The Online Library of Liberty

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• Foreword
• Economic Liberalism the Classical View
• 1: The Classical Psychology of Liberalism
• 1: The Theory of Moral Sentiments
• 2: The Lectures
• 3: The Wealth of Nations
• 4: The Achievement of Smith
• 2: The Political Ideas of the Classical Economists
• 1: The Political Philosophy of Hume and Smith
• 2: The Paradox of Economic and Political Freedom
• 3: Human Nature, History, and Government
• 4: The Nationalism of the Economists
• 5: The Structure of Government
• 6: Economic Improvement and Social Progress
• 3: Liberalism In the Great Century
• 1: The Importance of the Nineteenth Century
• 2: The Practice of Policy
• 3: The Meaning of Economic Liberalism
• 4: The Ideas of Policy
• 5: The Theory of Policy In Mill

2

The Practice of Policy

MEASURES THAT PROMOTED THE MARKET

During the century many measures directly or indirectly promoted free markets and gave the century its reputation for laisser faire (using that term always to mean nonintervention). One of the first, an indirect measure, was the restoration of the gold standard in 1819. It was the outcome of the Bullionist controversy of 1810-11, one of the great debates in the history of economic policy. Those who wanted to restore gold were most of them economic liberals. But except in international trade, they were not necessarily advocates of laisser faire. Throughout the century the liberals, and especially the free traders among them, were in favor of the gold standard and other hard-money measures. The opponents of hard money usually were protectionists and were nonliberal on other issues of economic policy also. Yet on such a basic political issue as Parliamentary reform they agreed with the economic liberals, and both believed it should be advanced in a radical way. The division was personified by Richard Cobden and Thomas Attwood. Attwood stood for protection, paper money, and Birmingham hardware, while Cobden represented free trade, gold, and Manchester textiles (the last without enthusiasm). But both were for Parliamentary reform. An interesting feature of the restoration of gold in 1819 was the behavior of Peel, a Tory, who sponsored it. In 1811 he had voted against the recommendations of the Bullion Report to restore gold, but in 1819 he incorporated them in his own bill. He explained that he hadn’t read the report until 1819 and thereupon was persuaded by it. He was to have another swift change of mind with even more remarkable consequences. That was in 1845, when he abruptly changed his opinion about the Corn Laws and sponsored their repeal.

In 1827 another step was taken toward free international trade. Huskisson, another Tory, inaugurated a program of tariff reform. Protection was to be limited to 30 percent and, it was said at the time, might someday be removed altogether. That is what did happen with the repeal of the Corn Laws and the Navigation Acts.

There were additional measures that promoted laisser faire in domestic or international markets. The Combination Acts were repealed in 1824. They had made trade unions illegal and were the major restraint upon the formation of voluntary organizations by the workers. The usury laws were repealed in 1826. Like the Navigation Acts they had been napproved eve by Smith, causing Bentham to challenge him on the point and apparently to change Smith’s mind. There was a drastic revision of the poor laws in 1834. The change was meant to end the practice of supplementing the wages of agricultural laborers with money from the relief funds. It also intended to make confinement in a workhouse the condition of receiving relief. In 1844 a general law of incorporation was passed, and it removed the necessity of a firm’s securing a charter by specific act of Parliament. The granting of monopoly rights by the government was brought to an end. The East India Company, the greatest of the trading monopolies and the creature of government, was abolished in 1858. One of the principal employes who was thereby retired was John Stuart Mill. Each of these measures was the last step in the movement toward making a particular market free. At the time, some of the measures seemed to be an abrupt reversal of policy, such as the restoration of gold and the repeal of the Corn Laws. But in retrospect one can see that prior to each enactment there had been a sequence of events leading to it. This means that when a free market was established, the decision to do so was not made lightly or unexpectedly. The Statute of Apprentices was repealed in 1814. It was a massive piece of legislation that in 1563 gave the government of Elizabeth comprehensive control over the economy. Had it been enforced until 1814 its repeal would have been momentous, but in fact the enforcement began to diminish after 1688, and the repeal was a formality.

While these changes were being made, they were reinforced by others of a political kind. Together the two increased the freedom of the individual to make decisions, the one in the market and the other in political affairs, although neither kind of enactment necessarily provided the individual with the means of using his freedom. Examples of the political changes were the abolition of the slave trade, the abolition of slavery in the British colonies, and the removal of limitations on the political rights of Catholics and Jews. The Reform Bill of 1832 had an economic effect because it gave business interests some of the representation they wanted in the House and so enabled them to propose measures that, by the middle of the century, were meant to establish free markets.

