The Development of Economics

CHAPTER XXVIII

REVOLTS AGAINST “ORTHODOX ECONOMICS” DURING THE LAST HALF-CENTURY

The theoretical development since 1870, sketched in the preceding chapters, was accompanied by a revival of the revolt against economic theory represented in the preceding generation chiefly by the Old Historical School. This movement was doubtless stimulated by many conditions, among them being (a) the writings of Darwin, Spencer, and others, who saw in the idea of evolution a new approach to the study of society; (b) the rapid changes and increasing complexity of economic life, the urgent problems of which the contemporary political economy seemed unable to solve; and (c) a natural reaction against theoretical studies based upon deductions from a few simple premises such as those employed by Jevons, the Austrians, and the so-called neo classicists. Typical representatives of this movement are the New Historical School, the Institutionalists, and the Statistical School.

A. The New Historical School

1. Gustav Schmoller.

To such studies, therefore, Schmoller directed his own energies and those of his students for many years. The results of these were published in books and monographs, especially in the Jahrbuch für Ge-setzgebung, Verwaltung und Volkswirtschaft im deutschen Reich und in Staats- und sozialwissenschaftliche Forschungen, which he founded and edited, and in the Zeitschrift für Sozial- und Wirtschaftsgeschichte. His own chief contributions were Geschichte der deutschen Kleingewerbe im 19. Jahrhundert (1870); Strassburger Tucher- und Weberkunst (1879); “Wirtschaftliche Politik Preussens im 18. Jahrhundert” (J. G. V. V., 1884-1887); “Die Thatsachen der Arbeitsteilung” (ibid., 1890-1893); Zur Social- und Gewerbepolitik der Gegenwart (1890); Einige Grundfragen der Socialpolitik und Volkswirtschafts-lehre (1898); Umrisse und Untersuchungen zur V erf as sungs-Verwaltungs- und Wirtschaftsgeschichte (1898); and Acta Borussica (1892-1900).

In his later life Professor Schmoller felt that adequate material for some generalizations at least had been accumulated, and he undertook the task of making them in his Grundriss der allgemeinen Volkswirt-schaftslehre, the first volume of which appeared in 1900 and the second in 1904. In this monumental work his mature views on the nature and methods as well as the content of the science are expounded. It probably represents better than any other publication the historical economists’ conception of the nature and present state of the science.

From these and many other expressions which might be quoted it is obvious that Schmoller believed in the existence of economic laws and regarded their discovery as one of the chief purposes of the science; and in his discussion of the methods appropriate to correct observation, concept-making, classification, and the discovery of causal connections he clearly expressed belief in the use of deduction and hypothesis as well as induction, indeed in all the methods which we nowadays describe by the word theory. What he objected to was the narrowing of the science to deductions from a small number of simple premises such as characterize the work of the classical economists, the Austrians, and most so-called theoretical economists, and faith in the validity of conclusions based upon such deductions.

In his exposition of the content of the science he did not hesitate to make deductions from the characteristics of human nature as well as from generalizations based on historical facts, and he made frequent appeals to environment, ethnology and psychology. A brief analysis of the contents of the Grundriss will make its leading characteristics clear.

It consists of an introduction and four books. The former includes a discussion of the nature and limits of the science, its psychological and moral foundations, and its literature and methods. The first book is entitled “Land, People and Technique”; the second, “The Social Constitution of National Economy”; the third, “The Social Process of the Circulation of Goods and the Distribution of Income”; and the fourth, “The Development of National Economic Life in General ”

The second part of the introduction includes nine chapters, which are broadly sociological in character. The topics discussed are (a) the purposes and means of social life; (b) the psychophysical means of promoting mutual understanding between men, that is, language and writing; (c) the sphere of spiritual consciousness and the collective powers; (d) individual feelings and needs; (e) human impulses; (f) acquisitive impulses and the economic virtues; (g) the nature of morality, the ethical ordinances of social life, custom, justice, and morals; and (h) the general connections between economic and moral life.

