountifort Longfield, was working along similar lines. Even if capitalists qua capitalists and not as labourers, produce nothing tangible, they perform a vital service in saving capital and paying factors to engage in ‘time-consuming’ processes of production. While most of the British classicists, including Ricardo, spoke perfunctorily of a period of production, they linked it strictly to the one-year harvest cycle in agriculture. Longfield was able to break out of this agricultural framework, moving ‘toward making the time dimension of production a variable in his analysis. He did this by linking the period of production directly to the division of labour and identifying increases in one with extensions of the other’.25

Longfield accomplished this linkage by repeating Adam Smith’s famous discussion of the pin factory and the division of labour, while showing that extending that division will bring more roundabout processes into play. In short, greater capital investment will eventually lower the labour time required to produce a unit of output, but only by increasing the waiting time between the initial point of investment and the eventual unit of consumer goods. During the time of waiting for the eventual product, the workers must be able to live, and this living is precisely what the capitalists provide.

They do so by ‘abstaining’ from consumption, thereby allowing the worker to ‘consume something produced by the toil of others, although nothing produced by him has yet been consumed by anyone’. In short, while the product of labour is off in the future, the capitalist saves money now and hires the worker: ‘The person who employs him [the worker] and directs his labour, in general pays him in the first instance, and repays himself by the sale of the articles thus produced.’26 In this way, Longfield was able to offer a remarkable anticipation of the Böhm-Bawerkian theory of capital.

The capitalists’ gross profit, then, consists of two parts: a return for the service of advancing wages to the workers until the product is sold (long-run interest), and returns for the labour of direction and for the assumption of business risk. Longfield made no attempt to stress the latter and concentrated on the former, the return for the service of advancing wages. Hence, as Longfield points out in anticipation of the sophisticated and highly perceptive Austrian discounted marginal productivity theory of factor pricing, the worker in effect pays the capitalist a discount from his marginal productivity for the service of supplying money now rather than having to wait for the sale of the product. Again Longfield:

[The capitalist] pays the wages immediately, and in return receives the value of [the worker’s] labour, to be disposed of to the best advantage... Hence the value of the labour fixed in... any article, is greater than the wages of that labour. The difference is the profit made by the capitalist for his advances; it is, as it were, the discount which the labourer pays for prompt payment.

It is only a slight step from this analysis to the identification of this discount as a payment for time-preference.

Sir George Ramsay, in his work of 1836, also stressed the importance of time in production and capital, though hardly in as sophisticated a manner as Senior. Time, as well as labour, enters into capital, and Ramsay points as an example to two casks of identical wine. The cask that ages several years longer increases in value, so that value therefore depends not only on labour expended, but also ‘on the length of time during which any portion of the product of that labour has existed as a fixed capital’. Lastly, in 1839, Joseph S. Eisdell, an unknown English follower of Longfield, generalized marginal productivity theory, also noting the important service of the capitalists in serving the worker by ‘advancing his wages immediately on the performance of his work, before the goods are ready for sale, he being too necessitous to wait until the sale, and the receipt of the money for the goods’. Here Eisdell captured the essence of the service the capitalist renders the worker and for which the latter is willing to ‘pay’ the former his discount or profit return: the service of paying the worker now, at present, while the capitalist takes on the burden of waiting for his return until some point in the future.

4.11   John Rae and the ‘Austrian’ theory of capital and interest

The most remarkable contribution to the theory of capital and interest in the post-Ricardian period was by the drifter and eccentric, John Rae (1796–1872). Rae set forth his theory as part of a tract designed to argue for a protective tariff: Some New Principles on the Subject of Political Economy (Boston, 1834). Rae had the most extensive and fully developed analysis, until Böhm-Bawerk and the Austrians, of the crucial role of time in the theory of capital and interest. In the theory of capital, Rae saw that a key to production is increasing investment in capital goods, themselves the product of labour and nature, and that capital goods can be ranked on the basis of their rate of return, and the time necessarily involved from their formation until their depletion. Specifically, lengthening the process of production, or the time involved in the process of investing in capital, will enable the use of capital goods of greater physical productivity. But while waiting a longer time will enable one to tap more physically productive processes of production, this benefit must always be weighed against the unwelcome necessity of waiting longer into the future until the return from capital is obtained. And here, John Rae presented the fullest development to date of the time-preference theory of interest. To balance against the greater productivity of waiting longer into the future, the capitalist must charge an interest rate based on the greater desirability of present as against future goods. In short, investors must sacrifice present for future goods, and so they must be compensated for this investment by a return reflecting their degree of time-preference. Investors will be sacrificing a smaller present good for a larger future good, the degree of difference – their interest return – being dependent on people’s cultural and psychological willingness to take a long-run view of the future. Those with lower time-preference rates, i.e. those who take a longer view of the future, are particularly looking to raise the standard of living of their children; on the other hand, for Rae, those with higher time-preference possess weak intellectual and moral principles and suffer from a ‘defect of the imagination’.

