II. THE APOGEE AND DECLINE OF THE CLASSICAL SCHOOL. JOHN STUART MILL…

II. THE APOGEE AND DECLINE OF THE CLASSICAL SCHOOL. JOHN STUART MILL

While the French economists, alarmed at the consequences involved in the theories of Malthus and Ricardo, strove to transmute the Brazen laws into Golden ones, the English economists pursued their wonted tasks, never once troubled by the thought that they were possibly forging a weapon for their own destruction at the hands of socialists.

The thirty years which separate the publication of Ricardo’s Principles of Political Economy (1817) from Mill’s book bearing the same title are occupied by economists of the second rank, who apply themselves, not to the discovery of new principles, but to the development and co-ordination of those already formulated. Of course we must not lose sight of the mass of critical work bearing upon certain aspects of current doctrines, which was produced by English economists just about this time. But their ideas attracted as little attention as did Cournot’s in France or Gossen’s in Germany.[742]

These were the days when Miss Martineau and Mrs. Marcet gave expositions of political economy in the form of tales, or conversations with “young Caroline,”[743] when MacWickar, writing his First Lessons in Political Economy for the use of Elementary Schools, expressed the belief that the science was already complete. “The first principles of political economy,” he wrote, “are mere truisms which children might well understand, and which they ought to be taught. A hundred years ago only savants could fathom them. To-day they are the commonplaces of the nursery, and the only real difficulty is their too great simplicity.”[744]

We cannot attempt the individual study of all the economists of this period.[745] However, one of them, Nassau Senior,[746] certainly deserves more space than we can give him in this history, and is perhaps the best representative of the Classical school, showing its good and bad points better than any other writer. He removed from political economy every trace of system, every suggestion of social reform, every connection with a moral or conscious order, reducing it to a small number of essential, unchangeable principles. Four propositions seemed sufficient for this new Euclid,[747] all necessary corollaries being easily deducible from one or other of these. Senior’s ambition was to make an exact science of it, and he deserves to be remembered as one of the founders of pure economics.

He is responsible for the introduction into political economy of a new and hitherto neglected element, namely, an analysis of abstinence or saving. (The former word, which is Senior’s choice, is the more striking and precise term.) It is true enough, as Senior remarks, that abstinence does not create wealth, but it constitutes a title to wealth, because it involves sacrifice and pain just as labour does. Hitherto the income of capital had been the least defensible of all revenues, for Ricardo had only discussed it incidentally, and had represented it as a surplus left over after paying wages. The claim of capital was believed to be as evident as that of land or labour, and there was no need for any further inquiry. But has it any real right to separate remuneration, seeing that, unlike the other two agents, it is itself a product of those two and not an original factor of production? Here at last is its title, not in labour, but in abstinence.

But if on the one hand Senior succeeds in establishing the claim of interest, he invalidates the claim of most other capital revenues on the other. Let us follow his argument. Cost of production is made up of two elements, labour and abstinence, and wherever free competition obtains, the value of the products is reduced to this minimum. Where competition is imperfect, where there is a greater or less degree of monopoly, then between cost of production and value lies a margin which constitutes extra income for those who profit by it. This revenue by definition of labour and abstinence is independent of every sacrifice or personal effort. This revenue Senior calls rent, and his theory is thus a mere extension of the Ricardian. Rent is not the result of appropriating the better situated or the more fertile lands only. It may be due to the appropriation of some natural agent or to the possession of some personal quality such as the artiste’s voice or the surgeon’s skill,[748] or it may simply be the result of social causes or fortuitous circumstances. Senior shows that rent, far from being an exceptional phenomenon, is really quite normal. This kind of revenue which is wanting in title—drawn, but not earned—is extremely important, and absorbs a great share of the total wealth. Indeed, Senior goes much further, and states that whenever, as in the case of death, capital passes from the hands of those who have earned it into the possession of others, it immediately becomes rent. The inheritor cannot plead abstinence—the virtue is not transmissible, and he has no title to his fortune except just good luck.[749]

No revolutionary socialist could ever have invented a better argument for the abolition of the existing order. And how different from the “natural order”! But Senior is quite unmoved, and the superb indifference with which economists of the Ricardian school affirm their belief in their doctrines without taking any account of the consequences which might uphold or might destroy those very beliefs has a peculiar scientific fascination for us.

Also, it was Senior who laid stress upon scarcity as the basis of economic value. But a thing to possess value must be not merely rare, it must also satisfy some want. It must be a rare utility. It is the same term, “scarcity,” that was employed by Walras.

The Classical doctrines were taught during the first half of the nineteenth century, not in England alone, but in every country of the world. In Germany they were expounded by von Thünen, of whom we have already spoken, and by his contemporary Rau.[750] In France, despite the growing influence of the optimistic politico-liberal creed considered in our last chapter, English Classical economics was still taught by a large number of economists, among whom Rossi deserves special mention. His Cours d’Économie politique, published in 1840, enjoyed a fair success, due, not to any originality in the contribution itself, but to the somewhat oratorical style of the work.[751]

But to proceed to the central figure of this chapter—John Stuart Mill.[752] With him Classical economics may be said in some way to have attained its perfection, and with him begins its decay. The middle of the nineteenth century marks the crest of the wave. What makes his personality so attractive is his almost dramatic appearance, and the consciousness that he was placed between two schools, even between two worlds. To the one he was linked by the paternal ties which bound him to the Utilitarian school, wherein he was nurtured; the other beckoned him towards the new horizons that were already outlined by Saint-Simon and Auguste Comte. During the first half of his life he was a stern individualist; but the second found him inclined to socialism, though he still retained his faith in liberty. His writings are full of contradictions; of sudden, complete changes, such as the well-known volte-face on the wages question. Mill’s book exhibits the Classical doctrines in their final crystalline form, but already they were showing signs of dissolving in the new current.

Like other theorists of the “Pure” school, he declared that there was no room in political economy for the comparative judgment of the moralist, but it was he also who wrote: “If, therefore, the choice were to be made between communism with all its chances and the present state of society with all its sufferings and injustices; if the institution of private property necessarily carried with it as a consequence that the produce of labour should be apportioned as we now see it, almost in an inverse ratio to the labour—the largest portions to those who have never worked at all, the next largest to those whose work is almost nominal, and so in a descending scale, the remuneration dwindling as the work grows harder and more disagreeable, until the most fatiguing and exhausting bodily labour cannot count with certainty on being able to earn even the necessaries of life; if this or communism were the alternative, all the difficulties, great or small, of communism, would be but as dust in the balance.”[753]

It was Mill the utilitarian philosopher who declared that a person of strong conviction “is a social power equal to ninety-nine who have only interests.” It was he also who wrote that “competition may not be the best conceivable stimulus, but it is at present a necessary one, and no one can foresee the time when it will not be indispensable to progress.” But he also admits that “co-operation is the noblest ideal,” and that it “transforms human life from a conflict of classes struggling for opposite interests to a friendly rivalry in the pursuit of a good common to all.”[754]

Mill, it has been said, was simply a gifted popular writer. But this is to under-estimate his ability. It is true that, unlike Ricardo, Malthus, or Say, his name is not associated with any economic law, but he opened up a wider prospect for the science which will secure him a reputation long after the demise of these so-called laws. His fame is doubly assured, for in no other work on political economy, not excepting even the Wealth of Nations, are there so many pages of fine writing, so many unforgettable formulæ which will always be repeated by everyone who has to teach the science. It is not for nought that the Principles has served as a text-book for half a century in most of the English universities.

Before examining the changes in the Classical doctrines which Mill himself effected, we must give a brief outline of those theories as they appeared in all their inflexible majesty towards the middle of the nineteenth century, during the period between the publication of the Principles and the death of John Stuart Mill, between 1848 and 1873. This was the period when the Classical Liberal school believed that its two old rivals, Protectionism and socialism, were definitely crushed. Reybaud, in his article on socialism in the Dictionnaire d’Économie politique of 1852, wrote as follows: “To speak of socialism to-day is to deliver a funeral oration.” Protection had just been vanquished in the struggle that led to the repeal of the English Corn Laws, and was to suffer a further check, alike in France and in the other countries of Europe, as a result of the treaties of 1860. The future lay with the Classics. It was little thought that 1867 would witness the publication of Kapital, that in 1872 the Congress of Eisenach would reassemble, when the treaties of 1860 would be publicly denounced.

Let us profit by its hour of glorious existence to give an exposition of the doctrines which it taught. The treatment must necessarily be very summary, seeing that we are not writing a treatise on political economy, and that our attention must be confined to writers who are definitively members of the Liberal school.

I: THE FUNDAMENTAL LAWS

A belief in natural laws was always an article of faith with the Classical school. Without some such postulate it seemed to them that no collection of truths, however well attested, could ever lay claim to the title of science. But these natural laws had none of that “providential,” “finalistic,” and “normative” character so frequently dwelt upon by the Physiocrats[755] and the Optimists. They are simply natural laws like those of the physical order, and are clearly non-moral. They may prove useful or they may be harmful, and men must adapt themselves to them as best they can. To say that political economy is a “dismal science” because it shows that certain laws may have unfortunate results is as absurd as it would be to call physics a “dismal science” because lightning kills.

Far from being irreconcilable with individual liberty, these laws are among its direct results. They are the spontaneous links which bind together all free men. Freedom is always subject to conditions. Men are not free in the matter of eating or not eating, and if they would eat they must cultivate the soil. Freedom is limited not only by the actions of other human beings, but also by the laws of the physical world which surrounds us.

These laws are universal and permanent, for the elementary needs of mankind are always and everywhere the same. Economics is in quest of such permanent laws, and has no concern with the merely temporary. It is only by seeking the more general and consequently the more nearly universal laws that economics can apprehend truth or hope to become a science. It must study man, not men—the type, not the individual—the homo œconomicus stripped of every attribute except self-interest. It does not deny the existence of other qualities, but merely relegates them to the consideration of other sciences.

It now remains to see what those natural laws were.

(1) The Law of Self-interest. This law has since been named the Hedonistic principle—a term that was never employed by the Classical school. Every individual desires well-being, and so would be possessed of wealth. Similarly he would, if possible, avoid evil and escape effort. This is a simple psychological law. Could anything be more universal or permanent than this law, which is simply the most natural and the most rational (using the term in its Physiocratic sense) statement of the law of self-preservation? In virtue of this fundamental principle the Classical school is frequently known as the Individualist school.

But individualism need imply neither egoism nor egotism. This confusion, which is repeatedly made with a view to discrediting the Classical writers, is simply futile. No one has displayed greater vigour in protesting against this method of treating individualism than Stuart Mill. To say that a person is seeking his own good is not to imply that he desires the failure of others. Individualism does not exclude sympathy,[756] and a normal individual feels it a source of gratification whenever he can give pleasure to others.

But this did not prevent Ricardo and Malthus showing the numerous instances in which individual interests conflict, where it is necessary that one interest should be sacrificed to another. And Mill, far from denying the existence of these conflicts, has taken special pains to emphasise them. The Classical writers, together with the Optimists, reply that such contradictions are apparent only, and that beneath these appearances there is harmony; or they point out that these antinomies are due to the fact that both individualism and liberty are only imperfectly realised, and as yet not even completely understood, but that as soon as they are securely established the evils which they have momentarily created will be finally healed.[757] Liberty is like Achilles’ lance, healing the wounds it inflicts. Other individualists, such as Herbert Spencer, declare that the conflict of individual interests is not merely advantageous to the general interests of society, but is the very condition of progress, weeding out the incapable to make room for the fittest.

(2) The Law of Free Competition. Admitting that each individual is the best judge of his own interests, then it is clearly the wisest plan to let everyone choose his own path. Individualism presupposes liberty, and the Individualist school is also known as the Liberal school. This second title is more exact than the first, and is the only one which the French school will accept. It emphatically repudiates every other, whether Individualist, Orthodox, or Classical.[758]

The English school is equally decisive in its preference for “Liberalism.” The terms “Manchesterism” and “Manchesterthum” have also been employed, especially by German critics, in describing this feature of their teaching.

But the Classical school itself thought of laissez-faire neither as a dogma nor a scientific axiom. It was treated merely as a practical rule which it was wise to follow, not in every case, but wherever a better had not been discovered. Those who act upon it, in Stuart Mill’s opinion, are nearer the truth nineteen times out of twenty than those who deny it.[759] This practical Liberalism is intended to apply to every aspect of economic life, and their programme includes liberty to choose one’s employment, free competition, free trade beyond as well as within the frontiers of a single country, free banks, and a competitive rate of interest; and on the negative side it implies resistance to all State intervention wherever the necessity for it cannot be clearly demonstrated, as in the case of protective or parental legislation.

In the opinion of Classical writers, free competition was the sovereign natural law. It was sufficient for all things. It secured cheapness for the consumer, and stimulated progress generally because of the rivalry which it aroused among producers. Justice was assured for all, and equality attained, for the constant pursuit of profits merely resulted in reducing them to the level of cost of production. The Dictionnaire d’Économie politique of 1852, which may perhaps be considered as the code of Classic political economy, expressed the opinion that competition is to the industrial world what the sun is to the physical. And Stuart Mill himself, the author of Liberty, no longer distinguishing between economic and political liberty, in less poetic but equally conclusive terms states that “every restriction of competition is an evil,” but that “every extension of it is always an ultimate good.”[760] On this point he was a stern opponent of socialism, although in other respects it possessed many attractions for him. “I utterly dissent,” says he, “from the most conspicuous and vehement part of their teaching, their declamations against competition.”

But the Classical school, despite its glorification of free competition, never had any intention of justifying the present régime. The complaints urged against it on this score, like the similar charge of egoism, are based upon a misconception. On the contrary, the Classics, both new and old, complain of the imperfect character of competition. Senior had already pointed out what an enormous place monopoly still holds in the present régime. A régime of absolutely free competition is as much a dream as socialism, and it is as unjust to judge competition by the vices of the existing order as it would be to judge of collectivism by what occurred in the State arsenals.

(3) The Law of Population also held an honourable place among Classical doctrines, so honourable, indeed, that even the Optimists never dared contradict it. And of all economists Mill seems most obsessed by it.[761] In his dread of its dire consequences he surpasses Malthus himself. And he reveals a far greater regard for moral considerations than was ever shown by the latter. Mill was already a Neo-Malthusian in the respect which he felt for the rights and liberty of women, which are too seldom consulted when maternity is forced upon them.[762] A numerous family appeared to him as vicious and almost as disgusting as drunkenness.[763] Time and again he declares that the working classes can hope for no amelioration of their lot unless they check the growth of population. One reason for his favourable view of peasant proprietorship is the restraint which it exercises upon the birth-rate. “The rate of increase of the French population is the slowest in Europe,” he writes, and this result he thought very encouraging.

To exorcise this terrible demon he would even sacrifice the principle of liberty which everywhere else he is at so much pains to defend. He was prepared to support a law to prohibit the marriage of indigents,[764] a proposal to which Malthus was absolutely opposed. His plea for this measure of restraint is expounded, not in the Principles, but in another of his works entitled Liberty. It is, of course, possible that Liberty may owe something to the collaboration of Mrs. Stuart Mill.

(4) The Law of Demand and Supply—the law that determines the value of products and of productive services, such as labour, land, and capital—is usually stated in the following terms: Price varies directly with demand, inversely with supply. One of the most important contributions which Mill made to the science was to show that this apparently mathematically precise formula was merely a vicious circle. If it be true that demand and supply cause a variation of price, it is equally true that price causes a variation of demand and supply. Mill corrects the dictum by saying that price is fixed at a margin where the quantity offered is equal to the quantity demanded. All price variations move about this point, just as the beam of a balance oscillates about a point of equilibrium.[765] He thus gave to the law of demand and supply a scientific precision which it formerly lacked, and by substituting the conception of equilibrium for the causal relation he introduced a new principle into economics which was destined to lead to some important modifications.

The law of demand and supply explains the variations of value, but fails to illuminate the conception of value itself. A more fundamental cause must be sought, which can be found in cost of production. Under a régime of free competition the fluctuations in value tend toward this fixed point, just as “the sea tends to a level; but it never is at one exact level.”[766]

A temporary, unstable value dependent upon the variations of demand and supply, a permanent, natural, or normal value regulated by cost of production, such was the Classical law of value. Mill was entirely satisfied with it, as will be seen from the following phrase, which seems rather strange, coming from such a cautious philosopher. “Happily,” says he, “there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete.”[767]

The law which regulates the value of goods applies also to the value of money. Money also has a temporary value, determined by the quantity in circulation and the demand for it for exchange purposes—the celebrated quantity theory. But it also has a natural value, determined by the cost of production of the precious metals.

(5) The Law of Wages. A similar law determined wages—the price of hand-labour. Here again is a double law. Temporary wages depend upon demand and supply—understanding by supply the quantity of capital available for the upkeep of the workers, the wages fund, and by demand the number of workers in search of employment.[768] This law was more familiarly expressed by Cobden when he said that wages rose whenever two masters ran after the same man, and fell whenever two men ran after the same master.

Natural or subsistence wages in the long run are determined by the cost of production of labour—by the cost of rearing the worker. The oscillations of temporary wages always tend to a position of equilibrium about this point.

This “brazen law,” as Lassalle calls it, well deserves its title. According to it wages depend entirely upon causes extraneous to the worker, and bear no relation either to his need or to the character of his work or his willingness to perform it. He is at the mercy of a fatalistic law, and is as helpless to influence his market as a bale of cotton. And not only is the law independent of him, but no intervention, legal or otherwise, no institution, no system, can alter this state of things without influencing one or other of the two terms of the equation, the quantity of capital employed as wages—the wage fund—or the numbers of the working population in search of work. “Every plan of amelioration which is not founded upon this principle is quite illusory.” Only by encouraging the growth of capital by means of saving, or by discouraging the growth of population and restraining the sexual instinct, can the terms of the equation be favourably modified. Upon final analysis there are only two chances of safety for the workers, and of these the first is beyond their power,[769] while the second means the condemnation to celibacy or onanism of all proletarians, as they are ironically called.