The four chapters of the first book treat respectively the dependence of the economy of a people upon external nature, races, and peoples; the elements and movements of population; and the economic significance of the development of technique. In the second book are discussed family economy; the settlement and manner of living of the social groups, city and country; the economy of the state and the other political units; the social and economic division of labor; the nature of property and the characteristic features of its distribution; the formation of social classes; and the development of the forms of business enterprise and activity. Book III is subdivided into nine chapters which treat respectively exchange, markets, and commerce; economic competition; measures, weights, coins, and money; value and price; property, capital, and credit, including rent and interest; the organs of credit and their recent development, including banking; labor relations, labor laws, the labor contract and wages; the most important of the newer social institutions embracing those pertaining to the care of the poor, insurance, employment, labor-unions, and courts of arbitration; and income and its distribution, with the subheads, profits, rent, and income from property and from labor. Book IV treats the oscillations and crises of national economies; class conflicts, class domination and its suppression by means of the state, law, and reform; the economic relations and conflicts between states, including commercial policies; and the economic and general development of mankind and of individual nations, including their rise, progress, and decline.

From this enumeration of the topics treated it is evident that the characteristic feature of Professor Schmoller’s work is the breadth of the field covered rather than the methods employed. He has discussed every aspect of the economic life of man and in so doing has been obliged to use all the methods employed by his predecessors and contemporaries. He has used historical and statistical data whenever they were suitable and available, making generalizations and deductions from them, but no less has he used data derived from other sources, such as other sciences and common observation, and he has reasoned from them as premises. He has also availed himself, to a limited extent, to be sure, of some of the theories of the classical and Austrian schools, finding them useful in the explanation of the phenomena with which he was dealing, but he avoided what he regarded as the chief fault of the classical school, namely that of confining the science to deductions from premises derived from the consideration of a so-called “economic man.” The man with whom he tried to deal and about whose activities he reasoned was the actual man revealed by history, observation, and the scientific studies of psychologists, biologists, archæologists, and other specialists who have made his nature and activities the subject of their researches.

The realism which characterizes the work of Professor Schmoller and his German contemporaries and successors cannot be put exclusively to the credit of the Historical School. He was the heir of a tradition which dates back to the Cameralists of the seventeenth and eighteenth centuries, who were primarily interested in training young men for the civil service of their respective states and principalities and who were therefore obliged to deal with the facts and conditions with which civil servants were concerned. The writings and lectures of these men were the germs from which the political economy of Germany developed, and even during the last quarter of the eighteenth and the first half of the nineteenth century, when the influence of the English classical school was the greatest in Germany, a German treatise on political economy was very unlike an English one in scope and content. It dealt primarily with the facts of economic life, theory in most cases playing a subordinate role.

2. Cliffe Leslie.

Regarding the first he says: “The desire for it [wealth] is by no means necessarily an incentive to industry, and still less to abstinence. War, conquest, plunder, piracy, theft, fraud, are all modes of acquisition to which it leads.”

“Unproductive expenditure and consumption . . . do not necessarily tend to diminish wealth. They are the ultimate incentives to all production, and without habits of considerable superfluous expenditure . . . a nation would be reduced to destitution.”

“The main questions respecting the influence alike of the ‘desire of wealth,’ and of expenditure and consumption are—to what kinds of wealth, what modes of acquisition, and what actual uses do they lead in different states of society, and under different institutions, and other surrounding conditions? To what laws of social evolution are they subject in the foregoing respects?”

He accompanies these criticisms with many statements descriptive of what he conceives to be the truth and indicative of the method of procedure which he approves in opposition to what he calls the deductive method of the classicists. The following are some of them:

“The truth is that the whole economy of every nation, as regards the occupations and pursuits of both sexes, the nature, amount, distribution and consumption of wealth, is the result of a long evolution in which there has been both continuity and change, and of which the economical side is only a particular aspect or phase. And the laws of which it is the result must be sought in history and the general laws of society and social evolution.”

