Worldly Philosophers

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THE WORLDLY PHILOSOPHERS Notes including • • • • •

Life and Background of the Author A Brief Synopsis Critical Commentaries Essay Topics and Review Questions Selected Bibliography

by Mary Ellen Snodgrass, M.A. Appalachian State University

LINCOLN, NEBRASKA 68501 1-800-228-4078 www.CLIFFS.com ISBN 0-8220-7230-0 © Copyright 1990 by Cliffs Notes, Inc.

All Rights Reserved

Cliffs Notes on The Worldly Philosophers © 1990

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THE WORLDLY PHILOSOPHERS Notes including • • • • •

Life and Background of the Author A Brief Synopsis Critical Commentaries Essay Topics and Review Questions Selected Bibliography

by Mary Ellen Snodgrass, M.A. Appalachian State University

LINCOLN, NEBRASKA 68501 1-800-228-4078 www.CLIFFS.com ISBN 0-8220-7230-0 © Copyright 1990 by Cliffs Notes, Inc.

All Rights Reserved


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LIFE AND BACKGROUND OF THE AUTHOR A summa cum laude, Phi Beta Kappa graduate from Harvard, Robert Louis Heilbroner (born 1919) is an influential economist and prolific writer, reviewer, consultant, and lecturer. Raised in luxury and educated at private schools, he claims to have patterned his liberal economic views after the family chauffeur, who served as a father figure after the author's father died in 1924. Heilbroner was assigned to the Intelligence Service during World War II, interrogating Japanese prisoners of war. He rose to the rank of first lieutenant and earned the Bronze Star. Following the war he obtained his doctorate from the New School for Social Research in New York City, where he served as the Norman Thomas Professor of Economics beginning in 1972. As a practicing economist, Heilbroner has lectured before business, university, and labor groups. Among his awards and honors are the Guggenheim fellowship (1983); membership in the executive committee of the American Economic Association, Council on Foreign Relations, and the Century Association; and honorary degrees from La Salle College, Ripon College, Long Island University, and Wagner College. Outside his profession he cultivates an interest in Oriental art, the eighteenth century, bird watching, and piano. Heilbroner achieved immediate recognition as a writer and economist with his first book, The Worldly Philosophers. Published in 1953, it was revised many times. The most recent revision reflects Heilbroner's evolving views and contains backnotes as well as alterations to the final chapters, which deal with the modern economists. The book has been printed in over twenty foreign editions and is respected and utilized in American colleges and universities as a standard introductory text. In 1956, Heilbroner published The Quest for Wealth, which describes the origin and nature of the human drive for acquisition and its role in today's money-directed society. The Future as History followed in 1960, a work attempting to predict future trends in U.S. and world economics. In this book, the author questions American optimism concerning conflicting world ideologies. Not entirely pessimistic, he warns Americans to assert themselves and halt long-term trends that may prove disastrous. In 1962, Heilbroner examined the development of economic societies from past to present in The Making of Economic Society. This overview includes inquiries into slavery, feudalism, the Industrial Revolution, and the market system. The following year, the author published The Great Ascent , a survey of economic development in a hundred emerging nations and the relationship of these nations to the modern Western world, particularly the United States. In this work the author favors foreign aid only as a means of promoting trade among nations. In An Inquiry into the Human Prospect (1974), Heilbroner stresses present dangers, especially overpopulation, depletion of natural resources, and the threat of nuclear disaster. Rejecting the label of pessimist, Heilbroner says of his book: "We all learn to live on two levels and yet there are dreadful contradictions between them. This troubles thoughtful people. But here history helps. If you know something about the past, then you know this contradiction is not new."


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A BRIEF SYNOPSIS The Worldly Philosophers is a useful book--not only to college students, but to any person wishing an understanding of economics. Basically the book offers three benefits:

1.

A simpl simplee but but comp compre rehen hensi sive ve exp expla lana natio tion n of the the idea ideass of the the Grea Greatt Econo Economis mists. ts. It give givess the the read reader er an insight into the lives of these economists and the history of economics. Robert L. Heilbroner places their concepts in a proper context, thereby explaining how their philosophies evolve along with historical events. Throughout the book, the author weaves into the narrative the freshness of language, wit, and originality which makes for interesting reading. He discusses economic concepts in plain, understandable language.

2.

A valua valuabl blee intro introdu duct ction ion to any any cour course se in in econ economi omics cs.. Stud Studen ents ts wil willl find find a basic basic expla explana nati tion on of of capitalism, socialism, communism, prosperity, depression, and the practical workings of an economy. In marked contrast to the dry, technical, and theoretical treatment of economics by most textbooks, The Worldly Philosophers offers a vibrant, practical explanation of the world of economics--past, present, and future. A student will find it extremely profitable to study the book along with these notes prior to enrolling in a course or taking an exam in economic principles and problems.

3.

An overv overvie iew w of the the poli politi tica cal, l, soc socia ial, l, and and ethi ethica call conc concept eptss of econ econom omic ic thou thought ght.. For For the perso person n pursuing an education on the history of the lives, times, and ideas of the great economic thinkers of the Western world, this book contains a capsulized version of the major tenets.

DEFINITIONS OF SIGNIFICANT TERMS AND CONCEPTS The following definitions and explanations of significant terms and concepts are arranged in the order in which they appear in each chapter.

CHAPTER 1 Worldly Philosophers

Philosophers who concern themselves with economics.

CHAPTER 2 Economics

The study of the ways in which people make a living; the study of human wants and their satisfaction; the science of production, distribution, and consumption of goods and services. Economic System

The rules, laws, customs, and principles which govern the operation of an economy. Each economic system has its own peculiar problems and therefore produces its own solutions. Economic Activity

All action concerned with the creation of goods and services to be in some way consumed.


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Consumption

The process by which goods and services are utilized in satisfying human needs and wants. Production

The process of creating the goods or services to be consumed. Distribution "Physical" 1.

The process of getting goods and services into the hands of consumers. 2.

"Personal"

The division of income among individuals. 3.

"Functional"

The division of income according to different types . . . wages rent, interest, profit. Basic Agents (Factors) of Production

Land, labor, capital, and management 1.

Land

Natural resources. 2.

Labor

Human effort. 3.

Capital

The physical necessities for production--buildings, machinery, tools, equipment, and supplies. This term commonly refers to the money used to purchase these necessities. 4.

Management

The planning, coordination, and direction of production. The Economic Revolution

The development of historical factors which culminated in the adoption of the market system (capitalism). Factors Responsible for the Economic Revolution

1.

The Renaissance

(1350-1600)--the era which saw the decay of a restrictive religious spirit in favor of a spirit of skepticism and inquiry. 2.

The Scientific Revolution

(1500-1700)--the period of scientific experimentation and discovery which laid the foundation for the Industrial Revolution. 3.

The Emergence of Nation-States

(l5th-l7th centuries)--a period giving rise to royal patronage for favored industries, maritime trade, common laws, standard measures, and common currencies.


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4.

The Age of Exploration and Discovery

(l5th-l7th centuries)--an era which provided natural wealth from the colonies in the form of gold, silver, and other raw resources. 5.

The Protestant Reformation

(l500-1648)--a time period encouraging enterprise and the investment of capital; a philosophical outgrowth which made interest and profit respectable.

CHAPTER 3 Age of Enlightenment

A period (roughly 1700-89) when political, economic, and social thought was dominated by an optimistic faith in reason and in the progress of the human race. Mercantilism

The doctrine which dominated European economic policies from 1500 until the advent of laissez faire through a program which stressed that the real wealth of a nation resulted from its stores of gold and silver, which could be acquired by an excess of exports to imports, self-sufficiency of the nation, and exploitation of colonies. Physiocrats

A group of thinkers during the Age of Enlightenment who opposed mercantilism, believing instead that the true source of wealth derives from land and agriculture; they advocated the doctrine of laissez faire. Francois Quesnay (1694-1774)

French economist who founded the school of Physiocrats and greatly influenced Adam Smith. Laissez Faire

Literally, "let [it] function"--the economic doctrine founded by Quesnay and the Physiocrats and expounded by Adam Smith, stressing no governmental interference in the operations of the market economy. Three Historical Stages of Capitalism:

1.

First Stage

(1450-1750) "Commercial Capitalism," when profits depended on the transportation of goods. 2.

Second Stage

(1750-1870) "Industrial Capitalism," when profits depended on manufacturing. This stage coincides with the Industrial Revolution. 3.

Third Stage

(1880-present) "Financial Capitalism," under which profits are derived from the investment of money. Industrial Revolution

The transition from the stable agricultural and commercial society of the Western world to the modern industrialized society; the second stage of capitalism.


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Enclosure Movement

The practice of fencing off lands formerly subject to common rights in order to provide pasture land for sheep. This movement caused a shift of the poor in England from farms to cities. Patron Saint of Free Enterprise

Adam Smith. Father of Modern Economics

Adam Smith. Classical Economists

The economists who preached the doctrine of laissez faire and stressed that the production, consumption, and distribution of goods and wealth are determined exclusively by economics laws and principles.

CHAPTER 4 Iron Law of Wages

Labor's wages must remain at the subsistence level, or natural price, because of the worker's tendency to produce more children. (David Ricardo) Malthusian Doctrine

Thomas Malthus' thesis that population, unless checked, grows at a greater rate than the means of subsistence and will result in starvation. Neo-Malthusianism

A name originally denoting birth control.

CHAPTER 5 Founder of British Socialism

Robert Owen. Founder of French Socialism

Saint-Simon. Utopia

A name which classifies any social, intellectual, or political scheme which is impractical at the time when it is conceived. Also, a reference to ideal states peopled by perfect human beings. Socialism

State ownership of the means of production, which is obtained through peaceful evolution without loss of personal liberty; the nationalization of all land and minerals, public transportation, trade, and banking, as well as factories--with the profits going to the people as a whole rather than to capitalists or landlords. Utopian Socialists

Reformers inspired by the Age of Enlightenment and the French Revolution who believed in progress and human perfectibility. Because these theorists wished to reform society by voluntary means, they earned the scorn of Karl Marx, who dismissed them as visionary idealists and labeled them "utopian socialists."


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CHAPTER 6 Hegelian Dialectics

The philosophical concept that in the world of ideas, change occurs as the result of a synthesis, or coming together of opposing forces: a given idea (thesis), when challenged by a new and opposing idea (antithesis), results in a new concept (synthesis) which is somewhat closer to the truth than the initial two ideas. Dialectical Materialism

Karl Marx's application of Hegel's dialectical method to an explanation of all world events. Historical Materialism

Marx's economic interpretation of history, which stresses economics as the basis for all human actions and historical events. Communism

A belief in the achievement of socialism by revolutionary means, particularly by class warfare. Marxism

Communism according to the exact words and predictions of Karl Marx. Scientific Socialism

What Marx and Engels called the ideas contained in The Communist Manifesto and Das Kapital ; scientific laws explaining the economic determination of history, class struggle, and the inevitable downfall of capitalism with the eventual triumph of workers over the moneyed class. Prophet of the Proletariat

Karl Marx. Capitalists

The class which provides or controls the money that underwrites the production of goods. Technically, capitalists are the upper class of the bourgeoisie, known as the "haute bourgeoisie," or high middle class, the most hated class under Marxism. Bourgeoisie

The middle class. Technically, it includes the "petite bourgeoisie," or small middle class--the small shopkeepers, government officials, lawyers, doctors, independent farmers, and teachers--and the "haute bourgeoisie." The term is generally used by Marxists to describe the owners of private property. (Bourgeois is the spelling of the adjective form.) Proletariat

Lowly wage earners, or workers. Anarchism

The support of no system of government; the belief that government, controls, and authority are oppressive. Father of Anarchism

Pierre Proudhon.


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CHAPTER 7 The Victorian Age

The period associated with the reign of Queen Victoria of Great Britain, 1837-1901. Imperialism

The extension of authority, or control, of one nation over another. Economic Imperialism

The economic and/or political domination of underdeveloped countries by powerful nations. The period between 1870 and 1914 is known as Europe's "Golden Age of Imperialism."

CHAPTER 8 Robber Barons

Unscrupulous titans of U.S. finance and industry, including Jay Gould, Jim Fisk, and Cornelius Vanderbilt. The term was derived from the title of a book by Matthew Josephson. Conspicuous Consumption

The use of material goods to flaunt a person's belonging to a moneyed or privileged class. Technocracy

Government run by technical experts, with money replaced by work units of currency.

CHAPTER 9 The Great Crash

The Wall Street Crash of October 1929, when the New York Stock Exchange collapsed after a selling wave in which stock values tumbled in a panic following an all-time high. The Great Depression

Worldwide depression triggered by the Wall Street Crash. The era extended from 1930-39, with the depths reached in 1933. The New Deal

Social and economic reforms carried out by President Franklin D. Roosevelt between 1933 and 1939 to combat the Great Depression. The Hundred Days

The period of remarkable cooperation between President Roosevelt and Congress, beginning with a special session on March 9, 1933, when the basic measures of "Relief, Recovery, and Reform" were enacted into law. Compulsory Savings

A deferred savings plan by which a government finances a war through a required deduction from all wages to pay for war bonds.


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CHAPTER 10 Plausible Capitalism

A capitalistic system that perpetually renews itself through growth. Monopoly

Literally, "single seller"; an economic situation in which one firm controls an entire market. Circular Flow

A static system which channels productivity and profits into an endless exchange. Entrepreneur

A risk-taker, or innovator, in the business world.

CHAPTER 11 Behavioral Regularities

Predictable aspects of the marketplace, such as competition and demand. Preanalytic

Creative; predicting change.

CRITICAL COMMENTARIES FOREWORD The Worldly Philosophers is an engaging, readable text. As such, it presents readers with a comprehensive explanation of the development of modern economic philosophy. This guide is designed to supplement the book in order to instruct students in unfamiliar basic concepts, such as mercantilism, as well as in periods of historical development in the social sciences, notably the scientific revolution, Renaissance, commercial revolution, and the Great Depression.

The text of this guide offers many insights into the realm of basic economics. A particular challenge is the bridging of gaps as the author leaps from idea to idea. The organization of this guide simplifies materials through chapter summary, commentary on background information, further explanations of relevant points in each chapter, and, finally, an overview and evaluation of the book as a whole. Overall, the guide seeks to sharpen the reader's comprehension of economics as a science.

CHAPTER 1: Introduction Summary

The subject of The Worldly Philosophers, the great economists, covers those theorists whose words and thoughts concerning the creation and distribution of wealth have had a major impact on society. Indeed, these men have swayed and shaped the world. The title of the book comes from their common interest: the human drive for worldly wealth. From this compulsion is derived the concept of worldly philosophers. Surprisingly, these economists did not appear on the scene of world events until long after the advent of history, philosophy, science, politics, art, and statecraft. They began in the latter part of the eighteenth century with the work of Adam Smith.


