Economic Thought and

Political Theory
RECENT ECONOMIC THOUGHT SERIES
Editors:
Warren J. Samuels William Darity, Jr.
Michigan State University University of North Carolina
East Lansing, Michigan, USA Chapel Hill, North Carolina, USA

Other books in the series:

DeGregori, T.:
DEVELOPMENT ECONOMICS
Nowotny, K.:
PUBLIC UTILITY REGULATION
Horowitz, I.:
ORGANIZATION AND DECISION THEORY
Mercuro, N.:
LAW AND ECONOMICS
Hennings, K. and Samuels, W.:
NEOCLASSICAL ECONOMIC THEORY, 1870 to 1930
Samuels, W.:
ECONOMICS AS DISCOURSE
Lutz, M.:
SOCIAL ECONOMICS
Weimer, D.:
POLICY ANALYSIS AND ECONOMICS
Bromley, D. and Segerson, K.:
THE SOCIAL RESPONSE TO ENVIRONMENTAL RISK
Roberts, B. and Feiner, S.:
RADICAL ECONOMICS
Mercuro, N.:
TAKING PROPERTY AND JUST COMPENSATION
de Marchi, N.:
POST-POPPER IAN METHODOLOGY OF ECONOMICS
Capinski, J.:
THE ECONOMICS OF SAVING
Darity, W.:
LABOR ECONOMICS: PROBLEMS IN ANALYZING LABOR MARKETS
Caldwell, B. and Boehm, S.:
AUSTRIAN ECONOMICS: TENSIONS AND DIRECTIONS
ToOl, Marc R.:
INSTITUTIONAL ECONOMICS: THEORY, METHOD, POLICY
Economic Thought and
Political Theory

Edited by
David Reisman
University of Surrey

"
~.

Springer Science+Business Media, LLC

Ubrary 01 Congress C8taloging-in-Publication Data

Economic thought and political theory I edited by David Reisman.

p. cm.-(Recent economic thought series)
Includes index.
ISBN 978-94-010-4604-6 ISBN 978-94-011-1380-9 (eBook)
DOI 10.1007/978-94-011-1380-9
1. Economic policy. 2. Economics-History. 3. Economic history.
1. Reisman, David A. II. Series.
HD87.E264 1994
33O'.01-dc20
93-42898
CIP

Copyright o 1994 by Springer Science+Business Media New York

Originally published by K1uwer Academic Publishers in 1994
Softcover reprint of the hardcover 1st editian 1994

AII rights reserved. No pari of this publication may be reproduced,

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Contents

Contributing Authors vii

Introduction
David Reisman ix

1
Communism, Sparta, and Plato
Samuel Bostaph

2
Sir James Steuart on the Managed Market
Anastassios Karayiannis 37

3
Economic Theory and Policy: An Introduction to John Stuart
Mill's Political Economy
Samuel Hollander 63

4
Church, State, and Market: Accent on the Social
Thomas Nitsch 103

5
State and Market When Command Goes Capitalist
A. Allan Schmid 129

6
Schumpeter and Capitalism in an Era of Transition
David Simpson 147

7
Cultural Evolution, Collective Learning, and Constitutional Design
Viktor Vanberg 171

v
VI ECONOMIC THOUGHT AND POLITICAL THEORY

8
Health and Choice: The Contribution of James Buchanan
David Reisman 205
Index 229
Contributing Authors

Samuel Bostaph is an Associate Professor and Chairman of the Depart-

ment of Economics, University of Dallas, where he has taught since 1981.
He earned his PhD from Southern Illinois University at Carbondale.

Samuel Hollander is University Professor of Economics in the University

of Toronto. He is the author of The Sources of Increased Efficiency: A
Case-Study of Dupont Rayon Plants, The Economics of Adam Smith, The
Economics of David Ricardo, The Economics of John Stuart Mill, and
Classical Economics.

Anastassios Karayiannis is Assistant Professor in the Department of Eco-

nomics at the University of Piraeus. He received his MPhil from the
University of Dundee in 1988 and his PhD from the University of Piraeus
in 1987. He has published several articles on the history of economic thought
and the book General Economic Equilibrium: A Critical Analysis of the
Modern Model (in Greek). His research interests focus on the history of
economic thought, economic methodology, and entrepreneurship.

Thomas Nitsch is Professor of Economics in the College of Business

Administration at Creighton University. He has authored numerous articles
and essays in social economics and the history of economic thought, includ-
ing 'Social Economics: The First 200 Years', in Social Economics: Retro-
spect and Prospect.

David Reisman is Senior Lecturer in Economics, University of Surrey. His

books include Adam Smith's Sociological Economics, Alfred Marshall's
Mission, The Political Economy of James Buchanan, and Market and Health.

vii
viii ECONOMIC THOUGHT AND POLITICAL THEORY

A. ADan Schmid is Professor of Agricultural Economics, Michigan State

University. His teaching and research interests relate to law and econom-
ics, public choice, and public investment analysis. He is the author of
Property, Power and Public Choice and Benefit-Cost Analysis: A Political
Economy Approach. Recently he has served as consultant on Eastern
Europe to the World Bank and the United Nations.

David Simpson is Economist at the Standard Life Assurance Company.

He was formerly Professor of Economics at the University of Strathclyde
and Director of the Fraser of Allander Institute; Associate Statistician at
the United Nations; and Instructor in Economics at Harvard University.
He has published a number of books and articles on a range of economic
topics, in particular input-output analysis, political economy, and economic
growth.

Viktor Vanberg is Professor of Economics and Editorial Director at the

Center for Study of Public Choice, George Mason University. He is co-
editor of Constitutional PoliticaL Economy. His recent publications include
a number of papers on rational choice and institutional arrangements,
together with a book, The Economics of Rules: Essays in Constitutional
Political Economy.
INTRODUCTION
David Reisman

For many, the distinction is clear. Economics is about the market, about
individuals maximizing utility and firms maximizing profit. Politics is about
the state, about constitutional rules and piecemeal interventions. The two
realms are separate and distinct. They are studied by different disciplines,
taught in different departments, analyzed in different journals.
Reality, however, is less tidy. Economy trespasses on polity where elected
officials are conceived as policy-merchants paid in votes, where civil serv-
ants are believed to be self-interested and not self-sacrificing. Polity tres-
passes on economy where law and order makes possible negotiated
contracts, where markets fail and citizens demand public services instead.
Analytically as separate as allocation and leadership, the simple fact is that
all known economies are mixed economies and that the real-world fron-
tiers have always been impossible to police.
This book is concerned with important thinkers of the past and present
who have this in common, that they make no effort to put up barriers
where nature intended no dam or obstruction. In that sense this book is
concerned with synthesis and bringing together, not with reduction or pulling
apart. Yet this book is more than a demonstration that interdisciplinarity
matters. It also shows that ideas matter and that economic systems are
often best understood when interpreted with the aid of an intellectual
template that guides the investigation. In an era of systemic upheaval such
as our own, few things can be more important than for perceptions to
move in step with events-and for political economists to learn to trade in
the scarce commodity of abstract thought.
This book is made up of eight chapters. The starting point is Plato who,
in Samuel Bostaph's essay, is seen to have tried to explain how ancient
Sparta sought to reconcile the communism of property rights with a high

ix
x ECONOMIC THOUGHT AND POLITICAL THEORY

degree of authoritarianism in the state. Bostaph's comparisons with Marx

and Engels look forward from ancient Athens to a different tradition that
nonetheless shares with Plato an interest in justice and belonging, the
individual and the community, the propertied and the disaffected, elitism
and dictatorship. They also look forward to the Scottish Enlightenment
when, as Anastassios Karayiannis shows in his chapter, Sir James Steuart
wrote of the managed market and the beneficient statesman at the very
time when Adam Smith was defending the invisible hand and the auto-
matic process. Steuart was impressed by the Mercantilists' propensity to
make the nation and not the individual the centerpiece of economic theory.
He was also concerned about the failure of the market to restore full
employment in the long run. His views on the money supply and the public
debt recall those of Keynes on the role of discretionary intervention in a
drifting economy that has lost its way.
John Stuart Mill is often cited as a theorist who, unlike Plato or Steuart,
tended to conceive of economics as virtually synonymous with competitive
markets and maximizing behavior. Samuel Hollander's essay clarifies the
matter by showing that Mill was attracted by abstraction while fully appre-
ciating just how much of institutional reality was deliberately being left for
separate study. Mill compared economic orders in his account of socialism;
he discussed state education and other forms of intervention; he explored
the economic origins of social stratification; and he showed a sociologist's
awareness of customs and norms. Hollander reaches the conclusion that
"Mill would have looked aghast at much of what today passes for Eco-
nomics." In reading Hollander's essay, one is strongly tempted to imitate
Mill and to look aghast as well.
Thomas Nitsch continues the theme of motivation and integration.
Writing of Christian (and particularly of Catholic) economics, Nitsch
argues that voluntary and self-help organizations may be seen as providing
a stimulus to intelligence and freedom that it is at least the equal of the
textbook's possessive individualism. Of particular interest is his contention
that the Catholic doctrine is committed to the middle way, neither laissez-
faire capitalism nor central planning and command. Now that the monolithic
structures of Eastern Europe are thawing into decentralization and hope-
fully also into democracy, Nitsch's chapter on the state as a part of the
society rather than as a night watchman or a dictator apart would seem to
be very much in sympathy with the search for a compromise that is being
undertaken by so many intellectuals in the vacuum of the transition that
is the subject of A. Allan Schmid's contribution to this book. Schmid's
theme is property rights and transfer of title, but it must not be inferred
that he expects the state in the East to wither away. Rather, his position
INTRODUCfION xi

is scrupulously agnostic. Before we can predict how the state will react to
joblessness, welfare, or agricultural support, Schmid says, we need to dis-
cover who in the East will acquire a property in the opportunity to influence
the state. Schmid also makes the important observation about rights and
their transfer that "commercial law is more adapted to preventing breach
of contract than failure to contract." Where something could happen and
does not happen, the inference might be that there is an opportunity for
a pragmatic state Nitsch-like to get involved.
Yet the case for the market is strong, and not least because of ignorance:
since no leader can be certain of the future, there must be a temptation,
eschewing paternalism and guidance, to tell history-to-come to mind its
own business without relying on Sir for a compass that he does not and
cannot be expected to possess. The concluding three chapters of the book
are concerned with Sir and with spontaneity.
Thus David Simpson, writing about Schumpeter's pessimistic predictions,
argues that capitalism need not be destroyed by its success. Privatization,
de-regulation, and lower tax rates all suggest to him that the controlling
state need not be just around the corner even if the entrepreneur is indeed
giving way to the bureaucrat in the large-firm sector. His theme of dynam-
ism is continued by Viktor Vanberg in his chapter on historical evolution
as a discovery process. Building on the insights of Hayek, Vanberg argues
that functionality is more likely than not to be the unintended outcome of
conjectures and refutations, survivals and failures, in a competitive envir-
onment that winnows and sifts.
Vanberg's discussion of the constitutional framework that would cir-
cumscribe individual experimentation with the reason of rules provides
the link to my own chapter, the last in the volume. Taking the example of
health and health care, I examine the economic thought of James Buchanan
in order to establish the direction in which the precommitment of consent
and the in-period calculus are likely to point when the pulse is racing and
the joints creak. Buchanan once said that "if socialism fails in the large
it also fails in the small." My chapter, concerned not with the national
economy but with a single sector, considers the extent to which the
contractarian analysis may be employed to establish the proper balance
between market and state.
My discussion does not conclude that there is a single "right" answer
that makes all other answers useless and out of date. What it does suggest
is that the discussion of ideas is a civilized activity-a process and not an
endstate-that is more likely to be of cultural benefit than is a dogmatic
intolerance that shouts down all opposition. It is likely that Vanberg and
Simpson, Hayek and Schumpeter, would be broadly in sympathy with the
xii ECONOMIC THOUGHT AND POLITICAL THEORY

notion that human experience is a search for explanations. So almost cer-

tainly would the other authors, the other subjects, of the chapters in this
book.
 1 COMMUNISM, SPARTA,
AND PLATO
Samuel Bostaph

The organization of our forces is a thing calling in its nature for much
advice and the framing of many rules, but the principal [first] is this-that
no man, and no woman, be ever suffered to live without an officer set over
them, and no soul of man to learn the trick of doing one single thing of its
own sole motion, in play or in earnest, but, in peace as in war, ever to live
with the commander in sight, to follow his leading and take its motions
from him to the last detail . .. in a word, to teach one's soul the habit of
never so much as thinking to do one single act apart from one's fellows,
of making life, to the very uttermost, an unbroken consort, society, and
community of all with all.
-Plato, Laws, 942a-c

Introduction

Was Plato a socialist or communist theorist? Was he the author of a so-

cialist or communist utopian ideal? Was ancient Sparta a socialist or com-
munist society? What is or was the relationship between the actual regime

1
2 ECONOMIC THOUGHT AND POLITICAL THEORY

of ancient Sparta and the attempts by Plato to envision an ideal polis?

These questions are the focus of this chapter.
The belief that Sparta was in some sense a communist society and Plato
an ancient source of argument for communism is widespread, especially
among journalists and the general public. Because a substantial number of
scholars and other students of history share that belief, this chapter is
primarily addressed to them. Of course, the terms socialist and communist
must first be given some meaning-or at least the meaning they have for
those who have used such terms to describe ancient Sparta and to refer to
Plato must be indicated. This is done in the next section.
Because ancient Sparta came before Plato, and many of its core insti-
tutions and practices are acknowledged, discussed, and used by Plato in his
attempts to envision an ideal regime, Sparta is discussed in the third sec-
tion. It is then possible in the fourth section to examine Plato's vision in
the context of what is known of Sparta, and to reach some conclusions
concerning their historical and theoretical relationship. Given those, the
relationship of the political economies of socialism and communism to
both the Spartan actual regime and the Platonic ideal regime is briefly
explored.
The general conclusion of the chapter is that historical Sparta was no
socialist or communist society and Plato can be identified as an author of
theoretical communism or socialism only in some trivial sense. Communal
elements did exist in historical Sparta, just as they did in Plato's visions of
the ideal regime; however, those aspects were incidental to the form and
substance of Sparta, and they are neither central to Plato's purpose nor
crucial to the structure of his ideal. If to be an author of theoretical com-
munism or socialism is to present a vision of a society in which communist
elements are a central and unifying theme, Plato is no such author. By the
same token, the relative unimportance of communal elements to the basic
nature and purpose of Spartan society means that Sparta was no socialist
or communist society.

What Is a Communist?

In Marx's inaugural article (October 16, 1842) as the editor of the Rheinische
Zeitung (1972, pp. 47-48), he identifies Plato as a communist theorist. At
the same time Marx rejects "communist ideas in their present form" and
pronounces "their practical realization" to be both undesirable and impos-
sible. Of course, this is no rejection of theoretical communism per se. In
fact, Marx goes on to claim that in the theory of communism, rather than
COMMUNISM, SPARTA, AND PLATO 3

its practice, "the reality of communist ideas" and thus their "true danger"
to existing regimes is found. For the theoretical development of com-
munist ideas might engender conviction, making them "ideas to which
reason has riveted our conscience, and chains from which one cannot break
loose without breaking one's heart." This is in contrast to the practical
efforts of any actual communist revolutionaries, which "can be answered
with a cannon."
Unfortunately, neither in that article nor in any subsequent publication
does Marx indicate why he includes Plato among past theorists of com-
munism, or what Platonic arguments are the rivets that might bind the
consciences of some men to that ideal. Even further, what indeed does
Marx mean by "communists" and "communism"? As is well known, no-
where in Marx's writings is any serious attempt made at a theory of any
communistic economic system or of a society of communism, in contrast
to his extensive treatment of capitalism.
Certainly, in the third of Marx's Economic and Philosophic Manuscripts
of 1844 are fragmentary comments that attempt to differentiate "crude" or
historical communism from the system as an intellectually and historically
evolving social "solution to the riddle of history" (p. 155) and ultimate
"objectification of human essence" (p. 162). As far as its historical or crude
forms are concerned (pp. 152-153), he indicates that they follow the abo-
lition of privately held property, but always fail to abolish the property
relation itself. Crude communism retains community or "general private
property," such as communal capital or communal property in women, as
well as that "alienating" manifestation of private property-the division of
labor (p. 187). As Marx asserts that "real" communism is a system that
abolishes (p. 155) or annuls (p. 213) the institution of private property
itself; it is a final system that history will produce (p. 176). Given these two
alternatives, and certain well-known "general private property" elements
in Plato's Republic and Laws, perhaps Marx intended to include Plato
among the theorists of crude communism. If so, he does not say it.
The German Ideology (1845-1846) slightly extends Marx's critique of
crude as contrasted with real communism in the context of the develop-
ment of his historical materialism argument. Among other things he as-
serts that in the communism of the future, to be established by means of
revolution, there will be no exclusivistic or excludivist division of labor and
no class structure. Thirty years later, in his May 1875 Critique of the Gotha
Program, Marx stigmatizes as "vulgar socialism" any practical focus by
members of the communist movement on questions of distribution. In
response to such a focus in the draft program of the German Social Demo-
cratic Party, he divides into two phases the communism that is to follow
4 ECONOMIC THOUGHT AND POLITICAL THEORY

the demise of the capitalist mode of production after the proletarian revo-
lution. The first will have common ownership of "the means of produc-
tion," which will be "cooperatively regulated" under the "revolutionary
dictatorship of the proletariat," and individual labor will be rewarded
according to its productivity. This "defective" phase or "political transition
period" is to be the forerunner of the eventual "higher phase of commun-
ist society," where there will be no state, no classes, no division of labor
and the individual will produce according to ability and consume accord-
ing to need. Thus, for Marx, the practice of the higher phase of commun-
ism cannot be introduced into any existing regime; it will be found in the
future after the end of regimes.
After Marx, Lenin later (1965, pp. 88-93) argues that the exact way in
which the dictatorship of the proletariat will be transformed into the higher
phase of communism cannot be known "for there is no material for
answering these questions" (p. 88). Perhaps as a result of the influence
of Stalin (von Mises, 1951, pp. 552-553), it has become conventional for
modern Marxists to refer to the first phase as either "socialism" or "state
socialism," that phase to be followed at some point by a stateless, higher,
and true or pure "communism."
While Marx's reasons for terming Plato a communist theorist are not
clear, Emile Durkheim, in his classic study of Saint-Simonian socialism,
not only refers to Plato as a "disciple" of communism (1962, p. 50), but
alleges that it was Plato who "first gave in antiquity a systematic formula"
(p. 64) to the theory of communism, of which all later theories are "hardly
more than variations" (p. 68). He further characterizes Plato's system as
one that looks to the past, "openly reproduc[ing] the ancient organization
of Sparta" (p. 79), thus implying that Spartan society was a communist
one.
Just as Marx had drawn a difference between phases of communism,
Durkheim distinguishes carefully between theories or systems of socialism
and those of communism. He uses the term socialism to describe systems
of state-managed industrial activities, whether consumption is state-managed
or not. Durkheim's socialism seems to correspond to Marx's final concep-
tion of the first or "lower" phase of communism. Durkheim reserves the
term communism for social orders in which there is no private property
permitted for its members, and the political and economic orders (the
latter of which he appears to confine to production activities) are entirely
separated.
Durkheim's use of the term communism thus refers to a theory or sys-
tem of state-managed consumption, with the consumption goods provided
somehow outside political control, rather than to the state-less Marxian
COMMUNISM, SPARTA, AND PLATO 5

"higher phase" of communism that incorporates both production and con-

sumption. Durkheim identifies Sparta as an example of the former social
order and Plato as a theorist of it. Although agreeing with Marx that Plato
was a progenitor of communist theory, Durkheim means something differ-
ent by that theory than Marx does. l
Identifying communism as "the socialism of consumption" (p. 496), the
historian of socialism Alexander Gray identifies Plato as the originator of
"the theory and the vision" (1968, p. 11) of it and the inspiration of later
utopians. He presents Sparta as an example of "Greek communism in
practice"; although he emphasizes the military nature of Spartan society
which, with its subordination of the individual to social ends, "is, of course,
of the very essence of socialism in its general sense, as distinguished from
that species of socialism generally referred to as communism" (p. 12ff)·
Plato's own vision is argued to be one restricted to the ruling classes within
the greater society and dependent on the material support provided by
that society. The result is a restricted "communism of poverty and of
asceticism, of abnegation and renunciation" (p. 12) in contrast to the wealth-
and income-equalizing theories of later ages. Gray's typology of Plato is
closer to Durkheim's than to Marx's.
Alban Winspear (1940, p. 262) credits Plato with the crucial insight that
it is economics, and primarily the institution of private property, that cre-
ates social division. Plato's purported reaction was to envision an "upper-
class communism" (p. 249) based on Spartan and Cretan practice. Winspear
chides Plato for not having gone far enough in his search for "a unified
state" by including the lower classes in his communist scheme.
Among other historians of socialism, Max Beer asserts that Plato pro-
duced "a theory of Communism" (1957, p. 14), to be applied to all Greeks
(p. 97). He further describes the Spartans as having "accomplished a com-
munist revolution" (pp. 60ft.) under the leadership of Lykourgos, "a com-
munist revolutionary" who constitutionally established a communism of
consumption in Sparta. Harry Laidler describes Plato's ideal as a state that
unites "the moral individual with the socialized state" (1968, p. 10) in a
"dictatorship of philosophic communists" (p. 12); while Igor Shafarevich
describes the Republic and the Laws as an ideal "chiliastic socialism" (p. 7),
that is, as a socialist analogue to the religious ideal of the "thousand-year
Kingdom of God upon earth."
Only a few general historians of economic thought include some men-
tion of communistic aspects of Plato's ideal polis. Lewis Haney refers to
Plato's "communistic beliefs" (1949, p. 59) and his desire for a "complete
communism" (p. 61) among the upper classes in his ideal state; Eric Roll
characterizes the life of the "elite" in the Republic as "a communistic life
6 ECONOMIC THOUGHT AND POLITICAL THEORY

of Spartan rigour" (1974, p. 29); Gide and Rist label Plato an "utopian
communist" (n.d., p. 213); while Ekelund and Hebert point out that Plato
"proposed that communism be imposed on the rulers" (1990, p. 18) of his
ideal state so that they would be incorruptible.
In contrast, and with his characteristic independence, Schum peter de-
clines to identify Plato as either a communist or a socialist, preferring to
label him as merely influential on later communist "schemes" while his
own is closer to "fascistic" in nature (1954, p. 55). Most recently, Spiegel
rejects both the communist and fascist labels, if they would imply any of
what is meant by such labels today, and remarks on the contrast between
the ascetic purpose of the communal elements in Plato's politically "au-
thoritarian" republic and the "utilitarian lineage of communism" (1991,
p.22).
Obviously opinions are mixed regarding the question of Plato's status
in the intellectual lineage of the theory of communism, if there is such a
theory distinct from that of socialism. In addition, some believe that his-
torical Sparta has a place in the history of actual communist social orders.
But should it? One suspects a linkage between the two questions. Plato's
reliance on aspects of historical Sparta in constructing his poleis of the
imagination is apparent in his many references to Spartan institutions and
Spartan society, as will be shown below. Especially for those who believe
that Plato is a theoretician of communism (of some sort) does this encour-
age a view of Sparta as an historical communist social order. And that is
one possible truth of the relationship between historical Sparta and Plato's
ideal.
Of course, Plato could have misunderstood Sparta or misused what he
knew of it in his own communist enterprise. Therefore, Plato could be the
father of communist theory, but Sparta no example of historical commun-
ism. Alternatively, Sparta may have been a communist society, but Plato
no communist theorist; however, by introducing aspects of Spartan society
into his own social ideal, he colored his own ideal with communism and,
for many, became its seminal theorist. Finally, Plato may have been no
theorist of communism; he may have understood Sparta and represented
what he knew accurately. However, by having been later mistakenly char-
acterized as a "communist theorist," he inadvertently contributed to a mis-
taken appraisal of Sparta as itself a communist society. Guilt by association,
as it were.
I will show that the last of these alternatives is most likely the correct
one. To do so, it is first necessary to examine historical Sparta. Because
knowledge of many aspects of ancient Spartan society is both fragmentary
and controversial, the reconstruction presented here may be too simplified
COMMUNISM, SPARTA, AND PLATO 7

and is certainly speculative; however, it does have the virtue of bringing

coherence to the historical sources. And isn't coherence a presupposition
of those who label Sparta as communist? It will prove useful at first to
review the political aspects of Spartan society separately from the eco-
nomic aspects. This is not to suggest, however, that the Spartan economy
was either separable from, or independent of, the political, cultural, and
institutional framework of Spartan society (Austin and Vidal-Naquet, 1977,
p.8).

Sparta

The Political Order

The political foundations of the Spartan polis were laid during the Archaic
Age in Greek history (800-500 B.C.) by descendants of the Dorian tribes
that swept into the Peloponnese and Crete after the mysterious destruc-
tion of the Bronze Age Mycenaean civilization. This migration probably
occurred during the eleventh century (Finley, 1970, p. 72). The political
order of the Mycenaeans had resembled the monarchical system of the
Near East coupled with a palace bureaucracy, while the Dorian "semi-
nomadic warriors ... governed themselves in tribal assemblies," the king
ruling only with the consent of his soldiers (Huxley, 1962, p. 15). This
political structure was by no means unusual (Starr, 1977, p. 30; Prentice,
1940, p. 138) since virtually all the various peoples on the Greek continent
and in Ionia were organized tribally at that time.
The following centuries saw a continuing struggle for political power
between the Dorian kings and the aristocracy. By the end of the Archaic
Age, the unique political organization of the Greek polis existed through-
out the Hellenic world, with each community having attained that organ-
ization in its own way. The arbitrary will of particular men as the principle
of political rulership had been discarded, and the members of the com-
munity that constituted each polis had become subject to the rule of law,
as interpreted and applied by their various councils, officers, and assemblies. 2
Lykourgos of Sparta was one of the earliest reputed codifiers of the
laws and (perhaps) mythic founder of the Spartan constitution (c. 825-800
B.C., according to Hammond, 1986, p. 103, who depends on Thucydides;
c. 700-670 B.C., according to Huxley, 1962, p. 49, and Forrest, 1968, p. 58,
who argue the logic of the historical evidence). In doing this, he may
(Aristotle, Politics, 1271 b20ff.) have adopted some of the main elements of
the constitutions of Dorian poleis on Crete, which in tum were supposedly
8 ECONOMIC THOUGHT AND POLITICAL THEORY

adopted from the constitution introduced by the (perhaps) mythic Minos.

In any event, Sparta became famous as the first of the classic Greek pole is
considered to be a community of free citizens possessing equal, given and
publicly known political rights (Finley, 1973, pp. 154-155) that granted them
"a defined and substantial say in running their city" (Forrest, 1968, p. 152).
The reforms attributed to Lykourgos occurred at a crucial point in the
early history of the Spartan state.
Sparta was originally formed by the union of the three Dorian tribes,
Pamphyloi, Hylleis, and Dymanes, under the two royal houses, the Agiad
and Eurypontid, named for the kings Agis I and Eurypon of the latter two
tribes. 3 These warrior tribesmen conquered Laconia and settled in four
villages c. 800 B.C. (Huxley, 1962, pp. 16ff). About 750 B.C. the village of
Amyclae was captured and added to the others. Although the number of
tribes did not increase, the number of tribesmen did through natural in-
crease as well as the adoption into the existing tribes of kinship groups
or clans (obai) having hereditary chiefs and common lands (Huxley, 1962,
p. 24). Tribal membership therefore was based on heredity, and obal
membership combined heredity and geographic location.
Throughout the eighth century, the united tribes expanded their con-
quest of Laconia to the mountain barriers east and west of the Eurotas
valley, and the sea to the south. Inhabitants of conquered cities became
the perioikoi, a class of subjects with no political rights in the Spartan state
but nevertheless responsible for paying tribute and supplying troops. In
the late eighth century, Helos on the southern coast of the Peloponnese
was captured. It was apparently at that point that the Spartan system of
land division among citizens began (Huxley, 1962, p. 31).
In this first or "old allotment," the land of Laconia was divided into
allotments (kleroi), each of which was assigned to a Spartan citizen or
"equal" (homoios) to be worked by people tied to the land (the "helots"),
with one-half the produce to go to the absentee landholder. Thus, each
citizen now had a landed estate on the income of which he was to subsist
and make his contributions to the community. In addition, the helots were
also liable for military service.
Then followed the First Messenian War, the results of which were the
additions of the fertile lands and inhabitants of Messenia to the Spartan
domain, Division of this additional land and its new helots among the
homoioi would enable virtual self-sufficiency for them; however, it also
engendered political discord because the Spartan aristocrats got the lion's
share of the spoils as compared to that given to the ordinary homoios
(Jones, 1967, p. 43). This may have reflected the power of the royal fam-
ilies and their entourage, which had increased since the time when warrior
COMMUNISM, SPARTA, AND PLATO 9

assemblies ruled the tribe (Michell, 1964, p. 23). The degree of social strife
(stasis) after the war is underscored by the fact that it was at this time
(708 B.C.) that one of the only Spartan colonies (Taras or Tarentum) was
founded, but not for the reasons of overpopulation or trading purposes
that motivated the founding of colonies by other Greek poleis (Jones,
1967, pp. 11-12). Sparta had no population problem and had a subsistence
agricultural economy, which was only enriched by the conquest of Messenia.
It is most likely that Taras was founded by political refugees forced out of
Sparta (Forrest, 1968, p. 61).
Whatever the source of the existing strife between the ordinary citizen
and the aristocracy, the Spartan constitution strove to eliminate it. It did
so by restoring the ancient power of the tribal assembly, while providing
a more formal political structure for governing the polis. Introducing the
constitution was the service reputedly performed by Lykourgos, who, after
visiting Crete, went to the Cretan priests of Apollo at Delphi and secured
the "Great Rhetra" or oracle on which to found the new political order
(Huxley, 1962, p. 43, n. 283).
The Rhetra instructed the Spartan homoioi to build a shrine to Zeus
and Athena and celebrate the feast of Apollo; to establish a gerousia, or
council of 30 elders, that included the two kings; and to legislate by initia-
tives from either the councilor the whole citizenry, with the latter having
the final word in regular public assemblies. This gave the predominance of
political power to the citizenry; however, the Rhetra was later amended
during the Second Messenian War to grant veto power over citizen initi-
atives to the council of elders, thus effectively balancing the political power
of the general citizenry against that of the gerousia (Plutarch, Lycurgus, n.d.,
p. 54; Huxley, 1962, p. 54).
The gerousia itself likely consisted of 27 elected members, each of whom
represented one of the tribal warrior brotherhoods into which the homoioi
were subdivided (Huxley, 1962, pp. 47-49; Forrest, 1968, pp. 45-46). This
unit was the phratry (from which the military company or lochos was
taken, three of which formed a mora, a regiment of the army). Three
phratries formed an obe-each of the three coming from a different tribe.
There were thus nine obes in existence at the time of the Rhetra. If there
were about 330 men in a phratry, then each obe was about 1,000 men and
each tribe about 3,000, for a total Spartan citizenry of about 9,000 men
when the constitution was established. (Forrest, 1968, p. 45).
The remaining three members of the council were the two kings and
a third leader, perhaps a leader representing the Pamphyloi tribe because
they supplied no king.4 If so, this would have provided a council that
combined representation of the individual tribal brotherhoods within each
10 ECONOMIC THOUGHT AND POLITICAL THEORY

tribe, with overall representation for each of the three. It is not known
whether the five Ephors, or city magistrates, of Sparta existed prior to this
constitution. Huxley (1962, p. 38) believes so; Plutarch (Lycurgus, n.d., p.
54), Jones (1967, pp. 30-31), and others believe the Ephorate was created
later. In any event, the result of the Lykourgan reforms was to make the
Spartan political order both reflective of its military organization and of
its tribal past (Michell, 1964, pp. 93-94). Sparta thus became a warrior
tribesmen state, a polis (Plato, Laws, 666e) organized more like an ancient
army than a true community, and dedicated (Aristotle, Politics, 1984,
1324b7) to preparation for war. Later (506 B.C.), the conflicts between the
two kings during military campaigns would result in one being designated
to lead the army in each campaign while the other remained at home.
Also attributed to Lykourgos and his reforms are the distinctive educa-
tional system and domestic customs that together formed the Spartan system
of military training or agoge. The agoge included elements similar to those
found in other ancient warrior societies (Jones, 1967, p. 34; Michell, 1964,
pp. 176,281-286), as well as in some existing today (Forrest, 1968, p. 53).5
It even extended to a preference for choral music and to dancing that
mimicked warfare (Michell, 1964, pp. 185ff.; Barnstone, 1988, p. 8), much
as the kata (forms) of the Asian martial arts are sham kumite (fights). The
agoge can only be understood if it is recognized that its purpose was to
create and maintain an army of professional soldiers in a high state of
discipline and readiness, both to retain control of Spartan lands and to
provide defense from all outside threats (Michell, 1964, p. 165).
The inside threat of a revolt of the helots was very real. This is shown
by the size of the subject population relative to that of the Spartan rulers
(perhaps as much as 20 or 30 to 1) and the ethnic and tribal homogeneity,
and thus common interests, in each of the several subject peoples as op-
posed to that of the Spartans (Forrest, 1968, p. 39). In fact, several revolts
did occur, and Sparta insisted, in making alliances with other poleis, that
they agree to render assistance in the event of such revolts (Jones, 1967,
p.9).
The element of the agoge that was most immediately relevant to the
needs of a warrior state was the system of public education of the youth.
From the ages of 7 to 30 Spartan males lived apart from their families and
underwent intense military training. It was supervised by the Ephors and
designed to instill a level of obedience, courage, physical fitness, and en-
durance superior to that of any other army (Michell, 1964, p. 128). The
training included physical exercise and intentional deprivation, trials of
courage and initiative, and instruction in skills and obedience by peers as
well as elders. Indeed, Plutarch (Lycurgus, p. 67) remarks of their training
COMMUNISM, SPARTA, AND PLATO 11

that it was intended to rival the conditions of the battlefield so that war
demanded less of them than their education. At the age of 19, the young
homoioi became part of the Spartan army; full citizenship and the right to
live with wives and family were only obtained after completion of training
at age 30. Military service continued until age 60 or death, whichever came
first.
In addition, the period of childhood before the formal period of train-
ing was regulated by eugenic laws and customs to encourage the bearing
and rearing of healthy children of "good stock." Wives were not held in
common, but occasionally were "shared" (Xenophon, "Constitution," 1942,
p. 659); some husbands lending their wives to conceive the children of
other men with desired qualities. This also may have represented an at-
tempt to compensate for childless marriages in the face of decline of the
homoioi population (Michell, 1964, pp. 56, 230-231), as well as the general
fear of childlessness itself (Zimmern, 1961, p. 74). Nevertheless, male
children who were presumed weak or apparently malformed were killed.
The one communal institution to which the young warrior was intro-
duced during his military training and that continued even after he mar-
ried and established a family was the syssition, or compulsory communal
evening meal-the earlier of the two daily meals being taken (Zimmern,
1961, p. 50) in the middle of the workday. The syssition was, in origin at
least, the military mess of the phratry to which he belonged and to which,
after he became a full citizen, he was required to make a fixed monthly
contribution from the produce of his kleros (Michell, 1964, pp. 281-282;
Forrest, 1968, pp. 45-46).6 In fact, failure to maintain that contribution led
to the loss of full citizenship rights, expUlsion from the syssition and de-
motion from the status of homoios to that of hypomeion, an impoverished
member of the Spartan community (Forrest, 1968, p. 124). It is not known
whether a hypomeion retained his membership and voting rights in the
assembly.
Participation in the nightly syssition no doubt aided the continuance of
the traditions and camaraderie necessary to the preservation of a warrior
state (Powell, 1988, p. 222). Perhaps that was its main purpose. Comple-
menting this was its use as a forum for educating the young in politics,
manners, and temperance (Plutarch, Lycurgus, n.d., p. 58). Regarding in-
struction in the latter virtue, if Plutarch (p. 71) is correct in relating the
Spartans' use of drunken helots as objects of ridicule during the syssitia,
then Sparta also retained another characteristic of primitive societies (David,
1989, pp. 7-17). This was the use of the degradation and humiliation of
those low in the social hierarchy to enhance its rigidity as well as the sense
of superiority enjoyed by those at the top, the homoioi.
12 ECONOMIC THOUGHT AND POLITICAL THEORY

Whatever its social purposes, the syssition was by no means a commu-

nal meal to which each contributed an equal share and that was the same
in all phratries. Much as dining varies from one college to another at Oxford,
dependent on the wealth of each college, so dining varied from one phratry
to another in ancient Sparta, dependent on the wealth and good fortune
in the hunt of its members (Fisher, 1989, pp. 31-32). Each was responsible
for a basic contribution, but some gave more than others for reasons of
prestige and patronage, so that "hierarchy in the syssition was extremely
important" (ibid., p. 37). On the other hand, the sharing of income and
wealth in this way would likely alleviate some of the resentment engen-
dered by wealth and income inequalities (ibid., p. 39), perhaps in the same
way that patronage of the arts and other civic activities by the wealthy
often accomplish the same end today.
It should be clear from this brief review of the political order of Sparta,
and its main supporting institutions, that the political and social hierarchy
were exceedingly rigid-and intentionally SO.7 According to political dis-
tinction, and in descending order of political importance, there were
homoioi, perioikoi, helots, and slaves. Helots given freedom in return for
military service became the neodamodeis, virtual mercenaries in the
Spartan army (Forrest, 1968, p. 128; Oliva, 1971, p. 107). Those who elected
to serve in the Spartan navy became the desposionautai (Huxley, 1962,
p. 73). Furthermore, (Michell, 1964, p. 230) entry into full citizenship by
means other than being born the son of a homoios was seldom granted
after the introduction of the constitution.
Significant distinctions based on heredity, age, and the fulfilment of
obligations even existed among the homoioi themselves. Obviously, the
aristocratic homoios was privileged in comparison to homoioi who were
not members of the royal families. Additional distinctions were made
according to parentage, the mothakes being sons of hypomeiones and who
served as companions of sons of homoioi (Jones, 1967, p. 37). Also, homoioi
who failed to marry, or were convicted of cowardice, were subject to social
discrimination, and only those who died on the battlefield were given state
burials and marked graves. Some of the "equals" were obviously and
perpetually more equal than others.

The Economic Order

The economic aspects of the history of Sparta prior to the conquest of

Helos in the late eighth century are obscure. All that is known is that after
the settlement of the original four villages that would become Sparta, the
COMMUNISM, SPARTA, AND PLATO 13

indigenous Achaean population of most of the cities conquered in Laconia

in the wars of the eighth century became the perioikoi (Huxley, 1962, p.
16ff.).
As previously mentioned, once Helos and all Laconia were secure, the
Spartans divided the land outside the perioikic cities into separate agricul-
tural estates (kleroi) which, with their inhabitants, were then assigned to
individual Spartan homoioi to provide them regular incomes. This assign-
ment was originally not a transfer of ownership, but rather made each
homoios a conservator of state property who retained the kleros and its
associated inhabitants and income by right of his citizenship, with that
retention dependent on good conduct (Michell, 1964, p. 205). The former
nomadic warrior tribesmen thus became surrogate rentiers of estates worked
by the helots, who were tied to the land. From the rents each homoios
received, he provided for his family, made his compulsory contribution to
his syssition and to occasional civic needs and religious festivals, and
outfitted himself for war. Transfer of the kleros and its helots remained a
state decision until the fourth-century Law of Epitadeus gave the right
of disposition of the kleros to the incumbent homoios (Oliva, 1971, pp.
188-190).8
Following the conquest of Messenia and the second allotment of es-
tates, the total agricultural wealth under Spartan dominance assured its
citizens virtual self-sufficiency in necessities, as long as they retained pol-
itical control (Huxley, 1962, p. 41). The tasks of retaining that control by
suppressing a rebellion of the helots in the Second Messenian War and
pursuing wars against hostile cities outside Sparta's borders occupied the
army for the rest of the seventh century. By the end of the sixth, Sparta
ruled Laconia, Messenia, and much of Arcadia; had conquered its main
enemy Argos; and was powerful enough to intervene in Athenian politics.
It had, however, irrevocably committed itself to an agrarian economic base
(Forrest, 1968, p. 38).
This was a result of the central economic role of the land-tenure system.
It supported both the rigid political hierarchy and the standing army neces-
sary to retain political control of the occupied lands, as well as to repel
potential invaders. It also reflected (Austin and Vidal-Naquet, 1977, pp.
14-15) the commitment to the basically aristocratic value system of an-
cient Greece, which enobled war and leisure-and, to a lesser extent, agri-
culture-while denigrating trade or production activities, where one man
might be subject to the will of another. What commercial activity existed
in Sparta was the province of the subjugated perioikoi (Hamilton, 1979,
p. 61).9
Despite the periodic wars, the latter part of the seventh century and the
14 ECONOMIC THOUGHT AND POLITICAL THEORY

whole of the sixth were characterized by relative peace and prosperity in

comparison with earlier conditions (Huxley, 1962, pp. 61-65; Michell, 1964,
pp. 11-12).10 There were even significant increases in trade between Sparta
and other poleis.l1 Although there was allegedly an internal ban on the use
of coined precious metal for money, it was used in external trade after its
introduction in the Peloponnese in the sixth century.12
For Huxley (1962, p. 73), it was the rise of Athens and Persia that
brought an end to this prosperity and initiated the isolation and increased
bellicosity for which Sparta was known in the fifth century. This interpre-
tation reinforces the conclusion of Thucydides (I, 1951, 88) and Hasebroek
(1965, p. 144) that the Peloponnesian War was the result of Spartan fear
of Athenian imperial power, although it does not necessarily mean that
the war was commercially motivated (Finley, 1973, p. 158).13 Although
successful in that war, the defeat of Sparta by Thebes at Leuktra in 371
B.C. and the other military failures of the fourth century, culminating in the
loss of Messenia, crippled the agricultural base of classic Sparta, consigned
Spartan armies to the status of mercenaries, and reduced the Spartan
economy to the level prevailing prior to the First Messenian War 400 years
earlier.
During the long period of relative Spartan prosperity, the political
equality of the homoioi was not at all matched by economic equality, as
one reference by Plato (Laws, 683d-685a) might imply, and some later
commentators (Jones, 1967, p. 41) have suggested. There were great dis-
parities in wealth and income among the homoioi (Jones, 1967, p. 36;
Michell, 1964, pp. 35, 207ft.) as there were also class (Ridley, 1974, p. 291)
and wealth (Forrest, 1968, p. 30) differences among the perioikoi and even
among the helots (Michell, 1964, p. 78)-who, if they satisfied the 50 per-
cent tithe and survived their military service, were otherwise free to man-
age their own economic affairs. The percentage tithe could even be seen
as an incentive to production in that both the helot and his rentier stood
to benefit from increases.
Several factors contributed through time to an increasing inequality of
wealth and income among the homoioi. Unequal estates were alloted among
the nobility and the ordinary homoioi at the beginning of the land-tenure
system, and this situation persisted. Managerial abilities and luck were not
equally distributed among the homoioi, and this led to differences in their
incomes while in possession of their kleroi. As a result of an understandable
desire to prevent the reduction-or even to encourage an increase--of
wealth and income, there was an incentive for marital arrangements aimed
at preserving or concentrating landholdings. 14 Also, inheritance customs that
dispersed holdings among male descendants created an incentive to restrict
COMMUNISM, SPARTA, AND PLATO 15

the size of families; and this, given the higher mortality rates of Spartan
males, increased the probability of having a surviving daughter for whom
to find a suitable marriage, rather than a son to inherit. 15 There were also
the key demographic factors of the continuing absolute attrition of the
homoioi through wars and the unwillingness to extend citizenship beyond
tribal membership.16
Over the centuries between the capture of Helos and the defeat of the
Spartan army at Leuktra in 371 B.C., the number of homoioi shrank
steadily-possibly being fewer than a thousand by the latter date (Austin
and Vidal-Naquet, 1977, p. 82)-while the disparities of wealth between
the richer and poorer citizens grew greater and the land became increas-
ingly concentrated in the hands of the female population. Michell (1964,
p. 334) even goes so far as to characterize the economic inequality among
the homoioi that resulted from the land tenure system as exceeding that
found in any other polis. These inequalities, and the associated debt of the
poorer members of the community, were to culminate in the third century
in social stasis, a situation resolved by debt cancellation, land redistribu-
tion, and reinstitution of the agoge by Agis IV, Kleomenes III, and Nabis.
Spartan state finances, like those of Athens and the other Greek poleis,
were handled on a cash-flow basis. When there was cash, it flowed. Other-
wise, there is little evidence of any attempt at systematic public finance
and none of state economic planning. Despite the fact that the Spartan
economy was virtually a permanent war economy-the income from the
kleroi being primarily devoted to support of the standing army-there was
no attempt to anticipate and prepare for war expenditures. For the expen-
ditures that did become necessary, perioikic tribute was used, resources
were seized, or citizens were compelled to make contributions to meet
specific needs. No direct taxes (Michell, 1964, p. 308) were levied, save the
obligatory monthly contribution to the syssitia. It was only after the defeat
of Athens in 404 B.C. that Sparta attempted to adopt the Athenian system
of extracting tribute from its allies (ibid., p. 312). For the brief period before
defeat at Leuktra it flowed into Sparta, but left no lasting imprint such as
that left by the tribute that had built Periklean Athens.

