A Distributivist Economic History

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Chapter 3: Justice in Economic History

Remove justice, and what are kingdoms but gangs ofcriminals on a large scale?

St. Augustine

The Recent History ofEconomic History

Economic ideas, like all thingshuman, are best understood in thecontext of the history that producedthem, because all human ideas are theproducts of some history. Prior to1972, that would not have been acontroversial statement, and it wasgenerally required that graduate

students of economics have at leastone course in economic history. But in1972, the University of Chicagodropped this requirement, and mostmajor institutions followed suit.Underlying this decision was the beliefthat economics is a hard ornatural science rather than ahumane one. As a hard science,economics would be totallyindependent of any cultural or

humane influences. Indeed, themost important economic history textwas Joseph Schumpeters History ofEconomic Analysis, and the very titlehints at the problem: If economics wasabout analysis understood mainly inmathematical terms rather thanempirical ones, than the usefulness ofa history is problematic; ifeconomics is merely a matter ofselecting the right equations, then

history is unnecessary since equationshave no history.1 Here we can see the

1 Schumpeter passes over the economichistory of the Roman Empire because itproduced no economists. In doing so, he didnot quite get his own joke. After all, if one ofthe longest periods of peace and prosperity in

continuation of the Enlightenmentproject to free all things from the pastand root them firmly in the soil ofpure rationality. But economics is astrange science to desire its freedomfrom history, since all of its data ishistorical, and its subject matter ishuman production, exchange, andconsumption, things that are beyonddoubt culturally conditioned.

The result of this shift in economiceducation is a generation (or two) ofeconomists practicing in completeignorance of the history of their artand likely to have less than a fullunderstanding of the ideas which theypurport to be using.2 As Robert M.Solow noted:

My impression is that the best andbrightest in the profession proceed asif economics is the physics of society.

There is a single universally validmodel of the world. It only needs tobe applied...We are socialized to thebelief that there is one true model andthat it can be discovered or imposed ifonly you will make the properassumptions and impute validity to

human history can be accomplished withoutthe aid of economists, then perhaps it is theeconomists, and not the historians, who aresuperfluous. Joseph A. Schumpeter, History ofEconomic Analysis (New York: OxfordUniversity Press, 1994).

2 D. McCloskey, The Secret Sins of Economics(Chicago: Prickly Paradigm Press, 2002), 29-30.


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Justice in Economic History Page2

econometric results that aretransparently lacking in power.3

It is doubtful that economic ideas(or anything dealing with humanactivity) can be properly understood

apart from the history in which thoseideas are embedded and of which theyare part and parcel. If we are going toseriously look at the relationshipbetween justice and economics, weneed to see how this relationship hasbeen handled by economists in history.

The Preacher as Economist

Prior to the 15th centuryeconomics was normally discussed as a

branch of ethics. Thephilosopher/ theologian generallyfunctioned as an economist becausethis was required to explicate themoral law. Hence we can call thisperiod the preacher as economist.4Of course, to explicate this law, itwas necessary to understand themechanics of economics, which theydid by inspecting the natural law.However, this natural law is not a

look at raw nature, as it came tomean in the 17th and 18th centuries,and certainly not a look at nature redin tooth and claw. Rather, it was a

3 Robert Solow, "Economic History andEconomics," American Economic Review75, no. 2(1985): 330.

4 This derives from a phrase originallyused by George Stigler, The Economist asPreacher. Stigler believed that the best

economist wasnt the one who discovered thetruth about economic reality, but the one whobest persuaded others to his point of view.

Truth becomes subordinate to persuasion ormarketing. I am using The preacher aseconomist and The economist as preacherin quite a different sense from what Stiglerintended, one much closer to John D. Mueller,God and Money(Washington D. C.: ISI Books,Forthcoming, 2006).

view of nature bound up with ateleology; that is to say, a search for thetrue ends and purposes of naturalthings. These ends cannot be knownscientifically but only morally.

The idea of the preacher aseconomist can be gleaned from theeconomic work of two of the greatestpreachers, Aristotle and St. ThomasAquinas. The former was perhaps thefirst to produce an economic treatise;the latter expanded Aristotles work ina Christian context. Together, theAristotelian-Scholastic view formed aconsensus that lasted until the 16thcentury.

Aristotle

For Aristotle, justice is not just apart of virtue, but virtue entire, nor isthe contrary injustice a part of vice,but vice entire (Nicomachean Ethics,1139a, 10).5 Justice underlies all thevirtues and deals with the relations ofman and man:

And therefore justice is often thoughtto be the greatest of virtues, andneither evening nor morning star isso wonderful; and proverbially injustice is every virtue comprehended.And it is complete virtue in its fullestsense, because it is the actual exerciseof complete virtue. It is completebecause he who posses it can exercisehis virtue not only in himself, buttowards his neighbor also (Ethics,1129b, 25).

In is within this relationship of

man to man, that is, within justice,that Aristotle locates economics. Hepresents a sophisticated analysis thatincludes a demand function, a

5 Aristotle, "Nicomachean Ethics," inIntroduction to Aristotle, ed. Richard McKeon(New York: Modern Library, 1947).


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distinction between use and exchangevalues, the function of money as themedium between value and demand(or need) and usury, among otherthings. Aristotle begins his reflection

with the family, for The family is theassociation established by nature forthe supply of mens everyday wants(Politics, 1252b, 11).6 It is the family,and not the individual that is thestarting point (contrary to moderneconomics) because only the family isself-sufficient; an individual in isolationcan neither reproduce nor provide forhimself (Politics, 1253a, 26). Man, forAristotle, is a social being always using

language and reason and alwaysembedded in a cultural milieu.

Crucial to our consideration ofjustice are two distinctions,Distributive and Corrective justice andNatural and Unnatural exchange.

Distributive and Corrective Justice

Distributivejustice deals with howsociety distributes its commongoods. Aristotle defines this as things

that fall to be divided among thosewho have a share in the constitution(Ethics, 1130b, 31-33). This refers tothe common goods of a state, apartnership, corporation, or somecooperative enterprise. For Aristotle,these things should be divided bymerit based on contributions, butwhat constitutes this merit will be amatter that is determined culturally,for democrats identify it with the

status of freeman, supporters ofoligarchy with wealth (or with noblebirth), and supporters of aristocracywith excellence (Ethics, 1131a, 25-29).

6 Aristotle, "Politics," in An Introduction toAristotle, ed. Richard McKeon (New York: TheModern Library, 1947).

Corrective justice,7 on the otherhand, deals with justice in exchange;that is with transactions betweenindividual men. In this case, justiceconsists in exchanging equal values, in

having an equal amount before andafter the transaction" (Ethics, 1132b,19-21). This equality in exchange isthe origin of just price theories. Theproblem is how to determine whatvalues are equal when dealing withdissimilar products, which is nearlyalways the case. To use Aristotlesexample, how many pairs of shoes areequal to one house? The only way toknow this is by need, which many

economists understand as the demandfunction mediated by money. Thus thedemand for houses and shoes can becompared by looking at their pricesand the two can be equated in termsof money. Money, however, is a socialconvention: this is why it has thename money (nomisma)because itexists not by nature but by law (nomos)"(Ethics, 1133a, 25-31). Thus therequirement for equality in exchange

comes from the natural law, but themethod of implementing it is legal orconventional. Although Aristotle usesmoney to make dissimilar itemscommensurate, he is not actually ableto tell us how to do that, and admits toreaching an impasse on the problem(Ethics, 1133b, 18-20).8 The valuation

7 During the Middle Ages, the termcorrective justice became commutative

justice due to a mistranslation. The wordAristotle uses is? ? ? ?? ? ? ? ? ? ? ?? (dirthotiks),corrective (LSJ). Although the termcommutative has become more common,we will use the term corrective as closer tothe original sense in Aristotle.

8 Nicholas J. Theocarakis, NicomacheanEthics in Political Economy: From the Scholastics tothe Neoclassicals (2004 [cited December 212005]); available from


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problem, that is, price, remains centralto economics.

Distributive justice, then, is adistribution of the products of a groupdistributed to the members of the

group, while corrective justice isbetween individuals. Distributivejustice will be proportional to onescontribution to the group, and hencethere can be unequal distributionsbased on unequal contributions.Corrective justice, on the other hand,will always involve equal amounts, likefor like. The distinction betweendistributive and corrective justiceremains central to economics, even if

economists do not always recognizethe connection. Neoclassicaleconomists generally cast economicquestions in terms of free exchanges,that is, in terms of corrective justice.Many other schools have a tendency tosee things in terms of distributivejustice. This makes a profounddifference in how they answer thequestions, even when using the samedata. To take a concrete example, we

can ask if factor sharesthe amountsof compensation given to capital andlaborare a question of distributivejustice or of corrective justice? If theformer, the shares will be determinedby merit, which is culturallydetermined; if the later, shares will fallunder a calculation of the demandcurves for labor and capital.Answering the question solely in termsof corrective justice suits the

individualistic premises ofneoclassicism because correctivejustice is only concerned withexchanges between individuals;social questions do not intrude

http:// www.het.gr/ HET / pdf/ dimosiefseis/ Nicomachean_Ethics_PolEcon_JHEI .pdf.

themselves. Therefore the notion of asocial justice does not arise.Distributive justice, on the other hand,is always a matter of merit andcontribution, questions which are

answered in a social context. Thisdistinction will therefore be a recurringtheme in our examination of justice ineconomic history.

Natural and Unnatural Exchange

Also connected with justice is anatural limit on exchange. Aristotlerecognizes that households need tohave at least some wealth and propertyto survive (Politics, 1256b, 9). But

wealth can be pursued in two ways:One way is to get the things we needto live, and the other is to get moneyitself. The former is a necessary partof household management (Politics,1257b, 19-20), but the latter has nonatural limit (Politics, 1258a, 1); in theformer case, men trade for what theyneed and cease when they haveenough; there is no point in acquiringmore bread then you can use. But the

latter case has no limit; money can beaccumulated without end. Thissecond type of exchange came aboutonly after the use of money replacedbarter.

Hence some persons are led to believethat getting wealth is the object ofhousehold management, and thewhole idea of their lives is that theyoughtto increase their moneywithout limit. The origin of thisdisposition in men is that they areintent upon living only, and not uponliving well: and, as their desires areunlimited, they also desire that themeans of gratifying them should bewithout limit (Politics, 1257b, 39ff).

The idea of some limit onexchanges strikes the modern person


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as strange, yet in an age ofconsumerism, consumption for its ownsake and not to fulfill any real need, itis an idea worth recalling. Indeed, realwealth is impossible if we forget the

reason for getting wealth in the firstplace.

St. Thomas Aquinas and theScholastics

St. Thomas synthesized the workof Aristotle with a specificallyChristian point of view to produce aneconomic view that reigned until the17th century. Underlying the economictheories were two fundamental

assumptions: that economic interestswere subordinate to the real businessof life, which is salvation, and thateconomic conduct is on aspect ofpersonal conduct, upon which, as onother parts of it, the rules of moralitywere binding.9 Economic activity wasregarded as a strong passion thatneeded restraint and boundaries; itneeded to be put in its place, a placedescribed by St. Thomas:

It is lawful to desire temporalblessings, not putting them in firstplace, as though setting up our rest inthem, but regarding them as aids toblessedness, inasmuch as they supportour corporal life and serve asinstruments for acts of virtue (STII -II, 83, 6).10

Here we have a view of economics asbounded, as existing within some limits.For example, self-interest, the

mainspring of modern economics, was

9 R. H. Tawney, Religion and the Rise ofCapitalism(New York and Toronto: MentorBooks, 1954), 34.

10 St. Thomas Aquinas, "SummaTheologica," (Allen, Texas: Christian Classics,1981; reprint, 1981).

neither unknown nor condemned bythe scholastics. Indeed, it was required,since every man was required toprovide for himself and his family.11However, self-interest was limitedto

providing the goods necessary for onesself and ones family only to the levelcalled for by their station in life;beyond that, self-interest becomes thevice of greed.12 The bounds ofeconomics were given by Aristotlesidea of natural and unnaturalexchange, the natural being that whichsupplies our needs, but the unnaturalis for profit itself, unrelated to actualneeds (STII-II, 77, 4).

Thus Thomas combines two ideas,the idea of a proper station in lifewith the idea of justice in exchange toprovide a synthesis betweendistributive and corrective justice. I t isjust this combination which, as weshall see, is often missing fromneoclassical economics.13 The idea ofproper stations in life shows thatequality was not a goal of Scholasticeconomics; while a race of sinless men

could live from a common purse,communism was left behind in thegarden.14 The stations in life wereembedded in a cultural milieu whichrequired a hierarchy. The mechanismby which the Scholastics attempted to

11 Mary L. Hirschfeld, Standard of Livingand Economic Virtue: Building a Bridge between St.Thomas Aquinas and the 21st Century(2005 [citedDecember 17 2005]); available from

http:/ / www.nd.edu/~econplcy/ workshops/ documents/ jsce_paper.pdf.12 Ibid.13 Albino Barrera O. P., Modern Catholic

Social Documents and Political Economy(Washington, D.C.: Georgetown UniversityPress, 2001), 57.

14 Jarrett Bede, Social Theories of the M iddleAges: 1200-1500(Westminster, Maryland: TheNewman Book Club, 1942), 122.


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unite the distributive and allocativefunctions was the Just Price.

Just Price Theory

The Scholastics were aware of all

the elements that go into modernpricing theory: utility, scarcity, supplyand demand, costs, etc. However, theyrefused to reduce price to mereeconomic calculation. Mostspecifically, they refused themainspring of modern pricing, utility,or usefulness to the buyer. As one ofthe later Scholastics, Louis Molina, putit,

That one may not accept a higher

price by reason of the advantage ofgain of the buyer is proved from thefact that the advantage is notsomething of the sellers but thebuyers; therefore the seller may notaccept payment for it; otherwise hewould sell what is not his (1759,Disputation, 348:6).15

Molina is repeating the words ofThomas from five centuries earlier,and the rejection of utility pricing is

fairly consistent across the centuriesdominated by Scholasticism. But if notutility, then what is the basis of the justprice? For St. Thomas it is a matter ofa price that is neither more nor lessthan the worth of the thing (ST, II -II,77, 1). But the worth of a thing is notfixed with mathematical precision,but depends on a kind of estimate, sothat a slight addition or subtractionwould not seem to destroy the equality

of justice (ST, II-II, 77, 1,r. 1).Thomas does not explicate the basis ofa just price because the practice isalready a part of the economic system

15 Bernard W. Dempsey S. J., "Ability toPay," Review of Social EconomyLXIII, no. 3(2005): 341.

of his time and he assumes hisaudience already knows what he istalking about.16 What seems hopelesslyimprecise to us was more or lessaccepted as a natural part of the

pricing system. Indeed, no pricingtheory, right to our own day, has eversucceeded in being precise. What theScholastics insisted on was that pricereflect the wider social concernsexpressed by the phrase, commonestimation. Common estimation was nota result of market concerns, althoughit took those concerns into account.Rather, it was an ethical judgmentabout price that preceded the market;

it was an ethical judgment of at leastthe most influential members of thecommunity.17 18 In general, theScholastic writers preferred prices thatwere fixed by law with due accountgiven to market conditions; but theywere unwilling to give free reign to themarket alone. The market was notsovereign, but constrained.

The primary factor in the commonestimation was the wages of the

workmen involved with the product,including the worker who is themerchant selling it. Just price theory

16 George O'Brien, An Essay on MedievalEconomic Teaching(Kitchner, Ontario: BatoucheBooks, 2001), 59.

17 Ibid., 64.18 There have been attempts to equate the

common estimation with the market priceso that the just price is just the price fixed by

the free market. See, for example, AlejandroA. Chafuen, Faith and Liberty: The EconomicThought of the Late Scholastics (New York:Lexington Books, 2003).However, this thesis ishard to credit, not only in the light of thespecific denial of utility pricing, but also forthe fact that if common estimation andmarket price were the same, then the vastliterature of the Scholastics on the subjectwould be merely tautological.


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was very much opposed to what is nowcalled economic profit; themerchant was entitled to earn enoughto support his station in life, but nomore. His work deserves

compensation, as does anyones. At thesame time, the worker was entitled tosupport adequate to his station inlife. Therefore wages were related toneeds of the worker or the vendor,rather than on a utilitarian valuationof the output.19 The idea of the justprice, from an economic standpoint,was that there should be no wealthwithout work, and that prices wouldbe driven to costs, including and

especially the cost of labor. Thereforethe just price theory is oftenconsidered a precursor of the labortheory of value favored by AdamSmith and David Ricardo.

The theory of the just priceconformed to the general practice ofthe middle ages which was to have afree market in natural produce(wheat or wool, for example) whileattempting to control the rate of profit

and wages. This control was exercisedthrough the guild system and throughpositive law by setting fixed prices.The guilds themselves wereassociations of masters andjourneymen that were grantedmonopolies over some trade in a givenarea in return for the pledge of aconsistent level of quality and a fairprice. Being monopolies, they werecarefully watched.

Thus the just price was an attemptto drive price to the costs ofproduction and eliminate what we

19 Amintore Fanfani, Catholicism,Protestantism, and Capitalism(Norfolk, Virginia:IHS Press, 2003), 59.

would now call economic rents.Modern theory finds the notion of ajust price somewhat quaint and, to theextent that prices were fixed by law ormonopolies, somewhat threatening.

However, it should be noted that bothmodern and medieval pricing makethe same claims, namely theelimination of unjust profits oreconomic rents by driving prices tocosts; it may be equated with what iscalled the long-term equilibriumprice.20 But the medieval theorymakes another claim missing frommodern pricing, namely that both themerchant and the laborer will receive

adequate compensation to supportthem in their station in life, a stationassigned by cultural forces. Therewould not be equality, but neitherwould there be massive wealth on onehand or destitution on the other, butthat some notion of the common goodwould rule all classes.

The Economist as Preacher

Between the 15th and the 18th

centuries enormous changes had takenplace in the economic life of Europeand most especially in England.Capitalism was by that time wellestablished, but lacked a coherenttheory to justify it. The ethicalframework of medieval economics wasunder attack, but there was little toreplace it. Or rather, what sought toreplace it was a new concept whichpreached quite openly that greed is

good. This idea was most famouslyexpressed in Bernard MandevillesFable of the Bees: or Private Vices, PublickBenefits(1714) in which he put forththe seemingly strange paradox that the

20 Hirschfeld, Standard of Living andEconomic Virtue.


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vices most despised in the older moralcodewould result in the greatestpublic good.21 Further, we see acomplete reversal of Aristotlesdistinction between natural and

unnatural exchange. Whereas naturalexchange aimed at providing thegoods necessary to live, for whichmoney was merely a means and not anend, the summum bonumof the newethic was the unlimited earning ofmoney for its own sake.22

Into this ethical vacuum came thesages of the Enlightenment. I f theolder sages made economics a colonyof ethics, the divines of the

Enlightenment tended to reverse thatorder. Recall that the problem of theEnlightenment was to root allexplanations in some naturalisticprinciple, be it logic or humanpsychology or induction based onobservations of nature. God would beknown not through written revelation,but through the revelation of nature.Thus the economist served a dual role:he interpreted the economic stars to

man and read therein the will of God.God, or nature, was still invoked as afinal cause, but always operatedthrough secondary causes which couldbe known scientifically and apartfrom any written revelation from thedeity god-nature.23 The major role forthe priests of this god-nature was to

21 E. K. Hunt,History of Economic Thought:

A Critical Perspective(Armonk, New York andLondon, England: M. E. Sharpe, 2002;reprint, Updated 2nd edition), 33.

22 Max Weber, The Protestant Ethic and theSpiri t of Capitalism, trans. Talcott Parsons, 2ndRoxbury ed. (Los Angeles: Roxbury PublishingCo., 1998), 53.

23 John Milbank, Theology and Social Theory:Beyond Secular Reason (Oxford: BlackwellPublishers, 1990), 39.

answer the question raised byMandeville: How did private vicesbecome publick benefits? Withoutany conscious appeal to the commongood, how could the common good

result? For most of the classical andneoclassical economists, the marketbecomes a theodicy where god ornature is a Machiavellian sovereignwho weaves long term benefits frompurely private interests.24 But asnature and natures God are morethoroughly understood, Godhimself becomes less necessary andnature becomes all we need to know.Thus the economist replaces the

preacher. The laws of nature,interpreted by Enlightenment divines,become the hand of God in humanaffairs, and economics is raised to thelevel of ethics, if not actuallysurpassing them. The transitionalfigure in this process is Adam Smith(1723-1790). There were, of course,Enlightenment treatises on economicsbefore Smith, but by popular acclaimhe is regarded as the founder of

classical economics.Adam Smith

Smith was a professor of moralphilosophy at the University ofGlasgow and was part of the ScottishEnlightenment. He was a Stoicphilosopher and not a particular fanof Christianity. But he was a bitterenemy of the mercantilist class and afriend to the working classes. His

writings on economics were a responseto the Mercantile Pamphleteers, agroup of writers who aimed toinfluence government policy in favorof the English merchant class. ButSmiths real aim was to do for political

24 Ibid., 37.


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economy what Newton had done forastronomy: reduce the seeminglyendless complexity to a simple naturalrule. As Newton had tamed gravitywith the inverse square law, Smith

hoped to find a similar law for politicaleconomy.25 The problem was,however, that Smith found not one,but two Newtonian principles: TheLabor Theory of Value and theInvisible Hand theory, and theywere opposed to each other; onetheory emphasizes conflict and theother emphasizes harmony.26 HenceSmith ends up being an iconic figureto two opposed economic

philosophies, capitalism andcommunism. In the invisible handtheory we have the foreshadowing ofwhat will become neoclassicism. Butfrom the Labor Theory of Value[LTV] is born Marxs theory ofcapitalism.27 We will take each theoryin turn, and then try to discover whythere are two of them.

The Labor Theory of Value

According to the LTV, theexchange value of a commodity isdetermined solely by the amount oflabor required to produce thatcommodity.28 This value forms anatural price and is the equilibriumprice around which the actual marketprices tend to fluctuate; the forces ofsupply and demand would push pricesto this natural price.29 Thus laborforms a universal standard of value:

Labour, therefore, it appears evidently,is the only universal, as well as the

25 Mueller,God and Money, 49.26 Hunt,History of Economic Thought, 45.27 Mueller,God and Money, 62.28 Hunt,History of Economic Thought, 51.29 Ibid., 53.

only accurate measure of value, or theonly standard by which we cancompare the values of differentcommodities at all times and at allplaces. (Wealth of Nations, [WN], I.V,p.43)30

Although labor is the real standardof value, Smith points out that it isnever purchased at full price, buttreated as any other commodity (WN,I.VIII, p. 70). Smith notes that, Inthat original state of things, whichprecedes both the appropriation ofland and the accumulation of stock,the whole produce of labour belongsto the labourer (WN, I.VIII, p. 68).

But, As soon as the land of anycountry has all become privateproperty, the landlords, like all othermen, love to reap where they neversowed, and demand a rent even for itsnatural produce (WN, I.VI, p. 52).Further, men stand in need of amaster and an advance on materialsand wages (WN, I.VIII, p. 69). Wagesdepend upon a contract, but the twoparties are not equal in negotiating the

wage contract. While masters caneasily combine and the law does notprohibit such combinations, the law (atthat time) prohibited them for workers.Masters can hold out longer than theworkers (Ibid. p. 70). Thus Smithidentifiesactualwages as the result of apower relationship between mastersand workers and not a result of purelyeconomic forces.

Smith is often viewed as an

unequivocal supporter of capitalism, afriend to business, the prophet ofselfishness, and the mystic of theinvisible hand. John Mueller has

30 Adam Smith, An Inquiry into the Natureand Causes of the Wealth of Nations(Amherst,New York: Prometheus Books, 1991).


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labeled this picture of SmithSmythology;31 the real Smith is farmore complex. For example, far frombeing a supporter of the mercantileinterests, Smith was extremely

suspicious of them:People of the same trade seldom meettogether, even for merriment anddiversion, but the conversation ends ina conspiracy against the public, or insome contrivance to raise prices. (WN,I.X, p. 137)

Smith believed that the interests ofthe merchants were generally contraryto the interests of the laboring andland-owning classes; while the fortunes

of these two rise and fall with thefortunes of the country as a whole, it isthe opposite for the merchants:

But the rate of profit does not, likerent and wages, rise with prosperity,and fall with the declension, of thesociety. On the contrary, it is naturallylow in rich, and high in poorcountries, and it is always highest incountries which are going fastest toruin. The interest of this third order,

therefore, has not the same connexionwith the general interest of society asthat of the other two. (WN, I.XI, p.219)

For Smith, the liberal reward oflabour is crucial to the success ofsociety:

But what improves the circumstancesof the greater part can never beregarded as an inconveniency to thewhole. No society can surely be

flourishing and happy, of which thefar greater part of the members arepoor and miserable. It is but equity,besides, that they who feed, cloathand lodge the whole body of thepeople, should have such a share of

31 Mueller,God and Money, 45.

the produce of their own labour as tobe themselves tolerably well fed,cloathed and lodged. (WN, I.VIII, p.83)

The liberal reward of labour, as it

encourages the propagation, so itincreases the industry of the commonpeople. The wages of labour are theencouragement of industry, which,like every other human quality,improves in proportion to theencouragement it receives. A plentifulsubsistence increases the bodilystrength of the labourer, and thecomfortable hope of bettering hiscondition, and of ending his daysperhaps in ease and plenty, animates

him to exert that strength to theutmost. Where wages are high,accordingly, we shall always find theworkmen more active, diligent, andexpeditious, than where they are low;in England, for example, than inScotlandIf masters would alwayslisten to the dictates of reason andhumanity, they have frequentlyoccasion rather to moderate, than toanimate the application of many oftheir workmen (WN, I.VIII, p. 86-87).

This passage gives us a clue to whatSmith was doing with the LTV; it is atheory about equity, that is, aboutdistributive justice. Smith was doingtwo things: First, he was attempting tofind a principle for economicsequivalent to Newtons inverse squarelaw for gravity32; second, he was tryingto establish the right of the worker to asufficient wage based on pure naturallaw grounds in such a way that it could

not be denied by reason or, one hopes,by employers. In explicating the LTV,Smith abandoned completely the ideaof utility in pricing, something thathad been connected to price theory

32 Ibid., 117.


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since Aristotle. Further, his explicationof the theory was totally inconsistent,and it would remain for later thinkers,such as David Ricardo and, morerecently, Piero Sraffa to work out the

details. Nevertheless, The LaborTheory of Value was influential inclassical economics, so much so thatJohn Stuart Mill (1806-1873) could sayof it, Happily, there is nothing in thelaws of value which remain for this orany other future writer to clear up; thetheory of the subject is complete.33But Mill did note the difficulty ofdistribution; the values returned to thelaborer were nothing like the full

values that the Labor Theory of Valueindicated. This led Mill to concludethat while the laws of productionPartake of the character of physicaltruth, the laws of distribution are ofhuman institution solely and could bemade different, if mankind sochose.34

The Invisible Hand

When Smith speaks of the LTV,

the rhetoric is very much about socialdiscord and class conflict. But Smithhas a second theory, a theory of socialharmony and economic welfare. Thisis the so-called invisible hand theory.The term originally appears in anearlier work, The Theory of MoralSentiments [TMS]:

[The rich] consume little more thanthe poor, and in spite of their naturalselfishness and rapacity, though they

mean only their own conveniency,though the sole end which theypropose from the labours of all thethousands whom they employ, be the

33 Richard T. Gill, Evolution of ModernEconomics(Prentice-Hall, 1967), 51.

34 Ibid., 31..

gratification of their own vain andinsatiable desires, they divide with thepoor the produce of all theirimprovements. They are led by aninvisible hand to make nearly thesame distribution of the necessaries of

life, which would have been made,had the earth been divided into equalportions among all its inhabitants, andthus without intending it, withoutknowing it, advance the interest of thesociety, and afford means to themultiplication of the species.In easeof body and peace of mind, all thedifferent ranks of life are nearly upona level, and the beggar, who sunshimself by the side of the highway,possesses that security which kings are

fighting for (TMS, IV.I, p. 249).35

In this view, the security of kings andbeggars is equal, and all have anequitable share, a share that would beno different even if there were a moreequitable distribution of property. Yetby the time Smith wrote the Wealth ofNations, he seems to have come to adifferent view. In theWealth of Nations,the invisible hand, which actually

appears but once in the text, has asomewhat different meaning:

By preferring the support of domesticto that of foreign industry, he intendsonly his own security; and bydirecting that industry in such amanner as its produce may be of thegreatest value, he intends only his owngain, and he is in this, as in manyother cases, led by an invisible hand topromote an end which was no part ofhis intention. Nor is it always the

worse for the society that it was nopart of it. By pursuing his owninterest he frequently promotes that

35 Adam Smith, The Theory of MoralSentiments, 6th ed., The Conservati ve LeadershipSeries(Washington, D.C.: Regnery PublishingCo., 1997), 249.


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of the society more effectually thanwhen he really intends to promote it(WN, IV.II, p. 351-2).

Here the term is used inconnection with foreign trade and only

means invisibility from thegovernment bureaucracy. Smith heldthat if each man would look after hisown business, the interests of trade,foreign or domestic, would take ofthemselves. Smith had concluded thata government of, by, and for themercantile classes did not benefitsociety. Everywhere Smith looked, hesaw a system of subsidies, bounties,tariffs and restrictions all designed to

grant privilege to the wealthy, and thisfact filled him with righteous anger.The rich could no longer be dependedon to make an equitable distributionof rewards, and government, heconcluded, is in reality instituted forthe defense of the rich against thepoor, or of those who have someproperty against those who have noneat all (WN, V.I.55); the rich hadcaptured the government to such an

extent that it nearly always favoredthem over the poor (WN, I.X, p. 151).

What does tie the two views of theinvisible hand together is the idea ofself-interest. As Smith expressed theidea:

Whoever offers to another a bargainof any kind, proposes to do this. Giveme that which I want, and you shallhave this which you want, is themeaning of every such offer; and it isin this manner that we obtain fromone another the far greater part ofthose good offices which we stand inneed of. I t is not from the benevolenceof the butcher, the brewer, or thebaker, that we expect our dinner, butfrom their regard to their owninterest. We address ourselves, not to

their humanity but to their self-love,and never talk to them of our ownnecessities but of their advantages(WN, I.II, p. 20).

The context of the passage is that of

exchanges between individuals, orcorrective justice. Self-interest hereis simply descriptive of the reasonpeople trade with each other. Nor wasSmith the Prophet of Selfishness;rather, he makes a clear distinctionbetween self-interest and privateinterests and always uses these termsin opposite ways. Self-interest is merelya man taking care of his own businessand is generally beneficial to the

public good; private interests are thecombination of merchants thatattempt to seize monopoly power,subsidies, and other privileges from thegovernment to the detriment of thepublic good. Self-interest for AdamSmith did not have the meaning thatselfishness had for Mandeville or thatit would later have for the utilitarianeconomists; these regarded selfishnessas the only proper (or even possible)

motive of human action. Self-interesthad for Smith the same meaning ithad for the Scholastics: the obligationeach man had to take care of himselfand his family through his own workand efforts. Since it was an exchangetheory, it was also a theory of socialharmony, since corrective justice(unlike distributive justice) is always anattempt to achieve equality inexchanges.

The Fragmentation of Economics

Many readers of Smith have noteda kind of schizophrenia in his work.For example, E. K. Hunt notes:

When Smith examined capitalismform the vantage pint of production,he was lead to a class conflict view of


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the economy; when he examined itfrom the vantage point of exchange,he was lead to a social harmonyview.36

But this was not schizophrenia; it was

merely the recognition of the twokinds of justice whichmustbe a part ofany economic system. However, Smithcould not join the two necessary halvesof economic theory into a coherentwhole. The unity that ancient andMedieval economists had attemptedwas now shattered, and thisfragmentation was reflected in thedivisions in the economists whofollowed Smith. They tended to view

the economy either from adistributivist or social justiceviewpoint, or from a corrective orsocial harmony viewpoint. On the onehand there were the labor theorists, whoconcentrated on the social aspects ofproduction and exchange, and on theother there were the utilitarians, whoconcentrated on the individual aspectsof exchange only.37 The two traditionscontinued in parallel for the next

hundred years, with each side talkingabout eitherDistributive or Correctivejustice, but rarely about both. That isto say, they each talked about half theeconomy, and hence talked past eachother. This continued for a hundredyears until the neoclassicists, workingwith exchange theory alone, discardeddistributive justice entirely.

David Ricardo

Whereas Smith was a philosopher,David Ricardo (1772-1823) was aninvestor, one who had made a fortunein the stock market and retired at theage of 42 to write about economics.

36 Hunt,History of Economic Thought, 80.37 Ibid., 100.

His viewpoint is very different fromSmiths; whereas Smith always wrotefrom the vantage point of aphilosopher in sympathy with theworker, Ricardo wrote from the

vantage point of the investor, and hischief concern was maximizing returnsto investment. One important eventthat had happened between the timesof Smith and Ricardo was thepublication off Thomas Malthuss(1766-1834) Essay on Population,discussed in the next section. Ricardocombined Smiths analysis withMalthusian pessimism. Neverthelesshis contributions to economic theory

were substantial. Here we shall beconcerned with just two of them, theLaw of Rents and his refinement ofthe Labor Theory of Value.

It is important to understand thehistorical context of Ricardos work.Industrialization had reduced theworking class to subsistence levels by1750; the standard of livingdeteriorated during the second half ofthe 18th century and any increase in

the opening decades of the 19thcentury was slight at best.38 The livingconditions can be glimpsed from thereport of a government official aboutslums in Glasgow:

Although the outward appearance ofthese places was revolting, I wasnevertheless unprepared for the filthand misery that were to be foundinside. In some bedrooms we visited atnight, we found a whole mass of

humanity stretched on the floor.There were often 15 to 20 men andwomen huddled together, some beingclothed and others being naked.There was hardly any furniture andthe only thing which gave these holes

38 Ibid., 67.


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the appearance of a dwelling was fireburning on the hearth.39

These conditions, however, werenot really the concern of eitherMalthus or Ricardo, who both

accepted them as the natural conditionof the poor and part of the providenceof God, who punished the poor fortheir improvidence and fecundity.Rather, they were concerned with adebate between the two wings of theEnglish ruling class, the old landedgentry and the new industrialists.Malthus endeavored to show that highrents were justified and useful, whileRicardo, a representative of the

capitalists, wanted to demonstrate thatthe landlords added nothing but cost.The specific occasion for their disputewas the debate over the Corn Laws,which imposed high tariffs on theimportation of wheat, thereby raisingthe price of bread (the staple of thepoor) and the rent on land.

The Law of Rents

David Ricardo developed the Law

of Rents partially to validate MalthussTheory of Population (the so-calledI ron Law of Wages) and give it astronger theoretical foundation. By theLaw of Rents, the rent on anyparticular parcel of land will be equalto the difference in the product of thatparcel and the product of the leastproductive parcel in use, that is itsmarginal productivity.40 Forexample, if one parcel A of land, the

least productive in use, produces 1bushel of wheat per acre, and another

39 Ibid., 69.40 Garrick Small, An Aristotelian Construction

of the Social Economy of Land(Sydney, Australia:University of Technology, Sydney, Australia,2000), 252.

parcel, B, produces 3 bushels/acre, therent on parcel B will be 2bushels/acre, while A will commandno rent at all. If a less productiveparcel of land, C, is put into

production, perhaps because ofpopulation pressures, and that parcelproduces only bushel/ acre, the renton parcel A will rise to bushel andon parcel B to 2 bushels/ acre. Anincrease in population would forcemarginal land into production, therebyraising the rents on all other tenants.The least productive land that can beused is that which provides subsistence,so that eventually, as more land is

placed in production, wages will sinkto subsistence levels. Indeed, it is notjust wages, but all non-rent returns,both returns to labor and to capital,which are limited by the Law of Rents.

The Law of Rents rests on threeassumptions: One, that land isnecessary for production, that is, thereis no substitute for land; two, that landhas varying productivities; and, three,that demand is rational, informed,

mobile, and driven by financialcalculations of value.41 Assumptionsone and two seem to be self-evident.The third assumption is no morethan the assumption of a perfectmarket. If actual markets are nearperfect, then this proposition will betrue. Hence, the operation ofRicardos rental relationship will be anindication of how closely an economyis to the perfect market ideal.42 It

would seem then that the Law ofRents should hold, at least in anidealized state. When all the land in acountry is owned, then land forms akind of monopoly and rents rise to

41 Ibid., 255.42 Ibid., 256.


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absorb all the increased values thatarise from productivity improvementsor population increases. The landlordis rewarded not for any services heprovides nor for anything he has done

to the land, but merely for the fact ofownership. Ricardo concludes thatsince the Law of Rents demonstratesthat the landlord absorbs any increasesin productivity at the expense of bothcapital and labor, the interest of thelandlord is always opposed to theinterest of every other class ofsociety.43

Although Ricardo mentions theinterests of the laborers, he is not

really interested in them. In fact, bythe I ron Law of Wages, the real wagesof workers cannot be increased abovesubsistence (labors natural price) forany length of time. This is because asthe real wages are increased, thepopulation rises. This causes moremarginal land to be put intoproduction to provide food for theincreased population, which, by thelaw of rents, raises the rent and hence

decreases the realwages of the worker,leading to a cycle of misery, death, anddecreasing population. The Iron Lawof Wages has in practice turned outto be made of straw, and this was trueeven in Ricardos own day; forexample, population growth from1820 to 1870 was 0.79%/ year, but percapita income growth was1.26%/ year, an effect contrary to thepredictions of the theory.44 Indeed,

wages and population have alwaysbeen more likely to rise and falltogether, rather than move in oppositedirections. Yet, despite the lack ofempirical evidence, the theory remains

43 Hunt,History of Economic Thought, 96-7.44 Mueller,God and Money, 72.

with us both in an unbroken line ofdire predictions from Ricardos day toour own, and in the theory of anequity-efficiency trade-off, by whichwe are to believe that increases in

wages at the lower end of the payscale necessarily lead to increases inunemployment. However, whatRicardo had stumbled across in theLaw of Rents was the theory ofmarginal utility as the limit on wages,of which the Law of Rents was merelya special case. I t would be another fiftyyears until the marginalist revolutionbefore anybody realized theimplications of the law, but when they

did, it changed economics forever.On the basis of these arguments,

Ricardo opposed the Corn Lawsbecause they increased the price ofbread and hence the cost ofsubsistence, and no one could reducecosts below subsistence wages for anygreat period of time. Ricardos heartwent out to the investor as Smiths hadto the worker; profits must find theirlimit merely because the worker insists

upon eating. The solution is to find away to lower the cost of bread byimporting wheat. This leads to thedoctrine of comparative advantage, bywhich nations could profitably trade,profit here meaning lowering thecost of subsistence and henceincreasing the rate of profit.

The Labor Theory of Value

It was Adam Smith who originated

the LTV, but he could never give it aconsistent formulation because hecould never quite account for thecapital component of production.Ricardo solved this problem becausehe realized that capitalthe tools andmachinery of productionweremerely the intermediate products of


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labor, created only because theycontributed to the eventual productionof a commodity for consumption.45Therefore capital is the embodimentof past labor in current production

and always regresses to labor (and toother capital, which in turn regressesto labor).46 Therefore capital is a seriesof time-dated labor inputs toproduction. Now all the outputs canbe expressed in terms of labor that isexpended either in the current periodor past periods. This assumed thatprices represented the cost ofproduction;47 this could be assumed ifsupply and demand worked to force

prices to production costs.If prices are always equal to the

labor embodied in a product(including the past labor known ascapital) then profit must be equal tothe total amount of labor to producethe whole product minus the portionrequired to produce the subsistencenecessary for the laborer. For example,if a product had 10 hours of labor(and hence a price equivalent to 10

labor-hours), and four hours wererequired to pay for the subsistence ofthe laborer, then profit would be equalto six labor hours, minus land rents.Therefore there are but two ways toincrease profits: lower the cost ofsubsistence, or lengthen the number ofhours the laborer works. Ricardosdistributive theory assumes the workeris entitled to no more than subsistence.

Although Ricardo used the LTVto defend high profits on the groundsthat it added to capital accumulation,later labor theorists used it to justify

45 Hunt,History of Economic Thought, 102.46 Small, The Social Economy of Land, 242.47 Hunt,History of Economic Thought, 104.

higher wages, since profits were thesurplus over subsistence, and there isno logical reason why all of thesevalues should go to the employer.Therefore the capitalists abandoned

the LTV and began to rely totally onthe utilitarian arguments, argumentsthat generally excluded a theory ofdistributive justice. But those interestedin distribution continued to use theLTV.

Karl Marx

It may seem odd that so long afterthe collapse of the major communiststates, and the conversion of others

into quasi-capitalist states, that it isnecessary to discuss Karl Marx (1818-1883). Yet Marxists have not acceptedthat the Stalinist states were a realimplementation of Marxs theories,and that only events unfolding incapitalist economies can validate orrefute Marxs thought.48 But howeverone treats the test of Marxisteconomics, the great joke about Marxis that he acceptedthe capitalist system

as a necessary development in humanprogress; he looked beyond capitalismto a later stage in development thatwould inevitably correct the defects ofcapitalism, but his critique ofcapitalism presupposed his acceptanceof it. He was an enthusiastic supporterof large-scale production andeconomic concentration of the meansof production. These laid thegroundwork for socialist state, and the

capitalist phase could not be avoided.Marx had a mystical view of history.In his view, history had a hiddenpurpose and moved inevitably towardsit consummation in the victory of thecommunism. Thus for Marx, the

48 Ibid., 245.


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atheist, history became a substitute forgod. If, as Marx believed, religion wasthe opiate of the people, history wasthe opiate of the Marxists. The greatvalue of capitalism, for Marx, was that

it destroyed the previous religiousculture and hence prepared mankindfor the next stage in its development.49As capitalism had destroyed religion,communism would destroy capitalismin the final consummation of amystical notion of history.

Marx was profoundly influencedby Adam Smith and David Ricardo.He reasoned that if Smith was correctthat all values were traceable to labor,

and Ricardo correct about subsistencewages, then the capitalists share, thatis, the difference between the priceand subsistence wages, was a surplusvalue that belonged to the capitalistmerely by virtue of his being acapitalist. Hence capitalism wasinherently the exploitation of workersby the taking of the surplus value.Marx, writing from within capitalism,was in fact able to make real

contributions to economic theory. Herefined Ricardos LTV, giving it amore precise formulation, andcontributed to the understanding ofbusiness cycles and depressions, a topicwhich had mystified, and continues tomystify, the utilitarian economists.Marx was a great admirer of capitalistindustrial technique. He believed thatsheer volume of output would renderthe question of just distribution

redundant and that for the new man,with all of his material needs easilysatisfied, the last barriers to

49 Christopher Lasch, The True and OnlyHeaven: Progress and Its Cri tics(New York andLondon: W. W. Norton & Company, 1991),150.

autonomous freedom would beremoved.50 Therefore justice, as such,was not really the aim of Marxism;volume production would solve theproblem.

One curious effect of Marxshistorical mysticism is that the presentmoment is always sacrificed in thename of the future. Capitalism, beingjust a stage in the building of theworkers paradise, is justified as anecessary historical development thatwill one day be replaced by somethingbetter. The practical effect is thatCommunist governments have alwaysbeen able to rationalize present

horrors in terms of future benefits.Having abandoned the present for thefuture, Stalinism and other tyranniescould, like Capitalism, be justified asmere historical stages, a mysticismthat provides a convenient excuse fordictators.

More profound than his effect oncapitalism was Marxs effect onsocialism. Before Marx, socialism

was a diverse set of movements which,in general, sought to restore to theworker the rights he had enjoyed inthe pre-capitalist era. In general, thesemovements did not look to the state,but to voluntary associations; theywere quite different form themodern notions of socialism, being,if anything, mostly opposed to statepower on the whole rather thansupportive of it. Guild socialists and

syndicalists, for example, looked toforms of association which wouldannihilate the sharp distinctionbetween owner and worker thatwas the centerpiece of capitalism.Marxism displaced these socialisms

50 Milbank, Theology and Social Theory, 202.


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with scientific socialism that reliedsolely on gaining control of the stateand the government bureaucracy. AsG. D. H. Cole put it,

Marx had infected socialists with an

economic fatalism which madethem acquiesce in centralization andtop-down control of industry as anunavoidable precondition ofeconomic efficiency. Instead of takingconcrete steps to counter hierarchicalauthority in the workplace, theystaked everything on the hope thatsocialist parties could gain control ofthe state.51

Marxism may have scared

capitalism, but it destroyed socialism,or at least any rival form of socialism.Socialism became a kind of statecapitalism, with bureaucratsreplacing industrialists as the realowners of capital and lords ofproduction and Socialism acquiredthe meaning is has today. The real testof Marxism is not with the communisttyrannies, but with the Fabiansocialists who gained control of much

of Western Europe. As a consequence,socialism in the West morphed into aform of Keynesian welfare economics,which was itself a variety ofneoclassicism.

After Marxism swamps all theother labor theorists, the movementlosses much of its vigor. The LTVitself would not become a consistenttheory until the work of Piero Sraffa(1898-1983). But by then, leadership

in economics had passed to anothergroup.

51 Lasch,The True and Only Heaven, 318.

The Utilitarians

Despite the prestige of Smith andRicardo, LTV was not the only theoryof value, or even the predominantone. LTV was an attempt to hold on

to the values of the old order, mostespecially the idea that there should beno wealth without work. Merelyowning capital could not be a moralbasis for wealth; only putting it to usein work could justify rewards. But thelabor theorists were swimming againstthe tide. As we showed in the lastchapter, values were losing theirobjective character and becoming amatter of mere personal preference.The hedonism of Bentham wasbecoming the utilitarianism ofeconomics, where value becomesnothing more than the marketcorrelation of individual preferences,and egotism was the only validmotivation for action. Hence theutilitarians concentrated on economicsas the science of exchanges.Specifically, they purged economics ofany notions of a labor theory of valueand any notion of distributive justice.They reduced all value, indeed allhuman action, to a rational calculationof utility.52 All normativeconsiderations are ruled out inadvance. Justice, insofar as it figuresin utilitarian economics at all, merelymeans voluntary exchanges, andliberty is no more than freedom toexchange goods.

52 E. K . Hunt, "The NormativeFoundations of Social Theory: An Essay onthe Criteria Defining Social Economics,"Review of Social EconomyLXIII, no. 3 (2005):432.


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Thomas Malthus

Thomas Malthus (1766-1834) ismost famous for his theory ofpopulation. In fact, he has two suchtheories, one predicated on there

being too many workers and the otherpredicated on there being too few.

Malthuss thesis was very simple:Population, when unchecked,increases in geometrical ratio.Subsistence increases only inarithmetic ratio.53 The check onpopulation was starvation, the limit ofwhat the land could produce. ForMalthus, the liberal reward of labor

would lead only to the poorreproducing faster than the foodsupply with the inevitable result ofstarvation for some and low wages forall:

A man who is born into a worldalready possessed, if he cannot getsubsistence from his parents on whomhe has a just demand, and if thesociety do not want his labour, has noclaim of rightto the smallest portion

of the food, and, in fact, has nobusiness to be where he is. At naturesmighty feast there is no vacant coverfor him. She tells him to be gone, andwill quickly execute her ownorders54

Malthus was equally clear on thesolution. Instead of working toameliorate poverty, the authoritiesshould increase it and work to raise themortality rates among the poor:

Instead of recommending cleanlinessto the poor, we should encourage

53Gertrude Himmelfarb, The Idea ofPoverty: England in the Early Industrial Age(London and Boston: Faber and Faber, 1984),105.

54 Ibid., 122.

contrary habits. In our towns weshould make the streets narrower,crowd more people into the houses,and court the return of the plague. Inthe country, we should build ourvillages near stagnant pools, and

particularly encourage settlements inall marshy and unwholesomesituations. But above all, we shouldreprobate specific remedies forravaging diseases; and thosebenevolent, but much mistaken men,who have thought they were doing aservice to mankind by projectingschemes for the total extirpation ofparticular diseases.55

MalthussEssay on Population(1798)

swept England and the continent withits apparent simplicity and logic. Itinspired Charles Darwin to formulatehis theory of evolution, and variationsof this theory remain popular todaydespite the contrary evidenceandespecially in dealing with lessdeveloped countries.56 But it alsoturned economics, so optimistic underAdam Smith, into the dismalscience, a calculation of limitations

where resources were scarce and onlymisery abundant.57 Malthus justifiedthis melancholy hue of his workwith a theodicy: Misery and vice werethe necessary conditions to rouse manfrom the torpor and corruption thatwere the original sin of man.58Poverty in this account is not the resultof oppression or injustice, but of the

55 Hunt,History of Economic Thought, 78-9.56 Ibid., 79.57 Milbank, Theology and Social Theory, 42.58 Himmelfarb, The Idea of Poverty, 107.

The importance of original sin to economicswill become a key tenant of the neo-conservative theology of economics. SeeMichael Novak, The Spirit of DemocraticCapitalism (New York: Simon & Schuster,1982), 349-51.


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unalterable Will of God operating onthe incontinence of the poor. Ofcourse, it has not the same effect onthe rich. For the rich, all those extramouths to feed become the limit on

the returns to capital; there will bestarvation for the poor andinconvenience for the rich.

Malthus had a second theory ofpopulation as well, one connected tohis analysis of gluts (we would saydepressions). It seemed obvious thatsuch gluts could only be the result ofan insufficient demand. Malthusbelieved that the cause of thisinsufficiency of demand was that as

capitalism progressed, there was atendency for capitalists to receive toomuch income. But these excessiveprofits needed to find investments ifthere was not to be a shortage ofdemand. However, new investmentsrequired new workers, and it wasobvious that the supply of workerscould not be expanded as fast as thegrowth in capital, since it takes 16 to18 years to bring new workers into the

market; in other words, there were toofew workers to absorb the new capital.When Malthus examined the shortagein spending, he found that the workersalready spent all they earned. Thecapitalists, however, were too busyaccumulating to be able to properlyspend their fortunes. But landlords,Malthus observed, were gentleman ofleisure. Since their income was fromrent, which required no effort, they

could spend their time consuming.Therefore, high rents would make upfor the insufficiency in demand causedby the too rapid accumulation of

capital combined with the too slowgrowth of the workforce.59

The constant in the two theories ishigh rents. In the first instance, highrents help to keep down the excess

population and in the second highrents work to make up aggregatedemand caused by a lack ofpopulation. And while we may betempted to smile at the self-servingnature of these theories, the fact is thatthe justification of economic rentremains an embarrassment toeconomic theory right up to thepresent time.

Jean Baptiste SayThe industrialization of England

led to widespread discontent and laborunrest. The wealthy in England hadbefore them the example of theFrench Revolution and becameincreasingly alarmed. They attemptedto suppress workers movements byoutlawing unions. This left the workerswith no legal means of resistance;hence they resorted to illegal means.

Riots and sabotage (jamming asabot, or wooden shoe, into themachinery to wreck it) increased.Upheavals occurred in 1811-13, 1815-17, 1819, 1826, 1829-35, 1838-42,1843-44, and 1846-48. Most of thesewere spontaneous manifestations of anutterly wretched working class.60England was in a state of low-level butnear continuous civil war. Theauthorities responded as authorities do

in a state of war: with utterruthlessness. Sabotage was made acapital offense, and laws againstunions were enforced with ferocity.

59 Hunt, History of Economic Thought, 86-87.

60 Ibid., 155.


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Furthermore, economic depressionsoccurred with appalling regularity,making the situation of the poor,desperate even in good times, evenworse.

In such conditions, the task for theutilitarian economists, who were alldefenders of the system, was to showthat the wealth of the industrialistswas just, the low wages fair, and thatthe gluts were at best temporaryphenomenon which would passquickly. Typical of these economistswas Jean-Baptiste Say (1767-1832).Says Law of Markets, usually stated assupply creates its own demand, is

considered by many as essential toany defense of free markets.61 Whatthe law says is that a free market willalways adjust automatically to anequilibrium in which all resources,including labor, were fully employed.62As a consequence, there could be nogluts or depressions. Anyappearance of gluts would be illusory.While there may appear to be toomuch of one product, what is actually

happening is that its price is too high,while the price of some othercommodity must therefore be too low.Since this is simply a pricing question,the market in its wisdom willautomatically correct the problem; theprice of one commodity will be raisedand the price of the other lowered. AsSay put it, If there is an overstock, ofmany kinds of goods, it is becauseother goods are not produced in

61 Larry J. Sechrest, Jean Baptiste Say:Neglected Champion of Laissez-Faire(Ludwig vonMises Institute, [cited December 28, 2005);available fromhttp:// www.mises.org/ content/ JEAN-BAPTISTE.asp.

62 Hunt,History of Economic Thought, 138.

sufficient quantities. That[commodity] which sells above its costof production will induce a part of theproducers of the other commodity tothe production of [the higher-priced

commodity] until the productiveservices are equally paid by both.63Say had proved, by unaided reasonalone, that the depressions whichcaused so much misery were in factimpossible. Whether or not oneconsiders Says method to have beeneffective, the idea of finding anautomatic way of achievingequilibrium would remain part of theutilitarian agenda.

Nassau Senior

Nassau Senior (1790-1864) wasperhaps the most influential economistof his day. While most of his specificanalysis has been rejected, the agendahe established for utilitarian economicsbecame the basis of what would laterbe known as the marginalistrevolution. Key points of Seniorsagenda were to show that markets

were self-adjusting and gluts wereimpossible; to free economics from anyconsiderations of value (themethodological question); and tofind a way to reduce the three sourcesof incomerent, profit, and wagesto one common principle.

Gluts

Like Say, Senior believed thatgluts were impossible. Since the desire

for wealth was insatiable, the idea thatthere could be too much on themarket was nonsensical. Both Say andRicardo had made much the sameargument, but they at least recognizedthat such gluts, impossible as they

63 Ibid., 139.


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were, had in fact occurred. Senior,however, did not seem to take noticeof the actual economic crises that didhappen in his lifetime; he simplyignored them.64 Senior seemed unable

to believe that while desire might beinfinite, cash might be in short supply.

Methodology

Senior believed that economicsshould not be concerned with socialwelfare, since this would involve theeconomist in normative and ethicalconsiderations; economics should beconcerned only with wealth, nothappiness. Therefore, economics could

not be based on the ends or purposesof an economy, since that wouldinvolve ethical questions. Rather, thescience should be rooted in a veryfew general propositions, the result ofobservation, or consciousness, andscarcely requiring proof, or evenformal statement.65 Senior selectedfour propositions which in his mindscarcely required proof: All mendesire more wealth with as little

sacrifice as possible; Malthuss law ofpopulation; industrial production canbe indefinitely increased; farmproduction, on the other hand, issubject to diminishing returns for eachadditional unit of labor.66

There are two problems withSeniors scientific principles. Thefirst is that they are not scientific. Theprinciple of a science gives a rule ormeasure to which all objects in that

sciences are subject. Thus gravityprovides a foundational principle forphysics in that the relationship of allmassive objects can be measured by

64 Ibid., 147.65 Ibid., 143.66 Ibid., 145.

the rule of gravity. Seniors principleswould not seem to do this. In thesecond place, they are arbitrary; thereseem to be other principles which arefar more foundational that could

just as easily have been selected. Forexample, it seems obvious that hecould have selected this principle: Asociety must produce enough food,clothing, shelter, and other goods, so asto support its members and provide forthe continuation of the race. Thiswould seem both to be morefundamental and to provide a measurefor the success of the economy.67 Whatreally happens in a methodology like

Seniors is that the principles are infact selected to support conclusionsalready reached; the pretense ofscience is merely a cover for onesown bias.

Distribution of Incomes

Seniors big challenge was toprovide a justification for rent andprofits. His strategy was to show thatall the factors of productionland,

labor, and capitalderived theirincomes from the same principle. I fthis were so, then there could be noreason for one group to attack thebasis of the income of another group,or grounds for complaint about onesown income. Profits, Senior claimed,were a reward for abstinence; the richwere rich because they abstained frompleasures, hoarded their cash, andinvested wisely. The hardest of these to

justify was rent. Rent for both Smithand Ricardo was a suspicious category,

67 Of course, it will be pointed out thatthe principle is itself value-laden, since itsuggests that men ought to be fed and therace ought to continue. As it turns out, allprincipled statements about men and theirinstitutions are value-laden.


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since it seemed to be a payment basednot on any work the landlord did,other then collect the rent, but for amerely legal form, ownership. Butrecall that Smith and Ricardo were

still wedded to the medieval idea thatwealth should arise only from work.For Senior, rent was unproblematic; itwas simply the revenuespontaneously offered by nature.68Senior accepted the division ofproperty uncritically. Senior then wenton to show that profit was really rentas soon as the capital, from which agiven revenue arises, has become,whether by gift or by inheritance, the

property of a person to whoseabstinence and exertions it did notowe its creation. Finally, Seniorclaimed that wages were just anotherform of rent given to the laborer asthe proprietor of a natural agent 69(that is, his ability to work.)

Seniors method meant that he wasforced to reverse himself, concedingthat profit was not a reward forabstinence, at least not for the current

recipients. Further, wages are not aform of rent; no one is paid for theirabilityto work, but only for the workthey actually do. But although Seniorsattempt was a failure, the quest for asingle principle of income wouldoccupy a major place in utilitarianeconomics. Before that quest could befulfilled, the utilitarians had to gothrough one more step, themarginalist revolution.

The New Poor Law of 1834

The Poor Laws were Englandswelfare system. The were establishedin the 16th century and necessitated by

68 Hunt,History of Economic Thought, 150.69 Ibid.

the fact that so many of the peasantrywere thrown off the land and into thecities, cities that could not provide allof them with adequate work, thatrevolution was a constant threat. Then

as now, welfare systems engenderresentment both on the part of thoseforced to pay for it and those forced todepend on it. Senior more thanresented the laws, he wished to seethem abolished, along with all publiclysupported relief. He felt that the poorwere merely lazy, and the Poor Lawssupported that laziness. Only bydegrading the poor could they beforced to work, never mind that there

was not enough work to employ them.Senior felt that the poor must beexcluded from political life andrepressed by military power, ifnecessary:

There seem to be only three means ofgoverning a densely peopled countryin which [the poor] form the largemajority. One is to exclude them frompolitical life. This is our Englishpolicy.Another is the existence

among them of a blind devotion tothe laws and customs of thecountry.A third plan is to rely onmilitary powerto arm and disciplinethe higher and middle classes, and tosupport them by a regular armytrained to implicit obedience.70

In 1834, these laws, which alreadygave only meager support to the poor,were re-written under Seniorsdirection to further stigmatize poverty.

The new law forced all the poor to goto the workhouse where they wouldlive in appalling conditions, work fromsunup to sundown, wear prisonclothing, and be fed a diet substantiallyless than that afforded by the lowest

70 Ibid., 142.


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wage offered in the free market.Outdoor relief (support apart fromthe workhouse) was outlawed, andfamilies were broken apart and forcedinto the workhouse as a punishment

for destitution. Senior felt that suchharsh measures were necessarybecause of the threat of an arrogantlaboring class, resorting to strikes,violence, and combinations [unions], athreat to the foundations not merely ofwealth, but of existence itself.71 Suchwas the tone and temper of utilitarianeconomics in the 19th century. Thetone would shift with the coming ofthe marginal revolution; one wonders

if the temper ever will.Summary

From the beginnings of consciousreflection on economics, there was aunity of ethics and economics, inthought if not always in practice.Aristotle discussed economics in hisEthicsand in Politics, and consideredthem part and parcel of each other.He also recognized two sides to

justice, the distributive and thecorrective. The latter includes theexchange economy and is more or lessconstant in every culture. But theformer, distributive justice, isirreducibly cultural, and this kind ofjustice, which includes the process ofproduction and distribution, will varywith the ethical orientation of theparticular society.

The synthesis of ethics and

economics, distributive and correctivejustice, held sway until the 16thcentury, but under the pressure of thenew mercantilist class, this synthesisbegan to give way. Virtue was no

71 Ibid., 140.

longer seen as necessary to theeconomic order. Indeed, newindividualist notions of man, andespecially man as primarily an egotist,engendered the view that vice, and not

virtue, was the proper foundation ofeconomic activity, an idea that leads toMandevilles paradox of private vicesas the base of public benefits. This isthe state of affairs towards the end ofthe 18th century, when Adam Smithbegins his reflections on the economicorder. Smith is a moral philosopherand well aware of the unities inAristotle and the scholastics. He isunwilling to abandon either corrective

or distributive justice. Unfortunately,he is not able to unite them under asingle theory, but ends up with twoincompatible theories, the LaborTheory of Value and the InvisibleHand theories; the formercorresponds to a distributive principleand the latter to a corrective principle.

The economists of the 19th centurytended to emphasize one of thesetheories, to the exclusion of the other.

Thus there was a fragmentation ofeconomic thought, with neither sidebeing able to produce a consistent,comprehensive, and coherent theory.Nevertheless, utilitarian theories beginto dominate, theories which call forthe complete divorce of ethics andeconomics and a scientific basis. Ingeneral, the utilitarians exclude allnotions of distributive justice. But they,no more then the labor theorists, were

able to define this science. This setsthe scene for the next stage in thedevelopment of economic theories, themarginalist revolution.


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Chapter 4: The Disappearance of Justice

There is no such thing as society.

--Margaret Thatcher

The Marginalist Revolution

Marginal Uti li ty

Utilitarian economics required fourthings that classical economics could notprovide. The first was a theory ofequilibrium which was automatic; itwas necessary to show that the marketwould quickly move to correct anyimbalances between supply and demand.Say had attempted this task in his law ofmarkets, but the task looked incomplete.The second was Seniors project offinding a single principle for all sourcesof incomeland, labor and capitalthat is to say, the distribution principle.The third project, also from Senior, wasto provide a scientific or natural lawbasis for economics which would foreverremove it from the realm of philosophyand ethics. Finally, economics needed acoherent price theory, one that did notdepend on distributive justice. Neitherthe labor theory of value nor total utilitywas able to provide this. Utility, for allthe fervor of its supporters, was no moresuccessful than the labor theory of valuein explaining economic realities.

It was this last category, price theory,which proved to be the key to the wholeproblem. Many economists hit upon thesolution more or less at the same time,including W. S. Jevons, (1835-1882),

Lon Walras (1834-1910), Carl Menger(1840-1921), and Alfred Marshall (1842-1924). The solution was to use not totalutility, but marginalutilitythat is, thevalue of the last increment. Thismarginal increment is not as valuable (oruseful) as the next to last increment.Marginal utility has a charming

simplicity about it. Think of being

thirsty. At such times a glass of water orsoda will have a certain value to youwhich can be expressed as the price youare willing to pay. But after the first glass,the second is much less valuable, and thethird has no value at all. Each successiveincrement has a marginalutility, that is,the change in utility from each successiveincrement can be expressedmathematically as the first derivative oftotal utility. Marginal utility proved to be

a universal solvent, washing away all theproblems of classical economics andfulfilling the agenda laid out by Say andSenior.

Marginal Utility in Exchanges

W. S. Jevons applied this principle toa general theory of exchange.Underlying his general theory was atheory of the human person based onBenthams hedonism. As Jevons put it,

Benthams ideasarethe startingpoint of this work. I have attempted totreat economy as a calculus of pleasureand pain and have sketched outtheform which the science must ultimatelytake.72 This assumption is importantbecause marginal utility only makessense if people normally act to maximizetheir marginal pleasures. In any othertheory of the human person, marginalutility would be extremely limited. But

assuming such a model of humanbehavior, then one could easily show thatsuch humans would be forevercomparing prices and utilities at themargin and adjusting their purchases to

72 Ibid., 251.


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The Disappearance of Justice Page26

maximize their pleasures. For example, ifone had two commodities, xand y, andcould only get another xby giving upsome y, then one could compare theratios of ones own subjectively

determined marginal utilities for theproducts, MUx/ MUy, with the prices ofthe two commodities, Px/ Py. If the ratioMUx/ MUy>Px/ Py then one could gainsome utility by trading some xfor somey. The process of comparing utilities andprices would continue until the personhad exhausted the gains possible byexchange.73 This application of theequations of differential calculus toquestions of human behavior was

considered a great advance; theinvisible hand of Adam Smithacquired a visible mathematics.74

Carl Menger used this sameexplanation to explicate the laws ofsupply and demand. All consumer priceswere ultimately determined by marginalutility through Mengers Law ofDemand: The quantity of a commoditythat people were willing to purchasedepended on the price, and the quantity

demanded and the price were inverselyrelated to each other. The higher theprice the lower the volume, and thereverse. Economics now had what it hadlacked, a coherent theory of prices. Thiswas something that neither the labortheorists nor the total utilitarians couldsupply, and it did not depend, likemedieval theory, on a cultural variablesuch as ones station in life.

General EquilibriumBy applying marginal utility through

a complex set of mathematics, the detailsof which need not concern us here, Lon

73 Ibid., 253.74 Paul Ormerod, The Death of Economics

(New York: John Wiley & Sons, Inc., 1994), 52.

Walras was able to show the existence ofa general equilibrium model underconditions of perfect competitioninvolving a large number of small firms.This means that there would be full

employment of all resources, includinglabor, and that supply would equaldemand in every market. Of courseproving the existence of such a modeland proving it actually worked inpractice are different things. If is obviousthat people are willing to exchange atnon-market-clearing prices from thesimple fact that people do not know whatsuch prices are. Therefore Walras positedthe existence of a crier who would

announce all the prices. Buyers andsellers would then announce theirintentions to trade at the announcedprices, but if this was not the equilibriumprice, then the crier would announce anew set of prices. This process wouldcontinue until the equilibrium priceswere discovered, and only then wouldtrade take place.75 Despite the obviousdrawbacks of the model, it has been acentral part of economic theory ever

since it was developed. Walras himselfrecognized the weakness of the solution,but believed that the economy wouldfind equilibrium by a process ofgroping

Distribution of Incomes

However, there was a problem. Inorder to make marginal utility work, itwas necessary to treat the three factorsof classical economics, land, labor and

capital, under the same mathematics;that is, they had to be treated ashomogeneous quantities. But quiteobviously, they are not, not in the realworld. They are heterogeneous. Land is notlabor, and labor is not capital.

75 Ibid., 87.


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Empirically these are three differentthings that operate according to differentlaws. Capital, for example, refers to manmade things that can be extended andsubstituted. That is, the supply of capital

goods can, in principle, always beextended, you can always make more ofit. Further, one kind of capital can, inprinciple, be substituted for another; ifthere is a shortage of commodity A,you can usually substitute some othercommodity in greater supply. Land, onthe other hand, is a fixed commoditywhose supply cannot be increased andfor which there is no substitute. And theworkera human beingdiffers from

the other two factors in ways too obviousto mention. Land is no substitute formen. Machines may be substituted forworkers only when an employer requiresmere physical exertion. But if therequirement is qualitative, if what isrequired is creativity, innovation,expertise, management, etc., then onlyhumans can provide these. How thencould these heterogeneous commoditiesbe described under the same

mathematics?The problem was solved by John

Bates Clark (1847-1938). Clark sethimself the task of solving the problemraised by Nassau Senior; that is, showingthat all incomeswages, profits, andrentsoriginate from the same principle.On the opening page of his textbook,The Distribution of Wealth, he declared:

It is the purpose of this work to showthat the distribution of the income ofsociety is controlled by a natural law,and that this law, if it worked withoutfriction, would give to every agent of

production the amount of wealth whichthat agent creates.76

Clarks solution was to treat capitalas an abstraction with no actual physicalcontent. Capital-goods were, of course,

physical entitiesmachines, tools,buildingsand these things were alwaysconsumed in the process of production.But capital itself was indestructible,perpetual, fluid, and mobile.77 Capital isno more than continuity of ownership,with the precise content of the thingsowned constantly changing. Whatapplies to capital comes to be applied toall factors. There are no landlords,laborers or capitalists, only owners of

inputs labeled a, b, c, and so on. Henceyou would get a production function x =(a, b, c ).78 The system ofmathematics is perfected by making aclean break with any actual reality.There were no longer such things asshovels and men and plots of land; thesewere mere appearance only. In reality,they were all just little bits of the capitalfund, with each little bit expressed in theformulas asa, b,z.

Clark went on to show that in aprofit maximizing firm each of these bitsgets employed until it reaches it marginalproduct, that is, the value of the last unitwhich can be profitably employed.Under conditions of perfect competition,all resources will be employed and eachresource will receive the value of itsmarginal product, which is deemed to bethe amount of wealth that the agentcreates. Further, these factor paymentsexhaust the value of the total output,meaning that no surplus values are

76 John Bates Clark,The Distribution of Wealth:A T heory of Wages, Interest, and Profi ts(New York:Augustus M. K elly, 1899; reprint, 1965), v.

77 Hunt,History of Economic Thought, 309.78 Ibid., 429.


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created. In other words, there is no suchthing as profit. As Clark explained it:

Normal prices are no-profit prices. Theyafford wages for all the labor that isinvolved in producing the goods,

including the labor of superintendingthe mills, managing the financesanddoing all the work of directing the policyof the business. Beyond this, there is noreturn, if prices stand at their normalrate; and the reason for this is thatentrepreneurscompete with each other inselling their goods, and so reduce pricesto the no-net-profit level.79

This is the equivalent of saying that thenormal level of profit for entrepreneurs

is the same as their marginal product asemployees, that is, that the employermakes no more than the employee.80

Clarks theory had an astoundingresult: justice was no longer a virtue, amatter of human intentionality, but theunavoidable result of an automaticand mechanical system. Distributivejustice disappears into the logic ofexchange; corrective justice supplies theplace of distributive justice, but only

when people are working to maximizetheir own self-interest. Presumably, aperson notworking in their own self-interest, say Mother Theresa, woulddestroy the logic of exchange andactually be working against justice. Theorder established by Aristotle and St.Thomas, in which distributive justiceprecedes the corrective (rewards must bedistributed before they are exchanged) isreversed, and Mandevilles paradox of

Private Vices; Publick Benefi tsis given amathematical form. Justice itself is nolonger about right relationships between

79 Clark, The Distribution of Wealth, 111.80 Joan Robinson, "Euler's Theorem and the

Problem of Distribution," The Economic Journal44, no. 175 (1934): 399.

a man and his neighbor, butrelationships between men mediatedonly by money; justice is no longer aboutthe right relationship, but about the rightprice.

Neoclassicism

Marginality became the majoranalytic tool of economics: marginalcosts, marginal products, marginalrevenues, etc., everything could bedescribed in terms of numbers andanalyzed in terms of margins. In fact,enthusiasm for the concept was such thatsome believed that all things could beexplained by marginal utility. For

example, Ludwig von Mises wrote agreat tome on what he callsPraxeology, inwhich he argues that not only theeconomy