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Commentary

Even though these economists are not yet named, they are described by such intriguing characterizations as madman, skeptic, and tramp. Among the identifications, which become apparent in subsequent chapters, are these: a philosopher--Adam Smith a parson--Thomas R. Malthus a stockbroker--David Ricardo a nobleman--Saint-Simon a madman--Charles Fourier a revolutionary--Karl Marx an aesthete--John Maynard Keynes a tramp--Henry George a skeptic--Thorstein Veblen

CHAPTER 2: The Economic Revolution Summary

From the beginning of civilization, human beings have faced the challenge of survival, which depends upon two factors--work and cooperation with others. Since individuals are notably self-centered, the possibility that humans will not remain faithful to work has threatened society's existence. If there are not enough miners to work the mines or if most miners should decide to follow another line of work; if farmers should decide to fish instead of plow and reap; or if an insufficient number of students studied medicine or engineering, the economy would break down. In summary, if the interdependence of human workers should fail at any vital point in the economy, the world would suffer. During the early portion of civilized life, only two methods safeguarded against such an outcome--tradition and command.

Tradition The passage of tasks, or jobs, from generation to generation through custom--a carpenter's child becomes a carpenter or a farmer's offspring take charge of the family farm. This reliance on tradition for the selection of a life's work was especially true of the Middle Ages and is still true in many underdeveloped areas of the world.

Command, or Central Authoritarian Rule The enforcement of economic survival by absolute rule or dictatorship. An example of this principle is the building of the pyramids in ancient Egypt and the carrying out of the Soviet Union's Five-Year Plans in the post-World War II era. Throughout most of history, one or the other of these two methods has solved the problem of survival. Because the methods are simple and need no economic explanation, there has been no need for economists. Since the Economic Revolution, however, the evolution of a third method--the market system--has presented a more challenging economic puzzle.

The Market System A system where buyers and sellers, motivated by self-gain, freely conduct business with the goal of making profits. Another name for this arrangement is capitalism. Prompted by neither the "pull of tradition or the whip of authority," free markets are motivated by a single factor--the human urge to acquire goods.


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The market system is not the simple exchange of goods which existed in primitive society, nor the commercial fairs of the Middle Ages. Nor is it a farm produce market or a stock exchange. The market system supports and maintains an entire society. Unplanned and slow to evolve, it was brought about through the most far-reaching revolution of the Western world--the Economic Revolution. Many factors combined to cause the revolution, such as the breakup of the manorial system, the decline of guilds, the acceptance of the concepts of land, labor, and capital, the effects of the Renaissance, scientific advancement, European voyages of discovery and exploration, the emergence of modern nation-states, and the Protestant Reformation, which sanctioned the concept of profit. The market system emerged only after bitter opposition to change by the people who tried to maintain their role in the status quo. Nevertheless, as the profit motive became respectable, the market system took shape, bringing with it the economists who satisfactorily explained the complexities of the system. In 1776, Adam Smith wrote his amazing masterpiece, Inquiry into the Nature and Causes of the Wealth of Nations, a work which helped society understand how changes in economics were leading toward a new plateau in human history. Commentary

Tradition, or the subsistence economy, bases itself on family, clan, or tribe. By this system, each unit produces all that it needs, and it consumes all that it produces. In many rural areas of Africa, Asia, and Latin America, the question of who will work and what work will be assigned to whom is settled by custom. The planned economy under central authoritarian rule differs from tradition in that the means of production and the authority to make economic decisions belong to the state. Examples existed in ancient Egypt and Babylonia, where massive work projects were organized at the whim of the ruling class. In more recent times, the communist nations which were formed after the Russian Revolution in 1917 have attempted the same large-scale operations as an outgrowth of a centralized authority. In neither instance did individuals actualize their own ideas or goals. In the market system, or market economy, economic decisions are decentralized: Each member of the labor force chooses which job to follow; each household selects what to buy with its income; and each business decides what to produce, what production methods to use, and where to sell the resulting product. Modern examples exist in the United States, Western Europe, Japan, and Great Britain. This capitalism, which is also called a free or private enterprise system, is named for its use of capital, or investment funds. None of the three methods, or systems, exists in pure form. Systems practiced today in the United States, Great Britain, Japan, or the Soviet Union are better described as mixed economies, which contain elements of both the market economy and the planned economy. For example, within free enterprise there are obvious government-sanctioned monopolies, such as electric power companies, railroads, and communications systems. In order to develop what is meant by the Economic Revolution and its roles in the remaining chapters of the book, a few definitions will prove helpful:

Economics The study of the ways in which human beings make a living; the study of human wants and their satisfaction; the science of wealth.


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Economic System The rules, laws, customs, and principles which govern the operation of an economy. Each economic system has its own peculiar problems and therefore produces its own solutions.

Economic Activity All action concerned with the creation and distribution of goods and services.

Consumption The process by which goods and services are utilized in satisfying human needs and wants.

Production The process of creating goods or services to be consumed.

Distribution a.

Physical

The process of transporting these goods and services to the people who need or want to consume them. b.

Personal

The division of income among persons. c.

Functional

The categorization of income according to type--wages, rent, interest, and profit.

Basic Agents of Production of the Market System Land Natural resources.

Labor Human effort.

Capital The physical necessities for production--buildings, machinery, tools, equipment, and supplies. Economists call these basic agents "factors of production." They include a fourth factor--management, which plans, coordinates, and directs production, although some economists label this factor a specialized high-level form of labor. The market system involves a high degree of economic activity, revolving around the production of goods and services. It is significant that the basic agents of production--land, labor, and capital--did not exist as abstract ideas until the Economic Revolution. Of course, there was land used for agriculture, and labor in the form of human workers doing physical tasks, and capital that provided funds for buying tools and maintaining the land. However, society as a whole did not consider these terms as impersonal ideas in the modern sense of "Let's start a business--we need land for the location of the factory, we need a labor force to do the work, and we must have the capital to finance our efforts."


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During the Middle Ages, land existed in the form of estates, manors, and principalities, but it was not "for sale" in the modern sense. Instead, the ownership of land provided the prestige and status around which social life revolved. There were serfs, apprentices, and journeymen who worked, but there was no labor market--that is, people who were looking for jobs. The serfs were bound to the land of their masters, the lords. The apprentices and journeymen served the master and were rigidly controlled by guild regulations. Capital funds in the sense of private wealth existed, but not with any idea of investing, expanding, or taking risks. The goal of medieval landholders was to stabilize and protect the nation by financing wars and conquests and by underwriting the household expenses of kings. A good example is the Fugger banking family of Bavaria, which failed to pursue the amassing of wealth begun by their patriarch, Anton Fugger. Under the medieval system, advertising was unheard of; the basis of price was the just price. People lived as their ancestors had lived--off the output of the family land. Without land, labor, and capital there was no production in the modern economic sense and therefore no market system. Society in the Middle Ages was run by custom and tradition. This system changed after the Economic Revolution, which represented a radical departure in commercial practices and concepts. The following factors were responsible for the Economic Revolution, which ushered in the market system:

The Renaissance (1350-1600)--when the weakening of restrictive religion produced a more skeptical, inquiring attitude.

The Scientific Revolution (1500-1700)--the discovery of scientific principles which laid the foundations for the Industrial Revolution.

Emergence of Nation-States (15th-l7th centuries)--a process that gave rise to royal patronage for favored industries, maritime trade, and the standardization of laws, measurements, and currencies.

The Age of Exploration and Discovery (l5th-l7th centuries)--an era which saw the rise of wealth in gold, silver, and raw resources from colonies in the New World.

The Protestant Reformation (1500-1648)--an era which encouraged enterprise, the investment of capital, and the respectability of interest and profit. The greatest single change necessary for the adoption of the market system, or capitalism, was a radical change in the attitude of society toward profit, or self-gain. Without the profit motive, there would be no capitalism, or market system. Certainly, the concepts of money and profit are old, with the first coined money dating back to Lydia, around 600 B.C., and with such Greek philosophers as Xenophon, Plato, and Aristotle, who were well aware of wealth, money, and profit. However, rather than emphasize any economic considerations, the ancient philosophers denounced economics in favor of basic questions about truth, good, evil, God, and life. Later, the Church and its philosophers, especially St. Augustine and St. Thomas Aquinas, were completely absorbed with the question of immortality. These religious thinkers emphasized salvation as


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the all-important concern of society and criticized the acquisition of earthly material goods or riches. And so it was that the New Testament phrase "For the love of money is the root of all evil" (I Timothy 6:10) blocked the development of the market system, which emphasized self-gain and profit rather than spirituality. Gradually, however, the factors listed above helped shape the market system. The Renaissance encouraged a new individualism in economic affairs and contributed to the breakdown of the guild system and to the rise of enterprise. Protestantism became a strong force in the alteration of concepts. Calvinism especially encouraged enterprise. Some Calvinists saw prosperity as a sign of God's grace, and poverty as evidence of damnation. Thus the Protestant Reformation obliterated the old concept of the just price and the ban against charging interest on loans. Consequently, the loaning of money and the investment of capital became respectable, and Western society as a whole adopted the profit motive, an idea explained by Adam Smith, the father of modern economics.

CHAPTER 3: The Wonderful World of Adam Smith Summary

Adam Smith (1723-90), a quiet, nervous, scholarly Scottish bachelor, taught first at Oxford University and then at the University of Glasgow. He gained fame as a moral philosopher, and during his lifetime, his book The Theory of Moral Sentiments earned the critics' appraisal as his best work. Consequently, he was already well known before publishing his enduring masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations. During a three-year tour of Europe as traveling tutor of the stepson of Charles Townshend, Smith met the leading thinkers of the Age of Enlightenment, including Benjamin Franklin and Dr. Samuel Johnson. He was particularly impressed with Francois Quesnay, principal spokesman for the French physiocrats, who believed that wealth arises from production. While traveling, Smith worked on his Wealth of Nations and completed the book in 1776, ten years after his return to Scotland. The Wealth of Nations, which resembles an encyclopedia, is far more than a mere textbook on economics. One critic calls it "a history and criticism of all European civilization." Among a host of topics, it discusses the origin and use of money, apprenticeship, statistics, waste, the military, foreign trade, landlords, the clergy, royalty, farming, and "the late disturbances in the American colonies." The book's 900 pages are demanding reading, for Smith often belabors a point without drawing a conclusion. It is not actually original in the sense that its basic ideas are unique to Smith. The author refers to more than 100 authors in developing his arguments, including Locke and Hume. He borrows heavily from the physiocrats, particularly Quesnay, from whom he takes the doctrine of laissez faire, or "leave it alone." However, the book is a masterpiece because it presents a comprehensive picture of economics--a revolutionary doctrine which views the economy as though it were a living organism. Briefly, these are Adam Smith's economic laws: 1.

How can society depend on capitalism, which is an unregulated market system? Smith replies with two laws of the market. The desire for wealth permeates all human activity. Therefore, selfinterest, or profit, motivates people to perform necessary tasks for which society is willing to pay. As Smith writes, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from our regard to their self-interest." Thus, the first law of the market is self-interest, or the profit motive.


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2.

But how can the individual's selfish desires benefit society? What stops greed from overwhelming the public, resulting in ruthless exploitation by profiteers? Smith answers that the individual, in the process of providing for personal interests, unintentionally contributes to the economic well being of society. Therefore, the second law of the market is competition. The individual who overcharges for products soon learns that competitors will take away business by offering more reasonable prices. If wages are too small, workers will hire out to another employer who will pay more for their services. Thus, selfish motives are tempered by interaction, resulting in social harmony.

According to Smith, under the market system each worker freely chooses a trade. Through such a multitude of choices, society reaps the benefit of having all its necessary tasks filled. The individual, motivated by self-interest, selects a particular task. Competition for these tasks prevents the individual from over-charging society. Thus, the two laws of the market--self-interest and competition--react upon each other and form a balance, guaranteeing the survival of society. In addition, the laws of the market not only insure that prices are competitive, but they also determine the quantities of goods produced. As Smith explains, when the public demands more gloves than shoes, there will be a brisk business in gloves, but little demand for shoes. Consequently, the price of gloves will rise as demand exceeds supply and pushes prices up. The price of shoes will go down because the supply exceeds the demand. At this point, self-interest becomes a factor. Since there are higher profits in the glove business and a greater need for gloves, new producers begin manufacturing gloves. Workers move from shoe factories to glove factories. The result is that glove production rises and shoe production falls. Before long, the market achieves a balance. As the supply of gloves grows to meet demand, glove prices decrease. As the supply of shoes falls below demand, shoe prices rise. This price increase stimulates shoe production. Therefore, the opposing forces of self-interest and competition balance the market. Finally, the laws of the market also regulate incomes of producers. When profits in one type of business become unusually large, new producers are attracted to the business--until competition reduces the surplus of profit. In the same way, labor's wages are regulated--workers are attracted to higher paying industry until the labor supply lowers the pay scale to that of comparable jobs. By the same token, the reverse is true--when profits or wages are too low, producers or workers will leave that field for more lucrative areas. But the key to the operation of the laws of the market is that the market is "its own guardian." It is selfregulating if left alone (laissez faire) so that competition can operate freely without government control and without monopolies. Does capitalism, or the market system, actually operate in this way? It did during Smith's time, for the business world was a world of atomistic, or elemental, competition. Yet, there was evidence that a large number of people did not profit from the system. Still, even though more than an eighth of England's population in 1720 was poor, Smith insisted that society could not flourish if "the greater part of the numbers are poor and miserable." In his radical view, society was definitely improving. By comparison, the capitalistic world of today differs greatly with its giant corporations and massive labor unions. However, the twin laws of self-interest and competition still form the basis of the market system. Adam Smith was optimistic in his vision of the future. To him, the society of the market system was dynamic and progressive. During his lifetime, division and specialization of labor greatly increased productivity. He expressed enthusiasm after his visit to a pin factory which employed only ten people.


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Each worker specialized in a single operation; the total daily output was over 48,000 pins. If each worker were to handle all steps involved in the manufacture of pins, the total output per worker would fall to twenty pins per day for a total production of 200 pins. According to Smith, a simple factory worker, in comparison with an African king, lives a more luxurious life as a result of the work of specialized labor. In his vision of society's economic progress, Smith saw two additional fundamental laws which propelled the market system in an ascending spiral of productivity and away from the "avarice of private greed." These laws he called the law of accumulation and the law of population. 3.

The law of accumulation refers to the accumulation of profits, which are put back into production. By accumulating profits, capitalists can purchase additional machinery, which will stimulate further division and specialization of labor, thereby boosting productivity. However, additional machinery means more workers to work them. Eventually this increased demand for workers leads to higher and higher wages until profits vanish. At this point, further accumulations are impossible.

4.

The solution to this obstacle is Smith's law of population. Labor, like any other commodity, is subject to demand. As the law of accumulation increases wages for workers, the numbers of the working class will increase. As the population of workers increases, its size becomes a counterforce, pushing wages down. As a result of lower wages, profits for the capitalist will rise again, and accumulation will continue.

Thus, these two evolutionary laws form an endless chain for society through which progress is inevitable. Even though the Law of Population depresses wages toward a subsistence level, it never arrives there. Conditions steadily improve, resulting in further accumulation for further investment. What is the end result? Not a utopia, but the economy, if left alone, will ultimately reach its "promised reward" --a world where poverty and wealth balance each other. Commentary

To comprehend fully why Smith's Wealth of Nations was a revolutionary book, one must know something of the economy and living conditions in England in 1776. The nation was entering the second of three stages of capitalism. 1.

