I. Ancient and Medieval ThoughtRaymond de Roover
II. Mercantilist ThoughtJacob Viner
III. Physiocratic ThoughtJoseph J. Spengler
IV. Socialist ThoughtMaurice Dobb
V. The Historical SchoolTheo Surányi-Unger
VI. The Austrian SchoolFriedrich A. von Hayek
VII. The Institutional SchoolAllan G. Gruchy
This entry includes articles on the major schools of economic thought other than those which now constitute the main body of academic thought in the Western world and their most direct antecedents. For discussion of the English classical school, see the biographies ofSmith, Adam; Ricardo; Mill; Hume; McCulloch; Senior. For the English and American neoclassical economists, see the biographies ofMarshall; Jevons; Pigou; Clark, John Bates; Fisher, Irving; Knight. For discussion of the influence of Keynes, seekeynes, John Maynard; Hansen; and the articlesIncome and employment theoryandLiquidity preference.
In ancient Greece, “economics” did not mean what it means today; rather, it em-braced everything pertaining to household management. (It kept this meaning until the eighteenth century.) Political economy, or economics in the present sense of the word, was not regarded as an independent discipline but was an integral part of ethics or politics. Socioeconomic questions were the province of ethics insofar as they dealt with private business contracts and of politics insofar as they touched upon public policy and affected social arrangements. It is not surprising, therefore, that Aristotle discusses economics in his books Nicomachean Ethics and Politics.
The Greek philosophers did not go beyond fundamentals and trite observations. Yet, their contributions are important because, as Joseph A. Schumpeter (1954) remarks, their economics is the fountainhead of practically all further work. They raised all the crucial questions, from value and price to economic organization, with which economists are still concerned at the present time.
Plato. Plato (427–347 b.c.) started in his Dialogues from the premise that no individual is self-sufficient and stated that cooperation and mutual intercourse are therefore the basis of the state as well as of the economy. Division of labor creates efficiency because, according to Plato, diversity of innate talents prompts individuals to specialize in what they are best fitted for, a fact that is sometimes overlooked or even denied—for example, by Adam Smith. States also are not self-sufficient, and rarely do they possess such a variety of resources that they can get along without commerce. The existence of an exchange economy is taken for granted, since Plato stated that each community will need a market place and a token money for purposes of exchange. Contrary to what is often asserted, Plato was not really an advocate of communism. In his scheme, communism was limited to the warrior class, whose members were forbidden to own property and were expected to share common meals and to live together like soldiers in a camp. Nevertheless, Plato was taunted by his pupil Aristotle for making this impractical proposal.
Aristotle. Like Plato, Aristotle (384–322 b.c.) assumed from the outset the existence of an exchange economy based on the division of labor and the institution of private property. He justified the latter on grounds of efficiency—people take better care of what is their own than of what is held in common. Money is necessary to obviate the inconveniences of barter. Besides being a medium of exchange, money is a measure of all things and “a guarantee of exchange in the future,” since it can be stored until needed. Although money, Aristotle recognized, varies in purchasing power, its value tends to be rather constant and more stable than that of other commodities. Therefore, Aristotle, unlike Plato, did not favor a token currency, but required money to be made of a substance, such as silver, that is “really valuable itself” as well as easy to carry.
According to Aristotle, the source of value is need, for no exchange will take place without need; and the basis of exchange will differ as needs differ. Although in his Topica Aristotle referred to the marginal principle, there is no evidence that he ever thought of applying it to demand theory. Instead, he developed the concept of value in useand value in exchange, which much later involved Adam Smith in inextricable difficulties. Medieval and later commentators have tried in vain to eluci-date the obscure passages that Aristotle devoted to price determination in Book V of his Nicomachean Ethics. While remaining silent about the virtues of competition, he mentioned monopoly as a device for exploiting the public.
Aristotle was definitely of the opinion that economic relations ought to be ruled by justice, of which there were two kinds: corrective, or commutative, justice, which applied to such private trans-actions as buying and selling; and distributive justice, which regulated the distribution of wealth. Corrective justice rested on the principle of equivalence; distributive justice was based on merit, the criteria of which might vary from one society to another. This whole concept of justice was later taken over by Thomas Aquinas and the Scholastics, almost without modification, and is still accepted by Roman Catholic social scientists.
Aristotle cited the story of Midas to emphasize the point that money is not identical with wealth. Agriculture and household management were honorable, but he frowned upon “krematistics,” or such wealth-accumulating activities as trade. Above all, he deplored moneylending because it involved usury—“money bred of money” is unnatural because money was invented to serve as a medium of exchange. These views, too, were adopted by the Scholastics.
In contrast with the Greeks, the Romans were not strong in speculative philosophy and made no significant contributions to economics, with the possible exception of treatises on agriculture which were practical rather than theoretical. The Romans, being administrators, excelled in legislation; and their great contribution is the body of law codified by Emperor Justinian, who reigned from 527 to 565. To be sure, Roman law is a compilation of legal texts containing nothing that even remotely approaches economic analysis; however, because of the use made of it by the Scholastics, it is very important to the evolution of economic thought.
Medieval or scholastic thought
Scope and method
Scholastic economics is often regarded as a medieval doctrine; but this, strictly speaking, is incorrect. Although it had its roots in the Middle Ages, it outlived this period by more than two centuries. Far from dying around 1500, scholastic economics continued to flourish throughout the sixteenth century with the famous school of Salamanca, founded by the great jurist Francisco de Vitoria, o.p. (c. 1480–1546). It reached its zenith of refinement and elaboration in the great works of synthesis and vulgarization of the seventeenth century and still had some vigor left in the eighteenth century, when Pietro Ballerini (1698–1769) and Daniel Concina, o.p. (1687–1756) took a last stand to defend the church’s traditional doctrine on usury against the insidious attacks of Marchese Francesco Scipione Maffei (1675–1755) and Nicolas Broedersen (c. 1690–1772).
Even then scholastic economics did not die. It left its imprint, although unacknowledged and even disavowed, on the works of Abbé Ferdinando Galiani (1728–1787) and Abbé Antonio Genovesi (1712–1769), both Neapolitan forerunners of the classical school. Adam Smith (1723–1790), if Schumpeter is correct, owed more to Scholasticism than to mercantilism or physiocracy. In any case, scholastic doctrines were transmitted to him by Hugo Grotius (1583–1645) and Samuel von Pufendorf (1632–1694), whose works were used as text-books when Smith attended the course in moral philosophy taught by Francis Hutcheson (1694–1746) at Glasgow College. This is a fact not to be denied. Regardless of controversies about who influenced whom and to what extent, there was continuity—not a sudden break—a point that should be stressed.
Like the Greek philosophers, the scholastic Doctors did not consider economics as an autonomous subject, but as a branch of moral philosophy (or moral theology). This is significantly the subject taught by both Smith and Genovesi, the former at Glasgow College and the latter at the University of Naples. However, Smith made economics into an independent science governed by expediency rather than by ethics.
In building their philosophical system, of which economics was a part, the scholastic Doctors combined elements from five different sources: the Bible, patristic literature, Greek philosophy, canon law, and Roman law. Greek philosophy, especially that of Aristotle, and Roman law were perhaps the most important for their economics. Canon law supplied only the canons outlawing usury and those denouncing trade as a sinful occupation. The scholastic writers took from Roman law the classification of contracts, which provided the framework for their whole doctrine. For example, the just price was discussed in connection with the emptio-venditio, or sales contract; and usury, in connection with the mutuum, or straight loan.
The medieval mind was legalistic. The question asked was not how the economic system functioned, but whether this or that was licit or illicit, just or unjust. In other words, the scholastic approach to economic problems was legal and ethical rather than mechanistic. The overemphasis on usury by many scholastic authors may have given the impression that this one question was the core of their doctrine, but this is not so. According to the Schoolmen, the scope of economics was to determine the rules of justice that applied to the exchange of goods or services (commutative justice) and to the distribution of income and wealth (distributive justice). This distinction between commutative and distributive justice was, of course, borrowed from Aristotle. Social justice is a new concept added by neoscholastic writers in recent times.
Like Marxian dialectics, the scholastic method follows a set pattern. One is certain to find economic questions discussed in any scholastic treatise dealing with moral theology or entitled De contractibus (“Concerning Contracts”) or De justitia et jure (“Concerning Justice and Law”). Often it will be unnecessary to go beyond the title page or the table of contents in order to identify a treatise as belonging to the scholastic school.
The scholastic Doctors, following Aristotle, assumed that man was unable to minister to his own needs without assistance from his fellow men. According to Thomas Aquinas, o.p. (1225?-1274), the division of labor was ordained by a divine providence that endowed men with greater inclinations for one profession than for another (Summa contra gentiles iii, 134).
In accordance with canon law, the community of goods was regarded as Utopian, except when practiced on a small scale in monasteries or con-vents. While not an institution of natural law, private property, Thomas Aquinas declared, was an addition thereto devised by human reason (Summa theologicaii-ii, 66, 2, ad 1). He justified its existence on the same grounds that Aristotle did: first, because common property is apt to be neglected and, second, because public ownership only engenders confusion and discord. In the absence of planners, a planned economy was still inconceivable. Although property was privately owned, the use of it was common, and superfluities ought to be given to the poor. However, people were entitled to live as befitted their station in life. A knight, for example, was not required to give away his horses, because he might need them to fulfill his feudal obligations. Only in case of extreme necessity did all things revert to common ownership. Thus, a poor man on the point of starvation did not steal when he took a piece of bread without the permission of its owner.
The scholastic Doctors extolled agriculture as an occupation leading to virtue, but shared all the prejudices of Aristotle and of the Church Fathers against trade. Did not the canon law proclaim that merchants could scarcely, if ever, please God (Decretum Dist. 88, c. 11)? The attitude of the theologians mellowed only gradually. Thomas Aquinas approved of manufacturers and of importers who brought needed commodities from abroad. Later, the warehousing function was also recognized as legitimate, but retailing had to wait until the sixteenth century before receiving approval.
The scholastic doctrine centered on two main problems: the theory of the just price, and usury. Both have given rise to a great deal of misunder-standing.
The scholastic Doctors were al-most unanimous in recognizing utility as the source of value. In the words of Schumpeter, their analysis “lacked nothing but the marginal apparatus” (1954, p. 1054). Value was not regarded as an intrinsic quality, but as something dependent upon the mental process of valuation. To illustrate this point, the Schoolmen often cited St. Augustine (354–430), who stated in The City of God that, human superiority notwithstanding, a horse or a gem was often worth more than a slave. Some even turned this argument into a paradox by insisting that, if value were a matter of natural dignity, a living creature, such as a fly, would be more valuable than all the gold in the world. Value, in other words, was a function of utility. The other element of value—scarcity—was not overlooked. Perhaps one of the best scholastic expositions of value theory is found in the sermons of St. Bernardino of Siena, o.f.m. (1380–1444). However, he is not the original author of the passage, which he appropriated, without acknowledgment, from a manuscript—still unpublished—of Pierre Olivi, o.f.m. (1248–1298). He felt free to do this because Olivi had been accused of heresy. According to Olivi and Bernardino of Siena, there are three sources of value: scarcity (raritas), utility (virtuositas), and desirability (complacibilitas). Scarcity does not call for comment; utility is an objective quality: want-satisfying power; complacibilitas can only have one connotation: a subjective desire to gratify a want. This interpretation agrees with that of Schumpeter (1954, p. 98) who, however, wrongly regards St. Antoninus of Florence, o.p. (1389–1459) as the originator of this conception. It is regrettable that this line of thought was not pursued further. The Scholastics were certainly on the right track, although they did not quite succeed in solving the riddle of value.
The just price
Next to value comes price determination. Roman law had left this matter to the higgling and haggling between contracting parties. The medieval glossators added the phrase sed communiter (“but it must be commonly”) to the principle that goods are worth as much as they sell for (res tantum valet, quantum vendi potest). Thus, price became a social phenomenon to be determined by the community. How can a community set a price? There are two possibilities: either spontaneously, by the chaffering of the market, or authoritatively, by public regulation. The first later became known as the “natural” or “vulgar” price; the second, as the “legal” price. In the absence of regulation, the market price was presumed to be just. This was the theory of both the civil law and canon law jurists. Among the theologians, only the Thomists acquiesced and arrived in their own way at the same conclusion; the Scotists and the nominalists dissented. Thus the Scholastics were divided and supported three rival, and partly conflicting, theories of the just price.
Albertus Magnus (1193–1280) stated unambiguously that the just price is set by the estimation of the market at the time of the sale. His pupil Thomas Aquinas was less specific and precise. Aquinas told a story (borrowed from Cicero) of a merchant who brought wheat to a country where there was a dearth. The question raised is whether this merchant may sell his grain at the prevailing price (pretium quod invenit) or whether he is bound to disclose that additional provisions are on the way. Thomas Aquinas answered his own question by stating that this merchant was not bound to do so by the rules of justice, but would act more virtuously if he did tell, or if he lowered his price. This answer, it seems, leaves no doubt as to the position of Thomas Aquinas.
The same point of view was taken by St. Bernardino of Siena, John Nider (1380–1438), and the majority of the theologians: the just price is set by “common estimation,” which means the appraisal of the market place—with the reservation that they never questioned the right or even the duty of the public authorities to set and regulate prices in an emergency.
Nothing has been said thus far about the cost of production as a price determinant. Albertus Magnus and Thomas Aquinas, however, did not overlook this point entirely, and stated in their comments on Aristotle that arts and crafts would be doomed to destruction if the producer failed to recover his outlays in the selling price of his product. Albertus Magnus gave the example of a carpenter who will cease making beds if the price he receives does not compensate him for his expense and workmanship. In other words, according to Albertus Magnus and Aquinas, the market price cannot fall permanently below cost. Unfortunately this idea was lost; and the later Thomists focused all their attention on the market price, disregarding cost of production as if the two concepts were antithetic.
The champion of the importance of cost of production was John Duns Scotus (1265–1308). Starting with the observation that the merchant per-forms a useful function, he drew the conclusion that a just price should cover all the merchant’s costs, including a normal profit and a compensation for risk. The weakness of this theory is, of course, that Scotus did not ask himself whether the merchant would be able to sell his wares above the market rate if his costs were too high. Scotus had very few followers; the best-known are another Scot, John Mayor (1469–1550), and a Portuguese, Johannes Consobrinus, also known as João Sobrinho (d. 1486), who taught for some time at Oxford.
Price regulation found strongest support among the nominalists. Jean de Gerson (1363–1429), for a while chancellor of the Sorbonne, even suggested entrusting to the public authorities the fixing of all prices—under the pretext that no one should presume to be wiser than the lawmaker. Since this scheme proved impractical, it found little support. Another nominalist, Henry of Langenstein the Elder (1325–1397), formulated the rule that if the authorities failed to set a fair price, the producer was allowed to set it himself; however, he ought not to charge more than would maintain him and his family suitably in his social condition. If he should overprice his wares in order to enrich himself or to better his status, he committed the sin of covetousness. The question whether such a producer would be able to obtain a price above that of his competitors was not raised by Langenstein. First published in 1874 by Wilhelm Roscher, Langenstein’s rule received a great deal of publicity and was hailed by many, including Max Weber, Werner Sombart, R. H. Tawney, Heinrich Pesch, and Amintore Fanfani, as a typical formulation of the theory of the just price. There is, however, not the slightest justification for this enthusiasm. Far from being representative, Langenstein was a relatively minor figure; and his views were those of a minority group that exerted little influence in his time except perhaps in the German and Polish universities, which in the fifteenth century were bastions of nominalism.
Although the Schoolmen were unable to agree on a criterion of the just price, they were unanimous in their condemnation of monopoly, which was defined broadly as any collusion to manipulate prices. First of all, monopolies were branded as “conspiracies” against liberty; next, they were deemed injurious to the commonweal because they created artificial scarcity; and finally, they were blamed for raising prices above the competitive level—that is, above the level that would prevail if there were no monopoly. Profits derived from monopolistic exploitation were stigmatized as turpe lucrum, or illicit gain, which, like usury, was subject to restitution.
Since the Doctors favored market price, it should cause no surprise that they also were opposed to price discrimination. According to St. Bernardino of Siena, a seller ought not to take advantage of a buyer’s ignorance, rusticity, or special need. In other words, prices ought to be the same to all, rich and poor alike. This was strictly in accordance with commutative justice, which, it is recalled, was based on equality and reciprocity.
The theory of the just price was applied to wages also, since wages were defined almost as if they were the price of labor (pretium laboris). Consequently, wages were determined by common estimation—that is, by the forces of supply and demand—excluding, of course, all attempts at exploitation. The author who gave the fullest treatment to this question was St. Antoninus, archbishop of Florence, to whom the purpose of wages was to enable the worker to support himself and his dependents on his social level. To achieve this purpose, St. Antoninus insisted upon punctual payment of the wage agreed upon and reproved employers who paid their workers in truck or in debased coin. He did not carry his criticism further, although he must have known that the wool and silk guilds of Florence attempted to keep wages down by using the antimonopoly legislation of the commune to prevent the formation of “brotherhoods” among the workers. In general, the Schoolmen were less favorable to the guilds than is generally assumed by Fabian socialists and Catholic historians who idealize the Middle Ages. Concerning wage differentials, Bernardino of Siena made the pertinent remark that skilled workers are better paid than unskilled because skill is scarce, for it is not acquired without toil and expensive training.
Monetary theory and usury
Monetary theory made little progress during the Middle Ages. The main author on this topic was Nicole Oresme (c. 1325–1382), who did not go much further than Aristotle. While neglecting monetary theory, most of the scholastic Doctors devoted an inordinate amount of space to usury, which they apparently regarded as a major social problem.
A great deal of misunderstanding exists about usury. According to modern concepts, usury is an exorbitant, oppressive interest rate; but the definition given by the Schoolmen was quite different. Usury was any increment, whether excessive or moderate, beyond the principal of a loan, or mutuum. Consequently, according to all the Doctors, usury occurred only in a loan. If it could be shown that a contract was neither explicitly nor implicitly a loan, there was no usury involved. Of course, a loan could be concealed under the color of another contract, which then became a contract in fraudem usurarum, or deceptively usurious.
With this approach to the problem, it is easy to see how the usury question became a hotbed of elusive discussion. The scholastic definition of usury allowed the merchants to make the most of legal technicalities and the Doctors to display their talents for casuistry and subtle distinctions.
Banking is as good an example as any. Since lending at interest was forbidden, the bankers found another way of making profits—by dealing in foreign exchange. The purchase of a foreign draft, because of the slowness of communications, always involved granting credit as well as dealing in exchange. Interest was, of course, concealed in the rate, or price, of exchange. Nevertheless, the bankers argued that a cambium, or foreign-exchange, contract was not a loan, but a legitimate business transaction. Although the argument rested on sheer sophistry, it was accepted by the theologians unless the cambium contract was too patently a disguised loan, as in the case of dry, or fictitious, exchange. The practical result of this tolerance was to outlaw discounting but to tie banking to exchange.