And thus Mill, who formulated the law with greater rigour than any of his predecessors, found himself alarmed at its consequences. He was specially impressed by the courageous but impotent efforts of trade unionism, then at the beginning of its career. Mill and the economists of the Liberal school were as strongly in favour of the removal of the Combination Laws as they were persistent in their demands for the repeal of the Corn Laws; but of what use was the right of association and combination when a higher law frustrated every attempt to raise wages? Just at this time Longe, writing in 1866, and Thornton, in his volume on Labour, began to question the validity of the wage fund theory. They experienced no difficulty in converting John Stuart Mill, who followed with his famous recantation in the pages of the Fortnightly. His defection caused a remarkable stir, and was thought almost an offence against the sacred traditions of the Classical school. The conversion was not quite complete, however, for the last edition of the Principles still contains the passages we have already quoted, as well as others equally discouraging to the working classes, and equally fatal to the hopes which they had reasonably placed in their own efforts.[770]

The wage fund theory, though badly shaken as a result of Mill’s defection, was not abandoned by all the Classical writers, and some recent American publications have attempted a revival of it.[771]

(6) The Law of Rent. The law of competition tends to reduce the selling price until it is equal to the cost of production. But suppose, as is often the case, that there are two costs of production, which of the two will determine the price? The higher will be the determinant, and so there exists a margin for all similar products whose cost of production is less. Ricardo showed that this was the case with agricultural products as well as with certain manufactured goods.[772] Mill included personal ability, and though the conception of rent was thus very considerably extended, it had not the scope which it had with Senior.

(7) The Law of International Exchange. According to the Liberal economists Ricardo and Dunoyer (see p. 346), international trade is subject to the laws regulating individual exchange, and the results in the two cases are almost identical, namely, a saving of labour to both parties. One party exchanges a product which has cost fifteen hours’ labour for another which, had an attempt been made to produce it directly, would have involved a labour of twenty hours. The gain is credited to the importing side, for exportation is merely the means whereby it is obtained. Its measure is the excess of the imported value over the value exported.

It is clear that each party gains by the transaction. It is not quite clear, nor is it altogether probable, that the advantages are equally distributed. But it is generally believed that if any inequality does exist the greater gain goes to the poorer country—to the one that is less gifted by nature or less fitted for industrial life. The latter country by very definition would experience great difficulty in attempting the direct production of the imported goods, and would even, perhaps, find it quite impossible. On this point the English Classical or the Manchester school is in complete agreement with the French school.[773]

It might possibly be pointed out that under a régime of free competition all values would be reduced to the level of cost of production, and products would be exchanged in such a fashion that a given quantity of labour embodied in one commodity would always exchange for an equal quantity embodied in any other. But in such a case where would be the advantage of exchanging? Ricardo had already anticipated this objection, and had shown that if the rule of equal quantity in exchange for equal quantity were true of exchange between individuals, it did not hold of exchange between different countries, for the equalising action of competition no longer operated, because of the difficulty of moving capital and labour from one to the other. A comparison should be made, not of the respective costs of the same product in the two countries, but of the respective costs of the imported and the exported products in the same country. Another buttress to strengthen the theory which measures the advantages of international commerce by the amount of labour economised![774]

But the value of the exchanged product is still undetermined. It lies somewhere between the real cost of production of the goods exported and the virtual cost of production of the goods imported, in such a way that each country gains something. That is all we are able to say. Mill has gone a step farther. He has abandoned the comparison of costs of production, which is purely abstract, and can afford no practical measure of the advantages, preferring to measure the value of the imported product by the value of the product which must be given in exchange for it.[775] We require to find the causes that enable a country like England to obtain a greater or a lesser quantity of wine in exchange for her coal. In other words, the law of international values no longer involves a comparison of costs of production, but is simply the law of demand and supply. The prices of the two goods arrange themselves in such a fashion that the quantities demanded by the respective countries exactly balance. If there is a greater demand for coal in France than there is for wine in England, England will obtain a great quantity of wine in exchange for her coal, and will consequently find herself in a very advantageous position.

Mill’s theory[776] constitutes a real advance as compared with Ricardo’s, for it affords a means of gauging the strength of the foreign demand, and of judging of the circumstances favourable to a good bargain. Mill was of the opinion that a poor country stood to benefit most by the transaction—thus confirming Bastiat’s belief. A rich country will always have to pay more for its goods than a poor one.[777]

Protectionists affect the opposite belief, holding that it is the poor country that is duped. The English trade with Portugal is one of their favourite illustrations. But it is simply an illustration, and it can never take the place of actual proof.

Notwithstanding these divergent views, Mill is more sympathetic to the Protectionists than any other economist of the Liberal school. His theory provides them with at least one excellent argument. Seeing that the advantages of international commerce depend upon demand and supply, a country may make it operate to its own advantage by merely pursuing a different policy. New industries might be developed whenever there is a considerable demand for new products, and that demand might easily be so considerable that the price would be lowered.[778] Mill recognises the justice of merely temporary protection, set up with a view to naturalising a new industry, and considers it logically deducible from his principles.[779]

Although Mill may in this way have done something to lighten the task of the Protectionists, we must never forget that he himself remained an entirely faithful adherent of the Free Trade doctrine and, except in the case of infant industries, vigorously denounced all protective rights. “All is sheer loss.… They prevent the economy of labour and capital, thereby annihilating a general gain to the world which would be shared in some proportion between itself and other countries.”[780]

The Free Trade doctrine has not remained where it was any more than the other special doctrines of the Classical school. It gave birth to one of the most powerful movements in economic history, which led to the famous law of June 25, 1846, abolishing import duty on corn. This law was followed by others, and ended in the complete removal of all tariff barriers. But the eloquence of Cobden, of Bright, and of others was necessary before it was accomplished. A national Anti-Corn League had to be organised, no less than ten Parliamentary defeats had to be endured, the allegiance of Peel and the approval of the Duke of Wellington had to be secured before they were removed. All this even might have proved futile but for the poor harvest of 1845. This glorious campaign did more for the triumph of the Liberal economic school and for the dissemination of its ideas than all the learned demonstrations of the masters. Fourteen years were still to elapse before Cobden and Michel Chevalier were able to sign the treaty of 1860. Even this was due to a personal act of Napoleon III, and Cobden was not far wrong when he declared that nine-tenths of the French nation was opposed to it.

II: MILL’S INDIVIDUALIST-SOCIALIST PROGRAMME

Such were the doctrines taught by the Classical school about the middle of the nineteenth century. The writers in question, however, strongly objected to the term “school,” believing that they themselves were the sole guardians of the sacred truth. And we must admit that their doctrines are admirably interwoven, and present an attractive appearance. On the other hand, it must be confessed that the prospects which they hold out for anyone not a member of the landowning class are far from attractive. For the labourer there is promise of daily toil and bare existence, and at best a wage determined by the quantity of capital or the numbers of the population—causes which are clearly beyond the workers’ influence, and even beyond the assuaging influence of association and combination. And although the latter rights are generously claimed for the workers, the occasional antagonism between masters and men presages the eternal conflict between profits and wages. The possession of land is a passport to the enjoyment of monopolistic privileges, which the right of free exchange can only modify very slightly. Rent—the resultant of all life’s favourable chances—reserved for those who need it least, monopolises a growing proportion of the national revenue. Intervention for the benefit of the worker, whether undertaken by the State or by some other body, is pushed aside as unworthy of the dignity of labour and harmful to its true interests. “Each for himself” is set up as a principle of social action, in the vain hope that it would be spontaneously transformed into the principle of “Each for all.” The search for truth was the dominant interest of the school, and these doctrines were preached, not for the pleasure they yielded, but as the dicta of exact science. Little wonder that men were prepared to fight before they would recognise these as demonstrable truths. And just as it was Mill who so powerfully helped to consolidate and complete the science of economics that Cossa refers to his Principles as the best résumé, the fullest, most complete and most exact exposition of the doctrines of the Classical school that we have,[781] it was Mill also who, in successive editions of his book, and in his other and later writings, pointed out the new vistas opening before the science, freed the doctrine from many errors to which it was attached and set its feet on the paths of Liberal Socialism.

We might say without any suggestion of bias that Mill’s evolution was largely influenced by French ideas.[782] A singularly interesting volume might be written in illustration of this statement. Without referring to the influence of Comte, which Mill was never tired of recognising, and confining our attention only to economics, he has himself acknowledged his debt to the Saint-Simonians for the greater part of his doctrines of heredity and unearned increment, to Sismondi for his sympathy with peasant proprietorship, and to the socialists of 1848 for his faith in co-operative association as a substitute for the wage nexus.

It would hardly be true to say that Mill became a convert to socialism, although he showed himself anxious to defend it against every undeserved attack. To those who credit socialism with a desire to destroy personal initiative or to undermine individual liberty he disdainfully points out that “a factory operative has less personal interest in his work than a member of a communist association, since he is not, like him, working for a partnership of which he is himself a member,” and that “the restraints of communism would be freedom in comparison with the present condition of the majority of the human race.”[783] And although he expresses the belief that “communism would even now be practicable among the élite of mankind, and may become so among the rest,” and hopes that one day education, habit, and culture will so alter the character of mankind that digging and weaving for one’s country will be considered as patriotic as to fight for it,[784] still he was far from being a socialist. Free competition, he thought, was an absolute necessity, and there could be no interference with the essential rights of the individual.

The first blow which he dealt at the Classical school was to challenge its belief in the universality and permanence of natural law. He never took up the extreme position of the Marxian and Historical schools, which held that the so-called natural laws were merely attempts at describing the social relations which may exist at certain periods in economic history, but which change their character as time goes on. He draws a distinction between the laws which obtain in the realm of production and those that regulate distribution. Only in the one case can we speak of “natural” laws; in the other they are artificial—created by men—and capable of being changed, should men desire it.[785] Contrary to the opinion of the Classical school, he tries to show that wages, profits, and rent are not determined by immutable laws against which the will of man can never prevail.

The door was thus open for social reform, which was no small triumph. Of course it cannot be said of the Classical school, or even of the Optimists, that they were prepared to deny the possibility or the efficacy of every measure of social reform, but it must be admitted that they were loath to encourage anything beyond private effort, or to advocate the abolition of any but the older laws. Braun, speaking at a conference of Liberal economists at Mayence in 1869, expressed the opinion that “that conference had given rise to much opposition because it upheld the principle that human legislation can never change the eternal laws of nature, which alone regulate every economic action.” Similar declarations abound in the French works of the period. But, thanks to the distinction drawn by Mill, all this was changed. Though the legislator be helpless to modify the laws of production, he is all-powerful in the realm of distribution, which is the real battle-ground of economics.

But, as a matter of fact, Mill’s distinction is open to criticism, especially his method of stating it; and we feel that he is unjust to himself when he regards this as his most important and most original contribution to economic science. Production and distribution cannot be treated as two separate spheres, for the one invariably involves the other. And Mill himself is forced to abandon his own thesis when he advocates the establishment of co-operative associations or peasant proprietorship, for each of these belongs as much to the domain of production as to that of distribution. Rodbertus, at almost the same period, gave a much truer expression to Mill’s thought by emphasising the distinction which exists between economic and legal ties.[786] Even these may mutually involve one another; still we know that the economic laws which regulate exchange value or determine the magnitude of industrial enterprise are not of the same kind as the rules of law which regulate the transfer of property or lay down the lines of procedure for persons bound by agreement concerning wages, interest, or rent. The first may well be designated natural laws, but the latter are the work of a legislative authority.

Stuart Mill, not content with merely opening the door to reform, deliberately enters in, and, in striking contrast to the economists of the older school, outlines a comprehensive programme of social policy, which he formulates thus:[787] “How to unite the greatest individual liberty of action, with a common ownership in the raw material of the globe, and an equal participation of all in the benefits of combined labour.”

We may summarise his proposals as follows:

(1) Abolition of the wage system and the substitution of a co-operative association of producers.

(2) The socialisation of rent by means of a tax on land.

(3) Lessening of the inequalities of wealth by restrictions on the rights of inheritance.

This threefold measure of reform possesses all the desiderata laid down by Mill. Moreover, it does not conflict with the individualistic principle, but would somewhat strengthen it. It involves no personal constraint, but tends to extend the bounds of individual freedom.

Let us briefly review these projects seriatim.

(1) Mill thought that the wages régime was detrimental to individuality because it deprived man of all interest in the product of his labour, with the result that a vast majority of mankind is living under conditions which socialism could not possibly make much worse.

It is necessary to replace this condition of things by “a form of association which, if mankind continue to improve, must be expected in the end to predominate, and is not that which can exist between a capitalist as chief and workpeople without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.”[788] This noble ideal of a co-operative community was borrowed, not from Owen, but from the French socialists. Mill had already eulogised the French movement, even before its brilliant but ephemeral triumph in 1848. He was not the only one to be attracted by the idea of a co-operative community, for the English Christian Socialists drew their inspiration from the same source.

Mill lived long enough to witness the decline of co-operative production in England, and of the Co-operative Consumers’ Union in France, but neither failure seems to have had any influence upon his projects.[789] Whatever the method might be, the object in his ideal was always the same, the self-emancipation of the workers.

(2) The rent of land, which Ricardo and his disciples accepted as a natural if not as a necessary phenomenon, appeared to Mill as an abnormal fact which was as detrimental to individuality as the wage system itself. Its peculiar danger was, of course, not quite the same. What rent did was to secure to certain individuals something which was not the result of their own efforts, whereas individualism always aimed at securing for everyone the fruits of his own labour—suum cuique. On the principle of giving to each what each produced, everything not directly produced by man himself was to be restored to the community. It is immaterial whether this extra product is due to the collaboration of nature, as Smith and the Physiocrats believed, or whether it is the result of the pressure of population, as Ricardo and Malthus thought, or the mere result of chance and favourable circumstance, as Senior put it. Nothing could be easier than to levy a land tax which would gradually absorb rent, and which could be periodically increased as rents advanced. The idea was a brilliant one, and Mill had learned it from his father. It soon became the rallying-cry of a new school of economists closely akin to the socialists.

The movement begot of this idea of confiscation deserves the fuller treatment which will be found in another chapter of this work.

Meanwhile, and until the larger and more revolutionary reform becomes practical, Mill would welcome a modest instalment of emancipation in the shape of peasant proprietorship. Like the co-operative ideal, this also was of French extraction. Admiration of the French peasant had been a fashionable cult in England ever since the days of Arthur Young.[790] Mill thought that among the principal advantages of peasant proprietorship would be a lessening of the injustice of rent, because its benefits would be more widely distributed. The feeling of independence would check the deterioration of the wage-earner, individual initiative would be encouraged, the intelligence of the cultivator developed, and the growth of population checked.

Mill inspired a regard for the frugal French peasantry in the English Radical party. To his influence are due the various Small Holdings Acts which have resulted in the establishment of small islets of peasant tillers amid the vast territories of the English aristocracy.

(3) Mill was equally shocked at our antiquated inheritance law, which permits people to possess wealth which they have never helped to produce. To Senior inheritance ranked with the inequality of rent, and he placed both in the same category. To Mill it appeared to be not merely antagonistic to individual liberty, but a source of danger to free competition, because it placed competitors in positions of unequal advantage. In this matter Mill was under the influence of the Saint-Simonians, and he made no attempt to hide his contempt for the “accident of birth.”

This right of bequest, he felt, was a very difficult problem, for the right of free disposal of one’s property even after death constituted one of the most glorious attributes of individuality. It implied a kind of survival or persistence of the human will. Mill showed considerable ingenuity in extricating himself from this difficult position. He would respect the right of the proprietor to dispose of his goods, but would limit the right of inheritance by making it illegal to inherit more than a certain sum. The testator would still enjoy the right of bequeathing his property as he wished, but no one who already possessed a certain amount of wealth could inherit it. Of all the solutions of this problem that have been proposed, Mill’s is the most socialistic. He puts it forward, however, not as a definite project, but as a mere suggestion.[791]

Mill might well have been given a place among the Pessimists, especially as he inherits their tendency to see the darker side of things. Not only did the law of population fill him with terror, but the law of diminishing returns seemed to him the most important proposition in the whole of economic science; and all his works abound with melancholy reflections upon the futility of progress. There is, for instance, the frequently quoted “It is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.”[792] In his vision of the future of society he prophesies that the river of human life will eventually be lost in the sea of stagnation.

It is worth while dwelling for a moment on this idea of a stationary state. Though the conception is an old one, it is very characteristic of Mill’s work, and he feels himself forced to the belief that only by reverting to the stationary state can we hope for a solution of the social question.

Economists, especially Ricardo, had insisted upon the tendency of profits to a minimum as a correlative of the law of diminishing returns. This tendency, it was believed, would continue until profits had wholly disappeared and the formation of new capital was arrested.[793] Mill took up the theory where Ricardo had left it, and arrived at the conclusion that industry would thus be brought to a standstill, seeing that the magnitude of industry is dependent upon the amount of available capital. Population must then become stationary, and all economic movement must cease. Though alarmed at the economic significance of this prospect, Mill acquiesced in its ethical import. On the whole he thinks that such a state would be a very considerable improvement on our present condition. With economic activity brought to a standstill the current of human life would simply change its course and turn to other fields.[794] The decay of Mammon-worship and the thirst for wealth would simply mean an opportunity for pursuing worthier objects. He hoped that the arrest of economic progress would result in a real moral advance, and in the appeasement of human desires he looked for a solution and for the final disappearance of the social problem. And as far as we can see the reformers of to-day have nothing better to offer us.

III: MILL’S SUCCESSORS

Mill’s influence was universal, though, properly speaking, he had no disciples. This was, no doubt, partly because writers like Toynbee, who would naturally have become disciples, were already enrolled in the service of the Historical school.

The Classical school failed to follow his socialistic lead. It still preached the old doctrines, but with waning authority, and no new work was produced which is at all comparable with the works which we have already studied. We will mention a few of the later writings, however, for, though belonging to the second class, they are in some respects excellent.

In the first place we have several books written by Cairnes,[795] notably Some Leading Principles of Political Economy (1874). Cairnes is generally regarded as a disciple of Mill, though as a matter of fact he was nothing of the kind. Cairnes was purely Classic, and shared the Classical preference for the deductive method, which he thought the only method for political economy. His preference for that method sometimes resulted in his abusing it, and he was curiously indifferent to all social iniquities. He accepted laissez-faire, not as the basis of a scientific doctrine, but simply as a safe and practical rule of conduct.[796] The old wage fund theory has in him a champion who attempted to defend it against Stuart Mill. It cannot be said that he made any new contribution to the science, unless we except his teaching concerning competition. He pointed out that competition has not the general scope that is usually attributed to it. It only obtains between individuals placed in exactly similar circumstances. In other words, it operates within small areas, and is inoperative as between one area and another. This theory of non-competing groups helps to throw some light upon the persistent inequality shown by wages and profits.

