Class Outlines, Major Points

Texts:

Heilbroner, Robert, The Worldly Philosophers

Gaffney and Harrison, The Corruption of Economics (G&H)

Those are inexpensive paperbacks. No overpriced commercial textbooks in this course.

OTHER READINGS.

Read several books by The Worldly Philosophers cited in Heilbroner, and a few other notable economists. These are on Reserve for this course. Compare what they actually said with Heilbroner's and my interpretations. It is your absolute right to go to the primary source, and draw your own conclusions.

VOCABULARY.

Learn new words as you meet them. Pay particular note to keywords used to explain views of The Worldly Philosophers. Don't be surprised if you are asked, later on, to define and show your mastery of some of these new words.

TRIADS FOR HELPING YOU ORGANIZE.

Generally, the human mind can grasp three things in a package, so I am presenting material in "triads," as much as possible. This will help you remember them, but memorizing is not the main goal. ORGANIZING is the main goal: seeing how things fit together. A related goal is PRIORITIZING. Often there could be more than three things in a package, but usually the most important three things comprise most of what you need to know.

INTRODUCTION

Historical Setting of The Worldly Philosophers

1. There are three ways of organizing society: Tradition, Authority, The Market

Man is a social animal, yet society consists of self-seeking individuals. How is this tension resolved?

A. Tradition. One is born into one's status, and the metiér (trade, profession) that goes with it. (Note how many English and German family names come from crafts, positions or professions.)

B. Authority. Do what the king or dictator and their bureaucrats command. C.

The market. Follow your self-interest, subject to reasonable rules, with enforcement of contracts.

2. There are three basic factors of production: Land, Labor, Capital

A. Land. Everything not produced by man, exemplified by but not limited to space on the surface of the earth. Includes all natural resources, even water and air. (For more on land, and how it differs from capital, see M. Gaffney, 1994, "Land as a Distinctive Factor of Production," on reserve for this course.)

B. Labor. Human effort devoted to producing goods and services, directly or indirectly.

C. Capital. Valuable human products that are not yet used up. Capital is i.

Formed by saving and investing, ii.

Maintained by self-restraint, iii.

Kept in existence from age to age by perpetual reproduction (or turnover), iv.

Migrates freely.

3. Triumph of Nationalism and Imperialism

We take nationalism for granted today, but most modern European nations barely existed before the 16th Century. Germany and Italy waited until the latter 19th Century, although Germany had been somewhat unified in the 16th Century before being shattered apart by the 30-years' war. Before that, Europe was linked by: a common religious allegiance, centered in Rome; commercial leagues of cities; and networks of powerful international banks.

Heilbroner's work focuses on the culture of our "mother country," England, but other unified nations in the 16th Century included Spain, France, Austria, Portugal, Russia, Turkey, Sweden, Poland, Switzerland, etc. England learned much from some of them, as Adam Smith brings out. Some of them, in turn, had shipped on a good deal of Chinese culture, as we see when we study France and the "Physiocrats." Italian and German and Dutch influences were also strong, through their bankers and traders, Dutch imperialists, and German settlers. American attitudes toward England were often hostile and suspicious, so we must look beyond England for some of our roots.

The U.S.A. was a new kind of nation, free from the start of monarchy, titled aristocracy, and an established church. In the early 19th Century under Jefferson and his dynasty, French cultural and political influences were very strong; in the late 19th Century, German influences prevailed, especially in the universities. African influences have worked their way into the culture around great barriers, while their transition from slavery to voting citizenship has dominated much of American politics from the get-go. Ethnically speaking, Ireland and Germany (added together) contributed more to our gene pool than England. Since 1860, people have flooded to America from around the world, bringing with them traces, large or small, of their respective cultures. The melting pot has produced a distinctive American culture - sometimes for the better, sometimes not.

The loss of the Levant to the intolerant Turks closed eastern Mediterranean trade routes. This forced Europeans to look westward to the oceans, shifting the balance of power to the Atlantic nations, which responded by taking to the sea, where they found great new riches - part of them by conquest and robbery.

England was unified politically by Henry Tudor (VII), 1485. Henry VIII and his daughter Elizabeth I consolidated it in the next Century. Having won over their domestic rivals they kept right on fighting, first taking over Ireland and Scotland, then continuing overseas. Expansive, imperialistic, emigrating Europeans gradually either settled or intruded into much of the world: N. and S. America, Asia, Africa, Australia, Oceania - only Japan, finally, avoided being violated, and even Japan was "opened up" by threat of naval action.

You know the rough outlines of the above from your basic history. Now here is something you may never have learned about.

4. The Enclosure Movement (Privatization of the land)

In most early societies, both before and after the fall of the Roman Empire, many or most people enjoyed extensive common rights to land. In the near east, a sedentary culture, this took the form of periodic redistributions, and forgiveness of accumulated debts, e.g. the Hebrew "Year of Jubilee" described in The Bible (Leviticus 25). In the migratory Teutonic cultures it took more direct forms. In feudal times, nobles to survive had to keep many retainers at hand and loyal, and to do so gave them land rights.

In and around 1346, The Black Death killed off nearly half the population of Europe. There followed a heightened competition to attract workers and retainers, soon resulting in a high level of real wages and the "golden age" of English (and other European) workers, lasting through the 15th Century. 19th Century historians, studying old records, were shocked to discover that the general standard of living was higher in the 14th Century than it had become by the 19th! (Read that again, to grasp its full meaning - it's astonishing.)

In the 16th Century, nation-building was accompanied by the enclosure (fencing) movement, i.e. privatization and engrossment of land. The kings abandoned the peasants, their traditional allies, and joined the nobles in dispossessing them. This was an ecumenical phenomenon: in England the Protestant Henry VIII was the leader, confiscating extensive Church lands in the process (lands whose income had constituted the welfare system of the nation); in Germany, the Catholic Charles V slaughtered 100,000 "Anabaptists" who claimed their traditional common rights to land.

English nobles were spurred on by discovering expanding markets for raw wool. The "Little Ice Age" helped raise demand for wool. Sheep need lots of land, and few shepherds. With national unity, the nobles had less need for armed retainers and archers, so they evicted them: it was a huge power play. Thus, as Heilbroner writes, a new age was "born in agony" - a phrase to remember. The effect was something like the "downsizing" movement today.

The Puritans recreated this lost society, especially in New England in the 17th Century; so did the Quakers in Pennsylvania. The French did the same in Quebec, and the Spanish in a few areas like the mountains of northern New Mexico and southern Colorado (site of "The Milagro Beanfield War), and Costa Rica.

For most Englishmen, though, Enclosure meant being uprooted and not replanted. It created three new classes: the landless proletarians; landowners newly freed from their traditional obligations to society; and a new class of industrial employers, e.g. those who hired the rootless workers to process the new supplies of wool.

The factory system, as it developed, also weakened and finally destroyed the previous system of craft gilds. These had given skilled workers a kind of property in their respective métiers. Now, industrial employers used new supplies of desperately cheap labor, uprooted from their ancient land rights, to undercut the craftsmen in the market.

The process only began in England and Europe. As Europeans expanded around the world, they introduced the new concept of European land tenure and dispossessed natives everywhere. The privatizers were "equal opportunity" evicters, also fencing out proletarians of European descent, just as they had in Europe itself.

5. Rationalism and the Idea of Progress: a new attitude

Along with those tragic changes there were some good ones, too. The spirit of rationalism was growing, with its companions of science, invention, technology and exploration. The idea of progress, that we take for granted, gradually worked its way into common thinking. People came to accept change, and the guidance of reason. There grew a new faith, or hope, in the ability of the mind to unlock the secrets of nature, and apply the results to better our lot. New inventions accumulated - printing, the compass, mapping, clocks, paper mills, windmills, spinning wheels. They began to work together synergistically to accelerate the processes of change, and stimulate the minds of those who used them. The growth of commerce and cities speeded such progress, because cities exist to bring people together.

Rationalism came along with the growth of trade and the power of merchants. Conquering the open seas called for a much higher level of naval technology than would do in the sheltered Mediterranean world. Merchants need arithmetic and accounting to calculate profit and loss, and divide up the gains after winning them. The laws of accounting are much like the laws of physics: everything must be accounted for. Turnover of capital is much like metabolism in physiology. Science and accounting reinforced each other.

6. Speculation, good and bad

Trade entails speculation: one must sink money in a cargo, risk it on the high seas with their storms, pirates, pilferage, and, at the end, possibly bad markets. This kind of speculation is on balance productive, resulting in gains at both ends.

On the bad side, ill advised speculation sometimes led to cycles of boom and bust. Some early crashes were in 1619, 1640, 1670, and especially 1720, the end of the "South Sea Bubble" that followed the Peace of Utrecht (1713).

7. Need for understanding the new order

As Europeans moved into this new era, they tried to understand what was happening. There was a new mobility, new ways of earning a living, loss of old forms of security, new kinds of misery to endure - what did it all mean, how did the pieces fit together? The old certainties and verities were dying; confusion reigned; what could one believe in now?

One group, the "bullionists," said the goal of a nation should be to import gold, or at least not go into debt and lose gold. An allied group, the "mercantilists," said that trade is a form of warfare, and a nation should control trade to maximize the national advantage over rival nations. While they were at it, many mercantilists favored keeping the poor poor, to provide cheap labor. Workers, of course, thought otherwise - but they had no votes.

The Mercantilists - Outline

1. We begin by surveying the attitudes of the "Mercantilists." "Mercantilist" is a generic name for a loosely similar lot of writers on business and public affairs in western Europe, from about 1500 to 1800. They did not call themselves "mercantilists" - that was a later epithet - nor think of themselves as a group, but they shared many attitudes prevailing in the age when they wrote. This was the age of nascent nationalism, supplanting a previous age of agricultural feudalism, semi-independent city-states, and a unifying or mediating universal church with strong political powers. Nationalism undercut the monopoly power of the church, some time before rationalism emerged to challenge its moral and intellectual monopoly. Churches, of course, are still strong today. Various churches are seeking to reclaim political power, and to combat science, with some success in our times. Religious wars are raging in some regions. But churches overall are still short of the monopoly power they once exercised over thought and politics.

Each mercantilist writer was likely to be pragmatic and focused on specific current issues, not seeking for philosophical generalizations, nor consistency, nor system. Their work was characteristic of that age of flux between the universalisms of the medieval church, and the later scientific universalisms of the Age of Reason. Hence, no single writer systematized all their thinking, as Aquinas did before them, and Adam Smith after them. Some of the many Mercantilists were Mun, Locke, Malynes, Child, Misselden, Serra, North, and Davenant. The most powerful Mercantilist was not a writer, but the finance minister of Louis XIV, King of France. This was J.B. Colbert, of whom you will learn more in the next episode, The Physiocrats.

2. Mercantilism was the narrow business side of nationalism. The aim of each mercantilist was to grow and benefit his own state at the expense of others, without much apology to religion. Call it "Unenlightened Self-Interest." The previous idea of a unified "Christendom" was discarded as an incubus. Indeed, even before nationalism there were mercantilists advising each city-state on how to gain at the expense of rivals and dependencies. The moral level was that of Machiavelli.

Mercantilism was more dynamic and flexible and, in a way, progressive than the static feudalism that preceded it. It saw human economic relations, previously governed by inherited "status," becoming governed instead by "contract," terminable and renewable. Sanctity, once defined by the church, became attributes of contract and property. Mercantilists saw nations being formed, and losers destroyed, and they relished the brawl (like later "social Darwinists"). Each nation needed more Lebensraum (living-space) to populate and tax and exploit: land in the form of colonies, fishing grounds, trade privileges, and even pieces of each other, so boundaries were in flux. Mercantilism was more dynamic than what preceded it, and even than some of the neo-classical economics that followed it, because it knew no concept of "equilibrium" (a "neo-classical" notion that you will meet later).