No charge could be made for lending, but the lender was sometimes entitled to compensation for reasons extraneous to the loan. Thus there emerged the theory of extrinsic titles: the three principal ones were poena conventionalis, damnum enter-gens, and lucrum cessans. Poena conventionalis was a penalty for tardy payment; damnum emergens, compensation for damages suffered by the lender. These two were readily admitted as valid; but not so lucrum cessans, or cessant gain, which meant that the lender might claim the same return as that yielded by rival or competing investments. Thus defined, lucrum cessans is in fact the same thing as the modern concept of opportunity cost. To admit this title, too, would have jeopardized the whole usury doctrine. Lucrum cessans was, there-fore, rejected by Thomas Aquinas and most of the theologians. Later, in the sixteenth century, it was permitted by some latitudinarians, but only between merchants.
The usury doctrine was the Achilles heel of scholastic economics. It involved the Schoolmen and their sixteenth-century and seventeenth-century successors in insuperable difficulties that contributed greatly to bringing their whole doctrine into disrepute.
As already mentioned, Scholasticism continued to prosper throughout the sixteenth century and afterward. The late Scholastics of the school of Salamanca made some new contributions, mainly in refining the old doctrines. The quantity theory of money was accepted as a matter of course. More than ever the adherents of the new school insisted upon the fairness of market price in the absence of public regulation. Some of them, such as Martin Azpilcueta (1493–1586), better known as Dr. Navarrus, were very skeptical about the merits of price fixing because it was unnecessary in normal times and ineffectual in times of dearth. Luis de Molina, s.j. (1535–1601), more famous for his views on grace than for his economic theories, formulated the law of supply and demand by stating that “a concourse [concurrentium] of buyers, more considerable at one time than at another, and their greater eagerness to buy will drive prices up, whereas paucity of purchasers will bring them down” (De justitia et jure II, disp. 348, no. 4). He also insisted that value depended upon consumers’ preferences rather than upon qualities inherent in commodities. A Belgian Jesuit, Leonardus Lessius (1554–1623), made two minor contributions: allowing monopolies with regulated rates for the common good and giving an accurate description of the Antwerp money market, implicitly recognizing the presence of interest concealed in the exchange rates.
In the seventeenth century, the economic teachings of the scholastic school were systematically presented in the great synthetic works of cardinals Juan de Lugo, s.j. (1583–1660) and Giambattista de Luca (1613–1683), but they made no new contributions. Scholastic economics had reached maturity. By failing to renew its methods of analysis, scholastic thought fell into discredit and entered into a precipitous decline that involved other sciences and philosophy as well as political economy.
Raymond de Roover
Baldwin, John W. 1959 The Medieval Theories of the Just Price: Romanists, Canonists, and Theologians in the 12th and 13th Centuries. Philadelphia: American Philosophical Society.
Bonar, James (1893) 1922 Philosophy and Political Economy. 3d ed. London: Allen & Unwin; New York: Macmillan.
Dempsey, Bernard W. 1943 Interest and Usury. Washington: American Council on Public Affairs.
De Roover, Raymond 1953 L’évolution de la lettre de change, XlVe-XVIIIe siècles. Paris: Colin. → Contains a detailed check list of scholastic authors.
De Roover, Raymond 1955 Scholastic Economics: Survival and Lasting Influence From the Sixteenth Century to Adam Smith. Quarterly Journal of Economics 69:161–190.
De Roover, Raymond 1958 The Concept of the Just Price: Theory and Economic Policy. Journal of Economic History 18:418–434.
Endemann, Wilhelm 1874–1883 Studien in der romanisch-kanonistischen Wirtschafts und Rechtslehre bis gegen Ende des 17. Jahrhunderts. 2 vols. Berlin: Guttentag. → Important for late Scholasticism.
Fanfani, Amintore 1933 Le origini dello spirito capitalistico in Italia. Milan (Italy): Società Editrice “Vita e Pensiero.”
Grice-Hutchinson, Marjorie 1952 The School of Salamanca: Readings in Spanish Monetary Theory, 1544–1605. Oxford: Clarendon.
HÖffner, Joseph 1941 Wirtschaftsethik und Monopole im 15. und 16. Jahrhundert. Jena (Germany): Fischer.
HÖffner, Joseph 1955 Statik und Dynamik in der scholastischen Wirtschaftsethik. Veröffentlichungen der Arbeitsgemeinschaft für Forschung des Landes Nordrhein-Westfalen, Geisteswissenschaften, Vol. 38. Cologne (Germany): Westdeutscher Verlag.
Nelson, Benjamin N. 1949 The Idea of Usury. Princeton Univ. Press.
Noonan, John T. Jr. 1957 The Scholastic Analysis of Usury. Cambridge, Mass.: Harvard Univ. Press.
O’Brien, George A. T. 1920 An Essay on Mediaeval Economic Teaching. New York: Longmans.
Oertmann, Paul 1891 Die Volkswirtschaftslehre des Corpus juris civilis. Berlin: Prager.
Rocha, Manuel 1933 Travail et salaire à travers la scolastique. École des Sciences Politiques et Sociales, Université Catholique de Louvain. Paris: Desclée de Brouwer.
Schreiber, Edmund 1913 Die volkswirtschaftlichen Anschauungen der Scholastik seit Thomas v. Aquin. Beiträge zur Geschichte der Nationalökonomie, Vol. 1. Jena (Germany): Fischer.
Schumpeter, Joseph A. (1954) 1960 History of Economic Analysis. Edited by E. B. Schumpeter. New York: Oxford Univ. Press.
Soudek, Josef 1952 Aristotle’s Theory of Exchange: An Inquiry Into the Origin of Economic Analysis. American Philosophical Society, Proceedings 96:45–75.
Weber, Wilhelm 1959 Wirtschaftsethik am Vorabend des Liberalismus: Höhepunkt und Abschluss der scholastischen Wirtschaftsbetrachtung durch Ludwig Molina, S.J. (1535–1600). Schriften des Instituts für Christliche Sozialwissenschaften der Westfälischen Wilhelms-Universität, Münster, Vol. 7. Münster (Germany): Aschendorffsche Verlagsbuchhandlung.
“Mercantilism” is the label commonly given today to the doctrine and practices of nation-states in the period roughly from the fifteenth to the eighteenth centuries with respect to the nature and the appropriate regulation of international economic relations. In this doctrine great emphasis is put on the importance of maintaining an excess of exports of goods and services over imports as the sole means whereby a country without gold or silver mines can obtain a continuous net inflow of the precious metals, regarded as essential to national wealth and strength. In the eighteenth century the elder Mirabeau and Adam Smith applied to this doctrine the terms “mercantile system” and “commercial system” to emphasize its contrast with the doctrine of the physiocrats, which minimized the importance of foreign trade and put its emphasis instead on the importance of agricultural production. In the 1860s German writers introduced the term Merkantilismus; corresponding terms, such as “mercantilism” in English, thereafter gradually became standard in all the languages of the Western world. The term is sometimes objected to because it is often used in a pejorative sense, or because it is held, justly, that although often so used, it inadequately represents the varied content of the economic thought of some four centuries. Similar objections can, of course, be made against most general abstract terms ending in “ism,” but it does not seem possible to do without them and it does seem possible to use them with disciplined restraint. In this article an attempt is made to limit the application of the term to the special and dominant aspects of thought and practice with respect to international economic relations during the fifteenth to eighteenth centuries.
The essentials of the doctrine can be summarized in terms of five propositions or attitudes: (1) policy should be framed and executed in strictly nationalistic terms, that is, national advantage alone is to be given weight; (2) in appraising any relevant element of national policy or of foreign trade, great weight is always to be put on its effect, direct or indirect, on the national stock of the precious metals; (3) in the absence of domestic gold or silver mines, a primary national goal should be the attainment of as large an excess of exports over imports as is practicable, as the sole means whereby the national stock of the precious metals can be augmented; (4) a balance of trade “in favor” of one’s country is to be sought through direct promotion by the authorities of exports and restriction of imports or by other measures which will operate indirectly in these directions; (5) economic foreign policy and political foreign policy are to be pursued with constant attention to both plenty and “power” (including security under this latter term) as coordinate and generally mutually supporting national objectives, each capable of being used as a means to the attainment of the other.
This constituted the solid core of mercantilist doctrine, from which there was little dissent before the 1750s by writers on economic matters, but it left room for extensive debate within the ranks of adherents of the doctrine. There could be major differences in the reasoning presented for adherence to the respective propositions here listed, and there could be sharp differences of opinion as to the choice of means by which the accepted objectives could best be pursued.
Mercantilism was essentially a folk doctrine, evolved in the light of the prevailing historical circumstances and values by simple inference from the apparent facts. It was a doctrine of practical men not given to subtle economic analysis, which was in fact sparsely available in the age of mercantilism. The philosophers before the 1750s, the theologians, and the universities neither challenged it nor made any important contributions to it. It was not an area in which disciplined scholarship showed any deep interest.
Differences within the doctrine
The most striking difference of doctrine within the ranks of the mercantilists turned on why the indefinite accumulation of the precious metals should be regarded as an important national objective. The terms “wealth,” “treasure,” and “riches” were used with considerable ambiguity, sometimes in a broad sense to cover stocks of valuable goods of any kind which could command a price, but more often in a narrow sense to signify only the precious metals. The narrow usage was occasionally extended to commodities (other than the precious metals) which had great durability and high value per unit of bulk, such as precious stones and even tin and copper. The emphasis with respect to enrichment, to economic improvement, was never in terms of the level of consumption, and when it was in terms of the level of production or output, it was usually with reference to the contribution such production could make, directly or indirectly, to the acquisition and retention of “wealth” or “riches” or “treasure” in the narrow sense. It was on accumulation that the emphasis was put, and there was a wide-spread assumption, tacit or explicit, on the part of the mercantilist writers of the period that accumulation over long stretches of time could be achieved only or predominantly by the piling up of stocks of durable and high-value-per-unit commodities, especially of the precious metals. Often the only link with consumption as an economic objective was the recognition of their ready convertibility through exchange into essential consumers’ goods as a reason why a limited number of specified durable goods were to be regarded as pre-eminently constituting items of national “wealth” or “riches.”
The emphasis on the “store-of-wealth” function of the precious metals competed, however, with the emphasis of other mercantilist writers on the “circulation” function of the precious metals in their role as money, an emphasis which led to hostility to the use of the precious metals as hoards or in plate and jewelry. These writers believed that production and employment varied in physical volume in close proportion with the variations in the amount of money in circulation. They thus over-looked or denied that the main consequence of an increase in the amount of money might be a general rise of prices; they perhaps were taking for granted that there normally existed large amounts of unemployed labor and natural resources. At least for the later mercantilists emphasis tended to shift from the store-of-wealth to the circulation function of the precious metals. But when paper money was introduced, it became more difficult to reconcile emphasis on circulation with continuing stress on the importance of the precious metals and on a favorable balance of trade as the means of acquiring them.
One method used was to deny the advantages of paper money, or to support limitations on the issue of paper money which would prevent it from acting as a stimulus to the export and a deterrent to the import of the precious metals. But as long as the emphasis continued to be on the circulation function of the precious metals, the absence of any obvious answer to the question why paper money could not perform this function adequately and more cheaply tended to lead either to a return to the older emphasis on the store-of-wealth function of the precious metals or to the substitution—for stress on the monetary and balance-of-trade aspects of mercantilism—either of protectionist ideas resting in large part on nonmercantilist arguments or of a new receptivity toward free trade ideas.
An additional and widely expounded ground for emphasis on the desirability of indefinite national accumulation of the precious metals was based on the observation that the rate of interest and the availability of credit varied with the quantity of money, the former in the inverse direction and the latter in the same direction. It was argued that cheapness and abundance of credit would promote enterprise, employment, and production and would increase the ability to compete in foreign trade by lowering the interest element in the costs of production of domestic goods. Before the 1750s no one appears expressly to have pointed out that a given increase in the national stock of money, to the extent that it caused a rise in the price level, would either leave the rate of interest unchanged or cause it to rise rather than to fall and would leave unchanged the real availability of credit, as distinguished from its amount measured in monetary terms. With the advent of paper money, moreover, it was no longer necessary to have a net inflow of precious metals from abroad in order to have an increase in the national stock of money.
Writers who saw an inflow of the precious metals as increasing the rate of employment of human and other productive resources presumably perceived that this would result in increased consumption on the part of the owners of these resources. There was also widespread—but by no means universal—acceptance of the general desir-ability of an increase in the population and the number of potential workers and no doubt a recognition that such an increase would involve increased consumption. But the emphasis on in-creased production was made to rest much more on the contribution it could make to a favorable balance of trade, on the support it could give to an increase in population, and on its role in alleviating the moral and other evils of involuntary unemployment, of vagrancy, and of pauperism than on an acceptance in principle of the desirability of a higher level of per capita consumption for the general public. “Luxury” expenditures, for example, on the part of the working classes were almost universally deprecated, and even for the well-off were much more often disapproved than approved, except as they were believed to be necessary means to the employment of otherwise idle resources or to the maintenance of appropriate status and dignity for the upper classes. Increase in production was sought primarily for the contribution it could make to the accumulation of wealth in the form of durable, valuable commodities, at least if one judges by what the writers of the period expressly said.
In the early stages of mercantilism it was often the practice to seek the general objectives by more or less direct and particular regulation of the details of individual commercial transactions involving trade with foreigners. Thus, in England there was for a time regulation by the Royal Exchanger of foreign exchange transactions and by other official agencies of transactions in commodity markets, so as to make sure that each individual transaction should as far as possible make a net contribution to the national stock of the precious metals. Later commentators on mercantilism labeled such practices as “bullionism” or “balance-of-(individual)-bargain system.” It was believed that attention should be given not only to the aggregate balance of trade but also to the separate balances in the trade with particular countries or in particular sectors of commercial activity. There was considerable suspicion, for instance, that the trade with the East Indies was for all of Europe a “losing” trade involving a chronic drain of the precious metals to the East. Thomas Mun first formulated a persuasive defense of the English trade with the East Indies even if it did involve, in its first effect, a net drain from England of the precious metals. This drain, he claimed, was not an ultimate one, since by re-export at higher prices of its imports of Indian commodities, England more than regained the precious metals which had initially been sent to India. Mercantilist literature, however, long continued to support discrimination between countries in the regulation of imports according to the usual state of the trade balances with such countries, or as an incident to tariff bargaining, or as an instrument of power politics.
The mercantilists gave priority status with respect to eligibility for export to goods with a high labor content in relation to their value. Export of manufactures was favored over export of agricultural products ready for consumption; exports of raw materials such as raw wool, or minerals, was regarded as injurious or wasteful. The export of machines and tools and the emigration of skilled workers were regarded as specially injurious. Underlying these positions were the beliefs that labor was in such abundant supply that it was permissible to treat it as nearly equivalent nationally to a free good, and that restriction of export of raw materials or of machines would not substantially diminish their domestic rate of production and would result in their retention for domestic processing or use. Such restrictions would thus work to make the balance of trade favorable and to increase domestic employment.
The general mercantilist position was that imports of goods and services were in principle desirable only if (a) they were essentials which could not be produced, at whatever cost, at home, or (b) they were raw materials which could not be produced at home in the needed quantities except by the withdrawal of scarce resources from the production for domestic use or for export of goods with a higher labor content in proportion to their value, or (c) they needed to be imported as a quid pro quo for other countries’ allowing their nationals to import from the country in question. The implicit mercantilist ideal was zero import, and export only in exchange for the precious metals. In France, Colbert and others gave this ideal express formulation in replying to objections raised by Frenchmen that the severity of French import restrictions would result in other countries’ prohibiting entry of French products. Colbert claimed that France alone had the potentiality to produce at home the whole range of commodities essential to national prosperity, whereas none of its neighbors could dispense with France’s commodities.
A variant of mercantilist doctrine, expounded mostly but not exclusively by English writers, substituted for a favorable balance of trade in terms of monetary values a “balance of labor” in terms of the relative labor content of the exports and the imports—with an aggregate excess of the labor content in the exports over that in the imports treated as “favorable.” This has been regarded by some modern commentators as a “refinement” or improvement of the balance of trade doctrine. It would, however, be easily possible for a given trade situation highly unfavorable by the trade balance criterion to be highly favorable by the balance of labor criterion, and vice versa. Under the balance of labor criterion, moreover, the fewer units of import commodities obtained on the average per unit of export commodity, other things being equal, the more “favorable” would be the balance of labor.
Mercantilism had political as well as strictly economic objectives in view. The minimum objectives were an even balance of trade and an even balance of power. But as large an excess of exports over imports as possible was an aspiration of all countries, and the great powers sought more than an even balance of power. They sought enough superiority of power to “give the law” to other countries, to enable conquest of adjoining territory or overseas colonies, or to defeat their enemies in war. It was general doctrine that strength was necessary as a means of protecting wealth and of augmenting it, while wealth was a strategic resource, necessary to produce strength and to support its exercise. With wealth one could finance and equip armies and navies, hire foreign mercenaries, bribe potential enemies, and subsidize allies. Power could be exercised to acquire colonies, to win access to new markets and to shut foreigners out of one’s own markets, and to monopolize trade routes, high-seas fisheries, and the slave trade with Africa. “Power” was clearly and obviously a relative matter; what mattered was the ratio of power, not the terms of the ratio. It was also true of power that geography had great importance in determining what comparisons were relevant; landlocked countries had little occasion to concern themselves with their power relative to a distant maritime power, and being a neighbor to a strong country could mean being under constant threat. It was also a distinctive feature of political relations that comparisons of strength were relevant not only between pairs of countries but also between groups of actual or potential allies. The emphasis on international comparisons, on ratios, which was highly relevant in the political sphere in a world of power politics, whether the power was expected to serve national aggression or national security, was often carried over to the economic sphere, where it had little relevance. It could and did lead to gross confusion about the nature and significance of national wealth and national economic well-being.
When great emphasis was placed, in the economic sphere, as it logically was in the sphere of power rivalries, on an inherent conflict of interests, this had grave consequences both for economic policy and for international politics. If it was relative status that solely or mainly mattered, economic damage to a rival country could logically be treated as equivalent to economic benefit to one’s own country, and famine abroad, to bountiful harvests at home. Such reasoning abounds in the mercantilist literature, and it was moral or sentimental revulsion against it more than superior economic analysis which brought much of the late eighteenth-century Enlightenment to the support of free trade ideas. Even among writers who were primarily interested in economic matters, the mercantilist “jealousy of trade” fostered, as overcompensation, an exaggerated belief in the harmony and mutuality of economic interests between countries.
The doctrine that low real wages (per hour or per day or per piece) were in the national interest was widely prevalent in England in the seventeenth and eighteenth centuries and has sometimes been labeled by modern writers as “the mercantilist labor doctrine.” Many English writers did expound this doctrine, with favorable balance of trade considerations obviously in mind. But a substantial number of writers denied the proposition on which the doctrine was based, namely, that English laborers, once their minimum needs were taken care of, preferred idleness to more (or superior) commodities, or, as one eighteenth-century writer phrased it, that for workers in general “the luxury of indolence tends always to swamp the luxury of goods.” Or, if they accepted the proposition as true to fact and regarded voluntary idleness as an evil, they proposed, on humanitarian and other grounds, the search for remedies less oppressive for the poor than low rates of real wages. It seems difficult to find on the Continent any trace of a special affinity between mercantilist thought in general and the low-wage doctrine, perhaps because it was generally impossible for the poor there to attain a basic minimum of subsistence without working to nearly the limits of their endurance, perhaps because in Catholic countries the frequency of religious holidays when work was prohibited satisfied their cravings for rest, leisure, and time-consuming dissipation.
