Front Page Titles (by Subject) I: Political Economy - Literature of Liberty, July/September 1979, vol. 2, No. 3
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I: Political Economy - Leonard P. Liggio, Literature of Liberty, July/September 1979, vol. 2, No. 3 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Samuel Hollander's bibliographical essay on David Ricardo highlights the partisan controversies that continue to surround issues of political economy. Political economy transcends narrow economic issues, and investigates the vital interconnections of political, social and ethical concerns in human economic activity.
Our first three summaries are general in scope and theme in order to set the following summaries in a broader context. Telly's lead summary portrays the broad contours of the “classical economic model” in which influential political theorists as well as political economists—as varied as John Locke, Thomas Hobbes, David Ricardo, and John Stuart Mill—developed their ideas. This classical model stressed natural laws, individual freedom, and self-interest. Appleby's article investigates a parallel theme of the relationships between economic ideology and modernization factors. Perkin's following summary questions the opposition, in practice, between individualism and collectivism in nineteenth century socio-political and economic thought.
The following summaries then turn to more specific issues: the industrial revolution in relation to literacy and enclosures; the views of the classical economists, Smith and Ricardo, on such themes as monopoly, money, and wages; and finally, three treatments of the still vexing issue of the causes and effects of inflation, a theme also treated in section III of our summaries.
The Classical Model of Political Economy
“The Classical Economic Model and the Nature of Property in the Eighteenth and Nineteenth Centuries.” Tulsa Law Journal 13, no. 3 (1978): 406–507.
An important contribution of economics to the idea of freedom has been the development of the so-called “classical economic model.” Although some writers, such as Mark Blaug, have denied the existence of a comprehensive classical model held by all nineteenth century economists, the general outlines of the theory are clear. The classical model assumes the existence of society in which most resources are privately owned. Individuals bargain with each other, and the principal motivation each participant is self-interest. Out of these economic interactions, an ordered society will emerge.
As is already apparent, the notion of freedom is crucial to this model. The major theorists in this classical tradition, such as Locke, Smith, and Mill, stressed that the preservation of liberty was an indispensable social precondition. For example, in On Liberty (1859), Mill argues that the function of society is to promote individual autonomy. Each person must be encouraged to assume responsibility for his own life, rather than become dependent on the customs favored by public opinion.
The exponents of the classical model viewed freedom as part of the law of nature. They believed that there were laws of the social world in some ways like the laws discovered by the physical sciences. These natural laws, far from being inconsistent with human freedom, demanded it as their precondition. If each person in society freely acted to promote his own interest, an “invisible hand,” as Adam Smith claimed in the Wealth of Nations and Theory of Moral Sentiments, would operate to transform private good into the general welfare of society.
David Ricardo developed the theme of nature even beyond Smith's exposition. In his economic theory, Ricardo allowed virtually no role for the entrepreneur. Economic law acted in an almost mechanical fashion; the correct working out of the economic processes that Ricardo postulated did not depend on particular entrepreneurial decisions.
The view of human nature professed by the proponents of laissez-faire emphasized self-interest. Perhaps the most striking example of one version of this theory was presented by Thomas Hobbes. In Hobbes's Leviathan (1651), men were not only self-interested but also mutually antagonistic, By contrast, John Locke's view of human nature was substantially more optimistic and harmonious, but he also saw man as egoistically motivated. The Scottish Enlightenment thinker, Frances Hutcheson, however, affirmed a social instinct of human benevolence, a natural feeling of personal sympathy for others. Adam Smith also subscribed to this position and believed in a natural harmony of interests.
The supporters of the classical model maintained that prices were determined by the market forces. For example, Adam Smith argued that products tended to gravitate around a “natural price,” which was determined by the costs of production. This could not be determined unless the market were allowed to function freely; furthermore, in the short run, supply and demand might cause prices to differ from the natural price.
Wages, under the classical model, were similarly determined by the market. Many followers of the classical model, beginning with John Locke, assumed that wages would tend toward the level of bare subsistence, owing to pressures of population. Smith, Turgot, and Ricardo, among others, each held versions of this “iron law of wages.”
The legacy of the Enlightenment, as expressed in the classical model, may be seen as a modification of the Greek doctrine of natural law. In the classical model, private property was recognized as an individual right This private and individual perspective of rights contrasted with the ancient Greek stress upon the ends of society as a whole.
Modernization, Ideology, and Economic Freedom
“Modernization Theory and the Formation of Modern Social Theories in England and America.” Comparative Studies in Society and History 20 (April 1978): 259–285.
