Month: April 2019

The following essay by Henry Carter Adams is added to provide another observation of what American economists in the late 19th century understood “socialism” to mean.  John Bates Clark also wrote his own essay on this topic in 1879.

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THE POSITION OF SOCIALISM IN THE HISTORICAL DEVELOPMENT OF POLITICAL ECONOMY.

by Henry Carter Adams

The Penn Monthly. Vol. 10 (April 1879), pp. 285-94.

It is certainly unfortunate that Socialism, as an economic system, should be confounded with social Democracy as a political factor and a revolutionary force. The apparent object of the latter is to increase the rate of mortality among the monarchs of Europe; the object of the former is purely scientific and economic. This confusion is unfortunate, because it places Socialism at a disadvantage before the public mind, and does not allow a candid judgment of its economic importance. What this importance is can be the most easily recognized by determining its position in the historical development of the study. To state this position is the object of the present paper.

But, first of all, has Socialism any just claim to be included in the history of Economy? It is no assumption to answer this question in the affirmative. Socialism is an ideal plan of a form of society which does not now exist, but which, its advocates claim, ought to be established. To support this claim, they have criticised severely and minutely the existing system of industry, and constructed an ideal system which they present for substitution. This has a position in the historical development of Political Economy, just as the Mercantile System, the System of the Physiocrats, or the English System of Private Economy has. If it is objected that Socialism is nothing but an ideal, a dream, like Plato’s ideal state, or Sir Thomas More’s Utopia, and that one must wait until it has asserted its reality by the establishment of its plan, before incorporating it in the history of Economy, it is answered: already such has been its influence in the modification of the doctrines of English Economy, that any historic sketch of economic thought must be incomplete which does not include it. Moreover, Economic Socialism has had actual economic and political results. The former are seen in what is termed German Economy of the present. It has given life to economic thought, and guided the criticisms which the Germans have made upon Adam Smith and his school. Its political results may be traced in many of the laws of the German Empire for the last twenty years, and in the ever-increasing importance of the state in economic industrial life. The [286] economic discussions, also, of the last ten years, could not be understood or in any way explained, if the writings of Carl Marx, who, in many respects, may be likened to Ricardo, were dropped from economic literature; or if the political agitations and philosophical writings of Lassalle, who, at nineteen, was a personal friend of Humboldt, were not admitted in the solution. Socialism has, of its own right, a position in economic history; and he who properly understands that position holds the key to the great economic problem of the present day.

A hasty sketch of the economic systems since the year 1500 is, for our purpose, indispensable. The difference in method between the Mercantile System and that of the Physiocrats is, that while the latter proceeded from theory to practice, the former developed from practice to theory. With the Physiocrats, for the first time, was there an economic theory opposed to existing commercial and industrial conditions. The Mercantile System sprang from the physical conditions and political life of the sixteenth century; the doctrine of the Physiocrats, on the other hand, as well as that of Adam Smith, was born of philosophical abstractions.

With the sixteenth century, entirely new factors entered into the world’s life, and for three centuries guided its history. These factors, so far as they are physical, were three great inventions: the invention of printing, of gunpowder, and of the mariner’s compass. These are of so great importance, that to trace in full their wonderful workings would be to write the subsequent history of the Christian world. The most significant of these factors, in its effect upon the economic life of the centuries which followed, is the mariner’s compass. By means of it the road to India was made secure, and the new world, with its rich mines, discovered. Under its guidance, Europe was brought into intimate connection with the decaying civilization of the East, whose peoples were glad to exchange the products of their luxurious climate, and their accumulated treasures, for the products of the industry of the West. In America, too, the rapid growth of the quickly-planted colonies gave rise to a constantly-increasing demand, which Europe alone could supply. To meet these demands, the industries of the Old World were developed, and out of this relation between manufactures and commerce and the political condition of Europe, grew the Mercantile System.