Speaking of Roscher’s discussion regarding the legal background of national economies he says:

“And it may be affirmed that the means by which wealth is acquired in successive states of society are subject to regular laws of social evolution, as a whole, although only in the earlier stages is their operation easily traced.”

“A priori political economy has sought to deduce the laws which govern the direction of human energies, the division of employments, the modes of production, and the nature, amount, and distribution of wealth, from an assumption respecting the course of conduct prompted by individual interest; but the conclusion which the study of society makes every day more irresistible is, that the germ from which the existing economy of every nation has been evolved is not the individual, still less the mere personification of an abstraction, but the primitive community—a community one in blood, property, thought, moral responsibility, and manner of life; and that individual interest itself, and the desires, aims, and pursuits of every man and woman in the nation has been moulded by and received their direction and form from the history of that community.

“The phenomena of wealth may be the subject of special inquiry by a special set of inquirers, but the laws of co-existence and sequence by which they are governed must be sought in the great Science of Society, and by the methods which it holds out.”

“The abstract and a priori method yields no explanation of the laws determining either the nature, the amount, or the distribution of wealth; . . . On the other hand the philosophical method must be historical, and must trace the connection between the economical and the other phases of national history. As regards the nature of wealth, it has been shown that essential differences in its kinds and constituents, profoundly affecting the economical condition of mankind, manifest themselves at different stages of progress, and that their causes must be sought in the entire state of society, physical, moral, intellectual, and civil. The amount of wealth has been proved to depend on all the conditions determining the direction of employments of human energies, as well as on the state of the arts of production, and the means of supply. And the distribution of wealth has been shown to be the result, not of exchange alone, but also of moral, religious, and family ideas and sentiments, and the whole history of the nation. The distribution effected by exchange itself demonstrably varies at different stages of social progress, and is by no means in accordance with the doctrines of a priori political economy. Every successive stage—the hunting, the pastoral, the agricultural, the commercial stages, for example, has an economy which is indissolubly connected with the physical, intellectual, moral, and civil development; and the economical condition of English society at this day is the outcome of the entire movement which has evolved the political constitution, the structure of the family, the forms of religion, the learned professions, the arts and sciences, the state of agriculture, manufactures and commerce. The philosophical method of political economy must be one which expounds this evolution.”

3. John Kells Ingram.

Ingram was a disciple of August Comte and believed that one of the chief defects of the political economy of his day was its separation from other social sciences. Like Comte he believed in a general social science, the chief task of which should be the explanation of the evolution of social institutions, among which economic institutions constitute but a single group, vitally related, however, to all the others.

In his exposition of the methods appropriate to this new science Comte explained the distinction between social statics and social dynamics, “the former studying the laws of social co-existence, the latter those of social development,” and drew an analogy between the procedure of the biologist and that of the sociologist. Both must study “the structures and functions which are exhibited by evolution as they exist at the several points of an ascending scale,” and in the case of the sociologist “the several successive stages of society will have to be systematically compared, in order to discover their laws of sequence, and to determine the filiation of their characteristic features.”

“I. As to the place of Economics in the general system of the Sciences, it holds that the study of wealth cannot be isolated, except temporarily and provisionally, from the other social phenomena; that it is essential to keep in view the connections and interactions of the several sides of human life. There is, in fact, properly speaking, but one great Science of Sociology, of which Economics forms a single chapter, which must be kept in close relation to the others.

“II. It has shown that Economic science, like Sociology in general, must be—to employ the useful terminology of Comte—not statical only, but also dynamical. It must not assume one fixed state of society, and suppose that it has to deal only with laws of coexistence, ignoring those of succession. It is now universally acknowledged that societies are subject to a process of development, which is itself not arbitrary, but regular; and that no social fact can be really understood apart from its history. Hence the ‘pocket-formulas,’ in favour with the older school, which were supposed to suit all cases and solve all problems, have lost the esteem they once enjoyed, and Economics has become historical in its method, the several stages of social evolution being recognized as having different features, and requiring in practice a modifying intervention which ought to vary from one stage to another.