In France the most prominent representative of political economy during the Second Empire was Michel Chevalier, a disciple of Saint-Simon. He nevertheless remained faithful to the Classical tradition of Say and Rossi,[797] his predecessors at the Collège de France. He waged battle with the socialists of 1848, made war upon Protection, and had the good fortune to be victorious in both cases, sharing with Cobden the honour of being a signatory to the famous commercial treaty of 1860. He realised the important place that railways would some day occupy in national economy, and the great possibilities of an engineering feat like the Suez Canal. He was also alive to the importance of credit institutions, which were only at the commencement of their useful career just then.[798] Although connected with the Liberal school, he was not indifferent to the teaching of the Saint-Simonians on the importance of the authority and functions of the State, and he impressed upon the Government the necessity of paying attention to labour questions—a matter to which Napoleon III was naturally somewhat averse. Every subject which he handles is given scholarly and eloquent treatment.

About the same time Courcelle-Seneuil published a treatise on political economy which was for a long time regarded as a standard work. Seneuil was a champion of pure science—or “plutology,” as he called it, in order to distinguish it from applied science, to which he gave the name “ergonomy.” For a long time he was regarded as a kind of pontiff, and the pages of the Journal des Économistes bear evidence of the chastisement which he bestowed upon any of the younger writers who tried to shake off his authority. This was the time when Maurice Block was meting out the same treatment to the new German school in those bitterly critical articles which appeared in the same journal.

It is to be regretted that we cannot credit France with the Précis de la Science économique et de ses Principales Applications, which appeared in 1862. Cherbuliez, the author, was a Swiss, and was professor first at Geneva and then at Zurich. Cossa, in his Histoire, speaks of it as “undoubtedly the best treatise on the subject published in France,” and as being “possibly superior even to Stuart Mill’s.” Cherbuliez belonged to the Classical school. He was opposed to socialism, and wrote pamphlets à la Bastiat in support of Liberal doctrines and the deductive method. But, like the Mills before him, and Walras, Spencer, Laveleye, Henry George, and many others who came after, he found it hard to reconcile private property with the individualistic doctrine, “To each the product of his labour.” He reconciles himself to this position merely because he thinks that it is possibly a lesser evil than collective property.

The Liberal school had still a few adherents in Germany, although a serious rival was soon to make its appearance. Prince Smith (of English extraction) undertook the defence of Free Trade, pointing out “the absurdity of regarding it as a social question,” and “how much more absurd it is to think that it can ever be solved other than by the logic of facts.” Less a doctrinaire than a reformer, Schulze-Delitzsch, about 1850, inaugurated that movement which, notwithstanding the gibes of Lassalle, has made magnificent progress, and to-day includes thousands of credit societies; though up to the present it has not benefited anyone beyond the lower middle classes—the small shopkeeper, the well-to-do artisan, and the peasant proprietor.

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IV. THE DISSENTERS

With Bastiat economic Liberalism, threatened by socialism, sought precarious refuge in Optimism. With Mill the older doctrines found new expression in language scientific in its precision and classical in its beauty.

It really seemed as if political economy had reached its final stage and that there could be no further excuse for prolonging our survey.

But just when Liberalism seemed most triumphant and the principles of the science appeared definitely settled there sprang up a feeling of general dissatisfaction. Criticism, which had suffered a temporary check after 1848, now reasserted its claims, and with a determination not to tolerate any further interruption of its task.

The reaction showed itself most prominently in Germany, where the new Historical school refused to recognise the boundaries of the science as laid down by the English and French economists. The atmosphere of abstractions and generalisations to which they had confined it was altogether too stifling. It demanded new contact with life—with the life of the past no less than that of the present. It was weary of the empty framework of general terms. It was athirst for facts and the exercise of the powers of observation. With all the ardour of youth it was prepared to challenge all the traditional conclusions and to reformulate the science from its very base.

So much for the doctrine. But there was one thing which was thought more objectionable than even the Classical doctrine itself, and that was the Liberal policy with which the science had foolishly become implicated, and which must certainly be removed.

In addition to such critics as the above there are also the writers who drew their inspiration from Christianity, and in the name of charity, of morality, or of religion itself, uttered their protest against optimism and laissez-faire. Intervention again, so tentatively proposed by Sismondi, makes a bold demand for wider scope in view of the pressure of social problems, and under the name of State Socialism becomes a definitely formulated doctrine.

Socialism, which Reybaud believed dead after 1848, revived in its turn. Marx’s Kapital, published in 1867, is the completest and most powerful exposition of socialism that we have. It is no longer a pious aspiration, but a new and a scientific doctrine ready to do battle with the champions of the Classical school, and to confute them out of their own mouths.

None of these currents is entirely new. Book II has shown us where they originated, and their beginnings can be traced to the earlier critical writers.

But we must not forget the striking difference between the ill-fated doctrines of the pre-1848 period and the striking success achieved by the present school. Despite the sympathy shown for the earlier critics, they remained on the whole somewhat isolated figures. Their protests were always individualistic—Sismondi’s no less than Saint-Simon’s, Fourier’s no less than Owen’s. Proudhon and List never seriously shook the public confidence in Liberalism. Now, on the contrary, Liberalism finds itself deserted, and sees the attention of public opinion turning more and more in the direction of the new school.

The triumph, of course, was not immediate. Many of the doctrines were formulated between 1850 and 1875, but victory was deferred until the last quarter of the century. But when it did come it was decisive. In Germany history monopolised the functions of economics, at least for a time. Intervention has only become universal since 1880. Since then, also, collectivism has won over the majority of the workers in all industrial countries, and has exercised very considerable influence upon politics, while Christian Socialism has discovered a way of combining all its most fervent adherents, of whatever persuasion, in one common faith.

The advance of this new school meant the decline of the Classical doctrine and the waning of Liberalism. Public interest gravitated away from the teaching of the founders. But in the absence of a new and a definite creed, what we find is a kind of general dispersion of economic thought, accompanied by a feeling of doubt as to the validity of theory in general and of theoretical political economy in particular. The old feeling of security gave place to uncertainty. Instead of the comparative unanimity of the early days we have a complete diversity of opinions, amid which the science sets out on a new career.

In the last Book we shall find that certain eminent writers have succeeded in renewing the scientific tradition of the founders. But every connection with practical politics had to be removed and a new body of closely knit doctrines had to be created before social thinkers could have this new point of view from which to co-operate.

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I. THE HISTORICAL SCHOOL AND THE CONFLICT OF METHODS

The second half of the nineteenth century is dominated by Historical ideas, though their final triumph was not fully established until the last quarter of the century. The rise of these ideas, however, belongs to a still earlier period, and dates from 1843, when there appeared a small volume by Roscher entitled Grundriss. We shall have to return to that date if we wish to understand the ideas of the school and to appreciate their criticisms.

The successors of J. B. Say and Ricardo gave a new fillip to the abstract tendency of the science by reducing its tenets to a small number of theoretical propositions. The problems of international exchange, of the rate of profits, wages, and rent, were treated simply as a number of such propositions, expressed with almost mathematical precision. Admitting their exactness, we must also recognise that they are far from being adequate, and could not possibly afford an explanation of the different varieties of economic phenomena or help the solution of the many practical problems which the development of industry presents to the statesman. But McCulloch, Senior, Storch, Rau, Garnier,[799] and Rossi, the immediate successors of Ricardo and Say in England and France, repeated the old formulæ without making any important additions to them. The new system of political economy thus consisted of a small number of quite obvious truths, having only the remotest connection with economic life. It is true that Mill is an exception. But the Principles dates from 1848, which is subsequent to the foundation of the Historical school. With this exception we may say, in the words of Schmoller, that after the days of Adam Smith political economy seems to have suffered from an attack of anæmia.[800]

Toynbee gives admirable expression to this belief in his article on Ricardo and the Old Political Economy:[801] “A logical artifice became the accepted picture of the real world. Not that Ricardo himself, a benevolent and kind-hearted man, could have wished or supposed, had he asked himself the question, that the world of his treatise actually was the world he lived in; but he unconsciously fell into the habit of regarding laws which were those only of that society which he had created in his study for purposes of analysis as applicable to the complex society really existing around him. And the confusion was aggravated by some of his followers and intensified in ignorant popular versions of his doctrines.” In other words, there was a striking divergence between economic theory and concrete economic reality, a divergence that was becoming wider every day, as new problems arose and new classes were being formed. But the extent of the gap was best realised when an attempt was made to apply the principles of the science to countries where the economic conditions were entirely different from those existing either in England or in France.

This divergence between theory and reality might conceivably be narrowed in one of two ways. A more harmonious and a more comprehensive theory might be formulated, a task which Menger, Jevons, and Walras attempted about 1870. A still more radical suggestion was to get rid of all abstract theory altogether and to confine the science to a simple description of economic phenomena. This was the method of procedure that was attempted first, and it is the one followed by the Historical school.

Long before this time certain writers had pointed out the dangers of a too rigid adherence to abstraction. Sismondi—an essentially historical writer—treated political economy as a branch of moral science whose separation from the main trunk is only partial, and insisted upon studying economic phenomena in connection with their proper environment. He criticised the general conclusions of Ricardo and pleaded for a closer observation of facts.[802] List showed himself a still more violent critic, and, not content with the condemnation of Ricardian economics, he ventured to extend his strictures even to Smith. Taking nationality for the basis of his system, he applied the comparative method, upon which the Historical school has so often insisted,[803] to the commercial policy of the Classical school; but history was still employed merely for the purpose of illustration. Finally, socialists, especially the Saint-Simonians, whose entire system is simply one vast philosophy of history, had shown the impossibility of isolating economic from political and juridical phenomena, with which they are always intermingled.

But no author as yet had deliberately sought either in history or in the observation of contemporary facts a means of reconstructing the science as a whole. It is just here that the originality of the German school lies.

Its work is at once critical and constructive. On the critical side we have a profound and suggestive, though not always a just, analysis of the principles and methods of the older economists, while its constructive efforts gave new scope to the science, extended the range of its observations, and added to the complexity of its problems.

Generally speaking, it is not a difficult task to give an exposition of the critical ideas of the school, as we find them set forth in several books and articles, but it is by no means easy to delineate the conceptions underlying the positive work. Though implicit in all their writings, these conceptions are nowhere explicitly stated; whenever they have tried to define them it has always been, as their disciples willingly admit, in a vague and contradictory fashion.[804] To add further to the difficulty, each author defines them after his own fashion, but claims that his definition represents the ideas of the whole school.

In order to avoid useless repetitions and discussions without number we shall begin with a rapid survey of the outward development of the school, following with a résumé of its critical work, attempting, finally, to seize hold of its conception of the nature and object of political economy. From our point of view the last-named object is by far the most interesting.

I: THE ORIGIN AND DEVELOPMENT OF THE HISTORICAL SCHOOL

The honour of founding the school undoubtedly belongs to Wilhelm Roscher, a Göttingen professor, who published a book entitled Grundriss zu Vorlesungen über die Staatswirtschaft nach geschichtlicher Methode in 1843. In the preface to that small volume he mentions some of the leading ideas which inspired him to undertake the work, which reached fruition in the celebrated System der Volkswirtschaft (1st ed., 1854). He makes no pretence to anything beyond a study of economic history. “Our aim,” says he, “is simply to describe what people have wished for and felt in matters economic, to describe the aims they have followed and the successes they achieved—as well as to give the reasons why such aims were chosen and such triumphs won. Such research can only be accomplished if we keep in close touch with the other sciences of national life, with legal and political history, as well as with the history of civilisation.”[805] Almost in the same breath he justifies an attack upon the Ricardian school. He recognises that he is far from thinking that his is the only or even the quickest way of attaining the truth, but thinks that it will lead into pleasant and fruitful quests, which once undertaken will never be abandoned.

What Roscher proposed to do was to try to complete the current theory by adding a study of contemporary facts and opinions, and, as a matter of fact, in the series of volumes which constitute the System, every instalment of which was received with growing appreciation by the German world of letters, Roscher was merely content to punctuate his exposition of the Classical doctrines with many an erudite excursus in the domain of economic facts and ideas.[806]

Roscher referred to his experiment as an attempt to apply the historical method which Savigny had been instrumental in introducing with such fruitful results into the study of jurisprudence.[807] But, as Karl Menger[808] has well pointed out, the similarity is only superficial. Savigny employed history in the hope of obtaining some light upon the organic nature and the spontaneous origin of existing institutions. His avowed object was to prove their legitimacy despite the radical pretensions of the Rationalist reformers of the eighteenth century. Roscher had no such aim in view. He was himself a Liberal, and fully shared in their reforming zeal. History with him served merely to illustrate theory, to supply rules for the guidance of the statesman or to foster the growth of what he called the political sense.

Schmoller thinks that Roscher’s work might justly be regarded as an attempt to connect the teaching of political economy with the “Cameralist” tradition of seventeenth- and eighteenth-century Germany.[809] These Cameralists were engaged in teaching the principles of administration and finance to students who were to spend their lives in administrative work of one kind or another, and they naturally took good care to keep as near actual facts as possible. Even in England and France political economy soon got involved in certain practical problems concerning taxation and commercial legislation. But in a country like Germany, which was industrially much more backward than either England or France, these problems wore a very different aspect, and some correction of the Classical doctrines was absolutely necessary if they were to bear any relation to the realities of economic life. Roscher’s innovation was the outcome of a pedagogic rather than of a purely scientific demand, and he was instrumental in reviving a university tradition rather than in creating a new scientific movement.

In 1848 another German professor, Bruno Hildebrand, put forward a much more ambitious programme, and his Die Nationalökonomie der Gegenwart und Zukunft shows a much more fundamental opposition to the Classical school. History, he thought, would not merely vitalise and perfect the science, but might even help to recreate it altogether. Hildebrand points to the success of the method when applied to the science of language. Henceforth economics was to become the science of national development.[810]

In the prospectus of the Jahrbücher für Nationalökonomie und Statistik, founded by him in 1863, Hildebrand goes a step farther. He challenges the teaching of the Classical economists, especially on the question of national economic laws, and he even blames Roscher because he had ventured to recognise their existence.[811] He did not seem to realise that a denial of that kind involved the undoing of all economic science and the complete overthrow of those “laws of development” which he believed were henceforth to be the basis of the science.

But Hildebrand’s absolutism had no more influence than Roscher’s eclecticism, unless we make an exception of his generalisation concerning the three phases of economic development, which he differentiates as follows: the period of natural economy, that of money economy, and finally that of credit. Beyond that he merely contented himself with publishing a number of fragmentary studies on special questions of statistics or history, without, for the most part, making any attempt to modify the Classical theory of production and distribution.

The critical study of 1848 hinted at a sequel which was to embody the principles of the new method. But the sequel never appeared, and the difficult task of carrying the subject farther was entrusted to Karl Knies, another professor, who in 1853 published a bulky treatise bearing the title of Political Economy from the Historical Point of View.[812] But there is as much divergence between his views and those of his predecessors as there is between Roscher’s and Hildebrand’s. He not only questions the existence of natural laws, but even doubts whether there are any laws of development at all—a point Hildebrand never had any doubts about—and thinks that all we can say is that there are certain analogies presented by the development of different countries. Knies cannot share in the belief of either Hildebrand or Roscher, nor does he hold with the Classical school. He thinks that political economy is simply a history of ideas concerning the economic development of a nation at different periods of its growth.

Knies’s work passed almost unnoticed, ignored by historians and economists alike, until the younger Historical school called attention to his book, of which a new edition appeared in 1883. Knies makes frequent complaints of Roscher’s neglect to consider his ideas.

Such heroic professions naturally lead us to expect that Knies would spare no effort to show the superiority of the new method. But his subsequent works dealing with money and credit, upon which his real reputation rests, bear scarcely a trace of the Historical spirit.

The three founders of the science devoted a great deal of time to a criticism of the Classical method, but failed to agree as to the aim and scope of the science and left to others the task of applying their principles.

This task was attempted by the newer Historical school, which sprang up around Schmoller towards the end of 1870. This new school possesses two distinctive characteristics.

(1) The useless controversy concerning economic laws which Hildebrand and Knies had raised is abandoned. The members of the school are careful not to deny the existence of natural social laws or uniformities, and they considered that the search for these was the chief object of the science. In reality they are economic determinists. “We know now,” says Schmoller,[813] “that psychical causation is something other than mechanical, but it bears the same stamp of necessity.” What they do deny is that these laws are discoverable by Classical methods, and on this point they agree with every criticism made by their predecessors.

As to the possibility of formulating “the laws of development” upon which Hildebrand laid such stress, they professed themselves very sceptical. “We have no knowledge of the laws of history, although we sometimes speak of economic and statistical laws,”[814] writes Schmoller. “We cannot,” he regretfully says later, “even say whether the economic life of humanity possesses any element of unity or shows any traces of uniform development, or whether it is making for progress at all.”[815] This very characteristic passage from Schmoller was written in 1904,[816] and forms the conclusion of the great synthetic treatise. All attempts at a philosophy of history are treated with the same disdain.[817]

(2) The newer Historical school, not content merely with advocating the use of the Historical method, hastened to put theory into practice. Since about 1860 German economists have shown a disposition to turn away from economic theory and to devote their entire energy to practical problems, sociological studies and historical or realistic research. The number of economic monographs has increased enormously. The institutions of the Middle Ages and of antiquity, the economic doctrines of the ancients, statistics, the economic organisation of the present day, these are some of the topics discussed. Political economy is lost in the maze of realistic studies, whether of the present day or of the past.

Although the Historical school has done an enormous amount of work we must not forget that historical monographs were printed before their time, and that certain socialistic treatises, such as Marx’s Kapital, are really attempts at historical synthesis. The special merit of the school consists in the impulse it gave to systematic study of this description. The result has been a renewed interest in history and in the development of economic institutions. We cannot attempt an account of all these works and their varied contents. We must remain satisfied if we can catch the spirit of the movement. The names of Schmoller, Brentano, Held, Bücher, and Sombart are known to every student of economic history. Marshall, the greatest of modern theorists, has on more than one occasion paid them a glowing tribute.[818]

The movement soon left Germany, and it was speedily realised that conditions abroad were equally favourable for its work.