Modernization theory has increasingly come to be seen as a failure. Its basic assumption is that societies develop from traditional to modern through evolutionary stages. Traditional societies, in this approach, tend to stress community while modern socieities place more stress upon individualism, self-development, and economic growth. The basic flaw of the theory is that it does not explain how ideology changes as economic development proceeds.
In point of fact, economic development does not uniquely determine a country's ideology. This may be seen by contrasting social thought in England and America during the seventeenth and eighteenth centuries.
The development of England during the seventeenth century was characterized by the rise of a stronger central government and at the same time the prevalence of a greater degree of economic freedom. Economists of the time tended to lavish praise on the benefits of trade. The tendency is especially noteworthy in the writings of Nicholas Barbon and, of course, in the far more widely known John Locke.
After 1689, however, the direction of British social thought changed. The Whig oligarchy in power emphasized national unity and economic growth through state direction. As measures such as the establishment of the Bank of England (1694) became law, the earlier emphasis on the benefits of trade and individualism ended. Writers now reverted to the older balance of trade theory, which stressed the need for a country to accumulate as much gold and silver as possible.
In the American colonies, the situation was different. Here centralized direction of the economy did not become the basis of an ideological movement. Government interferences with trade were bitterly resented, and American writers strongly favored individualism. For example Thomas Paine opposed social hierarchy and favored limited government. He viewed order as arising from individualism, not as something to be centrally imposed.
The contrast between Britain and America shows that economic development is consistent with different ideologies. The simple cause-and-effect relation between them assumed by modernization theory must be rejected.
Individualism vs. Collectivism?
“Individualism Versus Collectivism in Nineteenth Century Britain: A False Antithesis.” Journal of British Studies 17 (Fall 1977): 105–118.
The contrast between individualism and collectivism as themes of social reform and economic thought in nineteenth century Britain is a myth. The contrast was formulated by the great Victorian liberal A.V. Dicey in his influential lectures Law and Opinion (1905). He distinguished three stages in attitudes toward social reform: the period of Old Toryism, lasting to 1825 or 1830; the period of Benthamism or Individualism, from 1830 to about 1870; and the post-1870 period of Collectivism. Dicey stressed the role of ideas in accounting for the change from one period to another. Sir William Blackstone was the most influential thinker in the first period, and Jeremy Bentham in the second. Dicey did not single out a singel dominant thinker for the Collectivist period.
Dicey's scheme has been criticized by the so-called Tory or organic school of British institutional history, whose members include Oliver MacDonagh and G. Kitson Clark. They emphasize that reform measures proceeded largely according to the day-to-day activities of persons holding governmental office., not according to the carrying out of ideological aims. Both Dicey and the organic school are wrong: ideology was important, although not all important.
The real mistake of Dicey is to postulate a rigid antithesis between individualism and collectivism. Individualism meant that everyone should be able to pursue his own interests. As such, it was not viewed by most nineteenth-century thinkers as inconsistent with action by the state to protect individuals from exploitation. Specifically, acceptable forms of state intervention included: (1) the prevention of moral nuisances; (2) the enforcement of minimum standards of provision of certain services by some individuals to others (e.g., payment of wages in cash); (3) state financing for the private provision of certain services; (4) direct state provision of a service for part of the population; (5) public provision of a service, on a voluntary basis, for the whole of a population; and (6) the monopoly of essential services by the state (e.g., the telegraph system).
A great gulf stood between these types of collectivism, which most nineteenth-century writers accepted, and the nationalization of the means of production. Few favored this at all. Thus, for all but a few radicals, laissez-fairists, and socialists, there is no real opposition between individualism and collectivism in nineteenth-century Britain.
The Industrial Revolution and Literacy
“Literacy and the Industrial Revolution.” The Economic History Review (August 1978): 369–383.
This article examines the extent and timing of literacy changes in eighteenth and nineteenth century Britain and their relationship to economic growth.
Some British historians contend: (1) that literacy deteriorated during the Industrial Revolution; (2) that growth produces literacy rather than that literacy is a prerequisite of growth (Bowman and Anderson, “Concerning the Role of Education in Development,” in Geertz, ed., Old Societies and New States, New York, 1963, conclude that a literacy rate of 30–40 per cent was a necessary condition for a country to make a significant breakthrough in per capita income); and (3) that the provision of education by private interests was inadequate.
West begins by showing that the relatively high rates of illiteracy recorded in Lancashire were exceptional and were the result of the very high rate of immigration, especially from Ireland, into that county. He also shows, however, that even Lancashire lay within the 30–40 per cent range.