Summary

How should post-Lykourgan Sparta be characterized? It is tempting to

regard the political order established by Lykourgos as (Aristotle, Politics,
1984, 1265b34-42) a mixture of monarchy, oligarchy, and democracy;
however, such an approach is not really very informative. It uses terms
16 ECONOMIC THOUGHT AND POLITICAL THEORY

intended to reveal the locus of legitimized physical coercion (political

power) in an entire social order to characterize contending power centers
within such an order. Without knowing the exact governmental structure
and the rules according to which political power is exercised, one could
not anticipate how that order might have functioned. On the other hand,
if one knew that structure and rules, the particular terms used to denote
its parts would be irrelevant to its understanding.
It is also tempting to characterize the political order of Sparta as a
balance of powers between the executive, the legislative, and the judicial
branches of the government (Forrest, 1968, pp. 17-18). Unfortunately, any
attempt to do so founders on the difficulty of identifying which were which
within the Spartan structure. Each major element-the kings, the gerousia,
the assembly, the ephors-combined the duties of originating law, execut-
ing law and judging transgressions of the law (Jones, 1967, pp. 15ff.). Again,
if characterizing a political order is to convey understanding of how it
functions, inappropriate or anachronous analogs cannot be used.
The position taken here is that the Spartan polis is best understood as
what it was in itself, rather than what it was or is called. There were two
kings, a gerousia, an assembly, and ephors. Each part obtained particular
constitutional responsibilities as a result of historical compromises in the
struggle for political power. The political order among the homoioi com-
bined the representation of their tribal past, their geographical present,
and the military foundation blocks within Spartan society. It was not, at
least in structure, dominated by the demos, the kings, the aristocracy, or
the army; instead, it balanced those (potentially) contending factions (Plato,
Laws, 691e-692a, and Letters, VIII, 354b-c).17
Sparta was, like the other Greek poleis, exclusivistic in that only a
minority of the population had full political rights. In that sense, it was an
authoritarian regime. The rest of the popUlation-women, perioikoi, helots,
slaves, et alia-were ruled by, and had their rights defined by, the homoioi
minority. In classic Greek fashion, the political distance from citizenship
was measured by the degree to which one's will was subject to that of
those at the top, the homoioi. There were thus no classes in the Marxian
sense of peasants, proletariat, and bourgeoisie; status was politically rather
than economically defined.
Even further, culture and economic structure were strongly influenced,
if not solely determined, by the political necessities created by the seizure
and determination to retain control of Laconia and Messenia. The eugenic
practices, the educational system, and other elements of the agoge united
to provide the needed standing professional army, while freezing the social
structure and introducing that relative stability (eunomia) so admired by
COMMUNISM, SPARTA, AND PLATO 17

outsiders. The kleroikic system, intended to provide self-sufficiency for the

army, in like manner froze the economic structure into a subsistence agrar-
ian mold that retarded the economic development of Sparta. When the
army was defeated and the land was lost, the gains of several centuries
evaporated.

Plato's Republic and Laws

The purpose of this section is to explore the influence of Sparta on Plato's

vision of the ideal political and economic regime; however, historical Sparta
was only one of the influences on Plato. He taught and wrote in a cultural
context that also must be appreciated if his work is to be understood. It
will help to review that context briefly before narrowing the focus to the
specific influence of Sparta. Then it will be possible to ask in what sense,
if any, either historical Sparta or Plato's ideal regime might be termed
communist or socialist, given what has been learned.

The Cultural Context

Above the social frame of any particular polis arched the metaphysical
epistemological, religious, and ethical context within which Hellenes ex-
isted. Their belief in the unity of nature and the existence of order in the
universe, concomitant with the belief in the efficacy of reason to reveal
that order, grew with the rise of philosophy to make Hellenic civilization
the seedbed of both scientific and moral thinking in the West. As early as
Homer's Iliad and Odyssey (c. 750 according to Forrest, 1966) the concept
of universal moral law and the necessity of obedience to it had been ex-
pressed, as well as its central role in human affairs. In this earliest concep-
tion (Bowra, 1959, p. 79), the natural melded with the moral in the divine
law as "the will of the gods" and myth provided a basis for order in
society; but even the gods were believed to be subject to Necessity (ananke)
and Fate (moira).
Human nature, being part of Nature, was taken to mean that moral and
natural law must have the same foundation; social law was to express the
realization of natural law in society. The highest function of social law
would be that of "a creative, formative agent" for both securing and incul-
catingjustice (dike) (Kitto, 1951, p. 94). The basic laws (nomoi) ofthe polis
thus aimed at creating the ideal citizen. The relation between religion and
man-made law became that of the former providing the confirmation, rather
than the basis, for the latter.
18 ECONOMIC THOUGHT AND POLITICAL THEORY

There exists no better summary of the primary values intended to

motivate "the best men" (aristoi) of ancient Greece than the two inscribed
aphorisms of the Delphic Oracle, "Nothing in Excess" and "Know Thy-
self." The search for "the good life" and the attempt to achieve the ideal
of "the good man" as exemplar of that life through the practice of mod-
eration or temperance (sophrosune) embodied the spirit of these aphor-
isms. This meant "accepting the bounds excellence laid down for human
nature, restraining impulses to unrestricted freedom ... [and] obeying the
inner laws of harmony and proportion" (Hamilton, 1964, p. 21).
Kitto (1951, p. 252) emphasizes the consequent importance to the Greeks
of the doctrine of the Mean, whereby the will was to master the extremes
of the passions to produce a man who was like a tuned string, which "did
not imply the absence of tension and lack of passion, but the correct
tension which gives out the true and clear note." Eros was believed to be
the force that animated the highest blend of the intellectual and spiritual to
achieve the greatest ends, one that produced "a properly balanced person-
ality," and a life devoted to achieving and exhibiting the four cardinal
virtues of courage, wisdom, temperance, and justice (Bowra, 1959, p. 209).
The ancient Greeks were certainly not ascetics; however, there was an
element of asceticism in this emphasis on the virtue of temperance and the
exertion of the will, inspired by eros, to achieve harmony of soul, body,
and polis. 18 There was also an element of individualism in their emphasis
(Finley, 1970, pp. 130-131) on self-reliance and the value of innovation,
although they were not truly individualistic (Starr, 1977, p. 137). The fam-
ily (oikos) and polis remained the fundamental social units. Aristotle's
argument in the Politics that concludes with the famous words "man is by
nature a political animal" (1253a3) (lOon politikon) is better understood
by the modem reader in its more literal translation of "man is an animal
whose characteristic it is to live in a polis" (Kitto, 1951, p. 11).
It was further believed that for aristoi to achieve excellence of character
(arete),19 they required a setting of leisure, health, beauty, wealth, and
community that was not possible to everyone and in which only certain
men would be ultimately successful. 20 The specific aristocratic ethos within
which arete was to be sought was a constellation of values maintained by
education, the arts, and religious and social institutions that first appeared
in the eighth century (Starr, 1977, pp. 120ff.). By the fifth century, it was
believed that "arete was found in the full development of the individual
inside the social frame" (Bowra, 1959, p. 211). This evolved into the fourth-
century ideal of paideia, or civic cultural education, as the supreme means
to arete (Jaeger, vol. I, 1945, p. 204). Significantly, only Sparta (Aristotle,
Nicomachean Ethics, 1947, 1180a25) had such a public education.
COMMUNISM, SPARTA, AND PLATO 19

Plato's concept of the paideia that would produce arete, and achieve the
just man and the just polis, is presented in arguments for its ideal form as
well as for its practical realization. 21 Republic argues the ideal; Laws is
concerned with practice in the face of "frail human nature" (875b). Only
Laws concerns a truly constitutional polis-a polis under the rule of law.
It is thus appropriate that Sparta, the first constitutional Greek polis, pro-
vides only a springboard for Plato's ideal, while presenting (in conjunction
with those of Crete) key institutional patterns for his practical regime. The
narrative structures of Republic and Laws are well known and will not be
summarized here; it is only necessary to review the elements relevant to
the question of the degree to which Spartan influence is apparent.

Republic

In Gorgias, Plato argues (506e) that it is the presence of the order appro-
priate to a thing that makes it good. Thus, paideia is the perfection of man's
character in accordance with nature to make him good (Jaeger, vol. II,
1945, pp. 133, 146). Plato's purpose in Republic is to present a paideia for
self-realization, as well as a vision of the ideal polis (Brann, 1979, p. xxxvi).
The order of the ideal polis is used (592b) as an exemplar for achieving an
inner eunomia, or harmony, for the parts of the soul (41Oc). As each class
of the just city (rulers, auxiliaries, and non guardians) is associated with a
particular virtue, and maintaining the natural order of the whole is what
makes it just (433e), so each of the parts of the whole person (the intellect,
the spirit, and the desires) is to be dedicated to the achievement of its
proper virtue (wisdom, courage, and temperance) while the whole is to be
so ordered as to achieve a person's greatest good (justice), and thus
happiness (443d).
Plato's "city of words" thus anticipates what he argues is needed to
be a just man (435b); it does so as "a projection of justice on the largest
possible screen ... so that its nature may be easier to discern" (Brann,
1979, p. xliv). The aristocratic city is ruled by the philosopher king to
achieve the good through his wise policies and their implementation by
the guardians. Analogously, the aristos is ruled by his reason to achieve
the good through wisdom in his thought and courageous action. This is the
guardian city and the best man idealized in Republic. Replace the domin-
ance of wisdom with that of courage and one has timocratic man, whose
parallel city is timocracy (545a).
Of all existing regimes it was Sparta that Plato most admired. This is
apparent in his use of Sparta as representative of timocracy-the first
20 ECONOMIC THOUGHT AND POLITICAL THEORY

degenerate or unjust real regime (Republic, 544c-551b). The most admir-

able elements of Sparta are given as those that make it most resemble the
just but nonexistent regime, aristocracy, namely: "honoring its rulers and
in the abstention of its warrior class from farming and handicraft and
money-making in general, and in the provision of common public tables
and the devotion to physical training and expertness in the game and
contest of war ... " (547d). But most admirable of aU was the thorough-
going paideia of Sparta, devoted as it was to imposing order on the entire
community (Jaeger, vol. III, 1945, p. 168)-albeit wrongly, as it was not
the order of aristocracy dominated by wisdom, but that of timocracy domin-
ated by courage and "with a view to war" (Laws, 626b).
Plato's admiration for Sparta is also revealed in his argument for the
inevitable degeneration of aristocracy into timocracy. Decay begins with
an innocent failure in the eugenic calculations by the rulers of the aristo-
cratic regime. This produces future members of the ruling class lacking in
attention to paideia. The result is dissension among the guardians to the
point that houses and land are privatized, members of the nonguardian
class are brought into SUbjection as perioikoi and serfs, and the guardian
class occupies itself with repression of its subjects and war against its
neighbors. The similarities to Sparta and her political history, related in an
earlier section, should be apparent.
The degenerate Spartan regime of timocracy arises from innocent error,
and it does preserve much of aristocracy; however, its failure to be just lies
in the emphasis on the virtue of courage and the dominance of the war-
riors within the guardian class, to the exclusion of wisdom and wise men.
The lack of the class order intended by nature, where each person does
that for which he is uniquely suited, and the emphasis on gymnastics to the
detriment of poetry (422a) is what makes timocracy and timocratic man
unjust and, in consequence, unstable and ripe for degeneration into olig-
archy-an even more unjust regime.
Given Plato's admiration for Sparta, how did it affect his vision of the
ideal or just polis? First, the aspects of Sparta praised explicitly by Plato
(547d) are constituent elements of his ideal and require little comment.
The Spartan class structure and predominance of the homoioi finds its
reflection in the predominance of the guardians, and especially in those
who are the warriors. The warrior guardians obviously mirror the charac-
ter of the homoioi as a standing army, uninvolved in farming or commerce,
and their public messes bear some resemblance to the Spartan syssitia,
although there is insufficient detail in Republic to say how close it is. 22
Also, the emphasis on gymnastics and preparation for war in Sparta is part
of the paideia of Plato's warriors.
COMMUNISM, SPARTA, AND PLATO 21

Other elements of the Spartan agoge seem more like springboards to

the paideia of Plato's just polis. Among these are included the partial
application of the agoge to Spartan girls, the administration of the agoge
to all male children of homoioi until the age of 30 by members (the ephors)
of the ruling class, the emphasis by the homoioi on the virtue of courage
and the honours paid to heroism in battle, the marital and eugenic prac-
tices of the homoioi, and, last, the hereditary aristocracy. In Plato's vision,
the guardians are both male and female, they receive the same education
until the age of 50, they have all their major possessions, their children,
and each other in common; they are subject to exact eugenic planning;
and, most important, the wisest become the rulers. This was not Sparta;
however, for Plato, it might have been Sparta purified to achieve eunomia
through a universal paideia, the elimination of any potential sources of
dissension, and the establishment of the rule of natural aristocrats.
As far as the economic order of Republic is concerned, it should first be
noted that Plato attributes the origin of the polis (369b) to the individual's
lack of self-sufficiency in the face of scarcity. Further, he describes the
growth of the polis as contingent on extending the division of labor
according to comparative advantage, with the subsequent development of
an exchange economy. The introduction of a marketplace and a token
currency to support the division of labor, of a merchant class acting to
reduce transactions costs, and of an unskilled laboring class completes the
founding of Plato's "city of words."
The guardian class arises after the city has expanded to include indus-
trial and service sectors producing lUXUry goods, and the unbridled re-
quirements of the increasing population requires an army for territorial
expansion. This hypothetical or "conjectural" history of the polis thus
depends strongly on the economic principle of the division of labor, driven
by the attempt to satisfy more completely the needs of the citizenry. In a
sense, the consequent class division into rulers, guardians, farmers and
craftsmen, merchants, traders, and laborers is a result of stopping that
division of labor at the level of whole professions. Further, it is only when
"each perform(s) his one task as one man and (i)s not a versatile busy-
body" (433d) that justice exists in the polis. Thus, economics has partially
founded the polis, as well as provided the basis for a just order, given the
proper paideia.
The other founding principle is that of the different qualities of men
that suit them for their respective professions and classes, and of which it
is the purpose of eugenics and education to determine. The politically just
order is thus a mirror that reflects both economic and natural necessity.
Beyond maintaining the division of professions and classes according to
22 ECONOMIC THOUGHT AND POLITICAL THEORY

natural aptitudes, the guardians also strive to preserve eunomia among

members of the non guardian class by preventing extremes of wealth or
income (421e). Eunomia among the guardians themselves is to be pre-
served by their communal institutions (464), which focus their thoughts
and actions on the collective good rather than on their individual
satisfactions (462).
Entirely missing is any concern with extensive political control of eco-
nomic activity. The guardians receive their minimal required sustenance
from the output of the nonguardian class, much as the homoioi received
their incomes from their helot-worked kleroi. Beyond that, there is only
minimal interpenetration of political and economic activity in Plato's ideal
regime, as there was in historical Sparta. Apart from sequestration of the
share of output devoted to provisioning the guardians, the existence of
relatively free production and trade sectors is entirely compatible with
both Republic and what is known of the Spartan economy.23

The "Second-8est" Regime

Plato's concern with the form of the good polis led in Statesman to the
attempt to define the true statesman-for a just polis would only be pos-
sible if it were ruled in justice. To Plato this meant the determination of
the justice appropriate to the circumstances of each person. If the exercise
of authority requires the same qualitative knowledge at the level of the
household as it does at the level of the polis (259b), then the true states-
man is he who has that knowledge and is thus able to rule every man justly
and at all levels of social aggregation (294a). The just polis is the one in
which he rules.
This precludes the rule of law as the highest political principle, and the
constitutional polis as the just polis. In the absence of such a statesman,
Plato argues, the constitutional polis is the second-best. This leads to the
attempt in Laws to define that second-best regime, the one in which "frail
human nature" requires the rule of law for approximate justice. While
doing so, Plato cannot resist occasional references to the ideal or "best"
regime, which is an autocracy (710e) ruled by a wise, temperate autocrat
(712a), and which resembles (739c-e) the circumstances under which only
the guardians were to live in Republic (543a).
As he does in Republic, in Laws Plato presents an argument for the
origin of the polis, or state; however, this time his emphases are on actual
history and on authority. The regimes within which actual men have lived
and may live determine his fOCUS . 24 In particular, he traces the evolution
COMMUNISM, SPARTA, AND PLATO 23

of the historical states of Sparta and Crete from beginnings in the mythical
Age of Cronus to the contemporary blend of authority and liberty that
marks their superiority as regimes (701e) compared with both the Persian
monarchy (698a) and the Athenian democracy (69ge). Especially is Sparta
praised for the stability and longevity engendered by the balance of power
(691e) maintained by the political order of the double kingship, the
ephorate, and the gerousia.25
On the other hand, Plato also presents its history to illustrate the weak-
ness of Sparta in that it became a regime organized like an army and
perpetually at war (685). This he attributes to its laws, or constitution, the
main purpose of which is to instill the virtue of courage rather than that
of wisdom (688). Underlying this critique is Plato's basic view that the
purpose of law is to instill virtue (630c), while the purpose of education
is to instill the law (690d). So, while he clearly admires Sparta above all
existing regimes, Plato sees a fatal flaw that prevents attaining the peace
and order of the best regime possible to "frail human nature."
It is the main purpose of the rest of Laws to outline that second-best
regime in a hypothetical argument for how the new city of Magnesia might
be established in Crete. The influence of Sparta is even more evident here
than it is in Republic. 26 Again, the aspects of Sparta that Plato explicitly
praised in Republic (547d) are constituent elements of his real, or second-
best, regime, and Sparta is explicitly praised for its resemblance to the
regime envisioned (Laws, 836b)-especially in those (controversial) respects
in which Sparta differs from other pole is.
Magnesia is to be an autarchic inland polis, with no city walls, no gold
or silver money, and a popUlation fixed at 5,040 male citizen landholders
divided into four classes according to their property holdings. The wealthi-
est will possess no more than four times the property of the poorest, since
excess wealth breeds discord (729a) and no really wealthy man can be
either good or happy (743). Citizens and their servants or slaves practice
no trades and receive their incomes from the serfs who work their kleroi.
All tradesmen and craftsmen are resident foreigners who each practice
only one trade and are subject to a fixed term of residence and no possi-
bility of attaining citizenship. The produce of the agricultural sector is
divided into three portions: one going to the citizens, a second adminis-
tered by them for their households and servants, and the third going to the
foreigners. Only the last portion may be the object of trade on the market.
The political order is maintained by the code of laws, which is admin-
istered by officials, magistrates, and commissioners, who are both elected
and chosen by lot. There is a ruling council of 360, one-fourth of which is
elected from each of the four property classes. Thirty of the council members
24 ECONOMIC THOUGHT AND POLITICAL THEORY

form a monthly governing board and may convene general meetings of the
citizenry. Although all citizens are trained as soldiers and are part of the
standing army, only those between the ages of 25 and 30 serve full-time as
police or rural guards. Nevertheless, all citizens mess together and there
are also common messes for the women.
There is no state eugenic control because of the potential for resent-
ment (773c), but like are encouraged to marry like, and all men are en-
couraged to marry and procreate. Should they not do so, they are penalized
by law and lack of deference. Because "the child is even more the property
of the state than of his parents," the children are educated by the state
from the age of six, the sexes being segregated, but receiving a comparable
education in music, gymnastics, and military training (804e). Most signi-
ficantly, the office of supervisor of public education is by "far the most
important of the highest offices in the state" (765e) given the purpose of
education to instill the code of law that, in turn, will instill virtue.
Other than the proscription of pederasty and the more ambitious scope
of education (837ft.), the institutions of Magnesia that differ significantly
from those of Sparta are mainly economic. 27 They are better understood
if it is borne in mind that Plato's ideal human community, or touchpoint
to which the regimes possible to actual man are to be compared, is that of
the mythical age of Cronus when there was no scarcity and men were
ruled in complete justice by gods (713b-e). In recounting the Cronus leg-
end in Statesman (271cft.), Plato emphasizes the age of scarcity and human
weakness that follows the rewinding of the universe and the end of godly
rule. Although the gifts of the gods enable man to alleviate this scarcity,
man needs the rule of a statesman in place of the lost rule of the gods to
establish order and eliminate dissension. In the absence of either such a
statesman or godly rule, man needs laws patterned after "the immortal
element within us" for "we should do our utmost ... to reproduce the life
of the age of Cronus" (Laws, 713e).
In its material abundance, the Age of Cronus resembled the earliest
point of another of Plato's conjectural histories, when the simple survivors
of some massive calamity are supposedly bereft of both tools and guile,
but live peaceably in conditions of plenty amid neither riches nor poverty
(677ff). Again, in Critias Plato describes the Athens of the age of the
mythical island of Atlantis as one in which there was great abundance and
a class structure similar to that of his ideal regime in Republic, including
the communal institutions of the guardians (110c-e). Thus, the keys to
understanding the economic side of the regime in Laws would seem to be
Plato's desire to encourage abundance and order, and the consequent desire
to eliminate possible sources of dissension.
COMMUNISM, SPARTA, AND PLATO 25

There are regulations to increase agricultural yields (842c-e), to redis-

tribute wealth to prevent extremes (744d-e), to provide public works and
social services (761), to protect property (843c) and enforce contracts (920d),
and to punish violence and property crimes. In light of the flaw of self-love
(731e) and its tendency to stimulate greed and corruption in commerce
(918d), only a small number of the lowest of foreigners are to be allowed
to engage in it (919c), and it is to be regulated to increase available sup-
plies (913ft.), and to prevent fraud and excessive profits. Of course, no
citizen is permitted to engage in commerce. Again, it is clear that this
regulation is intended to promote abundance and eunomia, since "public
well-being should be considered before private" (875b).
All in all, when the regime in Laws is compared to Sparta, it is Sparta
adjusted to instill wisdom, temperance, and justice, as well as courage,
to promote abundance and to eliminate sources of dissension. The ideal
remains that of the unity of thought and action of a society of gods, or
sons of gods, or of the guardians of Republic, promoted by their communal
institutions, the key to which is the lack of property in things or themselves
(739c). The reality is that there are no such men and so the second-best
regime is one regulated by ordinance and law to prevent extremes in prop-
erty ownership and promote virtuous behavior (875c).

Summary

Teaching and writing in the midst of Athenian political decline, Plato

attempted to develop political theory in the light of what he believed were
the successes and mistakes of the political past, while retaining his commit-
ment to basic Hellenic values. His main purpose was to define the ideal of
justice and the paideia, life and political regime appropriate to its achieve-
ment. He found that ideal in a concept of the natural social order, ruled
and guided by a knowledgeable elite to achieve eunomia and stability. In
the existent world of imperfect man, the rule of law would provide a
second-best solution.
Plato drew on many sources, including his culture and his own life
experience during the disorders of the Peloponnesian War, the democracy,
the tyranny of "The Thirty," the execution of his beloved teacher, and the
continued strife of the fourth century. Historical Sparta was a useful source
of material, both for outlining his ideal and for contrast with it; it showed
the weaknesses that he thought would bring down any regime and life
short of that ideal. In the light of the historical accounts summarized earlier,
it is plain that Plato knew much about Sparta.
26 ECONOMIC THOUGHT AND POLITICAL THEORY

What Plato admired most in Sparta was the stability of the social struc-
ture-a division of labor that led to what seemed an harmonious social
whole-with clearly defined political classes functioning to provide social
cohesion. He made those the central institutional elements of his ideal.
What Plato disliked was the purpose of Spartan society-war-and the
primary virtue-courage-that impelled (he believed) its downfall. In their
respective places he substituted the achievement of the good and the
wisdom to do so. Both of these required the central intellectual element
absent from Spartan society-philosophy.
The communal elements in the Spartan polis, vestiges of its tribal past,
had been adapted to serve as training and unifying elements for a citizenry
that lived as an occupying army. Eschewing the general purpose of Sparta,
but admiring its unity and stability, Plato adapted the syssitia, the peda-
gogy, and a much-extended ideal of common property to his own uses.
These were: (1) the promotion of unity; (2) the public education of the
rulers; and (3) the elimination of anything that might stimulate the desir-
ing part of man (Republic, 442b, and Laws, 731e) to create dissension and
disharmony among the guardians in his ideal polis (Republic, 462a-c), or
among the "gods, or sons of gods" (Laws, 739c-e) in a paradigmatic polis.
For the second-best regime of flawed human beings, he thought it enough
to publicly educate all citizens, to eliminate extremes of wealth and poverty,
to promote material abundance, and to restrict and regulate commerce.

Evaluations and Conclusions

Was Sparta a Socialist or Communist Society?

In turning to the specific questions that were raised at the beginning of this
chapter, it should be clear from what is known of historical Sparta that it
cannot be described meaningfully as having been either a socialist or a
communist society according to any of the senses given to those terms by
those who have so used them. Rather than being keys to its understanding,
the social and economic structure of classical Sparta were derivative of its
political purpose-collectivistic tools of its collective end. That purpose,
in tum, was the outcome of the warrior tribal nature of ancient Sparta,
carried over into the classical era as the homoioi became a permanent
occupying army, intent on retaining political control of the occupied lands
and their peoples.
There were great disparities in incomes and wealth throughout Spartan
COMMUNISM, SPARTA, AND PLATO 27

society, and these grew over the centuries. There was no "communal cap-
ital" in the kleroi: they were individually assigned; their incomes were in-
dividually received and disbursed; and they were eventually individually
owned. It may be that in the sense that the Spartan homoioi can be said
to have produced, they produced according to their respective abilities;
however, this is also the rule by which they received-in both the eco-
nomic and military dimensions of their lives. In the use of their incomes
there is little evidence, beyond the syssitia contribution, of any "commun-
ism of consumption."
The syssitia, or communal meals, are best understood as a remnant of
warrior tribalism and a reinforcing element of what was, in essence, a
society as a permanent military camp. Syssitia even differed in quality and
abundance from one phratry to another. Military units, like families, mess
together; however, we do not, for that reason alone, refer to either as
"communistic. "
The family was, in fact, an important element of Spartan society, and
there was no community of women, only an occasional sharing of a wife
under particular and culturally compelling circumstances. 28 There were no
common homes, except the military barracks of homoioi youths, and no
common personal possessions, although Aristotle (Politics, 1263a35-7) notes
a practice of sharing personal possessions according to the (Pythagorean)
proverb, "The things of friends are common," a practice which Plato longed
to see (Laws, 739c) generalized in the "first-best" society. Nevertheless, in
the face of everything else known about Sparta, there is far from any
indication of the classless society of pure communism--even among the
homoioi.
The division of labor certainly existed among the homoioi in their
military and political structures, as well as in economic activity existing
throughout Sparta. And the self-interested actions of the homoioi were
manifest not only in the growing inequality of incomes and wealth but also
in their reputation for corruption and susceptibility to bribery (Michell,
1964, p. 303). There is also no evidence of any attempt at the state plan-
ning of production, or of specific interventions to increase production,
even in the restricted sense that Xenophon ("Ways and Means") proposed
as means to enhance the revenues of Athens. There was not even simple
state financial planning in Sparta. In summary, there is no historical
support for Sparta's having been a communist society or having had a
"dictatorship of the proletariat" or other state socialist regime. Even the
description of the sway of the homoioi over the rest of the population as
"authoritarian" relates Sparta only distantly to socialist aspirations.
28 ECONOMIC THOUGHT AND POLITICAL THEORY

Was Plato a Socialist or Communist Theorist?

If socialism or communism are to be more than labels for a subset of

institutions or practices existent within a greater society, the terms must
refer to something that differentiates that society from others in an essen-
tial way. That is, each term must be used to include that society in its
extension because, in essentials, it fits the intension or definition of the
term. Only in this way does meaningfulness replace ambiguity, as Plato is
at pains to demonstrate in Euthyphro. A thing is not what it is because we
think it so; we think it so because of what it is. For this reason, Sparta
should not be termed a communist or socialist society because what is
known of its essentials does not fit the intension given those terms by
those who have used them to refer to Sparta.
The same argument applies to the characterization of theories. For a
theory to be socialist or communist, its essential elements must be those
included in the intension of the terms. This is why the answer to the
question at the head of this section must be "no," if socialism or commun-
ism is what Marx or Durkheim, or those who agree with them, say it is.
Of the early attempts made by Marx to visualize communism, his
characterization of "crude" communism might be thought applicable to
Plato's guardians in the ideal regime of Republic, or to his regime of "gods,
or sons of gods" in Laws (739c-3). There are "general private property"
communal elements present in each; however, they are not central ele-
ments of either the political or economic structure of Plato's ideal in
Republic, and both political and economic structures are undefined in what
little Plato says of a first-best regime in Laws. The division of labor is a
residue of capitalism that continues in crude communism, and it is crucial
to both Republic and Laws; however, like the property relation itself, the
division of labor could hardly be part of the definiens of both capitalism
and "crude" communism. Surely, it is the communal elements that set
communism-crude or real-apart from capitalism and, as has been shown,
they were peripheral to both Plato's purpose and the structure of his ideal.
As far as the two phases of communism sketched in Marx's later work,
neither seems in any way evocative of Plato's theoretical constructs. Per-
haps the real regime in Laws might be impugned as "vulgar socialism"; but
Marx obviously meant that as an epithet, not a theory.
What else might be said to indicate the gulf that lies between what Plato
sought and what Marx's (alleged) theory of communism seeks to depict?
Plato's concept of a fixed human nature surely conflicts with Marx's view
that the "higher phase" of communism will change man's nature. To Plato
the attainment of arete is the supreme personal goal; Marx's historical
COMMUNISM, SPARTA, AND PLATO 29

materialism obviates personal virtues as well as vices. Further, the

abstemiousness of the guardians of Republic is to remove any tendency to
feed their self-love, whereas the end of scarcity under Marx's communism
would seem to enable its total fulfilment. Also, the division of labor is
crucial to Plato's ideal regime, whereas at the end of history in Marx's
communist paradise, there is to be no division of labor. Further, Plato
ranks material goods lowest of all, where to Marx the principle of their
production and consumption defines the perfect political economy. Finally,
for Plato the end of history is one enshrining the perfect state, and the
rulers in Plato's vision are the elite, the aristoi; Marx foretells the dictator-
ship of the proletariat, and then no state or rule at all.
Durkheim's depiction of socialism as, essentially, state-managed industrial
activities is obviously inapplicable to Republic, where industrial activity is
unregulated. In Laws, the state regulates agriculture to increase yields, and
commerce to minimize dissension; it does not manage industry beyond the
provision of infrastructure and certain minimal social services. This is hardly
a warrant to describe the real regime in Laws as Durkheimian socialism.
At first glance, Durkheim's communism, and his identification of Plato
as a theorist of it, seems almost a fit because of the ideal regime of Republic,
with its absence of private property among the guardians and the separa-
tion of the political and economic orders. However, Durkheim's commun-
ism is for all members of that society, while the communal elements are
confined to the guardians in Plato's ideal. The nonguardian members of
the polis are the property owners and producers whom the guardians rule
and guard and on whose production they subsist. Plato's ideal and his
theoretical context included that whole polis, conceived in both its polit-
ical and economic dimensions. His social theory could never be character-
ized as one of guardian consumption. Again, the secondary importance of
the communal institutions in Republic speaks against an aggrandizement
such as Durkheim attempts.
Others who have used the term communism to refer to the practices of
the guardians or some alleged theory of those practices fail less grandly
than Durkheim in realizing what Plato attempted to achieve. Plato's re-
gimes of the imagination are politically authoritarian and, in light of the
quotation that opens this chapter, he may even have aspired to totalitari-
anism; however, it is difficult to avoid the general judgment that to refer
to Plato as either a socialist or communist theorist is to focus on a few
peripheral practices included in his attempts to envision a just society and
thus to trivialize what he sought to do. It also restricts the meaning of
socialism or communism for those who are directed to the less significant
aspects of Plato's work to find a "theory."
30 ECONOMIC THOUGHT AND POLITICAL THEORY

Acknowledgments

I am especially grateful to Eva T.H. Brann, Francis Swietek, and Wayne

Ambler for valuable comments and suggestions. Nonetheless, any remain-
ing errors are solely my responsibility.

Notes

1. In the process of arguing that Plato's conception of the best state changed from the
Republic to the Laws as a result of the influence of contemporary history, Welles refers to
"the communism of Plato's political writings" (1948, p. 101). The commonality of property
among the guardians in the Republic is referred to as "real communism" (p. 109), while the
city described in the Laws, "whether we choose to call this state socialism, or communism,
or something else" (p. 114), presents "the pattern of the modern authoritarian state" (p. 101).
The differences in Plato's conception between Republic and Laws will be discussed later. It
is understandable, though regrettable, that in accomplishing his main purpose Welles presents
little to justify these appellations, despite a stated intention "to suggest how fundamentally
Plato grasped the principles of a communist state, practically and theoretically." There is also
a curious omission of the influence of historical Sparta on both of Plato's fictive cities in favor
of that of Athens, and this despite Plato's own references to Spartan institutions, customs,
and practices throughout both works. On this point see also Powell (1988, p. 156).
2. The distinctive Greek political institution of tyranny can be viewed as an interruption
of the development that culminated in the classic polis, tyranny being mainly important from
the mid-seventh to the end of the sixth century. Its beneficial aspects in aiding the transition
from oligarchical to democratic government in some pole is are argued in Prentice (1940, pp.
85ft.) and Kitto (1951, pp. 102ft.). Also see Finley (1970, pp. 103ft.) and Forrest (1966, pp.
104ft.). Compare this with Plato's view (Republic, 565-568) that tyranny is the last degener-
ate regime. Popper (1%6, vol. 1, p. 198 and p. 315, n. 63) argues that Plato so identifies
tyranny and hated it because it destroyed oligarchy. Sparta, which Plato admired, never
experienced tyranny and never made the transition to democracy.
3. Theoretically, a tribe was a kinship unit formed like a pyramid (Forrest, 1966, pp. 50-
55), at the base of which was the family (oikos) of an historical male aristocrat. Several
families having a common male ancestor formed a clan (genos), several of which in turn formed
a phratry (from phratores-"brothers"). A tribe was a combination of phratries, headed by
a basileus or king. Its status depended on the status of its supposed male progenitor. The
importance of this to the Greeks is shown in that Herakles was claimed as an ancestor of
both Spartan ruling royal houses (Herodotus, 1972, 7.204 and 8.133), and Herakles was
believed to be the son of Zeus and Alcmene (Hesiod, Theogony, 1977,525). At some point
before the Lykourgan reforms, and for unknown reasons, the three kings of the tribes that
formed the Spartan state became the two that traced their lineage through the Agiadai and
Eurypontidai. Oliva (1971, p. 26) speculates that, as it later was for the federation of the
Iroquois in North America, this may have been an expedient to prevent one tribe from
dominating the others in military as well as civil matters.
4. Huxley (1962, p. 49) speculates that the third leader was an Aigiad, arguing that the
two kings and an Aigiad commanded the army in the First Messenian War; however, he also
says that the three would thus provide a representative from each tribe. Because one of the
COMMUNISM, SPARTA, AND PLATO 31

two kings was an Agiad (ibid., p. 17), the two statements are inconsistent. To represent each
tribe with a tribal leader would require the third leader on the council to be a Pamphyloid.
5. For a comparison of the Spartan agoge and the military training and regimen of the
nineteenth-century Zulus, see Ferguson (1918). As "both alike made war, and preparation
for war, the primary aims of their association" (p. 197), the educational and military organ-
izational similarities are striking despite the great differences in the political orders and
cultures.
6. Plutarch (Lycurgus, n.d., p. 57) and, after him, Michell (1964, p. 282) include only 15
men in each mess group; however, these common messes were found in other and earlier
Dorian communities, such as those in Crete. Because the Cretan syssitia were one to each
phratry, and the Spartan polis had so many other aspects imitative of those in Crete, it seems
reasonable to expect the Spartan syssitia to parallel the Cretan in this regard. Perhaps, the
similarities between the elements of the agoge of Sparta and those of other Dorian commun-
ities merely reflected their common tribal past (Forrest, 1968, p. 53; Oliva, 1971, pp. 30-31).
Similar elements can be found in the training of warriors in tribal societies of the recent past,
as well as those of today.
7. The ancient Greeks accepted human inequality as a basic fact of life and all poleis were
divided into classes or orders according to what were believed to be natural differences
among men (Finley, 1973, pp. 45ft.). Each class had a distinct political and social existence
and, of course, "nobility of birth must be matched by nobility of conduct" (Hamilton, 1964,
p. 58). This meant that it was a matter of common belief that only the "best men" (aristoi)
could be good men, and only good men could truly enjoy the good life-a life not possible
for the demos, the commoners. As in the multitudinous class-based societies that have existed
since that time, whatever the rationale for dominance, membership in the aristocracy was
basically decided by masculine bloodlines from beginnings lost in myth. It was retained by
wealth and brute force, although not usually obtainable by those methods once a ruling
aristocracy existed.
8. According to Aristotle (Politics, 2, 1270al9-21), the homoioi could bequeath or give
their kleroi away but not sell them.
9. See Ridley for an argument that they were not restricted to this sphere, but also
farmed, fished, and herded.
10. Sparta certainly earned its reputation as the most bellicose of the Greek poleis in its
periodic suppression of helot revolts, in wars against its neighbors, as well as in military
meddling in the politics of sixth-century Athens. After the Lykourgan reforms, Sparta insti-
tutionalized a commitment to courage as the highest virtue and, especially after the Messenian
wars, possessed a well-trained and supplied standing army. Consequently, the marginal cost
of warfare as a method of dispute-resolution could be expected to be lower than that of other
poleis not having such institutions or armies-with predictable results. For a pioneering use
of economic analysis to explain the transition from peaceful to violent means for dispute
resolution among whites and Indians in late nineteenth-century North America-empha-
sizing the role of the Civil-War-enhanced standing army in lowering the marginal cost of war
for whites-see Anderson and McChesney (n.d.).
11. Huxley (1962, pp. 49ft.) compares the strife-ridden period of the early and middle
seventh century, with the period beginning at the end of that century and including the whole
of the sixth. He points out the contrast between the martial poetry of Terpander, Thaletas,
and Tyrtaios from the earlier period, and the poetry of AIkman, Stesichoros, Theognis, and
Pindar from the later. The later poetry reflects a more open, tranquil, prosperous, and cul-
tured society than that implied in the works of the earlier poets. The archeological evidence
(ibid. , p. 63) seems to support this interpretation. See also Jaeger (vol. I, 1945, pp. 97-98) for
32 ECONOMIC THOUGHT AND POLITICAL THEORY

a contrast between the "richer and fuller life" of Sparta in both these earlier centuries with
that of the Sparta contemporary to Plato.
12. Sources differ on the question of the extent to which coined precious metal circulated
internally in Sparta. Some agree with Plutarch (Lycurgus, n.d., p. 55) that there was an absolute
ban on such in archaic and classic Sparta, while others (Jones, 1967, p. 39) maintain that
foreign coins were used even as part of the mess contribution. It should be noted that the
famous iron spit money attributed to Sparta circulated in other poleis in antiquity prior to
the introduction of coined money in the seventh century. Unlike Athens, Sparta lacked a
domestic source of precious metal and a significant foreign trade sector. Just as Spanish
dollars circulated freely in colonial America, Athenian owls, Aeginetan obols, and other
currencies may have circulated in Sparta in place of a domestic currency. The supposed
proscription against an internal precious metal coinage may be a myth invented to explain
the absence of any Spartan coinage until the early third century.
13. The lack of any Spartan system of public finance (see below) and the resultant inability
to anticipate the cost of the war, as well as the factors mentioned in note 10, may also help
explain why war became the only option. See Gunderson (1974) on the war cost miscalcu-
lations by both sides that may have contributed to the outbreak of the American Civil War.
14. On the tendency for historical governing aristocracies to self-interestedly enforce
endogamy to preserve or increase its share of social output, see Olson (1982, pp. 67-69).
15. Using the method of the counterfactual in a computer exercise, Hodkinson argues
that the existence of some sort of female inheritance rights in Sparta would have reduced the
degree of wealth and landholding inequality that could develop through time, as compared
to what it would have been without such rights. Given the relative longevity and stability of
the actual Spartan system, and the concentration by Aristotle's time of two-fifths of the land
in the hands of women, he speculates that Spartan women may have had such rights.
16. The latter might be explained using Olson (1971, pp. 37-44). The homoioi were
competitors for the "exclusive collective good" represented by the right to kleroi, while
retention and defense of their common domain was an "inclusive collective good" to them.
Consequently, there was a tension between the stimulus the first provided for restriction of
the franchise, and the stimulus provided by the second for its expansion. The second would
be the weaker stimulus because the existence of the standing army made it possible to coerce
perioikoi and helots (whose respective populations were expanding throughout the whole
period) to fill any deficiency in the military resulting from a declining population of homoioi-
and without granting the franchise. The removal of the franchise, and therefore of the right
to kleroi, as the penalty for failing to contribute appropriately to one's syssition can be seen
as the outcome of the need to discipline the colluding homoioi so that no one might enjoy
the benefits of collusion without bearing a portion of the costs, in the absence of any system
of public finance. This could also (ibid., pp. 61-63) have been the purpose of the "selective
incentives" of the cult of fear, the exaltation of the virtue of courage, the punishment of
cowardice, and the burial customs of the homoioi.
17. Jaeger (1945) argues that it was Plato who first formulated the balance of powers
theory of stability in government. Also, compare Plato (Laws, 712e-713a and 832c) in his
reluctance to admit as "constitutional" any regime named or denoted merely by the social
location of the central coercive element.
18. I use the word ascetic in the Christian, self-punishing sense. The word ascetic or askesis
is, of course, Greek, and its classical meaning was "one who follows a discipline," e.g.,
gymnastic training.
19. The content of the ideal of arete changed from Homeric times to the heighth of classic
Athenian culture in the fifth century. Homeric arete emphasized physical excellence, where
COMMUNISM, SPARTA, AND PLATO 33

courage in battle meant glory and reputation (Starr, 1977, pp. 6-7), while by the fifth century
excellence of character was implied by the term (Prentice, 1940, pp. 89-90). Plato's Socrates
would have reduced the four cardinal virtues to the one of wisdom, as it contained all the
others (Jaeger, vol. 1, 1945, pp. 106, 173-174).
20. The achievement of sufficient leisure by means of which arete could be sought in
historical poleis, as opposed to the polis of the ideal, has been attributed by Bowra (1959, p.
86) and others to the widespread institution of slavery. Kitto (1951, pp. 131-134) considers
and rejects this explanation in favor of an intentionally sought simple standard of life. Cer-
tainly, such a standard would exhibit the virtue of temperance; however, Athenians scarcely
demonstrated the desire for a simple standard of life in their use of the tribute received
during the period of the Delian League. In addition, Spartans inhabited the richest agri-
cultural area of ancient Greece and their system of helotry was established to provide the
income and leisure for the Spartan homoioi to train for their virtually continuous wars, and
to pursue the particular Spartan concept of arete (Kitto, 1951, p. 95).
21. My use of the terms ideal and practical realization conforms to current colloquial usage.
They are not the terms Plato would use, as Jaeger (vol. III, 1945, p. 215) reminds us. Republic
would belong to the realm of the "intelligible" or of being or truth, while Laws would
represent that of the "visible" or of becoming or opinion.
22. Jaeger (vol. II, 1945, p. 243, n. 213) argues that Plato's (416e) use of the word syssitia
for the common meals of the guardians shows his adaptation of the Spartan custom. The
Cretan common meals were called andreia; however, in contrast to the Spartan custom, and
in apparent agreement with Plato's intention, the Cretan messes were maintained at public
expense (Hammond, 1986, p. 99). See also David (1978) on the syssitia in Laws.
23. This is not to say that extensive market activity existed in ancient Greece. Polanyi
(1%8, pp. 103-104) notes the hot-house character of local markets, which often had to be
encouraged by Spartan and other armies to provide supplies and dispose of booty. See also
Hasebroek (1965, p. 84).
24. Thus, Winspear (1940, p. 199) is incorrect in finding the account of the founding of
a polis in Republic incompatible with the account in Laws. Plato's emphasis was hypothetical
in the first and historical in the second. Each account suited his respective purposes in the
two books: the Republic presenting his ideal regime, the Laws his vision of the second-best-
and the one possible to the nature of man as revealed in history.
25. See also Letters: VIII, 354b-c.
26. The influence of Dorian Crete is also clear but will not be treated here. Sparta, not
Crete, is linked with Plato's alleged communism or socialism by the authorities referenced
earlier.
27. On the possible political necessity of Spartan pederasty, see Cartledge (1981).
28. Lacey (1968, pp. 194-208) is especially valuable for bringing consistency into the
accounts of Spartan family life given by all the main ancient authorities, showing the impor-
tance of the family in that society as against the view that view that it was merely an instru-
ment for the breeding of soldiers.

