The Revolt Against Classical Economics -- Towards Marxism
The Socialists
By the middle of the nineteenth century the collective contributions of the “classical” economists had become an orthodox and accepted body of doctrine.
But it was not without its critics.
England and the continent – Great Britain had a long tradition of individualism since John Locke (1632-1704) – and this was certainly seen in Classical economics.
As British economics passed across Europe, it was influenced by different cultural and philosophical views.
The emphasis was placed on the group rather than the individual.
Basically, between 1776 and 1848 many writers began criticizing the increase in industrialization that was taking place. Economic development struck many as uneven.
The “working class” generally received low wages, worked long hours, and worked under adverse factory conditions.
Thus there were attempts to “socialize” economics by “champions of the working class.”
Socialism defined:
“A socialist can be defined as anyone who asserts that capitalism has very serious problems, and who also believes that a substantial degree of common ownership is necessary if those problems are to be solved.” Samuels, Biddle and Davis, A Companion to the History of Economic Thought
As we see in Mill’s writings – socialism being defined as the state owning the means of production (not the output).
The ideas of the people involved covers a wide range. From revolutionary anarcho-syndicalists to moderate “progressives.”
Socialism before Marx (1800-50)
Limits of nature not the problem:
Pretty much all the writers preached a socialism of affluence, denying the Malthusian claim that nature placed severe limits on material progress. For them, capitalism stood condemned for perpetuating poverty in the midst of potential plenty. The rise of modern industry, they asserted, demonstrated that human ingenuity was boundless; social, political, and (above all) economic institutions were to blame for the continuing misery of the mass of the population, not divine displeasure or the limits of nature.
This attack on Malthus and his followers, including Ricardo and other classical economists (sometimes called Ricardian socialists) thought the “existing order” under capitalism could be greatly improved.
What was wrong with the existing order?
1) An indefensible degree of inequality.
a. The labor theory of value of often used here – but interpreted (as it had been by John Locke) as a theory of natural right. Since each productive individual was entitled to the full fruits of his own labor, the working man was clearly receiving much less than his due.
b. Why? Most said it was due to the inequality in economic relations – particularly the prevalence of unequal exchange. So here we see a theory of exploitation, derived from a theory of surplus labor.
This is still a popular argument today for those who support the minimum wage, for example.
2) Capitalism was also criticized on efficiency grounds.
a. The periodic industrial crises threw millions of working people into utter destitution and forced the economy to operate well below its potential capacity. Socialists often linked this with inequality of income, which they believed to be responsible for a chronic tendency to under-consumption.
So lack of demand, not productivity, was the problem.
Most famous here is the French socialist Simonde de Sismonde - great rival of Jean-Baptiste Say and the French Liberal School.
He viewed capitalism as being detrimental to the interests of the poor and particularly prone to crisis brought about by an insufficient general demand for goods. His under-consumption thesis (as we know - was shared by Malthus) and sparked the General Glut Controversy of the 1820s where their theories were pitted against those of Say, Ricardo and the Classical economists in general.
So the Say/Keynes debate is not new!!
b. Another reason for the waste under capitalism was that it failed to develop the skills and make use of the intelligence of the workforce. Human potential was being squandered through constant overwork, malnutrition, and cultural and educational deprivation. (Robert Owen)
c. Yet another reason (French socialist Saint-Simon) said that the excessive influence of the aristocracy and the military lead to the problems of inefficiency. All of this came at the expense of the productive classes (which included workers but also capitalist employers, intellectuals, scientists, and artists). So therefore, economic efficiency required the concentration of decision-making in the hands of enlightened (and well-paid) elite. We needed government planners to decide where resources should go.
Saint Simon’s most often quoted slogan is,
“To each according to his capacity, to each capacity in proportion to its work.”
Note the combining of the state (or the system of government) with the concept of capitalism.
d. Or – work would be performed for its own sake and production organized by voluntary associations of free producers. (Charles Fourier) Skill, responsibility, and managerial expertise should all be rewarded.
Here we have the workers cooperating freely to operate businesses.
3) Unrestrained economic individualism was innately self-destructive (see esp. Saint-Simon, de Sismondi and Owen). The “natural harmony of interests” was not correct. This is what Bastiat was responding to.
For example, Saint-Simon: Had a distrust of self-interest and economics. "he Hand of Greed" where he says that in the simplest forms of all humanity, humans try to survive. With this factor, he sees that all people have the initiative to try to gain a place in the world, no matter how insignificant. To form his form of utopian socialism, the society must eradicate this idea with time and teaching of future generation.
So we begin to see how self-interest is not necessarily a given -- it can be eradicated with education. Although we are still born with it (the hand of greed), we can overcome it.
So what should be done? There were quite a lot of differences in opinion among the socialists.
1) Return to a pre-capitalist and largely pre-industrial economy. No capitalist-labor relationships – this was the key. (Sismondi)
2) Some British socialists favored an egalitarian society of independent artisans who could exchange their products among themselves in proportion to the labor time expended in producing them, with a monetary system (of “labor notes”) designed to facilitate the process of “equal” exchange.
Again, no capitalist-labor relationships.