3. Here are some of the main tenets of Mercantilism.

a. The gains from trade are not mutual - one party gains what the other loses. It's a jungle out there! Hence, a nation as a whole does not gain by fostering domestic trade, for trade yields no net gain. It gains by regulating and controlling international trade to take advantage of other nations.

b. This rigging of trade takes at least three forms.

i. W.r.t. peer and rival nations, rig the terms of trade to favor the home nation: sell dear and buy cheap. One's own exporters should not compete against one another for the benefit of foreigners, but be organized in a monopoly. Importers, likewise, should be a monopsony.

ii. W.r.t. dependent nations and colonies, cast them as providers of raw materials for home manufacturers. This was the "policy of provision." Keep them away from tertiary activities like finance and insurance, which are at the top of capitalism's hierarchy of command and control. Keep them from trading with other nations; force them to use shipping of the home nation. Establish social, financial and political ties with their major landowners, to control the lesser ones and keep them in orbit. The last device is the essential tool of control that has made imperialism possible over many centuries. If you've seen Mel Gibson in Braveheart, you saw the English King Richard I use it to control the Scots. In U.S. history, at the time of the Revolution, such people were called "Tories" - a prominent one was Oliver de Lancey of New York. In the history of India, they were called Zamindars. Hitler called them "5th Columnists" - Vidkun Quisling of Norway was a prominent one, whose name has become a synonym for traitor.

iii. W.r.t. the globe (i.e. the sum of all other nations) export more than you import, to build up gold reserves. This side of Mercantilism is "bullionism." Some Mercantilists equated gold with national wealth. Later critics of Mercantilism, especially Adam Smith, lampooned and overstressed this aspect of it, such that many students learn that it was the essence of Mercantilism. That is a caricature, however: most of them weren't that stupid. A determined critic can ferret out stupid sayings by individual members of any group, but that does not represent the best of the group.

Actually, a nation can use an export balance to build up assets abroad, and residents of successful Mercantilist nations became absentee owners of colonial assets on a large scale. Some of this was accomplished by force, but planting settlements took a lot of capital, too.

c. Mercantilists championed a modified individualism, featuring freedom from medieval church morality, but in alliance with the state. They had little faith in the free market, but rather in sheltered trading, banking, or landed privileges. In this respect they somewhat resemble the Whig Party of Henry Clay in America, and hence both the Republican and Democratic Parties after the rigged "election" of Hayes as President in 1877 (for former Whigs then controlled both Parties). Indeed, people of that mindset still control both major parties today, although the name itself is no longer used.

d. Mercantilists gave high priority to military and naval power, to secure lands, and ocean routes, and privileged access to ports. The merchant marine and the navy were co-dependent. (James Monroe, John Quincy Adams, and Theodore Roosevelt would all have understood.)

e. Mercantilists were also "bullionists," who prized liquidity in a nation, both the quantity of gold it had, and the rate at which it circulated. They were tolerant of inflation, and even encouraged it, equating it with brisk trade and prosperity. In this respect they resembled later Keynesians.

Some of them were even concerned with full employment, and saw gold importation and inflation as means to that end. Lest they seem like champions of labor, however, read on.

f. Mercantilists championed low wage rates, privatization of common lands, and unequal distribution of wealth and income. They favored the enclosure and privatization of common and church lands, and their engrossment by a handful of royal favorites and Parliamentary leaders. This seems inconsistent with their concern for full employment, but remember, there was no consistent Mercantilist system or philosophy - Mercantilism was the product of many writers, riddled with contradictions (and, probably, hypocrisies and ruses). Also, like later Keynesians, they may well have wanted a way to keep the system working without challenging, or even examining, the basic distribution of property.

They favored low wage rates to aid exports without having to lower rents, and to use the labor supply fully without raising domestic consumption (i.e. without raising the demand for imports, and without diverting resources from exports to the domestic market).

g. Mercantilists were ambivalent and shifting about emigration of labor. As foreign land speculators and investors, they favored it, to populate their new ports and plantations. As home employers they opposed it, for it tapped into their labor pool. They generally resolved the dilemma by shipping off the more troublesome elements: jailbirds and religious dissenters, often as indentured servants, sometimes as convicts.

The Mercantilists, Questions and Answers

1. Economic philosophy before the Mercantilists was integrated into a grand, definitive synthesis by St. Thomas Aquinas, and after them by Adam Smith. What, if any, Mercantilist did the same for Mercantilistic philosophy?

None. Each Mercantilist writer was likely to be pragmatic and to focus on specific current issues, not to seek for philosophical generalizations, nor consistency, nor system.

2. Was Mercantilism in conflict with nationalism?

No. Mercantilism was the narrow business side of nationalism.

3. Was Mercantilism static or dynamic?

Mercantilism was more dynamic than the feudalism that preceded it. It saw human economic relations, previously governed by inherited "status," becoming governed instead by "contract," terminable and renewable.

4. Was Mercantilism a "good neighbor" policy?

No. The aim of each Mercantilist was to grow and benefit his own state at the expense of others. In their view, the gains from trade are not mutual - one party only gains what the other loses. It's a jungle out there!

There are echoes of this today in the attitude of the OECD (Organization for Economic Cooperation and Development), a powerful supranational body to which some countries have yielded parts of their sovereignty. The OECD believes that nations that compete to attract foreign capital are engaged in a "harmful" activity, and should be checked.

5. In what three ways would Mercantilists have a nation rig its international trade?

i. W.r.t. peer and rival nations, rig the terms of trade to favor the home nation: sell dear and buy cheap.

ii. W.r.t. dependent nations and colonies, cast them as providers of raw materials for home manufacturers. This was the "policy of provision." It is what triggered off the American Revolution.

iii. W.r.t. the globe (i.e. the sum of all other nations) export more than you import, to build up gold reserves. This side of Mercantilism is "Bullionism."

6. What is the relationship of Mercantilism to "Bullionism"?

See #5, iii, above.

7. The shift from Feudalism to Mercantilism was a change "from status to contract" as the governor of human relations. Explain what that is supposed to mean.

Mercantilism saw human economic relations, previously governed by inherited "status," becoming governed instead by "contract," flexible, voluntary, terminable and changeable.

Extra credit: explain how the above overstates the changes that actually occurred.

"Sanctity," once defined by the church, became an attribute of contract and property. Property in land was inherited, passed on for centuries, protected, and venerated like an icon.

8. Did the Mercantilists consistently favor individualism?

Mercantilists had little faith in the free market, but rather in sheltered trading, banking, or landed privileges. In this respect they somewhat resemble the Whig Party of Henry Clay in America, and hence both the Republican and Democratic Parties after the rigged "election" of Hayes as President in 1877 (for former Whigs then controlled both Parties).

9. Were the Mercantilists "hawks" or "doves" in foreign affairs?

Mercantilists gave high priority to military and naval power, to secure lands, and ocean routes, and privileged access to ports. They were constant hawks, inclined to assume that warfare and conflict are the natural human condition.

10. Where did Mercantilists stand on the rights of labor?

Mercantilists championed low wage rates, privatization of common lands, and unequal distribution of wealth and income. They favored the enclosure and privatization of common and church lands, and their engrossment by a handful of royal favorites and Parliamentary leaders. They favored low wage rates to aid exports without having to lower rents, and to use the labor supply fully without raising domestic consumption (which would raise imports).

11. Did Mercantilist philosophy fit in well with the 18th Century "Age of Reason"?

No. The ad hoc policies and inconsistencies of Mercantilism were not good enough for the Enlightenment. Physicists, biologists and chemists were popularizing new thinking that linked complex details into systems, unified by a few general principles. This is one reason that Mercantilism gave way to "classical political economy," which we study next.

In the 18th Century, the "Age of Reason," and "The Enlightenment," the ad hoc policies and inconsistencies of Mercantilism were not good enough. Physicists, biologists and chemists were popularizing new thinking that linked complex details into systems, unified by a few general principles. In this politico-economic world of new puzzles, it was time for a new thinker to step forward with a unified, coherent system of thought. One group of thinkers obliged: they pioneered ways to sort out the pieces and fit them together. We turn first to them, the French "Physiocrats."

B. The Physiocrats - Outline

1. These Physiocrats were pioneers of applied economic analysis. They were people of influence in the French court under Louis XV and XVI. Their motives were benign and idealistic, in contrast with the cynical Mercantilists. Their goal was to shape royal policies to solve real social problems at home. They observed that France, with the greatest resources and population and location, was not living up to its potential. They were French patriots motivated to strengthen their nation and raise the welfare of its people; but they thought France could learn from England, whose progress and power they admired. They preceded the English in analyzing and articulating what the English, to some extent, practiced; and in showing France how to improve on it.

2. They addressed problems specific to France, but in the process developed general principles applicable to all times and places. They wrote during "The Enlightenment," and "The Age of Reason," which led to the age of "Benevolent Despotism," when reform was in the air in every court in Europe. Ideas were international: they learned from English scientists like Isaac Newton and William Harvey, and philosophers like John Locke. Their ideas, in turn, spread widely to Europe and America. In religion they were mostly Deists, like Washington and Jefferson, while nominally Christian.

Their ideas were not purely Eurocentric, but had a strong Chinese strain. Turgot, a leader of the group, was called "The European Confucius" because of his interest in Chinese philosophy. Laissez-faire, their slogan, is Taoist. They followed an ancient Chinese tradition that "Nature ruled society" - but they called it "natural law." The idea is found in Laotze, d. 530 B.C. As for Christianity's being "Eurocentric," it is well to remember that it originated in Asia, and many scholars find Buddhist elements in the teachings of Jesus.

3. Politically, they got "ahead of the curve," and in France lost favor and power after 1776. (In Austria, under the Benevolent Despot Joseph II, their influence grew until Joseph died in 1790.) Their enemies who ousted and succeeded them paid the price in the French Revolution, from 1789, which the Physiocrats were trying to forestall.

4. Causes they championed:

A. Reforming obvious abuses: graft, corruption, tax-farming, etc.

B. Laissez-faire

C. "Natalism" - raising the birth rate

D. Untaxing production, trade, capital formation, and

parenthood

E. Focusing taxation on the net product of land (aka

economic rent), the only true taxable surplus

They had strong influence abroad, e.g. in England on Adam Smith, and in America on Ben Franklin, Tom Paine, John Adams, James Monroe, and especially on Thomas Jefferson. The "commerce clause" of the U.S. Constitution, the basis of our national unity, is pure Physiocracy. The Founding Father who led in demanding its adoption was James Monroe.

In trying to understand the thinking of the "Founding Fathers" who wrote the U.S. Constitution we have to understand that most of them were steeped in Physiocracy. Why should we care? The U.S. Supreme Court today often tries to interpret the Constitution according to the contemporary thinking of those who wrote it. Even Alexander Hamilton, champion of commerce, finds it necessary in his Report on Manufactures (1791) to refute a Physiocratic idea (a mistaken one) that farming is more basic than other pursuits. (He does it only clumsily, as though feeling his way through new territory - no one at that time had articulated the reasons for the tremendous productivity of urban land, which waited upon Henry George, 1879).

6. Some of them undervalued urban production relative to farm and other "primary" production. They called urban activities "sterile," because they generated no net rent (even though, in fact, they do). Another branch of Physiocrats (Vincent de Gournay, A.R. Jacques Turgot) did not buy into this quirky idea, so you may take your Physiocracy with or without it. Today, few economists overvalue primary production, but many other people still do.

The Physiocrats - Narrative

1. The Physiocrats were a group of French thinkers from "The Age of Reason" (18th Century) who mingled and found favor in the courts of Louis XV and, briefly, Louis XVI. They were at the core of "The Enlightenment" of the times - "Enlightenment" meaning to apply the findings of The Age of Reason to real life. Paris, in turn, was the leading intellectual center of Europe. Their ideas travelled east as far as St. Petersburg (Catherine the Great), and west as far as the new U.S.A. (Tom Paine, James Monroe, John Adams, Tom Jefferson, and Ben Franklin). It was actually the Americans who travelled, for all five of the foregoing lived in Paris in the 1780s, and fraternized with the Physiocrats. Some influential French Physiocrats also came to the U.S., like Pierre Samuel DuPont, and Jefferson's brilliant Treasury Secretary, the French-Swiss Albert Gallatin. Recall that Jefferson's political party, which routed the Federalists in 1800, was pro-French. Louisiana, which Jefferson joined to the U.S. in 1803, was heavily French. Jefferson's political "dynasty" lasted a long time: through Madison, Monroe, John Quincy Adams, Andrew Jackson, and Martin van Buren - at least.

François Quesnay, the leading thinker, was a physician who became personal doctor to Mme. Pompadour, favorite courtesan to Louis XV. She also did most of the heavy thinking for Louis, who preferred chasing stags and skirts. Quesnay's influence grew when he saved the life of Louis' son (a life later lost to the guillotine). Quesnay was a deep thinker and creative theorist. He explained matters in plain French, exploiting and augmenting the clarity and utility of that sophisticated language; but he also used intricate diagrams and mathematics that still beguile economists. Being a physician, he analyzed the economy in physiological terms of circulation and metabolism. Adam Smith was his pupil.

Marquis Viktor de Mirabeau, a rich nobleman, was a humanist whose book title, Friend of Mankind, bespoke his benign attitudes (similar to those of Wm. Godwin whom we will meet later in England). Mirabeau was also a "pro-natalist," meaning he favored raising the population of France, which had been falling. Quesnay persuaded him that the route to that was a stronger farm economy.