He then goes on to argue that the male literacy rate was stable from about 1740 to 1790 when it began to rise significantly. Thus, despite unprecedented population increase from 1760 on, the male literacy rate in England was maintained and before half the “revolution” was over it began to increase. The date of upturn, 1790, marked the beginning also of the large-scale factory system and the widespread commercial use of steam power.
The fact that literacy started to increase as early as 1790 indicates that the means of increasing it had begun to grow too. That implies in turn that private schooling was becoming increasingly available to all classes of the population.
Turning to schooling, as distinct from literacy, West rejects the view that the schools which taught only literacy skills were not well patronized and argues that parents invested “widely and voluntarily” in a type of education which had a literary rather than a practical orientation.
He then proceeds to deal with the contention that the working class was precluded from education in the private schools and had to wait until the authorities provided “free” education. He argues that the evidence suggests that a very high proportion of all children were attending school long before schooling became free and compulsory.
The Forster Education Act was passed in 1870 but it was several years before it had any significant effect on the actual provision of schools and schooling because it took a good deal of time to establish school boards, build schools, etc. Hence its effects could not begin to be felt until well into the 1870s. Yet the evidence strongly suggests that before 1879 something of the order of 90 per cent of the population was literate.
Parliamentary Enclosure and Uprooted Labor
“Enclosure and Labor Supply Revisited.” Explorations in Economic History 15 (April 1978): 172–183.
Did the British government's parliamentary enclosure acts uproot the rural population and thus create an increased supply of labor for industry in early nineteenth century England? Marxian Maurice Dobb argued in Studies in the Development of Capitalism (1946) that the parliamentary enclosures did create a new mobile labor force for “capitalist” industry's needs. On the other hand, since J.D. Chamber's seminal article [“Enclosure and Labour Supply.” Economic History Review 5 (1953): 319–343] the orthodox position has held that the government enclosures did not cause a “real flight from the countryside.”
However, on non-Marxian grounds and through empirical economic analysis of population movements in early nineteenth century England, we have substantial reasons for doubting the orthodox view of Chambers. First, Chambers's evidence is inadequate to maintain that the population increases that occurred in parliamentary enclosed villages were used in rural improvement projects associated with the enclosures, Secondly, Chambers erroneously argued that population grew more rapidly in parliamentary enclosed villages than in other villages possessing common land. And thirdly, at the county level, we find a small but positive association between government enclosure of common land and outmigration.
Smith's Critique of Monopoly
“The Burdens of Monopoly: Classical Versus Neoclassical.” Southern Economic Journal 44 (April 1978): 829–849.
Whereas in classical analysis a dominant theme is the importance of promoting free trade and eradicating all forms of monopolies, modern neoclassical analysis shows that the actual cost of monopoly is very small. West argues that the modern approach is “too confined” and has become too “institutionally sterile” because it has ignored important elements in the classical critique that are equally pertinent today. Adam Smith's vigorous attack on monopolies provides the starting point of this comparison between classical and neoclassical views of monopoly.
Neoclassical analysis finds that net welfare loss to monopoly is small because most of the effect of higher monopoly price is a redistribution of income to monopolists. Those who challenge this conclusion have centered on rent-seeking activities of those who wish to capture the gain. Classical analysis is much more encompassing in its assessment of the welfare loss to monopoly. Smith specifically pointed both to rent-seeking and attempts to thwart rent-seeking as monopoly losses and also regarded the income redistribution itself as a major loss to monopoly.
Smith's attack on monopolies condemned the state protectionist system of overseas trading companies. These companies, enjoying exclusive trading rights, were subject to diseconomies of scale which included the inefficiencies of large bureaucratic management. Smith identified both the “excessive shirking” and “inadequate monitoring” that has been noted in the modern literature on bureaucracy, and concluded that bad institutions were responsibile for inappropriate employee behavior. One major diseconomy he noted was the tendency for these trading companies to export bureaucracy to the countries they traded with thereby reducing the potential gains from trade. Smith focused particularly on the losses associated with exclusive trading laws with the colonies. He argued that the cost of the monopoly to the public included not only higher prices both in the colonies and the mother country, but also the costs of policing and maintaining the colonies—defending trade routes and maintaining order—and he believed that the loss exceeded the gain.
Although the modern reader may view Smith's tendency to include all restrictions on supply as monopoly as too general for cogent analysis, West points out that Smith should be congratulated for providing a dynamic analysis which included political, constitutional, and legal factors. He was interested in the costs of “monopolizing” as well as the costs of monopoly, and monopolizing behavior will involve the law and constitution as dependent variables. This greatly increases costs of monopoly.