Distinctive aspects of mercantilism
Mercantilism was a doctrine of extensive state regulation of economic activity in the interest of the national economy. It took for granted that man was inherently self-regarding and would pursue his own interests without concern about the consequences of such behavior for the interests of the community. It accepted as axiomatic that if individuals were in their economic behavior left free from tight regulation, the consequences for the community would be disastrous. But this had been practically universal doctrine from classical antiquity on, and therefore did not distinguish mercantilist from premercantilist thought.
Substantially new in mercantilist thought, however, was its systematic adjustment to the concentration of power and the monopolization of loyalty by nation-states, which in their relations with other states followed a “Machiavellian” or amoral code, and were more extensive in area of jurisdiction than the earlier city-states and feudal barons but less extensive than the empires of classical antiquity and than the universal Catholic church of the Middle Ages. Also substantially new in mercantilism were its greater concern with economic matters as one phase of the then prevalent secularization of thought and practice, the change in the specific character of the economic objectives of the political authorities, and the new administrative patterns of regulation of communal life. These new features were the product of the growth of commerce and of the changes in political organization associated with the breakdown of the Holy Roman Empire and of feudalism and the absorption of the hitherto substantially autonomous city-states by the new nation-states. Mercantilism was a doctrine of state intervention in economic life, but of state interventionism of a special pattern and with some special objectives. It was thus in sharp contrast with the later laissez-faire doctrine. It was also, however, in sharp contrast with some present-day systems of state interventionism, such as socialism, Russian communism, and the welfare state, for in principle at least these do not have the accumulation of the precious metals, favorable balances of trade, and national limits to moral obligations as central and ultimate objectives.
Differences in practice
Agreement on the general mercantilist objectives left abundant room for major differences both among periods and among countries in the choice of methods used in pursuing these objectives and in the degree of vigor of their pursuit. Practice was conditioned by limitations of administrative capacity; pressure of conflicting national objectives; domestic resistance arising out of regional, class, and occupational special interests; military weakness; and the idiosyncrasies, the apathy or enthusiasm, and the dynastic loyalties of monarchs.
The techniques adopted could be monetary ones, involving control of exchange markets and of the movement of the precious metals across national boundaries. They could take the form of regulation of individual commercial transactions; of regulation by general tariffs, prohibitions, or quantitative restrictions; or of subsidies to exports or to exporting or import-competing industries. The governments could themselves set up and operate factories producing for export or replacing imports; they could set up and operate companies engaged in foreign trade; they could grant monopoly privileges to privately owned chartered companies to produce and sell specified products in the domestic market, to engage in foreign trade on the basis of special privileges, and to administer overseas colonies. Governments could encourage immigration, restrict emigration, or promote early marriages in the belief that growth of population would serve the general mercantilist objectives. Wages and interest rates could be subjected to legal maxima in the belief that this would improve the national competitive position in foreign trade. Wars could be embarked upon for mercantilist reasons. On all of these matters, while ultimate objectives could be static within countries and uniform as between countries, the selection of means to serve these objectives could differ between countries and could undergo constant change through time within countries because of change of circumstances and of opinions.
Mercantilism in practice always in some measure fell short of what doctrine called for. Perhaps the most important deviations of practice from doctrine were those resulting from the fiscal necessities of government. All governments in the age of mercantilism found it difficult to finance their general activities. To adhere to mercantilist objectives without regard to fiscal considerations would often involve the exemption of important categories of exports from customs duties, the substitution of outright prohibition of specific exports and imports for customs duties—with a consequent loss of revenues—or the grant of subsidies to favored industries, shipping, fisheries, or colonies, all of these being measures which would involve an increase of government expenditures or decrease of government revenues.
Restraints on importation carried beyond some uncertain point could lead foreign countries injured thereby to adopt retaliatory or defensive measures, with the possible result that the gross contribution to a “favorable” balance of trade made by the import restrictions might even in the short run be more than offset by the adverse effect on exports.
Most mercantilist measures involved a burden on some occupational or regional sectors of the population. Such sectors, without challenging the general objectives of mercantilism, would commonly resort to all the forms of pressure and persuasion available to them to obtain a relaxation of the measures or a revision of them which would shift the burdens elsewhere. Thus, in England the graziers would press for a relaxation of the restrictions on the export of raw wool, and the independent merchants would protest vigorously against the special privileges granted to the trading companies. Even where absolute monarchy prevailed, governments found it necessary to make concessions to such dissenting groups.
Every measure restrictive of trade established a possibility of private profit from its evasion or violation, and no country was able to prevent extensive violation of the regulatory measures by smugglers, tax evaders, merchants operating illegally in restricted trades (“interlopers”), and bribed enforcement agents. Public resistance to particular restrictive measures and to the personnel endeavoring to enforce them, and lax administration at the top levels often led to apathy in enforcement. When Adam Smith, in 1778, entered into his duties as a commissioner of customs, he was astonished to find, expert though he already was, how much of his own personal effects consisted of articles of foreign manufacture which it was illegal not only to import but also to possess, and he warned a friend that the latter’s wife, upon investigation, would probably find that she was even a worse offender.
In Britain in particular, although there was general approval in principle of mercantilism, there was almost equally general dislike of the administrative institutions and practices essential to its effective execution. The British public was jealous of the exercise of power by the executive branch of the national government, of administration conducted by the central authorities in London instead of locally, and of agents of the central government with powers of inspection and arrest. Legislation was more centralized than in most countries, but enforcement was highly decentralized and was largely left to unpaid local magistrates with considerable autonomy and to suits brought on their own initiative by interested parties or by voluntary informers who were remunerated from the monetary penalties imposed by the magistrates as a result of such suits. The higher the customs duties and the more burdensome the regulations and prohibitions, the greater was the incentive to evade or violate them, so that in many cases difficulty of enforcement led to restraint in the severity of legislation or to partial or complete abandonment of serious attempts at enforcement. It seems quite plausible, therefore, that at least in England mercantilist measures were in practice not nearly as severe a restraint on foreign trade in the eighteenth century as were, say, the transportation costs of the time or than are the ordinary tariffs of presentday protectionism.
While there was a substantial unity of doctrine throughout the Western world with respect to the proper objectives of commercial policy, the differences between countries in political organization, administrative structure, and geographical circumstances led to very substantial differences in the intensity with which, and the selection of devices whereby, they pursued these objectives. In the smaller Germanic states, for instance, mercantilism was little more than a vague general doctrine. The major interests of German intellectuals relating to economic and political matters, as represented by the contents of cameralist writings and university courses, were directed to the principles of management of the absolute rulers’ finances, of organization and conduct of professionalized public administration, and of management of official property, including mints, mines, forests, and an occasional factory. In France, although public administration was on the whole centralized to an extent without parallel in England, taxation (including customs duties), property law, and guild regulations were largely under autonomous local administration following traditional and regionally diverse patterns and principles.
The decline of mercantilism
Criticism of the prevalent methods of pursuing mercantilist objectives was always fairly common in countries where some free discussion was tolerated. Much of this criticism, however, whatever its analytical merit, was special pleading by spokesmen for a political faction, an industry, a region, a particular port or town, or a particular privileged company.
In the 1750s there first began to appear comprehensive criticism of the basic principles of mercantilism by persons of stature with no visible private axes to grind. One major source of criticism was from exponents of an essentially new gospel of individualism which extolled the merits, on ethical and political as well as on economic grounds, of freedom of the individual from detailed regulation by the state. Here important voices were those of Adam Smith in Britain and of the marquis d’Argenson, the physiocrats, and Turgot in France. Important also was the widespread revulsion among intellectuals against the past record of almost continuous war and preparation for war, for which mercantilism was largely blamed. It was, in fact, much more the pacific and cosmopolitan views of the philosophes and the Illuminati on the Continent and of men like David Hume and Adam Smith in Britain than the more strictly economic argument of these and other writers which first put mercantilism seriously on the defensive among intellectuals.
In the early years of the nineteenth century the English classical school of economists rejected mercantilism on the basis of economic analysis, of which a part was substantially original with them. The school claimed that trade conducted under individual initiative and free from official regulation was inherently of mutual profit both to the individuals directly involved and to the community as a whole, and they applied this to domestic and international trade alike. Here they had had since the 1750s a number of important predecessors. They added, however, an analytical justification of this position which was essentially new, the principle that allocation of resources to production in accordance with comparative costs would maximize aggregate output and that the operations of individuals acting in their own interest in a free and competitive market would conform with this principle. They did not deny that this was subject to the qualification that producers knew both what their relevant costs were and what were the prices at which their products could be sold. But they claimed, as an obvious proposition, that businessmen were better informed on these matters than government could be. From this reasoning, they proceeded to the policy conclusion that the determination of what commodities and in what quantities a country could export and import to its greatest advantage should be left to the outcome of the decisions of individual businessmen operating to maximize their own incomes. This was a sharp break with mercantilism’s insistence on the necessity of regulation of economic behavior and its ranking of the desirability of export and import of particular commodities according to whether they were manufactures or agricultural products or raw materials and according to their labor content. To the classical school these were more or less arbitrary classifications, whose correspondence, if any, in practice with classification according to the comparative cost principle would be fortuitous.
The classical school also rejected the mercantilist stress on the balance of trade and on the national supply of the precious metals. They claimed that in the absence of government regulation an international automatic equilibrating mechanism would bring each country the amount of specie appropriate to its needs and circumstances and would prevent trade balances from getting into serious disorder. Here they had predecessors in the eighteenth century, most notably, perhaps, Isaac Gervaise and David Hume.
It is to be noted that neither the mercantilists nor the classical school distinguished clearly and systematically between short-run and long-run effects, and that insofar as one can judge from the historical context and the implications of their writing, the mercantilists were as a rule thinking in terms of short-run effects and the classical school in terms of long-run effects. Appraisal by economists of the comparative analytical merits of the mercantilists and their classical school critics should therefore give careful consideration to the distinction between short-run and long-run analysis, if they regard this, as does the writer, as a crucial distinction.
The classical school doctrine with respect to international trade became dominant for a while in England and obtained a wide degree of qualified acceptance elsewhere. There followed in England over half a century of approximately complete free trade, and elsewhere it led to a substantial liberalization of foreign trade policy. The restrictions on foreign trade which continued to be imposed were supported on grounds which were largely nonmercantilist in character; they were often designed, in fact, to protect agriculture rather than manufactures. Survival into the present of mercantilist doctrine and practice is by no means rare. There are, however, important differences between mercantilist doctrine and the doctrines by which present-day state regulation of foreign trade are mainly supported, and major differences also in the respective patterns and techniques of regulation. As far as scholars are concerned, support of mercantilism as it operated in its prime, based on express acceptance of its objectives, its doctrine, and the appropriateness of its practices to its doctrine, seems today to be confined to a minority, mostly economic historians. The analytical grounds on which mercantilism has been supported or criticized are in both cases sometimes of very disputable merit. Where policy is concerned, final appraisal, here, as generally in the social sciences, needs to deal expressly, as it often fails to do, with political, ethical, and socioeconomic values, as well as with the abstract logic of relations between actual and supposed matters of fact. It needs to call, therefore, on the resources of all the major social disciplines.
Colbert, Jean Baptiste 1861–1873 Lettres, instructions et mémoires de Colbert. Edited by Pierre Clément. 7 vols. Paris: Imprimerie Impériale. → A general errata list and an analytical table by Pierre de Brotonne were published in 1882.
Forbonnais, FranÇois VÉrnon D. de 1754 Éléments du commerce. 2 vols. Paris: Briasson.
Friedrich ii, der Grosse, King of PrussiaOeuvres de Frédéric le Grand. 31 vols. Berlin: Imprimerie Royale, 1846–1857. → See especially Volume 9, part 2, pages 212–240, “Exposé du gouvernement prussien” and “Essai sur les formes de gouvernement et sur les devoirs des souverains.”
McCulloch, john R. (editor) (1856) 1954 Early English Tracts on Commerce. Cambridge Univ. Press. → A photo-offset reprint of the 1856 edition was published by the Political Economy Club as A Select Collection of Early English Tracts on Commerce, From the Originals of Mun, Roberts, North and Others.
[Melon, Jean F.] (1734) 1739 A Political Essay Upon Commerce. Dublin: Woodward & Cox. → First published in French.
Steuart Denham, James (1767) 1805 The Works, Political, Metaphisical, and Chronological, of the Late Sir James Steuart of Coltness, Bart. Volumes 1–4: An Inquiry Into the Principles of Political Oeconomy: Being an Essay on the Science of Domestic Policy in Free Nations. London: Cadell & Davies.
Uztariz, GerÓnimo de (1742) 1751 The Theory and Practice of Commerce and Maritime Affairs. London: Rivington. → First published in Spanish.
Buck, Philip W. (1942) 1964 The Politics of Mercantilism. New York: Octagon.
Cole, Charles W. 1931 French Mercantilist Doctrines Before Colbert. New York: Smith.
Cole, Charles W. (1939) 1964 Colbert and a Century of French Mercantilism. Hamden, Conn.: Shoe String Press.
Cole, Charles W. (1943) 1965 French Mercantilism: 1683–1700. New York: Octagon.
Heckscher, Eli F. (1931) 1955 Mercantilism. Rev. ed. 2 vols. London: Allen & Unwin; New York: Macmillan. → First published in Swedish.
Johnson, Edgar A. J. 1937 Predecessors of Adam Smith: The Growth of British Economic Thought. Englewood Cliffs, N. J.: Prentice-Hall.
Schmoller, Gustav von (1884) 1931 The Mercantile System and Its Historical Significance: Illustrated Chiefly From Prussian History. New York: Smith. → A translation of a chapter from Schmoller’s Studien über die wirtschaftliche Politik Friedrichs des Grossen.
Schumpeter, Joseph A. (1954) 1960 History of Economic Analysis. Edited by E. B. Schumpeter. New York: Oxford Univ. Press.
Suviranta, Bruno 1923 The Theory of the Balance of Trade in England: A Study in Mercantilism. Helsinki: Suomalaisen Kirjallisuuden Seura.
Viner, Jacob (1921–1951) 1958 The Long View and the Short: Studies in Economic Theory and Policy. Glencoe, III.: Free Press. → See especially pages 277–305, “Power Versus Plenty as Objectives of Foreign Policy in the Seventeenth and Eighteenth Centuries.”
Viner, Jacob 1937 Studies in the Theory of International Trade. New York: Harper.
“Physiocrats” denotes the économistes, those who subscribed to the tenets of physiocratie (derived from physeikratia) and advocated governance of economic and political activity “in keeping with the laws implanted in Nature by Providence.” Constituting the first “school” of political economy to emerge in the history of that science, they exercised considerable influence, mainly in France, where most lived, in the 1760s and early 1770s.
The climate of opinion in France in the 1750s was favorable to the ascendancy of a promise-laden set of principles such as the physiocrats put forward. The country’s main industry, agriculture, was poorly carried on and generally in a bad way. Its system of taxation was vexatious, burdensome, and wasteful. Mercantilist policy and practice interfered with internal and external trade, retarded agriculture, and sustained privilege. It was believed in some quarters that adverse economic policies had brought about a diminution in population. Early in the century and again in the 1740s a number of works had appeared in which French agricultural and commercial policies were criticized and the country’s economic experience was contrasted unfavorably with that of a progressive England. The merits of economic freedom and competition, though still poorly understood, had come to be appreciated by some administrators. Economic analysis was improving under the stimulus of such authors as Hume and Cantillon.
The beginning of the school may be dated as 1756, when Frangois Quesnay published in the Encyclopedic his first economic article, “Fermiers,” to be followed in 1757 by “Grains,” in which the partially transitory influence of Cantillon’s “rent” theory is present; these essays foreshadowed much of what was to become the school’s body of principles. The formation of the school was facilitated by Quesnay’s enjoyment of the patronage of Mme. de Pompadour and the sinecure of physician-in-ordinary to Louis xv. In 1757 the already famous Victor Riqueti, marquis de Mirabeau, author of the popular L’ami des hommes, ou traité de la population (1756–1760), after an interview with Quesnay at his entresol at the Palace of Versailles, became his first disciple and shortly his most enthusiastic and energetic co-worker.
The fundamental principles of the school were first set down in the Tableau économique, of which three “editions” seem to have been issued in 1758–1759, the last accompanied by explanations and maxims. Most of the later editions of the Tableau illustrated the advantages of compliance with physiocratie principles. By the middle 1760s Quesnay had acquired a number of faithful disciples, attracted by his and Mirabeau’s writings, by discussions at their lodgings, and by the belief that in their principles might be found solutions for some of the nation’s economic ills. Outstanding among these were Nicolas Baudeau, Pierre Paul Mercier de la Rivière, Guillaume François Le Trosne, Pierre Samuel Du Pont de Nemours, and Anne Robert Jacques Turgot, who subscribed to many, but not all, the tenets of the school. They, along with lesser members of the school, produced a stream of publications that popularized and clarified Quesnay’s economic views, at first without modifying their fundamental content significantly. In time, however, some of Quesnay’s disciples found themselves under pressure to make certain physiocratie economic tenets more compatible with current reality and to develop a doctrine of judicial control to balance that of legal despotism and thereby preserve the social order.
The intellectual influence of the physiocrats, great in the 1760s, underwent a rapid decline after 1770. A combination of circumstances generated political and intellectual opposition. Many special interest groups believed that they would be dis-advantaged economically by physiocratie policies, among them tax farmers, financiers, manufacturers, landowners, possessors of exclusive privileges, and those who feared an increase in the price of bread. Turgot, who had risen to the office of comptroller-general, was relieved of his office in 1776, not long after he had introduced a number of physiocratie reforms; nearly all of these were suspended, and the remaining physiocratie journal was suppressed. The tenets and recommendations of the physiocrats were subjected to attack by both economic writers (e.g., Forbonnais, Galiani, Graslin, Mably) and noneconomists (e.g., Linguet, Necker, Voltaire). The residual authority of these tenets was gradually undermined by Smith’s Wealth of Nations, which appeared in 1776, two years after Quesnay’s death and eight years after he stopped writing on economic matters.
Interest in physiocracy did not completely disappear. Traces of it remain in early nineteenth-century economic literature. Physiocratic concerns continued to stimulate discussion, and some physiocratic reforms were finally introduced during the French Revolution. Physiocracy exercised some influence throughout Europe, particularly in Austria, Baden, Poland, Sweden, and Tuscany.
Presuppositions and theories
The physiocratic presuppositions and theories were largely imbedded in physiocratic models, the famous Tableaux économiques. Underlying the self-sustaining interclass flow of money, goods, and services incorporated in the idealized tableaux was a class structure more advanced than that then found in France. In the structure of the tableaux, the largest of the three classes, the productive, comprising one-half the population, engaged in agriculture, fishing, and mining. The proprietary class, made up of landed proprietors and those supported by proprietary income, comprised one-fourth the population, as did the sterile, or artisan, class, which included the balance of the population. In time, France’s class structure presumably would correspond to this ideal; for the physiocrats, especially Turgot, were alert to evolutionary forces which, having generated the existing structure, could also generate its successor.