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 2
SIR JAMES STEUART
ON THE MANAGED MARKET
Anastassios Karayiannis

... my point of view is, to investigate how a statesman may turn the circum-
stances which have produced this new plan of oeconomy to the best advan-
tage for mankind, leaving the reformation of such a plan to time and to
events.
-Sir James Steuart, 1767 (1966), pp. 75-6

Steuart was a creature of his time (the beginning of the Industrial Revo-
lution), experienced in European political and economic situations. He
worked on his An Inquiry into the Principles of Political Economy at the
peak of the transitional period-in the world of ideas-from mercantilism
(old order) to liberalism (new order). His attempts to synthesize these two
streams of thought is evident from his attitude toward the function of the
market and the role of the statesman.
Steuart justified and built a managed-market system as follows. At first,
he used an evolutionary and historical approach to describe the possibil-
ities and capabilities of a country to achieve and sustain an adequate level

37
38 ECONOMIC THOUGHT AND POLITICAL THEORY

of economic development. Then followed his positive analysis of how some

fundamental economic phenomena resulted in crucial market failures which,
according to his view, could not be corrected by any internal mechanism.
Last, he based most of his arguments on the assumption of the existence
of a "perfect" statesman, whose role would be fundamental in the correction
of those failures. All these reasons led him to the development of the
concept of a managed economy that contained some elements very relevant
to our time.
The purpose of this chapter is to analyze Steuart's ideas and arguments
on behalf of the managed market. In order to do so, the significant views
and arguments of Steuart on this issue, scattered throughout his "inquiry,"
are gathered and systematized. The subsequent analysis is also conducted,
as far as possible, "from the shadow of [Adam] Smith's reputation," as
Skinner has rightly suggested (1985, p. 19).
The chapter is composed of four sections. In the first section Steuart's
views of the content and object of political economy and the characteris-
tics of the statesman are examined. In the second section the cases where
the operation of the free market fails to guarantee full employment with
an adequate living standard are analyzed, and the ways and means with
which the statesman must intervene in order to correct such failures are
examined. The third section presents the means employed by the states-
man to stimulate an underdeveloped economy to reach and maintain a
high level of development and a favorable balance of trade. In the final
section the main differences between Steuart's and Adam Smith's attitudes
on the function of the free market and their beliefs regarding to the exist-
ence and operation of a perfect statesman are examined.

Political Oeconomy and the Statesman's Objects and

Characteristics

Steuart, from the very beginning of his inquiry, makes clear that the role
of the statesman is fundamental to political economy. The statesman's role
is not only stimulative and preventive but also regulatory and corrective
through indirect and direct intervention. Steuart begins his inquiry with
the definition of economy as the art of household management exercised
by the hand of the family (1.15).1 He uses a broader but similar definition
for Political Oeconomy, stressing its "paternalistic" substance: "Oeconomy
and government, even in a private family, present ... two different ideas,
and have also two different objects. What economy is in a family, political
SIR JAMES STEUART ON THE MANAGED MARKET 39

economy is in a state" (1.16)-an idea advanced in pseudo-Aristotle's

Oeconomica (343a, 1-5, 15-17) and developed later by Rousseau (1758,
pp. 117-118).
Steuart, as he himself declares, wanted to take up his pen upon the
subject of political economy toward "preparing the spirit of a people to
receive a good plan of economy, than a proper representation of it" (1.18).
Therefore,
... although it seem addressed to a statesman, the real object of the inquiry is
to influence the spirit of those whom he governs; and the variety of matter con-
tained in it, may even suggest useful hints to himself. But his own genius and
experience will enable him to carry such notions far beyond the reach of my
abilities (1.12; emphasis added).

He employed both induction and deduction in his work and tried to

verify his conclusions by an appeal to observation and experience (1.17,
1.142). Moreover, he stressed the relativity of conclusions regarding the
principles of economic phenomena, which is ultimately related to the dif-
ferences between times, countries, and institutions (1.4-5, 1.16, 2.339; see
also Karayiannis, 1992, p. 288).
The character of Steuart's "inquiry" is both positive and normative
(1.16, 1.74). Only after the positive analysis of any economic situation or
problem does Steuart reach normative conclusions with respect to specific
situations or problems. He states that his intention is to show what ought
to be and not what is the statesman's economic intervention and policy
(2.708).
Steuart used his various methodological tools together with his views on
the scope and character of political economy to describe the evolutionary
and interrelated processes of economics and politics. The influence of
economics on politics and vice versa is a noticeable element of Steuart's
historical and evolutionary approach (see, for example, 1.71-72, 74, 76,
181,209-216; see also Skinner, 1962, pp. 20-21; Hirschman, 1977, pp. 82-
83).
The basic principles of political economy depend on the assumptions
made with respect to the behavior of individuals. Steuart makes clear that
the motive of self-interest (1.20), though not the only "universal spring of
human actions" (1.143; see also Khalil, 1987, p. 126), is used
... as a general key to this inquiry; and it may, in one sense, be considered as
the ruling principle of my subject, and may therefore be traced throughout the
whole. This is the main spring, and only motive which a statesman should make
use of, to engage a free people to concur in the plans which he lays down for their
government (1.142; emphasis added; see also 1.143).
40 ECONOMIC THOUGHT AND POLITICAL THEORY

His second behavioral assumption is related to the statesman's self-

interest. This motive according to Steuart, is simply the promotion of public
good, and thus the statesman must judge everything in accordance with
the public interest which is nothing more than the product of a collection
of private interests (1.88, 142-144). Steuart, contrary to the early mercan-
tilists who thought the statesman's ultimate goal was the increase of the
power of the state, believed that the statesman's fundamental purpose
ought to be the increase of the welfare of "his subjects":

As we have taken for granted the fundamental maxim, that every operation of
government should be calculated for the good of the people (1.21).

The statesman, in doing his best in promoting the public interest, must
sacrifice the interest of some people for the general good (1.248), particu-
larly when this interest is contradicted by the public good (2.363). Thus,
the statesman, "in order to cement his society, should know how to engage
every one, as far as possible, to tum his attracting pole towards the par-
ticular center of common good" (2.394).
Steuart does not stress that the interest of the public is higher than of
individuals, that is, he does not favor an authoritarian system, neither a
"despotic" nor a "popular" one (1.279, 304; see also King, 1988, p. 23). As
he makes clear from the beginning,

.. . my natural partiality in favour of individuals had led me to condemn, as

Machiavellian principles, every sentiment, approving the sacrifice of private
concerns in favour of a general plan (1.10-11; see also 1.18, 293-294).

Although not a champion of individualism, neither does he follow the

Aristotelean dictum, according to which: "the State is by nature clearly
prior to the family and to the individual, since the whole is of necessity
prior to the part" (Politica , 1253a, 15-20). On the contrary, he mentioned
that individuals must avoid actions that may be turned against their wel-
fare; thus, they will be forced to ask the statesman to intervene, viz:

I must observe, that nothing would have been so easy as to soften many pas-
sages, where the politician appears to have snatched the pen out of the hand of
the private citizen: but as I write for such only who can follow a close reasoning,
and attend to the general scope of the whole inquiry, I have, purposely, made
no correction; but continued painting, in the strongest colours, every inconven-
ience which must affect certain individuals living under our free modern gov-
ernments, whenever a wise statesman sets about correcting old abuses .... The
more any cure is painful and dangerous, the more ought men carefully to avoid
the disease (1.11).
SIR JAMES STEUART ON THE MANAGED MARKET 41

Steuart's central figure in his inquiry is an imaginary statesman2 or "an

abstraction" (Skinner, 1985, p. 10), rather than a real one. He has en-
dowed this figure with the following qualities and characteristics that are
very rarely concentrated in a man or group of men who constitute the
government in any state. An efficient statesman who will be able to under-
take all those actions and responsibilities necessary for the promotion of
the general welfare must: sacrifice his personal interest for the common
good (1.11); have "virtue and justice" (1.20); be a cool administrator not
having a man's "passions, vices and weaknesses" (1.217); be "constantly
awake" (1.64); have a particular talent "to dispose the minds of a people
to approve even of the scheme which is the most conductive to their
interest and prosperity" (1.25); "gain the confidence of his people, so far
as to impress them with a firm belief that he will consult their good,
and nothing else, in what he undertakes" (2.656); be "sagacious" (1.291);
have adequate knowledge on economic matters (1.333); and be impartial
in regard to the interest of some of his citizens (2.389).
Steuart was well aware that the statesman's impartiality is crucial (1.26).
Thus, he stressed that the statesman must not favor the interest of some
of his people, that is, "by constituting a particular advantage in favour of
some individuals of the same class above others" (1.273), nor obey any
organized interests with a "strong ... influence in parliament" (2.625). On
the contrary: "When anyone interest becomes too predominant, the pros-
perity of the state stands upon a precarious footing. Every interest should
be encouraged, protected, and kept within due bounds" (2.637), and there-
fore, "I infer, that it is dangerous to the common interest, to permit too
close an union between the members of any subaltern society" (2.394-395).
Steuart, in analyzing the ways and means by which the failures of the
free market system could be corrected and/or avoided, introduced the
following assumptions in regard to the statesman's decision making: (1)
"a statesman at the head of government, who makes every circumstance
concur in promoting the execution of the plan he has laid down" (1.238);
(2) "every statesman to have good reasons for doing what he does, unless
I can discover that his motives are bad" (2.625); (3) "a statesman at the
head of government, systematically conducting every part of it, as to pre-
vent the vicissitudes of manners, and innovations, by their natural and
immediate effects or consequences, from hurting any interest within the
commonwealth" (1.122); and (4) "Let not ... a statesman regulate his
conduct upon suppositions, nor conclude any thing from theory, nor from
arguments a priori . .. but let him have recourse to information and ex-
perience concerning the real state of the matter" (2.693).
Steuart was well aware that the above assumptions in regard to the
42 ECONOMIC THOUGHT AND POLITICAL THEORY

qualities and efficiency of the statesman are chimerical, he said: "I might
safely say, there is no form of government upon earth so excellent in itself,
as, necessarily, to make the people happy under it" (1.23). However, he
used the statesman's intervention as the necessary role for the establish-
ment of a well-functioning economy. He does so because he does not
recognize any other role in its place (as, for example, the "invisible" hand
of Smith) and he wanted the government to work and act only for the
welfare of the citizens. In order to enforce his desire in regard to the
efficient and proper statesman's intervention, he proposed the punishment
of every civil servant for the abuse of public money (1.257; see also Eltis,
1986, p. 62) and he repeatedly noted the vices and the wrong decisions that
must be avoided by the statesman.3

Market Failures and the Statesman's Intervention

Steuart believed that a free market economy it is possible to fail in the

long run to achieve a state of full employment. The disequilibrium that
would emerge would not automatically be restored. For the restoration of
equilibrium the statesman's intervention through direct and indirect means
is imperative.
Steuart is much more concerned with the idea that the statesman must
be active mainly by influencing and preventing rather than prohibiting the
actions of individuals (1.278). He was against every sudden introduction of
new economic institutions or measures on the part of the statesman (1.292)
because it could prove hurtful for the economy (1.89; see also Ohmori,
1983, p. 186). For Steuart, the statesman must intervene in economic matters
gradually and must "model the minds of his subjects so as to induce them,
from the allurement of private interest, to concur in the execution of his
plan" (1.17). Thus, Steuart's economics could be characterized first as
economics of direction and stimulation and then, when the conditions of the
economy still remain unfavorable, as economics of prevention and control.
Steuart is mainly engaged with the long-run rather than the short-run
effects of the free market. 4 His main interest was to show in which cases
the free market fails to achieve full employment and what must be done
in preventing and/or correcting such a situation (Sen, 1957, p. 130; Meek,
1958, p. 297; Skinner, 1981, p. 29). He makes clear from the beginning that
the main principle to be followed by the statesman is the long-run equili-
brium between the supply of and demand for goods and services (1.67, 86).
He emphasized the long-run equilibrium as he considered that the short-
run disequilibrium or the "gentle alternate vibrations" (1.200) between the
SIR JAMES STEUART ON THE MANAGED MARKET 43

demand for and supply of goods and services "may favour both sides of
the contract" (1.201) and the level of output can be increased (1.194-195).
Steuart is primarily concerned with unemployment and conceived the
objects of "Political Oeconomy" to be the achievement of full employment
with an adequate living standard for all the people (1.17, 28). Thus, he
treated unemployment as the main problem that a "modern" economy has
to solve. He regarded it as a "load" on individuals and the state (1.73) and
a situation that cannot be supported for long "because no power whatso-
ever in a statesman can go so far as to preserve numbers at the expense
of the whole riches of his people" (1.294). If there were unemployment,
Steuart was against any direct regulation and prohibition to human propaga-
tion being imposed by the statesman (1.80). Instead, he proposed the direct
intervention of the statesman for the immediate relief of the unemployed
when other measures and policies prove inefficient, by recommending
" . . .hospitals for foundlings over all the country; and still more strongly
the frugal maintenance of children in such hospitals, and their being bred
up early to fill and recruit the lowest classes of the people" (1.80), and the
collection of "the children of the wretched into workhouses" (1.249).
Steuart analyzed the following causes of involuntary unemployment:
First is that produced by the sudden introduction of machines as labor-
saving innovations (1.122). In this case the statesman must find employ-
ment for the unemployed workers as he does for his soldiers after the end
of a war (1.122-3). He can employ the unemployed laborers in public
works, or in the army, or send them to the colonies (1.202-203).
A second cause of unemployment is produced by the diminution of
"effectual demand." The diminution of effectual demand could be pro-
duced by (1) a permanent disequilibrium between the market prices of
goods and their "intrinsic" values; (2) a permanent disequilibrium between
the supply of and demand for goods and services; and (3) an increase in
the rate of hoarding. Let us analyze more broadly those causes of unem-
ployment and the remedies suggested by Steuart.
Steuart, by distinguishing between the market price and the "intrinsic"
value of goods,S showed where the permanent disequilibrium between those
two rates caused the emergence of unemployment. More specifically, where
the supply of goods is higher than demand for a significant time, prices will
decrease and "the workman fall into distress, and . .. industry suffer a
discouragement" (1.192). In that case the supply price (i.e., cost of produc-
tion) becomes higher than the market price and "the reasonable profits"
are diminished (1.192).
Steuart suggested that the remedy for such a situation was the adoption
of two policies: (1) of managed supply and (2) of managed demand. The
44 ECONOMIC THOUGHT AND POLITICAL THEORY

first policy has to do with the diminution of the level of supply, that is, "the
statesman should diminish the number of hands, by throwing a part of
them into a new channel" (1.191), which is a "forced" restoration of
general equilibrium (1.229). The second policy can be realized through
the increase of demand, by manipulating the level of taxes,6 of public ex-
penses, and of the money supply (see also the excellent analysis by Akhtar,
1979, pp. 293-297).
By extending taxes and public expenditures, the regulation of demand
and production is made possible (1.332). More specifically, by taxes the
production of public services and the employment of public servants are
made possible (1.321). Thus, aportion of the taxes will, through the public
expenditures, be returned to the individuals since it will be spent for
domestic purposes (1.320). Generally speaking, through the imposition of
taxes and the use of the public revenues, "effectual" demand and produc-
tion will be increased while unemployment will be diminished (2.709, 725).
Moreover, if the revenues from taxes are used on public investments, the
level and efficiency of production will also be increased and thus unem-
ployment will decrease:
... if, for example, in consequence of the roads made, any inhabitant shall
incline to remove from place to place in a chariot, instead of riding on horseback,
or walking, he must engage somebody to make the machine: this is a farther
extension to occupation, on the side of those who labour (2.378); [therefore,]
. . . Expensive public works, are ... a means of giving bread to the poor, and of
advancing industry, without hurting the simplicity of manners (2.387).
If anyone argues that, by the imposition of taxes, resources are withdrawn
from the citizens and their level of demand and production decreased,
[t]he answer is, that it might be so, or not: whereas when the state gets it, it will
be spent undoubtedly. Besides, had it been spent by individuals, it would have
been laid out for the supply of private wants, which are not near so extensive
as those of the public: and farther, when money is so taken from rich indivi-
duals, it obliges them to find out a way of procuring more, out of their solid
property (2.726).
Thus, for Steuart there is no internal mechanism in the system that will
guarantee that the citizens will spend all their income.
On the other hand, the statesman is able to diminish unemployment by
using the supply of money as an instrument of economic policy. In order
to increase domestic consumption the statesman increases the supply of
money (1.323-324). And in the case where there is a shortage of metallic
money, the statesman must put into circulation paper money in order to
increase demand and production (1.327-328; see also Sen, 1957, p. 94).
SIR JAMES STEUART ON THE MANAGED MARKET 45

Steuart does not pay attention to the possibility of inflation produced by

an increase in the money supply, arguing that an increase in the quantity
of money and its velocity of circulation in the main increases demand
(1.303, 2.356-357); and if supply responds (2.354, 2.376), then production
and employment also increase (2.344). Steuart, in criticizing the Humean
quantity theory of money-though in an incomplete and incorrect manner
(see Karayiannis, 1988b, pp. 542-544)-emphasized that the increase in
money supply increases the demand and the supply of goods. Then, Steuart
called on the statesman to help in the promotion of the circulation of
wealth by introducing paper money in order to increase the circulation of
goods, the multiplicity of wants among the industrious, and therefore the
increase of supply through the increase of work effort and demand of
individuals (1.316; 1.328; 1.330). In other words, Steuart supported a mon-
etary policy of "cheap money" in order to increase, or at least to postpone
the diminution of, the level of effective demand, production, and employ-
ment (Karayiannis, 1988a, pp. 44-46; 1991b, p. 332).
Steuart recognized also that there are some cases where the market is
prevented from functioning competitively and thus permanent disequili-
brium is produced between the market prices and the "intrinsic value" of
goods. He was against any monopolistic and/or monopsonistic situation
that would eliminate competition and prove hurtful for the general welfare
because of the artificial increase in the rate of prices. In particular, he
called on the statesman to punish those who are activated at first as
monopsonist of a good but later become its monopolists and thus gain
super-normal profits (1.175). He was also against the privileges given to
some trading companies "farther than the public good necessarily requires
it should be" (2.389). He further considered that when a privilege has been
given to a company, the statesman must inspect all the affairs of the com-
pany "in order to be able to take measures which may effectually prevent
bad consequences to the general interest of the nation" (2.394). Moreover,
when there exist in the state "brotherhoods of labourers," that is,
"confraternities, which prevent competition, and raise profits" in the pro-
duction of necessary goods, it "is a point deserving the attention of a
statesman" (1.273; see also 1.288, 2.390). Steuart was against all those
collusions of producers because, among other things, people's manners
and industry have changed in the "modern" economy and the individual
"demands still more liberty" (1.288-289).
Effectual demand can also be diminished in the case where demand is
higher than supply and the market price is increased. If this disequilibrium
persists for quite a long period of time, then the real value of commodities
will be increased because the extraordinary profits will be consolidated in
46 ECONOMIC THOUGHT AND POLITICAL THEORY

it (1.192-193; see also Karayiannis, 1991a, p. 181). The consolidation of

profits into the real value of goods causes a downward inflexibility of
prices, and Steuart emphasized the likelihood and importance of such
inflexibility. At the same time, a price increase in one sector of the economy
will cause prices to rise in others, and hence an increase in the general
price level will take place (2.11.221). For Steuart, the general diffusion of
high prices is hurtful to the economy, because the absolute advantage of
the country in international trade is lost and thus exports and total de-
mand are decreased, a situation that causes unemployment (1.248). By
omitting the role of the entrepreneur, Steuart disregarded the possibility
that the increase of labor and capital productivity would counterbalance
the increase of the real wage rate (increasing living standard) and so the
level of prices would be diminished instead of being increased by the
consolidation of profits. Since Steuart did not recognize any self-adjusting
market mechanism in this case, he called for the statesman's intervention
to prevent or to correct such a situation (1.193-194, 204, 251) and to main-
tain or restore an equilibrium consistent with the natural intrinsic values
(Karayiannis, 1991a, p. 182). In order to prevent the consolidation of profits,
the statesman can use the following specific policies:
First, he can increase the supply of labor and competition from the side
of production to those branches of industry in which the profits have been
consolidated (1.250).
Second, he can discourage the consumption of luxury goods among his
people (1.250). The statesman is able to regulate directly the consumption
of his people through taxation.
In Steuart's time the scientific environment was in favor of the imposi-
tion of taxes only upon luxury goods (see, for example, Montesquieu,
1748, vol. I, p. 209; Hume, "Of Taxes," ed. 1970, p. 85; Rousseau, 1758, pp.
147-148, 152). Steuart followed this line and justified the imposition of
those taxes in the form of ad valorem on every stage of production (2.681)
on the following grounds7:

1. Only the surplus income over and above the consumption of necessary
goods is a suitable object for taxation: all taxes "ought to impair the
fruits and not the fund; the expenses of the person taxed, not the
savings; the services, not the persons of those who do them" (2.674)
and "the load of all impositions may be equally distributed upon every
class of a people who enjoys superfluity, and upon no other" (2.641;
see also 2.675-676 ft. 3, 686, 690, 719, 733).
2. By the taxation of luxury goods the statesman is able to manipulate
the consumption patterns of individuals (2.711, 719)-an idea also
introduced by Rousseau (1758, p. 153).
SIR JAMES STEUART ON THE MANAGED MARKET 47

3. By the taxation of luxury goods hoarding is decreased if the idle-rich

consumer wants to enjoy the same living standard as before the impo-
sition of the taxes (2.703-704, 724-725).
4. By the taxation upon luxury goods a redistribution of wealth is pro-
duced, "throwing a part of the wealth of the rich into the hands of the
industrious poor" (1.334).

Effectual demand can also be decreased in the case where large profits
have induced an increase in the rate of hoarding and "consumption and
the demand for work would diminish in proportion to the part of the
income withheld" (2.649).
He insisted on the deleterious effect hoarding has on effective demand
as he clearly emphasized the use of money not only as a unit of account
and a medium of exchange but also as a store of value (see Karayiannis,
1988a, p. 28, ft. 3). For Steuart, only increased "circulation of money"
could eliminate hoarding, redistribute wealth, and increase the work effort
of individuals (1.325-326). The "miser," by hoarding, diminishes the cir-
culation of money, and thus the statesman "ought at all times to maintain
a just proportion between the produce of industry, and the quantity of
circulating equivalent, in the hands of his subjects, for the purchase of it"
(1.323). In realizing this goal the statesman "must examine the situation of
his country, relatively to three objects, viz. the propensity of the rich to
consume; the disposition of the poor to be industrious; and the proportion
of circulating money, with respect to the one and the other" (1.324).
Steuart considered interest to be an instrument for the diminution of
hoarding, as "no money is to be suffered to remain useless to the propri-
etor of it" (2.444), and thus for the increase of consumption and employ-
ment (Karayiannis, 1988a, p. 40). Steuart was opposed to any direct
regulation by "statute" of the market rate of interest (2.457, 459).8 He
maintained that since the market rate of interest is determined by the
demand for and supply of loanable funds (mainly for consumption pur-
poses) (2.455), the statesman can influence its rate by regulating the supply
of money (2.462).
Steuart did not recognize the classical thesis that hoarding is eliminated
because all savings become investments through the movement in the level
of interest. He also did not relate the expectation of capitalists and entre-
preneurs to the rate of profit and its influence on their investment plans.
Instead he recognized the class of idle consumers who hoard their surplus
if it is not consumed in luxury goods. Thus he called for the statesman's
intervention with specific policies and measures for the elimination of
hoarding and increase in "effectual demand."
In addition to the instrument of the money supply and the rate of
48 ECONOMIC THOUGHT AND POLITICAL THEORY

interest in regulating effectual demand in the economy, Steuart also sug-

gested the use of public debt for the accomplishment of the same goals
(see also Stettner, 1945, pp. 456-457). This public debt can playa positive
role by increasing public expenses and hence effective demand and em-
ployment, viz:
Credit is in proportion to the capacity of paying the interest of money borrowed.
Having abundantly insisted on the advantages of industry in providing for the
poor, I next come to consider the permanent effects of it, after the first end has
been accomplished. If a thousand pounds are bestowed upon making a fire-
work, a number of people are thereby employed, and gain a temporary livelihood.
If the same sum is bestowed for making a canal for watering the fields of a
province a like number of people may reap the same benefit, and hitherto
accounts stand even: but the fire-work played off, what remains, but the smoke
and stink of the powder? Whereas the consequence of the canal is a perpetual
fertility to a formerly barren soil (2.II.260-261).
Steuart considered that the rate of hoarding in an economy is decreased
by the public debt and effectual demand is increased (2.642-644).9 For
Steuart the public debt qoes not decrease the consumption and investment
of individuals by absorbing capital. Instead, the public debt supplements
the effective demand of individuals, by giving an opportunity for the
employment of capital which otherwise is hoarded:
... loans are filled by money stagnating, which the owner desires to realize: if
he cannot do better, he lends it to government; if he can do better, he will not
lend it (2.643).
Steuart did not give credence to the possibility that the increase of
public credit could cause inflation in the economy. The extent of the public
debt, according to Steuart, is regulated by the consequences of increased
taxation for the repayment of capital borrowed. That is, the extent of
public debt could be increased to the point where the increase of effective
demand produced by the increase of public expenditures is outweighed by
the decrease in effective demand caused by the decrease of private spend-
ing because of the increased taxation (2.640-641).

Induced Development

Although Steuart recognized the positive effects produced by the principle

of "self-interest" and the accomplishment of "wants" as "a spur to industry,"
these motives are not his only base. In addition, he called on the statesman
to intervene in order for these motives to function more completely for the
SIR JAMES STEUART ON THE MANAGED MARKET 49

achievement of a higher stage of economic development and the main-

tenance of a favorable balance of trade. The intervention of the statesman
is helpful in the following cases of historical development: (1) when an
underdeveloped country is driven to the stage of development and from
infant trade to foreign trade; (2) when a country is competing in foreign
trade with more advanced countries; (3) when a country has lost its absolute
advantage in foreign trade; and (4) when a country is in the island trade
(i.e., isolated country). Let us examine in more detail the ways and means
by which the statesman intervenes in these cases.
In the first case, the transition of an underdeveloped economy to the
stage of modern economy can be facilitated through the statesman's stimu-
lation and intervention. More specifically, the statesman must create recip-
rocal wants among the producers "in order to bind the society" (1.40,
1.39).10 This can be achieved by promoting the circulation of money and
by helping to increase lUXUry consumption among individuals (1.43-44).
Luxury consumption in the case of infant trade, that is, when foreign trade
does not exist, could be introduced only through the statesman's inter-
vention. According to Steuart, an individual's consumption pattern is
determined by the effect of "imitation" or "fashion" and "conspicuous"
consumption" (1.60-61, 243-244) and thus the statesman is able to influ-
ence the consumption pattern mainly of the idle-rich consumers who have
a "taste for dissipation" (1.243). The statesman is able to influence this kind
of consumption (1.281) by two means: indirectly through his own example
and consumption pattern (1.244, 298, 309) and directly by the taxation of
luxury goods (2.712).
The statesman, by extending luxury consumption, is able to increase in
the absence of foreign trade the domestic demand, supply, and employ-
ment (1.151, 244, 261). This is made possible through the working of the
"aspiration effect," namely through the increase of work effort produced
by the multiplicity of wants and the imitation of lUXUry consumption (on
this effect see Eagly, 1961; Akhtar, 1978, pp. 68, 70). However, the decisive
factors that will make possible the transition of the economy to a higher
stage of development are the establishment and increase of trade and
money in circulation (1.156)Y
For the accomplishment of the above goals the statesman must encour-
age the "vibration" (i.e., the redistribution) of wealth among the citizens,
and particularly "between the rich and the industrious" (1.264). By the
vibration of wealth economic inequality among citizens is diminished (1.282)
and the operation of the aspiration effect is strengthened. Also, "as money
is introduced into a country it becomes ... an universal object of want to
all inhabitants" (1.156). The circulation of goods and the vibration of wealth
50 ECONOMIC THOUGHT AND POLITICAL THEORY

are made possible (1.304,314) and the work effort of laborers is increased
(1.157; see also Akhtar, 1978, p. 59).12 Thus, the wants of the industrious
will multiply as their wage is increased, and the total supply and demand
will also be increased:
The desires of the rich, and the means of gratifying them, make them call for
the services of the poor: the necessities of the poor, and their desire of becom-
ing rich, make them cheerfully answer the summons; they submit to the hardest
labour and comply with the inclinations of the wealthy, for the sake of an
equivalent in money (1.310).

The statesman is able to increase the work effort of individuals through

the following additional practices: (1) by setting wages according to piece
rates rather than time rates (1.169); (2) by the imposition of an expendi-
ture or "proportional" tax on necessary goods in cases where the positive
relationship between wage rate and work effort does not hold because of
consumption saturation (2.691); and (3) by exercising an economic policy
not "falling unequally upon individuals of the same condition" (1.212-213;
see also Karayiannis, 1988a, pp. 34-35).
When a country is at the stage of foreign trade, Steuart's interest is
mostly concentrated on the following issues: the way by which a country
can gain an absolute advantage in some exportable industrial goods; the
techniques and measures by which a country can maintain a favorable
balance of trade; and the effects of free and nonfree trade on the economic
development of the trading countries. Let us see how Steuart elaborates
these issues.
In cases where the statesman must help the economy to obtain a
favorable balance of trade, Steuart bestows him with many energetic and
complicated interventions (1.262; see also Kobayashi, 1992, pp. 61-63):13
"He must, as before, be attentive (1) to provide food, other necessaries
and employment for all his people" (1.231); (2) to engage "the strangers
to furnish articles of the first necessity, when the precious metals cannot
be procured" (ibid.); (3) "to accept, in return, the most consumable
superfluities which industry can invent" (ibid.); and (4) to "inspire his own
people with a spirit of emulation in the exercise of frugality, temperance,
oeconomy, and an application to labour and ingenuity" (1.231-232).
In justifying the intervention of the statesman in helping an underdevel-
oped country to gain an absolute advantage in foreign trade, Steuart has
developed the infant industry argument (Hutchison, 1988, p. 349). He
rationalized this argument because of the small profits at the beginning of
some branches of production that discourage its development (1.204). Thus
he stated that the statesman must permit a short-run, higher-than-normal
SIR JAMES STEUART ON THE MANAGED MARKET 51

rate of profit in the infant and protected branches of industry (1.236, 240)
in order to gain dexterity and knowledge in this kind of production (1.106,
199,262).14 In order for those profits to be gained by the protected branches
of industry, the statesman must prohibit or put duties on importation of
such commodities produced at lower prices abroad (1.262). However,
Steuart recognized that this kind of protection must not last for long:
He [i.e., the statesman] must keep constantly an eye upon the profits made in
every branch of industry; and so soon as he finds that the real value of the
manufacture comes so low as to render it exportable, he must ... put an end to
these profits he had permitted as the means only of bringing the manufactures
to its perfection (1.263).

The statesman also is able to support some branches of the economy by

subsidizing and giving premiums. If a surplus of products exists in the
country, the statesman "himself become[s] the purchaser, if others will
not; or, by premiums or bounties on the exportation of the surplus which
lies upon hand, promote the sale of it at any rate, until the supernumerary
hands can be otherwise provided for" (1.241, see also 1.299). The states-
man, by buying this surplus, is able to sell it in another country at a lower
price "at the loss to himself" (1.257) (i.e., the loss will be paid from the
revenues from taxes) and in this way prevent the emergence of unemploy-
ment. Steuart was well aware that there is a possibility for the subsidized
sector of the economy to remain in the same state because of the unwill-
ingness of producers to improve their production capacity:
. .. premiums are often abused. It belongs to the department of the coercive
power of government to put a stop to such abuse (1.257).

When a country has an absolute advantage in certain manufactured

goods, the statesman must do what he can in order to sustain such an
advantage. In addition, he can help the country to hold a positive balance
of trade by encouraging the exportation of manufactured goods (labor-
intensive goods) and the importation of raw produce (1.291).15
In the case where a country has lost its absolute advantage because of
an unavoidable decline, Steuart called on the statesman to intervene.
Steuart, under his growth-decay thesis in foreign trade (1.195-196),16 at-
tributed many duties to the statesman. He stressed some natural causes
that direct the economy toward decay, and thus he asked the statesman to
intervene in order to prevent decay from happening (2.637). He also noted
that the remedies must be scheduled according to the relative circum-
stances that prevail in any economy (2.700).
Four things cause the stage of decay in foreign trade to begin, that is,
52 ECONOMIC THOUGHT AND POLITICAL THEORY

where an absolute advantage is lost: (1) an increase of prices of the export-

able commodities caused by the consolidation of profits; (2) an increase in
the price of exportable goods caused by an increase of the "intrinsic" value
of commodities because the price of necessary goods has been increased;
(3) "the natural advantage of other countries" who can export goods at a
lower price because of their natural endowments; and (4) the higher produc-
tivity of other countries and their more advanced and well-administrated
economy (1.246-247).
In regard to the first cause of decay in foreign trade, Steuart suggested
the following strategy of recovery: the statesman must intervene by dimin-
ishing the luxury consumption of producers and thus causing the intrinsic
value of commodities to be decreased, viz:
If manufacturers become luxurious in their way of living, it must proceed from
their extraordinary profits .... To re-establish then the foreign trade, these con-
solidated profits must be put an end to, by attacking luxury when circumstances
render an augmentation of people inconvenient, and prices will fall of course
(1.250; see also 1.192-193, 239).

However, Steuart finds it preferable for the statesman to prevent the

consolidation of profits by encouraging supply in sectors where demand is
higher than supply (particularly of exportable goods) (1.240, 251).
Another natural cause of the increase in the intrinsic value of commod-
ities is produced by the unbalanced growth of agriculture and population.
In the case where popUlation increases faster than agriculture (1.252)-
as agriculture functions under diminishing returns (1.197-198)-then the
price of subsistence goods will be increased. In such a case the statesman
must encourage the importation of subsistence goods (1.198) or assist
"agriculture with his purse" (1.200)P Indeed, "These appear to be the most
rational temporary expedients to diminish the price of grain in years of
scarcity" (1.255). The statesman may also exercise some regulatory activ-
ities in order to "keep the prices of grain in as just a proportion as possible
to the plenty of the year" (1.254). Steuart also noted that placing premiums
upon exportation is a good measure for the decrease of the agricultural
surplus "when prices fall too low" (1.233).
For Steuart, the statesman's intervention and his remedies for the re-
establishment of foreign trade are "difficult, and sometimes dangerous"
(1.259); therefore, he suggested that the statesman must do what he can to
"preserve" a beneficial balance of trade (1.260).18
In regard to the other two causes of the loss of absolute advantage in
foreign trade, Steuart suggested that the statesman must encourage ex-
portation-when the country is competing in foreign trade with more
advanced countries-even by giving premiums (1.258).
SIR JAMES STEUART ON THE MANAGED MARKET 53

When a country has already lost its absolute advantage in foreign trade
by trading with a superior country, the statesman can intervene by intro-
ducing the following three measures:
First, To renounce this branch of commerce entirely, and to take the commodi-
ties wanted from foreigners, as they can furnish them cheaper. Secondly, To
prohibit the importation of such commodities altogether. Thirdly, To impose a
duty upon importation, in order to raise the price of them so high as to make
them dearer than the same kind of commodity produced at home (1.284).
Steuart disputed the second measure because he considered it to be
"too violent a remedy ever to be applied with success" (1.290). Instead of
that, the statesman must impose duties on the importation of goods which
will be gradually augmented (1.292). What, then, will be the optimum rate
of duties imposed on importations? Steuart argues that this rate must be
such as "to allow such commodities to be imported, with a duty which may
raise their price to so just a height as neither to suffer them to be sold so
cheap as to discourage the domestic fabrication, nor so dear, as to raise
the profits of manufactures above a reasonable standard, in case of an
augmentation of demand" (1.285).
Steuart turned against the sudden prohibition of imported goods be-
cause it will increase the price of those goods in domestic industry:
A sudden stop upon a large importation, raises the prices of domestic industry
by jerks, as it were; they do not rise gradually; and these extraordinary profits
engage too many people to endeavour to share in them. This occasions a deser-
tion from other branches of industry equally profitable to the state (1.291).
Here Steuart regards the profit motive as the main influence on the al-
location of capital and labor to the most profitable enterprises. However,
he did not use this mechanism for the explanation of the market phenom-
ena and their solution.
Steuart suggested the statesman at first do what he can by examining
the causes and the remedies for regaining a profitable foreign trade and
not to stop it altogether (1.293). However, he was well aware that inter-
national trade stagnates if the same policies on foreign trade are followed
by all countries (1.296).
The establishment of free trade, according to Steuart, can prove benefi-
cial to the trading countries only if they have the same level of develop-
ment and individuals share the same consumption preferences, viz:
Were industry and frugality found to prevail equally in every part of these great
political bodies, or were luxury and superfluous consumption every where car-
ried to the same height, trade might, without any hurt, be thrown entirely open.
It would then cease to be an object of a statesman's care and concern (1.296;
emphasis added).
54 ECONOMIC THOUGHT AND POLITICAL THEORY

Steuart recognized that through international trade, world production

would be increased by the increase in the work effort of individuals:
... trade has an evident tendency toward the improvement of the world in
general, by rendering the inhabitants of one country industrious, in order to
supply the wants of another, without any prejudice to themselves (1.119; see
also 120).
Through exports, "effectual" demand is increased, and if supply re-
sponds, "the whole industrious society will grow in vigour, and in whole-
some stature" (1.182). But if supply does not respond to the augmented
demand, extraordinary profits will emerge and exports will decrease (ibid.).
In the case of island trade, the statesman's main duty is the promotion
of domestic consumption when the country has not reached its full-capacity
level of production (1.300). Also in this state the statesman must prevent
fraud by merchants and promote the distribution of grain to all parts of
the country (1.255).
One can clearly deduce from the above analysis that for Steuart, the
main failures of the market that statesman must cure in the above four
cases of a country's developmental process are the increase in unemploy-
ment and the avoidance of a negative balance of trade. There is no inter-
nal mechanism or internal factor to treat such market failures. Therefore,
according to Steuart, it is only through the statesman's indirect and direct
intervention that the crisis produced in the free market can be overcome.

Steuart and Smith

It is natural to make a comparison between two famous economists of the

eighteenth century, Steuart and Adam Smith. If we proceed to the core of
their different solutions to economic problems, we find that the former
stressed the negative possible outcomes of the free market, while the latter,
the positive ones. On the other hand, when we compare Steuart's and
Smith's assumptions on the existence of a perfect statesman and his crucial
and necessary role in the economy, we come to another critical difference.
Contrary to Steuart, who assumed the theoretical existence of a perfect
statesman, Smith rejected such a possibility. Smith was extremely hostile
to politicians and spoke very caustically about them. In The Wealth of
Nations he called the statesman or politician an "insidious and crafty
animal ... whose councils are directed by the momentary fluctuations of
affairs" (ed. 1976, p. 468). In Lectures, he also says, "They whom we call
politicians are not the most remarkable men in the world for probity and
SIR JAMES STEUART ON THE MANAGED MARKET 55

punctuality" (ed. 1978, p. 539). Smith did not suppose the existence of a
perfect statesman like the one introduced by Steuart. On the contrary, he
comments that "[t]he violence and injustice of the rulers of mankind is an
ancient evil, for which, I am afraid, the nature of human affairs can scarce
admit of a remedy" (The Wealth of Nations, ed. 1976, p. 493).19 He be-
lieved that the statesman did not have an adequate and appropriate
knowledge to direct the economic actions of individuals so as to maximize
their welfare (The Wealth of Nations, ed. 1976, pp. 456, 687). Moreover,
for Smith, the statesman was also "by nature extravagant, and prone to
maldistribution" (Eltis, 1986, p. 67), while bureaucrats were inefficient
(Reisman, 1982, p. 217).
We are not claiming that Steuart's and Smith's different approaches
to the subject of the statesman's intervention gave rise to their different
analyses of the market. Rather it seems that because they stressed differ-
ent market forces as the predominant one (the former, the adequacy of
demand; the latter, efficiency of production) as well as different roles (the
former, the small producer; the latter, the capitalist-entrepreneur), they
reached different conclusions on the function of the free market. Steuart
stressed the possibility of crises and the long-run disequilibrium of the
market, while Smith emphasized the smooth operation of the system and
the tendency to long-run equilibrium. Or, to put it differently, Steuart's
analysis was addressed toward showing how the emergence of economic
crises could be avoided or prevented, while Smith's was directed toward
demonstrating what the general framework of the system would be that
would guarantee the minimum emergence of crises. Moreover, the differ-
ence of opinion between the two authors in regard to the purposes and
qualities of the statesman does seem to influence their different attitudes
toward the function of the free market. Their differences on the subject of
the statesman's intervention also brings to mind a similar differentiation of
opinions that took place in ancient Greece between Plato and Aristotle.
Plato entrusted to the statesman many activities in intervening in the
economic actions of individuals (see, for example, Laws, 632 B; see also
Karayiannis, 1990, pp. 34-36). Moreover, he stressed that the statesman
must be educated in the "art of government" in order to increase the
necessary qualities and characteristics for the execution of his duties (Laws,
250 B, 292 B; Statesman, 261 D, 293 A, D).
Aristotle, on the other hand, did not rely much on the statesman's
qualities for the smooth operation of the economy, but rather considered
the statesman to be inefficient in the direction and control of human
actions. Moreover, he noted that the majority of politicians seek to satisfy
their private interest and not that of the general good. As he comments:
56 ECONOMIC THOUGHT AND POLITICAL THEORY

... the majority of those engaged in politics are not correctly designated
politicians, for they are not truly political, since the political man is one who
purposely chooses noble actions for their own sake, whereas the majority em-
brace that mode of life for the sake of money and gain (Eudemian Ethics, 1216,
a20-30).
Therefore, if we want to draw a parallel between these two pairs of
scientists, we can say that Steuart displayed a similar attitude to Plat020
on the efficiency of the statesman's intervention, while Smith followed
Aristotle's approach more closely.