While many of the historical institutions about which Smith was writing have passed, we can still learn from his analysis. Smith reminds us that people use resources to change the rules of the game in their favor, but the rules are “part of the social fabric:” the system of “collective protection of private property” is vulnerable to attempt to close the market. West concludes by pointing to public education as a perfect example of monopolizing behavior which has eliminated the market to such an extent that it is no longer possible to measure the welfare loss.
Ricardo and the “Dual Development”
“The Reception of Ricardian Economics.” Oxford Economic Papers 29 (July 1977): 221–257.
Many historians of economic thought have argued that the economics of Ricardo was moribund by the 1830s. As a result, economics after this time developed in a dual fashion, split between the Ricardians and their opponents. Both of these contentions exaggerate the extent to which the dissenters rejected Ricardo.
The basic proposition of Ricardo's economics is the inverse relationship between profits and wages (more profits would mean less wages, and vice versa). The wage-rate is taken to be determined from outside the price-system and is measured in terms of a commodity standard of allegedly constant value, such as gold. Increases in wages, according to this view, cannot be inflationary but react only on the rate of profits. Opponents of this approach argue that to consider the wage-rate as determined outside the system is arbitrarily to reduce the number of variables for analysis.
Ricardo's contemporaries, however, did not advance criticisms of this sort against the doctrine. On the contrary, even alleged dissenters against Ricardo's system such as Mountstuart Longfield, Thomas Malthus, and Samuel Bailey all accepted the basic Ricardian doctrine of an inverse wage-profit ratio.
Furthermore, the Ricardian school was much stronger than often pictured. Recent suggestions that J.R. McCulloch was not a full-fledged Ricardian but was more in the tradition of Adam Smith must be rejected. Similarly, Thomas DeQuincey remained a loyal expositor of his mentor, Ricardo.
The members of the supposed dissenting school of anti-Ricardians did not form a united front but often criticized one another much more than they questioned Ricardo. For example, Malthus strongly dissented from many of the propositions of Samuel Bailey. Furthermore, many of their doctrines were consistent with Ricardianism. This is especially the case as regards the long-run determination of wages by supply and demand.
Those who postulate a dual development of nineteenth-century British economics inaccurately place John Stuart Mill in the non-Ricardian camp. Mill regarded himself as someone continuing to develop the insights of Ricardo; to a large extent this could be said of almost all nineteenth-century British economists prior to Mill.
Ricardo on Money
“Henry Thorton and the Development of Ricardo's Economic Thought.” History of Political Economy 10 (Summer 1978): 193–212.
The importance of monetary questions in David Ricardo's economics has frequently been understated. In particular, much of Ricardo's system developed as a response to the monetary theories of Henry Thorton (1760–1815), the English banker and parliamentarian whose book The Paper Credit of Great Britain studied the link between the quantity of money, prices, and interest rates.
In 1797, the Bank of England suspended specie payments (that is, payments in gold for bank notes). This policy was defended by the London banker and economist Henry Thornton, who argued that doing so had averted a panic. Thornton's analysis, found in his influential Paper Credit, stressed short-run disequilibrium in the financial market. He favored a discretionary monetary policy, since he believed that this was within the capacity of the Bank of England.
Ricardo in The High Price of Bullion (1810) and Reply to Bosanquet (1811) challenged these contentions. He regarded money as neutral and conducted his analysis in real (commodity) terms. An increase in the money supply could raise only the level of prices; it had no long-run effect on the rate of interest.
When the Bullion Committee was established to reconsider the specie payment question, Ricardo was able to influence Horner and Thornton, who were members of the committee, to adopt his own favorable view of specie resumption. Ricardo, although not the author of the committee's report in 1810, still exerted a powerful influence.
Ricardo continued his interest in monetary questions throughout his life. In particular, the Principles (1817) grew out of his controversy with Thornton and was not simply a response to the debates about Corn Laws. In the Principles, Ricardo continued his sharp separation between the goods and money sectors of the economy.
Inflation and Political Crisis: Germany
“Inflation, Revaluation, and the Crisis of Middle-Class Politics: A Study in the Dissolution of the German Party System, 1923–1928.” Central European History 12 (June 1979): 143–168.