When all such measures are brought together—and others, of an opposite intention or simply of a different intention are ignored—they do suggest that laisser faire governed the century. The suggestion is strengthened by other things about the period that are well remembered, such as the faith in material progress and the satisfaction with it, the collection of virtues which we know of as Victorian morality, the extension of Darwinism into a social philosophy, the miscellany of notions gotten in the novels from Mary Barton to the Forsyte Saga. There are Carlyle’s definitions of classical economics and laisser faire, even more alarming in French: la science sinistre and l’anarchie avec le gendarme en plus. Just as apposite, though not so familiar, are Cobbett on the Ricardians: “the nasty feelosofers”; Michael Sadler on them: “the pests of society and persecutors of the poor”; and Henry Adams on John Stuart Mill: “His Satanic free-trade majesty.”

All of this can lead one to believe that Britain must have been under the rule of the free market and its apologists, as if the idea of laisser faire had taken hold of the country about 1776, when The Wealth of Nations was published, and informed it with a grand design that was executed in the next century. The idea is not a simple mistake and is not just a misreading by the twentieth century of what happened in the nineteenth. One can go to the worthies of the nineteenth century and find them expressing the same misconception. No less a one than Cairnes was mistaken. He stated that Britain in his day was ruled by laisser faire and that the majority of the people had an “absolute faith” in it. If it had been his faith also, one could explain his mistake as wishfulness. But it was not. He was in fact intensely opposed to it. Much of what has been said against it in this century was anticipated by him in his celebrated lecture on it in 1870. He said:

The quotation is instructive in two ways. It shows that the informed as well as the world at large have been mistaken about laisser faire. And it indicates some of the problems—inequality and unemployment—that turned Britain away from completely free markets and made policy different from what Cairnes supposed it to be. He was, one may observe, a minor figure in the classical school but not an inconsequential one. The intensity of the lecture shows that he looked on the problems of his day as serious problems indeed. In this he was not alone. The economists were not indifferent to suffering, and they did not look at it with the cool detachment that today is thought to be the proper scientific manner. If they resemble anyone, they were like the activists of the present: the economists of today who have become personally engaged in the issues of the time, who have declared their political allegiance, and have used their skill to justify their political commitments and to advance them. Today the activists are more likely not to be in the liberal tradition as the term is used here.

Cairnes’ mistake was not unusal. Economists often have been poor historians, just as historians have been poor economists. Both at times have taken the form of things to be their substance. Smith (as noted earlier) was one of the worst offenders. The men who wrote the American Constitution thought they were following the British example when they divided power among three branches of government. Montesquieu had described the British practice in this way, and they had read him diligently. Actually Britain by that time had departed from the practice and had established cabinet government. Another instance is the conception entertained today about the meaning of economic liberalism. The character of that mistake I leave to the reader to ponder after he finishes this book.

MEASURES THAT RESTRICTED THE MARKET

While Britain in the nineteenth century was enacting measures on the principle that the market knows best which goods to produce and how to distribute them, it was at the same time enacting measures on exactly the opposite principle—that the market does not know. It also was enacting a third group of measures that were based on neither principle entirely, but on elements of each. The government taxed personal income during the Napoleonic Wars and retained the power after they were over, using it again in 1842 to restore the revenue lost by the reduction of import duties. The revenue bill of that year was characteristic of the way the political leaders combined principles of policy that seem to be contradictory. By lowering tariffs, the government gave consumers more freedom of choice in the spending of their income. But the government simultaneously levied a direct tax and left them with less income to spend. A later generation would say the net effect was liberalizing, because direct taxes restrict choice less than indirect taxes. The men who made the revenue law may have been familiar with that distinction, but they did not justify their behavior by it. What directed them was the need to make a concession to the free-trade movement and at the same time to find an alternative source of revenue.

The building of the canals and later of the railways had the effect of widening the domestic market and of making it more competitive. The construction was done mainly by private enterprise, although an exception was the Caledonian Canal in Scotland. Bentham approved of the government’s building it while M’Culloch said the money was “little better than thrown away.” Unlike the governments on the Continent, that of Britain wanted neither to own the transportation systems nor to give them subsidies. However, it did not scruple to regulate certain technical aspects of construction (such as the gauge of the railways), to specify the routes, to control the competition between canals and railways, to regulate the consolidation of the latter, and, most important, to fix rates. The Combination Acts were repealed in 1824, as stated above, and the government thereby accepted the principle of voluntary association. But there followed a number of laws defining permissible trade-union activity, the first of them passed the very next year and continuing to the arbitration law of 1896.