Conclusions

From the foregoing analysis it could be deduced that Steuart's attitude

toward the managed market and his policy suggestions came from his
analysis of cases of market failure. We cannot say with certainty that his
belief in the powers of the wise statesman forced him to schedule a market
analysis with visible cases of failure of whether the contrary was the case.
However, it is very difficult to deny the similarity of Steuart's views
about the necessity of the statesman's intervention with the economic
policies introduced by Keynes and the Keynesians and followed by various
countries in the twentieth century. The various economic policies for the
avoidance of unemployment, for increases in effective demand, and for the
protection of domestic production, and so on, are similar to those devel-
oped by Steuart. Despite his neglect of some mechanisms and behaviors
that would produce, under definite assumptions, a general equilibrium,
Steuart showed a lack of realism in regard to the efficiency of the states-
man's intervention (Hutchison, 1988, p. 350). This lack of realism is not
very profound in regard to the instruments of economic policy as it is in
regard to the abilities of the statesman.
It is not necessary to go through mercantilism, socialism, and economics
of control in order to find economic policies that are similar to those
suggested by Steuart. By abstracting from the characterizations and paral-
lels21 of Steuart's "inquiry" with older or later developed economic ideas,
policies, and arguments, it is difficult to deny evidence that may prove that
Steuart was born either too late or too soon. In the twentieth century,
most of the countries of the Western world have at one time or another
followed policies similar to those suggested by Steuart. The great weak-
ness of Steuart is his assumption of a perfect statesman to handle all the
problems that need a solution. As experience has shown, the existence of
such an entity is extremely rare.
SIR JAMES STEUART ON THE MANAGED MARKET 57

Acknowledgments

I would like to thank Ray Petri dis (Murdoch University) for helpful
comments on an earlier draft. The usual caveats apply.

Notes

1. All references cited to 1805 edition of Steuart's Works are as follows: volume, book,
page (e.g., 1.1.257). For Skinner's edition of Principles, we cite volume and page only (e.g.,
1.152).
2. In his work Steuart used the term statesman as "a general term to signify the legislature
and supreme power, according to the form of government" (1.16).
3. For example, Steuart noted the case in which some statutes of the king of France in
1720 destroyed the public credit (2.441-442).
4. For an excellent analysis of microeconomics before Smith, see Rashid (1986, pp. 844-
851).
5. Steuart regarded the "intrinsic" value of a commodity as being measured by the cost
of production and particularly by the level of real wages. However, he stressed also that the
level of wages is mainly determined by the demand for labor, that is, by the consumption
patterns of rich individuals and not by the price of necessary goods. That is why in our article
(1991a, pp. 168-174) we spoke of Steuart's "quasi labour theory" of value.
6. Taxes, as Steuart made clear, must not be imposed on individuals arbitrarily and
unequally (1.213). Also the individual must recognize that taxes "are paid for the advantage
of the public, not for that of private people" (2.708-709).
7. Steuart was against direct taxation on wages, profits and capital; he stressed that such
taxation would prove hurtful for the economy, because:

(a) Direct taxation on wages decreases the living standard of workers (2.675-676, ft. 3.).
(b) Taxes levied on necessary goods will increase the rate of wages and the general level
of prices in the economy (2.694-695) and thus exports and "effectual" demand will
be decreased. However, Steuart recognized one case where the taxation on necessary
goods would be beneficial to the economy. This is the case where the laborers enjoyed
a luxurious living and their work effort had been decreased (2.691-692, 695). Thus
Steuart not only stressed the demand side effects of taxation but also the supply effect
(Eltis, 1986, p. 61).
(c) By the direct taxation on income and profits, the incentives of individuals for increas-
ing their productive effort could be decreased (2.687-688). Steuart suggested direct
taxes be imposed only on the interest received from the public dept (2.722).
(d) Taxes on capital will decrease the surplus of the economy that is directed to invest-
ment (2.687-688, 705, 712, 723).

8. Steuart observed that if the statesman must regulate the rate of interest directly by law
it must be done by establishing a legal level of interest above the rate that could be established
in the market (2.457,460-461).
9. Steuart was opposed to the foreign debt not only because of fear of the country
becoming dependent on foreigners but also because of the loss of capital to foreign countries
58 ECONOMIC THOUGHT AND POLITICAL THEORY

through the payment of interest (2.636, 644-645). For the ways that, according to Steuart, a
public debt could be repaid, see Sen (1957, p. 112).
10. Steuart goes so far as to regard the spatial distribution of the units of consumption
and production as partially influenced by the activities of the statesman (1.60-61, 64).
11. Steuart considers trade to be a time-saving operation and a branch of product distri-
bution according to the dictates of demand and supply (1.156). He also makes clear that the
merchants have the power to introduce in underdeveloped countries a taste for superftuities
(1.163).
12. The introduction and extensive use of money in the economy, according to Steuart,
produces some beneficial effects: it (a) expands economic growth; (b) increases the effective-
ness of the tax system; and (c) produces a more equal distribution of wealth (Karayiannis,
1988a, p. 28, ft. 3).
13. For a more developed economy the statesman should have great delicacy of touch.
Steuart used the metaphor of the watch to show that the statesman must very carefully
intervene in the "modem" economy, and mostly with long-run targets (1.217; 278-279).
14. Steuart, in developing his thesis for the protection and encouragement of infant in-
dustry, mentioned that the statesman "must likewise spare no expense in procuring the ablest
masters in every branch of industry; nor any cost in making the first establishments, in
providing machines, and every other thing necessary or useful to make the undertaking
succeed" (1.263), and he "ought to multiply the numbers of scholars" (1.263). Is Steuart
suggesting here that the statesman must offer public education in bettering the "master" of
enterprises, or encourage the competition from the side of supply in order that only the most
able producers survive in the market? He does not make clear which one of those policies
is being suggested.
15. Steuart was an advocate of a favorable balance of trade. However, in contrast to the
old mercantilists who considered the surplus of foreign trade as consisting of precious metals,
Steuart emphasized its real terms and in particular measured it by the net amount of labor
value added. He recognized that only when a country imports lower labor cost, or lower
labor value-added commodities than are exported, does it have a favorable balance of trade
(1.291, 294).
16. Steuart strengthened his growth-decay thesis by considering history (1.195; for this
thesis see also Low, 1952, pp. 323-324; Skinner, 1981, pp. 32-33). This thesis had been put
forward first by Plato who, philosophically speaking, wrote: "since for everything that has
come into being destruction is appointed" (Republic, 546 A). In the eighteenth century Hume
was the writer who before Steuart stated this thesis in his letter to Lord Kames (4th March,
1758, ed. 1932, pp. 271-272).
17. Steuart proposed also the establishment of a granary scheme by which the real wage
rate and the level of production of grain will be secured (Campbell, 1953, pp. 50-51; Skinner,
1985, p. 12; Eltis, 1986, p. 56).
18. For the policies suggested by Steuart for dealing with disequilibrium in the balance
of payments and capital mobility, see Perlman (1990).
19. Smith was against the statesman's intervention because he considered there to be no
such being as an "impartial" statesman. He argued that statesmen usually make laws for their
material and other benefits (Lectures, ed. 1978, p. 181). He also stressed that the capitalists
by their money and power are able to influence and "corrupt the members of parliament"
(Pack, 1991, p. 149). Moreover, he was opposed to the statesman's intervention in the economy
because he considered that the British government in the past had done more harm than
good (Reisman, 1982, p. 219).
20. The resemblance between Plato and Steuart is also obvious in regard to the capability
SIR JAMES STEUART ON THE MANAGED MARKET 59

of the statesman to influence the "spirit of people." The philosopher stressed that "by further
laws and institutions you expel illiberality and commercialism from the souls of those who are
to pursue them thoroughly to their profit" (Laws, 747 B). Steuart, on his side, considered that
"[tJhe spirit of a people is formed upon a set of received opinions, relative to three objects;
morals, government, and manners" (1.22). This spirit changes naturally between generations
(1.24-25), but change is also affected by the government (2.638; see also Khalil, 1987, p. 121).
It seems that Steuart used the model of Spartan economy primarily to show how Lycurgus
prepared the "spirit of the people" (1.219, 227) in order to establish such a system of economy
which, as he said, "I readily grant, is not likely to take place" (1.227).
21. Steuart has been variously characterized by early (see King, 1988, pp. 32-33) and
modem commentators as mercantilist (see, for example, Kobayashi, 1967, p. 3; Anderson and
Tollison, 1984, p. 459) and as a predecessor of Keynes (Sen, 1957, p. 151).

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 3 ECONOMIC THEORY AND
POLICY: AN INTRODUCTION
TO JOHN STUART MILL'S
POLITICAL ECONOMY
Samuel Hollander

Introduction

This chapter outlines some implications for economic policy of John Steuart
Mill's position on the nature and function of abstract economics. It is
designed as a sort of introduction to his theory of economic policy rather
than a statement of that theory as such.'
Mill's methodological pronouncements are of prime importance in our
exercise. The second section is concerned with constraints on the applica-
bility of economic theory flowing from its character as a specialized sci-
ence of "wealth" (throughout read "income") based on maximizing behavior
and, accordingly, pertinent to particular institutional frameworks. Special
problems arise from the "progressive movement of society" at play. The
indispensability of theory as the sole means of dealing with causality and
avoiding misleading surface appearances, and various cautions regarding
the "art" of applied economics, are examined in the third section. A con-
cern with theory testing prior to application is a further consideration. It
emerges furthermore, in the following section, that economics does not
allow positive historical prediction; its function, rather, is to recommend
measures that encourage "beneficial" and counteract "injurious" tendencies.

63
64 ECONOMIC THOUGHT AND POLITICAL THEORY

The fifth section considers Mill's position that the scientific character of
economics flows from the competitive principle. This generalization must
be fully appreciated, since taken literally it severely limits the applicability
of theory. The declaration in fact excludes only small-number cases rather
than monopolistic competition or monopoly. Mill's enthusiastic champion-
ship of both the efficiency and the dynamic cases for competition is sum-
marized in the sixth section. A companion discussion in the subsequent
section broadens the relevance of competitive theory, considering the
"universality" of the method of economics. This extends the coverage of
theory to institutional structures other than capitalist-exchange provided
that maximizing behavior is at play (precluding custom, gift, or force) and
the absence of the small-number problem assured.
Mill's contrast between the laws of production and distribution-the
former supposedly "immutable" and the latter "malleable"-is of obvious
relevance for any theory of economic policy. The contrast, taken up in the
next section, is shown to be built on sand, the inflexibility of the first
category turning on given knowledge, while the amenability of the second
to social choice neglects the consequences of such choice, consequences
revealed by economic theory. Mill's distinction is only meaningful in a
weak sense involving the contrast between problems of efficiency and
of value judgment. In the subsequent section the impact of productive
organization on productivity (and also on population growth) illustrates
the fact that the choice of particular institutional arrangements has conse-
quences amenable to theoretical treatment in terms of the competitive
model.
The pre-conditions required to assure that competition is the appropri-
ate policy for manpower allocation is the subject of a later section. Here
are encountered Mill's elaborations of the Smithian analysis of the wage
structure. It was acceptable as yielding an equitable pattern-even accept-
able for Socialists-subject to (1) correction of certain irrational forms of
behavior, (2) removal of barriers to mobility created by education costs;
and (3) assurance of full employment in the labor market as a whole,
introducing a link between micro-economic and macro-economic analysis
of the very first importance to labor policy.
The aggregate labor market is dealt with more fully in the latter part of
the chapter, with particular reference to the population problem. Com-
petition again provides the key. Although Mill did not accept the com-
petitively determined general wage as necessarily "equitable," especially
considering the none quit able distribution of property, he sought means to
strengthen the relative strength of labor in the market, theory demonstrat-
ing that competition need not act against labor's interests. That was the
ECONOMIC THEORY AND POLICY 65

moral insisted upon, coupled with the belief that the solution to low wages
lay with labor itself, not with government or varieties of paternalism. A
concern with the "free-rider" problem emerges in the discussion of pru-
dential popUlation control opening up a potential for legitimate social
(even legal) control of population growth.
I suggest in the next-to-Iast section that Mill's celebrated recommenda-
tion for a stationary state-the logical limit to population control-should
not be taken too seriously. Too many social desiderata turn on growth, and
stationariness might be dangerous from the perspective of labor displace-
ment, capital loss abroad, resource misallocation, social conflict, and pros-
pects for new technology. On balance, Mill gave a positive answer to the
question of whether growth is desirable.
The final substantive section illustrates the impact of changing empirical
circumstances on the policy implications derived from the classical growth
model and the Law of Markets. Specifically, it concerns the linkage of
economic cycles with an unprecedented buoyancy of capital accumulation
and the consequential justification for socially desirable government ex-
penditure. That all this is consistent with the Law of Markets illustrates
the flexibility of the theory-policy relation in Mill's hands, and provides a
case study of his methodological caution against simple-minded applica-
tions. The new perspective extends to public finance, and here a contrast
emerges between Mill's new radicalism with respect to government ex-
penditure and his long-standing and continued concern with the disinsentive
effects of progressive taxation.

SpeCialization in Social Science: Constraints on the

Applicability of Economic Theory

Mill distinguished the "science" from the "art" of political economy, the
indicative from the imperative mood: "Science takes cognizance of a
phenomenon, and endeavours to discover its law; art proposed to itself an
end, and looks out for means to effect it" (CW, IV, p. 312). The science
is perceived generally as treating "the production and distribution of wealth,
so far as they depend upon the laws of human nature" (p. 318); and, more
narrowly, as "concerned with [man] solely as a being who desires wealth,
and who is capable of judging of the comparative efficacy of means for
obtaining that end" (p. 321). The specifications are finally formulated as
wealth maximization subject to "two perpetually antagonizing principles ...
aversion to labour, and desire of the present enjoyment of costly indul-
gences," which "do not merely, like other desires occasionally conflict with
66 ECONOMIC THOUGHT AND POLITICAL THEORY

the pursuit of wealth, but accompany it always as a drag, or impediment,

and are therefore inseparably mixed up in the consideration of it" (pp.
321-322). The science is, therefore, based on a specific behavioral pattern
and the social phenomena under investigation are themselves limited in
range to the production and distribution of "wealth."
An intimate connection is drawn between the wealth-maximization
hypothesis and the limited range of subject matter treated by political
economy. The supposed circumstance that different classes of social fact
depended "immediately and in the first resort ... on different kinds of
causes," allowed for "distinct and separate, though not independent,
branches of sociological speculation" (VIII, pp. 900-901). In political
economy, the relevant class of social phenomena is that

... in which the immediately determining causes are principally those which act
through the desire of wealth; and in which the psychological law mainly concerned
is the familiar one, that a greater gain is preferred to a smaller. I mean, of
course, that portion of the phenomena of society which emanate from the
industrial, or productive operations of mankind; and from those of their acts
through which the distribution of the products of those industrial operations
takes place insofar as not effected by force or modified by voluntary gift (emphasis
added).2

Income maximization was, therefore, not one among roughly equal motives,
but the predominating influence governing a specific range of social phe-
nomena; and since "the law of the effect is compounded by the laws of all
the causes which determine it" (IV, p. 322)/ there was ideally to be an
ultimate synthesis of the results of all the specialist branches of social
science to form a general theory of wealth. Economics provided a partial
theory of wealth, and a model based on the wealth-maximization hypothesis
as the "sole end" of activity was only an approximation to be qualified in
application to particular cases because of "disturbing causes," including
conflicting behavioral patterns (p. 323).
For the specialist procedure to be legitimate, the range of study must
accordingly encompass a sufficiently homogenous pattern of behavior; it
further followed that the specialist exercise was "liable to fail in all cases
in which the progressive movement of society is one of the influencing
elements" (VIII, p. 906). The scope of the subject matter of political
economy is thus restricted. Not only does the income-maximizing hypothesis
require that we concentrate on a particular range of activity (the production
and distribution of income) where such an assumption constitutes at least
an excellent first approximation, but even this assumption only holds good
(again as an approximation) in the context of a specified nation and period.
ECONOMIC THEORY AND POLICY 67

Mill's repeated references limiting the practical guidance to be derived

from political economy to "any given state of society," to "any given
condition of social affairs," to "any country or time the individual circum-
stances of which we are well acquainted" confirm the limited scope con-
ceived for the propositions of the science-the fact that even the isolation
of tendencies (as distinct from the making of specific predictions) requires
the initial postulation of a constrained environment. Universally applica-
ble propositions were, therefore, not in order because of the "eminently
modifiable nature of the social phenomena, and the multitude and variety
of the circumstances by which they are modified; circumstances never the
same, or even nearly the same, in two different societies or in two different
periods of the same society" (pp. 898-899). Far from being represented
as being of "universal" relevance, the axiomatic foundation of political
economy was pertinent only to well-defined environmental conditions, and
even then subject to qualification considering the potential intervention of
"disturbing causes."
Contrasting with his qualified championship of deductive theory in
political economy is Mill's rejection of the Bentham school and its "interest
philosophy." To base a theory of government 4 and make proposals for
reform on the assumption of self-interest was "unscientific" (p. 892). His
strictures did not relate to irresponsible policy applications but rather to the
supposed predominance of the Benthamite interest philosophy throughout
time and space, its universality (IV, p. 333). This criticism did not apply to
political economy envisaged as a science of relatively narrow scope and not
of universal relevance even as a first approximation; the procedure of distin-
guishing between income maximization and other behavioral patterns re-
flected a quest for practicality given the problem of "composition of causes,"
and was valid only in the light of the empirical relevance of the maximization
hypothesis in that temporal and geographic environment which the model
was designed to treat. And even in the advanced competitive capitalist
system for which the model is designed, other motives may be at play in
special cases so that the applied economist must be ever on the alert.
Apart from political ethology Mill seems hesitant to specify the particu-
lar specializations that would ideally complement political economy. Con-
ceivably, by the distinction between competition and custom and the
constraint that "only through the principle of competition has political
economy any pretension to the character of a science" (II, p. 239), he
intended the character of an independent science, the case of custom being
the subject of a complementary science based upon an alternative axi-
omatic basis. An investigation of wealth based on altruistic behavior might
provide a second example. 5
68 ECONOMIC THOUGHT AND POLITICAL THEORY

Contemporary political economy is actually less severely constrained

than it is formally represented to be. For its axiomatic foundation in fact
included some behavioral assumptions conflicting with income maximiza-
tion: "in a few of the most striking cases (such as the important one of the
principle of population)" corrections "are ... interpolated into the expo-
sition of Political Economy itself; the strictness of purely scientific arrange-
ments being thereby somewhat departed from, for the sake of practical
utility" (p. 323).
The relaxation of the formal constraints on the scope of political economy
also emerges in the treatment of knowledge (and elementary education
and health). In the case of speculative activity in general, the "material
fruits, [of thought], though the result, are seldom the direct purpose of the
pursuits of savants," and to that extent does not fall within the economist's
domain (p. 43). Mill, however, proceeds to qualify himself:
But when (as in political economy one should always be prepared to do) we
shift our point of view, and consider not individual acts, and the motives by
which they are determined, but national and universal results, intellectual
speculation must be looked upon as a most influential part of the productive
labour of society, and the portion of its resources employed in carrying on and
remunerating such labour, is a highly productive part of its expenditures.
Yet the proposed incorporation of activities governed by other than
income-maximizing motivation does not indicate what professional com-
petance the economist has to bring to bear. The incorporation into eco-
nomics of the determinants of pure science was largely a proposal flowing
from a realization that though maximization motives may be irrelevant,
the subject was too close to home to be safely relegated to "another
science."
What we actually do have from Mill is not always consistent with the
initial presumption of an absence of profit maximization.6 But to the ex-
tent that our comprehension of the system is extended beyond mere
empirical relationships, the potential role of deductive theory in policy
recommendation is enhanced.

The Indispensability of Economic Theory and

Further Cautions Regarding Policy Application

Thus far I have referred to limitations imposed on the scope of economic

theory, particularly in policy application. But Mill's harshest criticism was
reserved for the "experimental" method. The "infant state" of the social
ECONOMIC THEORY AND POLICY 69

sciences he blamed on a failure to appreciate that scientific methods "to

accomplish anything worthy of attainment, must be to a great extent if not
principally, deductive" (VII, p. 384). In discussing "fallacies of observa-
tion" (VIII, p. 781), Mill contrasted surface manifestations of apparent
causal linkages and a deeper undercurrent of causation moving in a very
different direction (a distinction made much of by Marx). Conspicuous
examples include the notion that lavish state expenditure provides a sti-
mulus to industry, an error corrected by the Law of Markets; the common
case against free trade, corrected by the comparative cost theory with
further light cast by the classical theory of growth; the explanation of
inflation in terms of upward wage pressure corrected by the inverse wage-
profit theorem which itself turns on the theory of allocation (cost of pro-
duction theory of value),7 coupled with the quantity theory approach to
the price level; and the notion that expansion of the currency is stimulatory
which erroneously presumes that inflation is unanticipated.
The requirement for theory does not, however, pertain to the techno-
logical level of conception. For example, an observed downward trend of
agricultural costs over several decades would have to be analyzed by an
empirical investigation of the impact of diminishing agricultural and in-
creasing manufacturing returns, innovation, changing work attitudes,
labor relations, health, skill, business organization, and so forth, with the
"abstract" science of economics scarcely entering the picture. Indeed, the
empirical investigation contributes toward a specification of the axioms
required by economic theory. The function of the science is rather to
explain the data at the more profound level involving human decision
making, for which reason precisely economic models were restricted to
particular behavioral patterns. Taking the Ricardo-Malthus-Mill growth
model as an example, we have a relation linking falling agricultural pro-
ductivity to the return on capital (a relationship that entails the inverse
wage-profit mechanism and thus the competitive pricing mechanism in
labor and commodity markets) and hence to savings decisions, and a re-
verse relationship brought into play by certain categories of innovations.
Theory tells us that the imposition of Corn Laws sets in motion the former
tendency and is thus adverse to the growth of wealth, a matter easily dis-
guised by the statistical data.
The theoretical constructs mentioned above turn on a specific set of
behavioral and institutional axioms. And this limitation on the scope of
the specialist social science rendered it unlikely that empirical laws per-
taining to specific policy changes, such as the effect of Corn Laws on
"wealth," could ever be obtained. Given the social and institutional environ-
ment relevant to legislation, there were likely to be too few observations
70 ECONOMIC THOUGHT AND POLITICAL THEORY

to reveal any pattern whatsoever, since different conflicting causes acting

on wealth would be at play in each specific case, some acting positively and
some negatively (pp. 908-909).8 Even in the unlikely event of a large number
of observations relating to Corn Laws in a given environment, at best all
that could ever be yielded is a generalization stating that in a majority of
cases such laws were accompanied by a particular outcome, and such
generalizations would be of little use since it would still remain necessary
to interpret them by reducing them to the underlying causal forces at
work. It is "from theory" only that the effects on wealth specifically due
to Corn Laws could be appreciated; to base recommendations on apparent
empirical regularities might prove disastrous. 9
The absence of genuine empirical laws precluded direct verification of
theory against the results of "a posteriori observation" in the specialist
branches of social science (p. 896). Nonetheless, responsible use of theory
in policy recommendation required at a minimum indirect verification-the
political economist's knowledge "must at least enable him to explain and
account for what is, or he is an insufficient judge of what ought to be" (IV,
p. 335). He must allow for "the disturbing influence of unforeseen causes,"
but also "carefully watch the result of every experiment, in order that any
residuum of facts which his principle do not lead him to expect, and do not
enable him to explain, may become the subject of a fresh analysis, and
furnish the occasion for a consequent enlargement or correction of his
general views" (pp. 335-336). If we cannot account for the existing state
of social phenomena in terms of our model, allowance made for disturbing
causes, "we are not, in the present state of our knowledge, fully competent
to draw conclusions, speculative or practical, for that country ... we must
turn back, and seek the explanation by an extension and improvement of
the theory itself" (VIII, pp. 909-910).
Even after satisfying the foregoing conditions, the "guidance of prac-
tice" remained a hazardous exercise. The intervention of unforeseen dis-
turbing causes was always a possibility: "Effects are commonly determined
by a concurrence of causes. If we have overlooked anyone cause, we may
justly reason from all the others, and only be further wrong. Our premises
will be true, and our reasoning correct, and yet the result of no value in
the particular case" (IV, p. 337). This problem was compounded by the
fact that, by its nature, the art of political economy involved more than the
application of the corresponding specialist science:
One of the strongest reasons for drawing the line of separation clearly and
broadly between science and art is the following-That the principle of classi-
fication in science most conveniently follows the classification of causes, while
arts must necessarily be classified according to the classification of the effects,
ECONOMIC THEORY AND POLICY 71

the production of which is their appropriate end. Now an effect, whether in

physics or morals, commonly depends upon a concurrence of causes, and it
frequently happens that several of these causes belong to different sciences
(p. 331n).

Because of the characteristic interdisciplinary nature of art, it followed

that the "mere political economist, he who has studied no science but
Political Economy, if he attempts to apply his science to practice, will fail"
(p. 331). In these terms we can appreciate Mill's appeal for broadminded-
ness, notwithstanding his insistence on the legitimacy of specialization. For
the necessity of a detached discipline of political economy did not gainsay
that its practitioners, like all other scientists, might be narrow minded,
"regarding, not any economical doctrine, but their present experience of
mankind, as of universal validity" (X, p. 306). The only security against
this narrowness was "a liberal mental cultivation, and all it proves is that
a person is not likely to be a good political economist who is nothing else."
Unfortunately, the qualities required of a good theorist mitigated against
those required of a good applied economist (IV, p. 333).

On the Preclusion of Secular Prediction

There could in fact be no practical maxims of general applicability even if

social phenomena conformed to known causal relationships, precluding the
problem of "disturbing" causes. The dilemma was that of weighing in the
balance the relative force of the numerous causal influences (even if we
suppose them to be known, which they are not) playing on the condition
and progress of society-influences "innumerable, and perpetually chang-
ing; and though they all change in obedience to causes, and therefore to
laws, the multitude of the causes is so great as to defy our limited powers
of calculation" (VIII, p. 878). Worse still, "the impossibility of applying
precise numbers to facts of such a description would set an impassable
limit to the possibility of calculating them beforehand, even if the powers
of the human intellect were otherwise adequate to the task." At best, the
laws of human nature applied to the circumstances of a given state of society
might suggest "that a particular cause will operate in a certain manner
unless counteracted"; but "we can seldom know, even approximately, all
the agencies which may coexist with it, and still less calculate the collective
result of so many combined elements" (p. 898). There is the further com-
plexity, of course, that "great men" or governments can influence social
progress, including the intellectual development of the race (pp. 936-937).
72 ECONOMIC THOUGHT AND POLITICAL THEORY

Social science was for these reasons unable to generate specific secular
predictions, and to this extent had to be distinguished from astronomy, the
data of which were relatively few and stable. The limitation extended to
population growth and living standards:

... all generalizations which affirm that mankind have a tendency to grow bet-
ter or worse, richer or poorer, more cultivated or more barbarous, that popu-
lation increases faster than subsistence, or subsistence than population, that
inequality of fortune has a tendency to increase or to break down, and the like,
propositions of considerable value as empirical laws within certain (but gener-
ally rather narrow) limits, are in reality true or false according to times and
circumstances (p. 791).

Mill had in mind socialist critics of contemporary society (see below on

'The Population Problem'). He also rejected predictions by socialists of an
increasing tendency toward monopoly (V, p. 730).10
Mill, it is true, did perceive certain regularities relating to "the progressive
change in the condition of the human species" (VIII, p. 925). But the
problem was that of connecting those regularities "with the laws of human
nature, by deductions showing that such were the derivative laws naturally
to be expected as the consequence of those ultimate ones." Until such
linkage was established, they were "applicable only within the bounds of
actual observation"; and "without any means of determining their real
limits, and of judging whether the changes which have hitherto been in
progress are destined to continue indefinitely, or to terminate, or even to
be reversed."ll Similarly, until an empirical relation "could be connected
with the psychological and ethological laws on which it must depend, and,
by the consilience of deduction a priori with historical evidence, could be
converted from an empirical law into a scientific one, it could not be relied
on for the prediction of future events, beyond, at most, strictly adjacent
cases" (p. 915), or, so it is implied, used as a reliable basis for long-term
policy.
Nevertheless, Mill based policy recommendations on secular general-
izations derived from observed facts rather than any specific theoretical
model. These generalizations relate differences in productivity between
countries and over time to natural advantage, security, knowledge and co-
operation, work habits, savings propensities, and so forth-characteristic-
ally inductive materials. Statistical generalizations as the basis for policy
recommendations such as Corn Law legislation were unavailable as we
have seen earlier; theoretical models were indispensible. But the individual
influences acting on wealth are supposedly discernable in the historical
record by close inductive analysis. And Mill's institutional recommendations
ECONOMIC THEORY AND POLICY 73

frequently involve measures designed to act on the individual components

thus obtained, thereby reinforcing positive "tendencies" and counteracting
negative tendencies generated in the course of "Progress":
We must seek our objects by means which may perhaps be defeated, and take
precautions against dangers which possibly may never be realized. The aim of
practical politics is to surround any given society with the greatest possible
number of circumstances of which the tendencies are beneficial and to remove
or counteract, as far as practicable, those of which the tendencies are injurious
(p.898).
For this, a knowledge of tendencies "without the power of accurately
predicting their conjunct result [sufficed] to a considerable extent." The
perception of which tendencies are "beneficial" or "injurious" raises the
issue of value judgment with which we are not now concerned.

Economic Science and Competition

We turn now to Mill's celebrated declaration that "only through the prin-
ciple of competition has political economy any pretension to the character
of a science" (II, p. 239), or the caution that the analysis of exchange or
price formation presumes competition, for "only so far as [prices] are thus
determined, can they be reduced to any assignable law" (III, p. 460).12
The analysis of competitive price, which turns on "the axiom ... that
there cannot be for the same article, of the same quality, two prices in the
same market," is in fact limited to the wholesale sector, for Mill represents
individual consumers as typically failing to act in maximizing fashion:
For [retail purchases] there often are not merely two, but many prices, in dif-
ferent shops, or even in the same shop; habit and accident having as much to
do in the matter as general causes .... Either from indolence, or carelessness, or
because people think it fine to pay and ask no questions, three-fourths of those
who can afford it give much higher prices than necessary for the things they
consume; while the poor often do the same from ignorance and defect of judge-
ment, want of time for searching and making inquiry, and not un frequently,
from coercion, open or disguised.
This provides a perfect instance of counteracting forces to income maximiza-
tion, limiting the applicability of economic models even in advanced
capitalism.13
The domain of economic theory extends to the treatment of monopolistic
competition in the modern sense of the term-namely markets subject to
unrestrained freedom of entry, yet in which competition does not act on
74 ECONOMIC THOUGHT AND POLITICAL THEORY

price (II, p. 243). This situation characterized the retail trade: "the price
paid by the actual consumer seems to feel very slowly and imperfectly the
effect of competition; and when competition does exist, if often, instead of
lowering prices, merely divides the gains of the high price among a greater
number of dealers." More specifically, "custom" indicated a particular mark-
up over the wholesale price and what competition there was avoided price
cutting (pp. 409-410).14
Mill recognized efficiency losses flowing from the excess capacity of
retail firms, today identified with monopolistic competition: "the share of
the whole produce of land and labour which is absorbed in the remunera-
tion of mere distributors, continues exhorbitant; and there is no function
in the economy of society which supports a number of persons so dispro-
portioned to the amount of work to be performed" (p. 410). His concern
with inefficiencies due to excessive numbers is a pervasive theme of his
critique of contemporary society: " ... the class of mere distributors, who
are not producers but auxiliaries of production, and whose inordinate
number, far more than the gains of capitalists, are the cause why so great
a portion of the wealth produced does not reach the producers" (III,
p. 791; c/., p. 983).15
A major source of the problem (in addition to the degree of rigidity
imposed by custom) was seen to lie in the ability to differentiate by location
if not by product-an ability already weakened in the "great emporia of
trade" (II, p. 410). For an increasing "intensity of modem competition",
which encouraged a policy of "great business at low prices, rather than
high prices and few transactions, "was observable in major cities offering
"a sufficient inducement to large capitalists to engage in retail operations";
these "generally found [it] a better speculation to attract a large business
by underselling others, than merely to divide the field of employment with
them" (p. 253).16
A word on simple monopoly. Mill recognized that increasing returns
mitigated against competition; in the context of increasing returns he ob-
served that "where competitors are so few, they always end up agreeing
not to compete. They may run a race of cheapness to ruin a new candidate,
but as soon as he has established his footing they come to terms with him"
(p. 142). Public utilities provide a case in point; it is to gas and water that
Mill alludes in referring to trades which "from the nature of the case, [are]
confined to so few hands, that profits may admit of being kept up by a
combination among the dealers" (p. 405). Though he justified regulation
of public utilities, governments were also charged with unjustifiable en-
couragement of barriers-to-entry (III, pp. 927-928).
A "strict or absolute" monopoly-a single seller-was easily dealt with
ECONOMIC THEORY AND POLICY 75

as the limiting case, with Mill providing a nice statement of the total revenue
function, which implies revenue rather than profit maximization as the
objective: "The monopolist can fix the value as high as he pleases, short of
what the consumer either could not or would not pay; but he can only do
so by limiting the supply" (p. 468). While Mill formally restricted the
scientific treatment of pricing to the competitive case and designated mono-
poly, whether natural or artificial, as a "disturbing cause," it was in fact a
structure that had "always been allowed for by political economists" (II
p. 239), and Mill made use of the tools of economic analysis in its treatment.

The Advantages of "Competition" Summarized

Mill regarded competition as providing "the best security for cheapness,"

that is, for efficiency (V, pp. 731-732), and he welcomed policy measures
encouraging the development of an institutional framework and pattern of
behavior most conducive to its effective operation. At the same time, he
conceded to Socialists that competition provided no assurance of quality;
here socialists had "really made out the existence not only of a great evil,
but of one which grows and tends to grow with the growth of population
and wealth.,,17 For
[e]ven in commerce properly so called-the legitimate province of self-interest
-where it is enough if the ruling motive is limited by simple honesty ... the
vastness of the field, the greatness of the stakes now played for, and the increas-
ing difficulty to the public in judging rightly of transactions or of character, are
making the principle of competition bring forth a kind of effects, the cure of
which will have to be sought somewhere else than in the corrective influence of
competition itself (V, p. 625).
Mill expressed concern with probity; he was not starry-eyed about compe-
tition where the institutional framework was inappropriate.
Mill's competition is not of the modern price-taking variety; it allows
firms a price-making ability and might be satisfied merely by the possibility
of free entry. And there is competition as a discovery process to be con-
sidered. ls The dynamic role of competition is much emphasized as a
stimulus to innovation:
When relieved from the immediate stimulus of competition, producers and
dealers grow indifferent to the dictates of their ultimate pecuniary interest;
preferring to the most hopeful prospects, the present ease of adhering to rou-
tine. A person who is already thriving, seldom puts himself out of his way to
commence even a lucrative improvement, unless urged by the additional motive
76 ECONOMIC THOUGHT AND POLITICAL THEORY

of fear lest some rival should suplant him by getting possession of it before him
(III, p. 928).
In a reaction to socialist claims, Mill insisted on competition as a discovery
process and essential source of progress into the foreseeable future:
It is the common error of Socialists to overlook the natural indolence of man-
kind; their tendency to be passive, to be the slaves of habit, to persist indefinitely
in a course once chosen. Let them once attain any state of existence which they
consider tolerable, and the danger to be apprehended is that they will thence-
forth stagnate; will not exert themselves to improve, and by letting their faculties
rust, will lose even the energy required to preserve them from deterioration.
Competition may not be the best conceivable stimulus, but it is at present a
necessary one, and no one can foresee the time when it will not be indispensa-
ble to progress (p. 795).19
The same emphasis on pressure stimulating innovatory measures-in fact,
it is extended to invention-emerges also in the discussion of the falling
profit-rate tendency. While technical change is frequently treated as an
exogenous disturbance (e.g., II, pp. 98-99; III, pp. 942-945), allowance is
made for induced technology and its application: "The curtailment of profit,
and the consequent increased difficulty in making a fortune or obtaining
a subsistence by the employment of capital, may act as stimulus to inven-
tion, and to the use of them when made" (III, p. 827). The treatment of
technical progress purely as a "disturbing cause" is clearly inappropriate.
Indeed, Mill himself speaks of the profit-technology relation as a "ten-
dency," thus according it the same status, with all its implications, ac-
corded the pressure on profits of scarce land: "the artificial abstraction of
a portion of profits would have a real tendency to accelerate improve-
ments in production. ,,20

The Universal Method of Political Economy

Mill's own conception of political economy eschewed all universalist con-

notations. The false perspective of contemporary political economists who
suggested that their subject, founded on axioms reflecting contemporary
conditions, was of universal relevance, Mill hoped would weaken with a
better appreciation of ethology (VIII, p. 906). At the same time, he in-
sisted on the utility of the subject constructed on a relatively narrow axi-
omatic base, and this because "its method of investigation is applicable
universally ... " (p. 904). Thus in the course of his criticism of English
economists who "attempt to construct a permanent fabric out of transitory
materials," and suppose that output is shared among three distinct classes
(laborers, capitalists, and landlords), all "free agents, permitted in law and
ECONOMIC THEORY AND POLICY 77

fact to set upon their labour, their capital, and their land, whatever price
they are able to get for it" (IV, pp. 225-226), Mill added a qualification
that withdraws the barbs as far as concerns the method itself: "Though
many of its conclusions are only locally true, its method of investigation is
applicable universally" (p. 226).
The so-called "universal" applicability of the method of political economy
does not conflict with the position that "only through the principle of
competition has political economy any pretension to the character of sci-
ence." Mill was quite explicit regarding the specific range of institutions
intended:
The conclusions of the science, being all adapted to a society thus constituted,
require to be revised wherever they are applied to any other. They are inappli-
cable where the only capitalists are the landlords, and the labourers are their
property; as in the West Indies. They are inapplicable where the universal
landlord is the State; as in India. They are inapplicable where the agricultural
labourer is generally the owner both of the land itself and of the capital, as in
France; or of the capital only, as in Ireland. We might greatly prolongue this
enumeration.

Mill adds that "whoever has mastered with the degree of precision which
is attainable the laws which, under free competition, determine the rent,
profits, and wages, received by landlords, capitalists, and labourers, in a
state of society in which the three classes are completely separate, will
have no difficulty in determining the very different laws which regulate the
distribution of the produce among the classes interested in it, in any of the
states of cultivation and landed property set forth in the foregoing extract"
(VIII, p. 904), a reference to the range of specific institutional arrangements
outlined above.
The general applicability of the method of political economy does not,
therefore, extend maximization principles to all possible cases including
those involving custom or gift or force, which were not amenable to eco-
nomic analysis and would have to be dealt with by "some other" science.
Mill was pointing rather to the working out of the maximization hypoth-
esis within a wide variety of institutional arrangements in addition to the
capitalist-exchange system but involving something akin to a competitive
frame of reference.21

The Laws of Production and Distribution

Mill's famous distinction between the immutable "laws of production"

and the malleable "laws of distribution," if tenable, would be profoundly
78 ECONOMIC THOUGHT AND POLITICAL THEORY

significant for a theory of economic policy. As for the "laws and conditions
of the production of wealth"-such as the constraint imposed on industry
by capital, diminishing agricultural returns, the differential effects on
capital of productive and unproductive consumption (savings vs. consump-
tion)-these "partake the character of physical truths. There is nothing
optional or arbitrary in them" (II, p. 199). Production is given priority in
the sequence of production, distribution, and exchange to convey the notion
of universally applicable constraints on social policy. In particular, on the
"laws of production" was based the need for population control, the simple
moral being that "a greater number of people cannot, in any given state
of civilization, be collectively so well provided for as a smaller. The nig-
gardliness of nature, not the injustice of society, is the cause of the penalty
attached to over-population" (p. 188). The error of confounding "necessi-
ties arising from the nature of things, and those created by social arrange-
ments" was responsible for two sorts of misconceptions, causing some
economists "to class the merely temporary truths of their subject among
its permanent and universal laws," and others "to mistake the permanent
laws of Production (such as those on which the necessity is grounded of
restraining popUlation) for temporary accidents arising from the existing
constitution of society-which those who would frame a new system of
social arrangements, are at liberty to disregard" (pp. 455-456). This latter
error, characterizing what was to be the Marxist perspective on Malthu-
sianism, Mill intended to undermine by according priority to production.
But his target extended to paternalist Conservative apologists for the status
quo who, for their own self-interested reasons, rejected population control
(XIII, p. 641).
The formal categorization of laws implies that political economy can
generate not even a tentative explanation of wealth differentials geo-
graphically or temporally, since it considers the narrowest range of deter-
minants-allocative efficiency and changing labor and capital supply in the
presence of decreasing and increasing returns-relegating various quali-
tative determinants (knowledge, physical energy, organization) to the ceteris
paribus pound as the subject matter of other sciences. In fact, it is only if
the state of knowledge-the same holds for physical energy and organiza-
tion-is placed on a par with the "properties of nature" that the distinction
between production and distribution can be made, since once knowledge
is recognized as an endogenous variable from the perspective of political
economy the notion of "physical" laws of production is untenable. For-
tunately, Mill by no means adopted in practice the narrow perspective
implied by the categorization. Consider the following statement on the
scope of political economy:
ECONOMIC THEORY AND POLICY 79

In so far as the economical condition of nations turns upon the state of physical
knowledge, it is a subject for the physical sciences, and the arts founded on
them. But in so far as the causes are moral or psychological, dependent on
institutions and social relations, or on the principles of human nature, their
investigation belongs not to physical, but to moral and social science, and is the
object of what is called Political Economy (II, pp. 20-21).
The dependence of the "economical condition of nations" on "institutions
and social relations" alludes to the notion that productive organization-
and thus productivity-is in very large part an institutional and social matter.
The analyses of the impact on productivity of the joint-stock arrangement,
of different systems of land tenure, of inheritance law, of poor relief sys-
tems, of civil protection, all demonstrate that production is "malleable."
Moreover, as we shall see, Mill is clear that its "malleability," as far as it
turns upon organization, actually does fall within the domain of the
economist. And the same can be said of knowledge, as is apparent from
the widening of the scope of political economy to cover activities not
motivated by maximizing behavior, and the role accorded such behavior in
decisions regarding innovation.
In addition to the neglect of the "universally" present phenomenon of
land scarcity and its consequences, Mill complained of a typical failure to
recognize features common to a wide variety of distributional arrange-
ments, a failure resulting from excessive attention to the outward forms of
the familiar capitalist-exchange system. Partly to counter this danger he
placed distribution before exchange.
Mill thus adopted a Marx-like approach to the source of profits, reject-
ing the popular belief that profits depended on prices, reflecting a failure
to look below "the outside surface of the economical machinery of society"
(p. 410).22 Profits arose rather from the fact that labor works for a longer
time than is required to reproduce its own subsistence (p. 411), money
constituting merely the machinery of the exchange process (pp. 71-72, 83,
86n; III, p. 455).
More generally, the laws of distribution were said to be "regulated by
the same principles when paid in money, as they would be if apportioned
in kind" under different social arrangements (III, p. 698). For example,
wage-rate determination in terms of the "ratio between population and
capital" would still hold good even "if all the capital in the world were the
property of one association, or if the capitalists among whom it is shared
maintained each an establishment for the production of every article con-
sumed in the community, exchange of commodities having no existence"
(pp. 695-696). And indeed, the inverse profit-wage relation was "a law of
arithmetic" that necessarily holds true: "If the labourers really get more,
80 ECONOMIC THOUGHT AND POLITICAL THEORY

that is, get the produce of more labour a smaller percentage must remain
for profit. From this law of Distribution resting as it does on a law of
arithmetic, there is no escape. The mechanism of Exchange and Price may
hide it from us, but his quite powerless to alter it" (p. 479). The primary
message Mill sought to convey is that even in a noncapitalist system the
same basic distributional problems arise; a technical divorce of distribution
and valuation within the context of an exchange system is not intended.
Profit, despite its source in "surplus labour time," emerges as a
nonexploitative income required to assure the appropriate supply of capi-
tal, with Mill insisting on a regular positive relation between the surplus
relative to the capital stock and the growth rate of capital: "[It is] an
almost infallible consequence of any reduction of profits to retard the rate
of accumulation" (p. 843). This regular functional relation applies also in
a socialist system, the required interest rate there dictated by the chosen
rate of growth of the national economy: "the renumeration for capital is
to be such as is found sufficient to induce savings from individual con-
sumption, in order to increase the common stock to such a point as is
desired" (V, p. 747). Evidently, wage income cannot be allowed to con-
sume the entire national income. Consistent with this perspective is Mill's
isolation as the main problem of capitalism, not the payment of profits as
a deduction from wage income but the excessive size of the class of dis-
tributors, a matter of inefficiency due to imperfections of competition.
The formal dichotomy between production and distribution represents
the latter as "a matter of human institution solely. The things once there,
mankind, individually or collectively, can do with them as they like ... . The
distribution of wealth, therefore, depends on the laws and customs of
society" (II, pp. 199-2oo). This formal designation is in practice under-
mined by the distributive constraints common to various institutional ar-
rangements just outlined. Distributive "rules" are, true enough, "what the
opinions and feelings of the ruling portion of the community make them,
and are very different in different ages and countries" but, given the state
of opinion and the corresponding distributive system, there will be certain
results that follow and that are as much "immutable" as are the laws of
production: "We have here to consider, not the causes, but the conse-
quences, of the rules according to which wealth may be distributed. Those,
at least, are as little arbitrary, and have as much the character of physical
laws, as the laws of production" (p. 2oo); and though governments or
nations have the power of deciding what institutions shall exist, they can-
not arbitrarily determine how those institutions shall work."
The distinction between the laws of production and distribution, under-
stood literally, therefore proved a brittle one. The "inflexibility" of the
ECONOMIC THEORY AND POLICY 81

laws of production applies only when key determinants of productivity are

held constant; the "modifiability" of the laws of distribution does not apply
to the consequences flowing from choice of particular distributive forms.
But the mutually exclusive contrast was not in fact called for to convey
Mill's message regarding constraints of a technical order that must be
faced under all forms of social organization, and the dependence of such
organization itself upon human will. Taken in this light we are close to the
distinction between problems bearing only on efficiency and problems
involving value judgment. 23

Productive Organization and Motivation

Though the task of rationalizing empirical regularities-especially those

relating to progress-remained to be undertaken, Mill sought wherever
possible to provide some foundation for various empirical results in laws
of behavior, thereby enhancing the significance of deductive theory as a
basis for policy recommentation. We shall illustrate by the attempt to
rationalize the observed impact of productive organization on efficiency
and population contro1.24
Mill had a low opinion of the efficiency of hired labor (II, p. 137). As
for hired managers, prudence required that they be somehow controlled
by the capitalist or that they be stimulated by a share in profits, for
"[m]anagement ... by hired servants, who have no interest in the result
but that of preserving their salaries, is proverbially inefficient" (pp. 401-
402). Their "fidelity and zeal" were assured by fear of dismissal and by
conscience in the case of routine tasks; but "to carry on a great business
successfully, requires a hundred things which, as they cannot be defined
beforehand, it is impossible to convert into distinct and positive obliga-
tions" (p. 137). Nonetheless, Mill maintained that Adam Smith's negative
evaluation on similar grounds of the joint-stock organization entailing the
divorce of ownership and control was exaggerated. For Smith had over-
looked various countervailing considerations. Thus the disadvantages might
be reduced by resort to some form of profit-sharing relating the "interest
of the employees with the pecuniary success of the concern," and by at-
traction of "a class of candidates superior to the common average intelli-
gence," opportunities enhanced in large concerns (p. 139). The net result
of such devices and the careful selection of candidates "often raises the
quality of the service much above that which the generality of masters are
capable of rendering to themselves" (p. 140).
While, therefore, Mill, in discussing alternative methods of organization
82 ECONOMIC THOUGHT AND POLITICAL THEORY

and proposing reforms, generally bases himself on apparent empirical

regularities, when it comes to joint-stock organization he attempts to ra-
tionalize the observations in terms of more basic behavior characteristics.
This applies equally to the impact on productivity (and on population
control) exerted by alternative forms of agricultural organization. In both
contexts decision making based on profit maximization provides a ration-
alization of empirical material, in an inverse deductive procedure.
Mill examined the qualifications required when cultivation is under-
taken, not for profit by the capitalist but for subsistence by the laborer
(peasant ownership, metayage, and allotment holding) who seeks "not an
investment for his little capital, but an advantageous employment for his
time and labour" (III, p. 499). Here many of the tools or theorems of
competitive analysis prove indispensable, and Mill expressed the hope that
"further adaptations of the theory of value to the varieties of existing or
possible industrial systems" would be undertaken by "the intelligent reader"
(p. 501). His analysis of various contemporary forms of land tenure reflects
a preoccupation with the empirical validity of the maximization axiom in
a wide variety of alternative institutional contexts. Appeal to "custom"
often indicates an admission of ignorance; but there is a surprisingly little
on custom in the analysis of land tenure and its impact on productivity
(and population) where the principles of "competition" based on maximiza-
tion axioms predominate. This same procedure again confirms the un-
tenability of a strict distinction between laws of production and distribution
in that the distributional arrangements are shown to play strategically upon
production.
There is also the matter of population control: "supposing a peasantry
to possess land ... sufficient for their comfortable support, are they more,
or less likely, to fall from this state of comfort through improvident multi-
plication, than if they were living in an equally comfortable manner as
hired labourers?" (II, p. 283). There was direct and indirect empirical
evidence of a negative impact of peasant proprietorship on population
growth from Switzerland and Norway (pp. 285ff.). The rationale in terms
of motivation offered is that "every peasant can satisfy himself from
evidence which he can fully appreciate, whether his piece of land can be
made to support several families in the same comfort as it supports one,"
evidence not available to the day laborer (p. 284).25 Moreover, the positive
impact of peasant proprietorship on productivity and accumulation created
a presumption in favor of the behavioral axiom selected: "Is it likely that
a state of economical relations so conducive to frugality and prudence in
every other respect, should be prejudicial to it in the cardinal point of
increase of population?" (p. 283).
ECONOMIC THEORY AND POLICY 83

The facts of the case thus vindicated or, rather, could best be accounted
for by the axiomatic basis of the self-interest model. Even so, Mill warned
against positive prediction in the application of the model to future cases,
considering the possible intervention of disturbing causes; in the Belgian
case, for example, there was the impact of the church to consider (p. 292).
And the important theme that "Cultivation spontaneously finds out that
organization that suits it best" (p. 293)-illustrating one aspect of the case
for competition-justified Mill's further argument that if there exists in
special circumstances excessive numbers under peasant proprietorship,
it could not be presumed that the technical farming unit was too small:
"a subdivision of occupancy is not an inevitable consequence of even undue
multiplication among peasant proprietors."