“III. While recognizing the real, and not inconsiderable, place which belongs to Deduction in Economics, as in other Sociological studies it holds that inductive research must preponderate. Instead of constructing an abstract ‘economic man,’ and deducing from one or two principles of action by which alone he is supposed to be activated all the economic phenomena of Society, we must, as in the other positive sciences, ascertain what the social facts are, and, only after this inquiry has been completed, endeavor to trace them to their sources in the constitution of the external world, in human nature, and in the contemporary circumstances of Society. And a most valuable organ of research must be that specialized form of Induction known as Comparison, which is best adapted to the study of ‘historic filiation.’

“IV. With these intellectual movements have been combined new tendencies in sentiment and moral tone. There has been what Professor Gide, the ablest representative of the new School in France, has well described as un grand degel—“a great thaw.” A more humane and genial spirit has taken the place of the dryness and hardness which once repelled so many of the best minds from the study of Economics, and won for it the name of ‘the dismal science.’ In particular, the problem of the Proletariate, of the condition and future of the working classes—has taken a powerful hold on the feelings, as well as the intellect, of Society, and is studied in a more earnest and sympathetic spirit than at any former time.”

4. W. J. Ashley.

Another noteworthy adherent of the New Historical School was W. J. Ashley, at one time professor of economic history in Harvard University, but later affiliated with the University of Birmingham, England. He was an Englishman by birth and education, having been at one time Fellow of Lincoln College, Oxford. One of his most important publications was entitled An Introduction to English Economic History and Theory, Part I, entitled The End of the Middle Ages, published in 1893.

“(1) Political Economy is not a body of absolutely true doctrines, revealed to the world at the end of the last and the beginning of the present century, but a number of more or less valuable theories and generalizations.

“(2) No age, since men began to speculate, has been without its economic ideas. Political Economy was not born fully armed from the brain of Adam Smith or any other thinker: its appearance as an independent science meant only the disentanglement of economic from philosophical and political speculation.

“(3) Just as the history of society, in spite of apparent retrogressions, reveals an orderly development, so there has been an orderly development in the history of what men have thought, and therefore in what they have thought concerning the economic side of life.

“(4) As modern economists have taken for their assumptions conditions which only in modern times have begun to exist, so earlier economic theories were based, consciously or unconsciously, on conditions then present. Hence the theories of the past must be judged in relation to the facts of the past, and not in relation to those of the present.

“(5) History seems to be proving that no great institution has been without its use for a time, and its relative justification. Similarly, it is beginning to appear that no great conception, no great body of doctrines which really influenced society for a long period, was without a certain truth and value, having regard to contemporary circumstances.

“(6) Modern economic theories, therefore, are not universally true; they are true neither for the past, when the conditions they postulate did not exist, nor for the future, when, unless society becomes stationary, the conditions will have changed.”

B. Institutional Economics

In recent years, especially in the United States, a group of economists has appeared which must be distinguished from the New Historical School as well as from the so-called orthodox economists. They criticize all other groups, including the Historical School, for whose so-called laws of development they have quite as little respect as for the theories of the Classical School or the Austrians. So far their work has been chiefly critical, but they seem to have set before themselves as a goal the study of what they call institutions, both in their evolutionary and their contemporary aspects, not relying to the same degree as the New Historical School upon history as a tool, but more upon biology, psychology, archæology and anthropology. They claim to be in search of facts, of reality as a basis for their work, instead of a priori assumptions and abstractions, but they do not hesitate to make use of abstraction, deduction, hypotheses, generalizations, and all the other theoretical devices.