That the government was responsible for maintaining employment was not a novel idea in the nineteenth century—it was indeed thought to be reactionary and even archaic. When expressly put before the House in 1848 it was repudiated.3 Still, in 1863 a law was passed that empowered certain public agencies to borrow money in order to provide work for the unemployed or to make direct payments to them. The law clearly was inconsistent with the New Poor Law of 1834. Moreover, in the thirty intervening years there had been no softening of the dogma that charity was unwise. Charity, men believed, was demoralizing because it made the poor dependent and lazy. After 1859, when The Origin of the Species was published, the notion was reinforced by the belief that protecting the weak makes for the survival of the unfit. Actually Britain was well prepared, verbally, to apply Darwinism to social behavior. Mill, for example, had proposed to help the poor by making the receipt of relief so onerous that they would be driven to supporting themselves. He seems not to have been influenced directly by Darwin but he was quite familiar with the ideas of Spencer who was. In any event, he made the proposal eleven years before Darwin’s work was published. And he himself made the best comment on his own proposal in On Liberty, where he said a characteristic of the English is to assert an outrageous principle long after they have given up any intention of practicing it.

The idea that prices and the quality of goods should be controlled was repudiated in the same way as the idea that the government was responsible for maintaining employment. Both ideas were Elizabethan and authoritarian, it was said. Yet the repudiation was contravened by a number of laws, beginning in 1825 with one that provided for the inspection of the food supply. As illuminating gas, then electricity, the telegraph, and the telephone came into being, the government controlled their rates and nationalized the latter two.

In monetary policy, one of the major laws was the Bank Charter Act of 1844, again sponsored by Peel, the major craftsman of economic policy of the century. It was a complex piece of legislation, and in its entirety cannot be described as promoting either laisser faire or the opposite. It prevented the joint-stock banks from issuing paper money and provided that no new rights of issue be given to private banks in the future. In time the joint-stock banks absorbed the private banks, and that left the Bank of England with a monopoly of the right of issue. Cobden supported the monopoly because the conditions of issue were fairly consistent with the gold standard. Mill did not see any importance in the question of monopoly versus competition in the issue of currency. The act did not alter a law of 1826 which had abolished the Bank of England’s monopoly of joint-stock banking. Actually the major economic issue in the debate over the Charter Act was how to regulate the supply of money, and on that issue there were liberal and nonliberal economists on each side.

There was another important aspect of monetary policy, and it deserves more notice than it has received The government, when business firms were in financial distress, guaranteed loans made to them by commercial banks. The Treasury issued Exchequer Bills to the firms, which in turn used their inventories as collateral; the firms then discounted the bills and increased their cash holdings. The purpose was to prevent forced sales of goods and to arrest a deflationary movement. The practice had started in the eighteenth century and always was much favored by businessmen, including those who favored a laisser faire solution to other problems. During the depression of 1836-37 the merchants and manufacturers of Manchester petitioned the government to reform the Corn Laws. The effect, they thought, would be to increase their exports (their argument being that a lower tariff on grain would cause Britain to import more of it, thereby providing foreigners with more British money which would be spent on British goods). In making the proposal, the business community also made some ringing declarations for the principle of free markets. At the same time it asked the government to issue Exchequer Bills. They had been a point in the Bullionist controversy, the gold standard people having opposed them. But their reason was not that the issue of bills was a form of government intervention. It was that the bills increased the monetary instability caused by the suspension of gold payments and contributed to the excessive profits of the Bank of England.

Laws that altered the distribution of income by taxing it, that tried to make transportation more efficient and fairly priced by intervening in its construction and the setting of its rates, that tried to regulate trade unions, settle labor disputes, support employment, fix prices, control the quality of food, that nationalized some public utilities, established a monopoly of the issue of paper money, that tried to prevent deflationary movements—such laws do not support the belief expressed by Cairnes, and many others then and since, that laisser faire was the governing policy of the country and the absolute faith of the majority of the people.

Beyond these laws, older than most of them and more consequential than any, was another form of intervention. It was the regulation of working conditions by the Factory Acts. The stated purpose of the acts was to reduce the hours of work, and that was their direct effect. But indirectly they raised hourly wages. That both changes would occur was recognized quite early, but the acts were not offered by their sponsors as a means of controlling wages. They were in their initial stage not even presented as a means of improving the condition of the laboring classes, except by a few radical businessmen like Owen and workers like David Brook. The first was passed in 1802. The purpose was to make the government attend to its obligations to apprentices, a responsibility it had been given by the Elizabethan Poor Law of 1601. The act of 1802 applied to the textile industry. Among other things, it required the mill owners to provide some education for the children in their employment. Education was also a feature of subsequent acts. In time the state regulated the conditions of work of all children in the textile mills (not just orphan apprentices), then extended regulation to the working conditions of women, then to the working conditions of both women and children outside the textile industry, and finally to men. At the end of the century most of the working population outside agriculture was within the scope of the acts. By then the acts were accepted as much by the descendants of the Manchester school as by the admirers of Lord Ashley, an early sponsor. With similar feelings, both could look back on the early opposition to the laws. It was like that stated in the following excerpt from the minutes of a Select Committee of 1816, appointed by Parliament to examine the proposal to improve the condition of workers:

That is laisser faire of a purity that is primordial. It is what is supposed to have been common in the nineteenth century. But the Factory Acts were passed, and so were others that modified free markets or eliminated them altogether. There were many more than are noted here. Spencer in 1880 listed several scores.5 But they were less important and do not alter the point I wish to make—that the policy of Britain in the century was a combination of measures, some promoting free markets, some with the opposite intention, and a third group (like the Exchequer Bills) that mixed the two.