Manpower Allocation and Competition

When operating effectively, competition assured a just structure of wages

as well as prices: "In truth, when competition is perfectly free on both
sides, its tendency is not specially either to raise or to lower the price of
articles, but to equalise it; to level inequalities of remuneration, and to
reduce all to a general average, a result which, in so far as realised (no
doubt very imperfectly), is, on Socialistic principles, desirable" (V, p. 729).
There was no tradeoff between efficiency and equity in this regard. Mill's
charges against contemporary capitalism relate-apart from inefficiency
due to market imperfections-to the lack of distributive justice and also to
dependency on "the will of an employer," not to competition as such:
No longer enslaved or made dependent by force of law, the great majority are
so by force of poverty; they are still chained to a place, to an occupation, and
to conformity with the will of an employer, and debarred by the accident of
birth both from the enjoyments, and from the mental and moral advantages,
which others inherit without exertion and independently of desert (p. 710).

Under these conditions rewards were divorced from either merit or effort;
it was not the case that everyone "willing to undergo a fair share of ... labor
and abstinence could attain a fair share of the fruits" (pp. 714-715); birth,
accident, and opportunity were the ruling determinants. The Socialist con-
tention that much "crime, vice and folly" resulted from poverty in con-
temporary conditions was also justified.
As for policy implications, the impediments to a satisfactory competi-
tive outcome had to be taken into account. It was required that certain
irrational forms of behavior be corrected, that the aggregate labor market
84 ECONOMIC THOUGHf AND POLITICAL THEORY

be in equilibrium, and that social and financial obstacles to upward mobil-

ity be removed.26 In these respects the standard Smithian competitive wage
analysis was inadequate; for it presumed the labor market as a whole to
be in equilibrium, whereas in the event of general unemployment the
differentials are distorted: "when the supply of labor so far exceeds the
demand that to find employment at all is an uncertainty, and to be offered
it on any terms a favour, the case is totally the reverse. Desirable laborers,
those whom every one is anxious to have, can still exercise a choice. The
undesirable must take what they can get" (p. 383). For this reason, and
also because of various natural and artificial monopolies, wage differen-
tials were "generally in an opposite direction to the equitable principle of
compensation erroneously represented by Adam Smith as the general law
of the remuneration of labor." This constitutes an original perspective on
the linkage between macro- and micro-economics of the very first impor-
tance engendered by empirical observation.
The reference to "natural and artificial monopolites" involves a second
major breakaway. Smith's allowances for educational costs (even when
supplemented by allowance for legal restrictions on mobility) did not suf-
fice to explain ruling differentials, for the costs even of a minimal educa-
tion and of maintenance during the training period "exclude the greater
body of the laboring people from the possibility of any such competition"
as would reduce the "monopoly" return of the skilled (p. 386). Here we
encounter the celebrated concept of noncompeting industrial groups re-
flecting social and financial obstacles to upward mobility. Despite broader
educational opportunities, there was still "a much greater disparity than
can be accounted for on the principle of competition" (p. 387). Various
"customary" expenses attaching to some trades, such as the cost of main-
taining clothes and appearance, further hindered entry.27
Notwithstanding the criticisms of Smithian analysis, Mill played down
somewhat the implications of his allowance for noncompeting groups. He
continued to emphasize in labor-market analysis the notion of an average
wage and in price analysis that of competitive cost price turning on labor
and capital mobility between alternative uses. It may well be that this
reflects his confidence in an actual and prospective breakdown of barriers
that promised to reinforce the relevance of orthodox competitive theory.
As he phrased it, although "[i]n this country there are few kinds of labor
of which the remuneration would not be lower than it is, if the employer
took the full advantage of competition," competition "must be regarded,
in the present state of society as the principal regulator of wages, and
custom or individual character only as a modifying circumstance, and that
in a comparatively slight degree" (p. 337).
ECONOMIC THEORY AND POLICY 85

The Population Problem

The formal definition of political economy incorporates reference to the

"laws of human nature." Mill's aggregative theorizing, however, does not
always require extension back to individual maximizing behavior. Such is
the case of the "wage-fund" approach to the labor market in its simplest
static version. On it he based a barrage of conclusions regarding labor
policy, reflecting the position that the condition of the laboring class "can
be bettered in no other way than by altering that proportion [between
capital and population] to their advantage; and every scheme for their
benefit, which does not proceed on this as its foundation, is, for all perma-
nent purposes, a delusion" (II, pp. 340-343). In these terms he countered
the view "that the government without providing additional funds, could
create additional employment" by means of tariffs or other protective
measures (p. 64). And in terms of this minimal theoretical structure he
formulated the equilibrating function of wage movements-"Goods can
only be lowered in price by competition, to the point which calls forth
buyers sufficient to take them off; and wages can only be lowered by
competition until room is made to admit all the laborers to a share in the
distribution of the wages-fund" but no further (p. 356)-and applied it
against minimum-wage proposals and also to emphasize that competition
is not necessarily adverse to labor's interests.
Mill's perspective on labor policy is nicely captured in his belief that
"the greater part of the good [government] can do [for the poor]" is "in-
direct, & consists in stimulating & guiding the energy & prudence of the
people themselves" (XIII, p. 645). Similarly, Mill attacked the paternalism
of the "young Englanders" (represented by The Times) as based on thin
air, contrasting with "those fundamental principles which one did think
had been put for ever out of the reach of controversy by Adam Smith,
Malthus, & others, designed to persuade labor that it is the business of
others to take care of their condition, without any self control on their own
part" (pp. 643-644). His message was a positive one. The Malthusian
doctrine "indicat[ed] the sole means of realizing that improvability by
securing full employment at high wages to the whole laboring population
through a voluntary restriction of the increase of their numbers" (I, p.
107); it did not, "as vulgarly supposed, imply that in one's opinions on
social arrangements one looks only to amount of production & not to the
producers" (XIII, p. 661).
Mill's position is best appreciated against a theoretical background that
perceives of competition as potentially acting in labor's favor by assuring
low prices and high wages in the appropriate market circumstances.
86 ECONOMIC THOUGHT AND POLITICAL THEORY

"Socialists generally," he complained, "and even the most enlightened of

them, have a very imperfect and one-sided notion of the operation of
competition" (V, p. 729). Mill did not actually consider the competitive
wage as the just wage, and this largely because the contemporary distribu-
tion of property governing the framework of the market was itself not
established on equitable principles. The competitive outcome was, how-
ever, acceptable Jaute de mieux in contemporary society and viewed as
such by general opinion:
I can conceive Socialism, in which the division of the produce of labor is made
among all, either according to the rule of equality (Communism) or according
to any other general rule which may be considered more just than absolute
equality. But under a system of private property in past accumulations in which
no general rule can be laid down, I think that to give anyone the power of
deciding according to his own views of equity without a general rule would only
perpetuate & envenom instead of healing the quarrel between capital & labor.
The only thing which people will in these circumstances submit to as final, is the
law of necessity, that is, the demand & supply of the market, tested (when not
otherwise known) by the result of a strike. All that I consider practicable in the
present state of society is to strengthen the weaker side in the competition,
which can only be done by the prudence, forethought, wise restraint, & habit
of cooperation, of the working people themselves (XV, p. 749).
As for the legitimate steps "to strengthen the weaker side in the compe-
tition," one must keep in mind both Mill's support of unions and property-
reform proposals.
The capital-population nexus, when extended to the growth context,
provides the full-fledged basis for population control and in this dynamic
context motivation proves to be of the essence with respect to both vari-
ables. That the growth model was not designed for positive prediction is
clear from the obvious fact that Mill was engaged in an exercise in persua-
sion designed to play upon the key behavioral patterns. He in fact rejected
the forecast by socialist critics of secularly falling real wages, tracing it to
"ignorance of economic facts, and of the causes by which the economic
phenomena of society as it is, are actually determined" (V, p. 727). Even
popUlation pressure was no longer an "irrepressable tendency" and an
"increasing evil," considering increased prudence, the acceleration of capi-
tal accumulation, and easier emigration (p. 728). Mill insisted on the fact
of rising living standards and also on the relatively limited effect that even
a full-fledged redistribution of income would have in raising the lower paid
(p.736).
What, then, was intended by the so-called "tendency" of population to
increase faster than subsistence? Nothing more than that, in the absence
ECONOMIC THEORY AND POLICY 87

of technical change and with no slackening of population growth, a decline

in marginal product and the real wage must occur. But "the progress of
improvement has a counteracting operation, and allows of increased num-
bers without any deterioration, and even consistently with a higher aver-
age of comfort" (II, pp. 188-189). In arguing thus, Mill was following directly
in Malthus's footsteps. But despite this common ground there are differ-
ences regarding the role of self-interest and the free-rider problem.
Allowance was made by Malthus for state-financed education programs
designed to inculcate the principle of prudential control (An Essay on the
Principle of Population, 1890 [1826], pp. 533-534). Beyond this nothing
more was required of the state: "The happiness of the whole is the result
of the happiness of individuals, and to begin first with them. No co-operation
is required. Every step tells. He who performs his duty faithfully will reap
the full fruits of it, whatever may be the number of others who fail"
(p. 457). It was held against communism that resort might have to be made
to legal control of family size and the age of marriage (p. 357).
Mill was at one with Malthus regarding the need to inculcate by state-
supported education the principle that population control holds the key to
living standards; and he emphasized the so-called problem of poverty-
that to rise above it required the actual experience of significantly higher
standards (CW, II, p. 342). He also emphasized the peculiar difficulties
attached to the system of hired labor: "The parent who has land to leave,
is perfectly able to judge whether the children can live upon it or not: but
people who are supported by wages, see no reason why their sons should
be unable to support themselves in the same way, and trust accordingly to
chance" (p. 284). But he was exercised by the free-rider dilemma. Accord-
ingly, behavior regarding family size, motivated by a sense of social re-
sponsibility, or at the least socially oriented behavior enforced by public
opinion, was required. In these terms he answered the free-rider objection
to Malthus that the greater the confidence in the general exercise of pru-
dence, the less motive for any individual to behave responsibly. The ob-
jection was valid, but "what is wanted is, not that the good should abstain
in order that the selfish may indulge, but such a state of opinion as may
deter the selfish from this kind of intemperance by stamping it as disgrace-
ful" (V, p. 449). The solution hinged on a reform of public opinion. Once
the Malthusian idea had taken hold among workers, "every laborer [would
look] ... upon every other who had more than the number of children
which the circumstances of society allowed to each, as doing him a wrong-
as filling up the place which he was entitled to share" (II, p. 371). Here is
added an important generalization regarding motive: "Anyone who sup-
poses that this state of opinion would not have a great effect on conduct,
88 ECONOMIC THOUGHT AND POLITICAL THEORY

must be profoundly ignorant of human nature; can never have considered

how large a portion of the motives which induce the generality of men to
take care even of their own interest, is derived from regard to opinion-
from the expectation of being disliked or despised for not doing it". As-
suming widespread acceptance of the foregoing opinion except on the part
of that minority "in the habit of making light of social obligations gener-
ally," a case might be made out for legal control, "just as in many other
cases of the progress of opinion, the law ends by enforcing against recal-
citrant minorities, obligations which to be useful must be general, and
which, from a sense of their utility, a large majority have voluntarily con-
sented to take upon themselves" (p. 372).
Control of population was one consideration in the evaluation of the
relative merits of communism and private property. A potential problem
existed under all institutional arrangements, and conceivably the case for
communism might turn out strongest, considering its potential in stimulat-
ing and enforcing a sense of social responsibility in individuals (p. 205).
For since the cause of falling standards would be crystal clear to all (there
being no employers or privileged classes to blame), "opinion could not fail
to reprobate, and if reprobation did not suffice, to repress by penalties of
some description ... culpable self-indulgence at the expense of the com-
munity" (p. 206).
Here, then, Malthus and Mill diverged. Mill occupied the middle ground
between Malthus who saw in self-interest the solution to excess popula-
tion, and in fact objected to communism precisely because it would have
to resort to measures of enforcement and punishment; and those who
found the solution in communism and only in communism. Mill did not
finally commit himself. He had a horror of centralized systems, and his
more positive comments on other forms of socialism were qualified, for
the full potential of private property had not yet been revealed. Moreover,
he himself declaimed against paternalism in matters affecting the labor
market (IX, pp. 374-375).28

On the Desirability of Economic Growth

Starting out from stationariness, an increase in the "effective desire of

accumulation"-a reduction in the minimum supply price of capital-would
create the potential for new growth, as will technological improvement.
The message of Mill's famous chapter "Of the Stationary State" is that any
new potential for expansion should ideally be taken out in higher real wages,
ECONOMIC THEORY AND POLICY 89

preeminently in the form of increased leisure: "A stationary condition of

capital and population implies no stationary state of human improve-
ment. ... Even the industrial arts might be as earnestly and as successfully
cultivated, with this sole difference, that instead of serving no purpose but
the increase of wealth, industrial improvements would produce their legiti-
mate effect, that of abridging labor" (III, p. 756).
But this new view on policy-actually intimated by Malthus and
Chalmers long before-does not mean that Mill disposed of the old growth
economics. The stationary state was that much closer with population
control than without, and there is no gainsaying the new look at distribu-
tion. Yet Mill was thoroughly aware that accumulation and population
were proceeding apace, so that stationariness was not in sight, rendering
his recommendations purely academic. Indeed, in the Britain of his day a
steady per capital wage and a constant return on capital were achieved
without population control because of the extremely high rate of capital
accumulation reflecting new technology: "There is room in the world, no
doubt, and even in old countries, for a great increase of population, sup-
posing the arts of life to go on improving, and capital to increase." In any
event, the recommendation itself is riddled with internal weaknesses which
we shall briefly consider.
Technical change in Mill's stationary state provides the source for in-
creasing leisure; indeed, stationariness of population would enhance pro-
ductivity by effacing diminishing returns: "Mankind would ... have the
full benefit of all improvements in agriculture, or in the arts subsidiary to
it, and there would be no difference, in this respect, between the products
of agriculture and those of manufactures" (p. 712)?9 But the presumption
regarding ongoing technical progress is partly wishful thinking since a
technologically progressive manufacturing had been specifically linked to
expansion. 30 The extension of joint-stock and other forms of complex or-
ganization he saw as determined by the progress of wealth and reinforcing
such progress (see the earlier section on "Productive Organization and
Motivation,,).31
Even assuming ongoing technological advance in the stationary state,
there are worrying possibilities. Capital-absorbing innovation necessarily
has a negative effect on the global "wages fund" and, therefore, on either
employment or per capita wages or both. That is the alpha and omega of
the Ricardian analysis of machinery that Mill accepted. The whole prob-
lem would be "temporary" in the event of net savings sufficient to com-
pensate for any shortfall in employment opportunities; the extent and speed
of adoption of such technologies relative to the generation of new savings
become the key issue. And here, Mill, like Ricardo, was optimistic. For a
90 ECONOMIC rnOUGHT AND POLITICAL lHEORY

variety of reasons, the adverse impact of new technology involved "a case
abstractedly possible [rather] than one which is frequently realized in fact"
(II, p. 134). For one thing, the extent and rapidity of adoption was rela-
tively slow compared with net accumulation in the progressive economies
of the day (p. 97). Further reason for optimism lay in the positive stimulus
to savings engendered by the effects of new technology-effects on both
the "ability" and "motive" to save (p. 98). But these optimistic prognos-
tications fall away in a stationary state; Mill was silent on the shadow of
"conversion" with its potentially adverse effects on labor.
Furthermore, in stationary conditions, as far as net domestic investment
was concerned, capital exportation portended trouble. Mill himself points
to a case where a floor to the return on domestic capital is imposed by
returns abroad above the minimum rate corresponding to zero net savings
such that "all further accumulations would go abroad" (III, p. 746). This
was not the issue in contemporary Britain only because there net domestic
investment was proceeding apace, with the return on capital held roughly
constant above the practical minimum.
The process of profit-rate equalization with its efficiency implications is
said to be aided "[i]n a rapidly progressive state of capital" since this
avoids the necessity for an actual contraction of sectors (II, p. 407). There
is reference to potential class hostility in a stationary or slowly growing
system. For "to work at the bidding and for the profit of another, without
any interest in the work-the price of their labor being adjusted in hostile
competition, one side demanding as much and the other paying as little as
possible-is not, even when wages are high, a satisfactory state to human
beings of educated intelligence, who have ceased to think themselves
naturally inferior to those whom they serve" (III, p. 766). A working-class
status might be tolerable in "a new country rapidly increasing in wealth
and population" (such as Australia and North America) where upward
mobility to the employing class was an option; but "something else is
required when wealth increases slowly, or has reached the stationary state,
when positions, instead of being more mobile, would tend to be much
more permanent than at present, and the condition of any portion of
mankind could only be desirable, if made desirable from the first.'>32
There is, then, no policy bias against the desirability of growth. There
are too many potential disadvantages attached to stationariness to allow
one to consider Mill's chapter on the stationary state as much more than
day-dreaming. And his concern for a desirable pattern of distribution as an
end in itself did not give the investigation of eqUilibrium conditions-for
which static theory is appropriate-precedence over growth theory.
ECONOMIC THEORY AND POLICY 91

A New Perspective on Macro-Economic Policy

Mill's adherence to the Law of Markets did not preclude recognition of

slack periods when available capital is kept idle.
When there is what is called a stagnation ... then work people are dismissed,
and those who are retained must submit to a reduction of wages: though in
these cases there is neither more nor less capital than before .... If we suppose,
what in strictness is not absolutely impossible, that one of these fits of briskness
or of stagnation should affect all occupations at the same time, wages altogether
might undergo a rise or a fall ... (II, pp. 338-339).

Similarly, "capital may be temporarily unemployed, as in the case of un-

sold goods, or funds that have not yet found an investment: during that
interval it does not set in motion any industry" (p. 65). Idle capital in these
contexts refers not only to unsold stocks of goods but also to money funds
available for investment in wage payments or other disbursements. What
is involved is a well-considered supplementing of the proposition that "in-
dustry is limited by capital," by a function describing the state of aggregate
demand for final goods-or, what is equivalent, the net excess demand for
money.33
The allowance for general excess commodity supply must be seen in
proper context, namely the recognition of regular cyclical fluctuations-
the fact that "[e]xcept during short periods of transition, there is almost
always either great briskness of business or great stagnation" (IV, p. 275).
As for to the "quiescent" period, "nothing [tends] to engender in any
considerable portion of the mercantile public a desire to extend their
operations. The producers produce and the dealers purchase only their
usual stocks, having no expectation of a more than usually rapid vent for
them"-in contrast with the "unusual extension" of the speculative or
"expectant" state where there exists some stimulus which "exciting more
than usual hopes of profit, gives increased briskness to business," such as
short crops, import restrictions, or new foreign markets (III, pp. 662-663).
But quiescence itself allows for expansion: "Each person transacts his
ordinary amount of business, and no more; or increases it only in corre-
spondence with the increase of his capital or connexion, or with the gradual
growth of the demand for his commodity, occasioned by the public
prosperity." And that a quiescent period entails expansion constitutes,
in fact, the necessary condition for the generation of regular cyclical
fluctuations. I allude to cyclical consequences flowing from the downward
"tendency" of the profit rate. The relationship is a mutual one, for while
92 ECONOMIC THOUGHT AND POLITICAL THEORY

the profit-rate trend engenders speculation and the cycle, various capital
losses associated with the cycle play back on the profit rate itself.
That cyclical fluctuations are a direct outcome of the falling profit rate
provides a fine instance of Mill's attempt to rationalize observed relation-
ships in terms of individual behavior:

[The] gradual process of accumulation ... in the great commercial countries, is

sufficiently rapid to account for the almost periodic recurrence of these fits of
speculation; since, when a few years have elapsed without a crisis, and no new
and tempting channels for investment have been opened in the meantime, there
is always found to have occurred in those few years so large an increase of capital
seeking investment, as to have lowered considerably the rate of interest ...
[which] tempts the possessor to incur hazards in hopes of a more considerable
return (p. 651) .
. . . the diminished scale of all safe gains, inclines persons to give a ready ear to
any projects which hold out, though at the risk of loss, the hope of a higher rate
of profit; and speculations ensue, which, with the subsequent revulsions, destroy
or transfer to foreigners, a considerable amount of capital, produce a temporary
rise of interest and profit, make room for fresh accumulations, and the same
round is recommended (p. 742).34

The falling profit rate provides a splendid illustration of the notion of

tendency to reflect not a necessarily observable trend, but one force among
other possibly conflicting forces playing on a particular variable: " ... it
would require but a short time to reduce profits to the minimum, if capital
continued to increase at its present rate, and no circumstances having a
tendency to raise the rate of profit occurred in the meantime. The expan-
sion of capital would soon reach its ultimate boundary, if the boundary
itself did not continually open and leave more space" (p. 739). Constancy
of the profit rate and of the real wage despite extraordinarily rapid accu-
mulation and population growth characterized contemporary Britain, pre-
cisely because of changes in ceteris paribus conditions on which the "trend"
is predicated, namely improved technology and capital losses of various
kinds including losses relating to cyclical fluctuations-unsustainable
capital projects during speculation periods, and "unproductive" consump-
tion during the depressions that follow (p. 741).35
Mill established that over recent decades the secular return on capital
had remained unchanged at a little over 3%. Though technical change
sufficed only partially to counteract the effect of land scarcity in the face
of expanding capital, putting downward pressure on the return on capital,
that pressure induced wastage and a resumption of the roughly constant
trend path; capital exportation also contributed to prevent profits from
ECONOMIC THEORY AND POLICY 93

reaching the minimum (p. 745). The emphasis in this latter respect is on
an historically low level compared to the level ruling in foreign countries,
such outflows treated as a "disturbing cause," whereby "the decline of
profits in England has been arrested ... . it does what a fire, or an inunda-
tion, or a commercial crisis would have done: it carries off a part of the
increase of capital from which the reduction of profits proceeds" (p. 746).
In the absence of such outflows the impact of technical progress would not
have sufficed to balance that of land scarcity and allow "a tolerably equal
struggle against the downward tendency of profits" (p. 741). The net
outcome of the various conflicting tendencies actually at work assured a
constant trend path of the return on capital with fluctuations about it of
a cyclical order.36
The policy implications flowing from the foregoing analysis of contem-
porary Britain are remarkable: "The theory of the effect of accumulation
on profits . . . materially alters many of the practical conclusions which might
otherwise be supposed to follow from the general principles of Political
Economy, and which were, indeed, long admitted as true by the highest
authorities on the subject" (p. 747). Specifically, in the absence of capital
loss of various kinds, the rate of accumulation would be so great on Mill's
empirical estimate as to force down the return on capital since technical
progress could not in practice be relied on to counteract such heavy
pressure on scarce land. The first deduction Mill draws from the fact of a
highly active "spirit of accumulation" is that "a sudden abstraction of capital,
unless of inordinate amount," need not be feared, for "after a few months
or years, there would exist in the country just as much capital as if none
had been taken away." At most, "the abstraction, by raising profits and
interest, would give a fresh stimulus to the accumulative principle, which
would speedily fill up the vacuum" (pp. 747-748). But more likely "the
only effect that would ensue, would be that for some time afterwards less
capital would be exported, and less thrown away in hazardous speculation."
The conclusion altered entirely the perspective toward government
expenditure. The standard warnings by orthodox writers against measures
that might reduce the capital stock, or its rate of accumulation, were no
longer pertinent. Mill writes indeed as if capital is no longer to be treated
as a scarce factor:
[In] rich, populous, and highly cultivated countries, it is not capital which is the
deficient element, but fertile land; and what the legislator should desire and
promote, is not a greater aggregate saving, but a greater return to savings,
either by improved cultivation, or by access to the produce of more fertile lands
in other parts of the globe. In such countries, the government may take any
moderate portion of the capital of the country and expend it as revenue, without
94 ECONOMIC THOUGHT AND POLITICAL THEORY

affecting the national wealth: the whole being either drawn from that portion
of the annual savings which would otherwise be sent abroad, or being sub-
tracted from the unproductive expenditure of individuals for the next year or
two, since every million spent makes room for another million to be saved
before reaching the overflowing point (p. 748).
Government funding of emigration is one of the most important of
Mill's policy deductions. The capital required for "the most extensive colon-
ization" was likely to be moderate (pp. 748-749); but even in the unlikely
event of an absolute decline in the domestic capital stock, the fresh stimulus
afforded savings would rapidly make up the deficiency.37 The new per-
spective also removed fears flowing from the "conversion" of circulating
into fixed capital: "Since even the emigration of capital, or its unproduc-
tive expenditure, or its absolute waste, do not in such a country, if confined
within any moderate limits, at all diminish the aggregate amount of wages
fund-the actual and potential increase in capital being so great-"still
less can the mere conversion of a like sum into fixed capital, which con-
tinues to be productive, have that effect" (p. 749). These sums, applied, for
example, to railways, "are mostly a mere appropriation of the annual over-
flowing which would otherwise have gone abroad, or been thrown away un-
profitably, leaving neither a railway nor any other tangible result" (p. 750).
Mill's favorable attitude toward expenditure of public money "for really
valuable, even though industrially unproductive purposes" carries no
Keynesian overtones. He had not abandoned the Law of Markets. Any
difference of opinion on that matter, he pointed out, "involves radically
different conceptions of Political Economy, especially in its practical as-
pect. On the one view, we have only to consider how a sufficient produc-
tion can be combined with the best possible distribution but on the other
there is a third thing to be considered-how a market can be created for
produce, or how production can be limited to the capabilities of the mar-
ket" (p. 575); and in our present context the same position is reiterated-
the downward "tendency" of the profit rate did not reflect lack of markets
(pp. 739-740). As we have just seen, Mill distinguished between estab-
lished "general principles of Political Economy" and the practical con-
clusions drawn therefrom by "the highest authorities," insisting that his
new position related specifically to the latter. In brief, increased govern-
ment spending was not conceived as absorbing otherwise unemployed
resources, but rather as promoting desirable public at the expense of mis-
conceived private projects-opera houses in place of a superfluous net-
work of railways-and unproductive private consumption (the cyclical
features) but in empirical circumstances entailing ongoing growth of the
economy and a simultaneous expansion of the private sector.
ECONOMIC THEORY AND POLICY 95

The same positive approach toward government expenditure is reflected

in the formal treatment of taxation. Where the magnitude of the surplus
and the strength of the sociological forces defining the "spirit of accu-
mulation" are high, the standard case against government expenditure is
weakened; taxation merely draws on funds that would otherwise have
been "wasted" in outflows abroad or in the course of cyclical movements
so that both categories of loss are avoided or at least diminished:
The amount which would be derived, even from a very high legacy duty, in each
year, is but a small fraction of the annual increase of capital in such a country;
and its abstraction would but make room for saving to an equivalent amount;
while the effect of not taking it, is to prevent that amount of saving, or cause
the savings, when made, to be sent abroad for investment (III, p. 823).38
A distinction, however, is made between forms of taxation that eat
into funds potentially available for accumulation, and taxation that has an
actual disincentive effect by reducing the return on capital. The distinction
reflects the proposition that "in rich, populous, and highly cultivated
countries ... what the legislator should desire and promote, is not a greater
aggregate saving, but a greater return to savings" (p. 748), for a greater
return will automatically generate an increase flow of funds available for
domestic investment. In these terms we can appreciate why Mill, notwith-
standing his new positive approach toward government spending, still in-
sisted on the need to avoid laying "a tax on industry and economy" by, for
example, progressive income taxation (p. 811). Similarly, a tax impinging
directly or indirectly on profits, he feared, would be "detrimental to the
public wealth, and consequently to the means which society possesses of
paying any taxes whatever" (p. 830).
Rapid capital accumulation thus remained an objective of policy and
doubtless would so remain at least as long as population growth proceeded
at a rapid pace. This latter qualification is important. For without it the
criticism in the chapter on the stationary state of political economists for
identifying "all that is economically desirable with the progressive state,"-
"with McCulloch, for example, prosperity does not mean a large produc-
tion and a good distribution of wealth, but a rapid increase of it; his test
of prosperity is high profits ... " (p. 752)-would be troublesome for he
himself called for "a rapid increase of wealth."

Summary and Conclusion

A pervasive theme can be traced through much of the foregoing-the use

of competitive pricing as template in approaching policy issues. But Mill
96 ECONOMIC THOUGHT AND POLITICAL THEORY

never blindly applies the competitive model; on the contrary, he warns

against inappropriate application, and his policy recommendations are
frequently designed precisely to assure a framework such that the axioms
of the model are satisfied. Given the fulfillment of that prerequisite, the
competitive model provided the key to efficient resource allocation, and
(when applied to the labor market) of an equitable structure of wages.
Competition was of the "classical" variety. It extended beyond statics
and constituted a dynamic process encouraging the discovery and adop-
tion of new methods, and guaranteeing the survival of the fittest as in the
choice between different firm or farm sizes and organizations. Moreover,
Mill was not making a case for the necessary preeminence of the capitalist-
exchange system over other institutional arrangements. The competitive
model in its static and its dynamic guises, appropriately modified, served
in the analysis of a variety of alternative institutional frameworks-I allude
to the "universality of the method of political economy"-and demon-
strated in some cases their efficiency advantage over even an ideally op-
erating capitalist-exchange system. (Though he himself had little to say
on socialist pricing schemes, he gave an open invitation to economists to
undertake such an investigation.) There are, of course, supplementary value
judgments that enter any policy preference, but it would be unjustified to
draw too sharp a distinction between the "scientific" objectivity of econo-
mic analysis and the "non-scientific" subjectivity of economic policy. Mill's
policy recommendations were based squarely on a systematic body of
scientific knowledge under alternative institutional arrangements.
Thus far I have alluded largely to allocation and efficiency issues. Mill
also saw in competition applied to the aggregate labor market the best
guarantee of working-class living standards, following along Malthus's
"prudential" path. He perceived no satisfactory alternative to the free
labor market given the system of private property since no "general rule"
could be laid down equivalent to communist "equality"; but the impact on
population control provided a further index in addition to that of effi-
ciency for any choice between alternative institutional arrangements.
We closed our examination with a discussion of macro-economic con-
siderations. It bears repeating first that Mill hit upon the fact that the
desirable operation of competitive pricing is distorted by general unem-
ployment. Second, while the Law of Markets throughout ruled supreme,
evidence of an unprecedented rate of capital accumulation-itself partly
responsible for cyclical instability-led Mill to a wholly new outlook on
the merits of public expenditure. (This supplemented a long-held case
favoring monetary intervention of a countercyclical order.) But though
orthodox classical theory was shown to be extremely flexible in application,
ECONOMIC THEORY AND POLICY 97

even in the context of this radical transformation of policy we find a reit-

eration of warnings against the potential disincentive impact of taxation
measures, especially of progression.
Serious implications for the current training of economists emerge from
Mill's theory-application nexus-presuming that policy is indeed our ulti-
mate concern. It points to the necessity for a profound knowledge of
actual conditions to allow estimation of the empirical appropriateness of
particular models. For a model pertaining (let us say) to the capitalist-
exchange system cannot be applied to that system without modification
for specific circumstance; while the general appropriateness of the model
selected will, of course, depend on the institutional arrangements under
investigation, suggesting that exercises in theory must not be limited to
games involving capitalists and hired labor. Second, there is the warning
emerging in the analysis of the wage structure against a sharp macro-micro
divide. And third, there is the requirement for some methodological so-
phistication to convey the fact that economics, unlike several of the physi-
cal sciences, does not have the predictive ability to allow one to say what
will happen historically. In these respects Mill would have looked aghast
at much of what today passes for economics.

Notes

1. The exercise might serve as a guide from Volume I of my Economics of John Stuart
Mill (1985) on "Theory and Method" to Volume II on "Political Economy." The chapter in
fact summarizes the first volume with specific reference to the conversion of economic theory
into the real world of policy. I am not concerned in this exercise with the precise timing of
Mill's pronouncements or other "scholarly" matters. All references CW are to the Collected
Works of John Stuart Mill, University of Toronto Press, followed by volume number and
page number.
2. On the implied competitive requirement see the section. "On the Preclusion of Secular
Prediction."
3. The methodological principle involved is that of "composition of causes"-that each
individual causal law is at work even if its effects are counterweighed by conflicting tenden-
cies. Thus the law of diminishing returns is operative even when (uncorrected) cost data may
not reveal it. This explains Mill's insistence on the law in the very context of a discussion of
the "countervailing tendency" of technological progress acting in "habitual antagonism" to
it (II, p. 182). It is in this sense that one must understand the phrase "tendency of the returns
to a progressive diminution ... a result of the necessary and inherent conditions of produc-
tion from the land" (p. 187).
4. The theory of government involved two general principles: that the actions of the
average ruler are determined solely by self-interest; and that the sense of identity of interest
with the governed is producible only by accountability to the governed.
5. The objective ideally was a "synthesis" connecting together theorems relating to the
production and distribution of wealth based upon a variety of different behavior patterns-
98 ECONOMIC THOUGHT AND POLITICAL THEORY

for example, "custom" as well as "competition"; linking the end of wealth creation with other
ends of human activity; and developing the whole (which would amount to a theory of "social
statics" or "the mutual actions and reactions of contemporaneous social phenomena") into
a full-fledged theory of social progress.
6. Thus in the context of small-scale farming Mill conceded "an absence of science, or at
least of theory; and to some extent a deficiency of the spirit of improvement, so far as relates
to the introduction of new processes. There is also a want of means to make experiments,
which can seldom be made with advantage except by rich proprietors or capitalists" (p. 147).
Theoretical science (and not only experimentation and innovation proper) is thus to some
extent undertaken in commercial undertakings, the expenditure governed by profit calculations.
7. Mill particularly emphasized the need to get the theory of value right (III, p. 456).
8. There is a further problem. The object of verification is to assure the adequacy of a
theoretical model for purposes of policy proposal. But since the most appropriate case study
for verification of the predictions of the theory is in all likelihood precisely that for which the
proposals, based on the model's predictions, are being made "the verification comes too late
to be of any avail for practical guidance" (p. 909).
9. Mill insisted that a priori or deductive method professes experience but not specific
experience of economic facts. By "specific experience" we must understand such relation-
ships as that between Corn Laws and wealth. It cannot refer to the individual axioms, since
Mill described the maximizing behavior characteristic of the contemporary commercial and
industrial sphere as an "empirical law" albeit of "the lowest kind" and this, like all the
axioms, is based on "specific" evidence (VII, pp. 454-455).
10. This was written in 1869. But in 1836 Mill had perceived Marx-like consequences of
a low return on capital for industrial structure: "the fall of profits, consequent upon the vast
increase of population and capital, is rapidly extinguishing the class of small dealers and small
producers, from the impossibility of living on their diminished profits, and is throwing busi-
ness of all kinds more and more into the hands of large capitalists" (XVIII, p. 136).
Also relevant are Mill's observations regarding prospects for cyclical stability (see the
section "A New Perspective on Macro-Economic Policy).
11. Here we must bear in mind the so-called "inverse deductive method." The complexity
of the quest for a dynamic science of society, extending as it does over the full range of
human history and all human activities, and entailing pre-eminently changes in behavior
patterns, precluded the direct derivation of laws of progress from the elementary principles
of human nature, even in the limited sense of tendencies. Required were preliminary obser-
vations of series of effects portraying regularities, that is, the discovery of "empirical laws"
of progress, which only at a subsequent stage would be related logically to principles of
human nature. This reverses the sequence characterizing the specialist branches of social
science where a ratiocinative analysis can often be undertaken on the basis of assumed
behavioral, institutional, and technological axioms-actually provisionally assumed axioms,
since they are continually subject to verification.
12. One formulation of the subject matter of political economy explicitly incorporates
the competition requirement. It encompasses the accumulation of wealth and its use in
production; the determinants of labor productivity; the legal protection of property; and
distribution, or "settling the division of the produce by agreements, under the influence of
competition ... and employing certain expedients (as money, credit, &c.) to facilitate the
distribution" (IV, p. 322).
13. The same perspective emerges in a discussion of "Competition and Custom," where
it is reiterated that the single-price axiom turning upon pecuniary interest does not apply at
the retail level because of the failure of consumers to act as maximizers (II, pp. 242-243).
ECONOMIC THEORY AND POLICY 99

14. The monopolistic competition model emerges also in the discussion of professional
remuneration where "competition operates by diminishing each competitor's chance of fees,
not by lowering the fees themselves" (II, p. 243). Medical services and banking, too, are
said to fall into the category at least to some extent, competition acting to keep the return
on capital on a par with opportunities elsewhere in part by reducing market shares (IV, pp.
306-308).
15. The efficiency losses in retailing extend to a failure of prices to reflect new technol-
ogy, although where a major change occurs the effect is likely to filter through belatedly.
Here the properties of demand elasticity emerge-for prices are more easily maintained in
the case of a "rich" clientele (III, p. 460).
16. The desirable trends were likely to be further undermined by the transport revolution
that breaks down the dependency of consumers on local dealers (p. 243).
17. On the benefits for labor deriving from competition, see the section on "The Popu-
lation Problem."
18. That competition also serves to assure that the preservation of the fittest emerges in
the context of scale economies:
Whether or not the advantages obtained by operating on a large scale preponderate in any
particular case over the more watchful attention, and greater regard to minor gains and
losses, usually found in small establishments, can be ascertained, in a state of free compe-
tition, by an unfailing test. Wherever there are large and small establishments in the same
business, that one of the two which in existing circumstances carries on the production at
greatest advantage will be able to undersell the other (II, p. 133).
19. Though Mill believed that monopoly impeded the adoption of new technology, he
justified patent protection, since the patent merely "postpon[es] a part of the increased
cheapness which the public owe to the inventor, in order to compensate and reward him for
the service" (p. 927). The essence of the allowance lies in the temporary character of the
protection, without which only the "very opulent or the public-spirited" would undertake
inventive effort and "bring [an] idea into a practical shape."
20. One final matter. Mill rejected the commonly held view that cyclical instability could
be attributed to "increased competition." He related it rather to the downward trend in the
profit rate. (On this, see "Summary and Conclusion.")
21. In all this nothing is said formally of the empirical justification for the hypothesis in
the systems in question. But we know that for economics to be of any great practical service
there must be evidence that the maximizing axiom does reflect the "predominating influence"
governing behavior in the particular sphere of activity and locale under investigation.
22. This perspective reflects the methodological proposition that (to use Marx's terminol-
ogy) "appearance" must not be confused with "essence."
23. For example, Book I, ix of the Principles is devoted to large- and small-scale farming
"as a question of production, and of the efficiency of labor"; examination of the issue "as
affecting the distribution of the produce, and the physical and social well-being of the culti-
vators themselves" was postponed (II, p. 152). Similarly, Mill in Book I applauded large-scale
industrial marketing "[w]ith a view merely to production, and to the greater efficiency of
labor," conceding "drawbacks, rather social than economical ... " (p. 141).
24. Drawing upon observations of the record, Mill spelled out three major "tendencies"
that characterize the "progressive economical movement of civilized nations," namely ad-
vances in technology, in security, and in "cooperation" (III, pp. 705-706). The progress of
wealth and industry is said also to encourage the propensities toward freer trade and emigra-
tion (pp. 711-712).
100 ECONOMIC THOUGHT AND POLITICAL THEORY

Mill envisaged good prospects for a great extension of the joint-stock and other forms of
complex organization determined by the progress of wealth and reinforcing such progress.
There is an objective argument, that the introduction of large establishments is facilitated in
a growing economy (II, pp. 140-141). And the "progress of modern society" played on the
capacity for industrial cooperation in a more subjective sense. While "economical progress"
had a debilitating effect upon intelligence and efficiency of the individual-hislher ability to
adapt means to ends-collective intelligence and efficiency increases because of an increased
capacity for cooperation reflected in better industrial discipline, adherence to plan, subordi-
nation of individual caprice, and so forth (III, p. 708), a capacity that improves with practice,
"and becomes capable of assuming a constantly wider sphere of action."
25. Cf "[IJt is much more obvious how many mouths can be supported by a piece of land,
than how many hands can find employment in the general labor market" (VI, p. 529). Malthus
had expressed the same opinion.
26. In addition, there was the possibility of a structure set around an unacceptably low
general level; but, as we shall see, the notion of "justice" does not extend to the general level
of wages.
27. The foregoing perspective governs the approach to women's earnings. It was the
competitive market mechanism on which Mill relied for at least part of the solution to their
relatively low earnings, considering the fact that "occupations which law and usage make
accesible to them are comparatively so few" (p. 395). Thus alluding to restrictions on female
factory labor, Mill protested: "it should ... be an object to give them the readiest access to
independent industrial employment, instead of closing, either entirely or partially, that which
is already open to them" (III, p. 953).
28. The growth model on which the recommendation for population control is based
entails a regular functional relation between capital accumulation and the return on capital,
and between population growth and the real wage. But there is some evidence of a possible
(partially absorbed) change in position in Mill's later writings pertaining to the motive governing
accumulation and perhaps population, too.
A second modification emerging late in Mill's career also has major policy implications,
namely a new concern with wage-induced substitution against labor.
29. One of Mill's arguments for a stationary state relates to its greater potential in en-
couraging population control: "If it were evident that a new hand could not obtain employ-
ment but by displacing, or succeeding to, one already employed, the combined influence of
prudence and public opinion might in some measure be relied on for restricting the coming
generation within the numbers necessary for replacing the present" (p. 753).
30. Mill saw self-interest as a positive driving force only in the more mundane task of
assuring small gains and savings, but as mitigating against truly innovatory ventures. He
placed his faith rather in hired management of above-average intelligence, a solution avail-
able only to large-scale enterprises. This in turn implies a rationalization of the relationship
between scale and innovation (possibly even invention). See also the comments on small-
scale farming in the section on "Productive Organization and Motivation."
31. Mill realized that natural resource exhaustibility rendered the theoretical stationary
state-zero growth of popUlation and capital at unchanged wage and profit rates-an im-
possibility. Innovation and new mining discoveries would be essential to counteract this sort
of diminishing returns (II, pp. 171, 184-185).
32. There is also a suggestion (in the first edition only) that custom impeding competitive
wage determination is reinforced in a stationary state (II, p. 337).
33. The Law of Markets is understood by Mill as an equality not an identity; in
disequilibrium excess commodity supply (excess demand for money) is allowed. The full
analysis requires reduction to manifestations of individual maximizing behavior.
ECONOMIC THEORY AND POLICY 101

34. Mill expressed some doubt whether social progress would "moderate" price fluctuations
arising "from the alternations of undue expansion and excessive contraction of credit. ... Such
vicissitudes, beginning with irrational speculation and ending with a commercial crisis, have
not hitherto become less frequent or less violent with the growth of capital and extension of
industry. Rather they may be said to have become more so: not in consequence, as is often
said, of increased competition; but as I prefer to say, of a low rate of profits and interest.
which makes capitalists dissatisfied with the ordinary course of safe mercantile gain" (p. 718).
But in evidence given in 1867 Mill denied that the cyclical problem was worsening in terms
either of depth or frequency (V, p. 601).
35. A "tendency" which itself encourages the counteracting force renders questionable
the designation of the latter as a "disturbing cause" bearing as it does a connotation of
independence.
36. For the most part the argument proceeds as if technical change constitutes a purely
exogenous disturbance. Yet allowance is sometimes also made for induced technology ren-
dering inappropriate its designation as "disturbing cause."
37. One aspect of Mill's support for colonial activity turns on the check to any reduction
in the domestic profit rate due to pressure on scarce land by providing a source of cheap
wage goods (p. 746).
38. Mill reacted similarly to proposals to payoff the national debt. See also his evidence
before the Select Committee on the Income and Property Tax (V, pp. 493-494). Although
he favored savings over consumption expenditure, on the grounds that by saving a "fund in
perpetuity [is created] for maintaining labor," a still better choice would be endowing a
school.
4 CHURCH, STATE, AND MARKE~
ACCENT ON THE SOCIAL
Thomas Nitsch

If Man is social by nature, he will develop his nature only in society, and
the power of his nature must be measured not by the power of the separate
individual but by the power of society. ... The reason for this [enhanced
productivity via simple cooperation] is that man is by nature . .. a social
animal-dass der Mensch von Natur .. . ein gesellschaftliches Thier ist.