Aggregate national interclass flow of product and income was summarized in the Tableau. The productive class produced 5,000 million livres of output; it did this with the aid of land rented from the proprietors, an investment of 2,000 million livres avarices annuelles in seeding, cultivation, etc., and a longer-period past investment of 10,000 million livres avarices primitives in durable instruments, animals, etc., of which one-tenth was annually replaced. For expositive convenience, constant returns were assumed, with an increment of two units avarices annuelles always resulting in an increment of five units in output. It was recognized that the response of output to increased avances annuelles was conditioned by the state both of avances primitives and of avances fondères (i.e., relatively permanent investments in buildings, clearing, drainage, etc.) made by proprietors in the past. Only Turgot discussed increasing and decreasing returns to inputs, but in a quite different connection. Of the 5,000 million livres of annual reproduction, or output, 3,000 million constituted reprises, or the return of expenses incurred by land-renting fermiers, 2,000 million in the form of avances annuelles and 1,000 million as outlay upon the maintenance of the avances primitives. The remaining 2,000 million represented the net product, the approximate monetary equivalent of which passed to the proprietors from the farmers who cultivated the land under a competitively determined lease that normally stipulated an annual rent of approximately the anticipated net product; this money was in effect used by the proprietors to purchase 1,000 million livres of produce from the productive class and of output from the sterile class. The sterile class got from the productive class 2,000 million livres of produce, which it consumed or worked up into wrought goods and services for the other two classes and its own needs. It utilized little or no fixed capital and replaced its working capital in the current production period; for this reason Turgot compared its advances to the avances annuelles of the productive class.
Underlying the Tableau is the school’s key postulate, that only the productive class cultivating the land produced a net product, whereas the sterile class merely recovered its outlay and the proprietary class, being disposable (i.e., not being actively involved in the continuation of the circular economic flow), could serve essentially public purposes. Expansion of the economy and the population therefore depended upon expansion of the expenditure of the productive class and the resultant expansion of the net product; hence the composition of expenditure was as important as its growth and stability. The physiocrats therefore condemned luxe de décoration, or excessive expenditure with the sterile class, but not luxe de subsistance, or heavy expenditure with the productive class; for usually diversion of expenditure from the productive class to the sterile class reduced the net expenditure of the former and thereby reduced the net product, and conversely. They also condemned man-made restrictions upon the sale of produce (among them duties and other barriers to internal and external trade in farm products); hoarding; the outflow of funds to foreign lands; and diversion of money into circuits that did not enter into agricultural markets. Some of these restrictions, they believed, had their origin in tax farming, flotation of government loans, monopolies and special privileges, and the absence of a regime of economic liberty. They noted that the demand for produce tended to rise as its quality improved and as the incomes of the masses rose above bare subsistence; and they sought to show that if produce commanded a bon prix, agricultural income, net product, and the economic condition of the population inclusive of the masses would improve.
The physiocrats’ theory of taxation and such theory as they had of factor pricing and distribution were corollary to their postulate that only the product of land included a surplus. All taxes there-fore were ultimately incident upon the net product.From this it followed that this surplus should be taxed immediately; then the cost of collecting revenue for the support of the state, together with the adverse side effects of taxation, would be minimized. Not more than the completely disposable one-third of the net product should be devoted to state and church functions, among them avances souveraines for public capital; otherwise, investment in agriculture would be too little. The proprietors needed to invest about one-third of their rent (i.e., net product) in the repair and improvement of their property and to retain another third as compensation for avances foncières and the bearing of the risks and cares associated with ownership. Only the gross income of the productive class included a surplus. While the current price of labor might temporarily exceed its fundamental (or long-run supply) price, much as the current price of a product might temporarily exceed its fundamental price, the price of labor did not normally include a surplus; it corresponded to the conceivably upward-elastic subsistence and other costs of population replacement. Although Quesnay’s scheme could not with consistency allow the farmer’s income (or that of other entrepreneurs) to include a profit or surplus, his followers tried inadequately to explain away what appeared to be such a surplus, and Turgot went so far as to include a normal return on capital in “fundamental” price. Quesnay and some of his followers tried to treat interest as a surplus-free capital-replacement cost, but others finally had to conceive of interest as including more than such cost.
The physiocrats put great stress upon the role of investment. Quesnay and most of his disciples confined this role to agriculture. The stress on investment in discussions of net product appeared also in Quesnay’s comparison of grande and petite agriculture. The former, involving large-scale and technologically advanced methods, required heavy capital investment; the latter, based upon traditional methods and backward owner–cultivator relations, utilized little capital. Grande agriculture was much more productive than petite; substitution of grande for petite might for a time permit increasing returns to capital. Turgot went beyond Quesnay to declare investment to be important in industry and commerce as well as in agriculture and to suggest how it gets allocated among alternative uses in keeping with prospective returns. In this and other respects, indeed, Turgot, together with Baudeau and Du Pont, among others, modernized the feudal framework within which Quesnay and Mirabeau had set their discussion.
The physiocrats sought to integrate their political and (not entirely homogeneous) philosophical views with their conceptions of actual and ideal economies. Although they appreciated, in somewhat varying measure, the power of self-interest and the workings of a system of interdependent prices, together with the roles of private property and a regime of economic liberty and competition, they also believed that the state might play an important part in making physiocracy function and realize individual-transcending purposes as well. For there existed a discoverable natural order, compliance with whose principles was essential to man’s prosperity and happiness. Positive laws must reflect this order and a limited monarch, or “tutelary authority,” must express and support it, subject to the ultimate approval of a judiciary competent to determine if natural law was being correctly interpreted.
The physiocratic contribution
Physiocracy contributed significantly to the development of economic science, and some of its concerns have continued to interest economists and others. In the first half of the nineteenth century physiocratic influence was reflected in discussions of such matters as underconsumption and the origin, form, and role of economic surplus, though these were examined within a quite different socioeconomic context than that envisaged by Quesnay. Detailed analysis of physiocracy was facilitated by the publication of a number of physiocratic works in 1846 under Daire’s auspices. As early as the 1860s the circular flow model present in the Tableau commanded the’ attention of Marx, whose reproduction schemes probably were inspired by it; and not long after, Walras developed a tableau he considered “analogous” to Quesnay’s. During the ensuing forty to fifty years much able scholarship was devoted to the physiocrats. With the emergence after 1930 of modern equilibrium and macroeconomic theory, together with national income accounting and input—output models, interest in relevant components of the physiocratic system increased, in Japan as well as in the West. This renewed attention was also stimulated by revival of interest in a major concern of the physiocrats, economic development. During the past half-century, moreover, the political and philosophical conceptions of the physiocrats have been subjected to renewed appraisal.
Joseph J. Spengler
Einaudi, Mario 1938 The Physiocratic Doctrine of Judicial Control Cambridge, Mass.: Harvard Univ. Press.
François Quesnay et la physiocratie. 2 vols. Edited by Al-fred Sauvy. 1958 Paris: Institut National d’Études Démographiques. → Volume 1 consists of essays on Quesnay by various authors, and includes a chronological table of works by Quesnay on pages 301–316 and an annotated bibliography of works about Quesnay on pages 317–392. Volume 2 contains short essays and extracts by Quesnay.
Hishiyama, Izumi 1960 The Tableau économique of Quesnay: Its Analysis, Reconstruction, and Application. Kyoto University Economic Review 30, no. 1:1–46.
Meek, Ronald L. 1963 The Economics of Physiocracy: Essays and Translations. Cambridge, Mass.: Harvard Univ. Press. → The first part includes translations of extracts from various authors. The second part includes four essays by Meek, three of which were previously published in 1951–1960.
Neill, Thomas P. 1949 The Physiocrats’ Concept of Economics. Quarterly Journal of Economics 63:532–553.
Quesnay, FranÇois 1756 Fermiers. Volume 6, pages 528–540 in Encyclopédic, ou dictionnaire raisonné des sciences, des arts et des métiers. Paris: Briasson.
Quesnay, FranÇois 1757 Grains. Volume 7, pages 812–831 in Encyclopédic, ou dictionnaire raisonné des sciences, des arts et des métiers. Paris: Briasson.
Quesnay, FranÇois (1758) 1766 The Oeconomical Table: An Attempt Towards Ascertaining and Exhibiting the Source, Progress, and Employment of Riches, With Explanations by the Friend of Mankind, the Celebrated Marquis de Mirabeau. London: Owen. → First published as Tableau oeconomique. Published also as part of Mirabeau’s L’ami des hommes.
Quesnay, FranÇoisOeuvres économiques et philosophiques de F. Quesnay, fondateur du système physiocratique. Paris: Peelman, 1888.
Samuels, Warren J. 1961 The Physiocratic Theory of Property and State. Quarterly Journal of Economics 75:96–111.
Samuels, Warren J. 1962 The Physiocratic Theory of Economic Policy. Quarterly Journal of Economics 76:145–162.
Spengler, Joseph J. 1945 The Physiocrats and Say’s Law of Markets. Journal of Political Economy 53:193–211, 317–347.
Weulersse, Georges 1910 Le mouvement physiocratique en France de 1756 à 1770. 2 vols. Paris: Alcan.
Weulersse, Georges 1950 La physiocratie sous les ministères de Turgot et de Necker (1774–1781). Paris: Presses Universitaires de France.
Weulersse, Georges 1959 La physiocratie à la fin du règne de Louis XV: 1770–1774. Paris: Presses Universitaires de France.
Woog, Henri 1950 The Tableau économique of François Quesnay: An Essay in the Explanation of Its Mechanism and a Critical Review of the Interpretations of Marx, Bilimovic and Oncken. Staatswissenschaftliche Studien, New Series, Vol. 7. Bern: Francke.
In the half-century prior to the Russian Revolution of 1917 the dominant doctrine inspiring the major socialist parties of continental Europe was Marxism (or was directly derived from Marxism). Since 1917 Marxism has become the official doctrine of the socialist sector of the world (i.e., of the Soviet Union and China and of the other countries of Europe and Asia associated with them). Treated historically, therefore, description and analysis of socialist thought must run predominantly in terms of Marxian doctrine. This is not to say that there have been no other different and rival socialist creeds that have been influential and continue to find an echo today. Marx spoke of the so-called “utopian socialists,” who had preceded him and in contrast with whom he called his own doctrine “scientific socialism.” Merging with these, there have been various brands of “ethical socialists,” including the Christian socialists, basing themselves on this or that ethical principle as the pre-eminent one, such as “equality” or “community values,” and on social motives, as against pursuit of “selfish” individual values and motives. Still others, such as the Fabians in England and the so-called Kathedersozialisten and their imitators on the Continent, advocated purely on grounds of expediency an extension of the economic functions and responsibilities of the state, thus identifying their “socialism” (and its consequential critique of individualism) with étatisme. Before coming to Marxism as a social philosophy something must accordingly be said about the historical origins and the varieties of these non-Marxian theories.
The author of one work on the socialist tradition (Gray 1946) starts with Moses, Lycurgus, and Plato, passing from them to the Essenes and the early Christian Fathers and thence to St. Thomas Aquinas and Sir Thomas More. Indeed, Plato and More have been cited as forerunners in many a work on the subject. But this article will not go so far back as this. It must be sufficient to distinguish those writers of the eighteenth or early nineteenth century who, in the shadows of the emerging modern world, sought to paint a picture of a perfect society of the future, deducible from first principles either of rationality or of morality and attainable only if mankind were sufficiently reasonable or good. Among these was Mably, a French contemporary of Adam Smith, who in a series of quasi-Platonic dialogues developed a critique of the institution of private property and who believed that nature had destined all men to be equal. He argued that the institution of private property both annihilates the primitive and natural equality of man and enables the indolent and unworthy to live at the expense of the active and industrious. Another eighteenth-century figure who both attacked the irrationality of existing society and went into considerable detail about the structure of an ideal society was Morelly (Code de la nature 1755).
The most quoted and influential of the architects of a Utopian future were Saint-Simon and Fourier. The former, a count descended from an old and honored family who renounced his title during the French Revolution, became the founder of something of a school (which included the positivist philosopher Auguste Comte). After his death there was even established a Saint-Simonian church. Among other proposals for the reorganization of society on new principles he propounded a scheme for productive associations and a projet de travaux under the aegis of government and advocated the principle that the rights of property ought to be rooted solely in its contribution to the production of social wealth. Here his disciples, who developed his doctrines in notable respects, went further and preached the end of inheritance of property and its eventual transfer to the state. It was they who, incidentally, coined the formula “from each according to his ability, to each according to his needs.” In his final work, Nouveau christianisme, 1825, Saint-Simon sought to expound a new religion dedicated to “the great aim of the most rapid improvement in the lot of the poorest class . . . the most numerous class.” Persecuted and divided, the SaintSimonian school disintegrated in the course of the 1830s.
Fourier is best known as the author of a scheme for the organization of phalanstères, communities in which both production and social life were to be organized on a cooperative or communal basis. This would allow the natural, inborn “harmony” of man to be realized—a harmony that existing commercial civilization had destroyed. In this new society work, instead of being a burden, would be enjoyed.
Another sketch of a communist Utopia was Cabet’s Voyage en Icarie of 1838. A more direct influence on French socialism in the middle and later nineteenth century was Proudhon, author of Qu’est-ce que la propriété?, 1840, and coiner of the aphorism “Property is theft.” This aphorism was for him the answer to the Lockean right to property by labor. Yet, regarding property, he could be called a “distributivist” as much as, or even more than, a socialist. His influence has been more in the direction of anarchism than of socialism, since two of his central ideas were equality and individual freedom and he preached against communism and the authoritarian state. His remedy for the evil of taking (and living on) interest was a system of universal and interest-free credit to be organized through a mutual credit bank (his system of mutualité)—a proposal that not surprisingly drew the fire of Marx’s criticism in the latter’s Misère de la philosophie. [See the biographies ofFourier; Proudhon; Saint-Simon.]
The Ricardian socialists in England
The germ of socialist ideas in England before Marx lay in a critique of classical political economy by a group of writers and pamphleteers who have come to be loosely described as the Ricardian socialists. A centerpiece of this critique for the main figures of this group was a concept of exploitation couched in traditional eighteenth-century terms of “natural right.” They were Ricardian in the sense that they sought to use Ricardo’s theory of value in such a way as to turn it, with the aid of natural-right notions, against the main precepts of the Ricardian school.
By the end of the eighteenth century Spence and Ogilvie had derived from the principle of natural right the conclusion that ownership of land should be shared equally and that no man should have more than he could cultivate. Nature or God had given the land “in common to all men,” and equal sharing of land by all was the basic guarantee and sine qua non of human freedom. By analogy, in the year after Ricardo’s death William Thompson (in An Inquiry Into the Principles of the Distribution of Wealth 1824) deduced the right of labor to the whole produce of labor from the postulate that labor is the sole (active) creator of wealth. In existing society this was prevented by a system of “unequal exchanges” that resulted in part of labor’s product being filched by the possessors of economic advantage. Apart from its injustice and its offense against the Benthamite maxim of “greatest happiness,” this system deprived labor of much of its necessary incentive (substituting want as the spur to labor) and hence was inimical to national wealth. Such a notion could be held to have been implicit to some extent in Adam Smith’s treatment of profit and rent as “deductions” and Ricardo’s treatment of them as alternative and rival forms of surplus. But in Thompson’s notion of appropriation, or exploitation, what was implicit in his forebears is given an explicit extension that those forebears would probably have disowned. Thompson, incidentally, also attempted a reply to Malthusian pessimism by stressing the historical relativity of population trends.
The year following Thompson’s Inquiry there appeared Thomas Hodgskin’s Labour Defended Against the Claims of Capital, which opens with the statement, “Throughout this country at present there exists a serious contest between capital and labour.” (Two years later his lectures at the London Mechanics Institution were published as Popular Political Economy.) Hodgskin similarly distinguished property associated with one’s own labor, which is a natural right, from property as the power to appropriate the product of the labor of others—that is, Lockean “natural right” from the “legal or artificial” right of ownership by conquest or appropriation. In a famous passage he declares, “I am certain that till the triumph of labour be complete; till productive industry alone be opulent, and till idleness alone be poor . . . till the right of property shall be founded on principles of justice and not those of slavery . . . there cannot and there ought not to be either peace on earth or goodwill amongst men.” Halévy says of his ideas that, while they “have their starting point in the philosophy of Bentham, it is in the philosophy of Karl Marx that they find their resting place.” Contemporaneously with Hodgskin, in 1825, John Gray published his Lecture on Human Happiness. Fourteen years later there appeared J. F. Bray’s Labours Wrongs and Labour’s Remedy, which also contrasts “unequal exchanges” with equal and speaks of the exchange between capital and labor as “legalised robbery.” Both writers ended by advocating some-what vaguely a kind of Owenite cooperation.
These writers apparently had in common the a priori derivation of ideal precepts for rebuilding society from postulated first principles of “justice” or of “natural right.” But what links them as fore-runners of Marx is their common championship of productive labor against the appropriation of labor’s product over and above a subsistence wage, in consequence of the concentration of property ownership in comparatively few hands.
Apart from the French Utopians and English Ricardians, the German economic writer Rodbertus is sometimes included in the category of pre-Marxian socialists and with his generalized concept of rent has been called an anticipator of Marx’s theory of surplus value. Certainly his theory at first sight has a good deal in common with that of the English Ricardian socialists. But the main concern of his theory was to provide an explanation of crises of overproduction (in terms of under-consumption) and of how these could be prevented. His critique of existing society must be classed as “conservative socialism,” and the social reforms he advocated as a forerunner of “Bismarckian socialism” rather than of the popular socialist movement as we know it. Again, Lassalle (in some respects influenced by Rodbertus) was a popularizer and propagandist of socialist ideas rather than a theorist in his own right. [See the biographies ofOwen; Rodbertus; Thompson.]
The Fabians and guild socialism
By the end of the century, when Fabian socialism arose in Eng-land as a rival both of nineteenth-century economic liberalism and of Marxism, the climate of thinking had changed. Gone was the influence of eighteenth-century rationalism and of the metaphysic of natural right, and gone with them was the habit of deriving ideal models for a future society from some mythical “natural” state of society in the past. The end of the Victorian era, the time of transition from the age of steam to that of electricity and from free trade to imperialism, had a more practical, more mundane, and more circumscribed cast of thought. The Fabians were not alone in their preoccupation with the inadequacies of laissez-faire and the propriety of extending the economic functions of the state. Certain academic economists, notably Sidgwick, had already opened this question, as earlier Jevons himself had done much more cautiously and as afterward Marshall and his disciple and successor Pigou were to do.