The first stage, known as commercial capitalism, occurred between 1450 and 1750. It was brought about by the five factors which produced the Economic Revolution and was affected by geographic discoveries, colonization, and increase in overseas trade. The early capitalists were protected by government control, subsidies, and monopolies and made their profits from transporting goods.

2.

The second stage began about 1750 and was made possible by new sources of energy, primarily the steam engine. This invention enabled the factory system to develop through the use of machines for manufacturing and resulted in the rapid growth of wealth. This stage, known as industrial capitalism, which reached its height during the 1850s, resulted as capitalists profited from manufacturing.

3.

The third stage of capitalism began in the last quarter of the nineteenth century. Because of the control and direction of industry by financiers, this stage is known as financial capitalism, with profits coming from investing.

Wealth of Nations appeared in England just as the Industrial Revolution was beginning, a fact unknown to Adam Smith and the capitalistic class of his day. In England, the government controlled practically every


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sector of the economy, including prices, wages, hours of work, production, and foreign trade. The House of Lords represented the noble families, or landed aristocracy, which controlled the vote as well as public office. Only 3 percent of the population affected the election of members to the less static House of Commons. For the poor, conditions were abominable. Men, women, and children, stripped to the waist and stooped over in semi-darkness, worked in dank mineshafts. The masses struggled brutally for a meager existence. When wool became a profitable commodity, land owners enclosed new pastures to raise sheep. The process of enclosure, which began in the sixteenth century, reached its height in the nineteenth century, with thousands of tenant farmers thrown off the land in order to make room for the more profitable sheep. Over 1.5 million of England's twelve to thirteen million population suffered poverty. Yet the grasping aristocracy, who considered the poor a necessary segment of a stable society, opposed any suggestion of a more equitable distribution of wealth. Mercantilism, the dominant economic concept of the day, upheld the view of government and business that real wealth consisted of gold and silver. Since the reign of Henry VIII, mercantilists sought a strong, self-sufficient economy, protected by a strong central government. Their program called for the following: 1. 2. 3. 4. 5. 6. 7.

accumulation of gold and silver a favorable balance of trade through an excess of exports the self-sufficiency of the nation through the utilization of raw materials from either England or her colonies colonies to provide raw materials, as well as a market for England's manufactured goods low wages and long hours for workers high tariffs to protect home industry and to discourage imports a strong merchant marine.

Adam Smith's Wealth of Nations launched a specific attack on the doctrine of mercantilism. In his celebrated Book IV, he called for free trade and the abolition of economic restraints and monopolies. Forget "balance of trade," he argued. "Wealth does not consist in money, or in gold and silver, but in what money purchases, and is valuable only for purchasing." As opposed to the emphasis on agriculture by the physiocrats, Smith emphasized manufacture. For Smith, the real wealth of nations consists of the goods which they can produce and trade. This condition can be accomplished only by allowing production and commerce to develop freely, without controls. The replacement of mercantilism with the doctrine of laissez faire did not come immediately with the publication of Smith's views. It was not until the nineteenth century that the Wealth of Nations made its full impact. Then Great Britain discarded mercantilism completely to become the world's wealthiest nation. Unfortunately, the rising industrial capitalists managed to disregard certain stinging accusations in Smith's philosophy, such as "People of the same trade seldom meet together but the conversation ends in a conspiracy against the public, or in some diversion to raise prices . . ." Adam Smith, in fact, was neither pro-capital nor pro-labor. At the University of Glasgow, he was influenced by the concept of "the greatest happiness of the greatest number." Consequently, he avoided taking sides with any class, concerning himself with the promotion of wealth for all of England's classes. A principle which his contemporary capitalists chose to ignore was Smith's concept of labor value. His observation that labor is the only real standard of value has been contradicted by most economists, but widely adopted by socialist writers. Some ninety years later, Karl Marx seized and expanded upon this idea, building it into his exaggerated theory of "surplus value."


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What British capitalists stressed was Smith's gospel of laissez faire. Ignoring the philosopher's warnings about the dangers of monopoly, they justified resistance to government attempts at social legislation. During this era, child labor was common in poorly ventilated and unsanitary factories; manufacturers shackled children to machines. To quell child labor laws, factory owners quoted Wealth of Nations in defense of deregulation. Accordingly, Adam Smith's proposals for protective measures for workers, farmers, consumers, and society as a whole; the abolition of slavery; and the control of monopolies were ignored. Capitalists championed the Wealth of Nations as a vindication of corrupt business practices. In this way, Adam Smith, the soft-spoken scholar, became the patron saint of free enterprise in the capitalistic world. In later times, Adam Smith, by thoroughly describing and explaining the market system, became the father of modern economics. He founded the school of Classical Economists, whose chief spokesmen were David Ricardo and Thomas Malthus.

CHAPTER 4: The Gloomy Presentiments of Parson Malthus and David Ricardo Summary

Adam Smith's vision of the world demonstrated glowing optimism when he founded the school of Classical Economists. Ironically, the chief spokesmen for that school--David Ricardo and Thomas Malthus--while accepting the principles which Smith laid down, differed sharply from him in their pessimistic views of an ominous future. Ricardo and Malthus violently disagreed with each other's economic views on practically every point except one--the dangers of overpopulation. When one published a book or article developing a particular economic thesis, the other attacked it. Yet, despite differences of philosophy, the two economists were congenial and held a high personal regard for each other. Of Dutch extraction, David Ricardo was a successful Jewish stockbroker who, by the age of 26, became financially independent. He won widespread respect, and his social position ranked high, including membership in Parliament where he earned the title, "the man who educated Commons." His Principles of Political Economy (1817) helped shift the economic picture from Smith's optimism to a widespread pessimism. A practical man in financial matters, Ricardo was essentially a theorist who created a dry, mechanistic picture of society. In contrast, the Reverend Thomas Malthus had none of Ricardo's good fortune or social success. He never enjoyed more than a modest income and was continually criticized for his ideas. In fact, his biographer called him "the best abused man of his age." Spending most of his life in academic research, Malthus was not at all practical in financial matters, yet was most practical in his economic views.

DAVID RICARDO (1772-1823) During the forty years following the publication of Adam Smith's Wealth of Nations, rivalry between the rising industrial capitalists and the conservative, complacently landed aristocracy dominated the English scene, particularly over the matter of food prices. Since capitalists had to pay at least a subsistence wage to workers, they were vitally interested in lowering grain prices. To this end, they welcomed cheap, imported wheat and corn. Landowners and landlords naturally resented imports because they depressed prices and profits from their own grains.


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The landlords' resentment was translated into action in Parliament where they held the majority. The result was the passage of the Corn Laws, which imposed duties on imported grains, thereby effectively keeping low-priced grain out of England. The landlords' political clout was so great that Parliament did not repeal the Corn Laws until thirty years later. Observing the advantageous position of the landlord, the struggle of competing capitalists, and the economic plight of the worker, David Ricardo envisioned an unpromising future for capitalism. To Adam Smith, society appeared balanced and harmonious, but, to Ricardo, society was a bitterly competitive contest. He viewed the worker as little more than an automaton, whose only human expression was an indulgence in sex. Instead of raising the family standard of living when wages rose, the worker produced more children and thereby increased the labor supply, offsetting the tendency for wages to rise as the supply met and exceeded the demand for workers. Thus, the worker was doomed to gain no more than a subsistence level of wages. As for capitalists, Ricardo saw them as eternally seeking profits but engaged all the while in fierce competition with other capitalists. This situation naturally reduced profits. Worse, the capitalist was further squeezed by the landlord because profits depended largely on the amount of wages which had to be paid, and the high price of grain always resulted in high food prices, which led to higher wages. While Ricardo considered the roles of the worker and the capitalist in the market system to be legitimate, he saw the landlord as a villain. Ricardo explained rent--the landlord's income--as a very special kind of return which originated from the differences in cost between productive land and less-productive land. In other words, the yield was so much greater from productive land that its cost of production was much less than that of less-productive land. This difference in costs was represented in rent, for the selling price of the product--artificially high due to great demand and lack of competition from imported grains--was the same for both yields. Rent in the nineteenth century was not controlled or restricted by free competition because land did not change hands. Thus, Ricardo viewed land as a monopoly. As the economy progressed and the population increased, more farming was needed to meet the increased demand for grain necessary to feed that population. This situation pushed the selling price of grain up and increased the income of the landlord. Thus the capitalist, who paid increased wages to the workers to enable them to live, also suffered. Therefore, concluded Ricardo, of the three parties in this bitter struggle--worker, capitalist, and landlord-only the landlord profited. As to the future, it held little promise as the worker was doomed to a subsistence wage because of his growing family, and the capitalist had his profits gobbled up by the landlord. Ironically, Ricardo was himself a landlord. However, this fact did not prevent him from attacking what he saw as an evil, and he continually sought the abolition of the Corn Laws. As a result, David Ricardo became the champion of the rising capitalists. Commentary

A little over twenty years after the death of David Ricardo, the Corn Laws were abolished (1846), and the industrial capitalists eventually broke the power of landlords and replaced them. Consequently, the dismal future which Ricardo had envisioned did not come to pass. One of Ricardo's main contributions to economic theory was his concept that rent rises from differences in the quality of land. This situation was a direct refutation of the physiocrats' concept that rent rose from the bounty of nature. Of greater importance, however, was Ricardo's theory of wages. While not called as such in the text, this theory has been labeled the Iron Law of Wages--which states that wages must remain at the subsistence level. This level, according to Ricardo, is labor's natural price--the income which is necessary for the


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worker to exist. By applying the doctrine of laissez faire, Ricardo argued that wages should be left to free competition and should never be controlled by government interference. Capitalists agreed with his theory.

THOMAS R. MALTHUS (1766-1834) Summary

Oddly enough, since his income was modest and he owned no land, Thomas Malthus defended the landlord and attacked Ricardo's views. Instead of viewing landlords as villains, Malthus praised them as ingenious capitalists. Still, Malthus was pessimistic over the future of capitalism, but for a different reason. He warned of general gluts, when the process of saving might lead to a lessened demand for goods and thereby to an excessive quantity of products without enough buyers. Although Ricardo refuted this logic, Malthus did demonstrate his foresight in predicting depressions. While motivated by compassion for the poor, Malthus earned criticism by opposing relief and housing projects, objecting to these measures on the grounds that charity is really cruelty in disguise. He reasoned that by keeping the poor alive, they would continue to propagate, producing more poor. It was not his articles on economics nor his Principles of Political Economy (the same title as Ricardo's book) which made Malthus famous. Rather, it was his anonymously published Essay on the Principles of Population as It Affects the Future Improvement of Society (1798), whose reception was so great that Malthus expanded the original edition from a 50,000-word pamphlet to a 600-page book. The effect changed Adam Smith's optimism to an outlook so bleak that Thomas Carlyle named economics "the dismal science." Critics heaped scorn and derision on "Parson" Malthus. Yet approval came from an unexpected quarter, for David Ricardo substantiated Malthus' claims about the perils of rising population. The inspiration for Malthus' masterpiece came from his reading of Political Justice , an incorrigible piece of optimism by William Godwin. Godwin's vision of the future was a utopia containing neither war nor crime nor disease nor government--nothing but complete happiness. Malthus expressed his dissension through his Essay on Population. Malthus' thesis--known as the Malthusian Doctrine--states that population grows at a rate greater than the means to feed it, and, if unchecked, the world's population will double every twenty-five years. Being the first economic statistician, Malthus based this estimate on the population growth of the United States, where a real census appeared before it did in England and revealed that the U.S. population had doubled in twenty-five years. So, explained Malthus, population will continue to increase geometrically, doubling itself from 1 to 2 to 4 to 8 to 16 to 32 times its original size until it reaches cataclysmic proportions. Meantime, the land, which cannot keep pace with subsistence, is put into cultivation in units of one additional section at a time. In other words, the means of subsistence can only increase arithmetically from 1 to 2 to 3 to 4 to 5 to 6 and so forth. Clearly, Malthus concluded, the result will be too many people with not enough food--that is, if population growth continues unchecked. How can population be checked? 1.

First, by positive checks--war, disease, infanticide, poverty, and famine. However, it's obvious that these age-old inhibitors cannot halt the disastrous population spiral.


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2.

Second, there are the preventive checks of sexual abstinence and vice--that is, prostitution and homosexuality. What Malthus advocated as the only possible solution is abstinence or "moral restraint." He called for late marriages because fertility lessens in the later years and passions cool. Even though he was acquainted with birth control, he disapproved of it on moral grounds. Being a minister, Malthus could hardly advocate vice, so he stressed the advantages of restraint. However, the Reverend, a realistic observer of human conduct, doubted the ability of people to practice restraint. Consequently, he predicted that the future of humankind will be starvation.

Are Malthus' facts correct? Yes, if measured by the actual rate of population growth in much of the world, particularly in India and China. Why, then, has his prediction not come to pass? Basically, because of the widespread use of modern birth control methods, especially in the Western world, and the tremendous increase in agricultural technology, which provides more than enough food in advanced countries. Commentary

While the majority of economists and scientists consider the Malthusian Doctrine invalid, an increasing number of demographers (scientists who study population statistics) warn that it is very real indeed. Less than 20 percent of the world's people depend on preventive checks. These people live in advanced areas of the world, especially Europe and the United States. The countries where population explosions occur are less technologically advanced areas in the Third World, notably India, China, and Latin America. Ironically, the increased use of modern sanitation, hygiene, and preventive medicine has increased the problem of overpopulation by reducing high death rates, which once served as a positive check. Malthus was not as incorrect in his analysis as modern economists would have us believe, but the Malthusian Doctrine is still a specter that haunts the minds of an increasing number of modern theorists. In any case, the warnings of the chief spokesmen for the school of Classical Economists swayed the minds of the nineteenth century, and the wonderful world of Adam Smith became the gloomy world of Thomas Malthus and David Ricardo, paving the way for the Utopian Socialists.

CHAPTER 5: The Visions of the Utopian Socialists Summary

"Gloomy" describes not only the future described by Malthus and Ricardo, but also the actual world of England in the 1820s. On the Continent, the nation had triumphed in the long struggle against Napoleon, but at home it wallowed in social evils brought on by the factory system. By current standards, working conditions were terrible. Children of ten years and younger labored in such industrial centers as Manchester and Birmingham in poorly ventilated buildings that lacked basic sanitary and safety measures. It was not unusual for children to be whipped--not only for a slight mistake, but to stimulate efficiency. Food, shelter, and treatment for workers presented additional problems. In some places, children were tortured and sexually abused and had to scramble with the pigs for food. A sixteen-hour working day was common--from six in the morning to ten at night. Many children spent their few hours of sleep on factory cots to save the long trudge home. Machinery saved labor, but wreaked havoc on workers. New machines were not covered or fenced off, and mangling accidents were common. With no workmen's compensation or health insurance, an injured employee was likely to be thrown into the streets. Mobs known as "Luddites" rallied to wreck and burn mills as a means of expressing their hatred of factories. The populace, alarmed by these disturbances, feared an insurrection of the poor against the rich.


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In the midst of this miasma appeared an unusual capitalist --Robert Owen.