-Karl Marx, Die heilige Familie, 1845; Das Kapital, 1867-1883

It is this natural propensity [springing from their mutual dependence] which

moves men to join together in civil society, and likewise into particular
associations of citizen with citizen which, while certainly lesser and imper-
fect, are true societies . ... Civil society exists for the common good-il bene
comune.

-Leo XIII, RN:DCOIDQO, 1891

Prominent among these [rights which are inalienable and proper to the
human person] is the "natural human right" to form private associations;
[and,] because the right of association is a natural right of the human
being, [it] therefore precedes his or her incorporation into political society.

-John Paul II, CA:OHA, 1991, #7

103
104 ECONOMIC THOUGHT AND POLITICAL THEORY

Introduction

Modern society (the social system) conceived structural-functionally is

constituted of four basic institutions (or subsystems) designated as follows:
ideology (the meaning system), polity (the organization system), economy
(the adaptation or provisioning system), and family (the belonging sys-
tem). Each of these, in turn, may be analyzed and further described in
terms of its (1) general symbolic medium (GSM), (2) sanction, (3) symbolled
value, (4) structural components, and so on. 1 Thus, for example, focusing
on polity versus economy, we have here, respectively, (1) power versus
wealth, (2) coercion versus inducement, (3) effectiveness versus utility, (4)
collectivities versus roles, (5) force versus dominion, and (6) sovereignty/
submission versus prestige/respect. In the case of the ideology or mean-
ing system, of which institutional religion is a subset, we have (1) influence,
(2) persuasion, (3) solidarity, (4) norms, and (5) consent (concensus)/
(normative) intractability (see Fig. 1).2
In the above societal system, the economy constitutes what is often
called the "social economy," to distinguish it from "individual," "personal,"
or other types of economy, that is, from the management or administra-
tion of the family, or "private" (versus the national or global) household. 3
But there is another specific and narrower conception of the social economy,
in what may be referred to as the Franco/Roman-Catholic paradigm of
l'economie nationale. Here, the latter is institutionally divided into the
private, public, and social sectors. The first (l'economie individuelle ou prive)
consists in the individual, privately owned and operated households and
firms interacting with one another on a self-interested, individualistic basis;
the second (l'economie d'etat ou public), in state enterprises, general-
government operations (regulatory, legislative, etc.), and national defense;
and the third, in what has recently been described as that "dynamic third
sector," l'economie sociale, composed of various forms of voluntary as-
sociations, vocational groups, intermediate bodies, and the like, as ex-
emplified by trade unions, employers' associations, mutual benefit societies,
charitable endowments, cooperatives, and so on. 4 In the earlier days, the
institutional church filled in the hiatus between the ("negligent") private
and public sectors with its own alms-houses, orphanages, hospitals, and so
forth, some of which remain today under Catholic auspices, still perform-
ing the so-called "corporal works of mercy." This is what the social economy
exhibits were all about at the International Expositions of the second half
of the last century.s
In developing this chapter, we shall employ both of these paradigms:
the (essentially) Parsonian/modern-sociological (PIM-S) and the Franco/
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 105

Figure 1 Basic institutions of human society (subsystems of the social system)

P
Polity/State
ORGANIZATION
(Power: Coercion)
{Effectiveness: Collectivities: Force}
[Sovereignty/Submission:Authority}

I F
Ideology Family/Kinship
MEANING BELONGING
(Influence: Persuasion) (Commitment : Activation
{Solidarity: Norms: of Commitment)
Cognitive/Evaluative} {Integrity: Values: Societal
[ConsenUConcensus : Value Systems}
Normative Intractability} [Loyaijyllnfidelity : Esteem
(Honor/Shame)}

E
Economy/Household-Management
ADAPTATION/PROVISIONING
(Weaijh : Inducement)
{Utility: Roles: Dominion}
[PrestigelDisgrace : Respect/Disrespect}

Note: Initial for Basic Institution or Subsystem (E = Economy, etc.); Popular Designation;
FUNCTIONAL DESIGNATION; (General Symbolic Medium: Sanction); (Value Symboled:
Structural Components: Encoded(s»; [Success/Failure Indicator: Rating Index.].
Source: Adapted from Malina and Nitsch (1991a).

Roman-Catholic (Fr/R-C), in perhaps an "overlay" if not integrative fash-

ion; and, whichever, at varying levels of abstraction depending on the
purview-that is, national, regional-bloc, global economy/society. Also, to
the extent that P/M-S fits within our Fr/R-C framework (Fig. 2), we shall
have it submissive to the traditional Mediterranean family analog of
society: state or polity = father, private-sector = mother, and the "middle
entity between the individual and the state" (Mukhay, 1952, p. 9)-inter-
mediate bodies, voluntary associations, vocational groups, and so on--or
l'economie sociale proper = the children (Malina, personal communica-
tion, July 10, 1992).
106 ECONOMIC THOUGHT AND POLITICAL THEORY

Figure 2 Modified Parsonian/Malina-Nitsch Model of the Social System

Modern Society

Basic Institutions/Subsystems

Note: (1) Economy: Adaptation/Provisioning, Wealth, Inducement, etc.

(2) Polity/State: Organization, Power, Coercion, etc.
(3) Ideology/Religion: Meaning, Influence, Persuasion, etc.
Source: Adapted from Figure 1, Malina and Nitsch (1991a).

It is notable that even the FrlR-C paradigm thus far described is a much
looser confederation and more of a "mixed bag" than corporat(iv)ism, or
the corporate state proper, in the strict sense thereof (e.g., Schneider,
1959; and see Freeman, 1989, passim).6 Ideally, there would be a clear and
distinct, free-standing network of these socioeconomic institutions, with
functional ties drawn (yet borders remaining) between that network and
the public (or state) and private (or individual) economies as they stand
equally free and distinct. The ideal model (in the Weberian sense) would
take the form of a pyramid, with the individual economy at the base, the
social economy in the middle, and the state forming the apex (Fig. 3). In
the R-C case, the principle of subsidiarity governs the overall (national-
economy) system, while that of solidarity is the glue of the social economy
proper.7
The role of the church or institutionalized religion as a secular force in
both its ideological and more material aspects has, of course, been promi-
nently recognized in the history of economic thought. Wasn't the church
the supranational impediment, in the same way that the manor and town
were the infranational ones, which had to be overcome and superseded in
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 107

Figure 3 The Franco/Roman-Catholic Model of l'Economie Nationale

l'Economie

d'Etat/public: Legislation, regulation;

2d) national defense/ security;
public works, utilities.

Socia/(e): cooperatives, mutual societies;

3e (Tiers) S
labor, employer, et al. ass'ns.;
"Social Partners."
/ndividuellelprive: private households,
firms; product and factor
markets -- more or less
atomistically competitive,
ala the"lnvisible Hand."

les Secteurs economiques

Source: Adapted from Desjardins (1983); Le Monde, Le Figaro-"Economi(qu)e."

the emergence of the nation-state and attendant mercantilist/cameralist

Oeconomie poiitique, StaatswirthschaJt, and so forth, as the dominant isms?8
For those histories of economics that still deem to cover the ancient/early
phases of BiblicaIlGraeco-Roman-Scholastic/Medieval thought, the insti-
tutionallideological role of the church/religion is obvious. And, again, once
secular society and economy had truly come into their own (albeit with the
considerable, if not indispensable, support of the Weberian Protestant Ethic
of Calvinism-Puritanism) with the ascendency of the industrial system,9
the more the sovereign or state neglected its "social responsibilities," the
more it befell institutionalized religion and its alms-houses, "People's
Homes," or "Soiidarites," to assume that mantle.lO This, along with, and
embracing, the aiding and abetting of labor associations and forms of "self-
help" constituted the so-called corporal works of mercy in praxis-generic
alias (in the Roman church at least), "Catholic action.,,11
When we turn our attention from economic history and the history of
economics to the contemporary setting and comparative economic systems,
we note, first of all, the scene-and various pertinent scenarios-that is
currently Europe-Eastern, Central, and Western. There we have a mixed
bag and general situation very much in flux. This includes, and not mutu-
ally exclusively or totally inclusively, the so-called "Socialist Economies in
Transition," the decomposition or dissolution of the former Soviet Union
(USSR) into the newly formed Confederation of Independent States (CIS);
108 ECONOMIC THOUGHT AND POLITICAL THEORY

the disintegration, deterioration or otherwise transformation of Yugoslavia

(Bosnia-Hercegovina et al.) into God knows what; and, most recently
(January 1, 1993), the separation of Czechoslovakia into Slovakia and the
Czech Republic. Side by side, and partially overlapping these developments,
is the reunification of Germany, or otherwise absorption of the German
Democratic Republic by the Federal Republic of Germany, and the struggle
of the latter and its partners to form a more perfect union. A full-fledged
European Community (EC) is attempting to evolve from the transitional
Common Market or EEC among socioeconomically disparate nations. Each
step of the way, the EC seeks to overcome the tug-of-war between the
negative political forces of not relinquishing all sovereignty and the (pre-
sumably, at least) essentially and mutually positive net present value of
total economic integration. Surely our topic of church, state, and market
is central to this scene, with the case of Poland as exemplary in this regard.

A "Third Way" or No: The Participatory Economyl

Workers' Self-Management, the Social Market Economy,
Welfare Capitalism, or What?

Basically the Roman-Catholic church has striven (1891 to 1991-92) to navig-

ate a middle course between the Scylla of unbridledllaissez-faire capital-
ism, on the one hand, and the Charybdis of monolithic state-socialism, on
the other. We have already noted the Fr/R-C formation or institution of
the Tiers Secteur-that middle or intermediate-body economy, l'Economie
sociale-between the first and second (individual/private and state/public)
sectors or economies. Recently, on reading Centesimus Annus and then the
just-promulgated Catechism of the Catholic Church (John Paul II, 1992),
an enthusiastic, right-wing cleric in this country (Sirico, 1992) has pro-
claimed-as fait accompli, once and for all-the official demise of any
"third way" or mere compromise solution between classical socialism and
classical capitalism. To him, it is now the (properly proscribed, of course)
market economy-virtuous as victorious!
Intermediate types and mixed varieties, both theoretically and praxe-
ologically, between the two extremes, as we know, are manifold, a mere
sampling appearing in the heading of this section. Yet, the church itself,
while rejecting both classical socialism/communism with rigorous central-
planning and the unfettered pursuit of private profit with near-total reli-
ance on the market mechanism for resource allocation and need satisfaction,
presently and provisionally giving the nod to a properly circumscribed and
supplemented market system (John Paul II, 1992, #2424-2425), continues
to protest that it "has no models to present" (John Paul II, 1991a, #43); or,
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 109

as an early apologist intermediating between Rerum Novarum (1891) and

Quadragesimo Anno (1931) had declared, "Catholicism gives to the world
no Economic system; it is not bound to any definite or fixed economic con-
stitution, and binds to no fixed economic system" (Pesch, III, 1926, p. 547;
ct. Nitsch, 1990, pp. 67-68, 88-89, nn. 74, 78).
Still, much to the dismay of many of the faithful and others outside the
esoteric circles of social economics, social/moral philosophy and theology,
the church-whose primary and exclusive focus is supposed to be the "Other
World," the Kingdom to come--continues to poke its nose into the affairs
of the "temporal order," the "things of this world," matters that "belong
to Caesar" and-of course-the marketplace. 12 At the same time, to the
consternation of others, the magisterium or "teaching office" of that church
proceeds to explain all material evil-all adverse human-social conditions
and developments-in terms of an initial offense against or separation
(alienation) from God on the part of the individual or group, although
moral responsibility is always personal, never collective or communal
(Nitsch, 1987, pp. 13, 19, op. cit. n. 30; idem, 1986, pp. 61-62).
Yet, like it or not, and for better or worse, this institution has served
and continues to serve as a significant, non-negligible force in the temporal
order, the real (social/material) world; it is not, nor does it purport to be,
totally or solely other-worldly, though that is its primary orientation and
particular competence (John Paul 1,1978; see also Nitsch, 1986, pp. 58-59).
Now, from the social-economic standpoint, there are two aspects of this
fact: one, empirical or positive; the other, moral or normative. One is the
subject of sociology or social analysis; the other, of normative or moral-
philosophical/theological nuancing. We shall examine the latter first.

Does the Pope Have Models, If Not Armies as Well?

The key to the present question lies in both Pesch's post-Rerum Novarum/
pre-Quadragesimo Anno formulation in the first quarter of this century
and John Paul II's recent disclaimer (CA, 1991, #43). The significant
qualifier in the case of Pesch, as the present writer sees it at least, is
bestimmte(s) in his original German (rendered above), to wit:
Der Katholizismus gibt der Welt kein Wirtschaftssystem, er ist an keine bestimmte
Wirtschaftsverfassung gebunden und bindet an kein bestimmtes Wirtschaftssystem
(emphasis added).
As with so many German terms and contexts (including the Hegelian-
Marxian aufheben, meaning to negate/abolish, affirm/preserve, and tran-
scend/supercede!), it seems likely that several connotations apply here
110 ECONOMIC THOUGHT AND POLITICAL THEORY

simultaneously: definite, fixed, preordained, definitive, and so on. Thus, in

his recent "no models" affirmation of the church's position and role as
articulated earlier by our so-regarded "commentator on Rerum Novarum
[and] sourcebook of Quadragesimo Anno" (Mulchay, 1952, p. 8), John Paul
II first declares and then explains (CA:OHA, 1991):

43. Ecclesia exempla non habet proponat; models that are real and truly effec-
tive can only arise within the framework of different historical situations, through
the efforts of all those who responsibly confront concrete problems in all their
social, economic, political and cultural aspects-aspectibus socialibus oeconomicis
politicis et culturalibus-as these interact with one another (emphasis added).

In a word, the economy-the human household-management system-is,

as the present writer noted some 30 years ago, "man-made"; there is no
preordained or predestined "best" form or formulation, de natura or super-
naturally (Nitsch, 1963).
But, instructively, to add meaning to his "responsibly" stipulation, the
Holy Father continues here:

For such a task the Church offers her social teaching as an indispensable and
ideal orientation, a teaching which, as already mentioned, recognizes the posi-
tive value of the market and of [private] enterprise, but which at the same time
points out that these need to be oriented towards the common good-in bonum
intendi commune. This teaching also recognizes the legitimacy of workers'
efforts to obtain full respect for their dignity and to gain broader areas of
participation in the life of industrial enterprises so that, while cooperating with
others and under the direction of others, they can in a certain sense "work for
themselves" [cit. LE:OHW, 1981, #15] through the exercise of their intelligence
and freedom.

The emphasis here is not added; but one is tempted to underscore "the
common good' and "broader areas of participation," which the author
himself might have done had he deemed it necessary by this point. At the
same time, to begin to bring all of this together, let us call attention to
some commonalities of language and thought, not between Karl Marx and
John Paul II, but between Adam Smith (WN, 1776-1789), Leo XIII a
century later, and John Paul II two centuries later. Thus, in referring to
our second quotation opening the chapter, we note the Pontiff's allusion to
the human-natural tendency "to join together in civil society"; Smith's term
(adapted by Hegel, for example) was "civilized"-alternatively, "commer-
cial," "civilized and commercial"-society (equal to Hegel's buergeliche
Gesellschaft)Y I refer here in particular to the so-called "alienation pas-
sage" (Smith, 1937, pp. 734-740) and opening paragraph of Book I,
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 111

Chapter IV, of the Wealth. Next, we move to the opening paragraph two
chapters earlier, where we find the famous allusion by Smith to that "cer-
tain propensity in human nature ... to truck, barter, and exchange one
thing for another" (viz., the human-natural propensity to trade), followed
by (1) an elaboration of the near-total interdependence of "man . .. in
civilized society" in the subsequent paragraph (especially p. 14), whence
(2) that opening paragraph of Chapter IV, where we are informed that
"when the division of labour has been once thoroughly established, . . . every
man . .. lives by exchanging, or becomes in some measure a merchant, and
the society itself grows to be what is properly a commercial society" (p. 22;
emphasis added). Here, we merely compare John Paul II's language re-
garding the workers' ability to "in a certain sense 'work for themselves'"
(CA:OHA, 1991). Of interest is that this comes at the tail-end of a pro-
nouncement that has just (qualifiedly) endorsed the market system (alias,
commercial society); and one surely has to wonder if the worker today,
and even in the system that the present Pontiff has in mind, is any more
of a "merchant" or any more her/his own "employer" than two-plus cen-
turies ago when Smith (d. 1790) was first-drafting and last-revising his
famous Wealth of Nations. Wisely, one must remark, did they qualify "in
some measure" and "in a certain sense."
Actually, it seems, as the present writer observed 29 years ago (Nitsch,
1964), it is difficult to accept that the church affirms or endorses no par-
ticular model or system when it (1) upholds private property as a natural
right; (2) relatedly declares the socioeconomic classes as (super)naturally
(pre )ordained; (3) opts for the marketplace over the central planning board;
and here, for good measure, we add, (4) views the state as likewise (super)-
naturally (pre )ordained. To Smith, Hegel, and Marx, this was a definite
model, particular system, and so forth: "civilized and commercial society,"
"buergerliche Gesellschaft" ("civil Society"), and "das kapitalische Sys-
tem"-all quite interchangeably. That is to say, the system or model that
may be clearly distilled from CA (1991) and the new CEC (1992) is no less
specific and distinct than Smith's normative "obvious and simple system of
natural liberty" qua "invisible hand [of] free and universal competition"
circumscribed and supplemented by the "visible hand" of the Sovereign
(WN, 1937, p. 651), Hegel's "buergeliche Gesellschft" cum "politische Staat,"
and Marx's socialism/communism, stages I and II. The only difference is,
with Smith and Marx, perfection was achieved and further evolution/
development would stop when commercial-society II and communism II
(respectively) were reached14 ; the Pope(s) says (have said), no specific one
forever. For the time being, however, the nod goes to reformed capitalism
(Ref-Cap) and not to revised socialism (Rev-Soc).
112 ECONOMIC THOUGHT AND POLITICAL THEORY

The Church in the Social System: Positive Analysis

As Malina and Nitsch have presented the matter recently (1991b, especially
pp. 52-57), the dynamic interaction between the several basic societal
institutions or subsystems in the present type of connection begins with
the church/religion in the I subsystem, and moves outward and around to
P, F, and E. (see Fig. 1). Namely, we said that in their Pastoral Letter on
Catholic Social Teaching and the U.S. Economy the National Conference
of Catholic Bishops (1986) or (1) the church was drawing on its influence
to persuade (2) the polity to exert its power in coercing desired changes in
(3) the economy. This we regarded as the primary/direct routing of the
thought and action. Surely, there was an intent and attempt as well to
work circuitously down through the local ordinaries, deaneries, and par-
ishes to engage (4) the family to participate in this process,15 just as there
was an intent to influence elements of the economy directly (as in Fig. 1),
that is, to conscientize and convert "corporate execs" and others to a more
just, Christian modus operandi. But, for reasons not articulated earlier
(1991a,b), it must now be noted that, characteristically, the bishops would
not address the family as an integral social unit or institution, but only
individual members thereof. Remember, it is individuals, not groups, that
are morally accountable, damned or saved, and so on. Thus, in the present
social analysis, it does no damage to our positive model to suppress the
family, or otherwise exclude it from explicit portrayal, as in Figure 3.
Otherwise, perhaps, if we let F = families as the societal subtotals of the
individual members thereof, we could now stipulate the indirect routing
of I ~ F ~ PIE, as well as the short-circuited I ~ E; but nothing of
significance is lost by focusing on the primary I ~ P ~ E thrust.
The reactionary response to the bishops' enterprise here, of course,
would be that (a la M. Friedman et al.) the social cost of the suggested
government intervention would exceed the social benefit thereof, both
properly discounted. That is, if something in the economy needs changing,
nature will take care of it; the government as "nightwatchman in the market-
place" is fine, also as mechanic and even reformer, but not as redesigner
or reconstructor of the economy or economic system as such. That's a
definite "no, no."
The U.S. Catholic bishops proposed no radical change in our extant
"mixed economy" in their pastoral letter , no alternative to the market sys-
tem here as regulated and supplemented by government, except for sig-
nificantly more activism and progressivism in the latter case. In this, they
have been affirmed by John Paul II in his latest social encyclical, where
he was endorsing (qualifiedly) essentially such a system as a reasonable
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 113

exemplar for the formerly socialist economies in transition. The pope, of

course, defines and redefines social doctrines in exercising his magisterium,
and as well in suggesting appropriate courses of action in more specific
current situations in discharging his "pastoral" office (pastorium). The
bishops, in conference or otherwise, only interpret and apply doctrine at
their respective local levels; hence, their letter was a pastoral utterance.
Yet, as such, they constitute a fixture in the (national) social order; there,
they, and the (arch)diocesan pastoral councils, and others down through
the hierarchy, constitute the church-under the eyes and authority of the
"Holy See" (Vatican), the church qua fixture in the universal social order.
And, of course, this is not to detract from the superior influence of the
non-Roman national churches, such as the Church of England, Church of
Norway, and so on.

Conclusion

The church (institutional religion), like the state or polity (of whatever
form), and the market system (the economic form in question) are fixtures
of the positive social order. The significance of the market economy is that
it is essentially "free-standing". In the case of the United States, for ex-
ample, it is regarded as the dominant basic institution or subsystem. 16 In
the Soviet Union, as we knew it, the economy-by virtue of state owner-
ship and central-command planning-was largely embedded in the polity,
which, in turn, was and currently is dominant. Societies differ structural-
functionally (see Fig. 1) according to the relative free-standingness of the
basic institutions or subsystems featured here, and to the relative "top-
sidedness" thereof.
For the foreseeable future (twenty-first century), the church will con-
tinue its free-standing existence and ongoing attempt to exercise its moral
influence in the social order, and in particular on the economic sphere
thereof, via its sanction of persuasion. This it has done and likewise will
continue to do at both the loftier level of its magisterium or teaching office
and that more mundane of its pastorium or pastoral solicitude, in the Roman
case at least.
With the liberation and recrudescence of religion (the churches) in
Eastern/Central Europe, and including "Mother Russia" itself, the analy-
sis of Friedrich and Brzezinski some 40 years ago (1956, pt. VI) has been
borne out. The churches, like the family, proved to be one of those
"Islands of Separateness" that would withstand the test of time in its
immunity from the power of the state. Dormant in appearance, perhaps,
114 ECONOMIC THOUGHT AND POLITICAL THEORY

but insulated by nature, hybernative by force as well as by expediency,

"inactive" but never inert, waiting .... What rightful place it will rise to
occupy is, of course, another question, and will no doubt vary from coun-
try to country.
From the point of view of Rome, the church is the dominant or top-side
institution in-if not of-the universal social order. This is what is meant
by its two (presumably interchangeable) designations: catholic, from the
Greek katholikos, meaning ubiquitous; and universal, from the Latin uni
+ verti, meaning (literally) to tum or rotate around one, specifically Rome,
to (and from) which all roads lead. At the same time, this church recog-
nizes itself and is recognized as a distinct or free-standing institution and
valence in the world or temporal order, other-worldly or eternally ori-
ented though it may be. Thus, while it may not view itself as embedded in
this world in the Polanyian sense, in the same "eyes of the Holy See" ("Ie
Saint-Siege") these other institutions-separate and distinct, and similarly
"nonembedded" as they may be (perceived)-remain (nonetheless) "rela-
tive," and must bend to "Her," or else. This is what is meant by that
church (the Vatican, Rome) qua "hieracracy" (Nitsch and Malina, 1984,
p. 7; Malina and Nitsch, 1991b, pp. 42ff.); and, as opposed, for example,
to theocracy, where there is total embedment of P, E, and F in I (church,
religion).
No doubt the United States will remain a chremacracy (ibid.) or plouto-
cracy, with E (wealth) dominant or top-side, and the church(es) or religion
playing essentially a tempering, restraining, nudging role. As the countries
of Eastern Europe move in the direction of free private-enterprise/
marketized systems, their economies perforce will become more dis-
embedded from the polity; although, as the U.S. bishops themselves
recognized, and as Marx had taught in his writings over the 40-year period
of 1843-1883,17 the state must initiate, orchestrate, and engineer any con-
version, reformation, or revolution of and in the social economy, however
fundamentally, simply, but completely social its "soul" must be. In this
process, and that of the Glasnost accompanying the same Perestroika, the
church emerges as both freer-standing and ascendent. This is virtually
axiomatic, given the need for another religion to fill the void created by
the decline of religious Marxism (Nitsch and Malina, 1984; pp. 3-13; 1989,
p.35).
Having confined our attention to the Northwestern world, we have not
begun to address our question in terms of the less developed countries
(LDCs) of the Third World, where church as integral and/or still mission-
ary as well as state and market (embryonically, or at least economy) is
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 115

surely as much of an issue as with the so-called advanced industrial nations

treated here. These, essentially, Malina and Nitsch (1984, p. 8) have re-
garded as "patronacracies" or living models of "clientelism," with E, P,
and I embedded in F or kinship, but certainly emergent and increasingly
free-standing. Malina and Nitsch also say, that "one Holy, Catholic and
Apostolic Church" has itself fractured, though not to the point of being
two (or more). Here, the struggle is between the traditional (Roman)
church and that "theology of liberation" which would sublate unto itself
Marxian social analysis as Thomas Aquinas did Aristotelian social analysis.
The former hold they can do so without joining Marx in his atheism, as did
Aquinas without succombing to Aristotle's "paganism." But that is an-
other chapter, to which John Paul II's Solicitudo Rei Socialis of 1987 more
exclusively applies, although to which the present analysis is clearly not
irrelevant. IS
We have come nearly full circle, where we rest. For all of the above-
North America, Western-Eastern Europe, Central and South America,
and non-Muslim Africa-the Fr/R-C model discussed earlier, along with
the accordingly adapted or Modified P-M/N paradigm of Figure 3, are
pertinent. Again, the most pregnant question in this regard lies in the
transitions and turbulences of Eastern Europe. How those scenes and their
respective scenarios will play and be played out, while not exactly any-
one's guess, is surely questionable. Suffice it to say, don't expect a Poland-
to-come (apparently the real success story so far l9) to be a U.S. clone
or little chip off the old U.S.A. block. Social market economy, welfare-
state capitalism, and so on, would seem the limit, while nothing would
be more R-C, for example, than genuine workers' self-management or
some solidaristic, "Social System of Labour" along Peschian lines, alias
"corprat(iv)ism.,,20
The quest continues for a more just and benign world order, for healthier
and happier peoples along with wealthier nations. From a social stand-
point, this has to be a function of the several institutions on which we have
focused here. The present writer was selected for this topic because of the
work he has done in the area of social Catholicism and, presumably, also
in relation to and as reconcilable (synthesizable?) with social Marxism.
The death, survivability or revivability of the latter is a question that will
provide ample grist for the mills of the students of economic thought and
political theory as well as simply practitioners of social analysis far into the
foreseeable future. Thus, similarly, one might inquire, "Is Aristotle dead,
or merely sublated beyond recognition?" Is the "invisible hand" of Adam
Smith, whence Hegel's "thousand-handed deity," defunct, or is it still alive
116 ECONOMIC THOUGHT AND POLITICAL THEORY

and well a la Ronald Reagan's "magic of the marketplace" held out to non-
believing, would-be achievers in his Caribbean Basin Initiative unveiled in
October 1982?21
The present writer harbors a modicum of faith, or at least of hope, that
the Roman Catholic church can and will serve as an instrument of improve-
ment of the human social condition both globally and nation-specifically.
Even with a Supreme Pontiff whom many regard as conservative-reactionary
in matters of faith and morals (the area of competency to which the claim
of infallibility pertains), there has been some noticeable attempt at
sublation-if not plain cooptation-of otherwise regarded "radical" per-
spectives, including the Marxian conception of homo faber, the human being
as subject and (co)creator, liberation theology's "preferential option for
the poor," and so on. It seems encouraging that conservative apologists
even adhere firmly to the recognition that the economic system is of human
design, is object and instrument. It also seems encouraging that socialization
of the means of production can be required by the common good, etc. (see
Peschke, 1992, in these regards). It is further encouraging that faithful
conservative apologists are also required to recognize, as one has most
recently (Whitehead, 1992), that "Papal Social [i.e., economic] Teachings"
are equally binding on the Christifideles Catholici Orbis Universos as "the
Church's authentic but ordinary teachings on faith and morals" (p. 4),
"e.g., birth control" (p. 8). That, to the present writer and to others, is
some concession!
Perhaps, with the models that remain valid from that particular moral-
theological stance, a viable and optimal middle way will be forthcoming;
and, perhaps some day, a truly radical Third Way qua the Aufhebung-
simultaneous abolition, preservation, and transcendence-of the two, still-
vying, basic alternatives will be seized on and synthesized. Surely, from
what is found in the last three social encyclicals of the present Pontiff
(John Paul II, 1981, 1987, 1991) and the equally doctrinal CEC (1992), the
Vatican would not frown on the adoption of the so-called "neo-" or "social
corporatist" model recently described and proposed by Pekkarinen and
colleagues (1992)-nor, similarly, on virtually the same under the aegis of
"negotiated economy" of Angresano (1993)-as a workable eclecticism
for both the reforming economies of Eastern and Central Europe and the
developing ones of the Third World. In light of Petr's recent essay (1990),
the affirmation of John Paul II (1991, #43) of the official Roman Catholic
position of letting history decide the actual form, rather than to force it
from an invariant worldly ideology, is the more prudent and humanly
beneficial course.
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 117

Acknowledgments

As in many previous efforts, the author must acknowledge the input of his
sometimes not so silent, but here essentially "limited," partner, Bruce J.
Malina, Professor of Theology at Creighton.

Notes
1. The list continues: (e) encodeds, (f) success/failure indicator, and (g) rating index; see
Fig.1.
On the role of religion or the church in premodern-Western society, when economy and
polity were still embedded, and then as they emerged as free-standing subsystems, see Clebsch
(1979). On the religion-state-economy trichotomy of the "classical liberal theorists" of the
seventeenth and eighteenth centuries (Locke-Smith), see Wiser (1986, pp. 99ft.).
2. For further explication, articulation, documentation, and application of this paradigm,
see Malina and Nitsch (1991, pp. 3-5); Nitsch and Malina (1984, pp. 5-9, Fig. 3); and Malina
(1986, pp. 69-87).
3. While the private, personal, domestic, family, and so forth, versus public, political, and
so on, distinction in the mercantilistic sense dates back at least as far as early-Peripatetic
antiquity and is repeated in very similar fashion by the "last of the mercantilists" in 1767, and
further distinctions have been drawn between political and social economy, one might most
instructively consult Elliott (1973, pp. 3, 13) for the generic social versus individual we have
in mind here. (See Aristotle, ed.ltrans. Armstrong, 1935ft., pp. 323ft. , 344-351; Steuart, 1767,
pp. 1-3; Nitsch, 1980, 1990.)
4. See Desjardins (1983), Mu\Chay (1952, p. 9), Leo XIII (1891-1939, #36-44), Pius XI
(1931-1939, #29-39), and John XXIII (1961, #84-103), whence "Teaching-Aid Outline"
(by Wm. J. Bertsch and Wm. J. Gibbons, S.J.), p. 107. The articles cited (G.H., Lebaube,
Noblecourt, Rollat; "Social") from the several 1985-88 issues of the two leading French dailies,
Le Monde and Le Figaro, are particularly illustrative of this sectoring of (alternatively)
economie and La Vie Economique, respectively: "Social," "Affaires," "Etranger," "Monnaies,"
"Marches Financiers," etc.; and, "Economie-Social-Entreprises-Bourse-Finances," under
which, for example, are "Commerce," "Automobile," "Echanges," "Politique Economique,"
and the article "Social: etc." Thus, that last item in Le Figaro notes that, according to "a
sounding of the Nouvel Economiste," some 63% of employers interviewed were in favor of
maintaining the "interprofessional minimum wage growth." The latter, we are further informed,
joined the National Council of French Employers in holding that the minimum wage should
be determined by branches of industry or individual firms, "not by a state decision." Simi-
larly, the earlier bylined article (Lebaube) in Le Monde makes reference to the "APEC"
(Association for the Employment of Staff), as the (higher-echelon) "equivalent of the ANPE
[National Agency for Employment]"; to the workers and employers, as represented by their
individual and respective "organisations syndicales et patronales," as '''the social parmers''';
and so forth. That same expression is employed in the earlier article of Noblecourt (1985),
regarding "the new cantors of liberalism [who WOUld] deregulate to the maximum the social
and economic game" (opening paragraph). There we also note, significantly, by the subtitle,
a suggestion of social-economic democracy-or "economie sociale democratique"-at the
grassroots level superceding the concentration of private-market power in the top- or senior-
118 ECONOMIC THOUGHT AND POLITICAL THEORY

management echelons (i.e., to paraphrase, challenging the private enterprise or managerial

power structure). Finally, one cannot help noting here that the very terms of the labor-
employer negotiations discussed there-employment, wages, and hours of work-come
under the penumbra of "Social Policy" in the Maastricht Treaty of the integrating European
Community (see Fig. 2).
5. The eminent economic sociologist and religious-reformative social economist Fr. Le
Play was responsible for organizing several of these exhibits (see Nitsch, 1988, pp. 34,203;
Herbertson, 1946, pp. 100-102). Cummings (1890) provides an excellent description of the
very Roman-Catholic nature of these exhibitions as that" 'universal' exposition of 1889."
Nothing could be more traditionally Roman-Catholic than the purpose of that exhibit, in that
author's words, "to establish the relation of the material, intellectual, and moral advance of
the worker to the advance in science, invention, art, and industry" (and see Nitsch, 1992a,
passim). By way of content, the 15 enumerated sections were entitled as follows: Remunera-
tion of Labor; Profit Sharing, Cooperative Production; Trade Organizations; Apprenticeship;
Banks of Pension and Life Annuities; Insurance; Savings; Distributive (or Consumptive)
Cooperation; Cooperative Loan Associations; Laborers' Dwellings; Workingmen's Clubs and
Recreations; Hygiene Sociale; Institutions Created by Employers; and Grande et Petite Industrie
(pp. 212-215). The "producer's point of view," as differentiated from but in combination with
the "sociological standpoint" quoted earlier in the chapter, is indicative of the essentially Fr/
R-C patronisme. Herbertson, in her account (p. 202), states regarding Le Play and the second
Paris Exhibition (1867): "He was responsible for the addition of the famous Group X, consisting
of 'objects intended to ameliorate the material and moral condition of the working-classes' ";
whence, "The precedent thus set was followed in the Exhibition of 1889, which devoted a
section to Social Economy." Boyd (1900, pp. 419-431) provides a similar description of "Social
Economy, Hygiene, Public Charitable Relief" at the Paris Exposition of 1900. There, "the
exhibits of the Palace of Congress and Social Economy, ... constitutling] grand Group XVI
of the Exposition," were organized in 12 classes labeled as follows: Apprentices-Protection
of Child Workers; Labor and Wages-Profit Sharing; Large and Small Industries-Coop-
erative Associations of Production and Credit-Professional and Trade Associations;
Farming .. . Large and Small ... -Agricultural Unions, Agricultural Credit; Workmen's
Dwellings; Cooperative and Provision Stores; Institutions for the Intellectual and Moral
Improvement of Working Men; Provident Institutions; Public or Private Movements for the
Welfare of the People; Hygiene; Public Charitable Relief (pp. 420-421). Finally, an exami-
nation of the contents of Book Five, "On the Amelioration of the Institutes of Charity and
Welfare," of de Villeneuve-Bargemont's prominent work on Christian Political Economy
(Paris, 1934) will provide a similar notion of this devout French/Roman Catholic's "economie
sociale" in practice (pp. 676a, 409-462); whence, the eminent Bishop Wm. Em. von Ketteler
of Mainz provides a German/Roman-Catholic slant, if one wants, of the church's historical
mission of filling in any void between individual and state in addressing the great "social
question" of the "condition of labour" down through the ages (1864, "The True and Practical
Means of Helping the Working Class," pp. 97-148; 1981, pp. 381-419). These include church-
operated institutions for the unable-to-work laborers, the proper moral and social formation
and empowerment of workers for more efficacious participation in the various cooperative
ventures and laborer associations, and the advancement of the producers' associations
themselves via special means that only Christianity has at its disposal (pp. 138-148). A prime
and living example of the sort of voluntary, social-help institution complying with this Fr/R-
C model are the Societies of St. Vincent de Paul founded (1833) by Frederic Ozanam, first-
positor of the "Social Question" (1836) and early envisioner (along with de Coux, 1836-1840)
of the "social revolution lying beyond the political revolution," and of St. Francis Xavier
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 119