Among the authors of the Fabian Essays of 1889 were some famous names, such as Bernard Shaw, Sidney Webb, Graham Wallas, and Sidney Olivier, who, although sharing a common platform, spoke each with an individual accent. Bernard Shaw had been weaned from Marxism to the economic theories of Jevons (under the economist Wick-steed’s influence) and from early revolutionary faith to a belief in evolutionary “gradualism,” which was the hallmark of the group as a whole. Webb was the patient empiricist, versed in the literature of royal commissions and acts of Parliament, who could report voluminously and in detail on social ills and inefficiencies needing remedy and the practical steps by which governmental action could remove them. In his Fabian essay he remarks that “history shews us no example of the sudden substitution of Utopian and revolutionary romance,” attacks the age of individualism as the age of anarchy, and advances a radical program of specific reforms as the necessary complement to political democracy. As a group, the Fabians were concerned with particular evils and remedial measures, rather than with any general philosophy of society or even (Shaw excepted) with the denunciation of private property and the receipt of rent, interest, and profit. Much emphasis was laid on efficiency, and their essential method would probably be called today “social engineering.” Some have even denied them the name “socialists,” owing to their lack of interest in any radical reconstitution of the property basis of society. Perhaps it is in Bernard Shaw, and in him only, that are found traces of continuity with earlier brands of socialism, whether of the English or the Continental variety, since he makes polemical use (in the Fabian Essays and in others of his works) of a generalized concept of rent as an “unearned surplus” reminiscent of Marxian surplus value—a socially created surplus, which ought to be appropriated by society and not by individuals.
Close on the heels of the Fabians—and to a large extent as a reaction against the strong element of étatisme in their outlook—came the comparatively short-lived but luminous movement known as “guild socialism.” Originating in a group of writers connected with the journal New Age (edited by A. R. Orage) in the first decade of the present century, it was soon reinforced by recruits from the contemporary university generation (mainly Oxford Fabians and most notably G. D. H. Cole). It drew largely upon the ideas of the French syndicalists, with their emphasis on industrial direct action and the “industrial democracy” of direct workers’ control, to correct the centralizing and bureaucratizing bias traditional to state socialism. (Cole’s early work, The World of Labour of 1913, is eloquent of this French inspiration.) Their target of attack was less the particular inefficiencies of capitalist individualism than the evils and the hateful human degradation of “wage slavery,” with labor treated as a commodity, the abolition of which required that the social ownership of industrial capital be combined with the organization of industry under the control of democratic guilds composed of the actual producers (i.e., workers by hand and brain in the industries in question). Industrial democracy in this form was necessary not only to emancipate the workers but also to complement, indeed to realize, political democracy. In their theory of the state, guild socialists tended to be pluralist and to reject the notion of state sovereignty. In its denunciation of wage slavery guild socialism had more affinity with earlier and with Continental socialist thought than had the more insular English Fabianism. [See the biographies ofCole; Wallas; Webb, Sidney and Beatrice.]
Not surprisingly, in view of its Hegelian roots, Marxian socialism started with a philosophy of history and a methodology. In a much-quoted phrase, Marx spoke of finding Hegel standing on his head and of proceeding to set him on his feet. This he claimed to have done by enunciating his materialist interpretation of history. According to this, it was the mode of production of any given epoch that was the key to the interpretation of that epoch, including its “superstructure” of ideas and moral sentiments and its legal and political institutions. This mode of production was conceived of as embracing not only its productive technology but also the prevailing “social relations of production”—namely, relations between men that turned upon their relations to the process of production and in particular to ownership of the means of production. In effect, these were class relations, and the contradictions inherent in such relations were the basis of class struggle, the prime mover of historical change to date.
History since the end of tribal society had witnessed three main modes of production: slavery, feudal serfdom, and modern capitalism based on wage labor. All of these were forms of class society —each marked by class antagonism in its specific way—in which the producer was in a position of subjection to a ruling class whose power rested on ownership. In consequence of this subjection the surplus product, over and above what the producer himself retained for subsistence, was appropriated by the ruling and owning class, whether slaveowners, feudal seigneurs, or capitalists. In the first of these socioeconomic forms, the ruling class owned the person of the laboring producer as well as the impersonal, material means of production. In the second, it had the legal right to annex a certain portion of the labor time of the producer, whether in the form of direct labor services or of tribute in kind. In the third, the laborer was in legal status a free agent, the relation between him and the capitalist being that of a contractual market relationship, yet the economic compulsion of his propertyless status obliged the proletarian wage earner to sell his labor power for little more than a subsistence wage (or for even less in conditions of acute unemployment). Thus the wage-labor-capital relationship under capitalism bore a major analogy with earlier and more patently servile forms of class relationship; property right per se was able to draw to its possessor, independently of any productive activity, a share of the total product.
This, in brief, was Marx’s concept of exploitation (and as fruit of exploitation, class struggle). His economic analysis, as expounded in Das Kapital, was designed to enlarge on this analogy with previous modes of appropriating surplus product and to show how the persistence of a difference between the value of labor power (sold for wages) and the value of its product was consistent with the “law of value”—that is, with conditions of a free market and of perfect competition. Unlike earlier socialist writers, he did not deduce the existence of surplus value or exploitation from some principle of natural right of labor to its product (all too often supposed by commentators and critics to be inherent in the labor theory of value). The analogy with earlier modes of appropriating a surplus product was for him a historical datum, which he sought to explain in terms of economic theory—doing so by penetrating below the market “appearance” of things to the “essence” of social relations under capitalism (the relationship between capitalist and proletarian as that of owner and propertyless). For this reason, the boundaries of economic analysis were drawn more widely than in the narrower market-equilibrium studies to which we have grown accustomed in post-Menger, post-Jevonian economics, from which property relations and their influence are excluded because they are thought to belong to social rather than to economic theory.
Marx’s explanation turned on his distinction, to which he attached great importance, between labor and labor power. Labor power was what was sold as a commodity in return for wages and, like other commodities, sold for a price determined by the cost in labor necessary to produce and reproduce it. This was the cost of producing its own subsistence—its essential input (this being modified, as Marx, like Ricardo, allowed, by a historically relative factor of social habit and custom). Hence wages absorbed only part of the product of labor at work for any given length of time—the value of labor power as a productive input was never more than a fraction of the net output emerging from the productive process. The difference was surplus value, which accrued to title of ownership as profit, interest, or rent.
In this consisted the main part of his critical diagnosis of contemporary society. But it was also fundamental to his description of the dynamic of capitalist society and his prediction of its eventual replacement by socialism. With the development of the capitalist mode of production the class struggle would develop both in extent and in acuteness. With the widening and deepening of exploitation the proletariat would acquire class consciousness and would develop its own organization, both economic and political, as the eventual instrument of capital’s overthrow. But there were two other agents of the dynamic process. First, there was a continuous tendency both toward concentration of production into larger units and toward centralization of capital itself, tendencies that at the same time encouraged more concentrated and more enduring organization of labor, while confronting labor with a more centralized, impersonal, and tyrannical foe. Second, because of its uncoordinated character (its characteristic “anarchy of production”), combined with a growing contradiction between the rate of growth of productive power and the slower rate of growth of markets, the process of capital accumulation was periodically interrupted by dislocating economic crises of overproduction. Such crises served the function of re-creating the reserve army of the unemployed when it became depleted by the expanding demand for labor and wages showed signs of rising and encroaching upon surplus value. They also encouraged the tendency to concentration on the side of capital (the larger swallowing the smaller in lean years) and increased the instability of the worker’s status and condition.
The inevitable outcome and only “solution” to these gathering contradictions was a revolt of organized labor against the growing tyranny of capital, as the latter showed itself increasingly to be a “fetter on production,” no longer revolutionizing technique and expanding productive capacity as it had done in its halcyon days but restricting and wasting productive capacity and holding it in check. On its negative side such a revolt could only take the form of dispossessing the capitalists of their ownership rights—the famous “expropriation of the expropriators.” On its positive side revolutionary transformation must take the form of the transfer of the means of production into social ownership and the social organization of production on a planned basis, since in conditions of modern technique and large-scale industrial production the kind of solution favored by Saint-Simon and Proudhon—the distribution of property in small units to all citizens—was clearly impracticable.
A social transformation of this kind, the most revolutionary known to history, would liquidate the class antagonism of previous class society by substituting the social equality of a community of active producers, where everyone was a worker drawing an income from society, for the unequal and divided society of those who owned and those who were dispossessed. The period of human history characterized by successive forms of class exploitation, each with its specific type of dominant and exploiting class appropriating surplus product in its own manner, would have closed. But this did not mean that historical change would have come to an end. The technical means of production would continue to develop, probably more rapidly than before; human organization, adapting to changing economic conditions and needs, would perennially undergo change. But the basic cause of social antagonism as known before in human history would have disappeared.
There was no pretense, however, that the relative social equality of all citizens as workers and producers would be the realization of an ideal of absolute justice among men. Socialists of the Marxian school have always spoken (since Marx wrote his Critique of the Gotha Programme) of two stages of socialism, a lower and a higher. In the former, although work incomes would constitute the sole category of income and inequalities due to the existence of property incomes would have disappeared, some differences of income would still remain, owing to the necessity of differentiating wages according to the amount and kind of work performed. Only at the latter stage, when the productive powers of society had been sufficiently developed and the moral standards of society sufficiently raised, would it be possible to achieve the fuller social equality of “from each according to his ability, to each according to his needs.” It has become customary in recent decades to call the first “socialism” and to reserve the name “communism” for the second. One could say that the former would realize equality of opportunity for all, but the effect upon individual incomes of inequality of human capacities and talents would not be eliminated; only under “full communism” would differences of human capacities and needs cease to be of economic significance.
Marx and Engels and their followers always regarded it as inconsistent with their conception and method to prepare anything resembling a blueprint of the future socialist society. The attempt to do so was the hallmark of the Utopian socialist, and in their ascetic refusal to emulate their predecessors in this respect, they stood at the opposite pole from Fourier and his obsessive love of detailed prescription. Socialism, it was stated, would be established by “the proletariat organized as the ruling class,” which would forthwith “convert the means of production into State property”; it would “centralize all elements of production in the hands of the State” (i.e., of the proletariat organized as the ruling class) and would “increase the total of productive powers as rapidly as possible.” There were some occasional hints in the writings of Marx and Engels that production would be organized consciously under some kind of prearranged social plan. But apart from the comments already quoted from the Critique of the Gotha Programme, that is virtually all. Lenin, who had the task of laying the foundations of the first socialist state, declared that “in Marx there is no trace of attempts to create Utopias, to guess in the void at what cannot be known.” [See the biographies ofBernstein; Kautsky; Luxemburg; Marx.]
Post-1917 social democracy
In the years since the Russian Revolution the socialist world has been more or less sharply divided between those who recognized this event as a genuine socialist revolution and those who denied it such a name. The difference partly turned on the methods used to achieve and to consolidate the revolution, namely the use of insurrection and armed force and the regime of the “dictatorship of the proletariat.” But there was also the deeper issue of whether socialism could be built at all in a backward country of weakly developed industry and predominantly peasant agriculture. The Russian Mensheviks denied that it could be and declared that the stage was set in Russia for no more than a “bourgeois revolution” against tsarist absolutism. What was distinctively new in Lenin’s controversial interpretation when he arrived back in Russia in April 1917 was that, while accepting that a bourgeois revolution was in process, he nonetheless declared that the industrial proletariat could and should seize power in alliance with the peasantry. In doing so, the proletariat could transform a bourgeois revolution into a socialist one and eventually start to build socialism. The discussion about “socialism in one country” that was to develop within the Bolshevik ranks in the following decade was in large degree an extension of this same controversy, since it was concerned with the question of whether the transition to socialism, already started by the nationalization decrees of 1917–1918 and carried over into the “mixed economy” of the 1920s, could be completed unless the revolution spread to other, more technically advanced, countries of Europe.
Socialist parties in western Europe (with the exception of the Italian) generally followed the Menshevik line in their estimate of the Soviet revolution. They proceeded to affirm their devotion to democratic parliamentary methods and their intention of achieving socialism, not by a single revolutionary act, but by a series of modifying reforms in the existing structure and by a gradual extension of the economic functions of government. The rift in socialist thought and policy was deepened after the formation of the Third (or Communist) International in 1919, in opposition to the Second International, which after its collapse in 1914 was to be revived in 1920. The concept of socialism current in most social democratic circles increasingly approached that of Fabian gradualism and, in the course of two decades, in most cases ceased to be Marxian in anything but name. After World War ii, partly under pressure of the “cold war,” the leading parties of continental Europe and Scandinavia not only eschewed Marxism, but dropped from their programs any proposal for extensive socialization of production.
Some would say that the temper of the times is to eschew general social theories as speculative or metaphysical and that for this reason one can no longer speak of socialist theory apart from the Marxist school. Certainly it is true that the tendency in England and elsewhere has been to favor an increasingly empirical approach. Sixty-three years after the appearance of the original Fabian Essays a number of younger thinkers of the English Labour party combined to produce in 1952 a collection of New Fabian Essays under the editorship of R. H. S. Grossman. What is remarkable about this new volume, in contrast with the emphasis of its forebear, is the playing down of socialization in the traditional sense of the transfer of means of production to state ownership (even to the point of dismissing it as an obsolete Marxian prejudice). If there is a single unifying theme in terms of which socialism as a credo is here definable, it is perhaps to be found in an emphasis on social equality. This is to be realized primarily through the extension of social services, a widening of educational opportunities, and progressive taxation. Indeed, one writer, C. A. R. Crosland, speaks as though the aims of the socialist movement were already achieved to a considerable extent, since the metamorphosis of capitalism “into a quite different system … is rendering academic most of the traditional socialist analysis,” and state intervention in economic life has so increased as to “justify the statement that the capitalist era has now passed into history.” Property rights, it is said, “no longer constitute the essential basis of economic and social power,” which has passed to a new class of managers. Nationalization and “the early Fabian emphasis on collectivism” are expressly rejected as key to the definition of socialism, and equality of status is enthroned as the essence of the definition instead. Before the war, in 1937, Douglas Jay in The Socialist Case had already said, “If we are to have the substance and not the shadow, we must define socialism as the abolition of private unearned or inherited incomes rather than of the private ownership of the means of production”; while as for planning in any of its forms, these are “possible rather than necessary elements of socialism.”
The economists’ debate
There remains to be said something in summary about the narrower discussion of socialism, by economists, which itself falls into two halves: discussion of the comparative merits of the two rival systems in the attainment of some postulated “optimum” and discussion of alternative mechanisms, or “models,” for the operation of a socialist economy. The latter has become a lively subject of debate today in the socialist countries themselves.
As a result of the new economics of Jevons and Menger in the last quarter of the nineteenth century, two opposite tendencies arose among leading academic figures. First, as we have noted, there was a tendency in England especially (which Jevons himself cautiously initiated) to re-examine the case for laissez-faire and the exceptions to it. This re-examination, developed by Sidgwick and Marshall, drew attention to a number of “exceptions,” in which public interest conflicted with private and in which production of wealth failed to be maximized when left to the free play of market forces. In the twentieth century, with the increasing prevalence of monopoly and restricted competition, this critique was extended to include the adverse effects of “imperfect competition” or “monopolistic competition”—the excess capacity latent in excessive product differentiation and also the swollen costs and distorting effects of salesmanship and advertising to which they give rise. Second and concurrently, the development of mathematical theories of general market equilibrium brought with it, as a signal corollary, a new justification of free enterprise: namely, that the general equilibrium toward which a competitive market always tends represents a maximum of utility (in given conditions of demand and of economic resources). This corollary of their analysis was underlined by Walras and popularized by his follower Pareto. What made this theorem on inspection less impressive than at first appeared was that the postulated optimum was relative to a given income distribution (or at least of a given structure of factor ownership taken as datum). Hence, it could not be used to pass judgment on income distribution itself. Its critics pointed out that the Walras–Pareto theorem defined, not a unique optimum position, but a whole series of positions. In a modified form, however, the theorem continued to be used as a justification of free competition as that which secures an optimum result relative to whatever income distribution existed (it being implicitly recognized that the state could, and should, modify that income distribution through taxation—so far as disincentive effects of taxation upon production allowed).
Soon, however, a counterattack was mounted upon the socialist case with the aid of this theorem, in the form of the contention that a socialist economy, since it would lack a market for factors of production, would have no way of attaining an optimum (of utility or welfare) or even of ascertaining in what direction this lay. Hence, in the words of Von Mises (the name chiefly associated with this argument), a socialist economy would be nonrational and uneconomic ex natura (1922). In the two decades that followed Von Mises’s challenge socialist economists (in Germany in the course of the 1920s and in England and the United States in the 1930s) sought an answer to it by demonstrating various ways in which the problem could be solved. Most of the suggested mechanisms, however, involved the creation of actual markets or else of quasi-market processes for factors of production and “producers goods” (i.e., all productive inputs) and the simulation of competition under socialism. Henry Dickinson, for example, proposed actual markets; Lange proposed a system of accounting prices to be adjusted so as to equilibrate supply and demand by a trial-and-error process, with output decisions and investment decisions taken on the basis of these accounting prices according to certain rules (1936–1937). Such solutions mainly implied decentralized decision making (at the level of individual industries or enterprises) and accordingly set limits to the amount of centralized planning (other than “indicative planning”) that could be used. This was not the case, however, with all the suggested solutions. In 1908, for example, the Italian economist Barone had already advanced one such solution in mathematical form. But doubt was expressed as to whether, as a centralized planning solution, it could be regarded as practicable in view of the complexity of the calculations involved. [See the biographies ofBarone; Lange.]
It should be added that the further discussion of what has come to be called “welfare economics,” especially in the course of the 1950s, has introduced considerable doubt as to whether the maximizing of welfare or of national output (or income) could be given any precise meaning. In both cases this doubt was primarily due to the aforementioned difficulty of income distribution; in the second case, for example, it was due to the dependence of prices, in terms of which output is summed into an aggregate, on income distribution. There was the difficulty introduced by a growing emphasis on the conventional element in wants and the influence of other people’s consumption on an individual’s satisfactions, as well as the effect of advertising propaganda (“the hidden persuaders”) upon desires. Even if sense could still be conceded to the idea of maximizing something, it followed that the “tolerances” to be allowed to any mechanism for achieving it were considerably wider than had earlier been supposed [SeeWelfare economics.]
During the 1950s the question of more, or less, centralized or decentralized models and of the degree to which planning and a market mechanism could be combined also began to occupy economic discussion in the socialist countries of eastern Europe. On the one hand, this discussion was provoked by the need to give more initiative to the individual industrial enterprise in regard to the choice of inputs and outputs (within a general framework of planning) in a period when considerations of efficiency, quality, innovation, and attention to consumers’ requirements were becoming more important than mere quantitative increase of output of a given range of products, which had been the main preoccupation of an earlier period. Combined with this was a reconsideration of the type of collective incentive to the enterprise that would be most conducive to the beneficial use of this initiative. On the other hand, the discussion was prompted by an increasing use of linear programming methods for selecting an optimum plan from among a range of alternative and self-consistent plans, according to the system of the Leningrad mathematician Kantorovitch. Such methods of optimal planning can be applied at various levels— that is, to decentralized or centralized decisions, to integral parts of a plan, or to a plan as a larger whole (at the time of writing they have been applied only to the former). In each optimal solution there is implicit a set of “shadow prices,” in terms of which the cost of inputs necessary to yield a given output program is minimized (or alternatively the output yielded by a given quantity of available inputs is maximized). Accordingly, the question of what system of prices is consistent with the choice of optimum methods of production is immediately raised.