Rae also anticipated Schumpeterian theory in placing great emphasis on the importance of inventions, and stressed that inventions opened up new opportunities for highly profitable capital investment, and that resulting high profits stimulated such investment.

Schumpeter paid high tribute to Rae’s achievement, calling his work a ‘theory of capital, conceived in unprecedented depth and breadth’, although, oddly enough, he doesn’t mention Rae’s stress on inventions. Schumpeter does add, however, that given ‘ten additional years of quiet work, graced by an adequate income’, Rae’s New Principles ‘could have grown into another -and more profound – Wealth of Nations’. And Böhm-Bawerk, who had not known of Rae’s achievement in the first edition of his History and Critique of Interest Theories, for once was very generous in his glowing account in later editions, calling Rae’s work ‘exceedingly original and remarkable’.

John Rae’s accomplishment was all the more striking because it did not come from a writer steeped in the economic discussions of the Great Britain of his day. On the contrary, it came from a man who must be described overall as a brilliant drifter, crank and loser. John Rae was a’ Scotsman, born in Aberdeen, the son of a prosperous self-made merchant and shipbuilder. Interested in invention and the natural sciences, Rae, as a young maths student at the University of Aberdeen, presented some inventions in mechanics to his professor, who pronounced them ingenious but impractical. Dropping the matter so as not to irritate his practical-minded father, Rae decided, upon graduation, to go to the University of Edinburgh to study medicine. But, typical of Rae, while studying for his M.D. dissertation, he became convinced that prevailing physiological theories were false, and so he dropped out of medical school, determined to write a grandiose ‘philosophical history’ of mankind. Embarking on this ambitious but truly impractical life work, Rae plunged into the study of biology, philology, ethnology, aeronautics, geology, education, and the social sciences, undoubtedly with radical ideas in them all. Very little of this ever got written or published, his published work consisting of a few scattered articles on such matters as emigration, education, Canadian religion, Hawaiian customs and legislation, and Polynesian languages. His extant unpublished papers are on geological topics.

This sort of life plan was scarcely calculated to yield John Rae a secure income, and the bankruptcy of his father, as well as a possible social stigma from his marrying the daughter of a shepherd, drove him to emigrate to the backwoods of Canada, at the age of 25.

It was during this course of self-study that John Rae read the Wealth of Nations, and developed an antipathy to that Scotsman’s general commitment to free trade and laissez-faire. In particular Rae acquired a lifelong interest in protectionism and government subsidies to industry. At least some of that reaction reflected a typically Scottish Calvinist hostility to luxury and consumer indulgence. A strong advocate of thrift and abstinence, Rae lamented any luxurious consumption among the lower classes, which weakens their ‘effective desire for accumulation’. Sensual appetites lead the poor to marry and increase their number of children unduly, also weakening their propensity to save and to raise their standard of living. Rae’s first interest in the protective tariff came in Scotland in 1819, attacking the desire of the numerous followers of Adam Smith to greatly lower the taxes and tariffs on whisky, and to allow the manufacture of whisky in small stills. Rae reacted angrily, worrying as he did about the ‘general morals of the people’ resulting from an abundance of cheap whisky.

Arriving in Canada, Rae soon became a schoolmaster at a private school and a physician in the small village of Williamstown, Ontario. Williamstown was a centre of the Scottish Presbyterian settlement in Canada, and Rae, a devout adherent of the Presbyterian Church of Scotland, embroiled himself in the claims of that Church to government support as against the exclusivist claims of the Church of England. Apart from Anglican elitism unsuited to North American conditions, Rae opined, the Presbyterian Church of Scotland insisted on austere morality as against the laxity of the Anglicans. He criticized the United States for not having an established religion, thereby lessening the incomes and tenure of the clergy and weakening the bonds of ‘genuine religion’.

After a decade in Williamstown, John Rae felt it was time to move on. In 1831, he resigned his post as schoolmaster and as one of the three coroners of the Eastern District of Ontario, and moved to Montreal. He had decided to begin work on his life project, or at least a subset of it to be devoted to the ‘Present State of Canada’, which would present his ideas on Canadian geology and economic development, and to make a strong plea for continued Canadian membership in the British Empire. While in Montreal, he petitioned the government of Upper Canada for a travel and research grant to finance this projected work, but the Upper Canada Assembly felt there were more important things to be done and turned down Rae’s grant proposal, despite the favourable recommendation of the lieutenant-governor.

Rae was still determined to work on his life project, and he repaired to the lumbering village of Godmanchester, not far from Montreal, where he apparently worked in menial tasks in lumbering while publishing pro-British Empire articles in the Montreal Gazette. There he wrote what was supposed to be another subset of his master plan, his great work on the New Principles of Political Economy.

The spirit of revolution against the British Empire was abroad in Canada, and Rae’s letters to the Gazette were vitriolic in denunciation. The criticisms of Britain, he fulminated, were ‘gross misrepresentations, infamous falsehoods and horrid blasphemies’. Recalling the horrors of the French Revolution, Rae thundered that ‘the banners of imperial justice must be displayed, else in a short time the reign of terror be attempted in Canada, and red ruin ride triumphantly’.