The massive German inflation of the 1920s was one of the main factors responsible for the weakening of the party structure of the Weimar Republic. While both the onset of the 1929 depression and the rise of National Socialism greatly accelerated the dissolution of Germany's bourgeois parties, they did not begin the process but rather continued to intensify factors of disintegration which had been present since the foundation of the Weimar Republic. The established bourgeois parties, such as the German Democratic Party, the German People's Party, and the German National People's Party, proved unable to come up with effective programs to combat the inflation. Instead they tended to dissolve into their constituent social and economic factions.
The inflation proved particularly onerous for those on fixed incomes such as pensioners and for members of the liberal professions. Political controversy over how to handle the inflation intensified after a Supreme Court decision of November, 1923 rejected the principle that “mark equals mark” applied to fulfillment of contracts. That is to say, debts could not be settled for their nominal monetary amount; the discount in value had to be considered. The Cabinet of Cancellor Wilhelm Marx split over how to respond to this decision. One party, headed by Hans Luther, wished to disregard it on the grounds that attempts to recalculate debts would impede economic recovery. Another group wanted to respect the court's decision.
German society was also polarized by the issue. Various groups sprang up to agitate for measures in line with special economic interests of various sorts. As the inflation progressed, the position of the bourgeoisie worsened and the party structure became irreparably damaged.
Inflation and Unemployment
“Old and New Fashions in Employment and Inflation Theory.” Journal of Economic Issues 13 (March 1979): 1–18.
Keynesian economics has proved unable to deal with the increasing rates of inflation prevalent in the U.S. economy. An approach emphasizing microeconomics is needed if the problem of stagflation is to be controlled.
A common occurrence in the history of science is that a widely accepted theory proves unable to cope with new facts. Instead of revising the theory, proponents of the dominant paradigm often deny that essential changes are needed, refusing to confront the challenge which the new data provide. Keynesian economics fits this pattern. Designed to handle the issues of the 1930s depression, it stressed aggregate spending and largely ignored problems of inflation. When inflation was discussed, Keynesian economists dealt with it only in terms of too much spending rather than with particular prices that were too high.
A major problem Keynesian theory is unable to explain concerns the simultaneous existence of inflation and unemployment, popularly termed stagflation. This is not in its origins a recent development and was in fact present in the 1930s and 1940s. Keynesianism finds this difficult to understand, since according to its view, increased spending should generate employment.
One modified Keynesian discussion of these problems has appeared in a recent book by Edmond Malinvaud. He attempts a mathematical derivation of the Keynesian theorems, but his works in large part
reduce to tautologies that ignore the important policy issues. Sidney Weintraub, the author of another recent discussion, is at least aware of the central issues of today. He points out correctly that Keynesian theory assumes that the consumers can anticipate all the effects of inflation, surely a dubious proposition. Weintraub's analysis emphasizes wage rates as a cause of inflation, but like Keynesian theory, it overemphasizes macroeconomics.
A better way to combat inflation is to cut out the waste in government programs. Since most unemployed workers are unskilled, we should emphasize programs to provide specifically for this type of worker. Price and wage controls should be applied to industries that are the source of the trouble, not to the entire economy indiscriminately.
Government and Inflation: The McCracken Report
“Economics, Inflation, and the Role of the State: Political Implications of the McCracken Report.” World Politics 31 (October 1978): 108–128.
An analysis of the problems of inflation made in the report of an influential committee headed by Paul McCracken poses important issues for democratic government. In 1975 the Organization of Economic Cooperation and Development (OECD) sponsored a committee of eight prominent economists to consider “the recent serious deterioration of economic performance” in the advanced capitalist countries. Their report, Towards Full Employment and Price Stability can be viewed in three dimensions: (1) as explanatory theory; (2) as policy science; and (3) as a set of largely implicit recommendations for political arrangements compatible with modern capitalism.
The main defect of the McCracken Report as an explanatory theory is that it attributes the main economic phenomena it considers to causes which it fails to define adequately. Inflation in recent years, it claims, has to a large extent been caused by political factors. Among these are increases in popular expectations, the development of inflationary expectations, increased union militance, and the growing dependence of the U.S. economy on the international situation. Similarly, the causes of recession, such as a diminished level of public confidence, have a political origin. Yet the authors of the McCracken Report fail to analyze these political causes with sufficient care.
The report's approach to policy science is also questionable. It advocates steady growth, on the grounds that a democratic capitalistic economy cannot endure the inflationary pressures of growth at more extensive rates. This recommendation presupposes that the continuation of capitalism is desirable. This, however, is an ideological assumption which the authors of the McCracken Report ought to have defended explicitly. So far as the report's recommendations for policy are concerned, the authors give no reasons for believing that their slow growth policy has a reasonable chance of being adopted.