3) Others (like Saint-Simon), thought a collective solution was needed – one that preserved the advantages of large-scale production and the social division of labor while eliminating the worst of the costs.
Saint-Simon envisaged the reorganization of society with an elite of philosophers, engineers and scientists leading a peaceful process of industrialization tamed by their "rational" Christian-Humanism.
4) Cooperatives – as per Robert Owen. He is considered the father of the "cooperative movement" - founded the famous New Lanark Mills in Scotland as an example of the viability of co-operative factory communities. Many industrialists actually visited these "model factories" and some even adopted parts of Owen's system. Owen attempted to extend these into agriculture - advocating collective farming (was tried in the U.S.). Although most of these efforts failed, he became the head of one of the largest trade union federations in Britain in 1843.
So the Socialist movement was not uniform by any means. We can see how it became divided:
· Was the new society to be egalitarian or stratified?
· Should it be democratic or authoritarian?
· Would it be based on market relations, or would nonmarket processes prevail?
· Could it be self-managed, or did it have to be run by the state?
· Would it be achieved by reform or revolution?
Socialists today are still discussing these questions.
The Classical Critics:
The classical economists of the time, of course, criticized these theories.
· They claimed that socialism would destroy the incentive to produce,
· to save, and
· to exercise moral restraint in the matter of procreation (remember what Malthus discussed).
· It would therefore have a very bad effect on the level and rate of growth of output.
John S. Mill was the only one somewhat sympathetic to socialist arguments – he rejected the Malthusian critique of socialism and accepted the possibility that public-spiritedness might well replace traditional economic incentives.
This is why he often favored self-managed workers’ cooperatives rather than state ownership of enterprises (in this way he was not a socialist per se). But later in his life (according to most history of thought experts), J.S. Mill’s doubts about the desirability of any form of socialism was solidified. He was, in the end, a capitalist!
State Socialism (1850-1945)
Most notably known in Germny (Schmoller and Wagner) –
combined loyalty to the emperor with a deep suspicion of unbridled competition.
These conservative state socialists advocated a substantial degree of state ownership and the encouragement of peasant proprietorship through state acquisition of large estates, supported tariff protection and government promotion of German trade and overseas colonies, and demanded strict regulation of hours and working conditions in factories. Wagner even supported the nationalization of all large-scale enterprises, including the banks.
Definitely a large role for the state. Whereas, depending upon definition, some of the earlier socialists had a much smaller role (some were to some degree, anarchists).
What started happening during this time is that the models of the classical and most especially, neoclassical (Marshall and some of the economists of the marginal (subjectivist) revolution of the 1870s etc.) were used to support a larger role for government.
Here are some examples:
1. Diminishing marginal utility of money:
2. The “Walrasian auctioneer” who was supposed to establish the vector of competitive prices, although a phantom, could potentially be conjured into life in the service of a government planning bureau.
Leon Walras actually described himself as “a scientific socialist.” Again, we know where “perfection” in the market is – but markets don’t always achieve that perfection. Therefore, we need to plan and mold that perfection.
General equilibrium theory could then be interpreted as a theory of socialism rather than as an account of the capitalist market process. These “perfect world” scenarios provided the theory for the “utopian” socialists to talk about how to obtain that perfect world.
Even the neoclassical concepts of marginal utility and marginal cost = marginal benefit offered a foundation for collectivist economic planning.
3. Since in capitalism, monopoly power was supposedly widespread and growing rapidly, the conditions for efficient resource allocation were routinely violated.
The neoclassical notions of allocative efficiency:
And productive efficiency:
Again – pointed to perfection that could be forced in society through good scientific planning.
All of this pointed to the benefits of a very considerable degree of state intervention and also reinstated the fundamental socialist notion of exploitation, although in a somewhat different form:
Monopoly power:
This is why between 1870 and 1945 many socialists were attracted to marginalist economics while some of the best neoclassical theorists were committed socialists.
Examples include “Fabians” Sidney and Beatrice Webb and George Bernard Shaw. They were among the first to use neoclassical economics as an intellectual weapon against capitalism – which they believed to be both wasteful and unjust.
In production – monopoly led to the curtailment of supply.
In distribution – Ricardian rent theory could be extended from land to capital, providing a theory of exploitation independent of the labor theory of value – since the great bulk of property income was unrelated to any productive contribution or sacrifice.
The anarchic nature of the capitalist economy generated enormous waste, because the coordination of individual decisions was necessarily highly imperfect.
Thus the Fabian socialists called for high rates of progressive taxation on unearned income and for the socialization of the means of production, which would be better employed under the direction of expert economic planners in the service of the state.
Notice the knowledge that planners were assumed to have! This is what Hayek eventually called “the pretense of knowledge.”
They thought they were the true scientific socialists – since their analysis was based on modern economic theory and backed up by painstaking empirical research.
It can be argued (what do you think) – that socialist convictions of many neoclassical economists were reinforced by the emergence of welfare economics (remember, from Bentham, as long as a policy increases overall benefit more than cost – go for it), which highlighted the need for redistribution of wealth in many cases.
And of course, the ideas of socialism are still very popular today.