[287] The underlying principle of Mercantilism was, that the precious metals alone constituted wealth. For nearly three centuries this idea worked unquestioned and unrestrained, until, in the latter part of the eighteenth century, Europe found herself, both politically and economically, in a disastrous condition. Governments had left their proper sphere, and monarchs had transformed themselves into great merchants; the interests of individuals and classes were neglected, because it was firmly believed that if a nation but held gold and silver within its territorial limits, its citizens must be rich and happy; monopolies were established in every branch of industry, patents and grants were issued without number, while laws were framed, entering into the details of life, and even into the minutiae of burial, for the purpose of creating a home market; the agricultural was subordinated to the manufacturing industry, and even in agriculture, that which produced bread-stuffs was in its turn subordinated to that which produced raw material for manufacture. With its three centuries of unrestrained working, this idea affected one thing besides. The middle class of the sixteenth century had disappeared, but a new class had been created in society, which, in the Revolution of 1789, took the name of the Third Estate. Of what was this Third Estate composed? The answer to this question is of significance in our present inquiry. This Third Estate was composed of that class in society under whose name the gold and silver of the world were held;—it  is that class which is now ruling the world. The great object of the Mercantile System had been effected. The countries of Europe held the precious metals, in amounts which would have been considered fabulous in the fifteenth century; still her people were more dissatisfied than ever; the misery of want had not disappeared from her borders.

About the middle of the eighteenth century, a Frenchman, Thomas [sic! François is intended] Quesnay, undertook to discover the cause of the misery of the agricultural classes in France. The writings of the school which he founded hold an important position in the development of economic thought. To understand this school, the philosophy of the day must not be forgotten. This was the philosophy of nature. To say that an institution was based upon nature, or to discover in any movement a natural law, was considered sufficient ground for its acceptance. It was the time of Rousseau and the [288] Contrat Social, when the phrase, “All men are by nature free and equal,” was pleasing the fancy of the enthusiastic French and their admirers. Still, this principle was recognized as being sadly out of harmony with many actual conditions; for example, how could the monopolies and hierarchies of the commercial and industrial world, which, according to the existing theory, were necessary, be explained? Could this principle of freedom be applied to economic life? This question the Physiocrats answered in the affirmative, by claiming to have discovered a “law of nature ” capable of regulating all economic movements, if only the unnecessary and disastrous interference of government were removed. This “law of nature” is all that remains of the Physiocrats. This law was accepted by Adam Smith, and appears in English Economy, in a new form and under a new name, as the law of supply and demand: the principle upon which is based the maxim of free competition. The characteristic feature of English Economy is the theory that the truest adjustment of economic society will come about by permitting the economic forces unrestrained activity. The reasoning upon which this is based is very simple: each individual knows better than any one else what is for his own interest, therefore society, which is a collection of individuals, will attain the most harmonious and satisfactory conditions by allowing to each person his free choice. By means of this force of self-interest is all economic activity explained; and further, if perfect freedom of action is permitted, whatever is found to result from the working of this force must be accepted as satisfactory, at least as unchangeable, for it contains in itself the ground of its own justification, in that it is in harmony with the principle of competition. The means through which competition works is the open market, where the law of supply and demand is recognized as supreme arbitrator. The actual price of products, or of labor, which is determined by this law, must be the just price, and, as such, should be accepted without question. If any individual should be so unfortunate as to be financially ruined thereby, or any class in society finds itself in a condition of want and misery, society is unblamable. The individual should have been more cautious, or, in technical language, sharper: the class should exercise more prudence. The universal postulate of this system is, that if proper freedom be allowed, every member of society must [289] find his proper sphere of activity and proper grade in the social organism, according to the degree of his talents and strength; and also, that the remuneration which he receives at the hands of society, through the open market, must be in proportion to the efficiency of his labor and sacrifice. The ultimate result of the workings of this force, according to Bastiat, will be perfect harmony of apparently conflicting interests.

We are now in a position to introduce our socialistic critics. The writings of Saint Simon, Fourier, and Robert Owen may be passed over without consideration. Their plans were communistic rather than socialistic, and most of their criticisms have been abandoned. Louis Blanc is the founder of Socialism of the present, although the German writers, Engels, Marx and Lassalle, have developed his plan and intensified his criticisms to such an extent, that they are now hardly recognizable. The first three of the six propositions upon which Blancism is built are as follows:

1. The deep and daily increasing misery of the lower classes (du peuple) is the greatest misfortune.
2. The cause of the misery in which the lower classes live is competition.
3. This competition, which is the support of the possessing class (la bourgeoisie, or capitalists), is the cause of their ruin.