Another characteristic of this group, at least of most of those who have expressed their views in publications, is their dissatisfaction with existing conditions and institutions, not the mild kind of dissatisfaction which every one feels who realizes the imperfection of even our best efforts and the serious character of the economic and other social problems that confront us, but the deeper, more thoroughgoing dissatisfaction of the radical. It is usually impossible to classify these with other radicals, Socialists for example, though they probably cooperate with the radical more frequently than with the more conservative groups. Their radicalism is sui generis. It appears to grow out of the conviction that change, especially in economic conditions and institutions, is the normal thing and that institutions normally lag behind in their development and are never what they should be.

The founder of this school, if it may be called such, and during his lifetime its chief inspiration and representative, was Thorstein Veblen, an erratic, cynical genius, whose keen mind, wide knowledge outside as well as inside the realm of economics, and facile pen were used with great skill to shatter and undermine confidence in the economics of both the past and the present. Upon a considerable number of the younger economists of the present time in the United States his influence has been great, though probably few of them would be willing to be classed as his followers. A brief statement of a few of his leading ideas will suffice to indicate what this group seems to stand for.

His criticisms of economics are chiefly directed against the premises from which, he claims, most economic theory is deduced. Granted these, he admits a certain degree of respect for the logical systems the economists have built up, but their premises he cannot grant. Indeed, he regards them as entirely untenable. Those of the classical school, he thought, were based upon hedonistic psychology and the conviction “that there is a meliorative trend in the course of events.” Modern psychology, he thought, has destroyed hedonism and the tenet of a meliorative trend, which was probably theological in its origin, and was transformed by Bentham and the Utilitarians into the view that the results of the operation of natural law are right and good. This view in turn was shattered by the undermining of the natural-law philosophy. Accepting the hedonistic view of human nature, the classical economists created the “economic man,” assumed freedom of enterprise, competition, and private ownership, and built up their science as a logical deduction from these premises.

The efforts of the post-classical economists to correct the defects of the classicists Veblen regards as entirely unsuccessful. The marginal utility theorists he treated with impatience, if not with contempt; and, while he professed a degree of admiration for Marshall, he regarded his effort to reconstruct the science as, all things considered, a failure. Marx, the other Socialists, and the Historical School, he thought, have succeeded no better. The field is, therefore, clear for new constructive work along new lines, and to this Veblen devoted himself.

One of the basic ideas upon which he built is a conception of human nature in accordance with which man is regarded as a creature of instincts which he has acquired in substantially the same manner that the other higher animals acquired theirs, namely, chiefly through heredity and the influence of environment, especially physical environment. These instincts “determine the ends and aims of his life.” The intelligence and rationality with which he is endowed have a part “in the provision of ways and means,” but only a part, since even here “tradition” and inherited “habits of thought” play the leading role.

Guided and mainly determined by these instincts, the actions of individuals and groups become habitual, and out of them develop institutions. Those actions that result from man’s efforts to utilize the physical environment for the satisfaction of his material wants result in economic institutions, which, according to Veblen, should constitute the subject-matter of economics.

In his various writings Veblen himself presented a theory of the process of development of economic institutions through the “savage,” the “barbarian,” and the “handicraft” stages into the “machine” age in which we live. In explaining this process he made use of all the pertinent sources of knowledge, especially psychology, anthropology, and the history of thought and culture, and indulged in a number of generalizations and theories. His analysis has to do chiefly with institutions resulting from the ownership of property and with pecuniary relations and technological processes and methods. He was very critical of the characteristic economic institutions of the present day and looked forward to a radical change in them, though he was careful not to assume the role of prophet.

It is the prospect of a new kind of economic science to be built up through the study of the development of social institutions, to which he pointed the way in the constructive parts of his work, as well as his destructive criticism, that have attracted the young economists who have been unable to find their way out of the confusion resulting from the conflicting views of present-day devotees of the science and the criticisms of past and present theory in which they have so freely indulged.

C. Statistical Economics

A variant of institutional economics—perhaps it should be regarded as a phase or subclass—is represented by a group of statisticians in the United States who look to statistics as the chief means of reconstructing or renovating economics. They are quite as critical of other devotees of the science, past and present, as are the other adherents of the institutional group and share with these their general point of view, including their conception of human nature, of the origin and development of institutions, and of the proper goal and methods of the science. They differ simply, if at all, in their faith in statistics as a tool and in their belief that the generalizations which statistics make possible will constitute the greater part, if not the whole, of the economic theory of the future.