(1840)-the former, to respond to the demands of charity and the latter, to fill in the void
of "any Catholic-worker Society designed for adults" (Durose lie, 1951, Chs. III and V; Williams,
1950, pp. 14-17; and, Nitsch, 1992a, pp. 18-23, 37-48).
6. On the new social corporatism versus the classical state or politico-economic variety
and the role of the Catholic church and Roman Catholic social thought therein, see Pekkarinen,
Pohjola, and Rowthorn, (1992, Ch. 1, especially pp. 1-3; Ch. 2, especially pp. 24-29). Careful
examination might reveal both fundamental similarities and specific differences between this
"neocorporatist" construct and the tripartite FrlR-C (and modified PIM-S) paradigm(s) ad-
vanced here. Thus, focus on corporatism as an economic system and as an objective instru-
ment for understanding and explaining economic performance across countries results in a
certain ostracism of church and religion, with seemingly the sole exception (by A. Guger,
ibid, Ch. 11, p. 344) regarding its "important influence on women's attitude to employment
and family" in Catholic versus Protestant countries. At the same time, the accent on social
(versus state, and so on) corporatism suggests this conception's transcendence over the other-
wise more compartmentalized political and economic focuses, and the integration of the two,
as when "citizens' political rights [are extended} to cover economic activities in order to
achieve social order in industrial and labour relations" (p. 3). Here, it is noted, "Solidarity
is [the} natural concomitant" of the "non-exclusive and egalitarian nature" of social corpo-
ratism. Solidarity in this context is instructively compared with the same of John Paul II in
his LE (1981, #8). The recommendation of the Scandinavian or Nordic-style corporatism to
the favorable consideration of the countries of Eastern Europe in their conversion from
centralized command planning to a market-based system should be compared with the inde-
pendent works of Angresano (1990, 1992, Ch. 13; 1993, pp. 12-18) recommending essentially
the same under the alias of "negotiated economy" as a "viable social economy."
7. Although it is the explicit function of the state to secure "the common good in the
temporal order," this role is subsidiary to that of individuals and lesser bodies promoting
their own interests to the extent feasible; that is, collective action should be conducted at the
minimal necessary and sufficient level (John XXIII, l%lb, #20, 53; 1961a, pp. 406, 414;
whence, Pius XI, 1931a, p. 203; 1931b, #79). On the "spirit of human solidarity ... and bond
of Christian brotherhood" which should guide the "social partners" (alias "workers and
employers") in their mutual dealings, see John XXIII (l%lb, #23; 1961a, p. 407); whence, the
same among workers of different occupations, between labor and capital, and on the inter-
national plane, as per John Paul II (1981b, especially #8, 14, 17-18,20). In both cases, the
official operative term is coniunctio(ne}. The Latinized solidarietas first appears in the Vati-
can II document, Gaudiam et Spes, of Paul VI et al. (1965a, p. 1051; 1965b, p. 231). In respect
to a contemporary, official articulation of !'economie socia/e, attention is called to the "wide
range of intermediate bodies (corpora media)" noted by John Paul II in the conclusion of his
section on "Work and Ownership" (1981b, #14, p. 7b; 1981a, p. 616) along with the "labour
or trade unions" sanctioned anew by the there-reaffirmed "right of association (ius sese
consociandi)" (1981a,b, #20 in.).
8. The closest thing I have as a written source here is my own term paper on "Mercan-
tilism" (Econ. 810, Ohio State University, Fall 1954, Robert D. Patton, Instructor), pp. 3-7.
No doubt the parallels-if not the source-here were the universalism and particularism
noted by Heckscher in his classic on the subject (1955, pp. 33-44).
9. See Gray (1933, pp. 65-73); and Patton and Warne (1%3, pp. 23-26 and Pt. I, passim).
It may be of further interest in the present connection to compare Thomas Mun's classic
remark (Eng/ands Treasure by Forraign Trade 1669, p. 2) that "the Merchant is worthily
called The Steward of the Kingdoms Stock" with Syriac Baruch, 14:17: "You said You would
make for Your world man [as} a Steward of Your Works .. .. " Contrary to Mun's attempt to
120 ECONOMIC THOUGHT AND POLITICAL THEORY

near-deify the merchant and justify his practices was Niccolo Machiavelli's (seemingly largely
successful) effort totally to secularize the social; viz., the political, sphere, whence political
economy. For, with his (originally) De Principatibus (On Principalities or On the Authorities
of the Prince) of 1513 (ed., 1924; trans., 1985) not only was the sovereign (or state) relieved
of any extra- or supra-political concerns and constraints (i.e., was "politics divorced from
ethics"), but the polity would become the dominant or top-side social institution, and, if
anything, religion would become imbedded in politics rather than vice versa. The reality and
durability of this turn of the tables dawned on the present writer when, just recently, the
media were informing how, almost handily, the three governing bodies of the Church of
England had produced the requisite two-thirds majorities approving the ordination of women
into the priesthood, effective pending the approval of the Queen and Parliament. (See Gray,
1931, p. 68; Mansfield, "Introduction," in Machiavelli, 1985, pp. vii, x-xi, xxi-xxii.)
10. The classic treatment of this subject is Gide and Rist (1947-48, pp. 602-618/526-540),
here especially the sections on "Social Catholicism" and "Social Protestantism"-neither one
to be confused with Catholic/Christian socialism-in Book V, Chapter. II, "Doctrines
Inspired by Christianity." On the truly immiserated condition of the working masses-"the
labouring poor, the great body of the people," who must have outnumbered the "rich" by at
least 500:1-and the little that could be expected in the way of solution from state interven-
tion and public relief in Marx's "homoeopathic doses," see Adam Smith, WN, Book. V, Chapter
I (1937, pp. 734-740, 670) and Marx (1883, pp. 365-366; 1954, p. 342). No one chronicled
better than Marx and Engels, of course, the extent to which the legislative and regulatory
measures taken by the British government, for example, failed to achieve even the modest
amelioration sought by Smith in his "obvious and simple system of natural liberty" as it came
to pass in the ensuing century.
11. In this regard and, more particularly, the French scene at the time of Rerum Novarum,
see especially Jannet (1893); also see Nitsch (1990a, pp. 57-58).
12. In the midst of a Mexican farm-workers strike (huelga) in a border area in south Texas
in the later 1960s, the present writer remembers reading the remark of a local priest that he
was ordained to administer the sacraments, not to intervene or take part in any labor dispute.
13. Smith, for some reason which the present writer has not yet established, preferred
"civilized" [sic] over the (then) more usual "civil" (as per Ferguson, 1767, for example)
society. At the hands of the first German translator of the WN (viz., "J.F.S.," National-
reichthuemern, 2 vols., Leipzig, 1776, 1778), Smith's "civilized society (nations)" was usually
rather transliterally rendered "civilisirte Staate (Nationen)"; but, on at least one occasion, we
find "civilized society" (1937, p. 737) translated "buergeliche Gesellschaft" (II, 1778, p. 467),
the rendering of choice of Chr. Garve (trans., Nationalreichthums, 4 vols., Breslau, 1794-1796),
upon which Hegel (according to Hoffmeister) relied in citing Smith in his Realphilosophie of
1803-1804. Yet even with Garve's later version, there is one instance where Smith's "civilized
... nations" (1937, p. Iviii) is simply transliterated "civilisirten . .. Nationen" (I, 1794, p. 3). In
a sense, Garve out-Adams Smith on two significant occasions (Book I, openings of Chapters
IV and VI), by rendering the latter's mere "society" as "civil society," that is, "buergeliche
Gesellschaft," bearing the implication that, in posse, "civil society," like its constituent classes
and their respective shares, always was. The seeds of Hegel's social (and political) philosophy
as found in those lecture-scripts I and II on Realphilosophie (1803-1804, 1805-1806ff.; ed.
J. Hoffmeister, Leipzig, 1932/1931) would grow and blossom into the "System of Needs,"
"buergeliche Gesellschaft," "politische Staat," and so on, which highlight his more renowned
Rechtsphilosophie of 1821 (ed. Hoffmeister, Hamburg, 1955; trans. T.M. Knox, Philos. of Right,
Chicago, 1952). See Nitsch (1982, pp. 21-34; 1983-1984, pp. 30-31; 1985) and Wiser (1986,
p. 1(0).
CHURCH, STATE, AND MARKET: ACCENT ON THE SOCIAL 121

14. As we employ them here, Marx's socialism/communism stage/phase I is accomplished

when the socialist state has succeeded in collectivizing the means of production (property);
stage/phase II, when the state itself and as such has become "aufgehoben." (Marx, "Third
Manuscript" [1844], as in MECW, III, 1975, especially pp. 296-306). Smith's C-S I and II
denote, respectively, (1) the extant "Mercantile or Commercial System" as he detailed it in
Book IV, and (2) his normative "system of natural liberty" qua that same with the visible
hand of the sovereign retrenched and retracted as per the end of Book I and, again, the
"invisible hand [of] free and universal competition" within and between nations prevailing by
virtue of and as supplemented by "the sovereign."
15. Indeed, the present writer has participated in this particular process, as both (1)
contributor to the "Implementation" column in the local archdiocesan newspaper, The
Catholic Voice; and (2) member of the task force that drafted the Archbishop's pastoral letter
on the local economy (see Sheehan, 1991).
16. See Malina and Nitsch (1991b, pp. 42-43). In addition to the two examples offered
in support of this contention (which was challenged from the floor when the paper cited there
[Malina and Nitsch, 1991a] was originally presented), the authors would here like to add the
following: most white Americans-WASPS (White Anglo-Saxon Protestants) and WERCS
(White Ethnic Roman Catholics) alike-will readily admit the responsibility of their fore-
bears for the destruction of the Red Man's or Native People's culture(s) in the "settlement
of the West." However, press the point that it was the RM's or NP's economy(ies) that was
(were) really destroyed in that process, and tempers flare. As a specific example, white men
felled many bison "just to watch them drop"; to the Lakota peoples of the plains, the buffalo
meant food, clothing, lodging, and tools. Truly, in that and many other cases across the con-
tinent, "white economic development spelled red economic destruction"; and, again, "them's
fightin' words where whites come from"! Today, most Native Americans would readily ac-
knowledge that their culture has survived in much better shape than their economy has.
17. See Nitsch (1987, pp. 2-3 and accompanying nn. 7-9; 1992b, pp. 110-112).
18. The church divided in Latin America has manifested itself anew most recently, with
Rome's "emendation" of the "Final Report" of CELAM (Consejo Episcopal Latinoamericano)
IV held in Santo Domingo, Dominican Republic in October 1992. See Hebblethwaite (1993),
whence Rodriguez (1992).
19. See Gregory and Stuart (1992, pp. 464-469), on "Poland: From Plan to Market via
Shock Therapy," for the Polish approach in the present case; the New York Times (1992) item,
whence Schnytzer and Weiss (1992) and Leven (1993), for a couple of opposing "failure
stories" in Poland's transition.
20. Justice has not begun to be done here to the relevant literature, both generic and
specific. Thus, the classic of Dahl and Lindblom (1953) entitled Politics, Economics, and Welfare
(read: power, wealth, and human-social well-being) with its obviously dualist focus, nonetheless
devotes explicit attention to Christianity, religion, and Rerum Novarum, for example, as per
the Index (s.v., pp., 530b, 531a), while Lindblom's more recent Politics and Markets (1977),
of (ostensibly, at least) the essentially same dualistic focus, devotes a chapter to "Preceptoral
'Education' and Moral Incentives" in comparing communism to previously articulated al-
ternative systems (market, political-economic, etc.), and Friedland and Robertson's Beyond
the Market Place (1990) is highlighted and interspersed with attention paid to family and
ideology (in the form of "culture") by the various contributors. Most recently, the contribu-
tions by J.E. Elliott, W.J. Samuels, E. Raiklin, A.N. Rugina, B.S. Clark, L. Armour, and J.W.
Barchfield (in O'Brien, ed., 1992) are most pertinent to the present study especially as re-
gards the reforming social economies of Eastern and Central Europe, both ideologically and
praxeologically. Finally, of particular interest and relevance here is the excellent study by
122 ECONOMIC THOUGHT AND POLITICAL THEORY

Freeman (1989), which, while it does not address the role of religion or the church or other-
wise assumes it politicoeconomically "neutral," inter alia, distinguishes between "pluralist-
private enterprise" (e.g., Britain), "corporatist-mixed" (Austria), "pluralist-mixed" (Italy),
and "corporatist-private enterprise" (Sweden) forms of political economy today.
21. Ronald Reagan (Oct. 15, 1981), as quoted in Newfarmer (1984, p. 182).

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 5 STATE AND MARKET WHEN
COMMAND GOES CAPITALIST
A. Allan Schmid

Countries touting what used to be called command economies have almost

disappeared from the face of the earth. The commitment to markets is
epitomized by an article in the new Romanian Constitution defining Ro-
mania as a market economy and ordering the state to ensure free trade
and protect competition (Gray, Hanson, and Ianachkov, 1992). Is it, then,
the end of history and arguments about choice of economic system? Are
there any choices left? It is the thesis of this chapter that there are op-
tions-and that a failure to recognize them is to narrow those who can
participate in these choices.

State and Market-Dichotomy or Nexus?

The choices most discussed have to do with how state property is priva-
tized (auctions, vouchers, etc.), monetary policy, how fast to abolish price
controls, currency controls, and subsidies, and how much to worry about
monopolies. There are two perspectives on these choices. One might be
called the minimalist state perspective and the other the state-market nexus
perspective. The minimalist perspective expects that the major role of the

129
130 ECONOMIC THOUGHT AND POLITICAL THEORY

state is to (1) put resources into the hands of some private owners as fast
as possible (and never upset their plans by future confiscations); (2) facilitate
trade among these owners by enforcing their contracts; and (3) enforce
competition (although most business agreements can be presumed to be
efficiency enhancing). In this minimalist conception there is a clear dicho-
tomy between state and market (Whynes and Bowles, 1981, pp. 12-13). In
command economies, the state gave the orders; in the market, the people
(consumers) give the orders.
The alternative perspective is not distinguished by the extent of the
state (quantitative involvement), but rather involves the unavoidable nexus
of state and market (Samuels, 1992). There is no market exchange unless
it is clear who the buyer is and who the seller is. But there is much more
to it than the ownership of tangible assets in land, apartments, and fac-
tories implied above. The state is present anytime there is an opportunity
for one person's actions to affect another's, raising the issue of who may
proceed without asking others (i.e., is in a position to hear bids to desist
by nonowners). The policy issue, then, is not whether the state is involved,
but who uses it when interests are incompatible (Schmid, 1989). The in-
compatibility is not sorted out once and for all with title to exchangeable
tangible assets. One question to be explored in this chapter is what is the
relationship between who uses the state (has opportunities or rights to
sell) and the economic development of the nations of Eastern Europe and
the former Soviet republics.

Command and Enablement

What is the difference between detailed central command and the neces-
sarily selective enablement of different interests? The negotiations among
a state firm and the central planners and the party involved both tangible
and intangible property. Firms strived to control tangible resources such as
steel and labor as well as the timely cooperation of other firms providing
inputs and further processing outputs. The state firm became "owner" of
resources and became obligated to perform via the equivalent of contracts
with other firms, all with direction from the state bureaucracy, rather than
bids and offers from legally equal firms.
By contrast, in a market economy the decisions to buy and sell are as
decentralized as the number of owners who choose to participate in a line
of action. But the decision or understanding that all participants have as
to who has what opportunities (who is buyer and who is seller) is central-
ized, collective, and common to the scope of those bound by and playing
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 131

according to the rules. In that sense, all economies are centralized. Even a
farmer offering produce at the side of the road has no buyers if they claim
the resources used to produce it. This is not to say that multilevel govern-
ments are not possible-local, provincial, and national. The state as a
collective process by which rights are learned may be formal, such as the
nation state, or informal, such as a business corporation, university, or
club. The participants may be consciously aware of making a collective
decision or spontaneous and unaware of how their individual choices are
producing a collective result. All of these systems exact certain costs of
entry and exit as they strive to maintain their boundaries. Each may have
a particular jurisdiction, and the connecting nodes continually act on and
define each other.

Conflict, EconomiZing, and Coordination

The property rights or institutional foundations of any economy have three

interacting elements. One is the sorting out of conflicting interests; the
second is the structure of incentives for effort and economizing; and the
third is coordination. In the state-market nexus perspective, the state is
unavoidably present in every transaction. If there is an opportunity for
people to conflict, the state is present. The scope of the state is coterminant
with the scope of human interdependence and answers the questions of
whose interests count when interests conflict.
Command economies, while counting some successes, have not been
successful in eliciting either the full productive efforts of their people or
the vigorous pursuit of economizing. Any social system, including the
economy, rests on arranging psychological reinforcements consistent with
desired activity (and a process for deciding what is desired). Increments of
reinforcement must be predictably associated with increments of effort.
When people learn that they can improve themselves, they work harder.
While command systems do reward those who fill their quotas, the tie of
action to reward seems looser than in market systems. Soviet-type econo-
mies rely more heavily on nonpecuniary reinforcements, and "profits" are
taxed away. The orders of superiors are often personal and capricious
(Litwack, 1991). In addition, there are fewer opportunities to try new
things when workers and managers are preoccupied with the center's defi-
nition of specific performance.
In a command system, it is easy for the center to determine a recipe for
producing a given good, but harder to know the opportunity cost of the
inputs if used by one firm rather than another because of the loss of
132 ECONOMIC THOUGHT AND POLITICAL THEORY

information when communicated from the input user to the center and
back to input producer (Ericson, 1991). It is the bids of other firms that
directly inform the market firm of opportunity costs. Even if the center has
some notion of opportunity cost, it has difficulty giving incentives to the
firms to economize. In spite of the advantages that market systems have
with respect to incentives, Peter Murrell's (1991) survey of the empirical
literature shows only small differences in technical and allocative efficiency
between market and centrally planned countries. This evidence draws our
attention to less dichotomous features of institutional systems. It will be
argued below that market information is itself often bounded and rights
impacted so that performance is affected by a complex meshing of formal
and informal institutions.
The problem for any system to solve involves the incentive to econo-
mize and the definition of economizing and hard work. One can econo-
mize by saving inputs while holding quantity and quality of output constant.
But, for example, if quality is hard for the buyer to measure (information
costs), the incentive to economize is the incentive to reduce and hide
quality. There is also incentive to push lost opportunities off on others.
Use of the environment as a waste sink is a case in point, and observation
reveals that both market and command systems can destroy the environ-
ment. It is the structure of property rights that determine whose oppor-
tunities count and enter into others' calculations of opportunity cost. The
hard work of the thief is not to be rewarded, and it is rights that determine
who is the thief-for instance, is the user of the environment a thief or a
person just using an owned resource? Cost is not just a physical fact of the
production function, but a social fact determined by collective choice.
What of coordination? In the command system, the center tries to visu-
alize the recipe for production and order its implementation. Some claim
that in the market system no one need be aware of the total recipe of all
functions in a marketing chain. Each resource owner need only make an
offer and find acceptance for hislher particular function, thus saving on
information costs, as Hayek has often explained. This is important as far
as it goes. But there is more. Capital must be aggregated; there are prob-
lems of assurance and monitoring; there are questions of remedies for
breach of contract since not all promises should be executed as first con-
ceived; and there are problems of unavoidably incomplete contracts. If the
answers to these questions are not provided by the planner, then each
requires a set of rights that makes the market what it is and distinguishes
one kind of market from another.
Many activities require the capital of more than one person. There must
be some process by which the resources of people who are unknown to
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 133

each other can be pooled. This is part of the task of company law to be
explored below. If the state does not pool resources by command, there
must be rules for the private agreements. The interests of the active man-
ager andlor risk bearer, the passive investor, stockholders, bondholders,
agents and principals, suppliers, and labor are often at odds, and rights
determine who counts.

Coordination and Uncertainty

How are all of these separable and separately owned pieces coordinated?
The simplistic answer is that the market does it. But what is the market?
It is often suggested that it is simply the individual owners negotiating
and making agreements. But complex cooperation does not just happen.
Consider just one instance. The cost of a given activity often depends on
scale. Producer A could lower costs if larger (or if the industry were larger);
Buyer B could go into production only if A were larger and had lower
costs than at present. But A makes no investment waiting for several B's
to grow and make possible a larger demand for A's product. Each waits
for the other. Today's prices don't contain much information on tomor-
row's potential prices because of the interlocked production functions.
Murrell (1991, p. 62) observes that "potential entrants have to formulate
their own general equilibrium model to calculate how expected returns
vary with their own and other agents' entry." In this context, Arrow (1987,
p. 208) adds that "the superiority of market over centralized planning
disappears. Each individual agent is in effect using as much information as
would be required for a central planner." Neither market nor plan auto-
matically solves these coordination problems where there is uncertainty
and economies of scale. We must search for useful mixtures. The volume
of missed opportunities for coordination is difficult to measure since these
opportunities leave little evidence behind except the fact that some nations
seem to get left out.
The problem of excess capacity is the obverse of missed investment
opportunities. Prices today may indicate that a profit is to be made in
product X. A firm makes new investments only to discover when the pro-
duction is on line that a number of other firms made the same decision;
therefore, there is excess capacity, and asset losses occur (Richardson,
1960; Shaffer, 1990). The larger forms of this are called real estate cycles,
or in agriculture the corn-hog cycle, or just business cycles. Another example
of production's missing the mark is when firms stay in place too long.
134 ECONOMIC THOUGHT AND POLITICAL THEORY

Investments are sunk only to be made redundant by changing preferences

or better technologies.
The welfare state is in part a response to the persistent failure of present
market institutions to prevent unbearable losses to immobile assets, both
physical and human. The new market economies have the same instincts
as the old and wish they could afford the "transfers" that the richer states
pay to their citizens left behind. The International Monetary Fund (IMF)
and rich donors insist that the new market states be less merciful and resist
the practice that the richer states themselves have never resisted as they
aid their farmers, coal miners, car and airplane makers. Analytically, the
very concept of transfer payment is rights defined. If redundant resource
owners knew what they know now, they would have demanded higher
returns or assurances before the investments were sunk. If the rights re-
gime had been different, the payments to the redundants would be for-
feited escrow for unfilled expectations rather than transfers. The redundant
would be suing for breach of contract rather than coming with hat in hand
(Beermann and Singer, 1989; Singer, 1988).
The reader might suspect that these examples of under- and overpro-
duction were included to make an argument for central planning again-
which the former Socialist nations have been trying to get rid of. But that
is not the argument here. Rather, it is to remind us that developmental
coordination is not automatic by either command or market.
Property rights relative to coordination can take many forms. In private
market economies when someone disappoints another, it could be the
basis of a court suit. Commercial law is mostly used to encourage actions
consistent with promises (act of commission) rather than to facilitate
agreements that otherwise never happen (act of omission). But that is not
to say that there are not other institutions used and that they are the same
in all market economies. In the German economy the large commercial
banks playa role in coordinating investments via credit and stockholding
both in the sense of getting a series of interrelated investments to come
on line at the same time and to avoid overcapacity. In Japan, the giant
interlinked banks and industrial and distribution firms (Kiertsu) , in co-
operation with the government's Ministry of Trade and Industry, have
had some success in staking out a position of interlinked investments to
develop new products and industries (Thurow, 1992). Could it be that the
former socialist countries will adopt a more primitive form of market
capitalism that cannot compete with the more modern forms that exist
around the world? The German and Japanese systems are not exactly cen-
tral planning, but they are not exactly a system of isolated individual con-
tracts either. Property rights do playa role in whether private quasi-planning
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 135

activities occur. The active role of German banks in corporate development

would be illegal in the United States.

Property and Plan

As noted above, commercial law is more adapted to preventing breach

of contract than failure to contract. Everyone agrees that coordination is
built on the expectation that others' promises will be kept. But it is not
efficient to force all promises to be physically executed. A better use of the
resource may have become evident since the promise was made. The higher
return from breach may allow a Pareto-better solution where the promisor
can be better off while still giving the promisee the value expected. Al-
though this is clear in principle, a lot of legal resources are incurred in
establishing just how much better off the promisee reasonably could have
expected to be.
But the bigger problem is that of incomplete contracts. It simply is not
possible for the parties to know fully what to contract for. And when
it becomes clear later, there is opportunity for one party to gain at the
other's expense. Again, concern about this opportunism may thwart some
potential cooperation. The central planner would try to make adjustments
as events unfolded. The court necessarily plays this role in market econo-
mies as one party sues another. Or can it escape by insisting that it just
executes the original meaning of the contract? But words don't speak for
themselves. As the court searches for meaning, it can ask itself what fair
is and how the resolution of the conflict will affect the path of development
in the future (assuming it does not choose simply in terms of who paid the
judge more). The court, unlike the central planner, does not issue direc-
tives for production quotas and the like, but its decisions provide the
precedent and example by which firms learn to coordinate their actions.
Firms copy successful firms and avoid practices that have resulted in others
losing court suits.

Auctions and Complex Coordination

One theme of the previous discussion might be summarized by saying that

auctions don't go very far in modern economies. In an auction, goods are
already produced and are offered for sale. On the basis of the prices
realized, the producers think again and decide to reallocate their resources
accordingly in the next period. Price contains all the needed information
136 ECONOMIC THOUGHT AND POLITICAL THEORY

in this simple world. The motivating power of auction opportunities can be

seen in the reforms of Chinese agriculture. When farmers were given the
right to work on the land individually, there was a significant increase in
output of vegetables and meat. The farmer could produce more by work-
ing harder, taking the goods to the nearest population center, and making
exchanges on the street. There are few cooperators to be coordinated in
this scenario. But the next stage has been slower. To go beyond working
harder to working together smarter, life gets more complicated. Fertilizer
must be acquired on credit or capital otherwise assembled. The common
irrigation system must be maintained. The needs of processors need to be
matched to farmer capacities. At some point some new varieties are needed
from researchers, and so on. As the interdependencies complicate, the
state is no longer simplistic and apart from the market but inextricably
part of its fabric. A case analogous to the Chinese experience can be seen
in the explosion of retail trading in the former Soviet bloc countries. This
activity is simple and similar to an auction, and thus the property rights
can be simple. This is in sharp contrast to manufacturing where the un-
certainties of coordination have limited new investment.

Development Theory and the State-Market Nexus

Does the system of property rights need implicitly to contain a substantive

theory of development? Or can it simply be procedural-a process of
exchange? In other words, does law matter? One answer is supplied by
Douglass North (1990). His study of economic history leads him to empha-
size rights clarity, no government expropriation of rights once set, and
institutions that lower transaction cost. In this view the substance of the
law is less important than the process. Give the rights to some people
(almost any people), don't change them, and make trade as frictionless as
possible.
The alternative (perhaps supplementary) view is represented by Alex-
ander Field (1991), also an economic historian. He notes that the location
of a right often has income effects and that there are substantial transaction
costs no matter how we try to eliminate them. This means that the sub-
stance of law matters. Who has to buy from whom matters. And it is
unlikely that the direction of bids and acceptances that favors certain sec-
tors at a certain stage and type of economic development will also be
suitable for another stage. This clearly was the case when the law facili-
tated the transition from an agrarian to an industrial economy in the United
States (Schmid, 1992). The idea that law matters is also consistent with the
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 137

theory of Ronald Coase who has made it clear that existence of transac-
tion costs does mean that the location of an exchangeable right affects
what a resource is used for (and that it is critical for income distribution).
With this as conceptual background, let's turn to an examination of
some of the company and contract law now being revised in the former
Soviet bloc countries. Commercial law does not have the popular attention
given to factor ownership questions, but most of these countries are revis-
ing or creating new rules. Can these laws simply duplicate those in the rich
countries? What if all the rich countries don't have the same laws? Does
it make any difference which ones are chosen? Have these laws been
evolving toward the true and the beautiful and thus only need to be copied
for those nations that want to be modern? This conception makes the task
largely a technical matter for lawyers. Or are there alternative substantive
paths to be chosen requiring political resolution of conflicts? There are as
many efficient outcomes as there are property rights distributions. It is
quite clear that distributive choices are being made when land is returned
to former owners or when factory shares are given to former employees
or the general public. It is less clear that distributive choices are made
when the commercial code is being discussed. Even less clear is whether
it makes any difference for the path of economic development. This chapter
is addressed to raising some questions rather than making a case for one
rule or the other.

Company Law

Company law refers to the procedures for forming a company-a grouping

of people with some shared purposes. It includes corporate forms, rights,
and duties of shareholders, including voting rules. Gray and colleagues
(1991, p. 9) observe that "the development of most company law reflects
the constant shifting of protection for various interests, whether the com-
pany, creditors, the investing public, managers, employees, or the national
economic interests of the state." When they address the case of Poland
they opine that "[t]he coming years should witness the natural evolution
of Polish company law as it seeks to protect newly emerging social and
financial interests." What is meant by natural evolution? Since these inter-
ests are not always compatible, is it nature that decides whose interests
count? Is it a matter of just incorporating new interests as they come along
or does the law have something to do with selecting what interests emerge?
The provision that is most easily understood is the granting of permis-
sion to form a company. Poland follows a pattern of countries molded on
138 ECONOMIC THOUGHT AND POLITICAL THEORY

civil law rather than common law and thus requires approval by a notary
and payment of stamp fees. At the moment there are few notaries, and
they receive 3% of equity capital up to 250 million zlotys, plus .01 % of
equity capital over 250 million. Stamp duties are also significant. These
requirements can best be understood simply as taxes and can be evaluated
as any tax.
The consequence of corporate forms offered is a bit less obvious. Po-
land offers two: limited liability company and joint stock company. Both
offer limited liability and require transparency, but differ primarily in
pUblicness. The Polish limited liability company is similar to the French
S.A.R.L. (societe a responsibility limitee), the German GmbH (Gesellschaft
mit beschranker Haftung), and the closely held private corporation in Anglo-
American law. The shares are transferable (so the market is embraced),
but the company's permission may be required (the market is circum-
scribed). The concept here is that in a small company the success of the
business depends on personal relationships and trust among the capital
contributors who are also probably active in management. This relation-
ship could be upset by indiscriminate sale to new unknown stockholders.
Most otherwise market-friendly countries of the world allow this limitation
to the market. Stockholders in a small firm active in its management may
not contribute effort to the firm in proportion to their capital contribution.
So the limited liability company allows voting representation to differ from
capital share. Control may be more concentrated than ownership of shares.
It is judged that the financial condition of the small closely held corporation
is inherently more transparent than a large corporation where many share-
holders have no first-hand knowledge of the firm. Thus, the closely held
firm is not required to have as extensive reporting requirements as larger
public corporations.
The Polish joint stock company resembles the French S.A. (societe
anonyme), the German AG (Aktiengesellschaft), and the Anglo-American
public corporation. The minimum capital requirement is larger than that
for the closely held company above. In most industrial countries, when a
firm reaches a certain size (49 stockholders in France) it must become a
public corporation subject to more stringent financial reporting require-
ments. The common distinction between public and closely held com-
panies is not followed through in Poland who allows both forms to restrict
the sale of stock. Perhaps Poland is anticipating the consequences of un-
friendly takeovers of large firms. Some scholars regard the threat of take-
overs as a performance-enhancing incentive for managers, while others
argue that they induce managerial myopia (Tirole, 1991; Jensen, 1988).
Hostile takeovers were common in the United States in the 1980s but
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 139

infrequent in Germany and Japan. Again, it appears that not all markets
are the same.
Even large firms may need stockholder loyalty to weather the financial
storms of emerging market economies (exit versus loyalty, in Hirschman's
terms-see Hirschman (1970». There will be differences of opinion among
stockholders as to whether the assets are better liquidated or should be
held for expected better days. Some countries may want to make it harder
for unfriendly takeovers so that the going concern in temporary trouble is
preserved, while others may feel that the greater danger is hopeless firms
who carry on too long.
Interest-bearing corporate shares are not allowed in Poland and most
Western countries. However, they are allowed in Hungary and the former
Czechoslovakia. The Polish rule means that those who want the extra
security of interest obligations can't be voting stockholders. Recall that
German and Japanese banks are large corporate stockholders as well as
holders of interest-bearing securities and thus participate more fully in
corporate policy. Gray and associates (1991, p. 11) argue that "interest
bearing shares might prove useful in countries trying to encourage private
ownership of companies by an inexperienced and risk-averse population."
This is a case where Hungary and the Czechs have not followed modern
Western practice, but have chosen a set of rights that they judge to fit their
circumstance better.

Corporate Governance

Articles of association and shareholders agreements are the place where

founders indicate something of their decisions on the form of corporate
governance. The questions most commonly addressed are rules of voting
and quorums at stockholder meetings. But perhaps more important is the
internal organization of the company. The literature comparing business
organization in the United States and Japan reminds us that coordination
of the factors involved in a business can be quite different among countries
that are equally committed to markets (Ouchi, 1981; Aoki, 1990). The fact
is that much of the coordination is inside firms and nonmarket, though not
necessarily hierarchical. There are many choices to be made with respect
to organization by products, functions, or regions, a process that has parallels
with the organization of the central planning agency. Alfred Chandler's
(1977) study of economic history suggests that organization or structure of
the firm follows the choice of business strategy. Strategic innovative deci-
sions to develop technology and new markets change the firm's economic
140 ECONOMIC THOUGHT AND POLITICAL THEORY

environment and require different internal organization than the merely

adaptive firm searching for cost-effective ways to deploy its resources for
known technologies (Lazonick, 1991; Storper and Walker, 1989).
Much of the choice of firm organization is not related to formal law.
But some of it is particularly as it is affected by the administration of anti-
trust law. Historically, the long-time U.S. prohibition of one corporation's
holding stock in another had a lot to do with the organization of
multifunction firms (Horwitz, 1992, p. 83). This is an area that deserves
further inquiry under current conditions existing in the former Soviet bloc
countries.
In the former Soviet bloc countries corporate governance has focused
on the participation of labor. Swaan and Lissowska (1992, p. 32) argue that
self-management in Poland affected the behavior of management. "In order
to avoid any conflict both with the worker's council and with the author-
ities, managers preferred to refrain from any initiative on the market and
to concentrate upon bargaining with the authorities." However, they ob-
serve that the enterprise councils in Hungary were an impetus for behavioral
change, and they attribute the difference not to formal laws but to legiti-
mization and trust at the national level.
It is interesting that in Yugoslavia where worker participation was most
developed, the idea is now virtually abandoned in private firms in Slovenia
(Gray and Stiblar, 1992). Worker participation in management was de-
bated but omitted from their new constitution. It is doubly ironic that this
is probably rooted in a desire to be like the West, although German law
requires worker participation in corporate boards. Again, are the former
socialist countries going to revert to a more primitive form of capitalism?

Bankruptcy and Capitalism

Capital markets are secured by interests in real property. Mortgage lending

commonly requires that title be given up if the loan is defaulted. It would
appear then that the former Socialist countries must learn to accept the
jobless, the homeless, and the landless in the name of progress. Mistakes
are inevitable, and many will be beyond the fault of the individual par-
ticipants in the newly emerging market economies. Gray, Hanson, and
Ianachkov (1992, p. 14) opine that "[f]oreclosure on the property-and
thus the possibility of eviction-will become a necessity if truly private
mortgage lending is to emerge. This will clearly take a major change in
attitude as well as a rethinking of the legal framework for eviction and
foreclosure." Maybe this is the end of history, and capitalist institutions
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 141

have reached the zenith of accomplishment. Then again, maybe not. As

noted above, these failures are part of the seedbed for the welfare state
(and in fact were the seedbed for communism). Some institutional creativ-
ity is sorely needed if this institutional cycle is not to be repeated.

Contract Law

The inexorable state-market nexus is clear in the choice of what contracts

to enforce. The state may not avoid the choice of where to place its
sanctions. Are some private agreements unworthy of being enforced? For
example, in the United States, a real estate contract discriminating on the
basis of race will not be enforced. It may be agreed to between buyer and
seller, but other parties feel aggrieved. As in all rights, the issue is who can
participate in a transaction. If all agreements are to be supported, the
effect will cancel other areas of substantive law that are the vehicle for
third party rights. For example, a contract might release a firm from charges
of negligence with respect to the safety of its workers or consumers. In the
abstract it sounds good that the state should not second guess the agree-
ments of its citizens, but the unavoidable issue is which citizens count. The
Hungarian civil code embraces the rule of laesio enormous, and the court
is required to weigh the substantive fairness of all contracts. American
common law was once similar (Horwitz, 1977). Has American law evolved
to the apex of truth and beauty worthy of emulation by all, or should each
nation ask what it wants to make of itself and if its needs at the beginning
of its capitalist experience are different than the already rich nations?
Inequality of bargaining power is one of the problems in contract en-
forcement. Are these inequalities greater in the former Soviet bloc than in
the contemporary industrialized countries? The perceived fairness of the
application of state power may be part of the equation adding to legitima-
tion of the state. Even in the richer countries there are debates about
contracts of adhesion, and German and United Kingdom laws differ from
those in the United States. Many contracts are not really negotiated item
by item. Rather, the bigger, more powerful party offers a take-it-or-Ieave-
it contract. Shall the state then enforce these contracts? Daniel Ostas (1992,
p. 520) argues that these are vital matters for public policy and that the
"Hungarians and Poles must determine for themselves the degree to which
the state will support one-sided exchanges." He dramatizes the point by
saying that adhesion contracts look a lot like a contract under central
planning-namely little choice on one side. He further notes that the lan-
guage of contracts may be different from everyday customary terms, and
142 ECONOMIC THOUGHT AND POLITICAL THEORY

if the courts enforce the express legal language with regard to privately
drafted penalty clauses, repossession clauses, and warranty disclaimers,
the effect may be very one sided.
Contract law technically refers to what agreement prevails if the par-
ticular matter is not explicitly described in the contract. So if the parties
did not think to address some issue that later turns out to be crucial, the
court supplies the provision according to custom, precedent, or code.
Consider the case of partially performed contracts. Until 1930, U.S. courts
did not enforce these contracts (Horwitz, 1992). Has the United States
now found the truth to which others must move or was there some func-
tional reason for this practice at the time or did it represent a political
choice between competing interests that changes over time as different
groups get control of government? Suppose that a firm has agreed to pay
a certain sum of money on a given date but that the other party has only
partially delivered the promised good. If the firm is forced to pay and then
counter-sue for delivery, it may be bankrupt before the sequence is com-
pleted. Many observers of Eastern Europe note that legal resources are
scarce, but little attention has been paid to whether this fact has implications
for the substance of law. It may be better not to enforce one side of an
agreement if the other side cannot also be enforced with speed. It can be
imagined that the needs of start-up firms of timid entrepreneurs may
be different than large, foreign-financed firms. And the needs may also
be different where risks can be spread to third party insurers than when
some equitable distribution of the costs of unfillable promises is needed to
keep both parties going. Going concerns should be husbanded in fledgling
market economies with poorly developed insurance markets among other
things.
The trend in the United States is to place less reliance on the courts
supplying missing provisions to contracts. On the one hand, firms buy
more legal resources and try harder to cover everything in the contract.
This may not make as much sense where these resources are very scarce
and particularly not available to new firms. If start-up firms cannot have
some faith that unforeseen events that were not covered in a contract will
not be settled in a fashion to share the costs, it may be part of the picture
of new enterprises that never happen.
On the other hand, firms that develop long-standing and continuing
exchange partners neither rely on contracts nor resort to the courts for
formal adjudication of unforeseen problems. They work them out amic-
ably so that the business relationship continues. To win a big settlement
and lose the continuing customer is bad business. This becomes part of
the business culture, but it can be expected to be in lessor supply in new
STATE AND MARKET WHEN COMMAND GOES CAPITALIST 143

market economies. So the details of contract law may be more important

there than in mature capitalist countries.
While this chapter has emphasized formal law, custom and business
culture are equally important institutionally. There are many problems in
coordination that cannot be handled well by any explicit public policy and
law (Swaan and Lissowska, 1992). Consider an unsolved coordination
problem even in the United States. The warehousing of goods would be
much more efficient if pallet size were standard. For pallets to be of stand-
ard size has implications for the size of boxes a firm uses to ship its prod-
ucts. Supposedly, this was the kind of problem that central planning was
designed to solve. But the record is not good. Great differences exist among
industries with respect to their ability to solve these coordination problems
involving the development of new technologies. Formal law and govern-
ment encouragement may help, but informal custom and culture dominate
these collective actions. More research is needed to understand if these are
just random events or whether their evolution can be enhanced.

Conclusion

Theory and observation suggest that the state-market nexus perspective is

the most useful way to describe the historical evolution of capitalist
economies and explore the options in the contemporary transitions under
way. Informed choice of the legal foundations of a market economy re-
quires a theory of development (answering the question of whose interests
contribute the most to where a nation wants to go). Thus it is a matter of
political choice, not just a matter of technical economics or law. There are
plenty of choices to be made even after privatization is complete. The
leading market economies are not all alike, and their further evolution
may well be affected by the new market economies if they do not become
entombed in a primitive capitalism long abandoned by the leaders.
History is not complete. Major ideologies still divide both academy and
politics. Some are convinced that the lesson of the Soviet experience is
that all must "abandon the Faustian urge to control, to know in advance,
and thus to allow economic outcomes to arise naturally as the unpredict-
able consequences of market interaction" (Ericson, 1991, p. 26). To label
something as natural has provided psychic balm for many for centuries.
But what is natural? Is it s/he who can grab an opportunity with little
collective help other than that of clan and kin? Does it look like the
Mafia? Many former Soviet bloc citizens suspect that all private firms look
a lot like the Mafia. Yes, let it happen. Social science knowledge of causality
144 ECONOMIC THOUGHT AND POLITICAL THEORY

will always be limited. But we can proceed less blindly. Some undesirable
things that can happen can be blunted by some conscious, deliberative
collective choice, and some other things need a particular type of collec-
tive help if they are to happen at all. Our ideological perspective will still
play a role in who chooses the legal foundations of the market.

Acknowledgments

I want to thank James Shaffer, Warren Samuels, and David Reisman for
stimulating my thinking on this chapter.

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 6 SCHUMPETER AND
CAPITALISM IN AN ERA
OF TRANSITION
David Simpson

Introduction

In this chapter I propose to assess the validity of J.A. Schumpeter's pre-

diction of the gradual extinction of capitalism in the advanced countries,
to be succeed by a form of socialism. Whereas the conventional wisdom
has it that this prophecy, like so many other economic forecasts, has proved
to have failed, I shall argue that his predictions and the reasoning behind
them, while not correct in every detail, seem to have every chance of being
proved correct. This is all the more remarkable when it is remembered
that these predictions were made more than 50 years ago. The first edition
of Capitalism, Socialism and Democracy was published in 1942 in the middle
of the Second World War.
The central message of the book was a simple one: that capitalism, as
a system of economic and political organization, carried within itself the
seeds of its own destruction. Capitalism was doomed to fail, and the symp-
toms of decline were already visible in the economic and political systems
not only of the United Kingdom but also of the United States. The suc-
cessor state to capitalism would be some form of socialism.
This message did not arouse a great deal of interest at the time. Leading

147
148 ECONOMIC THOUGHT AND POLITICAL THEORY

professional economists were still dazzled by the bright intellectual lights

of The General Theory. Schumpeter found that not only his two-volume
1939 work Business Cycles, on which he had lavished so much scholarly
effort, was apparently rendered redundant by the The General Theory. The
same book also overshadowed his Capitalism, Socialism and Democracy.
The General Theory appeared to offer an operational plan for saving cap-
italism, and with it democracy, while the Schumpeterian prediction had
undertones of historical inevitability which were perhaps uncongenial to
the Anglo-American mind.
As Haberler has pointed out (Haberler, 1981), Schumpeter must have
gained some satisfaction from Keynes' posthumously published article
(Keynes, 1946), in which he recommended that "the classical medicine" be
allowed to work, that is, that the recession be allowed to run its course.
Had he been alive today, Schumpeter would have been able to take even
more satisfaction from the apparent unwillingness of the governments of
the advanced countries to adopt Keynesian policies to cope with the cur-
rent recession, which in the United Kingdom is the longest recession since
the Great Depression. Schumpeter would have felt that this fell into the
category of "a remedial recession," that is, one that was necessary in order
to compensate for previous errors and to provide a basis for future sus-
tainable developments. In the words of the contemporary British prime
minister, the pains of a recession are "a price well worth paying" (Singer,
1993).
Now, however, with the general recognition of the inappropriateness of
Keynesian remedies for the ills of the mixed economy, or fettered capital-
ism as Schumpeter would have called it, there has been a revival of schol-
arly interest in Schumpeter's work (Swedberg, 1991; Marz, 1991; Allen,
1991). Some of these studies dwell as much on the author's life as his work;
no one who wants to complete his or her understanding of the character
of Schumpeter should neglect the memoir by his Harvard colleague and
fellow countryman, Gottfried Haberler, published only a few months after
his death (Haberler, 1950).
The essence of Schumpeter's vision about the breakdown of capitalism
that is set out at length in Capitalism, Socialism and Democracy can be
conveyed in one sentence from page 61 of the book:
The thesis I shall endeavour to establish is that the actual and prospective
performance of the capitalist system is such as to negative the idea of its break-
ing down under the weight of economic failure, but that its very success under-
mines the social institutions which protect it, and "inevitably" creates conditions
in which it will not be able to live, and which strongly point to socialism as the
heir apparent (Schumpeter, 1942).
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 149

Fourteen years earlier Schumpeter had put forward the same idea:
Capitalism, whilst economically stable and even gaining in stability, creates, by
rationalising the human mind, a mentality and style of life incompatible with its
own fundamental conditions, motives and social institutions, and will be changed,
although not by economic necessity and probably even at some sacrifice of
economic welfare, into an order of things which it will be merely a matter of
taste and terminology to call socialism or not (Schumpeter, 1928).