Sismondi, an earlier French writer, had pointed out the undesirable tendencies of unrestrained competition, but Blanc was the first who went so far as to charge it with the evils of the present industrial system, and to hold it responsible for the misery of want in which the lower classes live. It is this principle of competition against which Socialism aims all its blows; to so reconstruct industrial society, that this force shall not appear in it as the supreme arbitrator in the division of products, is the one object of all socialistic study.

The optimistic views which the advocates of the system of free competition profess, are based, according to socialistic critics, partly on false and partly on assumed propositions. They are the result of à priori reasoning and do not stand the test of a comparison with fact, and, further, in the reasoning itself, the unfavorable side of free competition has been overlooked. Among the propositions charged as false, are the following: that economic relations are developed according to any natural and therefore necessary [290] law; that each individual understands the best his own economic interests, and that each one, in forwarding his own, forwards the interest of society; that each member of society is entirely responsible for his own economic success or failure; and, above all, that harmony of interests can result from the strife of competition. Among the claims of the English school, which are criticised as unproven assumptions, are two characteristics of Socialism: First, that any interference on the part of the state with economic activity would be injurious to economic life, or, in other words, it is an assumption that the laissez faire policy of government is the true policy; and second, that the price of products and labor, or of interest and rent, dictated by the law of supply and demand, must be the fair and proper price, from which there is no appeal.

From these criticisms, one may easily determine the relation which socialistic economy holds to English economy. The particular complaint, however, which socialists urge against the prevalent system is, that it is unfair to the laborer. This complaint takes the following form: that the price of labor, as indicated by wages determined by the law of supply and demand, is no fair equivalent for the activity and sacrifice of the laborer. The extreme socialists claim that labor is the source of all wealth, and therefore, that all wealth belongs to the laborer, a very straightforward and satisfactory solution of the problem now troubling the century, if the premiss were only true. Other critics of the system of free competition, some of whom are socialists and some not, take the ground that, in industrial society of the present, the law of supply and demand cannot work its legitimate results; that there are other factors, the most important of which is ignorance, which opposes its free working, and that, as Louis Blanc has said, the principle of free competition which is the support of the possessing class, is the cause of the laborer’s ruin. Of the truth of this statement there is little room to doubt. That the condition of the laborer is very bad, indeed, as bad as possible, English economy freely admits. Thus, Ricardo showed that there was a tendency for the laborer to receive the least amount of wages possible for the support of life and strength; Mill formulated the law of wages which declared the same fact; Thornton endeavored to disprove the law, and succeeded so far as to show that it did not properly express the disadvantage at which it was necessary for the laboring class [291] to enter into this competitive strife with the capitalist. This, however, is no proper place to discuss the wages question; the above statements were introduced to show that the criticism of the socialists in favor of the laborer is no creation of their own fancy, but the statement of a somewhat startling fact.

The position of Socialism in the historical development of Political Economy, may be clearly stated by comparing the four following points in socialistic thought, with analogous points in previous systems:

1. The point of view from which society is contemplated.
2. The productive principle which is incorporated in the system.
3. The department of economic investigation to which it gives prominence.
4. The principle which it accepts as giving direction to all economic activity, and as supreme arbitrator between conflicting economic interests.

And first, with reference to the point of view from which society is contemplated. English economy considers society as a collection of individuals. The individual stands in the foreground; man is the unit, and as such he is studied. The system is a system of private economy. On the other hand, the socialist studies individuals as members of classes, and classes as parts of society. Society is the unit of investigation. Public economy, people’s economy, or class economy, is to take the place of private or personal economy. He contemplates the individual as part of the social organism. If personal and social interests conflict, there is no necessity to prove that the individual is in error in thus being out of harmony with society, his interests must be subordinated to the united wishes of other members of society. This is nothing more than the legal conception of true liberty introduced into Economy. That Socialism has carried the application of these views too far, may not be denied, but the position is well taken, and the system will receive the credit at the hands of all fair economic historians, of having successfully criticised the one-sided view of previous economists.