By the end of 1870 practical Liberalism had spent its force. But new problems were coming to the front, especially the labour question, which demanded immediate attention.[819] Classical economists had no solution to offer, and the new study of economic institutions, of social organisation, and of the life of the masses seemed to be the only hopeful method of gaining light upon the question. Comparison with the past was expected to lead to a better understanding of the present. The Historical method seemed to social reformers to be the one instrument of progress, and a strong desire for some practical result fostered belief in it. When we remember the prestige which German science has enjoyed since 1871, and the success of the Germans in combining historical research with the advocacy of State Socialism, we can understand the enthusiasm with which the method was greeted abroad.

Even in England, the stronghold of Ricardian economics, the influence of the school becomes quite plain after 1870.

Here, as elsewhere, a controversy as to the method employed manifests itself. Cairnes in his work The Character and Logical Method of Political Economy (1875[820]), writing quite in the spirit of the old Classical authors, strongly advocates the employment of the deductive method. In 1879 Cliffe Leslie, in his Essays on Political and Moral Philosophy, enters the lists against Cairnes and makes use of the new weapons to drive home his arguments. The use of induction rather than deduction, the constant necessity for keeping economics in living touch with other social sciences, the relative character of economic laws, and the employment of history as a means of interpreting economic phenomena, are among the arguments adopted and developed by Leslie. Toynbee, in his Lectures on the Industrial Revolution, gave utterance to similar views, but showed much greater moderation. While recognising the claims of deduction, he thought that history and observation would give new life and lend a practical interest to economics. The remoteness and unreality of the Ricardian school constituted its greatest weakness, and social reform would in his opinion greatly benefit by the introduction of new methods. Toynbee would undoubtedly have exercised tremendous influence; but his life, full of the brightest hopes, was cut short at thirty.

The lead had been given; the study of economic institutions and classes was henceforth to occupy a permanent position in English economic writings, and the remarkable works which have since been published, such as Cunningham’s Growth of English Industry and Commerce, Ashley’s Economic History, the Webbs’ Trade Unionism and Industrial Democracy, Booth’s Life and Labour of the People, bear witness to the profound influence exerted by the new ideas.

In France the success of the movement has not been quite so pronounced, although the need for it was as keenly felt there. Although it did not result in the founding of a French school of economic historians, the new current of ideas has influenced French economic thought in a thousand ways. In 1878 political economy became a recognised subject in the various curricula of the Facultés de Droit. The intimate connection between economic study and the study of law has given an entirely new significance to political economy, and the science has been entirely transformed by the infusion of the historical spirit. At the same time professional historians have become more and more interested in problems of economic history, thus bringing a spirit of healthy rivalry into the study of economic institutions. Several Liberal economists also, without breaking with the Classical tradition, have devoted their energies to the close observation of contemporary facts or to historical research.[821]

Finally, we have a new group of workers in the sociologists. Sociology is interested in the origin and growth of social institutions of all kinds and in the influence which they have exerted upon one another. After studying institutions of a religious, legal, political, or social character it is only natural that they should ask that the study of economic institutions should be carried on in the same spirit and with the help of the same method. This object has been enthusiastically pursued for some time. The mechanism and the organisation of the economic system at different periods have been closely examined by the aid of observation and history. Abstraction has been laid aside and a preference shown for minute observation, and for induction rather than deduction.[822]

II: THE CRITICAL IDEAS OF THE HISTORICAL SCHOOL

Among so many writers whose works cover such a long period of time we can hardly expect to find absolute unanimity, and we have already had occasion to note some of the more important divergencies between them, especially those separating the newer from the older writers of the Historical school. We cannot here enter into a full discussion of all these various shades of opinion, and we must be content to mention the more important features upon which they are almost entirely at one, noticing some of the principal individual doctrines by the way.

The German Historical school made its début with a criticism of Classical economics, and we cannot better begin than with a study of its critical ideas.[823]

Although these ideas had already found expression in the writings of Knies, Hildebrand, and Roscher, there was nothing like the discussion which was provoked by them when the newer Historical school, at a much later period, again brought them to public notice. The publication of Karl Menger’s work, Untersuchungen über die Methode der Socialwissenschaften, in 1883—a classic both in style and matter—ushered in a new era of active polemics. This remarkable work, in which the author undertakes the defence of pure political economy against the attacks of the German Historical school, was received with some amount of ill-feeling by the members of that school,[824] and it caused a general searching of hearts during the next few years. We must try to bring out the essential elements in the discussion, and contrast the arguments advanced by the Historians with the replies offered by their critics.

Broadly speaking, three charges are levelled at the Classical writers. (i) It is pointed out that their belief in the universality of their doctrines is not easily justified. (ii) Their psychology is said to be too crude, based as it is simply upon egoism. (iii) Their use, or rather abuse, of the deductive method is said to be wholly unjustifiable. We will review these charges seriatim.

The Historians held that the greatest sin committed by Smith and his followers was the inordinate stress which they laid upon the universality of their doctrines. Hildebrand applies the term “universalism” to this feature of their teaching, while Knies refers to it as “absolutism” or “perpetualism.” The belief of the Anglo-French school, according to their version of it, was that the economic laws which they had formulated were operative everywhere and at all times, and that the system of political economy founded upon them was universal in its application. The Historians, on the other hand, maintained that these laws, so far from being categorically imperative, should be regarded always as being subject to change in both theory and practice.

First with regard to practice. A uniform code of economic legislation cannot be indifferently applied to all countries at all epochs of their history. An attempt must be made to adapt it to the varied conditions of time and place. The statesman’s art consists in adapting principles to meet new demands and in inventing solutions for new problems. But, as Menger points out, this obvious principle, which was by no means a new one, would have met with the approval of Smith and Say, and even of Ricardo himself;[825] although they occasionally forgot it, perhaps, especially when judging the institutions of the past or when advocating the universal adoption of laissez-faire.

The second idea, namely, that economic theory and economic laws have only a relative value, is treated with even greater emphasis, and this was another point on which the older economists had gone wrong. Economic laws, unlike the laws of physics and chemistry, with which the Classical writers were never tired of comparing them, have neither the universality nor the inevitability of the latter. Knies has laid special stress on this point. “The conditions of economic life determine the form and character of economic theory. Both the process of argument employed and the results arrived at are products of historical development. The arguments are based upon the facts of concrete economic life and the results bear all the marks of historical solutions. The generalisations of economics are simply historical explanations and progressive manifestations of truth. Each step is a generalisation of the truth as it is known at that particular stage of development. No single formula and no collection of such formulæ can ever claim to be final.”[826]

This paragraph, though somewhat obscure and diffuse, as is often the case with Knies, expresses a sound idea which other economists have stated somewhat differently, by saying that economic laws are at once provisional and conditional. They are provisional in the sense that the progress of history continually gives rise to new facts of which existing theories do not take sufficient account. Hence the economist finds himself obliged to modify the formulæ with which he has hitherto been quite content. They are conditional in the sense that economic laws are only true so long as other circumstances do not hinder their action. The slightest change in the conditions as ordinarily given might cancel the usual result. Those economists who thought of their theory as a kind of final revelation, or considered that their predictions were absolutely certain, needed reminding of this.

But Knies is hopelessly wrong in thinking that this relativity is enough to separate the laws of economics from the laws of other sciences. Professor Marshall justly remarks that chemical and physical laws likewise undergo transformation whenever new facts render the old formulæ inadequate. All these laws are provisional. They are also hypothetical in the sense that they are true only in the absence of any disturbing cause. Scientists no longer consider these laws as inherent in matter. They are the product of man’s thought and they advance with the development of his intelligence.[827] They are nothing more or less than formulæ which conveniently express the relation of dependence that exists between different phenomena; and between these various laws as they are framed by the human mind there is no difference except a greater or lesser degree of proof which supports them.

What gives to the laws of physics or chemistry that larger amount of fixity and that greater degree of certainty which render them altogether superior to economic law as at present formulated is a greater uniformity in the conditions that give rise to them, and the fact that their action is often measurable in accordance with mathematical principles.[828]

Not only has Knies exaggerated the importance of his doctrine of relativity,[829] but the imputation that his predecessors had failed to realise the need for it was hardly deserved. We shall have to refer to this matter again. Mill’s Principles was already published, and even in the Logic, which appeared for the first time in 1843, and several editions of which had been issued before 1853, the year when Knies writes, we meet with the following sentence:[830] “The motive that suggests the separation of this portion of the social phenomenon from the rest … is that they do mainly depend at least in the first resort on one class of circumstances only; and that even when other circumstances interfere, the ascertainment of the effect due to the one class of circumstances alone is a sufficiently intricate and difficult business to make it expedient to perform it once for all and then allow for the effect of the modifying circumstances.” Consequently sociology, of which political economy is simply a branch, is a science of tendencies and not of positive conclusions. No better expression of the principle of relativity could ever be given.

Notwithstanding all this, modern economists have come to the conclusion that the criticisms of the Historical school are sufficiently well founded to justify them in demanding greater precision so as to avoid those mistakes in the future. Dr. Marshall, for one, adopts Mill’s expression, and defines an economic law as “a statement of economic tendencies.”[831]

Even the founders of pure political economy, although their method is obviously very different from that of the Historians, have taken similar precautions. They expressly declare that the conclusions of the science are based upon a certain number of preliminary hypotheses deliberately chosen, and that the said conclusions are only provisionally true. “Pure economics,” says Walras, “has to borrow its notion of exchange, of demand and supply, of capital and revenue, from actual life, and out of those conceptions it has to build the ideal or abstract type upon which the economist exercises his reasoning powers.”[832] Pure economics studies the effects of competition, not under the imperfect conditions of an actual market, but as it would operate in a hypothetical market where each individual, knowing his own interests, would be able to pursue them quite freely, and in full publicity. The conception of a limited area within which competition is fully operative enables us to study as through a magnifying-glass the results of a hypothesis that really very seldom operates in the economic life of to-day.

We may dispute the advantages of such a method, but we cannot say that the economists ever wished to deny the relativity of a conclusion arrived at in this fashion.

While willing to admit that the Historians have managed to put this characteristic in a clear light just when some economists were in danger of forgetting it, and that it is a universally accepted doctrine to-day, we cannot accept Knies’s contention that it affords a sufficient basis for the distinction between natural and economic laws. And such is the opinion of a large number, if not of the majority, of economists.[833]

The second charge is levelled against the narrowness and insufficiency of the psychology. Adam Smith treated man as a being solely dominated by considerations of self-interest and completely absorbed in the pursuit of gain. But, as the Historians justly point out, personal interest is far from being the sole motive, even in the economic world. The motives here, as elsewhere, are extremely varied: vanity, the desire for glory, pleasure afforded by the work itself, the sense of duty, pity, benevolence, love of kin, or simply custom.[834] To say that man is always and irremediably actuated by purely selfish motives, says Knies, is to deny the existence of any better motive or to regard man as a being having a number of centres of psychical activity, each operating independently of the other.[835]

We cannot deny that the Classical writers believed that “personal interest”—not in the sense of egoism, which is the name given it by Knies, and which somewhat distorts their view—held the key to the significance and origin of economic life. But the claims of the Historians are again immoderate. Being themselves chiefly concerned with concrete reality in all its complexity of being, and with all its distinctive and special features rather than its general import, they forgot that the primary aim of political economy is to study economic phenomena en masse. The Classical economists studied the crowd, not the individual. If we neglect the differences that occasionally arise in special cases, and allow for the personal equation, do we not find that the most constant motive to action is just this personal desire for well-being and profit? This is the opinion of Wagner, who on this question of method is not quite in agreement with other members of the school. In his suggestive study of the different motives that influence economic conduct he definitely states that the only motive that is really constant and permanent in its action is this self-interest. “This consideration,” he says, “does something to explain and to justify the conduct of those writers who took this as the starting-point of their study of economics.”[836]

But having admitted this, we must also recognise, not that they denied the changes occasionally undergone by self-interest under the pressure of other motives, as Knies suggests, but that they have neglected to take sufficient account of such modifications. Sometimes it really seems as if they would “transform political economy into a mere natural history of egoism,” as Hildebrand says.

We can only repeat the remark which we have already made, namely, that when this criticism was offered it was scarcely justified. Stuart Mill had drawn attention to this point in his Logic ten years previously.[837] “An English political economist, like his countrymen in general, has seldom learned that it is possible that men in conducting the business of selling their goods over the counter should care more about their ease or their vanity than about their pecuniary gain.” For his own part he ventures to say that “there is perhaps no action of a man’s life in which he is neither under the immediate nor under the remote influence of any impulse but the mere desire of wealth.”[838]

It is evident that Mill did not think that self-interest was the one unchangeable and universal human motive. Much less “egoism,” for, as we have seen in the previous chapter, his “egoism” includes a considerable admixture of altruism.

But here again the strictures of the Historians, though somewhat exaggerated, have forced economists of other schools to be more precise in their statements. The economists of to-day, as Marshall remarks, are concerned “with man as he is; not with an abstract or ‘economic’ man, but a man of flesh and blood.”[839] And if the economist, as Marshall points out, pays special attention to the desire for gain among the other motives which influence human beings, this is not because he is anxious to reduce the science to a mere “natural history of egoism,” but because in this world of ours money is the one convenient means of measuring human motive on a large scale.[840] Even the Hedonists, whose economics rest upon a calculus of pleasure and pain, are careful to note that their hypothesis is just a useful simplification of concrete reality, and that such simplification is absolutely necessary in order to carry the analysis of economic phenomena as far as possible. It is an abstraction—imposed by necessity, which is its sole justification, but an abstraction nevertheless.

It is just here that the final reproach comes in, namely, the charge of abusing the employment of abstraction and deduction, and greater stress is laid upon this count than upon either of the other two.

Instead of deduction the new school would substitute induction based upon observation.

Their criticism of the deductive method is closely connected with their attack upon the psychology of the older school. The Classical economists thought, so the Historians tell us, that all economic laws could be deduced by a simple process of reasoning from one fundamental principle. If we consider the multiplicity of motives actually operative in the economic world, the insufficiency of this doctrine becomes immediately apparent. The result is not a faithful picture, but a caricature of reality. Only by patient observation and careful induction can we hope to build up an economic theory that shall take full account of the complexity of economic phenomena. “There is a new future before political economy,” writes Schmoller in 1883, in reply to a letter of Menger, “thanks to the use that will be made of the historical matter, both descriptive and statistical, that is slowly accumulating. It will not come by further distillation of the abstract propositions of the old dogmatism that have already been distilled a hundred times.”[841]

The younger school especially has insisted on this; and Menger has ventured to say that in the opinion of the newer Historical school “the art of abstract thinking, even when distinguished by profundity and originality of the highest order, and when based upon a foundation of wide experience—in a word, the exercise of that gift which has in other sciences resulted in winning the highest honour for the thinkers—seems to be of quite secondary importance, if not absolutely worthless, as compared with some elaborate compilation or other.”[842]

But the criticism of the Historical school confuses two things, namely, the particular use which the Classical writers have made of the abstract deductive method, and the method itself.

No one will deny that the Classical writers often started with insufficient premises. Even when the premises were correct, they were too ready to think and not careful enough to prove that their conclusions were always borne out by the facts. No one can defend their incomplete analysis, their hasty generalisations, or their ambiguous formulæ.[843]

But this is very different from denying the legitimacy of abstraction and deduction. To isolate a whole class of motives with a view to a separate examination of their effects is not to deny either the presence or the action of other motives, any more than a study of the effect of gravitation upon a solid involves the denial of the action of other forces upon it. In a science like political economy, where experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problems so much. Even if the motives chosen were of secondary importance, the procedure would be quite legitimate, although the result would not be of any great moment. But it is of the greatest service and value when the motive chosen is one, like the search for gain or the desire for personal satisfaction, which exercises a preponderant influence upon economic action.[844]

So natural, we may even say so indispensable, is abstraction, if we are to help the mind steer its way amid the complexity of economic phenomena, that the criticism of the Historical school has done nothing to hinder the remarkable development which has resulted from the use of the abstract method during the last thirty years. But, although the Neo-Classical school has succeeded in replacing the old methods in their position of honour once more, it no longer employs those methods in the way the older writers did. A more solid foundation has been given them in a more exact analysis of the needs which personal interest ought to satisfy.[845] And the mechanism of deduction itself has been perfected by a more rigid use of the ordinary logical forms, and by the adoption of mathematical phraseology.

Happily the controversy as to the merits of the rival methods, which was first raised by the Historical school, has no very great interest at the present moment. Most eminent economists consider that both are equally necessary. There seems to be a general agreement among writers of different schools to consider the question of method of secondary importance, and to forget the futile controversies from which the science has gained so little. Before concluding this section it may be worth while to quote the opinion of men who represent very different tendencies, but are entirely agreed with regard to this one subject. “Discussion of method,” says Pareto, “is a pure waste of time. The aim of the science is to discover economic uniformities, and it is always right to follow any path or to pursue any method that is likely to lead to that end.”[846] “For this and other reasons,” says Marshall, “there always has been, and there probably always will be, a need for the existence side by side of workers with different aptitudes and different aims.… All the devices for the discovery of the relations between cause and effect which are described in treatises on scientific method have to be used in their turn by the economist.”[847]

These writers generally employ the abstract method. Let us now hear some of the Historians. Schmoller is the author of that oft-quoted phrase, “Induction and deduction are both necessary for the science, just as the right and left foot are needed for walking.”[848]

More remarkable still, perhaps, is the opinion of Bücher, an author to whom the Historical school is indebted for some of its most valuable contributions. “It is therefore a matter of great satisfaction that, after a period of diligent collection of material, the economic problems of modern commerce have in recent times been zealously taken up again and that an attempt is being made to correct and develop the old system in the same way in which it arose, with the aid, however, of a much larger store of facts. For the only method of investigation which will enable us to approach the complex causes of commercial phenomena is that of abstract isolation and logical deduction. The sole inductive process that can likewise be considered—namely, the statistical—is not sufficiently exact and penetrating for most of the problems that have to be handled here, and can be employed only to supplement or control.”[849]

III: THE POSITIVE IDEAS OF THE HISTORICAL SCHOOL

What made the criticism of the Historians so penetrating was the fact that they held an entirely different view concerning the scope and aim of economics. Behind the criticism lurked the counter-theory. Nothing less than a complete transformation of the science would have satisfied the founders, but the younger school soon discovered that so ambitious a scheme could never be carried out. It is important that we should know something of the view of those older writers on this question, and the way they had intended to give effect to their plans. The positive contribution made by the Historical school to economic study is even more important than its criticisms, for it gives a clue to an entirely different point of view with which we are continually coming into contact in our study of economic doctrines.