ROBERT OWEN (1771-1858) The early life of Robert Owen resembles a Horatio Alger story. Born into a poor Welsh family, Owen's schooling ended at age nine when he was apprenticed to a linen merchant. Nine years later, he moved to Manchester, borrowed $100, and began manufacturing machinery for the textile industry. Bold for a small capitalist, he became factory manager of a large spinning mill, even though he knew nothing about the trade. By age twenty, Owen advanced to part owner, becoming the boy wonder of the textile industry. A few years later, with borrowed funds, he bought a group of textile mills at New Lanark, Scotland, married the former owner's daughter, and made a fortune. Within five years, Robert Owen revolutionized mill operation by eliminating the typical evils of the British factory system and transforming New Lanark into a model workers' community, which was visited by writers, reformers, and skeptics--even the Tsar of Russia. By raising wages, reducing hours of work, improving factory sanitation, rebuilding workers' homes, and providing schools for employees' children, he reversed the standard concept of labor relations. Having improved conditions through benevolence, Owen gained productivity and efficiency. With New Lanark as a laboratory to test his hypothesis, he proved that a capitalist's concern for workers is profitable. What was his philosophy? Owen believed that humanity is no better than its environment. Since people are shaped by environment, improvement of that environment can produce a paradise on earth. Owen shocked business and government leaders by stating that the development of machine production, if organized entirely for profit, would inevitably lead to poverty and degradation for workers. His solution was cooperation. Envisioning Villages of Cooperation--planned communities where 800-1200 persons worked together and lived in private apartments--Owen insisted that kitchens, reading rooms, and sitting rooms be used in common. Young children would be boarded; older children would tend the gardens. The community would carry on a variety of occupations insuring self-sufficiency. At a distance from the commune would be the factory unit. Naturally, with the concept of laissez faire in full vogue, few persons gave serious consideration to Owen's scheme. In spite of David Ricardo's willingness to test the plan, the idea lacked funds and support. Undaunted, Owen sold the New Lanark mill to finance New Harmony, a cooperative based in Posey County, Indiana, on July 4, 1826. Because he chose poor associates, Owen's scheme lacked sufficient practical planning. One associate defrauded him and set up a whiskey distillery, rival communities sprang up, and the end result was complete failure. Owen lost 80 percent of his fortune. Finally, he sold the land and tried in vain to interest President Jackson and Santa Anna of Mexico in another venture. Returning to England, Owen continued to stick to his views--notably that money and private property are trustworthy. His philosophy made a deep impression on workers; evolving from his teachings, a series of producers' and consumers' cooperatives developed throughout England, some based on a moneyless system. What survived was the consumer cooperative movement, begun by twenty-eight backers who called themselves Rochdale Pioneers. Owen, who launched a moral crusade for the working class, inspired the Pioneers but was not directly involved with them. Instead, joining with the leaders of the movement, he formed a Grand National Moral Union in 1833 with a membership of 500,000 workers. This forerunner of modern industrial trade unions called for broad social change, particularly better wages and working conditions, the setting up of cooperatives, and the abolition of money.


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For two years, Owen traveled the countryside advocating unionism, but he met failure because he encountered too many obstacles. Not only did government disrupt the movement with anti-union legislation, but local unions failed to control their members, and strikes weakened the movement. Even worse, Owen and his lieutenants quarreled and ended their association. At the age of sixty-four, Robert Owen, the successful capitalist who disavowed capitalism, realized that his utopian projects had ended in failure. But he did not give up. Instead, he publicized his ideas in tracts and wrote his Autobiography. At the age of eighty-seven, he died, still optimistic. The most romantic of the Utopians, he influenced capitalism by proving that industry could sponsor humanitarian projects and still make profits. Commentary

Robert Owen, known as the founder of British socialism, first used the words socialist and communist. However, he created a concept of socialism that is quite different from Karl Marx's concept of class warfare. Owen's philosophy passed down to the Fabian Society of Great Britain, whose leaders included George Bernard Shaw, Sidney and Beatrice Webb, and H. G. Wells, and finally down to Britain's Labour Party, a moderate socialist party. The legacy of Robert Owen includes British socialism, the passage of legislation to correct deplorable working conditions, modern trade unions, and consumer cooperatives.

SAINT-SIMON (1760-1825) Summary

Count Henri de Rouvroy de Saint-Simon, a French aristocrat, possessed the spirit of democracy and translated his convictions into action by fighting in the American Revolution. Renowned for his pigheadedness, he determined to become a philosopher and launched a survey of human knowledge which, along with an unsuccessful marriage, dissipated his finances and led to a bungled suicide attempt. His search resulted in Saint-Simon's belief in the brotherhood of man, which evolved into an industrial religion. This half-mad utopian stressed the necessity of work, which led to his conclusion that workers deserve society's greatest rewards, and idlers deserve the least. Reality proved that the opposite situation was true: non-working aristocrats received the greatest share of wealth and did the least work. Saint-Simon proposed to reorganize society along the lines of a factory, with the function of government being economic rather than political. With the aid of scientists, technicians, and capitalists, government should arrange for rewards to be allotted in proportion to each person's social contribution. Rewards should go to active members and not to lazy onlookers. But Saint-Simon offered only theory without working out practical details. After his death, his ideas degenerated into a mystical, hazy religion, with churches in France, England, and Germany. Commentary

Saint-Simon, while quite impractical, is called the founder of French socialism. Defining a nation as "nothing but a great industrial society," and politics as "the science of production," he took as his motto: "Everything by industry; everything for industry."

CHARLES FOURIER (1772-1837) Summary

If Saint-Simon was half-mad, then his fellow countryman, Charles Fourier, was altogether crazy. He believed that the earth was geared to life cycles lasting 80,000 years--40,000 years of "ascending


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vibrations" and an equal number of "descending vibrations." The advancement of humanity consisted of eight stages. Four stages--Confusion, Savagery, Patriarchism, and Barbarousness--have already passed. Humanity now looks forward to Guaranteeism and eventually Harmony, the final stage when the sea will become lemonade, peaceable species of animals will evolve, and people will live to 144 years, of which 120 years will be spent in unrestricted sexual delight. Then the seesaw will tip and humanity will work its way backward to Confusion before beginning another life cycle. These eight stages would repeat themselves endlessly. In spite of his optimistic vision of the future, Fourier saw the practical world as utterly disorganized. As a solution, he proposed to reorganize society into phalanxes, or organized communes, of 1800 persons living under one roof, as in an ultra-modern hotel. Each person would have privacy, and the style of life would vary with one's ability to pay. Since everyone would have to work, there would be farmers, mechanics, and craftworkers. Children would perform dirty work and tend flowers. Residents would labor a few hours each day at whatever job appealed to them. A spirit of competition would exist. Fourier believed that the phalanx concept would produce profits as high as 30 percent of the investment. Every member would share profits, which would be divided on the basis of 5/12 to labor, 4/12 to capital, and 3/12 to ability or talent. Everyone would be encouraged to become a part owner. Surprisingly, the idea spread. In the U.S. alone, there were over forty phalanxes, including Brook Farm, Oneida, New Icaria, and Trumbull. However, while some lasted for several years, none proved permanent. Commentary

The one factor which utopian socialists shared was idealism: They dreamed of the betterment of humanity. Some of these dreams, particularly Fourier's, were ridiculous, but it takes dreams to stimulate people to progress. Of these utopian dreamers, all dared to be different and to present dreams to scoffers, but Robert Owen's contributions were the most practical and the most lasting. These thinkers were both utopians and socialists--economic reformers who attempted to create an ideal world by changing society. To understand their role, an explanation of several terms is in order:

Utopia An impractical social, intellectual, or political scheme. "Utopia" also refers to those ideal states which fail because they lack ideal human beings. Utopias are based on what the author thinks ought to be rather than what actually exists. Famous examples include Plato's Republic, Sir Thomas More's Utopia (from which the name comes), Sir Francis Bacon's New Atlantis, and Campanella's City of the Sun.

Socialism State ownership of the basic means of production. The fundamental objective of socialism is to prevent capitalists and landlords from exploiting workers. Socialists believe that wealth should be distributed equally and that distribution under capitalism is unfair. Their solution is the nationalization of land, forests, minerals, factories, transportation, trade, and banking--with profits distributed by the state to the people rather than to capitalists and landlords. Under socialism, rent, interest, and a leisure class would not exist. All would work according to ability. Private property in the form of clothing, household goods, money, shelter, and land would be allowed the individual, but all else would be owned collectively. This is, of course, the modern concept of socialism, which has evolved from the concept of common ownership.


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The whole idea of socialism dates to early utopian schemes. As already noted, the term originated with Robert Owen. But, as contrasted with communism, the socialists believe in attaining goals by an evolutionary process through democratic means.

Communism Redistribution of wealth through revolution and class warfare. Basically, this belief differs from socialism in its method of attaining the same goal.

Utopian Socialists Reformers who were inspired largely by the ideas of the Age of Enlightenment and the French Revolution, particularly the belief in progress and the perfectibility of humanity. They did not preach class hatred but appealed to the intellectual and capitalistic classes to reform society voluntarily. Ironically, the term is taken from Karl Marx, who used it scornfully, saying that these reformers were nothing more than impractical idealists. Thus they were named utopian socialists rather than his brand of practical revolutionary socialists. From the utopian socialists came the concept of the welfare state, held by modern socialists of Great Britain and Scandinavia, as well as others. The last economist to be taken up in this chapter--John Stuart Mill--was not actually a utopian socialist but rather the champion of democratic liberalism, which was a broad-minded view of the principles of laissez faire. However, Mill gradually approached the socialist point of view and, in doing so, he added respectablity to the ideas of the utopian socialists.

JOHN STUART MILL (1806-73) Summary

The son of James Mill, a famous economist, philosopher, and champion of laissez faire, John Stuart Mill, a child prodigy, learned Greek at the age of three and studied Latin at eight. By the age of twelve, he had read Greek and Roman classics in the original as well as English philosophy and history. He absorbed geometry, algebra, and differential calculus, and wrote books on history. By the age of thirteen, he mastered logic and read major works on economics. Mill did not write his philosophy of economics, however, until thirty years later. In the meantime, he fell in love with Harriet Taylor, who educated him on the subject of women's rights. Because she was married, their romance remained platonic for twenty years, even though they lived and traveled together. They married after Mrs. Taylor's husband died. With the publication of his two-volume economic masterpiece, Principles of Political Economy (1848), Mill gained recognition as the greatest economist of his age. The significance of this work is that it dealt a severe blow to the concept of laissez faire. In surveying the field of economics, Mill discovered that laws laid down by classical economists applied to production but not to the distribution of wealth. He argued that, because distribution depended on society's customs and laws, there was no right way to distribute wealth. This profound discovery meant that society could distribute its wealth on the basis of ethics and morality instead of cold, impersonal laws. In contrast to the despair of Malthus and Ricardo, Mill envisioned hope. He believed that through education, workers would realize the impact of the Malthusian doctrine and would voluntarily regulate population. He maintained that workers should form cooperatives and unions to seek higher wages.


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Opposed to government regulation and recognizing communism's threat to individualism, he believed legislation was necessary to protect women and children who worked in factories. Consequently, by favoring government intervention to remedy injustice, Mill modifed the doctrine of laissez faire. He called for taxes on inheritance and rent. The success of his book led to Mill's publication of a cheap, one-volume edition, priced to reach the working class. Commentary

John Stuart Mill, founder of utilitarianism, is known for contributing to political science and ethics. His essay "On Liberty," a manifesto against despotism, is perhaps the finest piece written on individualism. A peaceful and reasonable man, Mill treasured his wife and the pursuit of knowledge. He later called himself a socialist, although his philosophy placed him somewhere between capitalism and socialism. He was one of the first spokespersons favoring equal rights and education for women, the subject of his "Enfranchisement of Women" and The Subjection of Women (1869).

CHAPTER 6: The Inexorable System of Karl Marx Summary

In 1848, the threat of revolution was everywhere. The French endured a weak, dissolute king before fomenting riots; the Belgians likewise found no strength in royal leadership. Uprisings in Italy, Germany, Czechoslovakia, and Austria imitated the unrest of the French. The songs of workers and the poems of romanticists echoed the volatile rumblings of internal discontent. Yet, despite all their zeal and furor, these stirrings failed because they were spontaneous, undisciplined, and disconnected. From this fierce, bloody clamor, however, a new voice made itself heard--the voice of militant workers who comprised the Communist League. Their initial efforts proved insufficient against the reaction of European governments, but they presaged a turn of events in world economics which would make itself felt for years to come, for amid this turmoil appeared The Communist Manifesto, written by Karl Marx, with the collaboration of Friedrich Engels. Marx (1818-83), born in Germany, the second son of a liberal, middle-class Jewish family, pursued a college education, but to his father's dismay, he rejected the study of law. At universities in Bonn and Berlin, he dedicated himself to philosophy and came under the influence of Hegel's ideas. He found his ambition to teach blocked by authorities who rejected his liberal views, particularly his belief in constitutional government and atheism. Marx turned to journalism and edited the Rheinische Zeitung, a radical newspaper which was suppressed because of his attacks on law and the Tsar of Russia. At this time, he began studying politics and economics. Married to the beautiful Jenny von Westphalen, daughter of a Prussian aristocrat and his former next-door neighbor, he continued his journalistic career in Paris, Brussels, again in Paris, then in Germany. However, the pattern of his life changed little--radical views always led to expulsion. Hunger was never far from the Marx household. In Paris, in 1844, Marx formed an immediate and lifelong association with Friedrich Engels (1820-95). The son of a wealthy German textile manufacturer, Engels lived a double life by associating with capitalists while devoting himself to socialism. In Brussels, the two collaborated to produce The Communist Manifesto , which became the program of the Communist League, a loose organization of discontented workers who desired fundamental political and economic changes. The League eventually died and was replaced by the International Workingmen's Association, which underwent several phases of reorganization as its members tried to reach a consensus.