The second comparison is with reference to the productive principle incorporated into the socialistic system. The three productive forces which must be accepted in every complete economy, are land, capital and labor. The history of economy presents a peculiar [292] fact, namely, that three systems of industrial organization have been formed in which each of these forces has been respectively exaggerated at the expense of the other two. The doctrine of the Physiocrats was, that land is the source of all wealth. They defined rent as the free gift of nature, or the excess of the product of the land over that which justly compensated for the labor of tillage. Therefore, the one object of the Physiocrats was to increase the rent on land. Adam Smith corrected this one-sided view. Theoretically, his system was a perfect system in that it recognized the three productive forces. In fact, however, the system of private economy which Adam Smith founded, is the capitalist’s economy. Socialism has accepted the third productive force and based its system upon it. It is the laborer’s system of economy, its fundamental economic proportion being, that labor is the source of all wealth. Capital, according to both Marx and Lassalle, is built from the difference between what the laborer actually produces and what he receives in wages. The system as a system cannot survive, because this, its fundamental principle, is false. Labor is not the source of all wealth, at least as that word is defined by socialistic writers. The historian of the future will probably say that it was necessary for a century of unrestrained working to have been given to the private economy of Adam Smith, in order that the great importance and true position of capital, which, in all the previous life of the world had not been recognized, should be disclosed, but that, this having been accomplished, it was equally necessary that the reacting school should have exaggerated another productive force, to draw attention to the undesirable tendencies of the unrestrained principle of free competition, in order that the consequences of an undue supremacy of material possessions should be averted, and I think the judgment of the future will declare the historian to be right.

The third point of comparison concerns merely Socialism and the English system, and is with reference to the department of economic investigation to which each gives prominence. The school which Adam Smith founded has devoted its energies almost exclusively to the department of the production and exchange of wealth. In this sphere its results have been wonderful. The nineteenth century will take its place in history as the century of great inventions in the sphere of production and transportation. [293] This, socialistic writers recognize, and they admit candidly that this highly desirable result is the legitimate consequence of the working of the principle of self-interest as incorporated in English economy, but they claim that production is not all of the economic problem. A proper, equal and economic distribution is as essential, they say, to a harmonious and successful economy as intense production, They therefore have directed their attention to the distribution of wealth; in this department is included all of their studies. Taken by itself, Socialism is as one-sided as the system it criticises, but taken in connection with English economy, so far as this point is concerned, it appears as its harmonious complement and as such it will live.

The fourth and last comparison, which considers the principle of arbitration between conflicting interests, lies wholly in the department of distribution. As we have already seen, this principle, in English Economy, is free competition. We have also noticed the criticisms upon its workings which have been offered. That which is proposed by the Socialists as a substitute for this force, which shall give direction to all economic activity and serve as supreme arbitrator, is the State. This idea that the State should be introduced into industrial life, is also accepted from the teachings of Louis Blanc. This idea of an economic state will prove to be the important historical idea of Socialism. It will live as leading to two new schools of Political Economy; the one of which incorporates the idea into its teachings and makes it the foundation of its system, the other, while admitting the ground to be tenable for which the interference of the State is demanded, will attempt a solution of the problem of just distribution upon the old laissez faire principle. The first already exists in the rapidly-developing school of German Political Economy. According to this teaching, the only question calling for serious consideration is one of degree: how far shall the State be allowed to assume the character of a private producer? It finds the application of its principle in the administration of the State railroads, telegraphs, post, and express; in the management of public domains and forest, and in all those enterprises that are undertaken by the State and carried on as private enterprises, with the single exception that they are carried on not for profit to the State, but in the interest of the people. This school has also developed an entirely new system of Finance. The [294] German method of study and skill of systemization are greatly to be admired, and, so far as practicable, to be appropriated; but when one considers the principles upon which their Economy and Finance are based, these are found to be, in their extreme application, inappropriate to the political and industrial conditions of the United States. It is, moreover, difficult to see how they are to be applied in England and France. Out of this necessity, the error which has shown itself in English Economy on the one hand, and the inadaptability of German Economy to a free government on the other, must arise a new school, or, at least, a radical reformation of the old. A new problem is to be solved. How can the principle of competition be so restrained that its beneficial results may be retained, and its detrimental workings hindered? There is no country in the world where the political and economic conditions are so favorable for the solution of this problem as the United States. America must repudiate the centralizing tendency of German Economy, because that tendency is opposed to the ideas upon which the government is founded; but, on the other hand, another century of unrestrained activity of private enterprise will itself contradict the theory of freedom, and destroy that government. From this dilemma must arise an American Political Economy,—an Economy which is to be legal rather than industrial in its character.

H. C. ADAMS, PH. D.,
John[s] Hopkins University.

Image source: Henry Carter Adams Page at the NNDB website.