The study of economic phenomena may be approached from two opposite standpoints, which we may designate the mechanical and the organic. The one is the vantage-ground of those thinkers who love generalisations, and who seek to reduce the complexity of the economic world to the compass of a few formulæ; the other of those writers who are attracted by the constant change which concrete reality presents.

The earlier economists for the most part belonged to the former class. Amid all the wealth and variety of economic phenomena they confined their attention almost entirely to those aspects that could be explained on simple mechanical principles. Such were the problems of price fluctuations, the rate of interest, wages, and rent. Production adapting itself to meet variation in demand, with no guide save personal interest, looked for all the world like the intermolecular action of free human beings in competition with one another. The simplicity of the idea was not without a certain grandeur of its own.

But such a conception of economic life is an extremely limited one. A whole mass of economic phenomena of the highest importance and of the greatest interest is left entirely outside. The phenomena of the economic world, as a matter of fact, are extremely varied and changeable. There are institutions and organisations without number, banks and exchanges, associations of masters and unions of men, commercial leagues and co-operative societies. Eternal struggle between the small tradesman and the big manufacturer, between the merchant and the combine, between the peasant proprietor and the great landowner, between classes and individuals, between public and private interests, between town and country, is the common feature of economic life. A state rises to prosperity again to fall to ruin. Competition at one moment makes it superior, at another reduces its lead. A country changes its commercial policy at one period to reintroduce the old régime at another. Economic life fulfils its purposes by employing different organs that are continually modified to meet changing conditions, and are gradually transformed as science progresses and manners and beliefs are revolutionised.

Of all this the mechanical conception tells us nothing. It makes no attempt to explain the economic differences which separate nations and differentiate epochs. Its theory of wages tells us nothing about the different classes of workpeople, or of their well-being during successive periods of history, or about the legal and political conditions upon which that well-being depends. Its theory of interest tells us nothing of the various forms under which interest has appeared at different times, or of the gradual evolution of money, whether metallic or paper. Its theory of profits ignores the changes which industry has undergone, its concentration and expansion, its individualistic nature at one moment, its collective trend at another. No attempt is made to distinguish between profits in industry or commerce and profits in agriculture. The Classical economists were simply in search of those universal and permanent phenomena amid which the homo œconomicus most readily betrayed his character.

The mechanical view is evidently inadequate if we wish to delineate concrete economic life in all its manifold activity. We are simply given certain general results, which afford no clue to the concrete and special character of economic phenomena.

The weakness of the mechanical conception arises out of the fact that it isolates man’s economic activity, but neglects his environment. The economic action of man must influence his surroundings. The character of such action and the effects which follow from it differ according to the physical and social, the political and religious surroundings wherein they are operative. A country’s geographical situation, its natural resources, the scientific and artistic training of its inhabitants, their moral and intellectual character, and even their system of government, must determine the nature of its economic institutions, and the degree of well-being or prosperity enjoyed by its inhabitants. Wealth is produced, distributed, and exchanged in some fashion or other in every stage of social development, but each human society forms a separate organic unit, in which these functions are carried out in a particular way, giving, accordingly, to that society a distinctive character entirely its own. If we want to understand all the different aspects of this life we must make a study of its economic activity, not as it were in vacuo, but in connection with the medium through which it finds expression, and which alone can help us to understand its true nature.[850]

This was the first doctrine on which they laid stress: the other follows immediately. This social environment cannot be regarded as fixed. It is constantly undergoing some change. It is in process of transformation and of evolution. At no two successive moments of its existence is it quite the same. Each successive stage calls for explanation, which history alone can give. Goethe has given utterance to this thought in a memorable phrase which serves as a kind of epigraph to Schmoller’s great work, the Grundriss. “A person who has no knowledge of the three thousand years of history which have gone by must remain content to dwell in obscurity, living a hand-to-mouth existence.” We must have some knowledge of the previous stages of economic development if we are to understand the economic life of the present. Just as naturalists and geologists in their anxiety to understand the present have invented hypotheses to explain the evolution of the globe and of living matter upon it, so must the student of economics return to the distant past if he wants to get hold of the industrial life of to-day. “Man as a social being,” says Hildebrand, “is the child of civilisation and a product of history. His wants, his intellectual outlook, his relation to material objects, and his connection with other human beings have not always been the same. Geography influences them, history modifies them, while the progress of education may entirely transform them.”[851]

The Historians maintained that the earlier economists by paying exclusive attention to those broader conclusions which had something of the generality of physical laws about them had kept the science within too narrow limits. Alongside of theory as they had conceived of it—some Historians would say instead of it—there is room for another study more closely akin to biology, namely, a detailed description and a historical explanation of the constitution of the economic life of each nation. Such is the positive contribution of the school to the study of political economy, and it fairly represents the attitude of the present-day Historians towards the older economists.

Their aim was a perfectly natural and legitimate one, and at first sight, at least, seemed very attractive. But beneath its apparent simplicity there is some amount of obscurity, and its adversaries have thought that upon close analysis it is really open to serious objections.

In the first place, is it the aim of the science to present us with an exact, realistic picture of society, as the Historians loved to think? On the contrary, do we not find that a study can only aspire to the name of a science in proportion as its propositions become more general in their nature? There is no science without generalisation, according to Aristotle, and concrete description, however indispensable, is only a first step in the constitution of a science. A science must be explanatory rather than descriptive.

Of course Historians are not always content with mere description. Some Historians have attempted explanation and have employed history as their organon. Is the choice a suitable one?

“History,” says Marshall, “tells of sequences and coincidences; but reason alone can interpret and draw lessons from them.”[852]

Moreover, is there a single important historical event whose cause has ceased to be a matter of discussion? It will be a long time before people cease to dispute about the causes of the Reformation or the Revolution, and the relative importance of economic, political, and moral influences in determining the course of those movements has yet to be assigned. The causes that led to the substitution of credit for money or money for barter are equally obscure. Before narrative can become science there must be the preliminary discovery by a number of other sciences of the many diverse laws whose combination gives rise to concrete phenomena.[853] Not history but the sciences give the true explanation. The evolutionary theory has proved fruitful in natural history simply because it took the succession of animal species as an established fact and then discovered that heredity and selection afforded a means of explaining that succession. But history cannot give us any hypothesis that can rival the theory of evolution either in its scientific value or in its simplicity. In other words, history itself is in need of explanation. It gives no clue to reality and it can never take the place of economics.[854]

The earlier Historians claimed a higher mission still for the historical study of political economy. It must not only afford an explanation of concrete economic reality, but it must also formulate the laws of economic development. This idea is only held by a few of them, and even the few are not agreed as to how it should be done. Knies, for example, thinks that it ought to be sufficiently general to include the economic development of all nations. Saint-Simon held somewhat similar views. Others, and among them Roscher, hold that there exist parallelisms in the history of various nations; in other words, that every nation in the course of its economic development passes through certain similar phases or stages. These similarities constitute the laws of economics. If we were to study their movements in the civilisations of the past we might be able to estimate their place in existing societies.[855]

Neither point seems very clear. Even if we admit that there is only one general law of human development we cannot forecast the line of progress, because scientific prediction is only applicable to recurrent phenomena. They fail just when the conditions are new. Of course one can always guess at the nature of the future, but divination is not knowledge. And predictions of this kind are almost always false.[856] Historical parallelism rests on equally shaky foundations. A nation, like any other living organism, passes through the successive stages of youth, maturity, and old age, but we are not justified in thinking that the successive phases through which one nation has passed must be a kind of prototype to which all others must conform. All that we can say is that in two neighbouring countries the same effects are likely to follow from the same causes. Production on a large scale, for example, has been accompanied by similar phenomena in most countries in Western Europe. But this is by no means an inevitable law. It is simply a case of similar effects resulting from similar causes. Such analogies are hardly worthy of the name of laws. The discovery of the law, as Wagner says,[857] may be a task beyond human power; and Schmoller, as we have already seen, is of the same opinion.

One remark before concluding. There is a striking similarity between the ideas just outlined and those of a distinguished philosopher whose name deserves mention here, although his influence upon political economy was practically nil. We refer to Auguste Comte.

It is curious that the earliest representatives of the school should have ignored him altogether, but just as Mill remained unknown to them, so the Cours de Philosophie positive, though published in 1842, remained a sealed book so far as they were concerned. Comte’s ideas are so very much like those of Knies and Hildebrand that some Positivist economists, such as Ingram and Hector Denis, have attempted to connect the Historical tendency in political economy with the Positive philosophy of Comte.[858]

The three fundamental conceptions which formed the basis of the teaching of the Historical school are clearly formulated by Comte. The first is the importance of studying economic phenomena in connection with other social facts. The analysis of the industrial or economic life of society can never be carried on in the “positive” spirit by simply making an abstraction of its intellectual, political, or moral life, whether of the past or of the present.[859] The second is the employment of history as the organon of social science. “Social research,” says he, “must be based upon a sane analysis of the all-round development of the best of mankind up to the present moment, and the growing predilection for historical study in our time augurs well for the regeneration of political economy.” He was fully persuaded that the method would foster scientific prediction—a feature which is bound to fuse all those diverse conditions which will form the basis of Positive politics.

Comte wished to found sociology, of which political economy was to be simply a branch. The Historical school, and especially Knies, regarded economics in the same spirit. Hence the analogies with which Knies had to content himself, but which the younger school refused to recognise. But there was a fundamental difference between their respective points of view, and this will help us to distinguish between them.

Comte was a believer in inevitable natural laws, which, according to the earlier Historians, had wrought such havoc. The Historical method also, as he conceived of it, was something very different from what the older or the newer Historical school took it to be.

Adopting a dictum of Saint-Simon, Comte speaks of the Historical method as an attempt to establish in ascending or descending series the curve of each social institution, and to deduce from its general outlines conclusions as to its probable growth or decline in the future. This is how he himself defines the process: “The essence of this so-called historical spirit, it seems to us, consists in the rational use of what may be called the social series method, or, in other words, in the due appreciation of the successive stages of human development as reflected in a succession of historical facts. Careful study of such facts, whether physical, intellectual, moral, or political, reveals a continuous growth on the one hand and an equally continuous decline on the other. Hence there results the possibility of scientific prophecy concerning the final ascendancy of the former and the complete overthrow of the latter, provided always such conclusion is in conformity with the general laws of human development, the sociological preponderance of which must never be lost sight of.”[860] It was in virtue of this method that Saint-Simon predicted the coming of industrialism and that Comte prophesied the triumph of the positive spirit over the metaphysical and religious.

There is considerable difference between this attitude and the Historical method as we know it,[861] and the attempt at affiliation seems to us altogether unwarranted. But the coincidence between Comte’s views and those of Knies and Hildebrand is none the less remarkable, and it affords a further proof of the existence of that general feeling which prompted certain writers towards the middle of the century to attempt a regeneration of political economy by setting it free from the tyranny of those general laws which had nearly stifled its life.

It seems to us, however, that the Historical school is mistaken if it imagines that history alone can afford an explanation of the present or will ever enable us to discover those special laws which determine the evolution of nations.

On the other hand, it has a perfect right to demand a place beside economic science, and it is undoubtedly destined to occupy a position still more prominent in the study of economic institutions, in statistical investigation, and above all in economic history. Not only is a detailed description of the concrete life of the present of absorbing interest in itself, but it is the condition precedent to all speculations concerning the future. The theorist can never afford to neglect the minute observation of facts unless he wills that his structure shall hang in the void. Most abstract economists feel no hesitation in recognising this. For example, Jevons, writing in 1879,[862] gave it as his opinion that “in any case there must arise a science of the development of economic forces and relations.”

This newer historical conception came to the rescue just when the science was about to give up the ghost, and though they may have failed to give us that synthetic reconstruction which is, after all, within the ability of very few writers, its advocates have succeeded in infusing new life into the study and in stimulating new interest in political economy by bringing it again into touch with contemporary life. They have done this by throwing new light upon the past and by giving us a detailed account of the more interesting and more complex phenomena of the present time.[863] Such work must necessarily be of a fragmentary character. The school has collected a wonderful amount of first-class material, but it has not yet erected that palace of harmonious proportions to which we in our fond imagination had likened the science of the future. Nor has it discovered the clue which can help it to find its way through the chaos of economic life. This is not much to be wondered at when we remember the shortcomings of the method to which we have already had occasion to refer. Indeed, some of the writers of the school seem fully convinced of this. Professor Ashley, in an article contributed to the Economic Journal, employs the following words:[864] “As I have already observed, the criticisms of the Historical school have not led so far to the creation of a new political economy on historical lines: even in Germany it is only within very recent years that some of the larger outlines of such an economics have begun to loom up before us in the great treatise of Gustav Schmoller.”

In view of considerations like these one might have expected that the Historical school would have shown greater indulgence to the attempts made both by the Classical and by the Hedonistic schools to give by a different method expression to the same instinctive desire to simplify matters in order to understand them better.[865]

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II. STATE SOCIALISM

The nineteenth century opened with a feeling of contempt for government of every kind, and with unbounded confidence on the part of at least every publicist in the virtue of economic liberty and individual initiative. It closed amid the clamour for State intervention in all matters affecting economic or social organisation. In every country the number of public men and of economists who favour an extension of the economic function of government is continually growing, and to-day such men are certainly in the majority. To some writers this change of opinion has seemed sufficiently important to warrant special treatment as a new doctrine, variously known as State Socialism or “the Socialism of the Chair” in Germany and Interventionism in France.

Really it is not an economic question at all, but a question of practical politics upon which writers of various shades of economic opinion may agree despite extreme differences in their theoretical preconceptions. The problem of defining the limits of governmental action in the matter of producing and distributing wealth is one of the most important in the whole realm of political economy, but it can hardly be considered a fundamental scientific question upon which economic opinion is hopelessly divided. It is clear that the solution of the problem must depend not merely upon purely economic factors, but also on social and political considerations, upon the peculiar conception of general interest which the individual has formed for himself and the amount of confidence which he can place in the character and ability of Governments.[866] The problem is always changing, and whenever a new kind of society is created or a new Government is established a fresh solution is required to meet the changed conditions.

How is it, then, that this question has assumed such extravagant proportions at certain periods of our history?

Had the issue been confined to the limits laid down by Smith it is probable that such passionate controversies would have been avoided. Smith’s arguments in favour of laissez-faire were largely economic. Gradually, however, under the growing influence of individual and political liberty, a kind of contempt for all State action took the place of the more careful reasoning of the earlier theory, and the superiority of individual action in matters non-economic became an accepted axiom with every publicist.

This method of looking at the problem is very characteristic of Bastiat. The one feature of government that interested him was not the fact that it represented the general interest of the citizens, but that whenever it took any action it had to employ force,[867] whereas individual action is always free. Every substitution of State for individual action meant victory for force and the defeat of liberty. Such substitution must consequently be condemned. Smith’s point of view is totally different. To appreciate this difference we need only compare their treatment of State action. In addition to protecting the citizens from invasion and from interference with their individual rights, Smith adds that the sovereign should undertake “the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”[868] The scope is sufficiently wide, at any rate. If we turn to Bastiat, on the other hand, we find that the Government has only two functions to perform, namely, “to guard public security and to administer the common land.”[869] Viewed in this light, the problem of governmental intervention, instead of remaining purely economic, becomes a question of determining the nature, aims, and functions of the State, and individual temperament and social traditions play a much more important part than either the operation of economic phenomena or any amount of economic reasoning. It is not surprising that some writers thought that the one aim of economics was to defend the liberty and the rights of the individual!

Such exaggerated views were bound to beget a reaction, and the defence of State action assumes equally absurd proportions with some of the writers of the opposite school. Even as far back as 1856 Dupont-White, a French writer, had uttered a protest against this persistent depreciation of the State, in a short work entitled L’Individu et l’État. His ideas are so closely akin to those of the German State Socialists that they have often been confused with them, and it is simpler to give an exposition of both at the same time. But he was a voice crying in the wilderness. Public opinion under the Second Empire was very little disposed to listen to an individual who, though a Liberal in politics, was yet anxious to strengthen the power and to add to the economic prerogative of the Crown. More favourable circumstances were necessary if there was to be a change of public opinion on the matter. The times had ripened by the last quarter of the century, and the elements proved propitious, especially in Germany, where the reaction first showed itself.

The reaction took the form not so much of the creation of a new doctrine as of a fusion of two older currents, which must first be examined.

During the course of the nineteenth century we find a number of economists who, while accepting Smith’s fundamental conception, gradually limit the application of his principle of laissez-faire. They thought that the superiority of laissez-faire could not be scientifically demonstrated and that in the great majority of cases some form of State intervention was necessary.

On the other hand, we meet with a number of socialists who prove themselves to be more opportunistic than their comrades, and though equally hostile to private property and freedom of production, yet never hesitate to address their appeals on behalf of the workers to existing Governments.

State Socialism represents the fusion of these two currents. It surpasses the one in its faith in the wisdom of Governments, and is distinguished from the other by its greater attachment to the rights of private property; but both of them contribute some items to its programme. In the first place we must try to discover the source of these separate tendencies, and in the second place watch their amalgamation.

I: THE ECONOMISTS’ CRITICISM OF LAISSEZ-FAIRE

The doctrine of absolute laissez-faire was not long allowed to go unchallenged. From the time of Smith onward there is an uninterrupted sequence of writers—all of them by no means socialists—who ventured to attack the fundamental propositions of the great Scotsman and who attempted to show that his practical conclusions were not always borne out by the facts.

Smith based his advocacy of laissez-faire upon the supposed identification of public and private interests. He showed how competition reduced prices to the level of cost of production, how supply adapted itself to meet demand in a perfectly automatic fashion, and how capital in an equally natural way flowed into the most remunerative occupations.

This principle of identity of interests was, however, rudely shaken by the teachings of Malthus and Ricardo, although both of them remained strong adherents of the doctrine of individual liberty.

Sismondi, who was the next to intervene, laid stress upon the evils of competition, and showed how social inequality necessitated the submission of the weak to the will of the strong. His whole book was simply a refutation of Smith’s providential optimism.

In Germany even, as early as 1832, that brilliant economist Hermann was already proceeding with his critical analysis of the Classical theories; and after demonstrating how frequently individual interest comes into conflict with public welfare, and how inadequate is the contribution which it can possibly make to the general well-being, he declares his inability to subscribe to the doctrine laid down by most of Smith’s followers, namely, that individual activity moved by personal interest is sufficient to meet all the demands of national economy. Within the bounds of this national economy[870] he thinks there ought to be room for what he calls the civic spirit (Gemeinsinn) as well.