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Wherever he went, Marx, a quarrelsome and intolerant activist, organized workers' movements and edited communist papers. Eventually, he fled to England to spend the remainder of his life in London. There, he and his family and a faithful servant spent a miserable existence of abject poverty and near-starvation. Jenny and two of their five children died, and to add to his misery, Marx suffered from chronic boils. Despite everything, Marx remained devoted to his family. His only steady income was derived from his reports on European political affairs to the New York Tribune, but, at times, Marx couldn't send his reports to New York because he lacked money for postage. After selling the family silver and valuables, he pawned his shoes and overcoat to survive. What kept his family going was Engels' generous financial aid; later, Marx came into a small inheritance from an old friend. Undoubtedly, these years of extreme poverty account for much of Marx's bitterness. Marx worked in the British Museum library from ten to seven each day. He pored over books and manuscripts on economics, gathering and cataloging enormous amounts of data which formed the basis of his Das Kapital. This meticulous book required eighteen years of preparation, with the main part-Volume I--published in 1867, after two years of editing. Marx endured not only poverty but also disappointment. His later years were filled with bickering over the validity of his interpretations among a motley assortment of dissidents. At one point near the end of his life, disgusted with feuding, Marx declared, "I am not a Marxist." At his death, only Volume I of his masterpiece had been published. Engels published Volume II in 1885 and Volume III in 1894; the final volume appeared in 1910, making a total of 2500 pages filled with minute, tedious points of economic theory. As Marx did not make a systematic presentation of his philosophy, it is necessary to discover his basic concepts from a study of The Communist Manifesto and Das Kapital, each of which was written for a different purpose. Marx developed the principle of dialectical materialism from the dialectical method of Hegel, a German philosopher who believed that change occurs as the result of a blend of opposing forces. The given idea, or thesis, when challenged by an opposing idea, or antithesis, results in a new concept, or synthesis, which is somewhat closer to the truth than the initial two ideas. Accepting this fundamental premise, Marx went further. He substituted realism for Hegel's idealism and used it to explain world history. By stressing the reality of materialism, Marx evolved his economic interpretation of history. Marx's writings interpret history in terms of a class struggle for survival, which determines everything else in human affairs. The history of humanity, according to Marx, is primarily the story of one class' exploitation of another. Applying the theory of dialectical materialism, Marx determined that the inevitable next step was a revolt of the overwhelming majority of workers, who would overthrow the ruling capitalists and establish a dictatorship of the proletariat, or workers. This economic cataclysm would lead to communal ownership and a return to a classless society. While The Communist Manifesto states the revolutionary aims of communism and maintains that capitalism must inevitably destroy itself, Das Kapital is Marx's analysis of the means of destruction. It is a critique of political economy which attempts to explain economics in coldly analytical and scientific terms. To Marx, his scientific arguments comprise irrefutable evidence prognosticating the doom of capitalism. Marx sets the scene for his attack on capitalism by describing a capitalistic world of perfect competition-where the market is free, without monopolies, unions, or special advantages for anyone. Every product sells for its correct price or value. Agreeing with Adam Smith and David Ricardo on the definition of value, Marx states that the value of a product is the amount of labor which goes into making it. The worker wishes to sell labor-power; the capitalist wants a profit.


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But how can there be profit if everything sells for an exact value? It would be simple for profits to arise if there are monopolies to set excessive prices, or if capitalists pay less for labor than it is worth. Marx demonstrates that in its most perfect form capitalism is unworkable. Therefore capitalism, with its monopolies and imperfections, has no chance for survival. Das Kapital explains that profits arise from one product or commodity which is distinctive--labor. Because capitalists control all access to the means of production, the worker must sell labor-power to the capitalist for its exact worth. Its value is what it takes to keep the laborer alive.

Marx concludes that labor actually produces more for the capitalist by working extra hours. The surplus value of labor gives rise to the capitalist's profits. In short, while the worker receives only a daily wage equal to subsistence requirements, actual production for a workday results in extra units of products. The value is translated into profits for the capitalist, who steals what is rightfully the worker's. How can such a theft occur? Simple, answers Marx. It results when the capitalist monopolizes the means of production and forces the laborer to work a full day in order to remain employed. Since the typical factory work-week in England during Marx's time averaged slightly more than eighty hours, his concept of surplus value was not as farfetched as it seems today. In Marx's view, the capitalist strives to obtain more surplus value by expanding production, thereby increasing profits. However, other capitalists compete in the same fashion, hiring more people and bidding against other capitalists, consequently driving up wages. This situation serves to decrease profits. Marx rejects Ricardo's notions because he believes that workers are too enlightened to continue increasing their offspring. At the same time he scornfully rejects the Malthusian Doctrine, labeling it "a libel on the human race." Instead, Marx sees the capitalist providing a solution through the adoption of labor-saving machinery. By substituting technology, the capitalist forces workers out of jobs, thus increasing the labor supply and decreasing wages. However, the "solution" does not really solve the capitalist's problem, for as the capitalist adds equipment, the cost of each device inhibits the realization of any surplus value from them. Therefore, the capitalist defeats the purpose of the purchase but must continue modernizing because competitors are continually adding machines to increase production. Consequently, the percentage of profit steadily falls until the point is reached where production is no longer profitable. Bankruptcies result and small firms go out of business. If workers lose their jobs, labor is forced to accept cuts in wages. Machines are traded, human labor is rehired by the remaining firms, and, for awhile, surplus value and profits return. Not for long, however, as this is a vicious cycle. Capitalists ultimately dig their own graves, for on one hand, the working class, increasingly dissatisfied with its misery, grows larger. On the other hand, the capitalistic class grows smaller as larger capitalists gobble up smaller and weaker competitors. When finally only a few powerful capitalists remain, the time comes for the proletariat to rise and sweep away capitalism, which has, in a sense, destroyed itself. Marx predicted trends which capitalism would follow. Surprisingly, most of them have come true. These predictions he called the "laws of motion": 1.

As the economy expands, profits fall, both within the business cycle and outside it.

2.

As profits fall, business seeks new survival techniques by innovating, inventing, and experimenting.


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3.

Business runs in cycles of depression and boom.

4.

Huge firms dominate the business scene and suppress smaller firms.

5.

Finally, the working class overcomes factory owners and capitalism disappears.

Commentary

Some of Marx's predictions have indeed come true. Others are not so clear-cut. For example, profits do tend to fall within a business cycle, but they do not fall as steadily outside the business cycle. Some have risen instead. Most significantly, even though indicators reflect Marxist philosophy, capitalism continues to thrive in the United States, Japan, and Great Britain, even if it has partly disappeared in Western Europe. Russia, the communist bloc countries, and China are another matter. During the most intensive rule of communism, capitalism has remained suppressed except for a trickle of imports from the West, such as Coca-Cola, drilling equipment, medicines, and computers. However, with the 1989 thaw in Cold War tensions, capitalism was one of the first aspects of Western democracy to penetrate the Iron Curtain as McDonald's brought "burgers and fries" to Moscow. Obviously, Marx's vision of the future has proved too inflexible. Like the laws of gravity, he expected the weakening of capitalism to fall into place without the slightest deviation. However, he failed to predict many mitigating factors, such as improvements in the lives of workers. Further, in no case where communism has triumphed has the revolution taken place in an industrialized nation at the hands of the workers themselves. Russia, China, and Cuba were all primarily agrarian economies when the revolutions occurred. The same could be said for the satellite nations of Eastern Europe, except for Czechoslovakia. Another worthy consideration is the fact that each Communist country was taken over from without and during wartime. These nations did capitulate according to Marx's predictions, but largely from the work of professional revolutionaries. On the other hand, Germany and Italy, which chose fascism over communism during the late 1930s, today exhibit both state capitalism and private capitalism working in partnership. Non-communist economists find the weakest point in Das Kapital to be the theory of surplus value, for it does not satisfactorily explain prices. Likewise, these economists do not accept labor as the sole measure of value. Yet, economists have not derived an agreed-upon substitute measure of value. Furthermore, liberals and humanitarians cannot accept Marx's economic interpretation of history. They deny that history evolves purely from economics--to the exclusion of religion, nationalism, and human will. Also, they spurn the Marxian notion that the hero has a subordinate role in the motivation of historical events. On the other hand, until the time of Marx, historians had all but overlooked the effect of economics in human affairs. Undeniably, with all the flaws in his predictions, Marx made a sizable impact. No communist nation or party fails to pay homage to his teachings. While capitalism has not collapsed as Marx predicted, it has been forced to adapt. Socialism has risen throughout the world since Marx's time--and communism is an unyielding, inexorable variety of socialism. In the U.S., socialism has been avoided largely as the result of support of competition through government anti-trust legislation and regulation of public utilities. From the impoverished nations of Latin America to the emerging nations of Africa and Asia, the communist banner of Karl Marx continues


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to wave--proof that his concepts cannot be lightly dismissed. In truth, Marx is entitled to be called the Prophet of the Proletariat. Here are a few terms to help clarify Marx's philosophy:

Marxism Karl Marx's version of communism. While a typical Communist may believe that the final goal of communism will come into existence by a number of methods, the Marxist accepts Marx's every word and explanation as the only way. Both forms of communism accept the concept of revolutionary socialism --the attainment of a classless society by violent and bloody revolution, as opposed to the peaceful and democratic method of socialists. In terms of "left" and "right," Marxists are further left than Communists, who are, in turn, to the "left" of Socialists.

Scientific Socialism Laws evolved by Marx and Engels which explain the economic determination of history, the class struggle, the inevitable downfall of capitalism, and the triumph of the proletariat.

Capitalists Financial backers of production; also called the "haute bourgeoisie," or high middle class.

Bourgeoisie The middle class, technically divided between rich capitalists ("haute bourgeoisie") and small shopkeepers, government officials, lawyers, doctors, teachers, and independent farmers. A term generally applied to people with private property. (Bourgeois is the adjective form.)

Proletariat The workers, or the lowly wage earners.

Anarchism Rebellion against all forms of government. Anarchists are not content to wait for the withering away of the state. They believe in ending government rule by assassinating public officials. Because they disdain any type of government, anarchists are at the extreme "left" of all political groups. The early modern theorist of the benefits of anarchism was William Godwin, whose Political Justice (1793) expressed a utopian ideal. The father of anarchism, however, is Pierre Proudhon (1809-65) who quarreled violently with Marx and whose book What Is Property? answered the question in the title by stating that "Property is theft." The anarchist who championed direct action through violence was Mikhail Bakunin, who originally followed Marxism but, in time, became Marx's bitter enemy.

CHAPTER 7: The Victorian World and the Underworld of Economics Summary

Karl Marx's prediction that the working class would suffer increasing misery did not come to pass during the Victorian Age (the reign of Queen Victoria, 1837-1901), for wages climbed upward while the working day grew shorter. Even Marx and Engels were forced to admit that the English proletariat was becoming more bourgeois because of the Victorian world's prosperity and optimism. The recognized economists of the day expressed that optimism with little reference to Marx, who was dismissed as a crank. His theories, along with those of Malthus, the utopians, and three of the five Victorian Age economists, were confined to the underworld of economics.


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FRANCIS YSIDRO EDGEWORTH (1845-1926) Edgeworth, a shy, retiring professor and brilliant scholar, became interested in economics because it dealt with quantities. He applied mathematics to economics and derived his Mathematical Psychics (1881). Its thesis stated that every man, based on mathematical formulas, lives for pleasure, leisure time, and material goods. Of course, skilled and talented people are better "pleasure machines" than others; likewise, males are more endowed with sensibility than females. In developing his thesis, Edgeworth justified the divisions of sex and status numerically and denounced the future of trade-unions, which he considered imperfections. What was unique about Edgeworth was his use of mathematical formulation to prove his contentions. Essentially, he was conservative and defended his philosophy through the use of long, complicated algebraic expressions. He won a conservative following among fellow Victorians, and his book achieved immediate success. While perhaps helpful in focusing attention on the use of scientific inquiry as an aid to economics, much of Edgeworth's work is worthless. His weakness lies in ignoring the human factor, but the fact that he was not ridiculed by his contemporaries gives significant insight into his era.

FREDERIC BASTIAT (1801-50) In sharp contrast to Edgeworth, the French eccentric Bastiat heaped ridicule on the economic policies of his age. He failed at farming and estate management, but succeeded in adding deft touches of humor to economics. In his Economic Sophisms, he attacked Socialists, defended free trade, and launched his most acerbic barbs for those who selfishly supported a protective tariff. Beneath his wit lay the truth of his criticism--yet, in the Victorian world, he was labeled a crackpot.

HENRY GEORGE (1839-97) With Henry George, the underworld of economics gained an American recruit--a rugged but unschooled individual who had been an adventurer, gold prospector, sailor, printer, pamphleteer, journalist for the San Francisco Times and Post , lecturer, bureaucrat, tramp, and politician. At one time, the University of California considered him for the chair of political economy, but he ruined his chances by declaring in a speech that "logical thinking was all that was needed for a study of economics." Unlike his fellow dwellers in the underworld, during his lifetime he gained popularity--more in England than in the United States. An active proponent for his beliefs, he was almost elected mayor of New York City, barely losing to Tammany Hall's candidate and running ahead of Theodore Roosevelt. Drafted to run a second time in 1897, he died on election eve. His best known work is Progress and Poverty (1879), a passionate commentary which professes that the true cause of poverty is land rent. To Henry George, it was the height of injustice that landowners should enjoy huge incomes while they contribute nothing to society. Not only does rent work a hardship on the capitalist, it also straps the worker and leads to speculation in land values, as was evident in his time in California. Worst of all, rent is the cause of depression, George claimed. Part of his naive thesis contains a solution: a single tax on land equal to its rent. By negating rent with one tax, all other taxes could be eliminated. Wages would rise, and capital earnings would increase, for money would circulate more freely with no taxes for the non-landowner to pay. In short, the single tax would be society's magic cure.


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Regardless of George's lack of logic, his book became a bestseller; he achieved overnight fame. Progress and Poverty received praise as the worthy successor to Smith's Wealth of Nations. George won an international reputation after a lecture tour to England. The single tax became an obsession with him. However, the official world of economics decried his ideas, so Henry George was exiled to the underworld of economics.

JOHN A. HOBSON (1858-40) Of greater importance than the theories of Edgeworth, Bastiat, and George is the theme of the fourth economic heretic of the age--imperialism. The Victorian Era was a time when Great Britain, France, Germany, Belgium, Portugal, Holland, Italy, and Russia grabbed up colonies and economic concessions in Africa and Asia. The spirit of imperialism swept through the Western world, including the United States. Between the Napoleonic Wars (1803-15) and 1870, the laissez faire doctrine of free trade dominated. From 1870 onward, however, various factors caused a drastic change in attitude and policy relating to colonial expansion. Notably, as a result of the rise in Europe's population, the desire for military bases, nationalism, and the Industrial Revolution, imperialism became an extremely popular policy with virtually all classes of society; its chief spokesman, Rudyard Kipling, praised its virtues. Into this setting appeared John A. Hobson, a nervous, stuttering little man who took a critical look at capitalism and imperialism, in particular. He adopted John Ruskin's humanistic viewpoint toward economics, which stressed human values over cold statistics. By coauthoring an economic treatise which suggested that savings might lead to depression and unemployment, he lost favor with orthodox economists and was banished from London University Extension Lectures. As a result, he became a social critic, examining topical questions. The chief topic of interest to England was Africa, where the Boer War between Dutch colonists and the English in South Africa was brewing. Hobson journeyed to Africa, and his research there convinced him that his warning of the results of oversaving was justified. Returning to England, he quietly prepared a major work, in which the effects of savings and imperialism were combined to form his thesis. He published Imperialism, a Study (1902), a devastating attack on capitalism as well as imperialism. Hobson, a non-Marxist, went even further than Karl Marx. Whereas Marx predicted that capitalism would destroy itself, Hobson declared that imperialism would become the road to war, leading to the destruction of the world. In his view, capitalism has an insolvable problem: the rich get richer and the poor get poorer. Because of the vast inequality in the distribution of wealth, neither the rich nor the poor can consume enough goods. Because the rich are few, they can consume only so much. The poor, while large in number, lack the income to purchase more goods. Therefore, the rich--both individuals and corporations--must invest the bulk of their income in savings, which are useless unless spent on further production of goods. Otherwise, purchasing power dries up. But since there is no market for more goods, production leads to a glut on the market. Here, Hobson injects his comment on imperialism, for the only obvious answer to the problem is the utilization of savings in overseas investment. Foreign investments take off the excess capital, and foreign markets use the excess goods. This problem of excess, then, is the reason for modern imperialism, which is a direct outgrowth of the capitalistic system. But dire consequences lie ahead, he warns. Capitalistic


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nations each suffering the same glut, race each other to partition the world. With each nation trying to grab the biggest slice, bitter competition and rivalry promote the possibility of war. Needless to say, Hobson's indictment of capitalism hardly dented the official economic thought of his day. He was dismissed into the same backwater with Bastiat and Henry George. Yet, from one quarter there came a warm response. Lenin, a Russian exile, read Hobson's work and appropriated its thesis, augmenting it and wrapping it in a glittering package --Imperialism, the Highest Stage of Capitalism (1916). The antithesis of Lenin, Hobson disdained communism; his book analyzed capitalism and imperialism through logic. Hobson avoided class favoritism and refrained from turning thesis into dogma. He was puzzled over periods of history when capitalism showed little interest in imperialism. Further, even though his thesis points to the likelihood of war, he did not maintain that imperialism inevitably leads to war. On the other hand, Lenin declared that war was a certainty if capitalism and imperialism remained unchecked. He carried Marx's prediction of the doom of capitalism even further, showing that imperialism is the final stage in a downward spiral. For Lenin, imperialism is capitalism's death knell. Not only did Stalin share this view, but hard-line communists today still hold to its truth. During the height of the Cold War, Communist countries charged that all U.S. interest in underdeveloped countries was actually motivated by imperialistic designs, whether that interest was shown by private corporations or the Peace Corps. The U.S. reply to this charge has been that foreign investment and foreign trade alone do not represent imperialism, for there must be political interference and economic exploitation to justify a claim of imperialism. In point of fact, American foreign policy results from a defense of ideology--to protect less sophisticated nations from the intrusions of socialism. The U.S. differentiates between profit and plunder, noting that the best example of a powerful country looting weaker nations is given by the Soviet Union itself, especially in the cases of Hungary and Afghanistan. Another aspect to consider in the internationalization of capital is the fact that cheap goods manufactured in Hong Kong, Taiwan, Korea, or Mexico undersell similar products produced by the motherland. Such an intensification of competition ironically threatens American interests. The problem of imperialism has proven that it inevitably lashes back against the nation which created it.

ALFRED MARSHALL (1842-1924) Summary

Alfred Marshall, a refined academician and the most famous economist of the Victorian Age, was both accepted and respected for his Principles of Economics (1890), a tremendous success that is still used as a textbook. His thesis was equilibrium--the self-adjusting and self-correcting nature of economics; the foundation of his economics was the concept of time. For Marshall, there is a short period and a long period to consider. Both have to be weighed in answering the question of value. With diamonds, for example, in the short-run, it is demand which makes them expensive; in the long-run, it is the cost of production. To determine price, the economist must consider both supply and demand as equally important as two blades of a pair of scissors. To Marshall, a remarkably compassionate scientist, economics was an engine for the discovery of truth concerning the cause and cure of poverty. He contrived an elaborate system of economics which delighted established thought and which satisfied business. Introductory economics courses in England and the U.S.


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incorporate his system. Even more important is the fact that his most brilliant pupil, John Maynard Keynes, made a large splash in the world of economic thought. Yet, brilliant as Marshall was, nothing that he said went far enough. The time which he wrote about is an abstract. His economics, therefore, is a world of theory, and those theories are hopelessly unrelated to reality. Commentary

Imperialism refers to the extension of authority or control, either directly or indirectly, of one people over another. In this sense, imperialism is as old as history. During the early days of Western civilization, Greece and Rome furnished worthy examples. In modern times, the Age of Discovery ushered in a period when the nation-states of Europe raced to stake out colonies and to monopolize overseas trade. Portugal, Spain, Holland, France, and England formed a keen rivalry which provoked colonial wars in the early part of the eighteenth century and continued through the Napoleonic Era. Then interest weakened as the doctrine of laissez faire replaced that of mercantilism. A new period of imperialism, referred to as new imperialism, or economic imperialism, took place from 1870-1914. This was Europe's golden age of imperialism, motivated by the effects of the Industrial Revolution and characterized by economic and political domination of underdeveloped nations. Western Europe, which controlled most of world finance, commerce, military might, and intellectual life, extended its power over the peoples of Asia and Africa. The entire continent of Africa was so partitioned that only two nations remained independent by 1944--Ethiopia and Liberia. Asia was a fertile hunting ground for Europe, and vast but weak China soon became known as a "ripe melon." By 1914, some 283 million whites controlled over 900 million non-Europeans, mostly in Africa and Asia. This staking out of colonies led to bitter rivalry among European nations and was a strong factor leading to the outbreak of World War I. The basic question raised by Hobson was whether this stage of imperialism is inseparably related to capitalism. In other words, do capitalism and imperialism naturally go together? Communists charge that they do. The U.S. and Western Europe say otherwise. Current developments today differ, for practically every form of imperialistic holding has reverted to the original owners. At the height of imperialism, fivesixths of the world was needy and defenseless. Today, the poor five-sixths are still impoverished, but they are independent and defiantly aggressive, as is evident in South Africa's struggle against apartheid. The formerly rich one-sixth is still rich, but on the defensive. The key question--and the reason for Hobson's importance to economics--is whether the defiantly aggressive majority will be swayed by Marxism.

CHAPTER 8: The Savage Society of Thorstein Veblen Summary

As the full effects of the Industrial Revolution spread from Europe to America, the free enterprise atmosphere of the United States became a far different thing from the European practice of laissez faire. The game of making money in the United States was rough and savage, devoid of sportsmanship. The gentleman's rapier gave way to the roughneck's brass knuckles. In the United States, any man could prove his worth through business success, regardless of his ancestry, and money became the passport for entrance into the upper classes. Men such as William H. Vanderbilt, John D. Rockefeller, Jay Gould, Jim Fisk, and J. P. Morgan dedicated themselves to ruining competitors. They gave no quarter. In their public dealings, these robber barons were guided by J. P. Morgan's sentiment: "I owe the public nothing."


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From 1865 through the early part of the twentieth century, dishonesty was a virtue, the investor a gullible fool, and the stock market a private casino which the public financed. A practical demonstration was William Rockefeller and Henry Rogers' purchase of Anaconda Copper Company by paper manipulation and without a cent of personal investment--resulting in a $36,000,000 profit. Official economists viewed this scene unperturbed, their thoughts wrapped up with such terms as enterprise, thrift and accumulation, and consumption. At best, they apologized only slightly and shared the common blindness: They were too close to the scene to judge objectively. What was needed was the disinterested, detached view of an outsider, which was ultimately filled by the most aloof of skeptics, Thorstein Veblen.

THORSTEIN BUNDE VEBLEN (1857-1929) Veblen, born of immigrant Norwegians in Wisconsin, grew up in a pioneer Norwegian community in Minnesota. His austere childhood reflected the drab farm life. He grew up remote and aloof, an alienated, enigmatic man whose chief pattern of behavior was nonconformist. At the age of seventeen, Veblen's family sent him to study religion at a pious Lutheran college, where he promptly threw the faculty into an uproar when it came his turn to suggest a way of converting the heathens. He titled his method "A Plea for Cannibalism." To add to his apostate behavior, he converted the niece of the college president to agnosticism and, several years later, married her. Bad luck tagged Veblen. He found no immediate success in his teaching career. His first job lasted a year, and then the academy closed. He enrolled at Johns Hopkins on the expectation of a scholarship, which never materialized. After transferring to Yale, he received a Ph.D. in 1884. Returning home, he read, loafed, and buried himself in political science, economics, sociology, and anthropology. By normal standards, he was lazy and unassertive. He refused to make his bed, and when the dishes were dirty, he hosed them down. His eccentricity extended to his disdain for the telephone. His isolation continued for seven years until at the age of thirty-four, he yielded to family pressure to resume graduate studies. His appearance at the office of the economics department of Cornell in 1891 must have shocked the conservative department chairman, for Veblen was wearing corduroy pants and a coonskin cap. Still, his learning impressed the older man, and Veblen received a fellowship. The following year, he accompanied the head of the department when the latter moved to the University of Chicago. At the age of thirty-five, with a salary of $520 a year, Veblen earned a reputation among his students for refusing to take roll and assigning the grade of "C" to all students, although he upgraded the "C" to an "A" when a student needed to qualify for a scholarship. Veblen felt that there were too many students. The fewer he had, the better. Nevertheless, in spite of his rambling, mumbled lectures, his immense knowledge led to an annual salary of $1000 by 1903. Veblen possessed an unusual fascination for women; he engaged perpetually in affairs. After he made a trip to Europe with one of his lovers, he was forced out of his job, and his wife divorced him. He went to Stanford and then to the University of Missouri, remarried, and finally retired at the age of seventy. He chose to live alone in a small, western-style cabin, where he could meditate without distraction. There, aloof from society, he died. Even though Veblen was a failure in his personal life, he established a national reputation in the academic world as the result of two major books and a series of essays. His first book, The Theory of the Leisure Class (1899), appeared when Veblen was forty-two. An overnight success, it is his most famous work, due primarily to the fact that readers took it to be a satire of aristocratic foibles. Actually, the book was much more, for Veblen refused to accept the assumptions underlying classical economic thought. While


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orthodox American economists accepted European teachings, Veblen dug to the root of the economy to discover the nature of his society. The Theory of the Leisure Class examines the nature of economics and the meaning of leisure. While established economists explained human actions entirely by self-interest and competition, Veblen probed deeper. He doubted that self-interest held society together or that people preferred leisure over work.

Also, he discovered that there was no leisure class among American Indians, the Ainus of Japan, or Australia's bushmen. Everyone in these cultures worked--not for profit, but because of pride in workmanship and a common concern for their children's welfare. His study of Polynesians, ancient Icelanders, and the shogunate system of feudal Japan revealed a different kind of society. A leisure class existed in each, but it was not an idle class. Instead, its members worked hard at seizing riches through force or cunning and didn't contribute to the actual production of wealth. What was significant was that they prevailed with the approval of their community. To Veblen, this fact marked a fundamental change in the attitude of the savage toward work. What had once been a source of pride had become degraded by the transfer of approval to the plundering and predatory ways of the leisure class. Classical economists considered the desire for leisure inherent in human nature, but Veblen maintained that what was inherent in human nature was pride in work. As men plundered, seized booty and women, and received admiration for their prowess, approval transferred from the once-honored way of life to the spirit of plunder--and the leisure class gained respect. As societies progressed, continued Veblen, the leisure class changed its occupation and refined its methods, but its goal remained the same--the accumulation of goods without productive work, but by seizure. Applying his findings to the United States, Veblen wrote: ". . . by heredity human nature still is, and must indefinitely continue to be, savage human nature." Modern plunder did not exist for booty or women, but for the accumulation of money and its lavish display. The savage displayed numerous wives, the barbarian his conquests of war; in the same vein, modern savages displayed wealth. So Veblen arrived at a thesis: the leisure class advertises its superiority through conspicuous consumption--enjoying leisure more fully by being able to display it before the public. Thus, the modern U.S. businessman, by seeking and accumulating money and then displaying it--either subtly or conspicuously--is the modern counterpart of a savage heritage. Furthermore, everyone--the worker, the middle-class citizen, and the capitalist--seeks through conspicuous expenditure and even the waste of money to prove status. Carrying the theme a step further, Veblen explained why a proletariat revolution, as Marx predicted, had not occurred in the United States. It was simply that workers did not seek to overthrow the upper class, but rather strove to join it themselves. This ambition explained the nation's social stability. Published in 1904, Veblen's The Theory of Business Enterprise established his concept of business at the turn of the century. The book shocked readers, but it failed to make the splash of his earlier work on the leisure class. This time, there was no mistaking the book as satire; consequently, only economists and scholars read it. Rejecting earlier theories that the capitalist is the driving force behind economic progress, Veblen charged that the businessperson is the saboteur of business. As he explains, machines dominate society, but machines care nothing for profit. Therefore, business people are no longer needed. Eliminated by the machine, they are replaced by technicians and engineers.


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Entrepreneurs, however, as members of the leisure class, are still acutely interested in the accumulation of profit. Their only opportunity of gaining profit is to cause breakdowns in production so that values fluctuate. Being on the inside, businesspeople then make a profit during the resulting confusion. Thus, the entrepreneur cunningly builds up credits, loans, and artificially high capitalizations. Unfortunately, in the process, the efficiency of production remains continually off-balance. Looking to the future, Veblen predicted the end of the capitalist--not through the action of Marx's proletariat, but by a tougher force: the machine. The recurring business crisis brought about by the entrepreneur would show to all the inability of the system to remain in balance. As the alternative, Veblen hoped for the day when a corps of engineers would take over the running of the economy, along the lines of a huge, well-ordered production machine. And if this didn't come to pass, then eventually the plundering spirit of Big Business would increase until the system gave way to fascism. Veblen believed that the robber barons were interested in producing profits for themselves rather than in producing goods. An example of artificially high capitalization is the founding of U.S. Steel in 1901. Against real assets of some $682,000,000, almost twice that amount of stocks and bonds were issued--at a capitalization cost of $150,000,000, all of which was paid for by public investors. So there was justification for Veblen's scorn of the American entrepreneur. However, he greatly underestimated the ability of American democracy to correct these abuses. None of Veblen's later works received the acclaim of his two earlier books. He remained a skeptic as he probed society's problems, and typical of his thinking is his Imperial Germany. Although the book is so critical of Germany that, at one time, the U.S. government wanted to use it for propaganda, the post office, for a time, barred it from the mails because it was uncomplimentary towards Great Britain and the United States. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. In the book, Veblen charged that the U.S. centers of learning were being transformed into centers of football and high-powered public relations. While given to extremes, Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics. Commentary

Veblen's two major works formed a keen description of the robber barons and their savagery. The phrase "robber barons" comes from the definitive and highly readable The Robber Barons (1934), by Matthew Josephson. Also highly descriptive of these titans of Big Business is Ida M. Tarbell's History of the Standard Oil Company (1903). Veblen's "savage world" was savage on two counts. First, the practices of the actual business world which he observed were predatory. Second, in his examination into the nature of economy, Veblen concluded that by heredity, human nature itself is savage. Thorstein Veblen has been largely ignored by many economists; however, it is fair to note at least two facts. In his Theory of the Leisure Class , Veblen coined the term "conspicuous consumption," and he anticipated the rash of current writings on "status symbols," which has proven correct. For example, Americans look down on physical work, compared with office work. Consequently, the executive and the financier enjoy a high prestige. Business executives continue to accumulate money beyond their normal needs. The modern-day status symbol, such as the sable coat, Lear jet, face-lift, or yacht, exemplifies the concept of conspicuous consumption. As for his second major work, The Theory of Business Enterprise, Veblen foreshadowed "technocracy"-the belief in government by technical experts, with the use of work units of currency to be substituted for


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money. If alive today, Veblen would undoubtedly observe, with justification, the latest trend in the development and use of computers and robotics, as well as the fact that not only blue collar workers are being dispossessed from their jobs by the machine, but business executives find their positions increasingly threatened by computers.