The leader of this group is Wesley C. Mitchell, professor of economics at Columbia University and director of research of the National Bureau of Economic Research. His chief publications are A History of the Greenbacks (1903); Gold, Prices, and Wages under the Greenbackk Standard (1908); and Business Cycles (first edition, 1913; revised edition, Volume I, 1927). His general views on the nature, scope, and methods of economics have been expressed in a number of articles, noteworthy among which are “Quantitative Analysis in Economic Theory,” American Economic Review, 1925; “Human Behavior and Economics,” Quarterly Journal of Economics, 1914; “The Role of Money in Economic Theory,” American Economic Review, 1916; and “The Prospects of Economics,” published in 1924 with a number of other articles by other authors in a book entitled

Professor Mitchell is very diplomatic in the expression of his views and has frequently proclaimed his belief in the necessity and utility of economic theory, but it is quite obvious that he has very little, if any, confidence in any kind of theory that has yet been developed —except possibly that of the institutional group, which is as yet only in a tentative, formative stage—and great faith in the ability of statisticians to supply a kind of theory which will be more valuable than any at present available.

With the study of institutional problems he thinks “the fundamental issue of welfare is inextricably involved,” and here, he says, “quantitative analysis promises . . . to increase the range of objective criteria by which we judge welfare and to study the variations of these criteria in relation to each other.” The statistician’s “help in measuring objective costs and objective results is,” he thinks, “indispensable to convert society’s blind fumbling for happiness into an intelligent process of experimentation.”

Footnotes

1 Pp. 545, 546.

2 Grundriss, I, 100.

3 Ibid., I, 108, 109.

4 II, 562.

5 See Wagner’s Lehr- und Handbuch der politischen Oekpnomie and Schönberg’s Handbuch der politischen Oekpnomie.

6 These essays with others were republished in 1879 in a book entitled Essays in Political and Moral Philosophy. Our quotations are from that book.

7 Essays, pp. 148, 153, 156.

8 Ibid., p. 148.

9 Ibid., pp. 217, 219.

10 Ibid., pp. 220, 221.

11 Essays, p. 222.

12 Ibid., pp. 222, 223, 224.

13 Ibid., p. 228.

14 Ibid., p. 230.

15 Ibid., p. 241.

16 Essays, pp. 241, 242.

17 The latest edition of this book was published in 1915, after Ingram’s death, with an introduction by Professor Richard T. Ely and a supplementary chapter by Professor William A. Scott.

18 New and enlarged ed. (London: A. & C. Black, Ltd., 1915), pp. 191, 192.

19 Ingram, op. cit., pp. 193, 194.

20 Pp. xvii-xix.

21 W. J. Ashley, An Introduction to English Economic History and Theory, 3d ed. (New York: G. P. Putnam’s Sons, London: Longmans & Co., 1894), pp. ix and x.

22 Ibid., pp. x and xi.

23 Ibid., pp. xii and xiii.

24 For an excellent appraisal of Veblen’s work and influence see Paul T. Homan’s Contemporary Economic Thought (New York: Harper & Brothers, 1928), pp. 105 sq.