The Yugoslav economy was the first socialist economy to adopt a fairly drastic degree of decentralization, early in the 1950s. This took the form of giving economic enterprises greater discretion in their output programs (and even in large measure their investments) on the basis of contractual arrangements with other industries, enterprises, or wholesale and retail bodies. Yugoslavia is often cited, accordingly, as an example of a “decentralized market model.” In recent years, however, other countries, including the Soviet Union, have in varying degrees moved in the direction of decentralization of planning and of freeing the enterprise as a decision-making unit from a surfeit of detailed directives. New “models” of decentralized (contractual) supply arrangements and enterprise autonomy linked with collective enterprise incentives have been experimented with, especially in consumer goods industries (e.g., the Liberman scheme in the U.S.S.R. and the Šik proposals in Czechoslovakia).
However, while in the socialist countries increased concern has been shown with optimal planning, among Western economists the focus of interest has been shifting away from questions of static equilibria to questions of growth. One could say that most economists are more concerned today to use growth potential as a criterion of judgment for an economic system than to use its capability either for attaining an economically perfect allocation of productive resources (defined in some way) or for ensuring an equitable distribution of income. On the relative weight to be attached to such criteria opinion naturally varies among economists, as it always has done and continues to do among socialists. But so far as a growth criterion is concerned, there can be little doubt that socialist economies have a distinctly good record: vide the high rates of growth in Soviet industry in the prewar decade and again in the planned economies as a whole in the postwar period. (In agriculture, on the other hand, although there have at times been successes, the record is less impressive.) Long-term planning in the Soviet Union in particular has set itself the goal of maintaining an industrial growth rate in the neighborhood of 10 per cent during this and the ensuing decade, and of overtaking the U.S. economy both in absolute production and in per capita production at an early date. Much in the comparative economic judgment of the two systems will no doubt turn on the result.
Beer, Max (1919–1920) 1953 A History of British Socialism. 2 vols. London: Allen & Unwin. → Based on Beer’s Geschichte des Sozialismus in England, 1912.
Bergson, Abram (1948) 1954 Socialist Economics. Volume 1, pages 412–448 in Howard S. Ellis (editor), A Survey of Contemporary Economics. Homewood, III.: Irwin.
Brus, Wlodzimerz 1961 Ogólne problemy funkcjonowania gospodarki socjalistycznej (General Problems in the Functioning of a Socialist Economy). Warsaw: Panstwowe Wydawnictwo Naukowe.
Burns, Emile 1935 A Handbook of Marxism. London: Gollancz.
Carr, Edward H. 1951–1964 History of Soviet Russia. 7 vols. New York: Macmillan. → Volumes 1–3: The Bolshevik Revolution, 1917–1923, 1951–1953. Volume 4: The Interregnum, 1923–1924, 1954. Volumes 5–7: Socialism in One Country, 1924–1925, 1958–1964. See especially Volume 1, Chapters 1–2, and Volume 2, Chapter 15.
Cole, G. D. H. 1953–1960 A History of Socialist Thought. 5 vols. New York: St. Martins; London: Macmillan. → Volume 1: Socialist Thought: The Forerunners, 1789–1850, 1953. Volume 2: Marxism and Anarchism, 1850–1890, 1954. Volume 3: The Second International, 1889–1914, 2 parts, 1956. Volume 4 Communism and Social Democracy, 1914–1931, 2 parts, 1958. Volume 5: Socialism and Fascism, 1931–1939, 1960.
Dickinson, Henry 1939 Economics of Socialism. Oxford Univ. Press.
Gray, Alexander 1946 The Socialist Tradition: Moses to Lenin. London: Longmans.
Hayek, Friederich A. von et al. 1935 Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. London: Routledge.
Landauer, Carl 1959 European Socialism: A History of Ideas and Movements From the Industrial Revolution to Hitler’s Seizure of Power. 2 vols. Berkeley: Univ. of California Press. → Volume 1: From the Industrial Revolution to the First World War and Its Aftermath. Volume 2: The Socialist Struggle Against Capitalism and Totalitarianism.
Lange, Oskar (1936–1937) 1952 On the Economic Theory of Socialism. Pages 55–143 in Benjamin E. Lippincott (editor), On the Economic Theory of Socialism. Minneapolis: Univ. of Minnesota Press. → First published in Volume 4 of the Review of Economic Studies.
Lichtheim, George (1961) 1964 Marxism: An Historical and Critical Study. 2d ed., rev. London: Routledge.
Mehring, Franz (1918) 1948 Karl Marx: The Story of His Life. London: Allen & Unwin. → First published in German. A paperback edition was published in 1962 by the Univ. of Michigan Press.
Pigou, Arthur C. 1937 Socialism Versus Capitalism. London: Macmillan.
Schlesinger, Rudolf 1950 Marx: His Time and Ours. New York: Kelley.
Steklov, Iurii M. (1919?) 1928 History of the First International. London: Lawrence. → Translated from the 3d Russian edition.
Von Mises, Ludwig (1922) 1959 Socialism: An Economic and Sociological Analysis. New ed., enl. New Haven: Yale Univ. Press. → First published as Die Gemeinwirtschaft.
The German historical school of economics reached its peak in the second half of the nineteenth century. It developed as a countermovement of romantic (that is, historical and universalist) thinking in opposition to classical economics, whose approach was timeless and atomistic.
The historical school embedded economic theory (often isolated by the classical economists) in a matrix of all the fields in which man is socially active and thereby laid the original foundations of a social theory of economics. Such thinkers as Adam Müller and Friedrich List were the precursors of the historical school.
Adam Müller (1779–1829) did not regard the economy as a separate sphere of existence, dominated by the striving for profit. He considered the economy, rather, to be one element in the primordial social order, interrelated with custom, law, education, politics, and religion, and changing as these changed historically. In his theory of money, he went so far as to define money (intrinsically) as an expression of the desire for cooperation. He regarded governmental economic policy as a productive force and not merely as a necessity to be endured or, as did most of the classicists, as an organ of order and rule that should be kept in check. Yet Müller was not an avowed enemy of free enterprise and wanted to see it retained in a corporate state.
Müller’s ideas had their philosophical foundation in the works of J. G. Fichte, especially in the latter’s treatise Der geschlossene Handelsstaat, written in 1800. (Müller’s fundamental ideas also resembled those of G. W. F. Hegel.) Starting from the same Enlightenment ideal of individual freedom as did the liberal classicists, Fichte reached an entirely different conclusion. He advocated enlarging the powers of the state, provided that the state was defined as having a social purpose. This romantic economic and social philosophy had as its practical objective the welfare state rather than the constitutional state. Fichte ultimately produced a defense of an autarkic state, isolated from the world market, whose planned economic constitution was “beneficent” domestically.
There is a bridge that leads to Marx both from Fichte and from Müller. In his Lehre von Gegensatzen of 1804, Müller laid down the philosophical foundations of his economic views. He asserted that all living phenomena arise from the interaction of opposites, and he considered the investigation of such interactions to be the task of economics. Like Marx, but a generation earlier, he viewed the economy and economics as evolving; indeed, he saw them as totally immanent in history. However, his interest was centered on the spiritual forces behind the material appearances of economic life; in this he was quite the opposite of Marx. (The relationship of base to superstructure was reversed.) He criticized classical economics as mechanistic, coldly rational, materialistic, and static.
The Romantic school, which included, in addition to Müller, such men as Edmund Burke, F. von Gentz, K. L. von Haller, J. Görres, and F. Baader, had almost no influence. Its imprecise, cloudy thought was unable to make headway against the dominant classical economics. Moreover, the economic developments of the era (the urge toward emancipation of the bourgeoisie, the Continental blockade, the tariff law, and later the Zollverein) were not such as to allow the politically conservative (corporate state) tendencies of the Romantics to prevail.
The more influential economic ideas of Friedrich List (1789–1804) were put forward in Das national System der politischen Ökonomie, written in 1841. The German idea of the nation, awakened in the struggle against Napoleon, was the starting point for List’s economic thinking. He was primarily a practitioner of national economic integration, and his theoretical insights sprang from this soil. Starting from the historical fact that the economies of different countries are not equally strong, he advocated “educational” tariffs to protect infant industries and to enable weak, underdeveloped nations to rise to the standard of the richer, more industrialized ones. Only then would true international competition be possible.
List opposed his doctrine of a historical expansion of productive forces to the timelessness of liberal cosmopolitanism. He held that a nation’s wealth is represented not by stocks of commodities but by the abilities and skills of its people. For Adam Smith, only material production was productive; List also considered education, administration, and communication to be historically important productive forces.
The older historical school
The above were the roots of the older German historical school, whose principal representatives were W. Roscher (1817–1894), B. Hildebrand (1812–1878), and K. Knies (1821–1898). These men were Marx’s contemporaries. At that time the bourgeois movement for the unification of Germany was flourishing, and Prussian-German power politics had begun its then victorious course. Following Müller, the older historical school (in particular Knies and Hildebrand) emphasized the inclusion of economics in the totality of the common moral and national life, whose historical, organic growth is based on free human deeds rather than on natural laws. In his methodological critique of classical economics, Die Nationalökonomie der Gegenwart und Zukunft (1848), Hildebrand denied the existence of natural laws applying to economic activity. He asserted that economics must seek for the laws of the historical evolution of the economy, rather than for immutable laws. Hildebrand did concede that an objective regularity of evolution operates in the economy. (The stages of this evolution he called the natural economy, the money economy, and the credit economy.)
As the most consistent advocate of the historical approach, Knies, in his Die politische Ökonomie vom geschichtlichen Standpunkte (1853), conceded no such absolute validity to evolutionary laws. He admitted that certain similarities can be observed in phenomena. But these do not involve necessity, for they are not linked by any causal nexus. They are merely analogies. Human action does not arise from an “innate” egotism but derives its motives from the spirit of the times.
Precisely because of this dubious substitution of subjective motivations for objective law, economic science is indebted to Knies for clearing the way for the methodologically significant insight that statistical rather than causal regularities apply in the historical–social realm. With this, Hildebrand and Knies broke definitively with the ideas of the classicists. Roscher, in his Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher Methode (1843), remained somewhat dependent on classical ideas, though he stressed the historical method of research.
The similarities between the older historical school and Marx indicate a common intellectual background. For both, historical progress is a basic concept. Both take human actions in relation to productive forces as their point of departure, and both emphasize the concept of society. But Marx opposed his “rational” research into the laws of the historical process to the historical school’s relativistic concept of societies, which it saw as based on an irrational flow of history. For Marx the basesuperstructure relationship is the opposite; he regarded the social institutions as a superstructure dependent on the economy, rather than vice versa.
The later historical school
Thus the older historical school concentrated its attention on the fundamentals of universal historical economic development. The later historical school used this view as a point of departure and, at the beginning of the 1870s, turned to research into concrete details. The founder of this later school was Gustav Schmoller (1838–1917), and its adherents included L. Brentano, K. Bücher, G. F. Knapp, K. T. von Inama-Sternegg, and J. Conrad. Economic historicism also gained a more or less firm footing in England, France, Italy, and the United States. Men such as T. E. Cliffe Leslie, J. K. Ingram, W. J. Ashley, Charles Gide, L. Cossa, and Charles A. Beard were among its representatives in these countries.
The “great” dispute over method (Methodenstreit) with the marginalist neoclassicists forced the members of the later historical school to seek further clarification of their point of view, as in Schmoller’s “Zur Methodologie der Staats- und Sozialwissen-schaften” (1883). The antitheses were historical induction vs. deduction, individualizing vs. generalizing, and descriptive economics vs. economics that searches for laws or patterns. Another characteristic of the later school was its ethical and practical approach to questions of social policy, especially to labor problems. Schmoller was instrumental in the founding of the Verein fur Socialpolitik in 1872, whence the designation of the school as “professorial socialism” (Kathedersozialismus).
Brentano’s resolution of the problems inherent in previous naively linear correlations of working time, labor output, and wages was a significant insight in political economy. So was Knapp’s theory of money, presented in The State Theory of Money (1905), in which money is defined as a creation of the law rather than a “commodity.”
At about the turn of the century there developed a German trend toward historical and sociological research which included such important thinkers as W. Sombart and Max Weber. This movement, which was a successor to and a critique of the historical school, was also influenced by W. Dilthey. Later on, O. Spann and his disciples went back directly to Adam Müller.
Influence on institutionalism
The influence of the historical school was not confined to Europe but was felt in America as well, particularly by the American institutionalists. After World War I they increasingly worked toward independence of economic thought. In the 1920s J. R. Commons, R. G. Tugwell, A. B. Wolfe, C. E. Ayres, W. H. Hamilton, M. A. Copeland, W. E. Atkins, and others tried to establish an American system of teaching and research. Characteristically they turned away from marginal utility and the entire abstractly theoretical approach of British neoclassical political economy. These were replaced by empirical studies of economic behavior along social-psychological and, to some extent, social-ethical lines.
Thorstein B. Veblen’s economic relativism and his witty criticism of John Bates Clark’s doctrine, based on marginal utility theory, demonstrated most clearly how weary a then influential group of American economists had become of the tutelage of their intellectual elders, the European theorists. The criticism of the institutionalists was aimed primarily at the fiction of the “economic man” and at the hypothesis of an exclusively hedonistic motivation for his actions. This institutionalist thinking had many links to European ideas. The initial general rejection of the classical theory by American economists, as well as their acceptance of the methodological principles of the older German historical school (especially in the form in which they were cast by Bruno Hildebrand), was inspired by personal and intellectual contacts at German universities while the historical school was at its peak.
Institutionalism and the closely related behaviorism proceed from the assumption that economic acts are not solely governed by the hedonistic principle. Man’s economic behavior, his needs and desires, his ways and means, are merely functions of a constantly changing evolution that is infinitely complex, is molded by particular social institutions, and is in this sense “institutional.” The true nature of economic relationships can be learned only by thorough study of economic institutions, of the changes they undergo in the course of their evolution, and of their interrelationships with the changes in the psychological peculiarities of men’s economic behavior. Therefore the institutionalists demanded a dynamic concept of the economy.
This conceptual structure of institutionalism clearly echoes aspects of German experimental psychology and of Spencer’s evolutionary doctrine, with the ideas of traditional British association psychology in its background. It cannot be denied, however, that the relativism central to this institutionalist way of thinking is close to the basic notions of the German historical school.
There is still another channel leading from the German historical school to American institutionalism. In the 1920s certain economists led by Commons became tired of neoclassicist research in general, and of the dispute about what is “free of value judgments” in particular. In their reaction they adopted the moderate standpoint that had earlier been advocated in Germany by Bruno Hilde-brand, with his historical approach. They asserted that in establishing goals of economic policy, one must take into account the mass-psychological and social-ethical aspects of these goals.
A. T. Hadley, E. R. A. Seligman, and R. MayoSmith were among those who supported the “value-judgment-free” point of view and opposed Commons in this “value-judgment debate,” which is often called the “little” dispute over method (kleiner Methodenstreit). Veblen was in the forefront of the challenge to John Bates Clark’s economic theory, which was free of value judgments. As a young economist, Clark’s son, John Maurice Clark, agreed with Veblen on particular issues.
These discussions had implications for economic policy. The institutionalists felt that the abstract-theoretical postulate of absolute economic freedom should be disregarded, and stress should be placed instead on the actual development of economic institutions and the behavior of individuals and of important socioeconomic groups. Governmental economic planning and control were justified, if necessary, to ensure the social-ethical ideal of welfare in the long run. This view was adopted by W. C. Mitchell, Commons, Hamilton, L. D. Edie, and Tugwell, and, to a greater or lesser degree, by Wolfe, John Maurice Clark, F. C. Mills, O. F.
Boucke, D. Friday, and other economists. Still, American institutionalists did not simply accept the concepts of the German historical school. The methodological pragmatism of the majority of American institutionalists is manifested by their failure to evolve a unified cognitive procedure of a specific institutionalist nature. True, they accepted the deductive method. Yet their special interests lie in empirical–inductive, quantitative, mathematical–statistical, and causal–genetic analysis. For example, the work of W. C. Mitchell was primarily concerned with the analysis of business cycles and economic development. He is primarily responsible for the great growth of empirical research and of studies aimed at statistical and historical verification. It now appears that a more or less harmonious collaboration of abstract and empirical economic thought tends toward attaching increasing importance to the statistical, applied-mathematical, and historical approach.
works by members of the historical school
Hildebrand, Bruno (1848) 1922 DieNationalökonomie der Gegenwart und Zukunft, und andere gesammelte Schriften. Jena (Germany): Fischer.
Knapp, Georg F. (1905) 1924 The State Theory of Money. 4th ed. enl. Munich: Duncker & Humblot. → First published as Die staatliche Theorie des Geldes.
Knies, Karl (1853) 1930 Die politische Ökonomie vom geschichtlichen Standpunkte. New ed., enl. Leipzig: Buske. → First published as Die politischen Ökonomie vom Standpunkte der geschichtlichen Methode.
Roscher, Wilhelm G. F. 1843 Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher Methode. Göttingen (Germany): Dietrich.
Schmoller, Gustav F. 1883 Zur Methodologie der Staats- und Sozialwissenschaften. Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft 7:975–994.
works about the historical school
Albery, M. 1955 Institucionalismo económico. Revista de economía política 6, no. 3:126–141.
Boulding, Kenneth E. 1957 A New Look at Institutionalism. American Economic Review 47, no. 2:1–12. → Discussion on pages 13–27.
Coats, A. W. 1954 The Historist Reaction in English Political Economy: 1870–1890. Economica New Series 21:143–153.
Copeland, Morris A. 1958 Institutionalism and Welfare Economics. American Economic Review 48:1–17.
Dorfman, Joseph (1934) 1961 Thorstein Veblen and His America. New York: Viking; Kelley.
Dow, Louis A. 1961 Institutionalism and Contemporary Price Theory. American Journal of Economics and Sociology 20:181–193.
Eisermann, Gottfried 1956 Die Grundlagen des Historismus in der deutschen Nationalökonomie. Stuttgart (Germany): Enke.
Ellis, John M. 1961 Cannan and Veblen as Institutionalists. American Journal of Economics and Sociology 20:305–312.
Gruchy, Alan G. 1958 The Influence of Veblen on Mid-century Institutionalism. American Economic Review 48, no. 2:11–20.
Hall, Franklin P. 1956 Toward Understanding Institutionalism. Indian Journal of Economics 37:177–186.
Hamilton, David B. 1962 Why Is Institutional Economics Not Institutional? American Journal of Economics and Sociology 21:309–317.
Institutional Economics; Veblen, Commons, and Mitchell Reconsidered: A Series of Lectures. 1963 Berkeley: Univ. of California Press. → By Joseph Dorfman, C. E. Ayres, and others.
Jahn, Georg 1960 Die historische Schule der Nationalökonomie und ihr Ausklang: Von der Wirtschaftsgeschichte zur geschichtlichen Theorie. Pages 139–150 in Otto Stammer and Karl C. Thalheim (editors), Festgabe für Friedrich Bülow zum 70. Geburtstag. Berlin: Duncker & Humblot.
Knight, Frank H. 1952 Institutionalism and Empiricism in Economics. American Economic Review 42, no. 2:45–55.
Macario, Santiago P. 1952 El institucionalismo como crítica de la teoría económica clasica. Trimestre económico 19:73–112, 250–300, 481–509.
Mann, Fritz K. 1955 Wirtschaftstheorie und Institutionalismus in den Vereinigten Staaten. Pages 201–213 in Wilhelm Bernsdorf and Gottfried Eisermann (editors), Die Einheit der Sozialwissenschaften: Franz Eulenburg zum Gedáchtnis. Stuttgart (Germany): Enke.