CHAPTER 9: The Heresies of John Maynard Keynes Summary

Veblen died a few months before the "Great Crash" of 1929--when stock values reached an all-time high before tumbling down. There were no official warnings that such a financial catastrophe could occur. In fact, quite the contrary. Prosperity was everywhere, from President Hoover down to the lowly clerk; optimism was the keynote. In the United States there were 45 million jobs, a total income of $77 billion, and the average American family enjoyed the highest standard of living in history. Magazines featured articles on how everyone could get rich--the formula was to save a portion of one's earnings and invest regularly in good common stocks. The public listened, and not only bankers and businesspeople, but barbers, bootblacks, and clerks all rushed to place their orders on the stock exchange. It was easy to do, for they all could buy "on margin"--that is, for as little as 10 percent in cash. Beneath this surface boom, however, lay disturbing, but unnoticed facts. There were two million unemployed. Banks failed at the rate of 700 a year. Ominously, the distribution of income placed 24,000 families at the upper level of income, and some 6 million at the bottom--a ratio of 1 to 250. In this era of prosperity, the average American family was heavily mortgaged from excessive installment buying. When the crash came, it caught the public by surprise, as well as titans of finance, government officials, and expert economists. The crash occurred in late October. Within two months, losses in stock value were awesome. Forty billion dollars of value disappeared. The downward trend continued. Fortunes were lost; suicides rose in number. Nine million savings accounts vanished as banks failed by the thousands. Over 85,000 individual businesses were wiped out. Working women labored for 10-25 cents per hour. In New York City, breadlines formed at the rate of 2,000 people a day. The "Great Depression" loomed. By 1933, the national income had dropped by almost half; the average standard of living declined to the level of 1913. There were 14 million unemployed. The economy lay like a fallen giant as a feeling of hopelessness swept the land. What no respectable economist admitted could happen seemed a reality--a permanent depression. In this situation, one would expect a radical like Marx to appear to attack the plight of the unemployed and to offer a drastic remedy. On the contrary, a respectable Englishman offered a solution. Wellschooled in the theories of orthodox economics, John Maynard Keynes was Alfred Marshall's most brilliant pupil. Nevertheless, Keynes proved adaptable enough to make a practical attempt at solving the problem of permanent depression.

JOHN MAYNARD KEYNES (1883-1946) In contrast to Veblen, John Maynard Keynes' life was characterized by good fortune. Born into an old traditional English family, he attended the best schools. Reminiscent of John Stuart Mill's intellectual powers, Keynes studied the meaning of interest at age four. He won a scholarship to Eton, where he earned superior grades and won numerous prizes.


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At King's College in Cambridge, his grasp of economics was such that Marshall urged him to follow an academic career--which he declined in favor of something more lucrative. He placed second in civil service examinations for a position in the India Office but despised the work. Resigning his position, Keynes returned to Cambridge, where he began a thirty-three-year stint as editor of the Economic Journal, England's most influential economic periodical. Keynes' diverse interests made him the exception to the saying "jack-of-all-trades and master of none." Indeed, he mastered debate, bridge, mountain climbing, modern and classical art, currency and finance, and economics. In later life, he became Lord Keynes, Baron of Tilton, and while serving as a director of the Bank of England, he also operated a profitable theater. His greatest opportunity came with World War I when he undertook key roles in the Treasury and the Paris Peace Conference of 1919. Shortly afterward, he made a fortune of over $2 million by spending half an hour in bed each day studying and speculating in the international markets. Keynes attained national fame with the publication of his book The Economic Consequences of the Peace (1919). He stated that peace treaties are unjust and unworkable, with their apparent solutions ending in fiasco. While he was not the sole possessor of this observation, his view was the first written version which encouraged a complete revision of the treaties. The book succeeded, and international developments confirmed his thesis. Keynes' A Treatise on Money (1930) attempts to explain how the economy operates and to examine in particular the problem of unexplained bursts of prosperity followed by lows. Earlier writers accounted for this phenomenon by such theories as mental disorders of the economy or the effect of sunspots. Keynes returned to Malthus' warning--saving can result in depression. To understand Keynes' thesis, it is necessary to grasp the meaning of prosperity in market economy. The true measure of a nation's prosperity is not gold and silver nor physical assets, but its national income, which is the total of all individual incomes in a country. The chief characteristic of income is its flow from pocket to pocket via daily purchases and sales. Thus, this movement is largely natural and arises from the use and consumption of goods. On the other hand, one part of income which does not flow in daily transactions is savings, which represent the portion that is removed from the even flow of income. If that portion is hoarded, it serves no useful purpose. Significantly, no harm comes from the act of saving in modern nations because savings are usually put into banks and invested in stocks and bonds, becoming available when business wishes to expand production. In this event, savings flow into the economy. The increased capacity for production of more goods assures jobs and greater prosperity. Depression arises when savings are not invested into capitalistic expansion but are allowed to lie idle. Keynes' line of reasoning, which he did not invent, but only helped to explain, is known as the see-saw theory of savings and investment. As a see-saw go up and down, savings goes up when investment goes down. The reverse is also true. In his polished examination of the see-saw theory, Keynes concluded that depression arises from a decline of investment on one side and an increased accumulation of savings on the other. However, depression is only temporary, for an abundant supply of savings reduces interest rates, leading to a higher rate of return to be gained from investment. Thus, prosperity returns. Unfortunately, the see-saw theory has one shortcoming--its failure to explain a prolonged depression, such as the Great Depression of the 1930s. While interest rates declined during that period, no upswing of investment occurred. Recognizing this shortcoming, Keynes pondered the problem and published a


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revolutionary solution: The General Theory of Employment, Interest, and Money (1936). In it, he made the following pessimistic diagnosis of capitalism: 1.

There is nothing automatic in economic developments which will relieve a depression. An economy in depression can remain so indefinitely.

2.

Prosperity depends on savings being put to use. Otherwise, a descending spiral will result in depression.

3.

Investment cannot be counted on, as it depends on the expansion of production. The entrepreneur cannot be expected to increase production beyond demand for goods, so the capitalistic economy continuously lives in the shadow of collapse.

Keynes described how savings, in a time of depression, cannot continue to accumulate. Savings actually dry up, reduced to a trickle rather than a flow. When funds are needed for investment to stimulate the economy, there is no savings accumulation available. So the seesaw theory is invalid--replaced by the elevator theory. The elevator concept maintains that the economy, like an elevator car, can stall at any level. Even worse, a depression is a natural development, with every surge followed by a low. This phenomenon occurs because the economy, to avoid depression, must continually expand. However, capital expansion of any business is restricted by that business' market. So capital expansion does not move at an increasing rise, but in spurts. Understandably, Keynes' book proved as revolutionary as those of Adam Smith and Karl Marx. Keynes turned the classical view that depression is only temporary into the bleak conclusion that depression is inherent in the system itself and can be permanent. Of course, Keynes' vigorous mind did not halt on a dismal outlook for the future. He provided a cure-government needs to "prime the pump" by deliberately undertaking heavy government investment to stimulate the economy. By absorbing capital goods and spending whenever private enterprise is unable to expand, government can insure a high level of economic movement. Therefore, governments should incorporate judicious spending programs into their permanent plans. Keynes visited Washington in 1934 and observed President Franklin Roosevelt's New Deal methods to combat depression. This practical demonstration of Keynes' thesis became a defense for such policies. The WPA (Works Progress Administration) and a host of other New Deal projects existed specifically to "prime the pump." Such measures increased the national income by fifty percent and made a large dent in unemployment rolls. Unfortunately, New Deal projects failed in the long run. The number of unemployed still amounted to around 9 million. What finally ended the Great Depression was World War II. Yet, the failure of pump priming measures did not invalidate Keynes' thesis because government did not have enough funds to stem the tide and because opposition from the private sector feared government intervention in the economy. Keynes next attacked one of the chief problems of World War II with his simple, original book, How to Pay for the War. He proposed a compulsory savings plan for wage-earners for the purchase of government bonds during wartime, to be reduced at the war's end. In this way, inflation would be defeated by putting into savings the extra war income. Prosperity at the end of the war would be stimulated by the flow of money available for the purchase of consumer goods from the cashing in of bonds. Ironically, this cure was just the opposite of Keynes' cure for depression because a wartime situation is just the reverse of an economic low. Nothing came of the plan, however, for political leaders


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preferred to use the old method of taxation and rationing, along with the purchase of bonds on a voluntary basis. While labeled a radical by conservative economists, John Maynard Keynes had nothing but scorn for socialism and communism. Opposed to Marx's view that capitalism was doomed, Keynes believed in a policy of managed capitalism, one which would invigorate and save capitalism. Basically, he was a conservative with one major aim--the creation of a capitalistic economy in which its greatest threat, unemployment, would be forever eliminated. Consequently, he engineered a plan to foster a living and growing capitalism. Commentary

John Maynard Keynes observed a world sick with widespread depression which almost ruined trade and brought nations to the brink of bankruptcy. Exports fell, national banks failed, leading countries abandoned the gold standard, foreign debts went unpaid, and workers suffered mass unemployment. The result in Europe was a definite tendency toward dictatorial forms of government, as in Germany, Italy, Austria, and Rumania. The less favored nations, notably Germany, Italy, and Japan, embarked on territorial expansion. In the United States, against the background of the Roaring Twenties and the legacy of Coolidge prosperity, the air was filled with optimism. Herbert Hoover, president from 1929-33, promised "two chickens in every pot and two cars in every garage." Suddenly, the doomsday of Wall Street prosperity arrived without warning on October 24, 1929. By October 29, 16 million shares had been sold at staggering losses; by November 13th, $30 billion in capital values vanished. By the end of two months, the figure had increased to $40 billion. Just prior to the crash, the total value of stocks had been $87 billion. By March of 1933, it dropped to only $19 billion. This crash triggered the Great Depression for these reasons: 1.

Agricultural overexpansion resulted in surpluses.

2.

Industry overexpanded with too many factories and machines to meet demand for goods.

3.

Labor-saving machines replaced workers and produced more goods.

4.

Capital surpluses were created, producing an inequality in income distribution.

5.

Overexpansion of credit led to stock market speculation and installment buying.

6.

High tariff policies produced a decline in international trade.

7.

Political unrest contributed to defaults on foreign debts.

By 1930, in a typical U.S. industrial city, one out of four workers had lost their jobs. In major cities, many workers slept in public parks because they could not afford housing. Residential construction fell off by 95 percent. 1933 saw the turning point, with over 16 million workers unemployed out of a total population of better than 120 million. Stunned like the rest of America, congressional leaders stood helpless, waiting for the new president to take action. This was the situation when Franklin D. Roosevelt was inaugurated in March 1933. He immediately called a special session, which began emergency legislation under the slogan of "Relief, Recovery, and Reform." Under Roosevelt's leadership the following acts became law: the Emergency Banking Act; Federal Emergency Relief Administration; Civilian Conservation Corps (CCC); National Recovery


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Administration (NRA); Agricultural Adjustment Act (AAA); Federal Deposit Insurance Corporation (FDIC)--which guaranteed savings deposits in banks; Federal Securities Act, which led to the SEC (Securities and Exchange Commission) to regulate the stock market; Home Owner's Loan Corporation (HOLC); and the Tennessee Valley Authority (TVA), plus a host of other New Deal measures. Basic to the New Deal philosophy was the concept of "priming the pump" through federal action, which Keynes so ably defended in his major work, The General Theory of Employment, Interest, and Money. The result of the New Deal was that while the measures failed to end the Great Depression, the downward trend of the economy was halted and national confidence bounced back. In a world beset by communism and fascism, FDR saved American capitalism by using the goals and objectives of John Maynard Keynes.

CHAPTER 10: The Contradictions of Joseph Schumpeter Summary

Unlike Thomas Malthus and Karl Marx in the previous century, John Maynard Keynes looked forward to better times for capitalism in the twenty-first century. In his Economic Possibilities for Our Grandchildren, he predicted that by the year 2030, the age-old problem of equal distribution of wealth might be solved. Even though Keynes did not foresee the panacea immediately after World War I, in later years he deduced that capitalism would continue its upward climb. Certainly he could not attribute the easing of hard times to the bounties of nature, since the supply of raw materials was quite obviously finite and dwindling. Instead he lauded the ability of factory workers to utilize technology, thereby making each succeeding generation more productive. For example, in the 1960s, American workers turned out over five times the goods per hour in comparison with their forebears a century earlier. In like manner, Keynes envisioned a rosy future for his native England, calculating that by the year 2060, the nation would produce seven and one half times the wealth of the past century. The canny student of economy, however, cannot accept this cheerful prognostication without further delving, for a complete analysis of modern times requires a thorough study of more than Marx and Keynes. A third spokesman is necessary: the brilliant gadfly Joseph Alois Schumpeter, a spirited, histrionic Viennese aristocrat and Harvard professor, who saw capitalism in the twentieth century in terms of dynamic growth, yet he relegated it to destruction in the long run.

JOSEPH ALOIS SCHUMPETER (1883-50) A contemporary of Keynes, Joseph Alois Schumpeter was a native of Austria, born of solid, yet undistinguished stock. Educated amid the upper crust at an exclusive school, he developed elitist airs that followed him throughout his life. From being a brainy enfant terrible who challenged his teacher at the University of Vienna, he moved to England, where he served successfully as a financial adviser to an Egyptian princess. While in her employ, the twenty-seven-year-old Schumpeter published The Theory of Economic Development (1912), an unassuming overview of capitalistic growth. Surprisingly, the book describes a capitalist economy which lacks accumulation of capital. Relying on a circular flow, the model, like a toy train maneuvering around a hearthside track, remains static and predictable, never altering or expanding. In answer to the age-old stumper of where profits originate, Schumpeter declares that capitalism, grounded in inertia, has no momentum. Workers, he predicted, would, in time, receive full remuneration for their toil while owners will derive value equivalent only to the resources they contributed. Capitalists would obtain nothing except their wages as managers. Thus, in a changeless economy, profit does not exist.