The next critic, List, bases his whole case upon the opposition between immediate interests, which guide the individual, and the permanent interests of the nation, of which the Government alone can take account.

Stuart Mill, in the famous fifth book of the Principles, refuses even to discuss the doctrine of identity of interests, believing it to be quite untenable. On the question of non-intervention he admits the validity of one economic argument only, namely, the superiority of self-interest as an economic motive. But he is quick to recognise its shortcomings and the exceptions to its universal operation—in the natural incapacity of children and of the weak-minded, the ignorance of consumers, the difficulty of achieving it, even when clearly perceived, without the help of society as a whole, as in the case of the Factory Acts. Mill also points out how this motive is frequently wanting in modern industrial organisation, where, for example, we have joint stock companies acting through the medium of a paid agency, or charitable work undertaken by an individual who has to consider, not his own interests, but those of other people. Private interest is also frequently antagonistic to public interest, as in the case of the public supply of gas or water, where the individual entrepreneur is influenced by the thought of a maximum profit rather than by considerations of general interest. In matters of that kind Stuart Mill was inclined to favour State intervention.[871]

M. Chevalier, from his professorial chair in the Collège de France, extended his congratulations to Mill upon his successful restoration of the legitimate duties of Governments.[872] Chevalier thought that those who believed that the economic order could be set up simply by the aid of competition acting through personal interest were either illogical in their arguments or irrational in their aims. Government was simply the manager of the national organisation, and its duty was to intervene whenever the general interest was endangered. But the duties and privileges of government are not exactly those of the village policeman.[873] Applying this principle to public works, he points out that they are more or less State matters, and the guarantee for good work is quite as great when the State itself undertakes to perform it as when it is entrusted to a private individual.

In 1863 Cournot, whose reputation was unequal to either Mill’s or Chevalier’s, but whose penetrating thought, despite its small immediate influence, is quite important in the history of economic doctrines, treats of the same problem in his Principes de la Théorie des Richesses. Going straight to the heart of the problem, he asks whether it is possible to give a clear definition of this general interest—the economic optimum which we are anxious to realise—and whether the system of free competition is clearly superior to every other. He justly remarks that the problem is insoluble. Production is determined by demand, which depends both upon the preliminary distribution of wealth and also upon the tastes of consumers. But if this be the case, it is impossible to outline an ideal system of distribution or to fix upon the kind of tastes that will prove most favourable for the development of society. A step farther and Cournot must have hit upon the distinction so neatly made by Pareto between maximum utility, which is a variable, undefined notion, and maximum ophelimity, “the investigation of which constitutes a clearly defined problem wholly within the realm of economics.”[874]

But Cournot does not therefore conclude that we ought to abstain from passing any judgment in the realm of political economy and abandon all thought of social amelioration. Though the absolutely best cannot be defined, it does not follow that we cannot determine the relatively good. “Improvement or amelioration is possible,” says he, “by introducing a change which operates upon one part of the economic system, provided there are no indirect effects which damage the other parts of the system.”[875] Such progress is not necessarily the result of private effort. Following Sismondi, he quotes several instances in which the interests of the individual collide with those of the public and in which State intervention might prove useful.

Every one of these authors—in varying degrees, of course—admits the legitimacy of State intervention in matters economic. Liberty doubtless is still the fundamental principle. Sismondi was content with mere aspiration, so great did the difficulties of intervention appear to him. Stuart Mill thought that the onus probandi should rest with the innovator. Cournot considered liberty as being still the most natural and simple method, and should the State find it necessary to intervene it could only be in those instances in which science has clearly defined the aim in view and demonstrated the efficacy of the methods proposed. Every one of them has abandoned liberty as a scientific principle. To Cournot it was an axiom of practical wisdom;[876] Stuart Mill upheld it for political reasons as providing the best method of developing initiative and responsibility among the citizens. They all agree that the State, far from being a pis aller, has a legitimate sphere of action. The difficulty is just to define this.[877] This was the task to which Walras addressed himself with remarkable success in his lectures on the theory of the State, delivered in Paris in 1867-68.[878]

And so we find that the progress of thought since the days of Adam Smith had led to important modifications of the old doctrines concerning the economic functions of the State. The publicists, however, were not immediately converted. Even when the century was waning they still remained faithful to the optimistic individualism of the earlier period. The organon of State Socialism merely consists of these analyses incorporated into a system. The authors just mentioned must consequently be regarded, if not as the precursors of State Socialism, at any rate as unconsciously contributing to the theory.

II: THE SOCIALISTIC ORIGIN OF STATE SOCIALISM. RODBERTUS AND LASSALLE

State Socialism is not an economic doctrine merely. It has a social and moral basis, and is built upon a certain ideal of justice and a particular conception of the function of society and of the State. This ideal and this conception it received, not from the economists, but from the Socialists, especially Rodbertus and Lassalle. The aim of these two writers was to effect a kind of compromise between the society of the present and that of the future, using the powers of the modern State simply as a lever.

The idea of a compromise of this kind was not altogether new. A faint suggestion of it may be detected more than once in the course of the century, and an experiment of the kind was mooted in France towards the end of the July Monarchy. At that time we find men like Louis Blanc and Vidal—who were at least socialists in their general outlook—writing to demand State intervention not merely with a view to repairing the injustice of the present society, but also with a view to preparation for the society of the future with as little break with the past as possible. Louis Blanc was in this sense the first to anticipate the programme of the State Socialists. But its more immediate inspirers were Rodbertus and Lassalle, both of whom belonged to that country in which its effects were most clearly seen.

Their influence upon German State Socialism cannot be exactly measured by the amount of direct borrowing that took place. They were linked by ties of closest friendship to the men who were responsible for creating and popularising the new ideas, and it is important that we should appreciate the personal influence which they wielded. Rodbertus formed the centre of the group, and during the two years 1862-64 he carried on an active correspondence with Lassalle. They were brought together by the good offices of a common friend, Lothar Bucher, an old democrat of 1848 who had succeeded in becoming the confidant of Bismarck. Strangely enough, Bismarck kept up his friendship with Lassalle even when the latter was most busily engaged with his propaganda work.[879] Wagner, also, the most eminent representative of State Socialism, was in frequent communication with Rodbertus, and he never failed to recognise his great indebtedness to him. Wagner himself was on more than one occasion consulted by Bismarck.

But apart altogether from their connection with State Socialism, Rodbertus and Lassalle would deserve a place in our history. Rodbertus is a theoretical writer of considerable vigour and eloquence, and his thoughts are extraordinarily suggestive. Lassalle was an agitator and propagandist rather than an original thinker, but he has left a lasting impression upon the German labour movement. Hence our determination to give a somewhat detailed exposition of their work, especially of that of Rodbertus, and to spare no effort in trying to realise the importance of the contribution made by both of them.

1. RODBERTUS

In a history of doctrines Rodbertus has a place peculiarly his own. He forms, as it were, a channel through which the ideas first preached by Sismondi and the Saint-Simonians were transmitted to the writers who belong to the last quarter of the century. His intellectual horizon—largely determined for him by his knowledge of these French sources[880]—was fixed as early as 1837, when he produced his Forderungen, which the Gazette universelle d’Augsburg refused to publish. His first work appeared in 1842,[881] and the earliest of the Soziale Briefe[882] belong to 1850 and 1851. At the time these passed almost unnoticed. It was only when Lassalle in his treatise in 1862 referred to him as the greatest of German economists, and when conservative writers like Rudolf Meyer and Wagner drew attention to his work, that his books received the notice which they deserved. The German economists of the last thirty years have been greatly influenced by him. His ideas, it is true, are largely those of the earliest French socialists, who wrote before the movement had lost its purely intellectual tone and become involved in the struggle of the July Monarchy, but his clear logic and his systematic method, coupled with his knowledge of economics, which is in every way superior to that of his predecessors, gives to these ideas a degree of permanence which they had never enjoyed before. This “Ricardo of socialism,” as Wagner[883] calls him, did for his predecessors’ doctrines what Ricardo had succeeded in doing for those of Malthus and Smith. He magnified the good results of their work and emphasised their fundamental postulates.

Rodbertus’s upbringing decreed that he should not become involved in that democratic and radical socialism which was begotten of popular agitation, and whose best-known representative is Marx. Marx considered socialism and revolution, economic theory and political action, as being indissolubly one.[884] Rodbertus, on the other hand, was a great liberal landowner who sat on the Left Centre in the Prussian National Assembly of 1848, and his political faith is summed up in the two phrases “constitutional government” and “national unity.”[885] The success won by the Bismarckian policy gradually drew him nearer the monarchy, especially towards the end of his life.[886] His ideal was a socialist party renouncing all political action and confining its attention solely to social questions. Although personally favourably inclined towards universal suffrage, he refused to join Lassalle’s Arbeiterverein because Lassalle had insisted upon placing this article of political reform on his programme.[887] The party of the future, he thought, would be at once monarchical, national, and socialistic, or at any rate conservative and socialistic.[888] At the same time we must remember that “in so far as the Social Democratic party was aiming at economic reforms he was with it heart and soul.”[889]

Despite his belief in the possibility of reconciling the monarchical policy with his socialistic programme, he carefully avoided the economic teachings of the socialists. His too logical mind could never appreciate their position, and he had the greatest contempt for the Socialists of the Chair. He would be the first to admit that in practice socialism must content itself with temporary expedients, although he cannot bring himself to believe that such compromise constitutes the whole of the socialistic doctrine. He refers to the Socialists of the Chair as the “sweetened water thinkers,”[890] and he refused to join them at the Eisenach Congress of 1872—the “bog of Eisenach,” as he calls it somewhere. He regarded the whole thing as a first-class comedy. Even labour legislation, he thought, was merely a caprice of the humanitarians and socialists.[891] So that whenever we find him summing up his programme in some such sonorous phrase as Staat gegen Staatslosigkeit[892] (“the State as against the No-State”) we must be careful to distinguish it from the hazy doctrines of the State Socialists.[893] Despite himself, however, he proved one of the most influential precursors of the school, and therein lies his real significance.

Rodbertus’s whole theory rests upon the conception of society as an organism created by division of labour. Adam Smith, as he points out, had caught a faint glimmer of the significant fact that all men are linked together by an inevitable law of solidarity which takes them out of their isolation and transforms an aggregate of individuals into a real community having no frontiers and no limits save such as division of labour imposes, and sufficiently wide in scope to include the whole universe.[894] As soon as an individual becomes a part of economic society his well-being no longer depends upon himself and the use which he makes of the natural medium to which he applies himself, but upon the activity of his fellow-producers. The execution of certain social functions, which Rodbertus enumerates as follows, and which he borrows partly from Saint-Simon, henceforth become the determining factors: (1) The adaptation of production to meet demand; (2) the maintenance of production at least up to the standard of the existing resources; (3) the just distribution of the common produce among the producers.

Should society be allowed to work out these projects spontaneously, or should it endeavour to carry out a preconceived plan? To Rodbertus this was the great problem which society had to consider. The economists of Smith’s school treated the social organism as a living thing. The free play of natural laws must have the same beneficial effects upon it as the free circulation of the blood has upon the human body. Every social function would be regularly discharged provided “liberty” only was secured. Rodbertus thought this was a mistake. “No State,” says he, “is sufficiently lucky or perhaps unfortunate enough to have the natural needs of the community satisfied by natural law without any conscious effort on the part of anyone. The State is an historical organism, and the particular kind of organisation which it possesses must be determined for it by the members of the State itself. Each State must pass its own laws and develop its own organisation. The organs of the State do not grow up spontaneously. They must be fostered, strengthened, and controlled by the State.”[895] Hence, after 1837 we find Rodbertus proposing the substitution of a system of State direction[896] for the system of natural liberty, and his whole work is an attempt to justify the introduction of such a system. Let us examine his thesis and review the various economic functions which we defined above. Let us also watch their operation at the present day and see how differently these functions would be discharged in a better organised community.

1. It is hardly correct to speak of production adapting itself to social need under existing conditions, because production only adapts itself to the effective demand, i.e. to the demand when expressed in terms of money. This fact had been hinted at by Smith, and Sismondi had laid considerable stress upon it; but Rodbertus was the earliest to point out that this really meant that only those people who already possess something can have their wants satisfied.[897] Those who have nothing to offer except their labour, and find that there is no demand for that labour, have no share in the social product. On the other hand, the individual who draws an income, even though he never did any work for it, is able to make effective his demand for the objects of his desire. The result is that many of the more necessitous persons must needs go unsatisfied, while others wallow in luxury.

Truer word was never spoken. Rodbertus had a perfect right to insist on the fundamental fallacy lurking within a system which could treat unemployment—that modern form of famine—as simply an over-production of goods, and which found itself unable to modify it except through public or private charity. His remedy consisted of a proposal to set up production for social need as a substitute for production for demand. The first thing to be done was to find out the time which each individual would be willing to give to productive work, making a note of the character and quantity of goods required at the same time.[898] He thought that “the wants of men in general form an even series, and that the kind and number of objects required can easily be calculated.”[899] Knowing the time which society could afford to give to production, there would be no great difficulty in distributing the products among the various producers.

This is to go to work a little too precipitately and to shun the greatest difficulty of all. The uniform series of wants of which Rodbertus speaks exist only in the imagination. What we really find is a small number of collective needs combined with a great variety of individual needs. Social need is merely a vague term used to designate both kinds of wants at once. The slightest reflection shows that every individual possesses quite a unique series of needs and tastes. To base production upon social need is to suppress liberty of demand and consumption. It implies the establishment of an arbitrary scale of needs which must be satisfied and which is to be imposed upon every individual. The remedy would be worse than the evil.

But the opposition between social need and effective demand by no means disposes of his argument. The opposition needs some proving, and some explanation of the producers’ preference for demand rather than need ought to be offered. The explanation must be sought in the fact that the capitalistic producer of to-day manages his business in accordance with the dictates of personal interest, and personal interest compels him to apply his instruments to produce whatever will yield him the largest net product. He is more concerned about the amount of profit made than about the amount of produce raised. He produces, not with a view to satisfying any social need, but simply because it yields him rent or profit.[900]

This contrast between profit-making and productivity deserves some attention. Sismondi had already called attention to it by distinguishing between the net and the gross product. A number of writers have treated of it since, and it holds a by no means insignificant place in the history of economic doctrines.[901]

The opposition is dwelt upon in no equivocal fashion by Rodbertus. This pursuit of the maximum net product is clearly the producer’s only guide, but the conclusions which he proceeds to draw from it are somewhat more questionable. If we accept his opinion that the satisfaction of social need and not of individual demand is the determining factor in production, we are driven to the conclusion that modern society, actuated as it is by this one motive, cannot possibly satisfy every individual demand. But we have already shown that the phrase “social need” has no precise connotation; neither has the term “productivity,” which is so intimately connected with it. Further, if society has no desire to impose upon its members an arbitrary scale of wants that must be satisfied—in other words, if demand and consumption are to remain free—it can only be by adopting that system which recognises a difference between the present and the future “rentability” of the product. This difference between the sale price and the real cost of production of any commodity must, it seems to us, be recognised even by a collectivist society as the only method of knowing whether the satisfaction which a commodity gives is in any way commensurate with the labour involved in its production.[902] Pareto has given an excellent demonstration of this by showing how collectivist society will have to take account of price indications if social demand is to be at all adequately supplied.

2. Turning to the other desideratum, namely, a fuller utilisation of the means of production, Rodbertus contents himself with quoting the criticisms of the Saint-Simonians concerning the absence of conscious direction which characterises the present régime and the hereditary element which is such a common feature of economic administration. He is in full agreement with Sismondi when the latter declares that production is entirely at the option of the capitalist proprietor.[903] In this matter he is content merely to follow his leaders, without making any contribution of his own to the subject.

3. There still remains a third economic function which society ought to perform, and which Rodbertus considered the most important of all, namely, the distribution of the social product. An analysis of the present system of distribution was one of the tasks he had set himself to accomplish, believing with Sismondi and other socialists that a solution of the problem of distribution and the explanation of such phenomena as economic crises and pauperism constitute the most vital problems which face the science at the present moment.

A just distribution, in Rodbertus’s opinion, should secure to everyone the product of his labour.[904] But does not the present régime of free competition and private property accomplish this?

Let us watch the mechanism of distribution as we find it operating at the present time. Rodbertus’s description of it is not very different from J. B. Say’s, and it tallies pretty closely with the Classical scheme. On the one hand we have the entrepreneur who purchases the services of labour, land, and capital, and sells the product which results from this collaboration. The prices which he pays for these services and the price he himself receives from the consumer are determined by the interaction of demand and supply. What remains after paying wages, interest, and rent constitutes his profits.[905]

The distribution of the product is effected through the mechanism of exchange, and the result of its operation is to secure to the owner of every productive service the approximate market value of that service. Could anything be juster? Apparently not. But if we examine the social and economic hinterland behind this mechanism what we do find is the callous exploitation of the worker by every capitalist and landlord. The various commodities which are distributed among the different beneficiaries are really the products of labour. They are begotten of effort and toil—largely mechanical. Rodbertus did not under-value intellectual work or under-estimate the importance of directive energy. But intelligent effort seemed to him an almost inexhaustible force, and its employment should cost nothing, just as the forces of nature may be got for nothing. Only manual labour implies loss of time and energy—the sacrifice of something that cannot be replaced.[906] Consequently he does not recognise the intellectual or moral effort (the name is immaterial) involved in the postponement of consumption, whereby a present good is withheld with a view to contributing to the sum total of future good.[907] And he proceeds to define and to develop the opening paragraph of Smith’s Wealth of Nations: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour or in what is purchased with that produce from other nations.”