Mann, Fritz K. 1960 Institutionalism and American Economic Theory: A Case of Interpenetration. Kyklos 13, no. 3:307–323.
Palomba, G. 1952 Storicismo e naturalismo nell’indagine economica. Studi economici 7:257–270.
Popper, Karl R. 1957 The Poverty of Historicism. Boston: Beacon.
Spengler, Joseph J. 1959 Veblen and Mandeville Contrasted. Weltwirtschaftliches Archiv 82, part 1:35–65.
Spiethoff, Arthur 1952 The “Historical” Character of Economic Theories. Journal of Economic History 12:131–139.
Stocking, George W. 1959 Institutional Factors in Economic Thinking. American Economic Review 49:1–21.
Vianello, Mino 1961 Thorstein Veblen. Milan (Italy): Edizioni di Comunità.
Wagner, Valentin F. 1959 Die Armut des Historizismus: Theorie und Geschichte. Schweizerische Zeitschrift für Volkswirtschaft und Statistik 95:21–46.
Witte, Edwin E. 1954 Institutional Economics as Seen by an Institutional Economist. Southern Economic Journal 21:131–140.
Value theory before 1871
The “marginal revolution” of the 1870s is generally recognized as a major step in the advance of economic theory. Those who have been able to start with its established results often find it difficult to comprehend why an obvious and simple idea, which had occurred to many earlier thinkers, should have exercised such a great effect when W. S. Jevons, Carl Menger, and Leon Walras independently rediscovered it at about the same time and, particularly, why the tradition founded by Menger should so profoundly have affected economic theory for two generations. To account for this it is necessary to elaborate on the distinction that is commonly but inadequately expressed as a contrast between “objective” and “subjective” theories of value.
Since value is evidently an attribute possessed by certain things or services, it was natural to seek its determinants in some property or properties of the particular objects that possess it. This procedure had proved successful in the physical sciences, and the expectation that objects having the same value should have also other “intrinsic” properties in common therefore seemed reasonable. Of course, it had often been seen that the decisive factor might be something discoverable not in the object itself but rather in the relations of men to the object. Ever since the medieval scholastic philosophers (and even Aristotle), it had been pointed out again and again that to possess value an object must be useful and scarce. But this idea was rarely followed through systematically (though an exception must be made for the greatest of the early anticipators of modern theory, Fernando Galiani in his Delia moneta of 1750 ) and never to the point of realizing that what was relevant was not merely man’s relation to a particular thing or a class of things but the position of the thing in the whole means-end structure—the whole scheme by which men decide how to allocate the resources at their disposal among their different endeavors.
It was largely from approaching the problem of value through patient analysis of the character of economic choice in the various types of possible relations between different means and different ends that there ultimately emerged the explanation of value that made the work of Menger and his pupils so immediately effective. Although the answers supplied by Jevons and Walras to the old value paradox were no less correct, they were concealed from most contemporary economists by the mathematical notation employed. Moreover, these authors treated the solution of the utility paradox as merely a preliminary step to be gotten quickly out of the way in order to get on with the main business, the explanation of value in exchange. The Austrians, on the other hand, made the full analysis of the conditions of valuation, independent of the possibility of exchange, so much their central task that later they had to defend themselves against the misunderstanding that they believed marginal utility provided a direct explanation of price. Of course, the subjective value that it explains is merely a first step to the second stage, the theory of price.
On the Continent the utility-cum-scarcity approach had, since Galiani, remained an important tradition and considerable insight had been achieved in such works as E. B. de Condillac’s Le commerce et le gouvernement, 1776, Louis Say’s Considerations sur I’industrie, 1822, Auguste Walras’s De la nature de la richesse, 1831, Jules Dupuit’s De la me sure de I’utilité des travaux publics, 1844, and finally in the remarkable but at the time completely overlooked work of H. H. Gossen, Entwicklung der Gesetz des menschlichen Verkehrs, 1854. In Eng-land, on the other hand, the generally much more highly developed classical political economy had become wedded to an “objective” labor theory of value, and the utility tradition persisted only as a sort of undercurrent of protest, which reached a high point in 1834 with W. F. Lloyd’s The Notion of Value. It was fully swamped when as late as 1848 J. S. Mill in his Principles of Political Economy not only re-expounded the classical position but calmly asserted, “Happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete” (book 3, chapter 1, sec. 1). [See the biographies ofDupuit; Galiani; Gossen.]
Menger and the origins of the school
While W. S. Jevons (who with his preliminary sketch of a theory of value based on “final utility” had anticipated Menger by nine years) was writing in direct opposition to dominant doctrine and had little more than Benthamite utilitarianism to draw upon, both Menger and Walras were able to build on a rich literary tradition favorable to the utility approach. But in Vienna, where Menger worked, there was little interest in economic theory. At that time economics was taught at the University of Vienna by Germans of chiefly sociological interests. The rapid rise of a distinct Austrian school of economic theory was thus entirely owing to Menger’s work— though it did coincide with the university’s rise to great eminence in a number of other fields, which for some fifty or sixty years made it an intellectual center of great influence.
Carl Menger was a civil servant in the prime minister’s office at Vienna when at the age of 31 he published his first and decisive work, Principles of Economics (1871). It was the first part of an intended treatise, the rest of which never appeared. It dealt with the general conditions that create economic activity, value, exchange, price, and money. What made it so effective was that the explanation of value it offered arose from an analysis of the conditions determining the distribution of scarce goods among competing uses and of the way in which different goods competed or cooperated for the satisfaction of different needs—in short, what has been called above the “means-ends structure.” It is this analysis that precedes the theory of value proper. Friedrich von Wieser was to develop this systematically into a vorwerttheoretische part of economic theory that made the Austrian form of marginal-utility analysis so suitable as a basis of further development. From this analysis springs most of what is known today as the logic of choice, or the “economic calculus.”
Menger’s exposition is generally characterized more by painstaking detail and relentless pursuit of the important points than by elegance or the use of graphic terms to express his conclusions. Though always clear, it is labored, and it is doubtful whether his doctrines would ever have had wide appeal in the form in which he stated them. however, he had the good fortune of finding at once avid and gifted readers in two young men who had left the University of Vienna some time before Menger became a professor there. They decided to make the fulfillment of his teaching their lifework. It was mainly through the work of Eugen von Böhm-Bawerk and Friedrich von Wieser, classmates and later brothers-in-law, that Menger’s ideas were developed and spread. Gradually during the 1880s, when their most influential works appeared, they were joined by others working in the universities or elsewhere in Austria. Of these, Emil Sax, Robert Zuckerkandl, Johann von Komorzynski, and Robert Meyer particularly deserve mention. Some-what later came Hermann von Schullern zu Schrattenhofen and Richard Schüller.
The year 1889, in which the greatest number of important publications of the group were concentrated, also saw the appearance of an important theoretical treatise by two Viennese businessmen, Rudolf Auspitz and Richard Lieben, Untersuchungen über die Theorie des Preises (1889). This can, however, only with qualifications be included in the works of the Austrian school. It moved on parallel but wholly independent lines and with its highly mathematical exposition was too difficult for most contemporary economists, so that its importance was recognized only much later.
Of great importance for spreading the teachings of the school, especially in Germany, was the fact that another Viennese professor, Eugen Philippovich von Philippsberg, though not himself an active theoretician, incorporated the marginal-utility doctrine into a very successful textbook, Grundriss der politischen Ökonomie (1893). For some twenty years after publication this remained the most widely used textbook in Germany and almost the only channel through which the marginal-utility doctrine became known there. In other foreign countries, especially England, the United States, Italy, the Netherlands, and the Scandinavian countries, the basic economic publications of the Austrians became known sooner, partly in English translations. Probably the most important foreign adherent was an exact contemporary of Böhm-Bawerk and Wieser, the Swede Knut Wick-sell. Although he was also greatly indebted to Walras, Wicksell could write in 1921 that “since Ricardo’s Principles there has been no other book —not even excepting Jevons’ brilliant but somewhat aphoristic and Walras’ unfortunately difficult work—which has had such a great influence on the development of economics as Menger’s Grundsätze.” [See the biographies ofAuspitzandLieben; Menger; Wicksell.]
Development by Böhm-Bawerk and Wieser
In the theoretical development of Menger’s ideas the most important steps were Wieser’s interpretation of costs as sacrificed utility (or “opportunity costs,” as the concept later came to be called) and the theory of the determination of the value of the factors of production by “imputation” (Zurechnung). (This latter term and the term Grenznutzen— “marginal utility”—were introduced by Wieser.) In the field of value theory proper Böhm-Bawerk contributed mainly by the lucidity of his exposition and the great skill of his polemics. His most important original contribution was his theory of capital and interest, which was by no means accepted by all members of the school. In general it may be said that the school never developed a strict orthodoxy but that the development of Menger’s ideas by its different members shows distinct differences. This applies particularly to Böhm-Bawerk and Wieser, who in many respects represented very different intellectual types and whose endeavors marked the starting points of two distinguishable traditions within the school. Böhm-Bawerk was a particularly consistent logical reasoner, a masterly debater, and at the same time, a man of great practical experience (he was three times Austrian minister of finance). He was able to ground his work on a thorough command of the whole of economic literature, and he was always ready to take issue with other views. He therefore kept closer in many ways to Menger’s foundation than Wieser, who after the initial stimulus received from Menger, very much pursued his own ways. Wieser’s work in consequence has a highly personal character, and though in some respects (e.g., in the analysis of the role of different degrees of monopoly) he anticipated later development, in others, such as his insistence on the calculability and interpersonal comparability of utility, he developed in directions that had later to be abandoned. His Social Economics (1914), which constitutes the only complete systematization of the economic theory of the earlier Menger school, therefore cannot be regarded as representative but nonetheless constitutes a distinctly personal achievement. [See the biographies of BÖhm-Bawerk; Wieser.]
Controversy with the historical school
Carl Menger was a very effective teacher, and through his numerous pupils and his participation in the contemporary discussion of economic and financial policy he exercised considerable influence on Austrian public life. If after his first work, his literary contributions to pure theory, except in the field of money, are few, this is to be ascribed mainly to his involvement in the Methodenstreit, his dispute about method with the leader of the younger German historical school, Gustav Schmoller. That Menger’s book had remained practically unnoticed in Germany was chiefly owing to the fact that the dominance of the historical school had almost eliminated the teaching of economic theory from German universities. In these circumstances it was natural that it should seem urgent to Menger to vindicate the importance of theoretical research. This he undertook in his Problems of Economics and Sociology (1883), which in several respects became as important for the development of the Austrian school as his earlier Grundsätze, although in detail his methodological views were not fully accepted even within his own school. But the systematic justification of what Schumpeter (1908, p. 94) was later to call “methodological individualism” and the analysis of the evolution of social institutions (in which he revived ideas originally conceived by Bernard Mandeville and David Hume) had a profound influence on all members of the school and, later, far beyond the limits of economics. Compared with this, the points immediately at issue with Schmoller are of lesser significance, Although at the time they led to a passionate exchange of opinions to which several disciples on each side contributed. This exchange caused such a rift between the two groups that the German universities came to be filled more and more exclusively by members of the historical school and the Austrian universities by members of Menger’s school. [See the biography ofSchmoller.]
The third and fourth generations
In 1903 Menger retired prematurely from teaching and in consequence exercised little direct influence on the formation of the third generation of the Austrian school, which grew up during the decade preceding World War I. These years, during which Böhm-Bawerk, Wieser, and Philippovich were teaching at Vienna, were the period of the school’s greatest fame. It was particularly Böhm-Bawerk’s seminar that provided the center of theoretical discussion and produced the leading members of the third generation. Among them, particular mention must be made of Ludwig von Mises, who continued the tradition of Böhm-Bawerk, and Hans Mayer, who continued that of Wieser. Joseph Schumpeter, Although much indebted to Böhm-Bawerk, absorbed so many other influences (particularly that of the Lausanne school) that he cannot be wholly regarded as a member of this group. The same might be said of Alfred Amonn, who stood close to the English classical tradition. Somewhat younger but still wholly active at Vienna were Richard von Strigl, Ewald Schams, and Leo Illy (whose name was originally Leo Schönfeld).
In the 1920s a fourth generation appeared, to which Gottfried Haberler, Fritz Machlup, Alexander Mahr, Oskar Morgenstern, Paul N. Rosenstein-Rodan, and the author of this article belong. Most of these men, however, did the greater part of their work outside Austria. [See the biography ofVon Mises, Ludwig.]
Friedrich A. von Hayek
works by members of the austrian school
Amonn, Alfred (1911) 1927 Objekt und Grundbegriffe der theoretischen Nationalökonomie. Leipzig: Deuticke.
Auspitz, rudolf; and Lieben, richard 1889 Untersuchungen über die Theorie des Preises. Leipzig: Duncker & Humblot. → A French translation was published in 1914.
BÖhm-bawerk, eugen von (1884–1912) 1959 Capital and Interest. 3 vols. South Holland, III.: Libertarian Press. → First published as Kapital und Kapitalzins. Volume 1: History and Critique of Interest Theories, 1884. Volume 2: Positive Theory of Capital, 1889. Volume 3: Further Essays on Capital and Interest; was first published as appendixes to Volume 2 of the 1909–1912 edition and was printed as a separate volume in 1921.
BÖhm-Bawerk, Eugen von (1896) 1949 Karl Marx and the Close of His System. Edited by Paul M. Sweezy. New York: Kelley. → First published in German.
BÖhm-Bawerk, Eugen von (1914) 1951 Control or Economic Law? South Holland, III.: Libertarian Press. → First published in German.
BÖhm-Bawerk, Eugen von 1924–1926 Gesammelte Schriften. 2 vols. Edited by Franz X. Weiss. Vienna: Hölder.
BÖhm-Bawerk, Eugen von 1926 Eugen von BöhmBawerks kleinere Abhandlungen über Kapital und Zins. Edited by Franz X. Weiss. Vienna: Hölder.
Hayek, F. A. Von 1926 Bemerkungen zum Zurechnungs-problem. Jahrbücher für Nationalökonomie und Statistik 124:1–18.
Illy, Leo 1948 Das Gesetz des Grenznutzens. Vienna: Springer. → Leo Illy was formerly called Leo Schönfeld.
Komorzynski, Johann von 1889 Der Werth in der isolirten Wirthschaft. Vienna: Manz.
Mayer, Hans 1921–1922 Untersuchungen zu dem Grundgesetz der wirtschaftlichen Wertrechnung. Zeitschrift für Volkswirtschaft und Sozialpolitik New Series 1:431–458; 2:1–23.
Mayer, Hans 1932 Der Erkenntniswert der funktionellen Preistheorie. Volume 2, pages 147–239b in Die Wirtschaftstheorie der Gegenwart. Vienna: Springer.
Menger, Carl (1871) 1950 Principles of Economics: First General Part. Edited by James Dingwall and Bert F. Hoselitz, with an introduction by Frank H. Knight. Glencoe, III.: Free Press. → First published as Grundsätze der Volkswirthschaftslehre.
Menger, Carl (1871–1915) 1933–1936 The Collected Works of Carl Menger. 4 vols. With an introduction by F. A. von Hayek. The London School of Economics and Political Science. → Volume 1: Grundsätze der Volkswirthschaftslehre, (1871) 1934. Volume 2: Untersuchungen über die Methode der Socialwissenschaften, (1883) 1933. Volume 3: Kleinere Schriften zur Methode und Geschichte der Volkswirthschaftslehre, (1884–1915) 1935. Volume 4: Schriften über Geld-theorie . . ., (1889–1893) 1936.
Menger, Carl (1883) 1963 Problems of Economics and Sociology. Edited with an introduction by Louis Schneider. Urbana: Univ. of Illinois Press. → First published as Untersuchungen über die Methode der Socialwissenschaften und der politischen Ökonomie insbesondere.
Meyer, Robert 1887 Das We sen des Einkommens: Eine volkswirthschaftliche Untersuchung. Berlin: Hertz.
Philippovich von Philippsberg, Eugen 1893 Grundriss der politischen Ökonomie. Volume 1. Freiburg (Germany): Mohr.
Sax, Emil 1887 Grundlegung der theoretischen Staatswirtschaft. Vienna: Hölder.
Schams, Ewald 1934 Wirtschaftslogik. Schmollers Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reiche. 58:513–533.
SchÖnfeld, Leo 1924 Grenznutzen und Wirtschaft-srechnung. Vienna: Manz. → Leo Schönfeld was subsequently called Leo Illy.
SchÜller, Richard 1895 Die klassische Nationalökonomie und ihre Gegner. Berlin: Heymann.
Schullern zu Schrattenhofen, Hermann von 1889Untersuchungen über Begriff und Wesen der Grundrente. Leipzig: Fock.
Schumpeter, Joseph A. 1908 Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie. Leipzig: Duncker & Humblot.
Schumpeter, Joseph A. (1912) 1934 The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Harvard Economic Studies, Vol. 46. Cambridge, Mass.: Harvard Univ. Press. → First published as Theorie der wirtschaftlichen Entwicklung.
Strigl, Richard von 1923 Die ökonomischen Kategorien und die Organisation der Wirtschaft. Jena (Germany): Fischer.
Von Mises, Ludwig (1912) 1953 The Theory of Money and Credit. New ed., enl. Translated by H. E. Batson. New Haven: Yale Univ. Press. → First published as Theorie des Geldes und der Umlaufsmittel.
Von Mises, Ludwig (1922) 1959 Socialism: An Economic and Sociological Analysis. New ed. New Haven: Yale Univ. Press. → First published as Die gemeinwirtschaft.
Von Mises, Ludwig (1949) 1963 Human Action: A Treatise on Economics. New rev. ed. New Haven: Yale Univ. Press.
Wieser, Friedrich Von (1876–1923) 1929 Gesammelte Abhandlungen. Edited with an introduction by F. A. von Hayek. Tübingen (Germany): Mohr.
Wieser, Friedrich von (1889) 1956 Natural Value. Edited with a preface and analysis by William Smart. New York: Kelly & Millman. → First published in German.
Wieser, Friedrich von (1914) 1927 Social Economics. New York: Greenberg. → First published as Theorie der gesellschaftlichen Wirtschaft.
Wieser, Friedrich von 1926 Das Gesetz der Macht. Vienna: Springer.
Zuckerkandl, Robert (1889) 1936 Zur Theorie des Preises mit besonderer Berücksichtigung der geschichtlichen Entwicklung der Lehre. Leipzig: Stein.
Works about the austrian school
Antonelli, Étienne 1953 Léon Walras et Carl Menger à travers leur correspondance. Économic appliquée 6:269–287.
Bachmann, Verena 1963 Der Haushaltplan des Konsumenten und seine theoretische Erfassung durch die Grenznutzenlehre: Eine dogmengeschichtliche Untersuchung. Zúricher volkswirtschaftliche Forschungen, New Series, Vol. 7. Zurich: Polygraphischer Verlag.
Blaug, Mark 1962 Economic Theory in Retrospect.Homewood, III.: Irwin. → Contains a good survey of recent literature.
Block, Henri S. 1937 La théorie des besoins de Carl Menger. Paris: Librairie Générate de Droit et de Jurisprudence.
Howey, Richard S. 1960 The Rise of the Marginal Utility School: 1870–1889. Lawrence: Univ. of Kansas Press.
Hutchison, Terence W. (1953) 1962 A Review of Economic Doctrines, 1870–1929. 2d ed. Oxford: Clarendon.
Kauder, Emil 1953 The Retarded Acceptance of the Marginal Utility Theory. Quarterly Journal of Economics 67:564–575.
Kauder, Emil 1957 Intellectual and Political Roots of the Older Austrian School. Zeitschrift für National-ökonomie 17:411–425.
Kirzner, Israel M. 1960 The Economic Point of View: An Essay in the History of Economic Thought. Princeton, N.J.: Van Nostrand.
Pirou, GaËtan (1932) 1945 L’utilité marginale de Carl Menger à John Bates Clark. 3d ed. Paris: Domat-Monchrestien.
Rosenstein-Rodan, Paul N. (1927) 1960 Marginal Utility. International Economic Papers 10:71–106. → First published as “Grenznutzen” in Volume 4 of Handwörterbuch der Staatswissenschaften. This edition contained a comprehensive bibliography which was omitted in the 1960 edition.
Ruppe-Streissler, Monika 1963 Zum Begriff der Wertung in der älteren österreichischen Grenznutzenlehre. Zeitschrift für Nationalökonomie 22:377–419.
Seligman, Ben B. 1962 Main Currents in Modern Economics: Economic Thought Since 1870. New York: Free Press.
Stigler, George J. 1941 Production and Distribution Theories: The Formative Period. New York: Macmillan.
Stigler, George J. 1950 The Development of Utility Theory. Journal of Political Economy 58:307–327, 373–396.
Weber, Wilhelm 1949 Wirtschaftswissenschaft und Wirtschaftspolitik in Österreich, 1848–1948. Pages 624–678 in Hans Mayer (editor), Hundert Jahre österreichischer Wirtschaftsentwicklung, 1848–1948. Vienna: Springer.
Wien-Claudi, Franz 1936 Austrian Theories of Capital, Interest, and the Trade Cycle. London: Nott.
Institutional economics is very largely an American intellectual product stemming from the work of Thorstein Veblen and other economists working in the Veblenian tradition. The term “institutional” was applied to this type of economics early in the current century because it examines the economic system as a part of human culture, which is a complex of many institutions. The concept of an “institutional school” can be used only very loosely—in the sense that the members of this school have the same philosophical orientation, the same broad cultural approach to economic studies, and the same way of viewing the American economic system.
The development of institutionalism can be divided into three major periods. The first period from 1890 to 1925 was the period when Veblen was laying the foundations of the institutionalist movement. The second period runs from 1925 to 1945; during these years a group of institution-alists, prominent among whom were John R. Commons, Wesley C. Mitchell, John M. Clark, and Rexford G. Tugwell, continued the work of institutional economics after Veblen had come to the end of his career. The third period includes the years since 1945 when work along similar lines has been continued by a new generation of institutionalists, conspicuous among whom are Clarence E. Ayres, John K. Galbraith, Leon H. Keyserling, Gardiner C. Means, and Gerhard Colm.
Veblen’s cultural economics
An understanding of Thorstein Veblen’s economics, which he described as “evolutionary” or “cultural” economics, must start with the fact that Veblen came to economics from the field of philosophy. Veblen started his economic analysis by asking the fundamental philosophical question: How does an economist or any other scientist comprehend the real world about him? Veblen’s answer was that a scientist’s comprehension of reality depends upon his intellectual or philosophical orientation, or mental set, which is a product of his life experience. This intellectual orientation of the scientist may induce him to regard the outside world as a static mechanism or as an evolving process. According to Veblen the intellectual orientation of Alfred Marshall and other orthodox economists led them to view the economic system as a static mechanism, whereas his own orientation led him to regard the economic system as a dynamic process.
In explaining the American economic system as a developing process, Veblen turned to the field of cultural anthropology as a model for economic science. In his hands economics became a study of the material aspect of human culture. Like human culture, the economic system is an evolving historical product that passes through an endless number of developmental stages. There is no one universal economic system, but rather there are many different ones, such as the capitalist, socialist, fascist, and communist systems. Although he carried economic inquiry back to the early Stone Age and projected it into a socialist state of the future, Veblen’s main interest was always in explaining the nature and functioning of American capitalism in the period from 1875 to 1925. All institutionalists since Veblen have continued to make the study of the evolving American capitalist system their main concern.
The heuristic device Veblen used in constructing his theory of American capitalism is the dichotomy between “industry” (technology) and “business” (finance). This dichotomy is both psychological and cultural, since it finds expression in the conflict between the individual’s drives (or instincts) for workmanship and acquisitiveness, and between society’s industrial and business systems. The industrial system, Veblen held, is serviceable to mankind because it produces “economic” values, whereas the business system is disserviceable, since it can create only “pecuniary” values. Economic values are “real” values, goods of high social and private utility that contribute to race survival; pecuniary values are pseudo, or false, values that enlarge a person’s financial assets but make no contribution to race survival. According to Veblen the evolution of American capitalism was leading to a widening of the conflict between industry and business; the time would eventually be reached when this conflict would be so intense that the common people, led by technocrats, would attempt to overthrow the capitalist system in order to establish a socialist regime based on workmanship. However, there was no guarantee that the working population would be successful in establishing socialism. Veblen thought it quite possible that the vested interests, in cooperation with the military class, would succeed in establishing a fascist type of society. If the technician-led working class were to succeed in replacing capitalism with socialism, the socialist society of the future would eliminate the dichotomy between industry and business and enable the industrial system to produce an abundant supply of economic values. Veblen did not think in terms of any early establishment of a regime of workmanship.
Although Veblen was very critical of the orthodox economics of his time, he never intended to dispense with all accumulated economic theory. Much of the economic theorizing since the time of Adam Smith concerning supply, demand, costs, and related matters is as useful to an institutionalist as to any other economist. What Veblen objected to was the normalistic philosophical underpinning, the rationalistic psychology, the particularistic methodology, and the mechanistic view of the economic system associated with orthodox or Marshall an economics. Veblen did not dispense with the pure theory of competitive economic behavior. He said that it was not very useful in explaining twentieth-century capitalistic behavior, and that economists should go far beyond the pure theory of competition to develop a theory of capitalism. For Veblen pure economic theory could only be a first approximation to economic reality. Above the level of pure economic theory it was necessary to construct a theory of the concrete evolving economic system (for the United States a theory of capitalism) before economic reality could be adequately comprehended.
Veblen’s views about the nature of economic science are substantially those of all later members of the institutional school. Therefore, critics who assert that this school would do away with all inherited economic theory, that institutional economics is concerned only with the description of economic activity, or that it is not concerned with improving economic theory are misinformed about the nature of institutional economics as developed by Veblen and those who followed him.
Institutional economics after Veblen
The post-Veblenian group of institutionalists that came into prominence in the 1920s and 1930s differed from Veblen in a number of important ways. Unlike Veblen they did not attempt to theorize about the whole sweep of economic development from the Stone Age to the contemporary phase of capitalist evolution. These later institutionalists denied that capitalism would come to a catastrophic end. Commons, Mitchell, Clark, and Tugwell in the 1930s were optimistic pluralists who did not accept Veblen’s dualistic version of the class struggle. They did not agree with Veblen that capitalism must inevitably disappear and be replaced by either fascism or socialism. These men were antisocial-istic solidarists who believed that class conflict could be replaced by class cooperation in a remodeled type of capitalism.
What the institutionalists of the 1930s took from Veblen was his basic view of the economic system as an evolving process, his division of the economic process into the technological (industrial) and the institutional (business) processes, and his view that conflict and not harmony is the fundamental characteristic of contemporary economic life. They also agreed with Veblen that the force that keeps the economic process in motion is technological change, which not only makes existing institutional arrangements obsolete but also opens the door to new institutional arrangements more in harmony with technological requirements. The post-Veblenian institutionalists accepted Veblen’s view that it was possible, but not inevitable, that mankind would harmonize the industrial and business systems so as to produce an abundance of real, or economic, values.
John R. Common’s primary interest was in the new industrial order which developed after 1875 and which replaced the equilibrium of the earlier competitive economy with a conflict-laden disequilibrium. In this new stage of capitalist development, collective action gave rise to major protectionist groups organized by businessmen, workers, and farmers to advance their sectional interests. In the period from 1875 to 1929 some of the conflicts between these interest groups were eliminated by the courts operating under the rule of judicial sovereignty. But after 1929, when “welfare capitalism” emerged and the government took a more positive role in economic affairs, numerous governmental administrative agencies took over the courts’ work of domesticating the new industrial system and curbing economic conflict. Commons looked forward to seeing a form of “reasonable capitalism” in which conflict would be replaced by cooperation and reasonable values and practices would be established through administrative agencies working together with private economic groups.
In analyzing the era of finance capitalism that came after 1875, Wesley C. Mitchell made use of Veblen’s dichotomy between industry and business. Mitchell’s “money economy” is the financial super-structure that rests on the underlying real-product or industrial economy. The industrial economy deals with industrial technology and real output, whereas the money economy involves considerations of costs, prices, financial investment, and profits. In Mitchell’s “finance capitalism,” or “high capitalism,” of the period from 1875 to 1929, economic guidance was provided not by consumers but by large investors. This guidance led to much co-ordination within individual business enterprises but very little between them. A characteristic feature of Mitchell’s high capitalism was the recurring, self-generating business cycle that periodically led to booms in the money economy which were followed by depression in both the money and real-product economies. By the early 1930s Mitchell had come to the conclusion that technological change had so fundamentally altered the structure and functioning of the American capitalist system that the only way to eliminate the business cycle and secure a satisfactory coordination of the money and real-product economies was to introduce limited democratic national economic planning. This planning would enlarge general welfare by stabilizing the economy, providing full employment, and turning out more of Veblen’s economic values, or of what Mitchell described as goods that were “urgently needed.”
John M. Clark looked at the American economy from a point of view that emphasizes the distinction between “social” and “commercial” efficiency. He contended that the market mechanism no longer functioned satisfactorily when the economy was dominated by large-scale business enterprises. Prices were no longer closely related to costs, surplus profits were not eliminated, and many rigidities were introduced into the economic system. The business concept of cost was restricted so as to exclude many important social costs such as un-employment, communal health hazards, unused productive capacities, and other costs associated with business fluctuations. Clark drew a distinction between social and market values and between social and market costs. Social values are those that the private market system ignores, such as clean air, scenic beauty, public health, and community welfare. Social costs such as unused productive capacity, unemployment, destruction of worker morale, and resource spoliation are also ignored by the private market mechanism. Clark’s concerns were with bringing commercial efficiency closer to social efficiency and with making the economic system provide adequate supplies of both social and market values. He proposed to attack these problems in the 1930s through what he described as “social liberal” planning. This national planning would set forth the broad economic objectives of the nation in a social budget and would endeavor to achieve them by applying indirect economic controls only at certain strategic points. In the 1930s Clark had hoped that this “social control of business” would be sufficient to enable the American economy to achieve a high level of social efficiency.
It was Rexford G. Tugwell’s view that by the end of the 1920s the American industrial system had become mature but that the business system was still immature. Technological progress since 1875 had its own logic, which pointed toward large investments, mass production, low unit costs of production, low selling prices, and mass consumption. This logic of the industrial system, however, was unable to work itself out because of the obstacles placed in its path by the ideology of businessmen. Under the guidance of businessmen, large corporate enterprises have denied the logic inherent in technological progress by restricting output, keeping prices high enough to secure excessive profits, distorting income distribution, and by failing to assume responsibility for the social as well as the private costs of production.
The new equilibrium toward which Tugwell believed that the American economic system was moving in the 1930s could be hastened by establishing a fourth branch of government, namely, the directive branch. It would be the responsibility of this branch to improve the general welfare by democratically planning the nation’s economic activities with the voluntary cooperation of private business enterprise. Tugwell suggested in the 1930s that large-scale business enterprises should be federally incorporated and that all the enterprises in each industry should be represented by a tripartite body representing business, labor, and consumers. The government with the aid of a central planning board would develop an investment policy that would keep private investment in line with the needs of planned economic growth. Price guidelines would be developed so that more of the advantages derived from technological progress would be passed on to consumers in the form of lower prices. Agricultural planning would be coordinated with industrial planning so that surplus farm population would find employment in the expanding industrial core of the economy. In this manner the logic of business enterprise would be harmonized with the logic of technological progress in a coming era of cultural equilibrium.
Institutionalism since World War ii
Institutional economics since the end of World War ii has been largely associated with the work of such economists as Clarence E. Ayres, Gardiner C. Means, Gerhard Colm, John K. Galbraith, and Leon H. Keyserling. These economists have worked along the lines laid down by Mitchell, Clark, and Tugwell in the 1930s. A main difference, however, is that the institutionalists of the 1930s were dealing with welfare capitalism, whereas the institutionalists of the late 1940s and 1950s have been concerned with the problems of the next phase in the development of American capitalism, which may be called “guided capitalism.”
The postwar institutionalists agree that the technological changes of the past few decades have so altered the structure and functioning of the American economic system that it does not, of its own accord, provide high levels of production and employment, an efficient use of resources, and an equitable distribution of income. Ayres, Colm, and Keyserling accept Means’s view of “collective capitalism.” According to this view large collective organizations, such as corporations and trade unions, have so much economic power that they can prevent the use of economic resources that would result in full employment and sustained economic growth at a high level. Administered prices and wages have introduced seriously disruptive rigidities into the economic system, which make it difficult for the economy to achieve its full employment growth potential. Gerhard Colm contends that the American capitalist system is not “coherent” enough to prevent a considerable disequilibrium from existing. The cultural forces that make for coherence are too weak to prevent the growth of conflicts between special interests and the general welfare. Like the institutionalists of the 1930s, present-day institutionalists have come to the conclusion that controlling the nation’s major economic power groups, eliminating the economy’s numerous rigidities, and curbing its tendencies toward a less than full use of capital and labor require a considerable remodeling of the American economic system, but within the traditional social and political framework.
In proposing to solve the nation’s major economic problems with the aid of limited democratic national planning, present-day institutionalists have a large advantage over the earlier institutionalist proponents of national planning. In the 1930s national income analysis was in the earliest stages of its development; input–output analysis and econometrics were even less developed. Mitchell, Clark, and Tugwell could not quantify their planning proposals through projections of gross national product, since it was not then possible to make such projections. In other words, the planning proposals of the institutionalists of the 1930s were in no way operational and so could have little influence on economic decision making by the government. Since 1945 Colm, Keyserling, Means, and other advocates of limited democratic national planning have been able to turn to the national economic budgeting developed during World War ii and now widely used in western Europe as a device for quantifying their national planning proposals and making them operational. Present-day institutionalists recommend the use of the national economic budget—what Keyserling describes as “the American economic performance budget”—to explore the pattern of future economic growth and to indicate the kind of balance among productive factors that would be necessary to reach sustained and adequate growth.
The institutionalists’ “facilitative” or “indicative” national planning would be applied only at strategic points where the private market economy needs to be supplemented, if it is to achieve the desired growth goal. No such moderate planning could be successful without the active cooperation of business, agricultural, and labor groups. These major economic interest groups would become participants in the program of facilitative planning through a national economic council.
Institutionalism and the value problem
A matter of major interest to institutionalists is the objectives of their limited democratic national planning. From the institutionalist viewpoint, originating with Veblen, what ultimately provides direction for the economy is not the price system but the value system of the culture in which the economy is embedded. Economic guidance can only be as good as this cultural value system. John K. Galbraith calls attention to this value problem in stating his view that our affluent society suffers from an imbalance in which we produce too many private goods and too few public goods. Clarence E. Ayres tackles the same problem in his defense, based on his “technological theory of value,” of the current “industrial way of life.”
In Ayres’s analysis all values originate in the life process; the basic criterion of value is whether or not a good contributes to an improvement of the life process, that is to say, to race survival. As science and technology progress and the industrial system becomes more complex, more real or “technological” values are created, and the life process is improved. Running through all values, economic and otherwise, is a unity of value in the sense that what is good or bad is in all circumstances determined by reference to the same criterion—science and technology. All such values as freedom, equality, security, abundance, and excellence are interrelated and are associated with the scientific and technological basis of the life process. For example, science and technology have made possible an economic abundance, which in turn has enlarged the freedom of the consumer. The technological process gives rise to real, or “genuine,” values that enhance the life process, but the institutional or “ceremonial” process is the source of pseudo values that weaken the life process. The latter values reflect inherited superstitions and attitudes toward status and privilege that have no foundation in science and technology and are detrimental to the welfare of the human race. Ayres regards the shift toward a more industrialized society as a favorable development, since in such a society science and technology undermine myth and superstition and substitute real for “ceremonial” values. He views industrialization as a movement toward a more “reasonable” or “rational” society; what is needed to expedite this movement, in Ayres’s opinion, is more “pragmatic” national economic planning such as is proposed by Means, Colm, and Keyserling.
The influence of the institutional school
The number of economists in the United States who can be readily identified as institutionalists has never been very large. Much of the early influence of the institutional school was due to the fact that a few of its members, especially Veblen, Commons, Mitchell, and Clark, became very well known. Although the work of Veblen and other institutionalists in the years from 1890 to 1939 did not alter the general course of academic economics in the United States, it undoubtedly contributed to making economists in general somewhat more sophisticated about the limitations of their approach. Since Veblen’s time economists have been more aware of the significance of the preconceptions underlying their work and of the limitations of their assumptions about human nature and the nature of the economic system. In recent years the institutionalist approach has been particularly useful in the study of developing countries, whose problems are most successfully handled when analyzed from the view-points of a number of social sciences. Institutional economics has also interested scholars concerned with an interdisciplinary approach to the social sciences.
The influence of the institutional school has been limited by the fact that its broad approach to economics has not been accepted by the majority of economists. Furthermore, the breadth of their approach leads the institutionalists to be interested in data that are of little concern to many other economists. These data relate to matters not readily amenable to mathematical or quantitative treatment, such as the impact of technological change, the relations between the economic system and its surrounding culture, and the development of a theory of capitalism.
Another factor restricting the influence of the institutional school has been the nature of its economic policy recommendations, which are far less widely accepted than are Keynesian policy proposals. Since, in the United States, democratic national planning even of the moderate “indicative” type is neither politically acceptable nor of interest to the great majority of economists, the impact of institutionalist policy recommendations has been quite limited. Nevertheless, the institutionalist economic policy recommendations are sympathetically received in trade union quarters and by liberal elements in the Democratic party. Furthermore, economic trends in western Europe, where limited democratic national planning has been widely adopted in capitalist countries, suggest the possibility that the influence of the institutional school may be larger in coming decades than it has been recently. Should national economic planning cross the Atlantic, the institutional school could very well gain much more influence on the development of both economic theory and economic policy than it has at present.
Allan G. Gruchy
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"Economic Thought." International Encyclopedia of the Social Sciences. 1968. Encyclopedia.com. (May 24, 2016). http://www.encyclopedia.com/doc/1G2-3045000336.html
"Economic Thought." International Encyclopedia of the Social Sciences. 1968. Retrieved May 24, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3045000336.html