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As Schumpeter elaborates, the only explanation for profits occurs when the static economy fails to follow its circular path, a situation which occurs when capitalists introduce innovative technology or organizational changes. Such ephemeral profit disappears after competitors emulate the innovation. In rapid order, innovation becomes the standard operating procedure. Like a huge, insatiable maw, the system swallows up ideas, turning them into the well-digested fuel of everyday productivity. Because the introducers of these changes differ from the norm, Schumpeter awards them the title of entrepreneur, one who is a business trailblazer, or risk-taker. An additional surmise of Schumpeter's Theory of Economic Development is his explanation of the business cycle. As a swarm of imitators follows the trail blazed by the business pioneer, investment spending leads to a short-lived economic boom. Competition, as always, forces prices down. Ultimately, profits disappear. Ironically, the entrepreneur is not necessarily the receiver of the profit generated by an innovative idea. As a rule, profits tend to go to the business owner, with the entrepreneur forced out of the picture by the dynamics of the new process. Schumpeter paints an unappealing picture of the life of an entrepreneur--a talented specialist who differs markedly from the military leader or politician. Treated by society as an upstart or social pariah, the entrepreneur resides outside the limelight. Unlike people who are motivated by the urge for riches or title, the entrepreneur prefers instead to found a dynasty. Goaded by the will to conquer, to climb to the top of the heap, this creator resembles a paladin, or "knight errant of the system." For the entrepreneur, the carrot at the end of the stick is not the monetary reward but the challenge itself, the vacuum into which innovation falls. After the publication of his ingenious work, Schumpeter served as commissioner on the nationalization of industry, an arm of the socialist German government, as well as finance minister of Austria. Unfortunately, the unstable times did not permit his creative beacon to shine very far. After Schumpeter moved into a position as bank president in Vienna, the collapse of Europe's financial structure led to huge personal debts. During this trying period, Schumpeter's young and charming wife, whom he had groomed for her role as his helpmeet, died in childbirth. Like the fabled phoenix, Schumpeter rebounded. He built a career as a visiting professor in Japan, Germany, and the United States. At Harvard, he married economist Elizabeth Boody. Renewed, he allowed his creative juices to flow at will. In his thousand-page, two-volume Business Cycles, Schumpeter attempted to account for the Great Depression. He based his explanation on a description of three distinct types of business cycles: 1. 2. 3.

A short cycle. A second span lasting 7-11 years. A fifty-year cycle evolving from blockbuster inventions like the steam engine or automobile.

The Great Depression, which stands out from the norm of economic ups and downs, was the cataclysm that erupted when a series of all three cycles hit bottom simultaneously. Schumpeter's conclusion produced a major economic contribution: the belief that capitalism, which evolves from the values of the civilization itself, was losing its steam. Even though his prediction emphasizes a moribund state of the economy, the author appends a small hope that there are still three decades in which capitalism will struggle before dying out completely.


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A more complete economic vision appears in Schumpeter's Capitalism, Socialism, and Democracy (1942), in which the author mounts an offensive thrust against his arch-enemy, Karl Marx. Departing from his predecessor's obsession with the antagonism between capitalist and worker, Schumpeter fastens onto the bourgeois nature of the capitalist. Crucial to his denouncement of the wearer of the lounging suit is the author's depiction of plausible capitalism, which describes capitalism as an economic success but a sociological failure. The system bogs down in a bureaucratic nightmare of red tape, where entrepreneurial input counts for little. Yet, even though Schumpeter's scenario plays well on the surface, it is riddled by the disease of rationalism, which gobbles up its own reason for being. Schumpeter, from the vantage point of his cleverly constructed soapbox, appears to defeat Marx at his own game. The whole breastwork of logic carries some measure of significance in that it predicts the bureaucratization of business and government as well as the ebb and ultimate foundering of the middleclass ideal. Still, the fabric of his logic is weakened in fiber. The mood of Western capitalism did indeed follow his predicted trends through the 1960s. However, it has not resigned itself to the benign socialism he envisioned. The overwhelming weakness of "the world according to Schumpeter" is that the prognosis is more social and political than economic. In guessing which way the tide of history will direct itself, he lends credence to a belief in a noncapitalist elite, who will form the dynamic core of an otherwise inert society. Unlike Marx's paradigm, which centralizes a disgruntled proletariat in the heart of change, Schumpeter's model places a changing cast of creative movers and shakers at the lead position of capitalistic innovation. Commentary

Like the consummate poker player shoving the whole pot into a grandstand showdown, Schumpeter begs the whole question of economics by reducing it to a single quibble: Is the function of economics analytic or predictive? Do economists merely compartmentalize facts about life as we know it or do they serve as visionaries? In other words, is it better to know where the market has been rather than where it's going? Obviously, Schumpeter himself chose the latter role, opting to lay out a vision of future generations than to muck about with the nuts and bolts of mundane money matters. The driving force in Schumpeter's world-picture is his accolade to the talented few, the idea people who render service to an otherwise not-very-engaging business machine set in the well-worn ruts of sameness. An even more intriguing possibility is that Schumpeter, imbued with elitist notions from childhood, may have set up this paradigm as a means of self-glorification, seeing himself as the swami of elitism. Whatever his motivation, he has produced a passionate interest in the captains of industry--not the grasping, dog-eat-dog Vanderbilts, Rockefellers, and Morgans of the previous generation, but the Lee lacoccas and Donald Trumps, the Sam Waltons and Ray Krocs, whose genius expresses itself in the proverbial "better mousetrap." Certainly, Schumpeter's contribution to economics places an emphasis on the part of the whole, which has, in past overviews, tended to fall between the cracks. Instead of stressing the inevitability of money following money or of workers locked into a predetermined social stratum, he opens a window on the spectrum of creativity. To Schumpeter, economics is less dry, less stultifying when interpreted as an outgrowth of wit, talent, and innovation. From his perspective, the future of capitalism appears less the function of an inevitable movement toward some predetermined end and more like a shapeless lump of clay in the potter's hand. A truly humanistic approach, Schumpeter's evaluation leaves hope that there's always room at the top for the tinkerer, the visionary, or the risk-taker. In his scheme of things, the world beckons perpetually to a Walt Disney, an


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Estee Lauder, a Steven Jobs, or a Liz Claiborne, whose brain children never capitulate to mundane limitations.

CHAPTER 11: Behind the Worldly Philosophy The concluding chapter addresses the achievement of economists as a whole. How useful have their writings been in interpreting actual events? Has prediction been the economist's aim? Is this undertaking a worthy endeavor? Among the economists described in the book, John Stuart Mill came closest to functioning as an economic prognosticator. Unlike Mill, most theorists narrowed their perspectives, offering little more than a single option for the future. In comparison to the rest, Thomas Malthus' Essay on Population is the most limited and dogmatic in its prediction of doom from overpopulation. Conversely, Karl Marx, the "Great Predicter," remained cautious about carving his predictions in stone. The reason that economic prediction remains nebulous and hazy is that economics differs from more scientific studies, such as astronomy or physics. Because society exists in a state of flux, its behavior is less predictable than the motions of the planets or the status of atoms in a molecule. Therefore, economists are willing to forecast only a generalized picture of future trends rather than particular details. These economic generalizations, or laws, exist in a kind of historic vacuum, without recourse to inevitable changes in background situations. Thus, the savvy student of economics expects some ambiguity in predictions and knows to apply common sense to any grand schematic design. In its normal state, prognostication is possible only on two conditions: 1.

Behavioral regularities must govern the lives of individuals. These "givens" allow the economist to create "if . . . then" statements, such as Thomas Malthus' surmise that if workers continue to expand their families during boom times, then world population will soon outstrip necessary resources to feed the multitudes. In similar fashion, Karl Marx believed that if capitalists continued oppressing the working classes, their actions would lead to a class war and the inevitable collapse of capitalism.

2.

The outcome of the economy will influence society as a whole. Economists as a group share the common belief that how people spend their money affects the "overall shape of things to come." Because money is an integral part of the totality of society, it cannot be overlooked in any analysis of civilization as a whole.

These two conditions clarify how Schumpeter arrived at the conclusion that capitalists would evolve into hidebound bureaucrats. He believed that a change would occur in human nature. Significantly, however, he was the first economist to declare that economics was less crucial to human history than politics or sociology. In summary, it is remarkable that economics, apart from other social sciences, is able to predicate laws of any kind, especially definitive laws which describe how buyers and sellers will react in the marketplace. In assessing how well the laws of economics describe actual behavior, the student will notice immediately the limitations of time. Economists like Adam Smith were unable to foresee how factory systems would change following revolutionary discoveries, such as the steel-making process, which replaced the lowly pin factory. Likewise, David Ricardo did not envision improvements in nineteenth-century agricultural productivity; nor did John Stuart Mill or Karl Marx clearly predict innovative changes in the political control of economics. In more recent times, even Keynes' and Schumpeter's theories have already suffered major setbacks as events have moved in directions neither man could foresee.


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Most significant to the trouncing of economic prediction is the fact that economists as a group have not been able to predict three trends: 1.

The growth of technology. Adam Smith was unable to guess that mass production would vastly alter the factory system. Moreover, David Ricardo had no inkling how drastically steam power would alter production. In general, these market seers failed to understand how machines could displace labor. Only Karl Marx surmised that machines might replace workers and even he would be astounded at modern computer-driven machinery, particularly the sophisticated robotics that bolsters the automotive industry.

2.

Changes in society's attitudes and behavior. Adam Smith assumed that workers would remain complacent when, in fact, they became more militant. Karl Marx, assuming that human outlook would remain static, failed to see that workers could resolve their differences with capitalists within the confines of a democratic society.

3.

More profound than the other two trends is the fact that regularities of economics are no longer regular. Adolph Lowe, who questions how the random behaviors of individuals in the marketplace manage to provide for the entire community, reveals that people establish economic order because of their singleminded acquisitiveness. However, the will to maximize personal finances is waning as capitalism develops. Human lives are so well furnished that modern capitalism resorts to advertising to convince the public that it needs the new products which factories are turning out. Thus, one of the dependable "givens" of the economic equation is no longer a sure thing.

In short, economic vision has been bounded by turns and twists in the historical path. Each economic theory has reached only so far as the prevailing technology and lifestyle of the times allowed it. These aforementioned alterations in capitalism are therefore producing a less predictable market behavior. In a demonstrative break with his predecessors, Lowe contends that economics can no longer be governed from within. In order to maintain a balance, the economy requires active interference, such as tax inducements. Thus, the new function of economics is not to predict but to control. The old philosophical system, now completely out of date, must give way to an upgraded version--political economics. At this point, one quality of economic prognostication seems more pertinent than at any other time-Schumpeter's "preanalytic" grasp, which enables the economist to recognize coming trends, such as Schumpeter's cadre of entrepreneurial elite or Mill's vision of human improvement. Even though these projections derive from the personalities and backgrounds of the economists themselves, they must not be dismissed as whimsical or unimportant. Rather, they merit distinction for being penetrating, courageous, and intellectual acts. In summary, economics, because it is rooted in human behavior, cannot be reduced to a list of mathematical formulae. Economic exchange functions as a single building block of the total social picture. While economics is a thrilling study of one aspect of what it means to be human, it is still only one view of a complex and ever-changing world picture. Commentary

The role of economics in society has never seemed more crucial than it does today. There are tens of thousands of practicing economists who influence decisions in banks, corporations, and government. However, the field of vision among today's economists is greatly reduced. Lacking the scope of an Adam Smith, a Thorstein Veblen, or a John Maynard Keynes, these professionals concentrate on smaller spheres of interest, such as Paul Samuelson's work in mathematical economics, for which he won a Nobel prize.


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Breaking with earlier traditions, modern economics lauds such figures as Milton Friedman, spokesperson for the free market, and John Kenneth Galbraith, whose philosophy runs counter to Friedman. Whatever the area of interest, economists at present suffer no lack of problems to solve, whether depression or inflation. Under the stimulus of massive change--globalization of the marketplace, third world starvation in an era of affluence, and threats to the industrial order as Japan faces off against the American giant-economists look out on a host of possibilities. What mixed blessing will technology bring? Will the earth survive the pollutants produced by industry? Has ecology gone too far toward destruction to be rescued? Will the depletion of fossil fuels spell the end of the factory system? Is a global depression possible? Will technology extend into outer space? In none of the above troubling situations will economics bear the final resolution. The citizen of tomorrow will find the role of politics encroaching more heavily on economic growth. Never again will the market chug along on its own steam, as it appeared to do in Adam Smith's day. Consequently, the day of the worldly philosophers appears to have ended. Yet, their role in teaching humanity how to assess a major cog of civilization has brought about a worthwhile reaction--a better understanding of itself.

ESSAY TOPICS AND REVIEW QUESTIONS 1.

Explain the common interest that bound the worldly philosophers under a single heading.

2.

Contrast the family and educational backgrounds of Thorstein Veblen, David Ricardo, Joseph Schumpeter, and John Maynard Keynes.

3.

Explain how economists such as Paul Samuelson and John Kenneth Galbraith can evolve economic theories that oppose each other diametrically.

4.

Forecast how the market system is affected by significant change, such as the dearth of labor during wartime, the increase of women workers, the passage of child labor laws, competitive price wars between nations, the displacement of human workers by robots, the creation of new fuels, potential ecological disaster, depletion of natural resources, the exploration of outer space, and the failure of a major crop, such as cotton or soybeans.

5.

Explain why "laissez faire" was a significant concept in Adam Smith's time.

6.

Describe current attempts to solve the twofold problems of overpopulation and world hunger.

7.

Explain why utopian philosophers fail to achieve their goals.

8.

Discuss why division and specialization of labor are beneficial to society.

9.

Show how recent events in world affairs indicate major flaws in Karl Marx's predictions about the downfall of capitalism.

10.

Explain why World War II helped to end the Great Depression.

11.

Discuss how John Stuart Mill's economic laws differed from those of his predecessors.

12.

Analyze how modern consumers resemble their prehistoric ancestors.

13.

Explain Keynes' philosophy of "priming the pump."


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14.

Explain the differences and similarities between socialism and communism.

15.

Discuss the role of the entrepreneur.

16.

Explain how President Franklin D. Roosevelt dealt with the problems of the Great Depression.

17.

Debate the pros and cons of Pierre Proudhon's belief that "property is theft."

18.

Explain why David Ricardo described the landlord as a villain.

19.

Characterize Thorstein Veblen's comments on technology.

20.

Explain why economics differs from the other social sciences and why it can never be reduced to simplistic formulas.

SELECTED BIBLIOGRAPHY ARCHIBALD, PETER W. Marx and the Missing Link : Human Nature. Atlantic Highlands, New Jersey: Humanities Press, International, Inc., 1989. BOWLES, SAMUEL, et al., Eds. Unconventional Wisdom : Essays in Honor of John Kenneth Galbraith. Boston: Houghton Mifflin Co., 1989. GALBRAITH, JOHN KENNETH. Economics in Perspective : A Critical History. Boston: Houghton Mifflin Co., 1988. ---. The Great Crash of 1929. Boston: Houghton Mifflin Co., 1988.

GEORGE, HENRY. The Land Question: Property in Land and the Condition of Labor. New York: The Robert Schalkenbach Foundation, 1982. HEILBRONER , ROBERT L. Behind the Veil of Economics : Essays in The Worldly Philosophy. New York: W. W. Norton & Co., Inc., 1989. HELBURN, SUZANNE, AND DAVID BRAMHALL, Eds. Marx, Schumpeter, and Keynes: A Centenary Celebration of Dissent. Armonk, New York: M. E. Sharpe, 1986. HOBSON, JOHN A. The Economics of Unemployment. New York: Garland Publishing Co., 1985. KEYNES, JOHN MAYNARD. The Economic Consequences of the Peace. Intro. by Robert Lekachman. New York: Penguin Books, Inc., 1988. LOWE, ADOLPH. On Economic Knowledge: Toward a Science of Political Economics. Armonk, New York: M. E. Sharpe, 1983. MALTHUS, THOMAS. Essay on the Principle of Population, or a View of Its Past and Present Effects on Human Happiness. New York: Augustus M. Kelley Publishers, 1986. MARSHALL, ALFRED. The Principle of Economics. Philadelphia: Porcupine Press, Inc., 1982.


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Worldly Philosophers

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