Pierre Samuel du Pont de Nemours was a cagy politician and publisher who got the Physiocrats lots of good ink. He served for a time as Turgot's secretary. He later was to participate in the French Revolution, support a losing faction, and yet manage to survive. In 1799 he left France for America where he befriended Thomas Jefferson, and reinforced Jefferson's belief in Physiocratic ideas. With his son, a chemist, he established the I.E. Du Pont firm in Delaware, now America's most enduring family-business dynasty. (His namesake, P.S. du Pont IV, had a run at the Presidential nomination in 1988.) Baron A.R.J. Turgot was a skillful and honest administrator. Louis XVI, when newly crowned in 1774, made him Minister of Finance. It was a time when most people saw that France needed saving from itself. He proceeded vigorously to implement Physiocratic reforms, and weaken special privileges, but Queen Marie Antoinette, who had liked him once, fired him in 1776 for refusing to hire and promote her favorites. That political mistake led him to a comfortable early retirement, and later led her to a most uncomfortable one, as he had warned.

Turgot came to Physiocracy through the influence of Vincent de Gournay, rather than Quesnay. Turgot and Gournay did not buy into the quirk for which later critics have faulted Quesnay, i.e. the notion that commerce and industry are "sterile." They were of one mind, though, on all practical policy issues.

Turgot was also an intellectual, an author and an idealist - a fully rounded, admirable and independent human being. He always put Justice at the center of his system, unlike Adam Smith, who trod around it. Turgot believed in "natural rights," a popular ethical and philosophical concept of the times. Modern academic philosophers cavil at the concept that rights or law are "natural." Maybe not, but natural rights are firmly embedded in our culture: in Jewish and Christian Doctrine, the English Bill of Rights (1689), the American Declaration of Independence (1776), the Massachusetts Declaration of Rights (1780), the French Declaration of the Rights of Man (1789), the Bill of Rights in the U.S. Constitution (1789), the Gettysburg Address (1863), the United Nations Declaration of Human Rights (1946), and more orations and sermons than you could count.

2. France had a number of problems inherited from previous regimes.

A. Vast lands held by nobles (the "First Estate") and the Clergy (the "Second Estate") were exempt from taxes. The "Third Estate" (businessmen, workers, and plain folks) paid the taxes.

Most revenues came from taxes on consumption and exchange (excise taxes) and from forced labor (called the corvée) on public works and in the military. (Similar forced labor in Bohemia was called the "Robot," whence our word for a mechanical slave.) The corvée amounted to a tax on rearing children, which helped account for falling population in France. (Ironically, we are returning today to a somewhat similar tax system, and calling it "tax reform." We no longer force labor, except in prisons, but we do force people to pay special taxes for working, and again when they spend to support their families. California's Proposition 13, 1978, now shelters property from taxes above a low level, thus forcing the state to levy taxes on other bases - mainly human labor.)

B. J.B. Colbert, adviser to Louis XIV, had left France with a legacy of paternalism (or, more accurately, "dirigisme," which is the same control-freak policy but without any fatherly solicitude for the poor, infirm or aged), whereby the state micro-directed many business and manufacturing affairs.

C. The state controlled farm prices below market levels, in a clumsy effort to share the bounty of farms with the urban poor. To keep the poor quiet, the state tried in this small way to appease them for the many wrongs it did them. A harmful sideeffect was to demotivate farm production.

D. French Provinces regulated and taxed interprovincial trade, so that France itself did not comprise one common market.

E. Actual tax collections were handled by "tax farmers," each of whom was sold (or corruptly given) a contract for a certain region, and allowed to collect as much as he could force from the people there. This kind of "farmer" had the power of the state, without clear rules or restraints. Thus a basic tax on members of the Third Estate (commoners), called the taille, evolved under tax farming from a tax on real estate to a tax on visible wealth and expenditure.

F. No one ever heard of a merit system in the civil service.

3. The Physiocrat's impact on power

Quesnay enjoyed favor at the court of Louis XV, thanks to the good graces of Mme Pompadour, Louis's favorite and Quesnay's patient. (To understand French policy, a good rule was "Cherchez la femme.") It was the age of "The Enlightenment," and for a time, Quesnay reigned as a guru at its center. European monarchs viewed themselves as "Benevolent Despots"; they vied to patronize artists, scientists and intellectuals, and to show their modernity and compassion by helping (or ceasing to abuse) the poor and oppressed. It was something like the "radical chic" of the 1960s in America. Frederick the Great of Prussia, Charles III of Spain, and Catherine the Great of Russia, among others, imported French intellectuals and savored their ideas - French being the universal court language.

Above all, Joseph II, Holy Roman Emperor and ruler of Austria, bought seriously into Quesnay's ideas, and set about enacting them with conviction, royal power, and determination. To give you an idea of where Austria was coming from, though, his related reforms included freeing serfs, abolishing torture, allowing freedom of worship, basing the civil service on merit, and letting peasants marry whom they wished. Austria was just emerging from the night of tyranny and oppression. The ancient oppressors, including Joseph's own family, did not appreciate his efforts. Only the people loved him.

To help you remember Joseph's time and place in history, he was the patron of composers Gluck, Salieri and Mozart. Much has been made of the suspicion that Salieri may have poisoned Mozart, from professional jealousy. That may be a coded surrogate for the more plausible suspicion that someone did in Joseph himself, who died young in 1790. Privilege plays rough.

Joseph's keystone reform was having all lands valued, in order to tax them "ad valorem" (in proportion to value). That was Quesnay's central proposal. It aroused fierce opposition from the First and Second Estates, who had been riding on the the Third Estate for so long they regarded this free ride as a sacred right of property. When Joseph died (or was he pushed?) in 1790, his brother and successor, Leopold II, aborted his reforms, and joined the entente against the French revolution, then just beginning. The establishment then did its best to wipe out the memory of Joseph II, and jeer at him. Not until the uprisings of 1848 was there an effort to revive some of Joseph's reforms, by which time Austria had fallen behind rival powers, never to recover.

Louis XVI, King of France from 1774, made a Physiocrat, Baron A.R. Jacques Turgot, his Minister of Finance. Turgot was a seasoned administrator with a "bias for action," who got right down to it. He pushed through new edicts ending the corvée, and subjecting the vast estates of the nobles (the First Estate) and the clergy (the Second Estate) to taxation on the Net Product. He freed trade among the provinces, and let prices seek their own level in free markets. He proposed to end tax farming, and wipe out many other abuses and special privileges.

He also refused to let Queen Marie Antoinette pad his civil service with her friends. She got him sacked in 1776, and his laws repealed. (Ironically, Marie was the sister of Joseph II of Austria.)

Marie should not take all the onus, however, and it is perhaps only the male chauvinism of some historians that has highlighted her role. The major landowners of France, the taxexempt nobles and clergy, led in resisting Turgot. The Parlement de Paris represented these landowners. When Turgot issued an edict abolishing the corvée (forced labor), and substituting a land tax, the Parlement issued a Remonstrance against the Edict Suppressing the Corvée, 1776. It urged the King to maintain the rights of property, and also to preserve "rights attached to the person and those which derive from the prerogatives of birth and Estate." ("Estate" referred to the caste system then in place, with nobles being the First Estate, Clergy the Second, and commoners the third.) The Remonstrance warns against "mixing all the orders of the state together by subjecting them to the uniform yoke of a land tax." This would cause "disorder and confusion." "It is necessary that some command and others obey." That was the mindset of the ancien régime (old order).

Do not think that mindset passed away long ago. It was also the mindset of economists Francis Y. Edgeworth and Vilfredo Pareto, whom you meet later. The ideas of Pareto, an Italian fascist, have been adopted by much of the economics profession to justify the unequal distribution of wealth - a development that some of us consider unwholesome or worse.

It was tragic: Turgot might have been one of the great lawgivers of all the ages, like Moses or Solon. Well may he have said, "Bien rude prendr'essor avec les aigles en travaillant avec les dindons" (It's hard to soar with eagles when you work with turkeys).

Marie, meantime, began a long journey that ended on the guillotine. Her main legacy is her memorable dismissal of the starving poor, "Qu'ils mangent de brioche" (Let 'em eat cake). She was seriously out of touch, and was to pay the price. During this period, France got revenge on Britain by helping win the American Revolution (some say it was France did the heavy lifting, and the Americans who just helped). This victory did not placate the suffering French masses, though, who took THEIR special revenge starting July 14, 1789, when they stormed the Bastille.

4. What policies did the Physiocrats champion?

A. They would reform obvious abuses like corruption, favoritism, undue influence, graft, and tax farming. This program was more novel and shocking in 18th Century France than it might seem today.

B. They adopted the slogan of Laissez-faire, laissez-passer, le monde va de lui-même (Let things work, let them happen, the world goes by itself). Today, we just say "Laissezfaire." This advice is aimed at control freaks in government. It bids them resign as general managers of the universe, and let people produce and trade freely, guided by market prices. Adam Smith was to borrow this concept, and time has coupled it with his name. It was novel in 18th Century Europe, but derives much from the Taoist philosophy of the ancient Chinese Lao-tze (d. 530 B.C.), whom Turgot studied and admired. Let no one say that market economics is "Eurocentric"; its central idea derives from a great Chinese philosopher.

Recall that at this time the spirit of J.B. Colbert was ascendant in France. Physiocrats were reacting against his brand of extreme dirigisme. It is unlikely they would have gone as far to the other extreme as today's anarchists, libertarians, and Ayn-Randians. Quesnay, like Adam Smith later, explicitly acknowledged the need for the state to supply capital for public works, which Quesnay called avances souveraînes.

Laissez-faire meant letting prices seek their own level, free of controls. In France of that age, that meant in particular letting the price of grain and flour rise. This was the people's bread, but Quesnay et al. reasoned that the people would be more than compensated by their relief from oppressive taxes. The Treasury, in turn, would be more than compensated by the resulting rise in land rents, which the Treasury would tax.

Note that in France, laissez-faire meant raising the price of grain. In England, we will see that it meant lowering the price - for France exported grain, while England imported it. In passing from France to England, the generic concept of laissez-faire had to pass from the particulars of an exporting nation to those of an importing nation.

Laissez-faire also meant revoking monopolies, at least those that the state granted and supported. Chief among these were the "guilds."

C. Physiocrats were pro-natalist. This meant ending the corvée (forced labor), and encouraging subdivision of large estates by taxing the land. It also meant ending consumption taxes like the gabelle (salt tax). Does a salt tax seem trivial? To us, maybe, but that tells you something about the low living standards of that time and place. Salt was a big item in family budgets, just as it was later in Ghandi's India. In case the taste for salt was insufficient, the French required each family to buy seven pounds a year.

D. They would end all taxes that are contingent on production, labor, and trade. They would nurture capital, which they clearly distinguished from land: creating capital, conserving it, and turning it over. To them, taxing trade was as bad as regulating it - they correctly perceived taxes as a form of regulating. They favored complete free trade, including freedom from excise taxes, both domestically and internationally - but with emphasis on the domestic trade (unlike today's free traders, who slight domestic trade as they hype international trade).

E. They would focus taxes on the produit net, that is the Net Product of land after deducting all costs of improvement and production. ("Net" is French for "clean," or "clear," and has been borrowed into English accounting.) We will see that the classical English economists translated produit net as "rent." Today, "rent" has taken on many confusing and conflicting meanings, even among economists, so when in doubt, think of economic rent as the "Net Product" of land.

This idea, too, has Chinese antecedents, for the land tax in China is as old as history. Remember that Turgot, "the French Confucius," was much influenced by Chinese precedents. A famous administrator who revived it during the Sung dynasty was Wang An-shih, who was chief councillor, 1069-76 (just after William the Norman conquered England). Just like Turgot, he lowered the forced labor levy and raised the land tax - only Wang partly succeeded where Turgot failed, and the Dynasty lasted another 200 years.

In the 20th Century, Dr. Sun Yat-sen revived the idea. He was frustrated during his lifetime, but the idea passed to Taiwan in 1948, where Chiang Kai-shek and his successors applied it vigorously and with great success, somewhat atoning for Chiang's miserable record on the mainland. Eastern Asia, indeed, has prospered mightily by using this principle of public revenue. Hong Kong is the most visible modern example. Japan's Meiji Restoration was financed by land taxes, and the MacArthur reforms during the occupation restored many of them, helping with Japan's astounding postwar recovery and prosperity. Singapore has prospered with heavy use of land taxes, as have the "lucky countries" of Australia and New Zealand.

The French Physiocrats did not view this tax shift as a real shift that would raise the tax burden on landowners, because they believed other kinds of taxes are shifted to landowners anyway. You can't squeeze blood out of a stone, they reasoned, so there is only one true taxable surplus, and that is rent, the Net Product of land. For an acronym, we will use ATCOR (All Taxes Come Out of Rent) for this Physiocratic doctrine of tax incidence. Mirabeau's Theory of Taxation, 1760, spelled it out. Thus, to lower the corvée and poll and consumption taxes, and replace them with taxes on the Net Product of land, would not raise the end-result tax burden on landowners. This was true even if the tax switch was "revenue neutral," i.e. would raise as much money as taxes do now. It would even lower the total burden on landowners.

How's that again? LOWER the total tax burden? This would result from unleashing the great power of market incentives, incentives to work, to save, to exchange, to produce, and to direct resources to their best uses. Such forces are now twisted and suppressed by taxes on capital, labor and exchange. Such twisting and suppression constitute an "excess burden" of such taxation, a burden NOT imposed by taxes on the Net Product. This is the distinctive Physiocratic doctrine, one that we will find repeated in Adam Smith, David Ricardo, John Stuart Mill, and Henry George. (It is also expounded in "The Taxable Surplus of Land," a paper I presented in January, 1999, to the Russian Duma, which is on reserve for this course.)

F. They gave a lot of thought to the role of capital in production. They thought of capital as what we today call "front money" - which they called "avances". They stressed the importance of getting it back, which reflux they called "revenue" (French for comeback). This reflux is recycled (reinvested) to create new incomes. (Today we call it "turnover.")

Physiologists will see here the analogies to circulation of the blood, and metabolism of body tissues, reflecting Quesnay's knowledge of medicine. Turgot specifically credits James Harvey's science, and makes the connection. This was one of their reasons for wanting to keep taxation off capital, and focus it on the Net Product of land.

This part of their analysis was gradually lost, except among Austrian economists, who are still trying with little success to reintroduce it into Anglophone economics. This thread is important, but complex to follow, so we do not treat it in this short course.

G. Composing "left" and "right" positions. You may have noted that the Physiocrats appear "radical" in terms of raising taxes on the rich, and lowering them on the poor. At the same time they appear "conservative" (in modern terms) by favoring free markets. Their genius was to show how to accomplish both ends at once, by focusing taxes on the Net Product of land. This is a concept that most of the polarized pundits of today still fail to grasp, 223 years after Marie Antoinette axed Baron Turgot. It is one of the main ideas you should take from this course - an idea tragically missing from modern discourse.

5. Influence on Smith, Jefferson, Paine and Monroe

Adam Smith travelled in France and studied for a time with Quesnay, to whom Smith credits many of his best ideas. Neither Smith nor Quesnay was the first to write on political economy, but most people look back to Smith as the father of Anglophone economics. First or not, Smith cast a long shadow: people still quote and revere him. Few realize their debt to the Physiocrats, who passed the baton to Smith: he published The Wealth of Nations the same year France lost Turgot, 1776.

Thomas Jefferson also penned a famous document in 1776. The Declaration owes a lot to the Physiocrats. Jefferson, like Franklin, Adams, Paine, Monroe, Madison and others, spent time in Paris consorting with leaders of The Enlightenment like Turgot and Quesnay. Later he knew Du Pont and other transplanted Frenchmen in the States. Jeffersonian land policies, the basis of western settlement in the 19th Century, show the Physiocratic influence.

James Monroe is often called the father of the "commerce clause" in the U.S. Constitution (part of Article I, Section 8). This is the clause that gives Congress the power to regulate interstate commerce, and thus prevents the states from taxing trade among themselves. This idea is pure Physiocracy - see "D" above. The commerce clause is what created and sustains our huge domestic marketplace, the largest free trade zone in the world, and the basis of our national greatness.

6. Primacy of agriculture?

It was Quesnay's quirk to undervalue commerce and industry. He thought them "sterile," meaning they produced no Net Product. This quirk found its way into English thinking, too, and took nearly a century to be worked out. Jefferson even shipped on a bit too much of it. Indeed, the attitude called "agricultural fundamentalism" is still common in most nations, including ours.

Some captious critics of Physiocracy have seized on this flaw to try to discredit the whole structure of their thought. As noted above, de Gournay and Turgot were devoted Physiocrats who did not buy into the fallacy; neither should we. We may appreciate Quesnay's greatness, and forgive him this trespass. We can blame Adam Smith for exaggerating Quesnay's error. Smith did this in an unworthy effort to downplay his own debts to his French teachers by misrepresenting and belittling them.

7. Revival in the late 19th Century

Physiocratic ideas, especially of land reform, enjoyed a worldwide revival in the late 19th Century. Léon Walras (18341910) considered himself their intellectual and spiritual heir and successor. He penned vigorous attacks on land monopoly, as well as on French academic economists who supported it (Théorie d'Économie Sociale). In Germany. H.-H. Gossen revived the Physiocratic position; in England, James Mill, his son J.S. Mill, and the evolutionist A.R. Wallace; in America, Henry George; in Russia, Count Leo Tolstoy; and in Sweden, Knut Wicksell. The practical counterpart of this intellectual movement was a notable rise in dependency on the property tax, rising to a peak in about 1920 in the U.S.A.

The Physiocrats, Q & A

1. Were the Physiocrats narrow nationalists?

Patriots, yes; narrow, no. They addressed problems specific to France, but in the process developed general principles applicable to all times and places. In this respect they resembled the author of the Declaration of Independence, who was one of their students.

2. Were the Physiocrats influential in politics?

They were people of influence in the French court under Louis XV and XVI. They got "ahead of the curve," and in France lost favor and power after 1776. They had some vogue in many European courts. In Austria, especially, under the Benevolent Despot Joseph II, their influence grew until Joseph died in 1790. They had strong influence abroad, e.g. on Adam Smith and Thomas Jefferson. In trying to understand the thinking of the "Founding Fathers" who wrote the U.S. Constitution we have to understand that most of them were steeped in Physiocracy.

3. Where did the Physiocrats stand on free markets?

They adopted the slogan of Laissez-faire. Let people produce and trade freely, guided by market prices. Adam Smith was to borrow this concept, and time has coupled it with his name. It has been hypocritically "kidnapped" by various neoMercantilists and other privileged groups to support policies the original Physiocrats opposed. Confusing? Modern economics has become a jungle of semantic manipulation - we are here to learn to deal with it.

4. Who were some leading Physiocrats?

Dr. François Quesnay, Baron A.R. Jacques Turgot, Pierre Samuel du Pont, Marquis Viktor de Mirabeau, Vincent de Gournay, and others: quite a large clique. If all those names are hard to retain, just remember Quesnay (keh-NAY), the heavy thinker, and Turgot (tour-GO) the practical man-of-action. Americans will also have no trouble remembering Du Pont, friend of Jefferson.

5. What economic problems did the Physiocrats see in France?

Most revenues came from taxes on consumption and exchange (excise taxes) and from forced labor (called the corvée) on public works and in the military.

The state micro-directed many business and manufacturing affairs.

The state controlled farm prices below market levels. A harmful side-effect was to demotivate farm production.

French Provinces regulated and taxed interprovincial trade, so that France itself did not comprise one common market.

Actual tax collections were handled by "tax farmers."

No one ever heard of a merit system.

6. What tax policies did the Physiocrats endorse?

They would end all taxes that are contingent on production, labor, and trade. They favored complete free trade, including freedom from excise taxes, with emphasis on freeing domestic trade (unlike today's self-styled free traders, who hype international trade while taxing domestic trade, production, and labor).

They would focus taxes on the produit net, that is the Net Product of land after deducting all costs of improvement and production. This accomplished two ends at once. One, it raised revenues without taxes on production, labor, or trade. Two, it asserted a kind of "co-proprietorship" of land by the state.

7. Were the Physiocrats on the "left" or the "right" of the politico-ideological spectrum?

The Physiocrats appear "radical" in terms of raising taxes on the rich, and lowering them on the poor. At the same time they appear "conservative" by favoring free markets. Their genius was to show how to accomplish both ends at once, by focusing taxes on the Net Product of land. It is one of the main ideas you should take from this course.

8. Did the Physiocrats undervalue commerce and industry?

Some did; others did not. De Gournay and Turgot were ardent Physiocrats who did not buy into the fallacy; neither should we.

9. Did Physiocracy die away?

Physiocratic ideas, especially of land reform, enjoyed a worldwide revival in the late 19th Century. The practical counterpart of this intellectual movement was a notable rise in dependency on the property tax, rising to a peak in about 1920 in the U.S.A. As for laissez-faire, that was never stronger than in the oratory of today, but unfortunately only in a hypocritical form that endorses taxes on production, labor, and trade, and leaves out the taxation of land rents.

In England, one thinker introduced Physiocratic ideas, and built on them. He was Adam Smith. We turn next to him.

Adam Smith I (pp. 42-59)~3

1. Desperate poverty and exploitation of landless proletariat -condition Heilbroner keeps recapping, and with good reason. Review Introduction #4, "The Enclosure Movement."

2. Quesnay, Smith, and the search for understanding social relations as a System a Living System, like anatomy. The 18th Century was the "Age of Reason," and "The Enlightenment." Physicists, biologists and chemists were popularizing new thinking that linked complex details into systems, unified by a few general principles. It was time for a new thinker to step forward with a unified, coherent system of thought for political economy: to sort out the pieces and fit them together. We have seen how the Physiocrats pioneered the process in France. Adam Smith carried their ideas into the English-speaking world, and in the process clarified and expanded them. His weighty but readable book, The Wealth of Nations, became and remains a classic landmark of political economy.

Smith was "system-minded." He wrote at a time when Linnaeus had shown how all living things are related in a grand system. Von Humboldt was exploring the dynamic interactions among all living creatures, pioneering what we now call "ecology" (and he called Kosmos). Lavoisier distinguished between elements and compound substances, showed the role of oxygen in combustion and physiology, and began the process of classifying the elements. Newton's Laws of Motion and Law of Gravity had reduced the previous confusion of physics and astronomy to a few simple, consistent, universal rules. With such inspiration, Adam Smith sought to do the same for political economy.

3. Laissez-faire

Smith borrowed this French Physiocratic slogan and turned it into a common English phrase. He saw the market as an overall system that organizes economic life dynamically. It regulates itself through flexible goods prices; these act as "thermostats": high prices attract more competition, so overpricing cures itself, and vice versa for low prices. (Today, we call the thermostat effect "Negative Feedback," a term you should remember.) Excessive incomes for some producers, likewise, are held in check by competition. If Joe is overcharging you, go into his business yourself - it's a free country. (If "Joe" is GM or Edison or Exxon, with piles of wealth and lobbyists, that may not be so easy - but we'll get onto that later.)

4. The Invisible Hand

Smith had a colorful way with words. He called the market an "invisible hand" that guides each private party to act in the overall public interest, "even though that is no part of his intent." All are selfishly scrambling to seek their own private interests, yet they serve the public interest more effectively than any king or government could command them. This idea has been, and remains, enormously influential in our world. (Adam Smith left a lot of loose ends. For example, he applied these ideas only to goods prices. He did not address the labor market as such, nor the land market, nor capital markets. J.S. Mill did so, later.)

5. The Division of Labor (Specialization)

Smith went beyond the Physiocrats in observing that the gains from trade include a greater ability to specialize. He summed up his view in this: "The division of labor is limited by the extent of the market." Adam Smith favored widening markets as much as possible, to enable more specialization, which he saw as an unmixed gain.

Quesnay et al. were suspicious of cities, seeing them as sterile at best, and parasitic at worst. Smith, by contrast, was an urbanist. He saw cities as centers of specialization, ferment of ideas, and technological advance. For example, the number of patents issued per capita is many times higher in urbanized New York, New Jersey and Connecticut than in rural, anti-intellectual Montana, where real men go out a-huntin' and a-fishin' when they aren't a-ropin' dogies or a-hasslin' evee-loo-shunnists. He saw that farming depends on cities as much as cities depend on farming: gains from trade are mutual. Mutuality is central to Smith's thinking.

6. Mutuality of Gains from Trade

Adam Smith stressed that trade only occurs when both parties gain, so it is mutually beneficial. Mercantilists, recall, had assumed that one party always exploits the other.

7. Wealth of Nations - meaning the whole nation

Adam Smith's work addressed the general welfare more completely than previous writers had. He said the objective of policy is to enhance the wealth of the whole nation (hence his title), as opposed to some small segment like gold hoarders, the Treasury, or landowners, or the stock market. Today, Adam Smith's viewpoint seems obvious; yet modern media pundits who measure the nation's welfare by the level of the stock market are regressing from what Adam Smith made obvious.

8. Does Smith apply today?

The issues Smith raised remain hot today, and probably always will.

9. Perversions of Adam Smith peddled in his name.

Smith's espousal of laissez-faire was more balanced and moderate than that often preached in his name today. For example, he did not favor privatization of public utilities. He deplored monopolies, and concentration of wealth. He disapproved of unearned incomes. He observed that the main purpose of government is to protect the owners of property against the proles, and therefore the owners of property should pay the taxes. He was humane and tempered and practical and reasonable in his approach to life, and anything but an ideologue or extremist libertarian. He was the opposite of "doctrinaire." Yet modern doctrinaires use him, as they use so many innocent ancient philosophers, to support ideas that he actually opposed.

Adam Smith II (pp. 59-74)

1. Ugliness of life for "the unprofitable poor."

Heilbroner reminds us, as he does so many times, that the enclosure movement, ripping labor away from the land, left England with a landless proletariat who lived in desperate poverty and insecurity. If no employer could make money by hiring them, they were "unprofitable," hence had virtually no right to exist on this earth. If no one could make money selling or renting them land, they had no right to any place to live - not even a place to pitch a tent and lie down at night.

2. "Laws of Motion" of a free economy.

These are different from Newton's Laws. This is a Marxist concept that Heilbroner has borrowed to describe each writer's view of what the future holds. Smith himself did not use the term.

Adam Smith's historical "Law of Motion" was one of steady advance, made possible by capital accumulation: "upwards to Valhalla," as Heilbroner puts it. He saw capital as the cure for poverty, always making more jobs for workers, never displacing them. He saw no limits to growth imposed by nature, although he did see concentration of landownership as a bar to the prosperity of Spanish colonies. (He said little about concentration in England itself, possibly because he needed a patron, and his was the wealthy English Duke of Buccleuch. It was safer then, as it remains today, to dump on foreigners.)

3. "Law of Accumulation": Capital formation and its benefits

Smith saw capital formation driving down interest rates, and hence the need for returns to capital, thus letting labor have more of the product. He overlooked that lower interest rates make for higher land rents, so it may be land, not labor, that gains from lower interest rates. His successors Malthus, Ricardo and Mill were soon to correct this oversight, and Henry George was even to predict that landowners would reap MOST of the gains of progress (tried to buy a home lately, or rent a store?). Marx and George highlighted how capital may sometimes substitute for and displace labor, as happened during the Enclosure Movement. Ricardo showed how low interest rates may cause the misuse of capital, offsetting the gains from having more capital (this course is too short to develop that important idea.) However, most modern economists, following J.B. Clark and Francis A. Walker and Richard T. Ely, have regressed to embrace this error of Adam Smith. We wouldn't care what these "dead old white men" thought, except that their ideas now dominate the IMF and guide its disastrous policies of austerity (which go by confusing misleading names like "liberalization," and "monetarism").

4. The equilibrating "Law of Population": Higher wages lead to higher population.

This was simply an error, that few heed any more. There is too much evidence to the contrary.

5. The equilibrating "Law of Accumulation": Abundance of capital drives down interest rates.

See #3, above.

6. Immediate uses (misuses) of Smith at the hands of others:

Smith is used by some to talk down labor organizations, public education, welfare measures, and public regulation and/or ownership of natural monopolies.

Interested parties ever since Adam Smith have used his name to talk down labor organizations, public services of all kinds, public education, and welfare measures. Those were not his main points at all: he actually favored public ownership of utilities, for example. Although he was system-minded, and created a system of thought, he tempered his generalizations with common sense and frequent references to historical experience and real life. It is not until we get to Edgeworth that we find a "Dr. Strangelove" of an economist who carries abstract ideas to their logical conclusions, however absurd and inhumane those may be. Smith was humane and well-tempered - always a pleasure to read. Smith would never have imposed on us the toll road on Highway 91, or the deregulation of power in California, or the fiasco of the 1990s in Russia, all done in the name of the free market by fanatic ideologues misquoting Smith.

A. SMITH - Questions~3A

1. Why was there a large landless proletariat in England in 1776, when Smith wrote The Wealth of Nations?

2. Did Adam Smith address the cause of labor's problem directly?

3. How did Adam Smith say that the market regulates prices, volume of production, and the incomes of producers, all in the general public interest?

4. Where did Adam Smith stand on free trade?

5. What is "laissez-faire"? Why did Smith borrow a French expression?

6. What is "consumer sovereignty"?

7. What did Adam Smith say about specialization?

8. Was Smith a long-term optimist?

9. All great thinkers get "kidnapped" by lesser thinkers who use their ideas and names in ways that were no part of their intentions. How was Adam Smith misused?

A. SMITH - Answers~3B

1. a. "The idea of labor as a commodity dates from the "enclosure movement" of the 16th Century." This movement privatized lands previously common, and in the process wiped out small landholdings, cutting the former owners adrift, with nothing to sell but their labor.

b. The movement began, and moved very fast, when Henry VIII was King of England.

2. Not in the main, although he now and then shows his sympathy for the landless workers, and identifies land rents as unearned income, and criticizes large landholdings and speaks well of societies with more equal distribution.

Aside from that omission, Adam Smith's work addressed the general welfare more completely than previous writers had. He said the objective of policy is to enhance the wealth of the whole nation (hence his title), as opposed to some small segment like gold hoarders, the Treasury, or landowners, or the stock market. Today, Adam Smith's viewpoint seems obvious; yet modern media pundits who measure the nation's welfare by the level of the stock market are regressing from what Adam Smith made obvious.

3. Smith was "system-minded." He wrote at a time when Linnaeus had shown how all living things are related in a grand system, and von Humboldt was exploring the dynamic interactions among all living creatures, pioneering what we now call "ecology" (and he called Kosmos). Adam Smith saw the market as an overall system that organizes economic life dynamically. It regulates itself through flexible goods prices; these act as "thermostats": high prices attract more competition, so overpricing cures itself, and vice versa for low prices. Excessive incomes for some producers, likewise, are held in check by competition.

Smith called the market an "invisible hand" that guides private parties, each selfishly seeking his own interest, to act in the overall public interest, "even though that is no part of his intent."

Adam Smith applied these ideas only to goods prices. He did not address the labor market as such, nor the land market, nor capital markets. J.S. Mill did so, later.

4. Smith favored free trade, and criticized "mercantilists" who favored tariffs to keep English gold from leaking abroad. Smith, like his mentor François Quesnay, favored free trade within the nation as well as outside it, and would most likely have disliked what passes for free trade today, when internal or domestic trade is heavily taxed. As for outsourcing to low-wage countries, Smith never had to face that issue.

Adam Smith stressed that trade only occurs when both parties gain, so it is mutually beneficial. Previous writers had assumed that one party always exploits the other.

5. "Laissez-faire" means, literally, "let it happen." It means government should let the market regulate trade, without intervening. In practice it is often applied selectively, with government intervening on the side of property, but that was not the intent of Adam Smith

A Frenchman, François Quesnay, had coined the phrase. Quesnay was reacting against the extreme paternalism and stifling regulations of the French monarchy, and also against France's internal trade barriers, imposed by every province against the others. His original goal was internal free trade; international free trade was a by-product. In Smith's hands, however, it came to refer mainly to international free trade.

6. Consumer sovereignty means that producers have to supply what consumers want, or lose money. The expression is not found in Adam Smith, but expresses his ideas compactly.

7. "The division of labor is limited by the extent of the market." Adam Smith favored widening markets as much as possible, to enable more specialization, which he saw as an unmixed gain.

8. Adam Smith's historical Law of Motion was one of steady advance, made possible by capital accumulation. He saw capital as the cure for poverty, always making more jobs for workers, never displacing them. He saw no limits to growth imposed by nature.

He saw capital formation driving down interest rates and needed profits, thus letting labor have more of the product. He overlooked that lower interest rates make for higher land rents, so it may not be labor that gains. His successors were soon to correct this oversight, but most modern economists, sadly, have regressed to embrace the error of Adam Smith

9. Interested parties ever since Adam Smith have used his name to talk down labor organizations, public services of all kinds, public education, and welfare measures. Those were not his main points at all: he actually favored public ownership of utilities, for example.

Gloomy Presentiments of Robert Malthus

1. Prevailing Sentiment of Pro-Natalism. Three legs: Militarism, Godwinian Perfectionism, Smithian Optimism.

2. Malthus' Spectral Model: Exponential growth of population; arithmetic growth of food production; fixed land; limited ability to substitute labor or capital for land.

3. Malthus gave ammunition to reactionaries, and has been doing so every since. Malthus led to Darwin - so far, so good, no great harm done. But Darwin led to Francis Galton and elitist eugenics, which led to or supported Teutonism (in Germany), supported racism in the U.S.A., and fascism everywhere.

4. Ricardo noted how the Malthusian Effect divides society into classes: landlords who have, proletarians who have not.

5. Malthus' over-emphasis on food and farmland, overlooking fixity of other natural resources. Fallacy of identifying "landlord class" with farmers.

6. Malthus on poverty: it is inevitable, there is no way out.

7. Advice to poor: choose between food or sex. Advice to rich: avoid private charity and public welfare.

8. Is India an example of "overpopulation" causing poverty? Heilbroner says yes; Amartya Sen says no, the bogey of overpopulation is just a screen for tyranny, the real cause of poverty.

9. Fall of birthrate after Malthus; Eight causes given.

10. Advances in land-saving, labor-using capital and technology in farming and other industries belie Malthus' forecast. Productive power of enhanced specialization: Adam Smith verified.

11. Malthus' other pessimism: Over-production. His ability to hold two contradictory views at the same time.

12. Enduring truth in Malthus: fixity of natural resources, need to husband them carefully.

T. MALTHUS - Questions

1. What fault did Malthus find in Adam Smith's "Law of Accumulation" of capital, that kept Thomas Malthus from sharing the optimism of Adam Smith?

2. Explain the meaning of "arithmetic" and "geometric" growth rates, either verbally, or graphically, or algebraically, or with numerical examples. Which kind of growth rate did Malthus forecast for population, and which for food supply?

3. How did Malthus's ideas undercut the demands of labor for a larger share of the pie?

4. How did Malthus's ideas refute Adam Smith's idea of the harmony of economic interests?

5. What advice did Malthus have for the poor, and for the rich?

6. Is India an example of overpopulation, as H. asserts?

7. Why did the birthrate in England and Europe fall after Malthus wrote?

8. Why did food supply rise more than Malthus thought possible?

9. Is there enduring truth in Malthus?

T. MALTHUS - Answers

1. Adam Smith focused on the role of capital, and how it is indefinitely augmentable by human action. Malthus focused on land, whose supply is fixed, imposing a limit on growth - at least, on certain kinds of growth.

2. An arithmetic growth rate proceeds in equal steps, as 2,4,6,8,10, ... etc. A geometric rate proceeds in equal ratios, as 2,4,8,16,32,64, ... etc. On a graph, the arithmetic rate makes a straight line; the geometric rate curls upwards.

Malthus forecast an arithmetic growth of food supply, and a geometric growth of population, leading to general starvation among those not owning land.

3. Malthus said that raising wage rates would simply raise the birthrate, hence the supply of those seeking work, and seeking to buy food, thus forcing real wage rates back down. Thus, poverty for the landless is inevitable, there is no escape, and efforts to help the poor are self-defeating.

4. Malthus saw no harmony between the landowners and their workers, but a growing gap as food prices rose and wage rates fell.

5. To the poor, Malthus posed a harsh choice: you must choose between food or sex (birth control was not an option). To the rich, Malthus advised against charity, either public or private: it would only raise the birthrate, and defeat itself.

6. India is poor and populous, but there are more crowded countries that are not poor, like Japan, England, or Belgium. There is the recent example of China, whose output per capita has risen much faster than that of India in the last 20 years or so. There are nations with low population density whose people are poor, like Brazil and Russia. Many observers fault India's rigid class structure, and resistance to land reform.

7. Many reasons. Here are a few - perhaps you can think of more.

a. Urbanization - it lowers b.r. everywhere.

b. Delayed marriage - the Irish and French practice.

c. Laws against child labor.

d. Need for extended education.

e. Need for thrift - a French attitude, brought on by very high land prices, also observed today in Japan.

f. Periods of depression. Example of U.S. during the

1930s.

g. Advances in technology of contraception.

h. Decline of sexism, coupled with rising need for women to work outside the home, to make ends meet.

i. Changes in religious attitudes - in practice, if not in official teachings.

j. Higher incomes - history seems to show that Malthus had it backwards, and higher incomes actually tend to lower birthrates.

8. Rise of food supply, reasons.

a. Expansion onto new lands, worldwide.

b. Replacement of animal traction by machines. (Draft animals used to occupy or eat the produce of 1/3 of all land in farms.)

c. Substitution of higher-yielding crops for lower, e.g.

vines and tree-fruits for grain and grass.

d. Advances in genetics, bio-chemistry, agronomy, etc.

e. Advances in fertilization, pest control.

f. Synthetic fibers replace some sheep and cotton.

g. Growth of world trade, with higher specialization, fitting crops to more appropriate soils and climates.

h. Advances in irrigation technique, doing more with less water.

i. Subsidies to farming, a worldwide phenomenon.

j. Advances in storage and transportation and distribution of food crops. Abating losses and wastes is the same as producing more food. k.

Advances in knowledge of nutrition: better health with less food. l.

Exemption of food from most sales taxes. m.

Use of farming as an income tax shelter.

9. Yes, there is an important truth in Malthus: land is finite, "they ain't making any more of it." Creating capital, the panacea of Adam Smith, does not create more land.

However, the policy implication of the above is not that labor is doomed to starvation wages. Rather it is that we should make intensive use of the land we have, and let no one waste it nor hog it. This was the message of Henry George.

Beginning about 1890, with J.B. Clark, the economics profession was taken over by "neo-classical" economists who revived Adam Smith's idea that capital formation is a panacea. The important truth of Malthus, that Earth has limits, had to be revived from outside the profession by conservationists, environmentalists, pacifists, nutritionists, anthropologists, ecologists, and nationalists (opposing immigration). This struggle is still going on.

Ricardo and Rent

Ricardo's use of farmland as an example

1. Early 19th Century, higher population was raising demand for food, and raising supply of cheap labor. Both tended to raise rents of farmland. (Cheap labor tended to raise rents of all kinds of land.) Converse of the Black Death Effect (1349). 1.

Ricardo focused his analysis on farmland, thus blurring issues. It is doubtful if Ricardo, as a theorist, intended to limit it that way - he was too smart - but many lesser thinkers, after him, have done so. Rising population actually raises demand for all goods, and raises labor supply in all lines of work, while all kinds of land remain fixed. German writers like von Thunen (urban land) and Faustmann (forest land) analyzed rent of other kinds of land.

Soon after Ricardo, urban land soared in value and soon outvalued farmland many times over. So did industrial land, of the highest grade. For example, cotton mills, the core of the early industrial revolution, required location with access to pure water, free of lime, to avoid matting; and to water power. Only a few sites, in the region of Lancashire, had the required natural conditions.

Ricardo invited confusion because a, He was engaged in a political struggle against farm landowners in particular; b, he found the farm situation a convenient one to illustrate his more general point, that land rents are unearned; c, he was willing to sacrifice his general scientific point to his immediate political cause, and d, later writers, mostly allied with rent-takers, seized on the confusion to trivialize or obscure Ricardo's main point.

3. Napoleonic Wars (1789-1815) raise food prices in England. As war ends, farm lobby pushes through "Corn Law" (tariffs on wheat) to maintain high price. (One shilling = 1/20 £ = 12 pence.)

4. There was a "Rotten Borough" system in England: voting boroughs not reapportioned as people move to cities, so farmers overrepresented in Parliament. Property qualifications for vote, so proletarians not represented at all.

5. High food prices passed on to urban employers because workers required higher wages simply to survive. Thus, rents shifted from urban landowners to farm landowners.

6. Corn Laws lasted until 1846 (Irish potato famine). 7.

"The interest of landlords is always opposed to the interest of every other class in the community." - Ricardo, 1817. Heilbroner trivializes the point by referring to farm landowners only.

8. Nature supplies land in grades of varying quality. Man uses the best land first; moves to worse land as population rises. This lowers the "margin of production" and raises rents on all lands. Ricardo's Model: the Law of Rent. (Be able to illustrate it graphically. This means label the axis, draw a curve showing cost per unit of output, show the margin of production, show rent, and show the effect of raising the price of the product.) 8.

Heilbroner explains rent clearly, but then trivializes it away by understating its quantity, and limiting it to farmland. This benighted view is, alas, fairly common. It is a gross error, easily dispelled by looking at rents in San Francisco, for example, or riparian (beachfront) land anywhere. In San Francisco you can build an office block, and amortize the construction costs (net of land purchase) for $20 p.s.f. a year, or less. (To "amortize" is to pay off interest plus depreciation, year by year.) Then you can rent it out for $100 p.s.f., north of Market, or $70 p.s.f., south of Market. (Those figures have bounced up and down in the last few years.) The excess of rental receipts over amortization is location rent.

Ricardo as a Model-builder

Ricardo was a pioneer "model-builder," abstracting from incidentals to focus on a few essentials, allegedly finding a universal law that is independent of local institutions. Unfortunately, he got stuck in between the general model (of land rent) and the particular illustration (farmland), as we note above.

Unique qualities of land

The practical policy meanings of the Law of Rent are simple, and revolutionary (although Ricardo was a rich stock broker).

7.

Land rent is a surplus above cost of production. 8.

Land rent is an ideal tax base. 9.

Taxes levied on labor, production or exchange cause good land to go underused.

The reasoning is summed up in the following algebra, to be explained in class.

Let G = Gross revenue from land

C = Cost of production, expressed as an annual amount

N = Net Product = G - C

t = tax rate levied on G

NAT = Net after Tax = N - tG

NAT/N = 1 - tG/N 10.

Underuse of good land diverts demand to bad land, lowering wage rates, lowering the rate of return on capital, raising the price of housing, lengthening commutes, and causing other economic damage. 11.

Wage rates, and the marginal rate of return on capital, are equalized by interflowing. Rents are not. (Examples of Baguio vs. Tarlac; of Sta. Monica vs. Indio, Parlier and Boron.

D. RICARDO - Questions

1. How did The Black Death (1349) affect wage rates of the survivors?

How did it affect land rents?

2. How did the fact of there being more Englishmen when Ricardo wrote (1817) than in 1349 affect farmland rents? (By then, many of these Englishmen were industrial workers.)

3. What is "diminishing returns" of more labor applied to fixed land? How does it help explain the growth of rent?

4. Napoleon banned food exports from Europe to England for many years up to 1815. How did that affect the rent of English farmland?

5. What were the English "Corn Laws," 1815-46?

How did they affect the rent of English farmland?

6. How did high food prices affect urban land rents and prices? 7. How did repeal of the Corn Laws (1846) affect English urban land rents and prices?

8. What is the "margin of cultivation"?

a. Do hired workers on good land make higher wages for the same work as those on land at or near the margin of cultivation (bad land)?

b. Do products grown on good land (at low cost) sell for less than those grown on bad land (at high cost)?

c. How did higher prices of English "corn" (wheat, to us) affect:

i. The margin of cultivation;

ii. Rent on good land;

iii. Intensity of use of good land.

9. (Optional; answer not given)

Explain Ricardo's Law of Rent in your words. Also, illustrate it with a graphical model or a diagram - you may want help from the Instructor. If you use a graph, label the axes and curves; show the point representing the margin of cultivation; show the area representing rent, and explain why this area measures rent. Last, show the effects of a higher price of the product on the margin of cultivation, and rent.

Show the effect of lower cost of production (e.g., lower wage rates) on the margin, and on rent.

10. Why is land rent also called "the net product" of land?

11. What "Laws of Motion" of history does Ricardo offer? 12.

Show the effects of underusing high-grade land.

D. RICARDO - Answers

1. Wage rates rose, because there was more land per worker. Loss of population meant a loss of consumer demand, so it was not that supply of food fell relative to demand. Rather, wage rates rose at the expense of land rents.

2. By 1817, the demand of industrial workers for food raised the price of grain, and with it raised land rents. It did not raise farm workers' wage rates, as there were more landless people competing for available work. It drove deeper the wedge between classes, the haves and the have-nots.

(In the U.S. today, the cost of buying the average farm equals about 18 years wages of the average worker. It used to be 4-5 years or less, in 1947. That is more than most workers can save in a lifetime, even if they remain healthy.)

3. Nature supplies land in varying qualities or grades. As population rises, mankind must resort to lower and lower grades of land, so each added worker adds less to total output than the average of the first workers. In addition, people crowd more thickly on the good land, with the same effect. The effect is called, "diminishing returns."

(More technically, there is "marginal" return - the effect of the last worker added - and an "average" return. Both of these fall as more workers crowd the available space, but the marginal return falls more than the average.)

4. Napoleon's embargo of England raised food prices in England, thus raising the rent of English farmland. During the wars themselves this was somewhat offset by the wartime demand for soldiers and industrial labor, but after 1815 English labor was hit with both returning veterans and higher food prices.

5. The English Corn Laws were high tariffs on imported food, especially grain. They upheld English food prices, and thus raised farmland rents.

6. High food prices hit urban consumers, mostly workers, who in turn passed some of the hit along to urban landowners in the form of lower rents and prices. These workers were extremely poor, living on the edge of starvation, so mere bread was a large fraction of their cost of living. Their wage rates had to be raised, merely to keep them alive: that was the irreducible minimum. This, in turn, took a cut out of employers' profits, and thus what employers could pay for land for factories, shops, lodgings, etc. In this way, the Corn Laws shifted rents from city land to farmland.

A modern counterpart was the effect of oil price controls, when we had them, on land prices in producing and consuming states. President JFK imposed field price ceilings on oil producers, to hold down heating oil prices in the snowbelt states, (and power rates in California, while he was at it). This transferred land rents from places like Texas to places like Massachusetts, and made JFK unpopular with Texas landowners and their pliant neighbors (who think as they are told), and unbeatable in Massachusetts.

A similar example is the effect of the U.S. Supreme Court decision taking some Colorado River water from California and bestowing it on Arizona. This transfers land rents from us to them.

7. Repealing the Corn Laws lowered food prices, and thus transferred rents back from farmland to city land.

8. The margin of cultivation is land that is just barely worth using at the given level of product prices and production costs. Remember, rent is the "net" product of land, meaning the gross yield less the costs of production. At the margin of cultivation, the costs eat up the entire yield, leaving zero rent. The land is worth using because workers earn a living there, and capital gets the same return as on good land. There is nothing left over to pay rent, but the land is there whether its owner gets any rent or not. Naturally, such land does not usually interest absentee buyers, so usually the user and the owner are the same person

a. Workers on good land make no more than those on bad land, unless the workers own the land. Migration and competition among workers holds rates down to a common level. On good land, the surplus goes as rent. A high fraction of the best farmland (e.g. in Champaign County, IL, or the Tarlac area of Luzon in the Philippines) is owned by absentees who take out rent (either as cash, or crop-shares).

Formalizing that, there is a Law of Wages: Wages everywhere are determined by (or at least equal to) output at the margin of cultivation.

b. Products grown on good land at low cost sell in the same markets, at the same prices, as the products of bad land raised at high cost. The cost advantage of good land is not passed on to consumers, but accrues as rent to the landowner.

c. i. Higher wheat prices "extended" the margin of cultivation, i.e. farmers had recourse to worse land. (Land may be "worse" owing to lower yields, or higher costs, or remote location, or any combination of those.)

ii. Higher wheat prices raised rents on good land.

iii. They also caused it to be used more intensively an effect called using the "intensive margin" of cultivation.

9. Answer not given.

10. Rent is the net product of land, meaning the gross yield less the human costs of production. These "human costs" include labor, and all things supplied by labor, including materials and capital.

Rent has something in common with "income," or "profit," but also a lot of differences. A person's income includes a normal return on his capital, which is not part of land rent. It includes a return for his labor, not part of land rent. If he is a tenant he pays rent to a landlord, and his income includes no rent at all. If his land is mortgaged, his personal income is net of interest payments, but these are not deducted in finding land rent.

Therefore, avoid equating rent with income or profit. Think of rent as a scientific term, and income as a personal one.

In addition, economists have learned to distinguish AVERAGE returns on capital from MARGINAL returns on capital. Average returns include rents; marginal returns do not, and are therefore lower than average returns. We will henceforth use the term Marginal Rate of Return (MROR) to clarify the word "profit." The only reason for using "profit" at all is to explain and analyze the ideas of those writers, like Marx, who use it centrally.

11. Ricardo limited himself to a practical goal: defeating the Corn Laws. He succeeded - but not until 23 years after his death in 1823.

Ricardo's implied law of motion is like Malthus': that growing population will divide society into a landowning class and an ever-poorer landless class.

Ricardo tempered the law by implying that urbanization and industrialization and world trade would relieve England from the worst effects of land scarcity. He applied his concepts of rent and diminishing returns mainly to farmland, not saying explicitly that they apply equally well to urban land, and the raw materials of industry. Ricardo was silent on the matter, but he left the door open for many of his readers to believe that urban/industrial economies are free from diminishing returns. It remained for Alfred Marshall and Henry George to apply diminishing returns to urban land.

Ricardo was less optimistic than Adam Smith about the effects of capital accumulation. Ricardo even showed how machinery might displace labor and depress wages. He chose not to make an issue of it, preferring the quiet life. Most economists today "go into denial" about his point, saying, in effect, "he didn't really mean it." However, he clearly did mean it. His logic is clear, and the issue keeps returning.

Three Utopian Socialists

1. Repeat: frightful conditions of life of the proletarians. (Dickens was the classic portrayer of these conditions, still called "Dickensian." Heilbroner keeps reminding us, the modern age was "born in agony."

2. Growth of Luddism and sabotage. Today we call it "alienation": the inevitable result of dividing society into haves and have-nots. . Luddism is the belief that machines substitute for labor and destroy jobs. To discredit the idea, Tory spokesmen have deliberately identified with one of its least impressive believers, Ned Ludd, an alleged idiot who smashed machines, ca. 1811. In France, a parallel movement was named "sabotage," after the angry workers' who threw their wooden shoes (sabots) instead of wrenches into machines. (It might, instead, be named for Ricardo, who was no idiot.) We will keep the name "Luddism," but without prejudice one way or the other. It is a reasonable question to keep raising.

3. End of Napoleonic Wars with Treaty of Paris and Congress of Vienna, 1815. There was an extreme reaction to and suppression of ideals and goals of French Revolution (liberté, égalité, fraternité). The self-styled "Holy Alliance" of Austria, Prussia and Russia kept the lid on movements for social reform.

4. 1819, crisis marks postwar depression. This was the first and the mildest of 5 major crashes in the 19th Century.

5. Robert Owen.

. Owen believed that most people are mainly products of their environment, and may be improved by better nurture, education, association, and character training. In this, he replicated William Godwin and the Marquis de Mirabeau, the optimistic philosophers against whom The Reverend Thomas Malthus had reacted. Owen, owner of a factory, sought to create such a nurturing environment in his own company town, New Lanark.

Malthus, not surprisingly, was a genetic elitist. He would have approved of the chic modern sperm bank that limits its donors to Nobel Laureates and their peers. But it was for Darwin (1859) to carry this beyond sheer class prejudice and give it some rationale. Charles Darwin credited his inspiration to Malthus, with the idea that natural selection will improve the race. Many Darwin associates and followers, like Huxley, Sumner and Spencer were militant genetic elitists (Darwin himself was not), as is Garrett Hardin in our times, along with Herrnstein and Murray, authors of The Bell Curve. Darwin himself was not - he avoided needless controversy, for he got enough flack as it was. However, Darwin's cousin, Francis Galton, was an early "eugenicist," believing people should be bred for quality, like race horses. Eugenics had a great fad in the world until it was discredited by one of its most avid believers, Adolf Hitler. Not all biologists, however, were so minded. A notable exception was Alfred Russel Wallace, whom we study later. Wallace was Darwin's friend who, after wandering in the East Indies, came up with natural selection at the same time as Darwin. The two were such gentlemen that neither claimed priority, and they presented their findings at the same time, at the same conference. Wallace went on to become a radical egalitarian. None of that has prevented modern elitists from kidnapping Darwin's name to promote the ideas of Huxley, Sumner and Spencer, and suppressing the ideas of Wallace. Such is the evolution of great creative ideas over time: from science to "scientism" (look it up).

Owen favored unions, and tried to form one among his own employees. It was suppressed, along with all unions, by English laws of the early 19th Century - a time of extreme reaction against ideas of the French Revolution.

The 19th Century was a time of myriad Utopian experiments in the U.S.A. - migration, and mixing of ethnic groups, made for a fluid society. Even in the slave states, a noted Owenite was Jefferson Davis himself, later President of the Confederacy. He and his brother Joseph owned a large plantation at Davis Bend on the Mississippi River which they tried to make a model community on Owenite principles. It sounds crazy to us now, but we have to remember these people actually believed in slavery as a way of life, and thought they were trying to make it work better.

Owen was more successful in founding consumer cooperatives. The Rochdale coop plan has endured, although with limited scope. One of its American supporters was southern California Congressman Jerry Voorhis, whom young Richard Nixon unseated on Nixon's road to the Presidency. The successful Berkeley Co-op was an interesting amalgam of ethnic Finns with U.C. students.

The 19th Century was a time of myriad Utopian experiments in the U.S.A. - migration, and mixing of ethnic groups, made for a fluid society. The so-called "2nd Great Awakening," 1800-30, was a period of thriving religious millennialism, which mixed well with Utopianism. Some surviving Utopian colonies are Free Acres NJ, Arden, DE, Fairhope AL, and Amana IA. Many familiar towns were once Utopian colonies, like Atascadero, Reedley, Patterson, and Solvang, CA (now a tourist trap). Rural Utopian colonies persist among the Amish, the Hutterites, the Shakers and the Doukhobors. The original State of Deseret under Mormon leadership might be considered a kind of Utopian colony, the largest of all, and of course it has survived, adapted to the commercial world, and grown rich and Republican. Mormons even founded San Bernardino, although they later abandoned it. Puritan settlements in 17th Century New England had a Utopian element, along with a commercial one: the combination proved to be tough. "The City of Brotherly Love" in "The Quaker State" was originally seen as a kind of Utopia, and so were some of the other colonies.

Utopianism was a strong streak among 19th Century Americans and pioneers. Many colonies, like Solvang (Danish), Anaheim (German), and Kingsburg (Swedish), were ethnic as well as Utopian. Some, like Modesto, gave a Utopian spin to irrigation and land development (Modesto's civic motto is "Water, Wealth, Contentment and Health," emblazoned across its main street, visible on TV for several weeks running during the Gary Condit scandals). There were a few non-religious socialist utopias, like the Kaweah Colony, and Job Harriman's Llano del Rio Cooperative Colony in the Antelope Valley. Harriman, a socialist, had come within a whisker of being elected Mayor of Los Angeles, 1913. Harriman also ran for vice-President of the United States, under Gene Debs, and they polled a substantial vote in 1920. It is hard for today's children to realize how Utopian and wistfully communal their ancestors were, often in the name of religion. It was a different time, before commercial evangelism and talk-show radio and hyper-individualism preempted the name of religion.

Utopians were seldom a majority, but they were numerous, and leavened the loaf. Some were impractical visionaries, but others were tough and practical and hardworking. It is worth remaining aware of them, to help understand how different most of us are today from our 19th Century forebears who spawned such movements in large numbers. The nearest thing in this Century may be the kibbuzim of Israel, but not to forget the everyday PTA's of America, which bring parents together in a common community enterprise in every town.

People were desperate, and always will be, to escape the "Dismal Laws" as seen by Malthus and other pessimists, and believed to represent the science of political economy.

Even in the slave states, a noted Owenite, believe it or not, was Jefferson Davis himself, later President of the Confederacy. He and his brother Joseph owned a large plantation at Davis Bend on the Mississippi River which they tried to make a model community on Owenite principles. It sounds crazy to us now, and hypocritical, but we have to remember these people actually believed in slavery as a way of life, or were trying to rationalize it and justify their ways to the world. They actually thought they were trying to make slavery work better. Even slaveowners can be infected with idealism-remember the case of Thomas Jefferson. As for hypocrisy, it is a common human failing - just look around. The best defense of a hypocrite is to accuse others of it, so don't go by finger-pointers: judge for yourself.

Owen's most practical legacies are the Consumer Cooperative Movement, and his faith in public education. His least attractive legacy is the "company town": paternalistic at best, but tyrannical and oppressive in practise.

6. Claude-Henri Saint-Simon. His important ideological legacy is the radical notion that labor is dignified, and that the rentier leisured class should work, too. A rentier is a person who lives on rents. The term has expanded over time to include persons living on interest and dividends, too, but Saint-Simon, like many other classical political economists, recognized that the interest received on savings is a different animal from the rents received from land, since saving involves some sacrifice on the part of the saver.

Saint-Simon's most memorable contribution for us is his observation that if all rentiers were to disappear, output would not suffer, since the quantity of land is fixed. His was a religion of work, and the Dignity of Labor - a novel idea in his times. We will find economists Thorstein Veblen and John Stuart Mill and Henry George making the same point. For this shocking sentiment, other economists, mostly subsidized by rentiers, called them bad names. (Today, prominent politicians and pundits mostly blame impoverished welfare mothers of shirking work, while they admire, honor and revere rentiers.)

7. Charles Fourier.

Fourier's ideal was one of communal living arrangements like common meals, with a good deal of the work shared in common. Fourier's utopian colonies did not work; yet a few remain, and their idealism has leavened society. A well-known such colony was established at Brook Farm, near Roxbury, MA. Economically it failed, but among its graduates were Horace Greeley of the N.Y. Tribune, and Charles A. Dana of the N.Y. Sun, two of the most influential journalists of the 19th Century. Greeley ("Go west, young man!") was the Democratic candidate for U.S. President in 1872 (he had been a Republican, before switching in protest against the corruption of U.S. Grant). We might compare Fourierism with the Hippie movement of the 1960s, a form of protest that apparently died away, but whose graduates became leaders of society 20 years later. They were like meteorites that fall in the ocean and disappear, but make waves that travel a thousand miles.

R. Owen, C.-H. Saint-Simon, C. Fourier - Questions~6A

1. What was "Luddism"?

2. Did Robert Owen believe heredity or environment determines human achievement?

3. What were Owen's views on labor unions?

4. What is a rentier, and what were Saint-Simon's views on the class of "rentiers."

5. What "Utopian Colonies" can you name that survived? What is their significance in U.S. history?

6. Were the Utopians proto-Marxists?

R. Owen, Saint-Simon, C. Fourier - Answers

3. Owen favored unions, and tried to form one among his own employees. It was suppressed, along with all unions, by English laws of the early 19th Century - a time of extreme reaction against ideas of the French Revolution.

The 19th Century was a time of myriad Utopian experiments in the U.S.A. - migration, and mixing of ethnic groups, made for a fluid society. Even in the slave states, a noted Owenite was Jefferson Davis himself, later President of the Confederacy. He and his brother Joseph owned a large plantation at Davis Bend on the Mississippi River which they tried to make a model community on Owenite principles. It sounds crazy to us now, but we have to remember these people actually believed in slavery as a way of life, and thought they were trying to make it work better.

Owen was more successful in founding consumer cooperatives. The Rochdale coop plan has endured, although with limited scope.

4. A rentier is a person who lives on rents. The term has expanded over time to include persons living on interest and dividends.

Saint-Simon's chiefest contribution is his observation that if all rentiers were to disappear, output would not suffer. His was a religion of work. (Today, this idea has been turned upside down and used mainly against impoverished welfare mothers, while rentiers are admired, honored and revered.)

5. Some surviving Utopian colonies are Free Acres NJ, Fairhope AL, and Amana IA. Many familiar towns were once Utopian colonies, like Atascadero CA and Patterson CA and Solvang CA (now a tourist trap). Rural Utopian colonies persist among the Amish, the Hutterites, the Shakers and the Doukhobors. The original State of Deseret under Mormon leadership might be considered a kind of Utopian colony, the largest of all, and of course it has survived, adapted to the commercial world, and grown mighty. Puritan settlements in 17th Century New England had a Utopian element, along with a commercial one: the combination proved to be tough. "The City of Brotherly Love" in "The Quaker State" was originally seen as a kind of Utopia, and so were some of the other colonies.

Utopianism was a strong streak among 19th Century Americans and pioneers. Many colonies, like Solvang and Anaheim, were ethnic as well as Utopian. Some, like Modesto, gave a Utopian spin to irrigation and land development (civic motto is "Water, Wealth, Contentment and Health). There were a few non-religious socialist utopias, like the Kaweah Colony, and Job Harriman's Llano del Rio Cooperative Colony in the Antelope Valley. Harriman, a socialist, also came within a whisker of being elected Mayor of Los Angeles, 1913. Harriman also ran for vicePresident of the United States, under Gene Debs, and they polled a substantial vote. It is hard for today's children to realize how Utopian and wistfully radical many of their ancestors were, compared with today. It was a different time, before Bolshevism gave socialism a bad name.

Utopians were seldom a majority, but they were numerous, and leavened the loaf. Some were impractical visionaries, but others were tough and hardworking. It is worth remaining aware of them, to help understand how different most of us are today from our 19th Century forebears who spawned such movements in large numbers. The nearest thing in this Century may be the kibbuzim of Israel.

People were desperate, and always will be, to escape the "Dismal Laws" as seen by Malthus and other pessimists, and believed to represent the science of political economy.

6. Owen, Saint-Simon and Fourier were not Marxists. They saw reform coming from the top down. They were more like Teddy Roosevelt, or Otto von Bismarck - but without the imperialism. The Utopians did not send others, soldiers and missionaries, to force their ideas on others. They went themselves, moving and settling to live the lives they preached.

John Stuart Mill

Mill was acknowledged, and rightly so, as the greatest economist of his time, as well as a great philosopher, feminist, and a practicing political scientist. Like Ricardo, he served in Parliament. Owing to his radicalism, he has been snidely belittled in our times, after he died, but the derogation must be sly since he was so famously smart, conscientious, learned and respected. A.

Production and Distribution of Wealth.

1. Mill restated many ideas from Quesnay, Smith and Ricardo: but he selected well. Mill added the idea that society may distribute (divide up) wealth independently of the "laws of production" (meaning, especially, diminishing marginal returns to labor). Entitlements to land are arbitrary and may be reshuffled, he seemed to say, although he was cautious and tentative about it. He would not regard this as redistribution, but as forming a correct initial distribution. To avoid disruptions, he would not reshuffle ownership, overtly, but would reform taxation, as we shall see. There is a long history of periodic redistributions of wealth, illustrated from Leviticus 25:10 (the Liberty Bell law). Mill, a deep student of ancient history in the original Greek and Latin and Hebrew, was aware of all that. 2.

Critics point out that redistribution may affect production by damping and twisting incentives. Mill and later economists (e.g., Wm. Vickrey, a recent Nobel Laureate) found solutions. Mill would tax inheritances at graduated progressive rates (i.e., the greater the amount, the higher the tax rate), but the tax would fall on the heirs, not on the donors, so a donor may lower the tax burden by dividing up the estate among many heirs. Mill would also, like Quesnay et al., tax land rents (the net product of land). He finessed and de-radicalized this 2nd proposal by limiting the tax to future increases of rent - a compromise that satisfied neither the pro's or the con's, but paved the way for upcoming proposals by Alfred R. Wallace and Henry George and others to focus taxation on all rents.

3. Scarcity breeds substitution. According to Mill, there is a market mechanism to overcome or abate scarcity of land: dearness of land causes investors to finance, and inventors to develop, and engineers to design, new capital to substitute for land, and use more labor. Investors and inventors and engineers are all practicing economists, who take relative costs into account all the time. Heilbroner rather too superficially tells us that Mill thought a rise of wages would end capital accumulation. That may be a misquote. Mill actually said that "Scarcity breeds substitution," so high wages would cause new capital to be directed towards substituting for labor, instead of for land - just as high rents and land prices cause the reverse. That is, Mill looked at the nature of capital, not just the mass or quantity of it.

That is one of Mill's greatest ideas. Adam Smith, in expounding the working of his "invisible hand," wrote mainly of final commodities at the retail level. Mill extended the idea to factors of production like land and labor themselves. Does anyone notice that this makes the invisible hand save us from Malthus' scenario of doom? I hope you do, because it makes an excellent exam question.

It is a hard idea to grasp, at first. We are habituated to think of "labor-saving" as the goal and the necessary effect of technical change, but change may also be land-saving. To illustrate, Appendix I contains a long list of land-saving technologies. For another illustration, consider what are now called "Green Taxes." The idea of Green Taxes originated with a follower of Mill, the English economist Arthur C. Pigou. These are taxes levied on polluters, metered according to the quantity and toxicity of pollutants emitted. They are also called "effluent charges." They induce polluters to modify two things, to lower their effluent charges. These two things are products, and processes.

Mill also added the idea of capital turnover. Mill recognized Ricardo's argument that machines might soak up so much capital there would be too little left for payrolls (which they called "advancing subsistence"). In response, Mill said as land prices rise, and wage rates fall, investors will choose kinds of capital that substitute for land, and make more jobs. They will replace capital more often - each replacement employing more labor. We may summarize that in the short phrase, "Scarcity breeds substitution."

This was carrying the idea of flexibility in the economy, guided by the price system, farther than Smith had, and farther than many later economists, even today, are able to see. The idea of fixed factor proportions dies hard, and is constantly being revived. Thus Mill, whom some have thought to be socialistic, showed deeper appreciation of market adjustments than many people who think of themselves as libertarians.

4. Mill foresaw workers buying out owners (e.g., UAL). He did not foresee how this might happen via pension funds buying common stocks, a strong modern trend. It is doubtful, though, that that has made more than a minor blip in the concentration of wealth, which keeps growing in our times.

B. Population and Gender

1. Mill was a pioneer feminist. He gave Harriet Taylor credit for his best ideas, although biographers think he may have been carried away by love (he married her after Mr. Taylor died, and adopted their daughter, who adored him). The daughter, Helen, grew up to crusade with Henry George, q.v.

2. Mill advocated birth control, and was optimistic of results. He worried, like Malthus, about alleged overpopulation, but thought birth control a more humane solution than Malthus' frightful Four Horsemen of the Apocalypse (Pestilence, Starvation, War, and Natural Disasters). As for abortion, Victorians did not discuss such things, and Mill's views are unknown. That was something each unwed mother had to face on her own.

C. Mill and "Socialism"

1. Mill was not a "socialist" in any meaningful sense. He believed in small business, and wrote extensively on the virtues of small farms. He might have inspired the popular 1976 book by E.F. Schumacher, Small is Beautiful. Only ignorant name-callers (of whom there are always a few) call Mill a socialist. However, to clarify matters, it is useful to distinguish two sharply different concepts of socialism: "Distributive" Socialism, and "Managerial" Socialism. Managerial Socialism means government ownership and administration of industrial operations, e.g. Caltrans, or the Riverside Department of Public Utilities (water and power). This may be done for the benefit of private landowners who are served. "Distributive" Socialism, by contrast, means arranging tax policy in an egalitarian way, as Mill proposed, while leaving management of business in private hands.

J.S. MILL - Questions

1. Humanism and/or secularism from The Renaissance, followed by rationalism from the Age of Reason, gave faith that progress would be benign. Adam Smith reflected and reinforced that faith. Godwin carried it to extremes. Malthus and Ned Ludd were pessimistic about progress. Mill refuted the pessimism of Malthus and Ludd, without going to any unrealistic extremes. Explain separately the pessimism of Malthus and of Ludd, and how Mill refuted each source of pessimism.

2. What is "negative feedback"?

What mechanisms of negative feedback are important in the systems of Adam Smith, Thomas Malthus, and J.S. Mill?

3. What is "intensification" of land use, and how has it helped belie the dismal forecasts of Malthus? How did Mill explain this?

4. Smith saw the invisible hand of the market regulating the volume of production and the pricing of different commodities (consumer goods), as well as the incomes of the producers. Mill agreed, but went deeper and saw the market also regulating "factor proportions," i.e., the ratios in which land and labor combine in processes of production. He described how the relative prices of labor and land direct how capital is invested, and how this leads towards a benign equilibrium. Summarize Mill's argument.

5. Mill accepted the reality of The Law of Diminishing Returns in production, as described by Malthus. He introduced a new idea, however, that governments can redistribute income, mainly through taxation, to avoid the division of society into unequal classes.

His critics objected that such taxation would suppress incentives to produce. How did Mill answer them?

6. What were Mill's "Laws of Motion"?

J.S. MILL - Answers

1. Malthus thought population growth would outrun subsistence. Ned Ludd thought new machines would destroy jobs.

Mill favored population control through birth control, which he thought feasible (and he must have known how, for he had no children of his own). He thought increased demand for land would stimulate substitution of capital for land instead of for labor, making more jobs per acre of land. Think of a high-rise office building as an example, and then think of other examples.

Mill recognized Ricardo's argument that machines might soak up so much capital there would be too little left for payrolls (which they called "advancing subsistence"). In response, Mill said as land prices rise, and wage rates fall, investors will choose kinds of capital that substitute for land, and make more jobs. We may summarize that in the short phrase, "Scarcity breeds substitution."

This was carrying the idea of flexibility in the economy, guided by the price system, farther than Smith had, and farther than many later economists, even today, are able to see. The idea of fixed factor proportions dies hard, and is constantly being revived. Thus Mill, whom some have thought to be socialistic, showed deeper appreciation of market adjustments than many people who think of themselves as libertarians.

2. Negative feedback is exemplified by the thermostat: a fall of temperature turns on the furnace.

Adam Smith shows how prices act as economic thermostats, regulating output and consumption to balance supply and demand. He also, incidentally, had the erroneous idea that higher wage rates tend to raise birthrates, putting a cap on the rise of wage rates. Smith's idea is like Malthus', but with an optimistic spin - it occurs at a higher level of well being.

Malthus also saw higher wage rates as raising birthrates,

forcing wages back down to or below subsistence.

Mill accepted the ideas of Smith and Malthus, but added the important factor of adjusting factor proportions, as in #1, above.

3. Intensification means using more non-land inputs with given lands, and getting more gross output per acre, or "yield," as it is called in farming.

Carrying it a step further, as land rises in value, intensity has to be measured in dollar terms, not just per acre terms. A convenient measure is the ratio of Nonland Inputs to Output.

4. No answer given here, but see #1.

5. Mill identified some taxes that have positive incentive effects, and are also progressive and redistributive. One of these is a land tax; another is a progressive tax on inheritances. Mill would make the rate progressive with the heir, not the decedent: thus, a decedent could avoid the tax by dividing the estate among many heirs, breaking up concentrations of wealth.

Mill pushed the land tax idea only very cautiously. Like Owen et al., he saw reform coming from the top down, and had to avoid alienating the ruling class. He set the stage for two later reformers, Alfred R. Wallace and Henry George, who pushed it more directly.

6. As a Prophet, Mill foresaw a gradual end to growth of both population and capital, leaving a "stationary state." Viewing this as sympathetically as possible, he did not mean stationary intellectually nor technologically, but only in terms of gross demands on nature; and it was not a forecast so much as a recommendation. Seen thus, it may yet come to pass.

Mill stressed that capital (unlike land) is constantly turning over, i.e. wearing out and being replaced. Thus, the character of capital may change completely, while the total mass of it remains the same. This is a simple idea that has yet to penetrate modern economists who persistently equate "growth" with change, and lack of "growth" with stagnation.

Karl Marx

1. Marx was bred in the spirit of the uprisings of 1848 in Europe. This was the age of Les Mis. Marx found refuge in England.

2. He was an angry, authoritarian personality - not someone you would want to live with.

3. He made much of "Dialectical Materialism," a philosophy of historical evolution. The idea that there are "Laws of Motion" in a system proved very popular, and helps account for the persistence of Marxist studies in a culture (ours) that is basically hostile to Marx. Heilbroner imputes limited laws of motion to prior worldly philosophers, but relative to Marx they were quite static, while later "Neo-classical Economics," as developed by Alfred Marshall and J.B. Clark, became totally, ridiculously static and "ahistorical," relying mainly on a priori reasoning, leaving a wide-open field for Marxist economic historians. Since those who write history control the future, that was a major blunder by neo-classical economists.

a. "Dialectical" means evolving through constant struggle and clash of opposites, followed by their synthesis into a new social form, followed by a new struggle with a new opposite.

The idea of evolution through struggle has a lot in common with Darwin's natural selection, and the two ideas grew about the same time. Darwin, however, led to genetic elitism, where Marx led toward the determinism of external circumstances.

b. "Materialism" means that the social forms that struggle are informed by ideas that spring from current modes of production and exchange. They are not just abstract ideas, they have a technological basis. More than that, though, they have an "institutional" basis, e.g. who owns what? "Social forms" sounds abstract, but it means entitlements to property: their historical origins, and the laws and courts and police and armies that support them. Marxists dramatize this by referring to capital as a "relation," meaning it gives the owner a commanding relationship over those whom he hires. Social relations are mainly a class struggle between two sharply defined classes, the bourgeoisie (owners and employers) and the proletariat (hired workers). Marx oversimplified, of course, and people have resisted being sorted into just two classes, and yet the concept of class struggle is a useful concept to explain politics in all ages and climes. It's the "haves" vs. the "have-nots."

Marx fails to distinguish between the haves who own land, and others who have capital. Occasionally he does, but generally he assumes they go into league with each other, and team up to exploit the proles. It's an interesting point, to which we shall return. In the early history of capitalism in France, the followers of Calvin, called Huguenots, were small capitalists who allied with the proles to combat the dominant landowning class. Later, after winning some security, the small capitalists joined the landowners to suppress the proles. Some modern economists have equated capital with labor on the grounds that capital is a labor-product.

c. In simpler terms, Marx was saying that the industrial revolution called for a new set of laws, especially laws about property rights and contracts. Laws? Marx saw them as tools of the capitalists, along with their lawyers and courts. He wanted a dictatorship (supposedly of the proletariat) to supersede laws, and serve the proles.

Marx's dialectic