25 Edited by Rexford Guy Tugwell and published by Alfred A. Knopf, New York, 1924.

26 Amer. Econ. Rev., March, 1925, p. 5.

27 Ibid., pp. 7 and 8.

28 Amer. Econ. Rev., p. 8.

29 Ibid., p. 9.

30 Ibid.

31 Ibid., p. 11.

32 Ibid.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”
• 9In other connections he says: “It is very certain that it [money] is not a good in itself and that the quantity of it does nothing for the opulence of a country in general provided there is enough of it to sustain the prices of the goods necessary to life.”
• 10Silver and gold, he says, have as competitors copper, leather, shells, and “a simple piece of paper which costs nothing but nevertheless performs all the functions of money to the amount of millions by passing from hand to hand an infinite number of times.” By way of illustration he refers to the Lyons fair in the following manner: “In a commerce consisting of purchases and sales to the amount of more than eighty millions not a ‘sou marque’ of money is seen. Everything is done by bills of exchange which after passing through an infinite number of hands, finally return to the original drawer.”
• 11In other connections he emphasized the need of an equilibrium between purchases and sales and the importance of proper adjustments of prices, especially of the prices of raw produce and manufactures.
• 12In order to secure these and other needed adjustments, he affirmed that reliance can be placed only on nature. The following words of his taken from Chapter V of the Dissertation present this doctrine clearly:
• 13In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 14In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 15In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 16The author, Richard Cantillon, was born in Ireland between 1650 and 1690. Soon after the death of Louis XIV he removed to Paris and engaged in the business of banking during the period in which John Law flourished. Being confident of the ultimate failure of the Mississippi scheme, Cantillon speculated on the bear side of the market and made a fortune, but incurred the enmity of Law and was obliged to leave France. He was murdered in London on May 16, 1734, by a discharged man-servant, who set fire to his house and stole some of his papers.
• 17The deviation of the market prices of commodities from “their primary and natural price” Ricardo also described as “accidental and temporary.” The demand and supply of a commodity at the moment may be such as to establish a price for it above or below the point indicated by the labor principle, but in that case the profits of the capital employed in its production will be above or below the average in other industries, and this fact will increase in the one case and decrease in the other the amount of capital employed in this industry, thus causing changes in the supply which will tend to bring the market into accord with the natural price. He concludes his discussion with these words: “In speaking, then, of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.”
• 18The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 19The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 20The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 21The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 22Even before land of inferior fertility is taken into cultivation, superior lands may bear rent, according to Ricardo, provided the point of diminishing returns in their cultivation has been reached. “It often, and, indeed, commonly happens,” he says, “that before No. 2, 3, 4 or 5, of the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation.” By way of illustration he assumes that equal amounts of capital and labor will produce on land of qualities numbered 1, 2, and 3, 100, 90 and 80 quarters of corn respectively and then adds: “It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land No. 3.”
• 23“In such a case, capital will be preferably employed on the old land, and will create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour.” The reason for the creation of rent in this case is that the only available opportunities for the employment of additional labor and capital under the conditions assumed are either on land No. 3 or at a diminished return on land No. 1; and, since two rates of profits on the same market are impossible under competitive conditions, capital and labor must be content with the diminished returns represented by their lower productivity when added to the amounts already employed in the cultivation of No. 1, and the landlord can command the difference between their present and their former productivity.
• 24“The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of production; but by the greater quantity of labour necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most unfavorable circumstances; meaning by the most unfavorable circumstances the most unfavorable under which the quantity of produce required renders it necessary to carry on production.” In the case of production from land, the most unfavorable circumstances are those represented by the last application of capital and labor, namely those applied to the poorest quality of land or at the lowest returns on the superior qualities, and these, according to the proposition just discussed, yield no rent.
• 25In another passage he says: “The reason, then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high.”
• 26A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 27A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 28Conversely “it follows from the same principles, that any circumstances in the society which should make it unnecessary to employ the same amount of capital on the land, and which should therefore make the portion last employed more productive, would lower rent.”
• 29Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 30Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 31Ricardo concludes his chapter on rent by noting that the landlord profits in two ways by increasing difficulties in the production of raw produce, namely by securing a larger share of the total produce and by a rise in the price and thus in the purchasing power of each unit of the product. The following are his words : “Since the same cause, the difficulty of production, raises the exchangeable value of raw produce, and raises also the proportion of raw produce paid to the landlord for rent, it is obvious that the landlord is doubly benefited by difficulty of production. First he obtains a greater share, and, secondly, the commodity in which he is paid is of greater value.”
• 32In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :