Principles of Economics

APPENDIX B
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§ 1. We have seen how economic freedom has its roots in the past, but is in the main a product of quite recent times; we have next to trace the parallel growth of economic science. The social conditions of the present day have been developed from early Aryan and Semitic institutions by the aid of Greek thought and Roman law; but modern economic speculations have been very little under the direct influence of the theories of the ancients.

It is true that modern economics had its origin in common with other sciences at the time when the study of classic writers was reviving. But an industrial system which was based on slavery, and a philosophy which regarded manufacture and commerce with contempt, had little that was congenial to the hardy burghers who were as proud of their handicrafts and their trade as they were of their share in governing the State. These strong but uncultured men might have gained much from the philosophic temper and the broad interests of the great thinkers of past times. But, as it was, they set themselves to work out their own problems for themselves; and modern economics had at its origin a certain rudeness and limitation of scope, and a bias towards regarding wealth as an end rather than a means of man’s life. Its immediate concern was generally with the public revenue, and the effects and yield of taxes; and here the statesmen of the free cities and the great empires alike found their economic problems more urgent and more difficult, as trade became broader and war more expensive.

In all ages, but especially in the early middle ages, statesmen and merchants had busied themselves with endeavours to enrich the State by regulating trade. One chief object of their concern had been the supply of the precious metals, which they thought the best indication if not the chief cause of material prosperity, whether of the individual or the nation. But the voyages of Vasco da Gama and Columbus raised commercial questions from a secondary to a dominating position among the nations of Western Europe. Theories with regard to the importance of the precious metals, and the best means of obtaining supplies of them, became in some measure the arbiters of public policy, dictating peace and war, and determining alliances that issued in the rise and fall of nations: and at times they largely influenced the migration of peoples over the face of the globe.

Regulations as to trade in the precious metals were but one group of a vast body of ordinances, which undertook, with varying degrees of minuteness and severity, to arrange for each individual what he should produce and how he should produce it, what he should earn and how he should spend his earnings. The natural adhesiveness of the Teutons had given custom an exceptional strength in the early middle ages. And this strength told on the side of trade gilds, of local authorities and of national Governments when they set themselves to cope with the restless tendency to change that sprang directly or indirectly from the trade with the New World. In France this Teutonic bias was directed by the Roman genius for system, and paternal government reached its zenith; the trade regulations of Colbert have become a proverb. It was just at this time that economic theory first took shape, the so-called Mercantile system became prominent; and regulation was pursued with a masterful rigour that had not been known before.

As years went on there set in a tendency towards economic freedom, and those who were opposed to the new ideas claimed on their side the authority of the Mercantilists of a past generation. But the spirit of regulation and restriction which is found in their systems belonged to the age; many of the changes which they set themselves to bring about were in the direction of the freedom of enterprise. In particular they argued, in opposition to those who wished to prohibit absolutely the exportation of the precious metals, that it should be permitted in all cases in which the trade would in the long run bring more gold and silver into the country than it took out. By thus raising the question whether the State would not benefit by allowing the trader to manage his business as he liked in one particular case, they had started a new tendency of thought; and this moved on by imperceptible steps in the direction of economic freedom, being assisted on its way by the circumstances of the time, no less than by the tone and temper of men’s minds in Western Europe. The broadening movement did go on till, in the latter half of the eighteenth century, the time was ripe for the doctrine that the wellbeing of the community almost always suffers when the State attempts to oppose its own artificial regulations to the “natural” liberty of every man to manage his own affairs in his own way
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§ 2. The first systematic attempt to form an economic science on a broad basis was made in France about the middle of the eighteenth century by a group of statesmen and philosophers under the leadership of Quesnay, the noble-minded physician to Louis XV
*35. The cornerstone of their policy was obedience to Nature
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They were the first to proclaim the doctrine of free trade as a broad principle of action, going in this respect beyond even such advanced English writers as Sir Dudley North; and there was much in the tone and temper of their treatment of political and social questions which was prophetic of a later age. They fell however into a confusion of thought which was common even among scientific men of their time, but which has been banished after a long struggle from the physical sciences. They confused the ethical principle of conformity to Nature, which is expressed in the imperative mood, and prescribes certain laws of action, with those causal laws which science discovers by interrogating Nature, and which are expressed in the indicative mood. For this and other reasons their work has but little direct value.

But its indirect influence on the present position of economics has been very great. For, firstly, the clearness and logical consistency of their arguments have caused them to exercise a great influence on later thought. And, secondly, the chief motive of their study was not, as it had been with most of their predecessors, to increase the riches of merchants and fill the exchequers of kings; it was to diminish the suffering and degradation which was caused by extreme poverty. They thus gave to economics its modern aim of seeking after such knowledge as may help to raise the quality of human life
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§ 3. The next great step in advance, the greatest step that economics has ever taken, was the work, not of a school but of an individual. Adam Smith was not indeed the only great English economist of his time. Shortly before he wrote, important additions to economic theory had been made by Hume and Steuart, and excellent studies of economic facts had been published by Anderson and Young. But Adam Smith’s breadth was sufficient to include all that was best in all his contemporaries, French and English; and, though he undoubtedly borrowed much from others, yet the more one compares him with those who went before and those who came after him, the finer does his genius appear, the broader his knowledge and the more well-balanced his judgment.

He resided a long time in France in personal converse with the Physiocrats; he made a careful study of the English and French philosophy of his time, and he got to know the world practically by wide travel and by intimate association with Scotch men of business. To these advantages he added unsurpassed powers of observation, judgment and reasoning. The result is that wherever he differs from his predecessors, he is more nearly right than they; while there is scarcely any economic truth now known of which he did not get some glimpse. And since he was the first to write a treatise on wealth in all its chief social respects, he might on this ground alone have a claim to be regarded as the founder of modern economics
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But the area which he opened up was too vast to be thoroughly surveyed by one man; and many truths of which at times he caught sight escaped from his view at other times. It is therefore possible to quote his authority in support of many errors; though, on examination, he is always found to be working his way towards the truth
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He developed the Physiocratic doctrine of Free Trade with so much practical wisdom, and with so much knowledge of the actual conditions of business, as to make it a great force in real life; and he is most widely known both here and abroad for his argument that Government generally does harm by interfering in trade. While giving many instances of the ways in which self-interest may lead the individual trader to act injuriously to the community, he contended that even when Government acted with the best intentions, it nearly always served the public worse than the enterprise of the individual trader, however selfish he might happen to be. So great an impression did he make on the world by his defence of this doctrine that most German writers have it chiefly in view when they speak of
Smithianismus*40.

But after all, this was not his chief work. His chief work was to combine and develop the speculations of his French and English contemporaries and predecessors as to value. His highest claim to have made an epoch in thought is that he was the first to make a careful and scientific inquiry into the manner in which value measures human motive, on the one side measuring the desire of purchasers to obtain wealth, and on the other the efforts and sacrifices (or “Real Cost of Production”) undergone by its producers
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Possibly the full drift of what he was doing was not seen by him, certainly it was not perceived by many of his followers. But for all that, the best economic work which came after the
Wealth of Nations is distinguished from that which went before, by a clearer insight into the balancing and weighing, by means of money, of the desire for the possession of a thing on the one hand, and on the other of all the various efforts and self-denials which directly and indirectly contribute towards making it. Important as had been the steps that others had taken in this direction, the advance made by him was so great that he really opened out this new point of view, and by so doing made an epoch. In this he and the economists, who went before and came after him, were not inventing a new academic notion; they were merely giving definiteness and precision to notions that are familiar in common life. In fact the ordinary man, without analytical habits of mind, is apt to regard money as measuring motive and happiness more closely and exactly than it actually does; and this is partly because he does not think out the manner in which the measurement is effected. Economic language seems technical and less real than that of common life. But in truth it is more real, because it is more careful and takes more account of differences and difficulties
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§ 4. None of Adam Smith’s contemporaries and immediate successors had a mind as broad and well balanced as his. But they did excellent work, each giving himself up to some class of problems to which he was attracted by the natural bent of his genius, or the special events of the time in which he wrote. During the remainder of the eighteenth century the chief economic writings were historical and descriptive, and bore upon the condition of the working classes, especially in the agricultural districts. Arthur Young continued the inimitable records of his tour, Eden wrote a history of the poor which has served both as a basis and as a model for all succeeding historians of industry; while Malthus showed by a careful investigation of history what were the forces which had as a matter of fact controlled the growth of population in different countries and at different times.

But on the whole the most influential of the immediate successors of Adam Smith was Bentham. He wrote little on economics himself, but he went far towards setting the tone of the rising school of English economists at the beginning of the nineteenth century. He was an uncompromising logician, and averse to all restrictions and regulations for which no clear reason could be given; and his pitiless demands that they should justify their existence received support from the circumstances of the age. England had won her unique position in the world by her quickness in adapting herself to every new economic movement; while by their adherence to old-fashioned ways the nations of Central Europe had been prevented from turning to account their great natural resources. The business men of England therefore were inclined to think that the influence of custom and sentiment in business affairs was harmful, that in England at least it had diminished, was diminishing, and would soon vanish away: and the disciples of Bentham were not slow to conclude that they need not concern themselves much about custom. It was enough for them to discuss the tendencies of man’s action on the supposition that everyone was always on the alert to find out what course would best promote his own interest, and was free and quick to follow it
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There is then some justice in the charges frequently brought against the English economists of the beginning of last century, that they neglected to inquire with sufficient care whether a greater range might not be given to collective as opposed to individual action in social and economic affairs, and that they exaggerated the strength of competition and its rapidity of action: and there is some ground, though a very slight one, for the charge that their work is marred by a certain hardness of outline and even harshness of temper. These faults were partly due to Bentham’s direct influence, partly to the spirit of the age of which he was an exponent. But they were partly also due to the fact that economic study had again got a good deal into the hands of men whose strength lay in vigorous action rather than in philosophical thought.

§ 5. Statesmen and merchants again threw themselves into problems of money and foreign trade with even more energy than they used to do when these questions were first started in the earlier period of the great economic change at the end of the Middle Ages. It might at first sight seem probable that their contact with real life, their wide experience, and their vast knowledge of facts would have led them to take a wide survey of human nature and to found their reasonings on a broad basis. But the training of practical life often leads to a too rapid generalization from personal experience.

So long as they were well within their own province their work was excellent. The theory of currency is just that part of economic science in which but little harm is done by neglecting to take much account of any human motives except the desire for wealth; and the brilliant school of deductive reasoning, which Ricardo led, was here on safe ground
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The economists next addressed themselves to the theory of foreign trade and cleared away many of the flaws which Adam Smith had left in it. There is no other part of economics, except the theory of money, which so nearly falls within the range of pure deductive reasoning. It is true that a full discussion of a free trade policy must take account of many considerations that are not strictly economic; but most of these, though important for agricultural countries, and especially for new countries, had little bearing in the case of England.

During all this time the study of economic facts was not neglected in England. The statistical studies of Petty, Arthur Young, Eden, and others were ably continued by Tooke, McCulloch and Porter. And though it may be true that an undue prominence is given in their writings to those facts which were of direct interest to merchants and other capitalists, the same cannot be said of the admirable series of Parliamentary inquiries into the condition of the working classes, which were brought about by the influence of the economists. In fact, the public and private collections of statistics and the economic histories that were produced in England at the end of the eighteenth century and the beginning of the nineteenth, may fairly be regarded as the origin of systematic historical and statistical studies in economics.

Nevertheless there was a certain narrowness in their work: it was truly historical; but for the greater part it was not “comparative.” Hume, Adam Smith, Arthur Young and others had been led by their own instinctive genius and the example of Montesquieu occasionally to compare social facts of different ages and different countries, and to draw lessons from the comparison. But no one had grasped the notion of the comparative study of history on a systematic plan. In consequence the writers of that time, able and earnest as they were in their search for the actual facts of life, worked rather at haphazard. They overlooked whole groups of facts which we now see to be of vital importance, and they often failed to make the best use of those which they collected. And this narrowness was intensified when they passed from the collection of facts to general reasonings about them.

§ 6. For the sake of simplicity of argument, Ricardo and his followers often spoke as though they regarded man as a constant quantity, and they never gave themselves enough trouble to study his variations. The people whom they knew most intimately were city men; and they sometimes expressed themselves so carelessly as almost to imply that other Englishmen were very much like those whom they knew in the city.

They were aware that the inhabitants of other countries had peculiarities of their own that deserved study; but they seemed to regard such differences as superficial and sure to be removed, as soon as other nations had got to know that better way which Englishmen were ready to teach them. The same bent of mind that led our lawyers to impose English civil law on the Hindoos, led our economists to work out their theories on the tacit supposition that the world was made up of city men. And though this did little harm so long as they were treating of money and foreign trade, it led them astray as to the relations between the different industrial classes. It caused them to speak of labour as a commodity without staying to throw themselves into the point of view of the workman; and without dwelling upon the allowances to be made for his human passions, his instincts and habits, his sympathies and antipathies, his class jealousies and class adhesiveness, his want of knowledge and of the opportunities for free and vigorous action. They therefore attributed to the forces of supply and demand a much more mechanical and regular action than is to be found in real life: and they laid down laws with regard to profits and wages that did not really hold even for England in their own time
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But their most vital fault was that they did not see how liable to change are the habits and institutions of industry. In particular they did not see that the poverty of the poor is the chief cause of that weakness and inefficiency which are the causes of their poverty: they had not the faith that modern economists have in the possibility of a vast improvement in the condition of the working classes.

The perfectibility of man had indeed been asserted by the socialists. But their views were based on little historic and scientific study; and were expressed with an extravagance that moved the contempt of the business-like economists of the age. The socialists did not study the doctrines which they attacked; and there was no difficulty in showing that they had not understood the nature and efficiency of the existing economic organization of society. The economists therefore did not trouble themselves to examine carefully any of their doctrines, and least of all their speculations as to human nature
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But the socialists were men who had felt intensely, and who knew something about the hidden springs of human action of which the economists took no account. Buried among their wild rhapsodies there were shrewd observations and pregnant suggestions from which philosophers and economists had much to learn. And gradually their influence began to tell. Comte’s debts to them were very great; and the crisis of John Stuart Mill’s life, as he tells us in his autobiography, came to him from reading them.

§ 7. When comparing the modern view of the vital problem of the Distribution of wealth with that which prevailed at the beginning of last century we have found that, over and above all changes in detail and all improvements in scientific accuracy of reasoning, there is a fundamental change in treatment; for, while the earlier economists argued as though man’s character and efficiency were to be regarded as a fixed quantity, modern economists keep constantly in mind the fact that it is a product of the circumstances under which he has lived. This change in the point of view of economics is partly due to the fact that the changes in human nature during the last fifty years have been so rapid as to force themselves on the attention; partly to the direct influence of individual writers, socialists and others; and partly to the indirect influence of a similar change in some branches of natural science.

At the beginning of last century the mathematico-physical group of sciences were in the ascendant; and these sciences, widely as they differ from one another, have this point in common, that their subject-matter is constant and unchanged in all countries and in all ages. The progress of science was familiar to men’s minds but the development of the subject-matter of science was strange to them. As the century wore on, the biological group of sciences were slowly making way, and people were getting clearer ideas as to the nature of organic growth. They were learning that if the subject-matter of a science passes through different stages of development, the laws which apply to one stage will seldom apply without modification to others; the laws of the science must have a development corresponding to that of the things of which they treat. The influence of this new notion gradually spread to the sciences which relate to man; and showed itself in the works of Goethe, Hegel, Comte and others.

At last the speculations of biology made a great stride forwards: its discoveries fascinated the attention of the world as those of physics had done in earlier years; and there was a marked change in the tone of the moral and historical sciences. Economics has shared in the general movement; and is getting to pay every year a greater attention to the pliability of human nature, and to the way in which the character of man affects and is affected by the prevalent methods of the production, distribution and consumption of wealth. The first important indication of the new movement was seen in John Stuart Mill’s admirable
Principles of Political Economy*47.

Mill’s followers have continued his movement away from the position taken up by the immediate followers of Ricardo; and the human as distinguished from the mechanical element is taking a more and more prominent place in economics. Not to mention writers yet living, the new temper is shown in Cliffe Leslie’s historical inquiries, and in the many-sided work of Bagehot, Cairnes, Toynbee and others; but above all in that of Jevons, which has secured a permanent and notable place in economic history by its rare combination of many various qualities of the highest order.

A higher notion of social duty is spreading everywhere. In Parliament, in the press and in the pulpit, the spirit of humanity speaks more distinctly and more earnestly. Mill and the economists who have followed him have helped onwards this general movement, and they in their turn have been helped onwards by it. Partly for this reason, partly in consequence of the modern growth of historical science, their study of facts has been broader and more philosophic. It is true that the historical and statistical work of some of the earlier economists has seldom if ever been surpassed. But much information, which was beyond their reach, is now accessible to everyone; and economists who have neither McCulloch’s familiarity with practical business, nor his vast historical learning, are enabled to get a view of the relations of economic doctrine to the true facts of life which is both broader and clearer than his. In this they have been helped by the general improvement which has taken place in the methods of all sciences, including that of history.

Thus in every way economic reasoning is now more exact than it was: the premisses assumed in any inquiry are stated with more rigid precision than formerly. But this greater exactness of thought is partly destructive in its action; it is showing that many of the older applications of general reasoning were invalid, because no care had been taken to think out all the assumptions that were implied and to see whether they could fairly be made in the special cases under discussion. As a result, many dogmas have been destroyed which appeared to be simple only because they were loosely expressed; but which, for that very reason, served as an armoury with which partisan disputants (chiefly of the capitalist class) have equipped themselves for the fray. This destructive work might appear at first sight to have diminished the value of processes of general reasoning in economics: but really it has had the opposite result. It has cleared the ground for newer and stronger machinery, which is being steadily and patiently built up. It has enabled us to take broader views of life, to proceed more surely though more slowly, to be more scientific and much less dogmatic than those good and great men who bore the first brunt of the battle with the difficulties of economic problems; and to whose pioneering work we owe our own more easy course.

The change may, perhaps, be regarded as a passing onward from that early stage in the development of scientific method, in which the operations of Nature are represented as conventionally simplified for the purpose of enabling them to be described in short and easy sentences, to that higher stage in which they are studied more carefully, and represented more nearly as they are, even at the expense of some loss of simplicity and definiteness, and even apparent lucidity. And in consequence general reasoning in economics has made more rapid progress, and established a firmer position in this generation in which it is subject to hostile criticism at every step, than when it was at the height of its popularity and its authority was seldom challenged.

So far we have looked at recent progress from the point of view of England only: but progress in England has been only one side of a broader movement which has extended over the whole western world.

§ 8. English economists have had many followers and many critics in foreign countries. The French school has had a continuous development from its own great thinkers in the eighteenth century, and has avoided many errors and confusions, particularly with regard to wages, which have been common among the second rank of English economists. From the time of Say downwards it has done a great deal of useful work. In Cournot it has had a constructive thinker of the highest genius; while Fourier, St Simon, Proudhon and Louis Blanc have made many of the most valuable, as well as many of the wildest suggestions of Socialism.

The greatest relative advance during recent years is perhaps that which has been made by America. A generation ago, the “American school” of economists was supposed to consist of the group of Protectionists who followed Carey’s lead. But new schools of vigorous thinkers are now growing up; and there are signs that America is on the way to take the same leading position in economic thought, that she has already taken in economic practice.

Economic science is showing signs of renewed vigour in two of its old homes, Holland and Italy. And more especially is the vigorous analytical work of the Austrian economists attracting much attention in all countries.

But on the whole the most important economic work that has been done on the Continent in recent times is that of Germany. While recognizing the leadership of Adam Smith, the German economists have been irritated more than any others by what they have regarded as the insular narrowness and self-confidence of the Ricardian school. In particular they resented the way in which the English advocates of free trade tacitly assumed that a proposition which had been established with regard to a manufacturing country, such as England was, could be carried over without modification to agricultural countries. The brilliant genius and national enthusiasm of List overthrew this presumption; and showed that the Ricardians had taken but little account of the indirect effects of free trade. No great harm might be done in neglecting them so far as England was concerned; because there they were in the main beneficial and thus added to the strength of its direct effects. But he showed that in Germany, and still more in America, many of its indirect effects were evil; and he contended that these evils outweighed its direct benefits. Many of his arguments were invalid, but some of them were not; and as the English economists scornfully refused them a patient discussion, able and public-spirited men, impressed by the force of those which were sound, acquiesced in the use for the purposes of popular agitation of other arguments which were unscientific, but which appealed with greater force to the working classes.

American manufacturers adopted List as their advocate: and the beginning of his fame, as well as of the systematic advocacy of protectionist doctrines in America, was in the wide circulation by them of a popular treatise which he wrote for them
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The Germans are fond of saying that the Physiocrats and the school of Adam Smith underrated the importance of national life; that they tended to sacrifice it on the one hand to a selfish individualism and on the other to a limp philanthropic cosmopolitanism. They urge that List did great service in stimulating a feeling of patriotism, which is more generous than that of individualism, and more sturdy and definite than that of cosmopolitanism. It may be doubted whether the cosmopolitan sympathies of the Physiocrats and of the English economists have been as strong as the Germans think. But there is no question that the recent political history of Germany has influenced the tone of her economists in the direction of nationalism. Surrounded by powerful and aggressive armies Germany can exist only by the aid of an ardent national feeling; and German writers have insisted eagerly, perhaps too eagerly, that altruistic feelings have a more limited scope in the economic relations between countries than in those between individuals.

But though national in their sympathies, the Germans are nobly international in their studies. They have taken the lead in the “comparative” study of economic, as well as of general history. They have brought side by side the social and industrial phenomena of different countries and of different ages; have so arranged them that they throw light upon and interpret one another, and have studied them all in connection with the suggestive history of jurisprudence
*49. The work of a few members of this school is tainted by exaggeration, and even by a narrow contempt for the reasonings of the Ricardian school, the drift and purpose of which they have themselves failed to understand: and this has led to much bitter and dreary controversy. But with scarcely an exception, the leaders of the school have been free from this narrowness. It would be difficult to overrate the value of the work which they and their fellow-workers in other countries have done in tracing and explaining the history of economic habits and institutions. It is one of the great achievements of our age; and an important addition to our real wealth. It has done more than almost anything else to broaden our ideas, to increase our knowledge of ourselves, and to help us to understand the evolution of man’s moral and social life, and of the Divine Principle of which it is an embodiment.

They have given their chief attention to the historical treatment of the science, and to its application to the conditions of German social and political life, especially to the economic duties of the German bureaucracy. But led by the brilliant genius of Hermann they have made careful and profound analyses which add much to our knowledge, and they have greatly extended the boundaries of economic theory
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German thought has also given an impetus to the study of socialism and the functions of the State. It is from German writers, some of whom have been of Jewish origin, that the world has received the greater part of the most thoroughgoing of recent propositions for utilizing the property of the world for the benefit of the community with but little reference to the existing incidents of ownership. It is true that on closer investigation their work turns out to be less original as well as less profound than at first sight appears: but it derives great power from its dialectic ingenuity, its brilliant style, and in some cases from its wide-reaching though distorted historical learning.

Besides the revolutionary socialists, there is a large body of thinkers in Germany who are setting themselves to insist on the scantiness of the authority which the institution of private property in its present form can derive from history; and to urge on broad scientific and philosophic grounds a reconsideration of the rights of society as against the individual. The political and military institutions of the German people have recently increased their natural tendency to rely more on Government and less on individual enterprise than Englishmen do. And in all questions bearing on social reforms the English and German nations have much to learn from one another.