THE INFLUENCE OF PARTIES AND INTERESTS

How can the policy be explained, and what shall it be called? Is there a principle to be read from it? Or was it the work of party politics, or of vested interests?

One explanation is that it was all of these things, because, in this view, policy is politics and politics by its nature cannot be consistent (or more than superficially so). The policy of the nineteenth century is looked upon as a collection of diverse measures, each meant to manage a particular problem in whatever way it could be managed: by using some principle or other of economic policy, by the party in power enacting something from its program, or by the government yielding to the pressure of a vested interest. But this is not really an explanation, because it says that what happened is not to be explained in any one way.

What can be said of party behavior as an explanation? The Whigs were associated with economic individualism, freedom of contract, and similar notions ascribed to liberalism, while the Tories were associated with protection for agriculture, a hostility to trade, and a state of mind that disliked the market and its works. But these associations were so flexible, were so often qualified and even contradicted, that they are not helpful as explanations. Let me cite just two facts. Most of the measures here noted—and they were the most important—were approved by majorities in the House in excess of the majority held by the party in office when the laws were passed. The other fact is that when the main features of the policy were established—in the years from 1819 to 1846, between the resumption of gold convertibility and the establishment of free trade in grain—the leading economic statesman was Peel. He promoted measures that cannot be connected with the program of either party any more than they can be connected with laisser faire or its opposite. From the political historians, Peel has received the attention he merits. But the economists have not been as attentive. They are inclined to think it was Gladstone or Robert Lowe who made the critical decisions about policy and gave the century its distinctive features. Gladstone and Lowe are best remembered for some high-minded statements in favor of laisser faire. Yet neither acted, as distinct from spoke, as though he wanted the principle to guide the state. Actually, before they came to power the course of policy had been pretty firmly established by Peel.

How influential were vested interests? They certainly did have influence, but it was not strong or consistent enough to make it the explanation of policy. There were indeed times when Parliament acted as if it wanted to prove it was the official representative of the bourgeoisie. At the time of the Bullion controversy the House heard the petition of the cotton textile workers for relief in the depression of 1811. They wanted a law to limit the number of apprentices. They could not have it, they were told, because the House would not legislate against laisser faire. The point was made strongly by Perceval and Rose, two leaders of the anti-Bullionist group, who were joined by Giddy, a Bullionist. The Members also expressed opposition to the granting of money to the poor, which, they said, was wholly objectionable.

The government at the time was making loans to employers. The workers were turned away in June of that year, and in November the Luddite riots began. In the 1830s the House turned away the handloom weavers when they petitioned for help to relieve their technological unemployment. They were told the House had no power to change the laws of economics. At the same time it listened to the businessmen who asked for (and received) loans to carry their inventories. The textile manufacturers at times acted as if they were illustrating some of the cruder doctrines of imperialism. They repeatedly called on the Foreign Office to use influence and if necessary military power to open foreign markets to them, as when in 1848 they demanded the lifting of the Danish blockade of the Elbe so that cotton goods could be shipped to Germany.

There are, however, far too many examples of the opposite sort of thing, and they cast overwhelming doubt on the notion that policy was the work of vested interests. The Foreign Office often refused the exporters’ requests. Parliament took almost forty years to repeal the Corn Laws. On the great issue of regulating the conditions of work, it acted in opposition to the majority of employers. When one looks into the origin of laws that were detrimental to business, or were thought to be by the business community, one finds they often were promoted by a few unusual businessmen. The Factory Acts are a good example. I am not saying that vested interests on the whole were indifferent to what Parliament did, or that they did not try to use Parliament for their purposes. They often tried and sometimes succeeded. But they did not use political power as often as its use was called for, and when they did, their behavior often was inept and fearful, and they did not often succeed.

These remarks—about the influence of parties and interests—are not offered as conclusive evidence. The reader interested in the point will want much more. To supply it would take me much beyond the purpose of this chapter which is to explain what determined policy and to treat only incidentally of what did not. I believe that a detailed historical study would support the statements I have made.

[2] J. E. Cairnes, Essays in Political Economy. Theoretical and Applied (London, 1873), pp. 248-249.

[3]Parliamentary Debates, Vol. 101, pp. 638, 650.

[4]Report of Minutes in Evidence Taken by the Select Committee on the State of Children Employed in the Manufactories of the United Kingdom. Session 1816 (London, House of Commons, 1816), III, 10.

[5] Herbert Spencer, The Man versus the State (London, 1884), pp. 5ff.