In view of Rae’s strong connections in Montreal, it is difficult to see why he languished in Godmanchester. His sister, Ann Cuthbert, a poet and headmistress of a boarding school, was married to a wealthy dry-goods merchant, James Fleming. Fleming’s brother, John, was a prominent writer as well as a leading official of the Bank of Canada and Bank of Montreal, and the family moved in the circle of leading Scottish Presbyterian merchants and ultra-loyalists of the British Empire, surrounded by a Canadian populace of what they took to be French-Canadian insurgents and radicals.

Rae conceived his New Principles to be another subset of his life work, this time devoted to the growth of nations and to the necessity for a protective tariff and other forms of government promotion of industry. He finished the book in 1833 and originally meant to publish it in England, but for some reason changed his plans and travelled to Boston to seek aid in publishing the book there. In Boston, Rae met and was taken under the wing of the powerful Alexander Hill Everett (1790–1847), a leading Boston Brahmin, a protégé of ex-President John Quincy Adams, and recently Adams’s minister to Spain. An accomplished linguist and classicist as well as an attorney, Everett had left government service to become the editor of the prominent and influential North American Review. A decade earlier, Everett had written New Ideas on Population (1823), in which he sensibly attacked Malthus for not realizing that population growth can bring abundance, not poverty, by extending the division of labour, expanding markets and cities, and increasing the production of food and manufactures.

Everett, like the rest of New England, had lately shifted from free trade to the advocacy of a protective tariff, particularly for the region’s nascent textile manufacturers. The protectionists were looking around wildly for textbooks and academics who would support their cause, since the works of Adam Smith and J.B. Say were dominant in American universities. Meeting and being impressed with John Rae and hearing of his new protectionist work, Everett was enthusiastic about him and arranged, sight unseen, to publish the book in Boston.

Apparently, Everett had bought a pig in a poke. Reviewing it in the North American Review, Everett damned Rae’s New Principles with faint praise. He had been looking for a hard-hitting protectionist tract; instead, he found the book filled with technical jargon he could barely comprehend. And much of it had little or no bearing on the tariff issue. The bulk of the book dealt with the theory of capital and interest, and the importance of the expansion of capital to the growth of a nation. As Everett shrewdly pointed out, these views were not really at variance with those of Adam Smith. And none of it bore directly on the protectionist issue.

To Rae himself the connections were clear, if too remote for those interested in public policy. He believed that economic development depended jointly on new inventions and their application in capital investment, and most of his proposed government policies were subsidies and bounties to new inventions and industries, to be financed by heavy tariffs on the imports of ‘luxuries’. In that way, Rae’s Calvinist soul would be satisfied, for the government would be imposing moral principles by promoting thrift, invention and industry, while discouraging sinful luxuries, especially, in a prefigurement of Thorstein Veblen, where ‘consumption is... conspicuous’ and therefore particularly wasteful. Rae’s denunciation of luxurious consumption, which Rae boldly called ‘a loss to the society, in proportion to their amount’, did not sit very well with Everett, but his main criticism was that the country needed a ‘well-written and well-reasoned essay on this [protectionist] question’, a work of ‘sufficient compass and authority to serve as a textbook’. Clearly, John Rae’s work did not fill the bill.

The book was a commercial failure, and was quickly forgotten. The understandably chagrined and embittered Rae wrote in a letter, years later, that ‘unfortunately, I was induced to publish in Boston, under the assurance from A.H. Everett that it would be appreciated there. He was, however, I believe scared of it. Could not make up his mind, nor could anyone there, if I was right or wrong, and so passed it by with praise of its style, etc. This damned it’. In addition, the free traders and the worshippers at the shrine of Adam Smith — who came in for considerable direct criticism in the book — attacked Rae’s work. But possibly more fatal than any of these factors was the timing of the book. For after the tariff of 1833, lowering tariffs considerably, tariff agitation in the United States began to subside, and the tariff was repeatedly lowered throughout the 1840s. Free trade had apparently triumphed, at least until the Civil War.

In Canada, furthermore, there were scarcely any economists or academics fit to appraise Rae’s work, and in Britain there was a general scorn for ‘colonials’, and failure to take North Americans seriously. In England, however, Nassau Senior, whose work on capital and interest was not far from Rae’s, read the New Principles by the mid-1840s and admired it greatly, and traces of Rae can be found in Senior’s later writings. Senior passed the book on to John Stuart Mill, who commended it warmly in his overwhelmingly popular 1848 treatise, the Principles of Political Economy. Rae heard of Mill’s praise five years later, through a Canadian friend, and wrote warmly if mournfully to Mill that ‘it is the only thing connected with that publication which has afforded me any gratification’.

Here a mystery arises for the history of economic thought. Despite Mill’s warm commendation of Rae’s book in what was the dominant treatise on economics for a generation, no economist anywhere picked up on the reference, and knowledge of Rae virtually disappeared. The only exception was the great Italian classical economist Francesco Ferrara (1810–1900), who translated Rae’s New Principles into Italian in the mid-1850s. Apart from that, nothing. W. Stanley Jevons, devoted to the history of economic thought, apparently never heard of the book, and even the great Böhm-Bawerk had never read John Rae when in the 1880s he wrote the first edition of his History and Critique of Interest Theories. Rae remained unknown to economists until his memory was revived, and his work reprinted, by Professor Charles Whitney Mixter at the turn of the twentieth century. Perhaps a clue to the puzzle is in Böhm-Bawerk’s later editions, where he points out that Mill’s encomiums to Rae, while warm, were general and even banal, and scarcely conveyed the brilliance and originality of his work on capital and interest. As Böhm-Bawerk explains it:

But it is a strange fact that in all his numerous quotations [from Rae] John Stuart Mill never included any of the material which constitutes the essence of Rae’s original ideas. He quotes, instead, merely ornamental incidentals, and even among those only the sort of thing that could be used to illustrate the traditional doctrines that Mill himself was presenting. And since Rae’s book seems to have been read in the original by only extremely few persons, just the most interesting part of its contents remained unknown to his contemporaries. There was little likelihood that they, and even less that subsequent generations would be apprised by Mill’s quotations of the importance of the book, or impelled to conduct any research into his quickly forgotten work.27

Disappointed in the reception of his book, unemployed and destitute, Rae won an appointment as headmaster of a government district grammar school in what was then the brawling frontier town of Hamilton, Ontario. There he lived in genteel poverty on a low salary and was continually in debt, but he was apparently beloved by his students and was known in Hamilton as a graceful and elegant ice skater as well as president of the Hamilton Literary Society. There he played a prominent role in the first contingent of Hamilton militia which, in 1837 and 1838, helped put down an armed rebellion by Canadian nationalists anxious to cut the ties with the empire. Rae engaged in aeronautical experiments with balloons, and wrote increasingly on geological topics. He also continued to work on the economic geography of Canada, and finally in 1840, completed his magnum opus, a lengthy book on the ‘Outlines of the natural History and Statutes of Canada’.

Unfortunately, however, the decade of the 1840s saw fate land a series of hammer blows against John Rae. First, the manuscript of his book on Canada was irretrievably lost en route to possible publishers in New York. Second, after teaching in Hamilton for 14 years, Rae was summarily fired in 1848. The problem was that Rae became inevitably embroiled in educational political struggles, particularly over getting Presbyterians appointed to teaching and administrative posts in the Anglican-dominated Ontario school system. Furthermore, in 1843, in the Disruption, the Church of Scotland (and hence its affiliated Presbyterian Church in Canada) split in irretrievable schism, with hard-core Calvinists opposed to secular state domination of the Church splitting off from the established Church of Scotland and forming the Free Church. As we might expect from his character, Rae, along with his friends, joined the Free Church, which lost him the political support of the established Presbyterian officials dominant in his school district. Rae’s stay in Hamilton was doomed.

Rae then left Canada and did some school teaching in Boston and New York, where, a year after his dismissal, he received another staggering blow -news of the death of his wife, Eliza. Discouraged, restless, penniless and uprooted at the age of 53, John Rae began a new life of wandering and drift. Attracted by the gold rush, he sailed to California, where he did a little school teaching and carpentry; in ill-health in California, Rae was soon off to the Hawaiian Islands, where he was to spend the rest of his days. There, on the island of Maui, Rae prospered economically for the first time, teaching English to Hawaiian natives, farming, and functioning as medical agent for the board of health. Rae began to blossom politically because of his new friendship with a fellow Scottish expatriate, Robert Crichton Wyllie, a surgeon from Glasgow University, wealthy businessman, and now minister of foreign relations of the Hawaiian Kingdom. With Wyllie’s patronage, Rae became coroner, notary public, medical attendant and district judge in Maui.

His favourable circumstances now led Rae to resume his various scientific interests: he wrote articles and papers on geology, particularly on volcanoes, ocean tides, and Hawaiian geology; on the Polynesian language; and tried to revive interest in marketing his long-neglected navigational inventions.

But John Rae was incapable of holding onto money, and so perpetually reverted to destitution. With his patron Wyllie dead, and in ill-health, Rae accepted the offer of an old friend and former student to pay for his trip from Hawaii to live with him permanently at his home in Staten Island. But Rae died on Staten Island the following year.

Restless and eccentric, John Rae in a sense wrote a suitable and poignant epitaph for himself in New Principles, in his sensitive appreciation of the lone role of the inventor or innovator in society:

Pursuing objects not to be perceived by others, or if perceived, whose importance is beyond the reach of their conceptions, the motives of their conduct are necessarily misapprehended. They are esteemed either idlers, culpably negligent in turning account the talents they have got, dullards deficient in the common parts necessary to discharge the common offices of life, or madmen unfit to be trusted with their performance; shut out from the esteem or fellowship of those whose regard they might prize, they are brought into contact with those with whom they can have nothing in common, knaves who laugh at them as their prey, fools who pity them as their fellows. Their characters misunderstood, debarred from all sympathy, uncheered by any approbations, the ‘eternal war’, they have to wage with fortune, is doubly trying, because they are aware, that, if they succumb, they will be borne off the field, not only unknown, but misconceived.28

4.12   Nassau Senior, praxeology, and John Stuart Mill

There are few economists in any age who are self-conscious about the methodology of their craft. Even more was this true during the alleged heyday of the British classical school which, as we have seen, was an era of disintegration rather than triumph of the Ricardian paradigm. But an excellent methodologist was one of the finest economists of that epoch, Nassau W. Senior. Senior indeed took up the torch of the praxeological method that had been expounded and used by the great French economist of the early nineteenth century, Jean-Baptiste Say.

Senior began to spell out his views on methodology in his very first, introductory lecture at Oxford in 1826. With exceptional clarity, he began by stating that economic theory rests on the broadest general insights about human nature, insights that are self-evident in the sense that once stated they command universal assent. Economic theory, says Senior, ‘will be found to rest on a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to his thoughts, or at least, as included in his previous knowledge’. But if these premises, or axioms, rest on general knowledge of man and the world, then conclusions deduced from them must possess equal generality: ‘Its conclusions are also nearly as general as its premises – those which relate to the nature and production of wealth, are universally true.’ It is then the task of the economist to narrow down the conclusions to those areas which are directly relevant to the problem at hand. Thus:

those [conclusions] which relate to the distribution of wealth, are liable to be affected by peculiar institutions of particular countries – in the cases, for instance, of slavery, corn laws or poor-laws – the natural state of things can be laid down as a general rule, and the anomalies produced by particular disturbing causes can be afterwards accounted for.

As specifically part of his apodictic conclusions, Nassau Senior generalized laws that other economists had been approaching or groping for. For example, Senior defined ‘wealth’ as all goods and services that possess utility and which therefore will be purchased in exchange. He then stated in his first ‘fundamental proposition’: ‘That every person is desirous to obtain, with as little sacrifice as possible, as much as possible of the articles of wealth.’ Not only did Senior thus ably generalize some important insights of universal human action: he also in that way dismissed Adam Smith’s unfortunate distinction between ‘productive’ (material) and ‘unproductive’ (immaterial) labour; everything which people desired and were willing to buy was ‘productive’. It is because Ricardo at least implicitly adopted this distinction that he was able to dismiss cavalierly any explanation of the pricing of immaterial services and hence to move toward a cost theory of value.

In elaborating on this first fundamental proposition, Senior moved on to an eloquent summation of the relationship between desire, individual diversity, choice, and human effort:

In stating that every man desires to obtain additional wealth with as little sacrifice as possible, we must not be supposed to mean that everybody, or indeed anybody, wishes for an indefinite quantity of everything... What we mean to state is, that no person feels his whole wants to be adequately supplied; that every person has some unsatisfied desires which he believes that additional wealth would gratify. The nature and urgency of each individual’s wants are as various as the differences in individual character. Some may wish for power, others for distinction, others for leisure... Money seems to be the only object for which the desire is universal; and it is so because money is abstract wealth...

As equal diversity exists in the amount and the kind of the sacrifice which different individuals, or even the same individual, will encounter in the pursuit of wealth.29

Two decades later, on returning to the Drummond chair at Oxford, Nassau Senior, in his introductory lectures in 1847, returned to the problem of the methodology of economics (published in 1852 in his Four Introductory Lectures on Political Economy). He now denned economic science as expounding ‘the laws regulating the production and distribution of wealth, so far as they depend on the action of the human mind’ – the latter clause emphasizing that economics was a ‘mental’ rather than ‘physical’ science. Indeed, Senior saw clearly that the proper scientific method was dualistic, the physical sciences treating the properties of matter, while the mental ones study ‘the sensations, faculties, and habits of the human mind, and regard in matter only the qualities which produce them’. The methods of the two sciences must necessarily differ, for the physical sciences ‘being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis’. Observation may guide such strictly empirical sciences as technology, but such sciences as physics, ‘those which treat only of magnitude and number.... draw them altogether from hypothesis’. The physical sciences must rest on tentative hypotheses, precisely because they are ‘only secondarily conversant with mind’. On the other hand, ‘the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the working of the human mind. And the only mind whose workings a man really knows is his own’. And of course economics was one of the mental sciences.

In this way, Nassau Senior, with brilliant clarity, developed the essentials of what Ludwig von Mises, a century later, would call ‘praxeology’. As in the case of other mental sciences, economics cannot, like the physical sciences, conduct experiments. It is true, Senior noted, that economics deals with such material matters as production, productivity and diminishing returns, but the ‘political economist dwells on them only with reference to the mental phenomena which they serve to explain’, as among the motives or sources or capital, rent, profit, etc. In short, wrote Senior,

All the technical terms, therefore, of Political Economy, represent either purely mental ideas, such as demand, utility, value, and abstinence, or objects which, though some of them may be material, are considered by the Political Economist so far only as they are the causes of certain affectations of the human mind, such as wealth, capital, rent, wages, and profits.

It is important to consider the once famous battle between Nassau Senior and John Stuart Mill on economic method, for Mill was soon to become the undeservedly towering economist for the next half-century. Mill agreed that economics, as a mental science, cannot conduct experiments; but he did not conclude, with Senior, that its premises or axioms should be complete, general and apodictic. Instead, he asserted that the foundations and premises of economics can only be ‘hypothetical’, that is, they must make assumptions that abstract from, and hence distort, reality. The axioms of economics are only partially, or hypothetically, true. In short, for Mill, since economics focuses on man’s desire for wealth, it must assume, even though admittedly falsely, that man’s only desire is for wealth. Thus, as Mill stated in his Essays on Some Unsettled Questions in Political Economy in 1844:

Political Economy... does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive... Political Economy considers mankind as occupied solely in acquiring and consuming wealth; and aims at showing what is the course of action into which mankind living in a state of society, would be impelled, if that motive... were absolute ruler of all their actions... Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed.30

Mill conceded that the founding assumption of his economics was ‘an arbitrary definition of man’. For it reasoned from ‘assumed premises – from premises which might be totally without foundation in fact, and which are not pretended to be universally in accordance with it...’.

And thus, John Stuart Mill, in this adumbration of the methodology of the deliberate creation of the fallacious ‘economic man’ – the man who is only interested in pursuing wealth – elaborated what might be called the orthodox, or dominant, ‘positivist’ methodology in economics. The positivist method, set down with such fallacious and fateful clarity by Mill, after a struggle with alternative praxeological (as well as other) methods, finally triumphed in the mid-twentieth century with the unfortunate rise to dominance of the positivism of Vilfredo Pareto and Milton Friedman.

Part of the motivation of Senior’s thoughtful lectures on method in 1847 was precisely to engage in a critique and demolition of Millian positivism. Since Mill, like Smith and Ricardo before him, returned to their fallacious limitation of ‘wealth’ to material goods, the resulting distortion of value and production theory made Senior’s task all the more important. Senior’s assault on Mill, as well as on Ricardo, was formidable and devastating. He made their essential differences clear:

neither the reasoning of Mr. Mill, nor the example of Mr. Ricardo, induce me to treat Political Economy as a hypothetical science. I do not think it necessary, and, if unnecessary, I do not think it desirable.

It appears to me, that if we substitute for Mr. Mill’s hypothesis, that wealth and costly enjoyment are the only object of human desire, the statement that they are universal and constant objects of desire, that they are desired by all men and at all times, we shall have laid an equally firm foundation for our subsequent reasoning, and have put a truth in the place of an arbitrary assumption. (Italics added.)

Senior goes on to concede that indeed we shall not now be able to infer, from the fact that a labourer may so act as to obtain higher wages, or a capitalist higher profits, that ‘they will certainly act in that manner’. But, at least ‘we shall be able to infer that they will do so in the absence of disturbing causes. And if we are able, as will frequently be the case, to state the cases in which these causes may be expected to exist, and the force with which they are likely to operate, we shall have removed all objection to the positive as opposed to the hypothetical treatment of the science’.31

One danger of the hypothetical method, Senior wisely and prophetically points out, is the perpetual danger of forgetting that the premises are not complete and are only partial and even false assumptions. Another and even deeper flaw is that, since the assumptions are false from the very beginning, there is no way to bring in experience or observation to correct or even check on the conclusions of the abstract analysis. In this way, positivists, who always trumpet their method as being the only truly scientific and ‘empirical’ one, turn out to be resting on runaway and uncorrectable false premises. On the other hand, and ironically, the praxeological method, which has long been accused of a priori mysticism, is the only one that bases theory on broadly known and deeply empirical – indeed universally true – premises!

Being universally true, the praxeological method provides complete and general laws rather than partial, and hence generally false, ones. As Marian Bowley astutely sees the difference:

Thus in the question of the definition of the desire for wealth: if it is stated in Mill’s form that everyone always prefers wealth to anything else [the ‘economic man’], with the added warning that it is only a hypothesis, the constant relation between the desire for wealth and all other conflicting motives is not defined completely by the general law. It remains necessary to introduce a further premise in each individual stating the general relation of other motives to that of the desire for wealth, as well as evaluating the actual variables. Now Senior’s explanation of the desire for wealth includes information as to the interconnections between the variables.

Or, as Miss Bowley explains further:

Senior’s substitution of net advantages for earnings is equivalent to defining in general terms the relation between all the variables which influence the distribution of resources between occupations, instead of leaving that relation to be considered afresh in each use.32

Thus, a positivist, assuming that businessmen are always and only interested in maximizing money profits, might well overlook and ignore instances of businessmen placing other motives (such as giving an executive post to one’s relative) higher than profits. Or, worse still, if acknowledging such instances, he would be tempted to dismiss these cases contemptuously as ‘irrational behaviour’. Similarly, Charles Dickens, who repeatedly spoofed and attacked classical economics in his novels, had a utilitarian son refuse to help his impoverished mother on the ground that the science of political economy told him that to be rational a man must always buy in the cheapest market and sell in the dearest. And since Smith-Ricardo-Mill classical economics solely emphasized cost of production and therefore was totally blocked from even talking about the consumer, it was especially open to this Dickensian misconception.

4.13   Notes

‘Marx, I daresay, had said a good deal of it long before him, and what Marx overlooked had been said over and over again by his heirs and assigns. But Marx, at this business, labored under a technical handicap; he wrote in German, a language he actually understood. Professor Veblen submitted himself to no such disadvantage. Though born, I believe, in these States, and resident here all his life, he achieved the effect, perhaps without employing the means, of thinking in some unearthly foreign language – say Swahili, Sumerian or Old Bulgarian – and then painfully clawing his thought into a copious but uncertain and book-learned English. The result was a style that affected the higher cerebral centers like a constant roll of subway expresses. The second result was a sort of bewildered numbness of the senses, as before some fabulous and unearthly marvel. And the third result, if I make no mistake, was the celebrity of the professor as a Great Thinker.’ H.L. Mencken, ‘Professor Veblen’, A Mencken Crestomathy (New York: Knopf, 1949), pp. 269–70.

• 1J.A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 473 (italics in original).
• 2Alexander Gray, The Development of Economic Doctrine (London: Longmans, Green and Co., 1931), pp. 170–71. Noting that Ricardo habitually wrote in sweeping conclusions, followed by mumbled qualifications and backtrackings, enabling his followers to claim that such pursuers of the Ricardian logic as Marx and Henry George ‘misrepresented’ Ricardo, Gray retorts that ‘perhaps the final lesson to be learned from Ricardo is that the literary graces are not merely ornamental but useful, and that he who is deficient in the art of expression has only himself to blame if he is misrepresented’. Amen! Ibid., p. 189.
• 3No more delightful passage has been written on the effectiveness of the obscure than in the sparkling essay of H.L. Mencken on the work of Thorstein Veblen: ‘What was genuinely remarkable about them [Veblen’s ideas] was not their novelty, or their complexity, nor even the fact that a professor should harbor them; it was the astoundingly grandiose and rococo manner of their statement, the almost unbelievable tediousness and flatulence of the gifted headmaster’s prose, his unprecedented talent for saying nothing in an august and heroic manner... If one tunneled under his great moraines and stalagmites of words, dug down into his vast kitchen-midden of discordant and raucous polysyllables, blew up the hard, thick shell of his almost theological manner, what one found in his discourse was chiefly a mass of platitudes – the self-evident made horrifying, the obvious in terms of the staggering.
• 4St Clair writes about the poet and ardent Ricardian Thomas De Quincey: ‘De Quincey, a great admirer of Ricardo, attributed his obscurity to profundity of thought. It is natural, said the author of the Opium Eater, that a man of brilliant intellect should express himself in elliptical language, difficult for less gifted persons to follow...’. Oswald St Clair, A Key to Ricardo (1957, New York: M. Kelley, 1965), p. xxiii.
• 5Schumpeter, op. cit., note 1, p. 474.
• 6Senior’s ancestors had been prosperous merchants. His grandfather, Nassau Thomas Senior, had converted from Judaism to Christianity in the mid-eighteenth century. Nassau Thomas’s father, Moses Aaron Senior, had emigrated from Hamburg in the 1720s; he had come from a long line of Spanish-Portuguese Jews who had been merchants and financiers in Spain and had emigrated to Amsterdam and Hamburg.
• 7S.G. Checkland, ‘The Propagation of Ricardian Economics in England’, Economica, n.s., 16 (Feb. 1949), pp. 40–52; Ronald Meek, ‘The Decline of Ricardian Economics in England’, Economica, n.s. 17 (Feb. 1950), pp. 43–62.
• 8Other writers doggedly pushing underconsumptionist fallacies in this period include the protectionist Yorkshire landowner and later MP Edward Stillingfleet Cayley (1802–62); Captain William R.A. Pettman; and a top royal bureaucrat in India, Sir William Henry Sleeman (1788–1856).
• 9Since Meek’s article, D.P. O’Brien, in the first comprehensive study of McCulloch, has demonstrated that McCulloch had abandoned the Ricardian labour theory of value for the more qualified Smithian cost-of-production theory. In fact, O’Brien shows that McCulloch was far more Smithian than Ricardian. D.P. O’Brien, J.R. McCulloch: A Study in Classical Economics (New York: Barnes & Noble, 1970).
• 10Frank W. Fetter, ‘The Rise and Decline of Ricardian Economies’, History of Political Economy, 1 (Spring 1969), pp. 67–84.
• 11Quoted in Barry Gordon, ‘Criticism of Ricardian Views on Value and Distribution in the British Periodicals, 1820–1850’, History of Political Economy, 1 (Autumn 1969), p. 380.
• 12Schumpeter, op. cit., note 1, p. 580n. Also see Edwin Cannan, A History of the Theories of Production & Distribution (3rd ed., London: Staples Press, 1917), pp. 133–4.
• 13Frank A. Fetter, ‘Rent’, Encyclopedia of the Social Sciences, reprinted in M. Rothbard (ed.), Capital, Interest, and Rent: Essays in the Theory of Distribution, by Frank A. Fetter (Kansas City: Sheed Andrews & McMeel, 1977), p. 368.
• 14It has only recently been recognized that Bailey was philosophically Austrian – an insight buried in Robert Rauner’s neglected 1956 doctoral dissertation at the University of London, ‘Samuel Bailey and Classical Economics’. Denis P. O’Brien, ‘Classical Reassessments’, in W.O. Thweatt (ed.), Classical Political Economy: A Survey of Recent Literature (Boston: Kluwer, 1988), pp. 199–200.
• 15Thor W. Bruce, ‘The Economic Theories of John Craig, A Forgotten English Economist’, Quarterly Journal of Economics, 52 (August 1938), p. 699.
• 16Whately’s biographer noted that Oxford ‘was one way, and Richard Whately the other. Oxford had resigned itself to Orthodoxy and Toryism and Whately was an inquirer and a liberal’. In W.J. Fitzpatrick, Anecdotal Memoirs of Richard Whately... (London, 1864), I, p. 56, quoted in Salim Rashid, ‘Richard Whately and Christian Political Economy at Oxford and Dublin’, Journal of the History of Ideas, 38 (Jan.-Mar. 1977), p. 148. In 1826, Whately anonymously published a rousing and controversial pamphlet, Letters of the Church, by an Episcopalian, calling for disestablishment of the Anglican Church, and separation of Church and state. Ibid.
• 17The Rev. John McVickar, professor of political economy and moral philosophy at Columbia University, was moved to rewrite Whately’s Easy Lessons for an American audience, in his own primer for children, First Lessons in Political Economy (1835).
• 18Laurence S. Moss, Mountifort Longfield: Ireland’s First Professor of Political Economy (Ottawa, 111.: Green Hill Pubs, 1976), pp. 39–42.
• 19One English writer who adopted catallactics during this period was the pseudonymous Patrick Plough who, in the custom of the day, both introduced and explained the term within the title of his tract, Letters on the Rudiments of a Science, called, formerly, improperly. Political Economy, recently more pertinently, Catallactics (London, 1842). See Israel Kirzner, The Economic Point of View: An Essay in the History of Economic Thought (Princeton, N.J.: Van Nostrand, 1960), pp. 72–5.
• 20E.R.A. Seligman, ‘On Some Neglected British Economists, V, Economic Journal, 13 (Sept. 1903), pp. 360–1.
• 21Lloyd’s ‘special utility’ was his term for what would later be called ‘marginal utility’; ‘abstract’ or ‘general’ utility would later be called ‘total utility’. See Seligman, op. cit., note 20, pp. 360–1.
• 22Kendall was born to a Massachusetts farm family, and graduated from Dartmouth College in 1811 at the head of his class. He became a lawyer, and emigrated to Kentucky in 1814, where he functioned as attorney, editor and postmaster. He became editor of the important Frankfort (Ky) Argus in the capital of Kentucky, in 1814, and later became a leading Jacksonian brain-truster and postmaster-general.
• 23Quoted in Gordon, op. cit., note 11, p. 384.
• 24Bailey, however, did add a welcome methodological critique of James Mill’s clumsy attempt to define away the increase of the value of wine through aging as some sort of mystical, vicarious expenditure of a year’s worth of labour. As Bailey sardonically rebut ted Mill’s assertion that the equivalent ‘labour may be correctly considered as having been expended’ on the wine: ‘a fact may be correctly considered as having taken place only when it really has taken place’. Colonel Torrens also provided a similar critique of Mill’s labour theory.
• 25Moss, op. cit, note 18, p. 67.
• 26Ibid., pp. 68, 201.
• 27Eugen von Böhm-Bawerk, Capital and Interest, Vol. I, History and Critique of Interest Theories (South Holland, 111.: Libertarian Press, 1959), p. 208.
• 28Quoted in R. Warren James, John Rae: Political Economist (Toronto: University of Toronto Press, 1965), I, pp. 191–2.
• 29Published in Senior’s Outline of the Science of Political Economy (1836), cited in Marian Bowley, Nassau Senior and Classical Economics (1937, New York: A.M. Kelley, 1949), pp. 47–8.
• 30It should be noted that, in this passage, Mill also made two exceptions to his assumed exclusive motivation of the desire for wealth: aversion to labour, and desire to consume at present. But he correctly added while these motives may conflict with the pursuit of wealth, they also ‘accompany it always as a drag, or impediment, are therefore inseparably mixed up in the consideration of it’.
• 31Senior’s use of the term ‘positive’ we would now say is ‘praxeologic’, his ‘hypothetical’ we would now say is broadly ‘positivist’.
• 32Bowley, op. cit., note 29, pp. 63, 62n.