The difference between his attitude and Marx’s is also interesting. Marx was thoroughly well versed in political economy, and had made a special study of the English socialists. His one object was to set up a new theory of exchange, with labour as the source of all value. Rodbertus, who drew his inspiration from the Saint-Simonians, focused attention upon production, and treated labour as the real source of every product—a simpler, a truer, but a still incomplete proposition. Rodbertus never definitely commits himself to saying that labour by itself creates value, but, on the other hand, he never denies it.[908] Social progress, he always maintained, must consist in the greater degree of coincidence[909] between the value of a product and the quantity of labour contained in it. But this is a task which the future must take in hand.[910] Again, if it be true that the worker creates the product, but that the proprietors of the soil and the capitalists who have had no share in its production are able to manipulate exchange in such a way as to retain a portion of it for themselves, it is clear that our judgment concerning the equity of the present system needs some revision. This secret embezzlement for the profit of the non-worker and to the injury of the diligent proceeds without any outward display of violence through the free play of exchange operating within a system of private property. Its sole cause lies in the present social system, “which recognises the claim of private landowners and capitalists to a share of the wealth distributed, although they have contributed nothing towards its production.”[911]

Hence his exposition of the twofold aspect of distribution. Economically exchange attributes to each of the factors land, capital, and labour a portion of the produce corresponding to the value of their respective services as estimated in the market. Socially it often means taking away from the real producers—from the workers—a part of the goods which their toil has created. This portion Rodbertus refers to under the simple name “rent,” which includes both the revenue of capitalists and the income of landlords.

No economist ever put the twofold aspect of the problem in a clearer light. Laying hold of the eternal opposition between the respective standpoints, he emphasises the difficulties which they present to so many minds. Justice would relate distribution to merit, but society is indifferent provided its own needs are satisfied. Society simply takes account of the market value of these products and services without ever showing the least concern for their origin or the efforts which they may originally have involved—the weary day of the industrious labourer and the effortless lounge of the lazy capitalist being similarly rewarded. Rodbertus’s great merit was to separate this truth from the other issues so frequently confused with it in the writings of the earlier economists and to bring it clearly before the notice of his fellow economists.

Rodbertus’s criticism did not end there, although the demonstration which we have just given of the distinction between the social and the purely economic point of approach to distribution constitutes its essential merit. We must not omit the practical conclusions which he draws from it.

What concerned Rodbertus most—at least, so we imagine from the standpoint which he adopted—was not the particular way in which the rate of wages or interest, high or low rents, are determined, but the proportion of the revenue that goes to the workers and non-workers respectively. The former question is a purely economic one of quite secondary importance compared with this other social problem. Believing that he had already shown the possibility of the workers being robbed, the problem now was to determine whether this spoliation was likely to continue. Does economic progress give any ground for hoping that rent or unearned income will gradually disappear? Bastiat and Carey had replied in the affirmative. The proportion that goes to capital, so they affirmed, is gradually becoming less, to the great advantage of the labourer. Ricardo, faced with the same dilemma, had come to the conclusion that with the inevitable increase in the cost of producing food the landowner’s share must be constantly growing. Say had asked himself the same question in the earliest edition of his treatise, but had found no reply. Rodbertus adopts none of their solutions, but independently arrives at the conclusion that the worker’s share gradually dwindles, to the advantage of the other participants.[912]

Theorist as he was, a simple deduction was all that was needed to convince him of the truth of this view. The rate of wages, we have already seen, is determined by the interaction of demand and supply in the labour market. The market price of labour, however, like that of any other product, is always gravitating towards a normal value—this normal value being none other than Ricardo’s necessary wage. “The share of the product that falls to the lot of the producer both in an individual instance and as a general rule is not measured by the amount which he himself has produced, but by that quantity which is sufficient for the upkeep of his strength and the upbringing of his children.”[913] This celebrated “brazen law” became the pivot of Lassalle’s propaganda, although it was never definitely recognised by Marx.

Granting the existence of such a law, and admitting also that the amount produced by labour is always increasing, so that the mass of commodities produced always keeps growing, a very simple arithmetical calculation suffices to show that the total quantity obtained by the workers always remains the same, representing a diminished fraction of the growing totality.

A similar demonstration affords a clue to the prevalence of crises. The entrepreneur keeps adding to the mass of commodities produced until he touches the full capacity of social demand.[914] But while production grows and expands the worker’s share dwindles, and thus his demand for some products remains permanently below production level. The structure is giving way under the very feet of the unsuspecting producer.[915] This theory of crises is simply a re-echo of Sismondi,[916] and gives an explanation of a chronic evil rather than of a crisis pure and simple. Its scientific value is just about equal to Sismondi’s other theory concerning proportional distribution.

This theory upon which Rodbertus laid such emphasis had already been outlined in his Forderungen, and a fuller development is given in his Soziale Briefe, where he expressly states it to be the fundamental point of his whole system, all else being mere scaffolding. His one ambition all his life long was to be able to give a statistical proof of it, but its importance is not nearly as great as he imagined it to be.

In the first place, doubt as to the validity of the “brazen” or “iron law of wages”—upon which the theory is based—is entertained not merely by economists, but also by socialists. And even if it were true, Rodbertus’s proof would still be inconclusive, for the workers’ share of the total product depends not upon one fact alone, but upon two—the rate of wages and the number of workers. Rodbertus’s error and Bastiat’s are very similar. Bastiat had tried to determine the capitalists’ share of the total product by taking account of one fact only, namely, the rate of interest, whereas he ought to have taken the amount of existing capital into consideration as well.

But we must admit that although the arguments used by Rodbertus are scarcely more reliable than Bastiat’s, his theory itself is nearer the facts as judged by statistics. No amount of a priori reasoning without some recourse to statistics can ever solve the problem. Statistics themselves seem to prove that labour’s portion, in some countries at least, has shown signs of diminishing since the beginning of the present century.

This does not necessarily mean that the worker must be worse off, for it may well happen that a diminution in the general share obtained by labour is accompanied by a growth of individual wages. All that we can conclude is that wages have not increased as rapidly as has capital’s share,[917] but this has not prevented the workers sharing in the general growth of prosperity.

Logically enough, Rodbertus proceeds to draw certain practical conclusions, including the necessity for the suppression of private property and of individual production. The community should be the sole owner of the means of production. Unearned income must go. Everyone should contribute something to the national dividend, and each should share in the total produce in proportion to his labour. The value of all commodities will depend upon the amount of time spent on them and effort put into them; and since the supply will always adapt itself to the needs of society the measure will be constant and exact, and equal distribution will be assured.

But Rodbertus recoils from his own solution, and the ardent socialist becomes a simple State Socialist. What frightens him is not the terrible tyranny of a system under which production and even consumption would be strictly regulated. “There would be as much personal freedom under a system of this kind as in any other form of society,” he remarks,[918] “society” evidently always implying some measure of restraint. His apprehension was of a different kind. He had a perfect horror of any revolutionary change, and stood aghast at the lack of education displayed by the masses. He realised how unwilling they were to sacrifice even a part of their wages in order to enable other men to have the necessary leisure to pursue the study of the arts and sciences—the noblest fruits of civilisation. Finally it seemed to him that illegal appropriation and the rightful ownership which results from vigorous toil are too often confused by being indiscriminately spoken of as private property. “There is,” says he, “so much that is right mixed up with what is wrong that one goads the lawful owner into revolt in trying to lay hold of the unlawful possessor.”[919]

Some kind of compromise should at all costs be effected. If private property—one of the great evils of the present day—cannot be got rid of without some inconvenience, cannot we possibly dispense with freedom of contract, the other source of inequality? Let us assume, then, that we have got rid of free contract while retaining the institution of private property. By doing this, although we are not immediately able to clear away unearned income, we shall have removed some of the greatest inconveniences that result from it. We shall arrest the downward trend of labour’s remuneration, and poverty and crises will disappear together.[920]

Such an attempt might be made even now. Let the State estimate the total value of the social product in terms of labour and determine the fraction that should go to the workers. Let it give to each entrepreneur in accordance with the number of workers he employs a number of wage coupons, in return for which the entrepreneur shall be obliged to put on the market a quantity of commodities equal in value. Lastly, let the said workers, paid in wage coupons, supply themselves with whatever they want from the public stores in return for these coupons. The national estimate would from time to time be subject to revision; and in order that the proportions should always be the same, the number of coupons given to labour would have to be increased if the number of commodities produced ever happened to increase. Rodbertus’s aim was to give the workers a share in the general progress made, and such was the plan which he laid down.[921]

There is no need to emphasise its theoretical, let alone its practical difficulties. We were led to mention it for a double reason. In the first place, it is interesting as an attempt to effect a compromise between the society of the present and the collectivism of the future. Marx regards the growing servility of the worker with a certain measure of equanimity as a necessary preliminary to his final emancipation. Rodbertus would speed the process of amelioration and would better his lot here and now.[922] It also throws an interesting light upon his extraordinary confidence in the all-powerful sovereignty of the State, and the ability of government to bend every individual will, even the most recalcitrant, to the general will. At the same time it reveals his utter indifference to individual liberty as an economic motive.

This indifference gradually merges into extreme hostility, while his confidence in the centralised executive becomes all the more thoroughly established. His later historical works contain an exposition of an organic theory of the State which is meant to justify such confidence. Just as in the animal world the higher animals are found to possess the most highly differentiated organs as well as the most closely co-ordinated, so in history as we pass from the lower social strata to the higher ones “the State advances both in magnitude and efficiency; and its action, while increasing in scope, grows in intensity as well. The State in its passage from one evolutionary stage to another presents us not merely with a greater degree of complexity, each function being to a greater and greater extent discharged by some special organ, but also with an increasing degree of harmony. The social organisms, despite their ever-increasing variation, are placed in growing dependence upon one another by being linked to some central organ. In other words, the particular grade that a social organism occupies in the organic hierarchy depends upon the degree to which division of labour and centralisation have been carried.”[923]

We are thus driven back upon the fundamental question set by Rodbertus at the outset of his inquiry: Can the various social functions, acting spontaneously, efficiently further the good of the social body, or should these functions be discharged by the mediation of a special organ, the State or Government? There is also the further question as to whether the reply which he gives is entirely satisfactory.

We are immediately struck by a preliminary contradiction: the economic boundaries of the community do not coincide with its political boundaries. The one is the result of division of labour and is coextensive with the limits set by division of labour, while the second is the product of the changing conditions of history. It is only logical that the economic functions of the State should be performed by other organs than those of the political Government, since its sphere of action is necessarily different. But it is to the State, as evolved in the course of a long historical process, that Rodbertus would entrust this directing power. Between Rodbertus’s description of the State’s economic activity and his final recourse to a national monarchical State is an element of contradiction which strikes us rather forcibly, especially when he comes to speak of “national” socialism.

In order to demonstrate how inadequately the present social organisation performs its duties, Rodbertus appeals to an ideal method of discharging them which he himself has created, and he has not the slightest difficulty in showing that hardly any of his ideal functions are being performed at the present time. Production is not based upon social need, nor is the wealth produced distributed in accordance with the labour spent. But we must never forget that Rodbertus’s conception of the social need was extremely hazy. His distribution formula, “to everyone according as he produces,” if applied logically is impossible, and satisfies neither the demands of humanity nor the needs of production. Had his definition of social function been less ambitious, his argument, perhaps, would have been more convincing.

Let us admit, however, that the existence of an economic society implies the successful accomplishment of certain functions which we need not trouble to define just now. The question then arises—a question that implies the severest criticism of the present organisation: Can the control and oversight which men ought to exercise over these functions be performed otherwise than through the instrumentality of the State? There was only one alternative for Rodbertus—extreme individualism or State control. But nature and history both escape the dilemma. The biological analogy has been carried too far, and most writers would be content to abandon it altogether. Like most of his contemporaries, Rodbertus imagined that economic individualism and personal liberty were indissolubly bound together, and that it was impossible to check individualism without endangering liberty. It is now realised, however, that this association of ideas, like many another, is temporary and not eternal, and the growth of voluntary associations intermediate between the State and the individual is every day showing it to be false.

We are now in a better position to appreciate the kind of appeal which this doctrine would make to State Socialists—people who are essentially conservative, but nevertheless genuinely desirous of seeing a larger element of justice introduced into our industrial régime. The distinction drawn between politics and economic socialism makes a first claim upon their respect. Then would follow the organic conception of society, which is a feature of all Rodbertus’s writings. It was his belief that production and distribution could only be regarded as social functions, and that the breakdown of individualism implied a need for greater centralisation or a greater degree of State control. On the other hand, the State Socialists refuse to associate themselves with the radical condemnation of private property and unearned income, both of which are features of Rodbertus’s teaching. The State Socialists set out to transform the Rodbertian compromise into a self-sufficing system, and instead of regarding their doctrine as a diluted form of socialism they are rather inclined to treat socialism as an exaggerated development of their theory.[924]

2. LASSALLE

Rodbertus’s efforts to establish a doctrine of State Socialism upon the firm foundation of a new social theory had already met with a certain measure of success, but it was reserved for Lassalle to infuse vitality into these new ideas.

Lassalle’s brief but brilliant political career, ever memorable for the natural vigour of his eloquence, at once popular and refined, and its indelible impression of a strikingly original nature aflame with a passion both for thought and action, together with the romantic, dramatic character of his checkered existence, lent wonderful force to his utterances. In 1848, at the early age of twenty-three, he was a Marxian revolutionist. The revolutionary period was followed by a time of enforced inactivity, when he devoted himself almost exclusively to philosophical, legal, and literary pursuits. In 1862 the silence was at last broken by his re-entry into the political arena. The whole political life of Germany was at that moment convulsed by the half-hearted opposition which the Prussian Liberal party was offering to Bismarck’s constitutional changes. Lassalle declared war both upon the Government and upon the bourgeois Opposition—upon the latter more than the former, perhaps. Turning to the working classes, he urged them to form a new party which would avoid all purely political questions and to concentrate upon their own economic emancipation. For two eventful years the whole of Germany resounded with his speeches and his declamations before various tribunals, while the country was flooded with his pamphlets advocating the complete establishment of the Allgemeiner deutscher Arbeiterverein (General Association of German Workers), which he had already founded at Leipzig in 1863. The workers of the Rhineland received with open arms the agitator who thus took up in their midst the tangled skein of a broken career, and welcomed him with songs and decked him with garlands. The Liberal press, on the other hand, thoroughly taken aback by his unexpected onslaughts, mercilessly attacked him, even accusing him of having secret dealings with the Government. Suddenly the clamour ceased: Lassalle died on August 31, 1864, as the result of a wound which he had received in a duel,[925] and only the Deutscher Arbeiterverein, the earliest embryo of the great German Social Democratic party, remained as a memento of those violent attacks upon individualist Liberalism.

As far as theory goes, Lassalle’s socialism is hardly distinguishable from Marx’s. Social evolution is summed up in a stricter limitation of the rights of private property,[926] which in the course of a century or two must result in its total disappearance.[927] But Lassalle was pre-eminently a man of action, bent upon practical results. At that particular moment the German working class was only just waking up to the possibility of political existence. The path that it should follow was still undecided. In the year 1863 a number of workmen had tried to persuade their comrades to meet together in a kind of general congress. They further appealed to Lassalle and to other well-known democrats for their advice concerning the labour question. This gave Lassalle the opportunity he required for forming a political party of his own, with himself as chief. The next question was to fix upon a programme. “Working men,” says Lassalle, “must have something definite,”[928] and, on the other hand, “it is almost impossible to get the public to understand the final object which we must keep in view.”[929] So, without burdening his propaganda with too remote an ideal, he concentrates all his efforts upon two demands, the one political, the other economic—universal suffrage on the one hand and the establishment of producers’ associations supported by the State on the other. In order to win over the masses, he invoked, not the doctrine of the exploitation of the workers by the proprietors—which would have alienated the middle classes from him[930]—but the “brazen law of wages,” which is the happy title by which he chose to designate the Ricardian law of wages.

Rodbertus realised the necessity for distinguishing between an esoteric and an exoteric Lassalle[931]—between the logical theorist of the study and the opportunist politician of the public platform. Only to his contemporaries was the latter Lassalle really known. But his letters, which have been published since his death, go to show that there is at least no need to attach any greater importance to his proposed reforms than he was prepared to give them himself. It is not necessary to emphasise the fact that his plan was really borrowed from Louis Blanc or to call attention to the letter written to Rodbertus in which he declares himself quite prepared to change his plan provided a better one can be found. This idea of association was one that was by no means unknown to the German Liberal party; nor was it the first time that it had been preached to the working classes. Lassalle’s rival, Schulze-Delitzsch, had begun an active campaign even as far back as 1849, and had succeeded in establishing a great number of co-operative credit societies, composed largely of artisans, and aiming at supplying them with cheap raw materials. But such associations were to receive no support from the Government.

What was new in Lassalle’s scheme was just this appeal for State intervention. It was his energetic protest against eternal laissez-faire that impressed public opinion, and he himself was anxious that it should be presented in this light. Speaking to the workers of Frankfort on May 19, 1863, he declared that “State intervention is the one question of principle involved in this campaign. That is the consideration that has weighed with me, and there lies the whole issue of the battle which I am about to wage.”[932]

He harks back to this fundamental idea in all his principal writings. It was the theme of his first address delivered to the workers in Berlin in 1862. It is there presented with all his customary force. The bourgeois conception of the State is contrasted with the true conception, which is identical with the workers’. The bourgeoisie seem to think that the State has nothing to do except to protect the property and defend the liberties of the individual—a conception of State action that would be quite sufficient were everybody equally strong and intelligent, equally cultured and equally rich.[933] But where such equality does not exist the State is reduced to the position of a “night watchman,” and the weak is left at the mercy of the strong. In reality the State exists for quite other purposes. The history of mankind is the story of one long struggle to establish liberty in the face of natural forces, to overcome oppression of every kind, and to triumph over the misery, ignorance, want, and weakness with which human nature has always had to reckon. In that struggle the individual, in his isolation, is hopeless and union becomes indispensable. This union is a creation of the State, and its object is to realise the destiny of mankind, namely, the attainment of the highest degree of culture of which humanity is capable. It is a means of educating and of furthering the development of humanity along the path of liberty.

The formula savours of metaphysics rather than of economics. There is a striking similarity between it and the formula employed by Hegel, the philosopher.[934] Lassalle was really a disciple of Hegel and Fichte.[935] Through the influence of Lassalle the theories of the German idealists came into conflict with the economists’, and his incomparable eloquence contributed not a little to the rising tide of indignation with which the Manchester ideas came to be regarded.

III: STATE SOCIALISM—PROPERLY SO CALLED

The years that elapsed between the death of Lassalle and the Congress of Eisenach (1872) proved to be the decisive period in the formation of German State Socialism.

Bismarck’s remarkable coups d’état in 1866 and 1870 had done much to discredit the political reputation of the leaders of the Liberal party, who had shown themselves less than a match for the Chancellor’s political insight. This reacted somewhat upon economic Liberalism, because it so happened that the leaders of both parties were the same.[936] On the other hand, the idea of a rejuvenated empire incarnate in the Iron Chancellor seemed to add fresh lustre to the whole conception of the State. The Jahrbücher für Nationalökonomie, first issued by the Historical school in 1863, had by this time become the recognised organ of the University Economists, and had done a great deal to accustom men’s minds to the relative character of the principles of political economy and to prepare their thoughts for an entirely new point of view.

Labour questions had also suddenly assumed an importance quite undreamt of before this. The German revolution of 1848 was presumably political in character: the great capitalistic industry had not reached that stage of development which characterised it both in England and in France; and it is a significant fact that the two great German socialists, Rodbertus and Marx, had to go abroad to either of those two countries to get their illustrations. But since 1848 German industry had made great strides. A new working-class community had come into being, and Lassalle had further emphasised this transformation by seeking to found a party exclusively upon this new social stratum. The association which was thus founded still survives. Another agitation, largely inspired by Marxian ideas, was begun about the same time by Liebknecht and Bebel. In 1867 both of them were elected to the Reichstag, and two years later they founded the Socialdemokratische Arbeiterpartei (Social Democratic party), which was destined to play such an important part in the history of the next thirty years.

In this way labour questions suddenly attracted attention, just as they had previously done in France during the July Monarchy; and just as in France a new current of opinion—unceremoniously set aside by the coup d’état, it is true—had urged upon the educated classes the importance of abandoning the doctrine of absolute laissez-faire and of claiming the support of Government in the struggle with poverty, so in Germany an increasing number of authors had persuaded themselves that a purely passive attitude in face of the serious nature of the social problem which confronted them was impossible, and that the establishment of some sort of compact between the warring forces of capital and labour should not prove too much of an undertaking for the rejuvenated vitality of a new empire.

The new tendencies revealed themselves in unmistakable fashion at Eisenach in 1872. A conference, which was largely composed of professors and economists, of administrators and jurists, decided upon the publication of a striking manifesto in which they declared war upon the Manchester school. The manifesto spoke of the State as “a great moral institution for the education of humanity,” and claimed that it should be “animated by a high moral ideal,” which would “enable an increasing number of people to participate in the highest benefits of civilisation.”[937] At the same time the members of the congress determined upon the establishment of the Verein für Sozialpolitik, an association charged with the task of procuring the necessary scientific material for this new political development. This was the beginning of the “Socialism of the Chair,” as it was derisively named by the Liberals on account of the great number of professors who took part in this conference. The same doctrine, with a somewhat more radical bias, became known as State Socialism. The imparting of such a bias was the task undertaken by Wagner,[938] in his Grundlegung, which appeared in 1876.[939]

Difficult though the task may prove, we must try to distinguish between the work of the earlier economists and the special contributions made by the State Socialists. Like all doctrines that purport to sum up the aspirations of a group or an epoch and to supply a working agreement between principles in themselves irreconcilable, it lacks the definiteness of a purely individualistic or theoretical system. Its ideas are borrowed from various sources, but it is not always scrupulous in recognising this.

It is first and foremost a reaction, not against the fundamental ideas of the English Classical school, as is generally believed, but against the exaggerations of their second-grade disciples, the admirers of Bastiat and Cobden—known to us as the “Optimists” and styled the “Manchestrians” in Germany. The manifesto, drawn up by Professor Schmoller at the Eisenach Congress, speaks of the “Manchester school,” but makes no mention of the Classical writers.[940] It is true that a great many German writers regard the expressions “Smithianismus” and “Manchesterthum” as synonymous, but these are perhaps polemical exaggerations upon which we ought not to lay too much stress. On the other hand, Liberalism had nowhere assumed such extravagant proportions as it had in Germany. Prince Smith, who is the best-known representative of Liberalism after Dunoyer, was convinced that the State had nothing to do beyond guaranteeing security, and denied that there was any element of solidarity between economic agents save such as results from the existence of a common market. “The economic community, as such, is a community built upon the existence of a market, and it has no facility to offer other than free access to a market.”[941]

The State Socialists, on the contrary, are of opinion that there exists a moral solidarity which is much more fundamental than any economic tie between the various individuals and classes of the same nation—such solidarity as results from the possession of a common language, similar manners, and a uniform political constitution. The State is the organ of this moral solidarity, and because of this title it has no right to remain indifferent to the material poverty of a part of the nation. It has something to do besides protecting people against internal or external violence. It has a real work of “civilisation and well-being”[942] which it ought to perform. In this way State Socialism becomes reconciled to the philosophic standpoint which Lassalle had chosen for it. Lassalle’s insistence upon the mission of Governments and the importance of their historic rôle has been incorporated into its system, and the attention that is paid to national considerations reminds one of the teaching of Friedrich List.

It is impossible not to ask whether the State is capable of carrying out the duties that have been entrusted to it. There is little use in emphasising duty where there is no capacity for discharging it. The State’s incapacity as an economic agent has long been a notorious fact. Wagner and his friends were particularly anxious to correct this false impression, and as far as their doctrine contains anything original it may most conveniently be described as an attempt to rehabilitate the State. Optimists of Bastiat’s genre looked upon the State as the very incarnation of incapacity. The State Socialists, on the other hand, regard government as an economic agent very similar to other agents which the community employs, only a little more sympathetic perhaps. Much of their argument consists of an attempt to create a presumption in favour of government as against the ordinarily accepted opinion which individualism had begotten. Such was the nature of the task which they undertook.

Their first action was to insist upon the weaknesses of individuals. Following in the wake of Sismondi and other socialists, they emphasised the social inconveniences of competition, which is, however, generally confused with individual liberty.[943] They also insisted upon the social inequality of masters and workers when it comes to a question of wage-bargaining—a fact that had already been noted by Adam Smith—as well as upon the universal opposition that exists between the weak and the strong. The inadequacy of merely individual effort to satisfy certain collective wants is another fact that was considerably emphasised.

As far back as the year 1856 Dupont-White, a Frenchman, had complained bitterly that all the paths of civilisation remained closed merely because of the existence of one obstacle—the infirmity and malignity of the individual.[944] He also attempted to show how the collective interests of modern society are becoming increasingly complex in character and of such magnitude as to be utterly beyond the compass of individual thought.[945] “There are,” says he in that excellent formula in which he summarises the instances in which State intervention may be necessary, “certain vital things which the individual can never do, either because he has not the necessary strength to perform them or because they would not pay him; or, again, because they require the co-operation of everybody, which can never be got merely by common consent. The State is the one person—the entrepreneur—who can undertake such tasks.”[946] But his words went unheeded.

Writing in a similar vein, Wagner invokes the testimony of history in support of his State doctrine, showing us how the State’s functions vary from one period to another, so that one never feels certain about prescribing limits to its action. Individual interest, private charity, and the State have always had to divide the field of activity between them. Never has the first of these, taken by itself, proved sufficient, and in all the great modern states its place is taken by State action. To conclude that this solution was useful and necessary and in accordance with the true law of historical development only involved one further step.[947] One almost unconsciously proceeds from the mere statement of a fact to the definite formulation of a law. “Anyone,” says Wagner, “who has appreciated the immanent tendencies of evolution (i.e. the essential features of economic, social, or political evolution) may very properly proceed from such a historical conception of social evolution to the formulation of postulates relative to what ought to be.”[948] In virtue of this conception there is a demand for the extension of the State’s functions, which may easily be justified on the ground of its capacity for furthering the well-being and civilisation of the community. The influence of Rodbertus’s thought, especially his theory concerning the development of governmental organs to meet the needs of a higher social development,[949] is quite unmistakable in this connection.

The similarity between his views and those of Dupont-White, though entirely fortuitous, perhaps, is sufficiently remarkable to justify our calling attention to it. White is equally emphatic in his demand that the State should exercise charity and act beneficently.[950] He shows how the modern State has extended its dominion, substituting local government for class dominion and parental despotism, taking women, children, and slaves successively under its care, and adding to its duties and responsibilities in proportion as civilisation grows and liberty broadens downward. Fresh life requires more organs, new forces demand new regulations. But the ruler and the organ of society is the State.[951] In a moment of enthusiasm he even goes so far as to declare that “the State is simply man minus his passions; man at such a stage of development that he can commune even with truth itself, fearing neither God nor his own conscience. However imperfect it may be, the State is still vastly superior to the individual.”[952] Such writing is not without a touch of mysticism.

Without going the extent of admitting, as M. Wagner would have us do, that the simple demonstration of the truth of historical evolution is enough to justify his policy, we must commend State Socialism for the service it has performed in combating the Liberal contempt for government. If we admit the right of a central power to regulate social relations, it is difficult to understand why certain economic relations only should be subjected to such supervision.

But the real difficulty, even when the principle is fully recognised, is to define the spheres that should respectively belong to the State and to the individual. How far, within what limits, and according to what rules should the State intervene? We must at any rate, as Wagner says, begin with a rough distribution of attributes. It is impossible to proceed by any other method unless we are to assume, as the collectivists seem to do, a radical change in human psychology resulting in the complete substitution of a solicitude for the public welfare for private interest.

Dupont-White thought the problem insoluble,[953] and Wagner is equally emphatic about the impossibility of formulating an absolute rule. The statesman must decide each case on its merits. He does, however, lay down a few general rules. As a first general principle it is clear that the State can never completely usurp the place of the individual.[954] It can only concern itself with the general conditions of his development. The personal activity of the individual must for ever remain the essential spring of economic progress. The principle is apparently the same as Stuart Mill’s, but there is quite a marked difference between them. Mill wished to curtail individual effort as little as possible, Wagner to extend Government action as much as he could. Mill insists throughout upon the negative rôle of Government; Wagner emphasises the positive side, and claims that it should help an ever-increasing proportion of the population to share in the benefits of civilisation. No inconvenience, Wagner thinks, would result from a little more communism in our social life. “National economy should be transferred from the control of the individual to the control of the community in general,” he writes, in a sentence that might have been borrowed directly from Rodbertus.[955] Both he and Mill are agreed that the limit of Government action must be placed just at that point where it threatens to cramp individual development.[956]

The practical application of these ideas would affect both the production and the distribution of wealth. But on this question State Socialism has done little more than seize hold of ideas that were current long before its day.

In the matter of distribution it takes exactly the same standpoint as Sismondi. There is no condemnation either of profits or interest as a matter of principle, such as is the case with the Socialists, nor is there any suggestion of doing away with private property as the fundamental institution of society; but there is the expression of a desire for a more exact correspondence between income and effort[957] and for such a limitation of profits as the economic conjuncture will allow of, and, on the other hand, for such an increase of wages as will permit of a more humane existence. It is impossible to disguise the fact that all this sounds very vague.[958]

The State would thus undertake to see that distribution conformed to the moral sentiment of each period. Taxation was to be employed as the instrument of such reforms. Dupont-White, in his Capital et Travail,[959] which was written as early as the year 1847, had hit upon the precise formula in which to describe these projects: “To levy a tax such as will strike the higher classes and to apply the yield to help and reward labour.” Wagner says just the same thing. “Logically State Socialism must undertake two tasks which are closely connected with one another. In the first place it must raise the lower strata of the working classes at the expense of the higher classes, and in the second place it must put a check upon the excessive accumulation of wealth among certain strata of society or by certain members of the propertied classes.”[960]

In the matter of production State Socialism has simply been content to reproduce the list given by Mill, Chevalier, and Cournot of the cases in which there is no economic principle against the direct control or management of an industrial enterprise by the State. Speaking generally, Wagner is of the opinion that the State should take upon itself the control of such industries as are of a particularly permanent or universal character, or such as require either uniform or specialised methods of control or are likely to become monopolies in the hands of private individuals. The same argument would apply to industries satisfying some general want, but in which it is almost impossible to determine the exact advantage which the consumer derives from them. The State administration of rivers, forests, roads, and canals, the nationalisation of railways and banks, and the municipalisation of water and gas, are justified on the same grounds.

Such are the essential features of State Socialism, which bases its appeal, not on any precise criticism of property or of unearned income, such as we are accustomed to get from the socialists, but entirely upon moral and national considerations. A juster distribution of wealth and a higher well-being for the working classes appear to be the only methods of maintaining that national unity of which the State is the representative. But it neither specifies the rules of justice nor indicates the limits of the ameliorative process. The fostering of collective effort affords another means of developing moral solidarity and of limiting purely selfish action; but the maintenance of private property and individual initiative seemed indispensable to the growth of production—a consideration which renders it inimical to collectivism. Its moral character explains the contrast between the precise nature of some of its positive demands and the somewhat vague character of its general principles, which may be applied to a greater or lesser extent according to individual preferences. It is impossible to deny the essentially subjective character of its criteria, and this affords some indication of the vigorous criticism offered by the economists, who are above all anxious for scientific exactitude, and the measure of enthusiasm with which it has been welcomed by all practical reformers. It forms a kind of cross-roads where social Christianity, enlightened conservatism, progressive democracy, and opportunistic socialism all come together.

But its success was due not so much to the value of its principles as to the peculiar nature of the political and economic evolution toward the end of the century. Its most conspicuous representative in Germany was Prince Bismarck, who was totally indifferent to any theory of State Socialism, and who preferred to justify his policy by an appeal to the principles of Christianity or the Prussian Landrecht.[961] One of his great ambitions was to consolidate and cement the national unity which he had succeeded in creating. A system of national insurance financed and controlled by the State appealed to him as the best way of weaning the working classes from revolutionary socialism by giving them some positive proof of the sympathy of the Government in the shape of pecuniary interest in the welfare of the empire. In a somewhat similar fashion the French peasant became attached to the Revolution through the sale of national property. “I consider,” says Bismarck, speaking of invalidity insurance, “that it is a tremendous gain for us to have 700,000 annuitants among the very people who think they have nothing to lose, but who sometimes wrongly imagine that they might gain something by a change. These individuals would lose anything from 115 to 200 marks, which just keeps them above water. It is not much, perhaps, but it answers the purpose admirably.”[962] Such was the origin of those important laws dealing with sickness, accidents, invalidity, and old age which received the imperial seal between 1881 and 1889. But just because the Chancellor did not consider that there was the same pecuniary advantage to be derived from labour laws in the narrow sense of the term—that is, in laws regulating the duration of labour, Sunday rest, the inspection of factories, etc.—he was less favourably inclined towards their extension. The personal predilection of the Emperor William II, as expressed in the famous decrees of February 4, 1890, was needed to give the Empire a new impetus in this direction.

Accordingly it was the intelligent conservatism of a Government almost absolute in its power, but possessed of no definitely social creed, that set about realising a part of the programme of the State Socialists. In England and France and the other countries where political liberty is an established fact similar measures have been carried out at the express wish of an awakening democracy. The working classes are beginning to find out how to utilise for their own profit the larger share of government which they have recently secured. Progressive taxation, insurance, protective measures for workmen, more frequent intervention of Government with a view to determining the conditions of labour, are just the expressions of a tendency that operates independently of any preconceived plan.

The regulation of the relationship between masters and workmen gave to State Socialism a legislative bias. Governments and municipalities have long since extended their intervention to the domain of production, the new character of social life rather than any social theory being again the determining motive. Public works, such as canals, roads, and railways, have multiplied enormously in the course of the nineteenth century, thanks to the existence of new productive forces. The demand for public services has increased because of the increasing concentration of population. Communal life keeps encroaching upon what was formerly an isolated, dispersive existence, and community of interest is extending its sway in village and borough as well as in the great city and the nation at large. Industry also is being gradually linked together, and the area of free competition is perforce becoming narrower. In the labour market, as well as in the produce and the money markets, concentration has taken the place of dispersion. Monopoly is everywhere. Collective enterprise, instead of being the exception, tends to be the rule, and public opinion is gradually being reconciled to the idea of seeing the State—the “collective being” par excellence—becoming in its turn industrial.

Under conditions such as these it was impossible that the doctrine of State Socialism should not influence public opinion.

State Socialism has the peculiar merit of being able to translate the confused aspirations of a new epoch in the history of politics and economics into practical maxims without arousing the suspicions of the public to the extent that socialism generally does. Legislators and public men generally have been supplied with the necessary arguments with which to defend the inauguration of that new policy upon which they had secretly set their hearts. A common ground of action is found for parties that are generally opposed to one another and for temperaments that are usually incompatible. That is the outstanding merit of a doctrine that seems eminently suitable for the attainment of tangible results.

And so by a curious inversion of functions by no means exceptional in the history of thought, State Socialism at the end of the century finds itself playing the part of its great adversary, the Liberal Optimism of the early century. One of the outstanding merits of that earlier Liberalism was the preparation it afforded for a policy of enfranchisement or liberty, which was absolutely necessary for the development of the industrial régime. And so it became the interpreter of the great economic currents of the time. In pursuance of this exclusive task all traces of its scientific origin disappeared, the elaboration of economic theory was neglected, and the habit of close reasoning so essential to systematic thinking was abandoned. In a somewhat similar manner State Socialism has become the creed of all those who desire to put an end to the abuses of economic liberty in its extremer aspects, or such as are generally concerned about the miserable condition of an increasing number of the working classes. Absorbed in immediate matters of this kind, the promoters of State Socialism have managed to influence practical politics without shedding much light upon economic theory. And now they in their turn find their system threatened by the fate which awaits all political doctrines. Even at the present moment one is tempted to ask whether this growing multiplicity of State function is not in danger of arousing on the part of consumers, entrepreneurs, and workmen a general feeling of contempt for the economic capacity of the State.

In conclusion, we must note another characteristic fact. Whereas during the greater part of the nineteenth century the attacks of Socialism were directed against Liberalism and economic orthodoxy, Neo-Marxian syndicalism is concentrating its attention almost exclusively upon State Socialism. Sorel emphasises the similarity that exists between Marxism and Manchesterism, and on more then one point he finds himself in agreement with a “Liberal” like Pareto. On the other hand, no words are sufficiently vigorous to express his condemnation of the partisans of social peace and interventionism, which appear to him to corrupt the working classes. Syndicalist working men have on more than one occasion shown their contempt for the State by refusing to avail themselves of measures passed on their behalf—old-age pensions, for example. This attitude is perhaps due to the influence of the anarchists upon the leaders of French syndicalism.

The fusion of these two currents of ideas—the Neo-Marxian and the anarchist—and their effect in turning the attention of the French working classes away from State Socialism, is an interesting fact whose political results will by no means prove negligible.[963]

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