It is significant that the author places the word "inevitably" in the first
passage within quotation marks.
Schumpeter was much too wise to accept the doctrine of historical in-
evitability. This feature distinguishes his work from that of Marx. Schum-
peter was careful to emphasize that his predictions amounted to no more
than pointing out historical tendencies that could be arrested or even
reversed. In general, he was skeptical of the ability of economists (or
anyone else, for that matter) to predict the future:
An economist can no more foretell the future than can a doctor say when one
of his patients will next have a road accident, and what his injuries will then be.

From the first two passages above it is clear that Schumpeter followed
Marx not only in believing that capitalism will eventually be replaced by
socialism but also that this change would be brought about by factors
endogenous to the capitalist system itself. But whereas, in Marx's case,
capitalism would disappear in an abrupt and violent collision of economic
and political forces, Schum peter had a very different vision. There would
be a steady and gradual decomposition of pure capitalism, "a quenching of
capitalist attitudes and institutions." Of course, the concept of pure cap-
italism is an abstraction. No historical circumstances ever fit that descrip-
tion exactly. Even at one moment in time, there are different patterns of
capitalism (Albert, 1991).
According to Schumpeter, the most important factor in the decline of
capitalism is the decline in the motivation of the entrepreneur, the hero of
the early stage of pure capitalism. The modern business corporation, itself
a product of the capitalist process, "socialises the bourgeois mind." The
modern corporation executive acquires something of the psychology of a
salaried worker employed in a bureaucratic organization.
Meanwhile, the increasing size of firms undermines the concept of
property or of freedom of contract. The figure of the working proprietor
of a firm, characteristic of early capitalism, has simply disappeared from
the contemporary mixed economy. The contract of employment, which
once involved a personal link between two individuals, has now become
150 ECONOMIC THOUGHT AND POLITICAL THEORY

stereotyped, bureaucratic, and impersonal. In Schumpeter's words, "the

capitalist process takes the life out of the idea of property."
An increasing size concentration of firms also means that the political
attitudes of society are profoundly changed by the elimination of a host
of small and medium-sized firms. Schumpeter anticipated that the mixed
economy, or "operating the capitalist economy in the labour interest," as
he put it, could not be sustained in the long run. It had the disciplines of
neither the competitive forces prevailing in the traditional capitalist mar-
ket economy nor the sanctions of a Soviet-style planned economy. Com-
petition within a pure capitalist market economy eliminates all activities
that no longer have an economically useful function. Such redundant
activities are eliminated by decree in a planned economy (if and when
they are recognized). But in a mixed economy, it is frequently possible for
those who have a vested interest in uneconomic activities to use the demo-
cratic political process to protect and thus to perpetuate such activities.
In the absence of incentives or sanctions, the mixed economy would
therefore have to rely on self-denial or at least self-restraint on the part of
those taking part in the economic process. Individuals would have to act
in the interest of the economy as a whole rather than in their own material
self-interest. It would therefore appear unlikely that the mixed economy
could survive for long as a viable form of economic organization. With an
increasing proportion of uneconomic activities, the pressures for change
would become irresistible. Thus Schumpeter anticipated that there would
be a gradual transition of the mixed economy toward a state of greater
government control and regulation which he would call socialism.
Many of those who read Capitalism, Socialism and Democracy when it
first appeared mistook Schumpeter for a Socialist. Haberler says that this
mistake was made even by the editor of the German edition of the book
(Haberler, 1981). Other defenders of capitalism criticized the author's
attitude as defeatist. In the preface to the second edition of his book,
Schumpeter replied: "I deny entirely that this term (defeatism) is applica-
ble to a piece of analysis ... the report that a certain ship (capitalism) is
sinking is not defeatist. Only the spirit in which this report is received can
be described as defeatist. The crew can sink down and drink. But it can
also rush to the pumps" (Schumpeter, 1950, p. xv).
Elsewhere in the book Schumpeter is discussing industries in the United
Kingdom that could be socialized without serious loss of efficiency. At the
bottom of the list is agriculture. Schumpeter writes:
If he (the socialist) insists also on nationalising land-leaving, I suppose, the
farmer's status as it is-i.e., transferring to the state all that remains of ground
rents and royalties, I have no objection to make as an economist.
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 151

To this statement, however, he adds the following footnote:

This is no place for airing personal preferences. Nevertheless I wish it to be
understood that the above statement is made as a matter of professional duty and
does not imply that I am in love with that proposal which, were I an English-
man, I should on the contrary opposed to the best of my ability (Schumpeter,
1950, p. 231).
It is not difficult to find the origins of Schumpeter's vision of the individu-
alist economic order and its counterpart, the democratic political system,
as being doomed to be succeeded by the interfering collectivist state.
According to Samuelson (1981), Carl Menger, the founder of the Austrian
school, had become convinced that capitalism was dying. This conclusion,
says Samuelson, accounted for the scholarly sterility of the last 25 years of
Menger's life.
It is interesting to speculate to what extent Menger's views concerning
the demise of capitalism were influenced by his environment. Vienna at
the turn of the century was a city of extraordinary social, cultural, and
political change. The election of a socialist mayor in 1987, who took into
municipal ownership the tramways and electric power and gas companies
of the city, and the assassination of the Empress Elizabeth in 1898, seemed
to portend growing instability. These changes were mirrored in the cul-
tural and intellectual life of the city. Among the notable creative spirits in
the cultural ferment of the period were the psychologist Freud, the painter
Kokoschka, the composer Schoenberg, and the dramatist Kraus.
Menger passed on this pessimistic vision to the later members of the
Austrian school. Both Schumpeter and Hayek, as well as von Mises, ab-
sorbed the implicit belief that capitalism was on the brink of destruction.
Each of them reacted to this message in different ways. In 1927 Mises
wrote surely the most intellectually devastating assault ever mounted on
socialism (Socialism, 1951), while Hayek spent most of the later part of his
life analyzing the functioning of capitalism, highlighting in particular its
beneficial aspects. He also wrote a polemical warning (Hayek, 1944) about
the dangers of postwar socialism. This book stressed the socialist roots of
Nazism, but it was an unfashionable view and the book was received with
an embarrassed silence. Schumpeter was much more detached: Capitalism,
Socialism and Democracy represents a careful analysis of the reasons for
what be believed was the forthcoming decline of the capitalist system.
Superficially, Schumpeter's analysis resembles that of Marx, and he never
disguised that part of his thinking that he owed to Marx. However, as we
shall see, Schumpeter's analysis of the demise of capitalism was based on
reasons entirely different from those of Marx. In Schumpeter's vision,
capitalism is destroyed by its success, not its failure. The most important
152 ECONOMIC THOUGHT AND POLITICAL THEORY

element in its destruction is the spread of rationalism. Capitalism would

end not with a bang but a whimper, with the transition to socialism being
so gradual that it would be impossible clearly to mark the boundary of the
passage from the former state to the latter.

Reasons for the Decline of Capitalism

Pure capitalism can be defined as an economic system characterized by

the private ownership of capital, the division of labor, the allocation of
resources by the market, and the minimum of government intervention.
In such a system, according to Schumpeter, competition takes place prin-
cipally through the medium of innovation. Innovation is something brought
about by competition between entrepreneurs. The driving force of compe-
tition that causes entrepreneurs to innovate is not just the prospect of
profit, but the threat of loss arising from the actual or potential innovative
behavior of rival entrepreneurs. Schumpeter is careful to emphasize that
it should not be supposed that innovation takes place by employing means
of production which are previously unemployed. While this is possible, it
is not the essence of the phenomenon. Innovation means simply putting
existing factors to work in different ways.
The fact that innovation requires the bidding away of existing resources
from their employment in other firms is one reason why competition through
innovation is quite disruptive. Another reason is that specific forms of
capital and labor with highly specialized skills rendered redundant by rival
innovations elsewhere do not easily migrate to more successful firms and
industries, as assumed by neoclassical theory. The value of such capital is
more often destroyed, as, for example, after the switch in demand for
transport services from railways to cars and airlines. In the case of specific
labor skills, competition incurs significant economic costs such as the costs
of unemployment and retraining as well as that of job search. Thus the
typical path through time of the capitalist economy is not a smooth one,
but is marked by periodic upheavals at the level of the firm and, less
frequently, the industry, and by irregular fluctuations in the economy as a
whole. Schumpeter's metaphor of a "perennial gale of creative destruc-
tion" is well chosen and contrasts strongly with the moving equilibrium
depicted by steady-state growth theory.
In Capitalism, Socialism and Democracy, Schumpeter explains the
mechanism according to which, in his view, pure capitalism would gradu-
ally give way, through an intermediate stage of controlled or fettered cap-
italism, to an economic system wholly controlled by government, which
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 153

could be called socialism. Unlike Marx, Schumpeter made control and not
ownership the test of socialism.
Increasing government control would take three main forms, accord-
ing to Schumpeter: the growing regulation of business activity, increasing
levels of taxation, and widening public ownership. Three further features
distinguish the process of transition: an increase in concentration of the
ownership of property (with a concomitant shift in political attitudes),
the withering of the entrepreneurial function, and the growth of an anti-
capitalist mentality.
Under pure capitalism, the Schumpeterian entrepreneur has a number
of identifying features. He is moved by the desire to found a family for-
tune; therefore, he is content to take a long view of the required return on
investment. He may also be moved by the creative satisfaction that comes
from getting things done, and by the desire to prove himself superior to his
competitors. He is possessed of an aptitude, entrepreneurship, that is
distributed rarely among the population, like a talent for singing. He will
typically launch a new firm, controlled by himself, as the vehicle for intro-
ducing an innovation. What distinguishes the entrepreneurial function from
all others is that the entrepreneur innovates.
However, with the continued evolution of capitalism, the function of
innovation and with it the role of the entrepreneur are expected to change.
Innovation would become a routine function, carried out by existing com-
panies, not new firms. The individual entrepreneur would gradually become
extinct since his function would increasingly be performed by committees
operating inside large firms. As the function of the entrepreneur becomes
redundant, his or her social status would decline: so, too, would that of the
whole bourgeois class. Not only would the function of innovation become
routinized in this period of fettered or controlled capitalism; so, too, would
the function of invention. These changes would, in Schumpeter's view,
follow from the gradual extension of what he called "the range of the
calculable" as capitalism progressed.
These were, and are, bold predictions. Have subsequent events shown
them to be correct?
In 1981, in approaching the 40th anniversary of the publication of
Capitalism, Socialism and Democracy, a small number of distinguished
scholars conducted a reappraisal of this work (Heertje, 1981). Running
through most of the diverse contributions was the implicit assumption that
Schumpeter's prediction of the decline of capitalism had been falsified.
The survival, indeed the flourishing, of capitalism in the postwar period
was a fact so much taken for granted that it seemed unnecessary to spell
it out.
154 ECONOMIC THOUGHT AND POLITICAL THEORY

Ten years further on, with the complete collapse of socialism in the
Soviet Union and in Eastern Europe, and with all forms of socialism ap-
parently in retreat throughout the world, whether in the developing coun-
tries or in Scandinavia, such predictions seem even more unrealistic, perhaps
even absurd. However, as we shall see, there is still a case to be made in
favor of Schumpeter's prediction.

The Decline of Capitalism

Consider four principal dimensions or yardsticks by which the metamor-

phosis of capitalism into socialism might be measured. They are: (1) the
ownership of the means of production; (2) the organization of the economy;
(3) the distribution of income; and (4) values and culture.

The Ownership of the Means of Production

From the standpoint of pure or classical Marxism, ownership is the most

important, indeed the only, acceptable criterion of progress toward social-
ism. While various forms of guild socialism, cooperative forms of owner-
ship, and even municipal socialism were not only preached but actively
practiced in many of the advanced countries in the nineteenth and twen-
tieth centuries, the orthodox Marxist position that socialism was to be
equated with state ownership of all productive assets was never seriously
challenged in countries that actually professed themselves to be socialist.
The single exception to this rule was Tito's Yugoslavia, a deviation which,
while legitimized by references to the textual works of Marx and Lenin,
owed its existence in part to the particular historical circumstances in which
the communist state in Yugoslavia came into existence, and in part to the
personality of Tito himself. In principle, as opposed to practice, the pri-
macy of state ownership as the sole criterion of socialism was, of course,
the subject of the interminable debates to which socialist intellectuals in
the Western countries were addicted.
Marx believed that ownership of productive capital in an advanced
society would pass overnight from private ownership into the hands of the
state, acting on behalf of the working class, during a violent political revo-
lution. Schumpeter had an entirely different vision of this transition, in
which the question of ownership played a lesser part.
We may note with the advantage of hindsight that Schumpeter was
surely right to play down the significance of ownership. When operated at
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 155

arm's length, as in the case of British Petroleum, some French banks and
insurance companies, and some Italian industrial companies, state-owned
concerns have not differed significantly in behavior and performance from
their privately owned counterparts. In most cases, of course, governments
and parliaments in the Western world have been unable to resist the temp-
tation to interfere in the operation of state-owned companies, with conse-
quences that have been all too apparent.
Nevertheless, it must be acknowledged that, using the orthodox Marxist
criterion of private versus state ownership, the progress toward socialism
that seemed to characterize most, if not all, of the advanced countries in
the 35 years after World War II, began to be reversed in the 1980s. Pri-
vatization has become a world wide phenomenon, spreading from the
advanced to the developing countries in much the same ways as the Social-
ist message had done in the immediate postwar era. Therefore, if the
proportion of productive assets owned by the state is to be the criterion of
the extent to which a given country has passed from capitalism to social-
ism, then there can be no doubt that Marx was wrong. But while Marxists
have to accept this measure, Schumpeterians do not. Schumpeter clearly
attached little importance to the question of the ownership of productive
assets per se. For him, the key issue was that of government control over
the private sector of the economy.

The Organization of the Economy

The centrally planned economy is the characteristic form of economic

organization associated with classical or Marxist socialism. One can justify
this statement, not in terms of textual authority or philosophical argument,
but by reference to the actual practices of states that professed themselves
to be socialist. Once again, Yugoslavia was the exception.
To the Marxist, therefore, a second yardstick by which an economy
could be said to have progressed toward socialism was the extent to which
its economic activity was centrally planned.
To Schumpeter, again, a movement to a planned economy, although
probable, was of minor importance. Instead, capitalism would gradually
be suffocated under a widening and thickening blanket of regulations and
taxes, responding to the political demands, via the democratic system, of
interest groups, notably the trade unions.
There was plenty of evidence to be found in the first half of this century
in support of his thesis, not only in the United States and the United
Kingdom but in the other leading industrialized countries as well. Even as
156 ECONOMIC THOUGHT AND POLITICAL THEORY

late as the mid-1970s in the United Kingdom, it might have been argued
that Schumpeter's predictions had a degree of plausibility.
But in retrospect it seems that the tide began to tum in the late 1970s,
and that the postwar trend to ever more controlled and taxed market
economies began to be reversed with accelerating rapidity in the 1980s.
The counter-revolution in favor of the free market, led simultaneously by
Mrs. Thatcher in the United Kingdom and President Reagan in the United
States, was a program composed primarily of removing state-owned com-
panies to the private sector (in the United Kingdom) and of deregulation
of previously regulated markets, notably the airline industry (in the United
States), while in both countries a program of lower rates of income tax was
enacted. In the case of the United Kingdom, statutory reductions were
also made in the lawfully permitted powers of trade unions.
The type of program stated in these two countries has significantly al-
tered the characteristics and behavior of the two economies concerned. It
has unleashed previously restrained spirits of enterprise, resulting, at least
in the United Kingdom, in discernible improvements in productivity growth.
At the same time negative results have emerged such as increased market
volatility, leading to large-scale unemployment and a growing inequality in
the distribution of income.
Most important, the British and American programs of privatization
and deregulation have been widely imitated not only throughout the rest
of the industrialized countries but also in the developing countries and,
most dramatically of all, in the countries of Eastern Europe and the former
Soviet Union. In the latter countries, those living examples of Marxist
socialism, the overthrow of the political dictatorship of the Communist
party has been accompanied by a program of selling state-owned industry
into private hands, and the replacement of the planned economy by the
free market as the principal method of allocating national resources.
In these circumstances, how can it be seriously argued that Schumpeter's
predictions have any validity?
Leaving aside for one moment the question of the permanence of the
Thatcher-Reagan counter-revolution in the advanced countries, it can
readily be conceded that the changes in the developing countries are both
desirable and unlikely to be reversed. But it is the advanced countries on
which Schumpeter was focusing his attention. It may be conceded for the
purposes of argument that there has been a tendency within the last dec-
ade to abolish many forms of regulation and control in advanced market
economies. But what of taxation? Here the case for Schumpeter is strong.
The chronic federal deficit in the United States is common knowledge.
It is also well known that the size of the deficit mounted rapidly during the
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 157

years of the two Reagan administrations. A similar phenomenon can be

seen in most of the advanced countries. Governments everywhere are
wrestling with actual or potentially chronic budget deficits, arising from an
apparently insatiable demand on the part of their populations for the free
or subsidised provision of welfare services, notably pensions, but also
medical care, educational services, and unemployment, and other forms of
social security benefits. At the same time, there is a deep reluctance to pay
the taxes necessary to fund such services.
Until World War I, as Drucker points out, no government in history
could obtain more than about 5% or 6% of the national income of its
people through taxation (Drucker, 1993). But the growing monetization of
the economy that came with industrialization and the development of
international money markets meant that by World War I even the two
poorest participants could tax and borrow in each year more than the total
annual income of their respective populations. There no longer seemed to
be any limits to the amounts that government could tax, borrow, or spend.
And, using taxes and expenditure, the government of the modern state
could, above all, redistribute personal incomes.
In his 1918 paper, "The Crisis of the Tax State" (Schumpeter, 1954),
Schumpeter was the first economist to point out the implications of these
possibilities. In particular, he pointed to the danger of the demand for
public expenditure outrunning the willingness or the ability of society to
pay for it. This could lead to a crisis:

If the will of the people demands higher and higher public expenditures, if more
and more means are used for purposes for which private individuals have not
produced them, if more and more power stands behind this will, and if finally
all parts of the people are gripped by entirely new ideas about private property
and forms of life-then the tax state will have run its course and society will
have to depend on other motive forces for its economies and self interest
(Schumpeter, 1954, p. 24).

By "the tax state" Schumpeter meant what he would later call fettered
capitalism.
Of the many weaknesses that afflict the mixed economy of the present
day, the insatiable demand for government spending is surely the most
threatening.
It is a far more serious threat than the chorus of anti-capitalist senti-
ment which, at the time of writing, is rising once again, having been appar-
ently silenced during the later Thatcher years. Will this chorus of criticism
survive the recovery from the recession? My guess is that it will. The
quality of modern life in the mixed economy has deteriorated so much that
158 ECONOMIC THOUGHT AND POLITICAL THEORY

it cannot be repaired with the sticking plaster of another temporary boom

in output. Whatever satisfaction that may be derived from increasing
quantities of consumer goods cannot compensate for the negative features
of increasing inequality, congestion, and pollution that characterize daily
life in the cities of the advanced countries. Nevertheless this dissatisfaction
is unlikely to be critical.
Much more likely to accelerate the demise of the capitalist system, even
in its fettered form, is the probable failure of governments in democratic
countries to satisfy the demands of their citizens for health, medical care,
and educational services as well as social security benefits. Since the wish-
list is open-ended, the demand is, in principle, infinite.
It was precisely this dragon that Mrs. Thatcher and President Reagan
set out to slay. They failed. The statistics show that for the seven leading
industrialized countries in the world, every one, with the exception of the
United Kingdom and Germany, experienced an increase in the ratio of
government expenditure to GDP between 1979 and 1989. By 1992, both
Germany and the United Kingdom had exceeded their 1979 ratio.
Apart from privatization and deregulation, what was mainly achieved
in the 1980s in the United States, United Kingdom, and elsewhere was a
reduction in income tax rates (although not the overall tax burden since,
especially in the United Kingdom, the burden of indirect taxes rose). But
that was the politically popular part.
The consequence of rising government expenditures in the 1980s cou-
pled with reductions in tax rates has inevitably been a rise in government
indebtedness. Again, taking the leading seven industrialized countries, from
1981 to 1990, the gross public debt as a percent of nominal GDP or gross
national product (GNP) rose in all countries except the United Kingdom.
It is true that many circumstances do not warrant worry about rising
government debt: war, recession, and viable public sector investment
projects, for example. However, it is surely ominous when the debt-to-
national-income ratio rises during a long period, such as the 1980s, without
war or recession and with continually rising productivity. Furthermore, as
Green (1993) points out, an increase in government indebtedness can set
in motion processes that might threaten the stability if not the viability of
the system. In other words, the build-up of debt can become sufficiently
great so as to become a limiting factor in fiscal policy.
As Drucker has pointed out:
The governments in all developed countries-and in most developing ones as
well-have become such heavy spenders that they cannot increase their expen-
ditures in a recession. But that is, of course, the time when, according to all
modern economic theory, they should do so in order to create purchasing power
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 159

and with it revive the economy. In every single developed country governments
have reached the limits of their ability to tax and their ability to borrow. They
have reached these limits during boom times, when they should, according to
modem economic theory, build up sizeable surpluses. The fiscal state has spent
itself into impotence (Drucker, 1993, p. 121).

When the real interest rate rises above the economy's growth rate and a
primary deficit exists, then the debt ratio must rise. As the debt-to-income
ratio rises, so does the risk that the debt will be repudiated.
Green puts forward an alternative view: the real problem of the contem-
porary mixed economy may not be a secular rise in the debt-to-national-
income ratio but instead a "knife-edge" disequilibrium relationship between
the demand for public services and the productivity of the economy. In the
1960s and 1970s too much attention, says Green, was paid to the former,
at the expense of the latter. In the 1980s, the position was reversed. Cer-
tainly, this seems a correct reading of the situation in the United Kingdom,
when in the late 1980s the then Chancellor of the Exchequer was using a
large budget surplus to reduce the national debt. Only five years later, the
size of the projected deficit constrains the present freedom of movement
of the Chancellor of the Exchequer, both in the micro and macro aspects
of fiscal policy.
However, Green concludes, a secular rise in the debt-to-income ratio
also poses an intergenerational problem. In the short term, it simply leads
to "scrimping" on essential public services, but in the long term it can lead
to civic impoverishment and "growing inequalities between those with the
wherewithal to provide substitutes for public services and those without."
Perhaps the most important intergenerational transfer is civilization itself.
Green quotes Oliver Wendell Holmes when he says that "taxes are what
we pay for civilized society."
Politicians who have said that they would increase taxes have simply
not been elected. The classic example was Walter Mondale in the 1974
U.S. presidential election. President Bush, seeking election in 1988, pro-
mised not to increase any taxes (the famous "read my lips-no more taxes"
pledge). President Clinton in the 1992 election made promises not to in-
crease the taxation of the middle classes. Similar promises were made by
Chancellor Kohl in the Federal German elections held after reunification
in 1990. Prime Minister Major in the British general election of 1992 even
pledged to reduce rates of income tax further, although at an unspecified
future date.
All these candidates must have known that it was most unlikely that
they would be able to keep their promises. The fact that they made them
at all reflects the pressure of expectations put on them in the competition
160 ECONOMIC THOUGHT AND POLITICAL THEORY

for votes that characterizes contemporary capitalist democracy. Yet they

were lying, as Schumpeter anticipated. According to Allen (1992), Schum-
peter's entries in his private diary included such aphorisms as "Democracy
is government by lying."
On the other side of the budget, Mrs. Thatcher and President Reagan
were both elected on programs of reducing public expenditure. In this
case, knowing the strength of their convictions, it may be accepted that
they both did truly believe in this proposition, and both tried as hard as
they could to achieve a reduction. Yet two years after Mrs. Thatcher left
office, the proportion of public expenditure to GDP in the United King-
dom is higher than it was when she came into office. President Reagan's
legacy is an increased federal government deficit as well as increased public
expenditure.
Drucker (1993) claims to have detected evidence that democracy in the
United States is declining as the result of elected representatives fleecing
their constituents to enrich special interest groups. He points to the steady
decline in voting participation in the United States, and claims that in all
the advanced countries there is a concurrent decline in public interest in
the functions of government, and in policy issues. Instead, he says, voters
increasingly vote on the basis of "what's in it for me?"
It may be objected that a fatal flaw in democracy as a political system
does not mean that capitalism is necessarily condemned. But one does not
have to be a Marxist to agree that contemporary forms of Western demo-
cracy are inextricably linked to the capitalist system. Indeed, this argument
is advanced with as much vigor by proponents of the market economy or
of free enterprise as it is by those on the Left.

The Distribution of Income

Despite all the rhetoric about social justice that characterizes the Marxist
and non-Marxist tradition in socialism, the concept of equality of income
does not seem to have played a major part in Marx's own thought. Indeed,
if the distribution of income in the Socialist state is to be made independ-
ent of production, and organized instead to serve the principle of "to each
according to his need: from each according to his ability," then it is evident
that the resulting distribution of income would be unequal, to the extent
that needs are unequally distributed throughout any given population. It
will, of course, be a different distribution from the unequal distribution
according to ability that would be characteristic of pure or unfettered
capitalism, and different again from the post-tax distribution characteristic
of the fettered capitalism of the contemporary advanced countries.
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 161

While some in the non-Marxist socialist tradition not only preached

equality of incomes but actually established short-lived experimental com-
munities that practiced absolute equality of income distribution, it is not
a principle that was practiced in the socialist countries themselves. Indeed,
the widening gap between the living standards of the governing political
class, that is, members of the Communist party, and those of the rest of
society was one of the factors that finally undermined the system.
What is astonishing in retrospect is the quite open way in which, in a
nominally socialist society, discrimination was practiced between the elite
and the rest of society. In the USSR and the other communist countries
of Eastern Europe, there was privileged access for the ruling group to the
enjoyment of large cars, large fiats, country houses, and foreign travel. In
a society where the quantity and quality of consumer goods available to
the general popUlation was notoriously inadequate, exclusive access to
certain shops that were well supplied with goods not available elsewhere
was reserved to members of the Communist party. Despite the fact that
such behavior was devastatingly satirized by George Orwell in Animal Farm,
and criticized by some unorthodox socialist intellectuals such as Milovan
Djilas, the practice continued right up to the collapse of the system.
It may therefore be asked whether distribution of income can legitimately
be considered as an appropriate dimension for measuring the supposed
capitalist transition. We would argue in the affirmative, since it is clear that
for Schumpeter as for most other writers on this subject, pure capitalism
was a state in which the distribution of income was determined by earning
ability (including, of course, the earning power of owned wealth), entirely
untrammelled by taxation or regulation. An essential element of the tran-
sition sketched by Schumpeter was the increasing burden of taxation laid
upon the upper and middle classes to which the entrepreneurs belonged.
Thus, a movement toward greater equality in the distribution of income in
a society is an indicator of movement in the direction away from pure
capitalism and toward socialism.
While for most of this century, rates of taxation on the upper income
groups in the advanced countries have increased, after the Thatcher-Reagan
counter-revolution the higher rates of tax at the upper end of the income
scale in both the United States and the United Kingdom were reduced.
This practice has been imitated in other advanced countries such as Sweden,
long renowned for its egalitarian ethos.
As far as reducing very high marginal rates of tax on the rich are con-
cerned, it seems to have been a case of relaxing the stranglehold on the
goose's neck so that a continuing supply of golden eggs can be obtained.
That the politics of envy is alive and flourishing in the advanced countries
is evidenced by the promises of both President Clinton in the United
162 ECONOMIC THOUGHT AND POLITICAL THEORY

States and the Labour party in the United Kingdom, in their respective
1992 election campaigns, to increase once again tax rates at the upper end
of the income range. Even more remarkable has been the way in which the
British monarchy has been compelled by a recent upsurge of public opinion
to pay income taxes, something that it had not done for more than 50 years.
In both the United States and the United Kingdom during the 1980s,
standard measures showed increases in inequality in the distribution of
income. But Drucker (1993) argues that taxation has made little difference
to the distribution of income. Citing Pareto, he contends that only two
factors determine the distribution of income in a country: productivity
growth and culture. About the United States, Drucker claims that as long
as productivity was increasing, that is, until the late 19608 or early 19708,
then income distribution became more equal. But once productivity in-
creases began to disappear, a phenomenon that he dates from the begin-
ning of the Vietnam War, inequality began to increase. Differences in
taxation between the Nixon-Carter years on the one hand, and the Reagan
years on the other, made little difference.
Drucker goes on to claim that income distribution in the United King-
dom has become less equal in the last 30 years, as productivity has stopped
growing. However, the rate of growth of productivity in the United King-
dom increased in the 19808 under Mrs. Thatcher.

Values and Culture

It will be recalled that the central part of Marx's vision of the transition
from capitalism to socialism was the transfer of political power from the
middle class to the working class. Although this has not happened sud-
denly and violently, as Marx had predicted, it certainly has happened, and
nowhere is this revolution more clearly illustrated than in the culture and
public values of the societies of the advanced countries.
In the era of pure or classical capitalism, which might be approximated
in the case of the United Kingdom and the United States by the period
from 1875 to 1910, the culture and values that were publicly espoused and
disseminated through the media of the time were essentially those of the
middle classes, as Marx never tired of pointing out. While the aristocracy
may have had different values (in some respects more akin to those of the
working classes), they were prudent enough to keep them to themselves,
and in public paid lip service to the values of the middle classes. As Oscar
Wilde observed of London's upper class society of that period: "Hypocrisy
is the tribute which Vice pays to Virtue."
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 163

Whatever the private behavior of individuals may have been, it is not

difficult to write down some of the characteristic values that were, at least
outwardly, publicly approved in the society of that period.
There was a work ethic of earnest endeavor, associated with, if not
parsimony, at least deferred gratification-in some cases, deferred until
after death. Self-denial was accompanied by a culture of duty to others, by
integrity, and by public responsibility. Speech and written forms of address
were modest and formal to the point of pedantry. The same was true of
clothing. In the arts, there were aspirations to what was believed to be
good taste, even if the performance sometimes fell short. These public
values were epitomized in the public architecture, notably the town halls
of the great industrial cities of England. Despite higher levels of industrial
pollution than exist today, the main public places of these cities were kept
clean and orderly. Such values were also reflected in the only national
medium of communication of the period, the press. Later, the same values
were reflected in Lord Reith's BBC.
These public values were most strongly espoused and propagated by
the middle classes. The working classes had somewhat different values,
which only found public expression in the music halls and, in the United
States, in the burlesque theaters. Any wider expression was frowned upon.
Working-class values of this period tended toward immediate consump-
tion rather than saving. Speech and dress were informal, and personal
behavior tended toward generosity rather than parsimony or frugality.
One hundred years ago the counterpart of today's mass media was a
small number of newspapers. Radio broadcasting began only in the 1920s,
but as recently as the 1950s in the United Kingdom at least it still contin-
ued to broadcast middle-class values. In this period, the working classes
were forced to listen to Radio Luxembourg or else the BBC's Light Pro-
gramme. Television broadcasting did not begin in Britain until the late
1930s, but as recently as the 1950s, presenters were still wearing formal
evening dress on television in the evenings. Today, because of the perva-
siveness of film, video, and television as media of communication as well
as the mass circulation tabloid newspapers, public values are much more
obtrusive than they were a century ago. It is impossible to escape them,
unless one is a hermit.
The values reflected in the mass media of today are the polar opposite
of those of the Victorian middle classes. A commercial television station,
TV AM, which won its broadcasting franchise in the United Kingdom
some five years ago with a declared "mission to inform," was quickly
forced to abandon its approach. It had to adopt "a mission to entertain,"
as the former approach proved insufficiently attractive to advertisers.
164 ECONOMIC THOUGHT AND POLITICAL THEORY

In newspapers, the popular tabloids have not evolved to become more

like The Times of 100 years ago. Quite the reverse; the self-styled "quality"
newspapers have lowered their standards to become much more "popular"
in taste and appeal, while the popular tabloids compete with each other in
a circulation war of ever lowering standards.
In the United States, opinion surveys show that the great majority of
people today identify themselves as "middle class," yet it is clear that, as
in the United Kingdom, the values they appear to espouse resemble those
of the Victorian working class much more closely than those of the middle
class of that period.
Just as politicians drawn from the aristocracy and from the working
class felt obliged 100 years ago to pay lip service to middle-class values in
order to get elected, so today they must pay lip service to working-class
or populist values. To get the Republican nomination for president in
1988, George Bush was required to use in public populist phrases that
were quite incongruous. In the United Kingdom, the present Conservative
prime minister feels obliged to broadcast his belief in "a classless society,"
a state that is as difficult to imagine as an economy without firms.
Whereas 100 years ago, the prevailing standards in values, culture, fash-
ion, and all forms of public behavior were set by a tiny handful of middle-
class or upper-middle-class people, this group has now lost all social as
well as political influence. Like the former metropolitan elites in a newly
independent colony, the presence of this elite group in society is tolerated,
as long as they do not attempt to exert any influence over the new order.
To summarize, then, contemporary values and culture appear to be
based on self-indulgence rather than self-denial. Hedonism has replaced
the work ethic. Speech and clothing are informal. Public responsibility has
been replaced with the principle of "whatever you can get away with."
Litter and graffiti, if not encouraged, are at least tolerated in a growing
number of Western cities. In private as well as in public life, middle-class
values have been overthrown. The class war is indeed over, and, as Marx
and Schumpeter predicted, the middle-class values that predominated in
the heyday of unfettered capitalism have been comprehensively defeated.
It is not an accident that this should be so. Marx's vision of the circum-
stances in which the proletariat would overthrow the bourgeoisie would
appear to be one in which the accumulation of capital was a completed
process. In other words, the stage of quasi-abundance of commodities had
been reached, a stationary state where it was implicit that consumer wants
could be satisfied by the existing stock of capital. Technical progress as
well as further capital accumulation were redundant, and the economic
problem could be reduced to one of administration. The whole economy
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 165

would be like one gigantic public utility, and the economic problem for a
socialist society would resemble the organization of the water supply in a
country where there was an abundant rainfall.
Although advanced societies may not reach this state of quasi-abundance
in the foreseeable future, we are certainly moving toward it, or perhaps
approaching it asymptotically. The advanced countries are rich enough to
be able to support the large fraction of their population who do not work,
including the 10% or so of the labor force who are unemployed at the
present time.
In such a society of quasi-abundance-the only circumstances in which
it seems that a system of classical or Marxist socialism possibly could work-
there is no need for traditional middle-class values. They would become
redundant.
Even in our present state of semi-transition, there are some indications
that the pace of effort in the more advanced countries is relaxing. In the
United Kingdom and the United States, an increasing proportion of each
generation of the middle class sees no reason not to work less and play
more than its predecessors. In the advanced countries, the number of hours
worked on average has shown a steadily downward trend. Williams has
calculated that, when the supply of labor is measured by hours offered
through a working life, the reduction in the supply in the United Kingdom
between 1870 and 1980 is almost 50% (Williams, 1983). Even Germany
and Japan are showing signs of being less workaholic than they used to be.
lt is therefore entirely appropriate that we should be observing changing
attitudes toward work, leisure, personal saving, and consumption.

The Socialization of the Labor Market

Although in Schumpeter's view the transition from capitalism to socialism

would be gradual, which it was, he also speculated that a watershed or
critical milestone would occur with the socialization of the labor market.
By this he appears to mean what we nowadays would call a permanent
statutory incomes policy.
During the 1960s and 1970s, the United Kingdom and other European
countries, and even briefly the United States, experimented with statutory
incomes policies, although they were invariably temporary. These ex-
periments failed, not only in terms of their economic objectives but also
politically. The unpopularity of Mr. Callaghan's wage increase limit of 5%
contributed to his defeat in the 1979 general election. With Mrs. Thatcher
166 ECONOMIC THOUGHT AND POLITICAL THEORY

coming into power, incomes policies were consigned to the category of the
unthinkable.
Even today, with a reassessment of the Thatcher-Reagan policies, no
one has suggested the possibility of re-introducing statutory incomes
policies. Yet it does seem that the perennial problems of inflation and
unemployment are still present in the United Kingdom, if not in the United
States, and that the problem of unemployment is getting worse over time.
In each succeeding business cycle since the end of World War II, the level
of unemployment, both at the peak and the trough of the cycle, has been
higher than its predecessor. For those who believe that the price of labor
is the most important single determinant of the demand for labor, the
observed coincidence of secularly rising unemployment, together with ris-
ing real wages for those fortunate enough to be in employment, once again
brings the question of incomes policies back on the agenda.

Conclusions

In this chapter we have examined Schumpeter's famous prediction that in

the second half of the twentieth century, capitalism would be in a state of
transition from the pure form, characteristic of the period 1870-1914,
toward a different form of economic organization that might be called
socialism. This intermediate or transitional stage Schumpeter referred to
in Capitalism, Socialism and Democracy as controlled or fettered capital-
ism. In an earlier work he had referred to it as the "tax state." It is perhaps
more familiarly known as the mixed economy.
The question at issue is whether the changes that have been observed
in the almost half-century since World War II in the economies of the
most advanced countries, that is, the leading industrialized countries of
the world, indicate a movement in the direction of socialism, or not. Up
to the 1970s, it seemed as if a plausible case could have been made in favor
of Schumpeter's thesis. In the 1980s, Mrs. Thatcher and President Reagan
introduced a series of measures explicitly directed at rolling back the
boundaries of the state and, as they saw it, reversing the drift toward
socialism. Notable among these measures were the privatization of state-
owned industries, the deregulation of those industries that were privately
owned but tightly controlled by the state, and a reduction in rates of
income tax, especially at the upper end of the income range. These policies
at first appear to be successful in terms of the performance of the British
and American economies in that decade and were widely imitated through-
out the world. The example of the Thatcher-Reagan counter-revolution
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 167

was followed not only in other advanced countries but also in the developing
countries as well as in the formerly socialist countries of Eastern Europe
and the former Soviet Union.
Has this counter-revolution been truly successful, or does it represent
no more than a pause for breath in the long march into socialism? It
depends what dimensions or criteria are used to measure progress toward
socialism. In this chapter, progress according to four different yardsticks
was examined.
The first criterion, the extent to which productive assets in a society are
publicly owned, is the only worthwhile criterion of progress toward social-
ism so far as classical or Marxist socialists are concerned. For Schumpeter
it is a criterion of lesser importance. On the yardstick of public ownership,
the verdict is clear: in the advanced countries since the Second World War
public ownership is widely recognized to have failed to deliver a satisfac-
tory performance in economic terms. It also appears to have failed to
deliver hoped-for improvements in industrial relations. By contrast, the
newly privatized industries appear already to be showing an improved
performance. So, on this criterion, there has been no movement in the
advanced countries toward socialism; if anything, the reverse has been
true.
The second yardstick, the organization of the economy, is the one on
which Schumpeter would have preferred his predictions to have been
judged. It was the increasing fettering of the pure capitalist economy by an
ever-growing range of regulations and taxation which Schumpeter felt would
be the principal symptom of the transition to socialism. In this chapter, it
has been argued that the growing indebtedness of most of the advanced
countries during the 1980s showed that the crisis anticipated by Schumpeter
as early as 1918 was approaching. The apparently insatiable demand of the
citizens of the advanced countries for publicly provided health and educa-
tion services and social security benefits seems to be unmatched by their
willingness to vote for the tax increases required to pay for these benefits.
The third yardstick is the distribution of income. To the ordinary per-
son, a greater equality of the distribution of after-tax real income is per-
haps the simplest and most obvious measure of any transition toward
socialism. Problems of measurement mean that a verdict of this point must
remain ambiguous. It has long been recognized that one of the weaknesses
of the democratic process is that coalitions may use it to alter market
outcomes in their favor. In particular, it was feared that the poor majority
might gang up on the rich minority. Now, however, it seems that there is
a rich majority in most of the advanced countries.
The fourth yardstick, values and culture, is the counterpart of Marx's
168 ECONOMIC THOUGHT AND POLITICAL THEORY

"social and political superstructure." Here, the outcome is surely un-

ambiguous. Whereas at the turn of the century the public values of the
advanced countries were clearly middle class, these values have been every-
where completely overturned. Traditional working-class values now con-
stitute the accepted norm of public behavior in the advanced countries.
Seldom can a revolution be so complete without a shot being fired. It is
true that the timing and nature of the transition have been different in
different countries, as one would expect. As far as the United Kingdom is
concerned, middle-class values have held sway as late as the 1950s; from
the 1960s onward, however, their demise has been rapid.
For Schumpeter, the entrepreneur was a heroic figure whose function
was uniquely valuable in the capitalist system. For this socially useful func-
tion, he deserved the respect and esteem of society, and up to about the
First World War he did indeed enjoy that respect and esteem in most of
the advanced countries. Decline can be detected after the First World
War, accompanied by a growth in the influence of an anti-capitalist men-
tality, also anticipated by Schumpeter.
The entrepreneur, acclaimed by Mrs. Thatcher and President Reagan,
enjoyed a brief revival of fortu"ne in the 1980s. Once again, entrepreneurs
did seem to be men possessed of superhuman qualities, performing a so-
cially useful function while at the same time amassing personal fortunes.
With the collapse of the boom at the end of the 1980s, however, their
fortunes and reputations appear to have deflated equally suddenly; some
even are languishing in jail.
To sum up, then, if we are to judge any movement from pure capitalism
toward socialism by the extent of state ownership-the classic Marxist
criterion, then it must be recognized that the popular view of socialism in
retreat is upheld. If, however, we judge any possible transition from cap-
italism to socialism by the indicators that Schumpeter himself would have
preferred, those representing government control of the economy rather
than government ownership, then a rather different picture emerges. The
evidence is not unambiguous, but present trends indicate that the Achilles
heel of the mixed economy may be the demand for publicly provided
goods, services, and transfer payments unaccompanied by commensurate
willingness to pay for them. But this does not necessarily mean that it is
evolving toward socialism in most of the conventionally understood senses
of that word.
Only since 1989 have people in the West realized just how great a
failure conventional socialism in Eastern Europe had been. Few people,
with the possible exception of von Mises, had anticipated the full extent
of the economic, political, and environmental disaster that the socialist
SCHUMPETER AND CAPITALISM IN AN ERA OF TRANSITION 169

experiment turned out to be. Certainly Schumpeter did not. It is fairly

certain, therefore, that within the foreseeable future, few people will want
to repeat that particular mistake.
But if the term socialism is to be disallowed for the state into which
contemporary forms of capitalism may be evolving, what term should then
be used?
We want to describe the state in which working class or at least populist
values prevail, but where private rather than public ownership of produc-
tive assets is the norm, and the allocation of resources takes place prim-
arily through the market rather than through central planning. This might
sound like social democracy, but if self-restraint cannot be exercised by
society in the matter of publicly provided health, education, pensions, and
other welfare benefits, then the democratic system itself may be vulnerable.
Schumpeter would not have been surprised. Like Hayek, he warned that
what he called socialism would be "likely to present fascist features."

References

Albert, Michel. (1991). Capitalisme Contre Capitalisme. Paris: Editions du Seuil.

Allen, Robert L. (1991). Opening Doors: The Life and Work of Joseph Schumpeter.
New York: Transaction Publications.
Drucker, Peter. (1993). Post Capitalist Society. Oxford: Butterworth-Heineman.
Green, Christopher. (1993). "From 'Tax State' to 'Debt State'." Journal of Evo-
lutionary Economics 3(1): pp. 23-42.
Haberler, G. (1950). "Joseph Alois Schumpeter, 1883-1950." Quarterly Journal of
Economics (August): pp. 333-372.
Haberler, G. (1981). "Schumpeter's Capitalism, Socialism and Democracy After 40
Years." In Arnold Heertje (ed.), Schumpeter's Vision. New York: Praeger.
Hayek, F.A. (1944). The Road to Serfdom. London: Routledge.
Heertje, Arnold. (1981). Schumpeter's Vision. New York: Praeger.
Keynes, J.M. (1946). "The Balance of Payments of the United States." Economic
Journal 56: pp. 172-187.
Marz, Edward. (1991). Joseph Schumpeter, Scholar, Teacher and Politician. New
Haven and London: Yale University Press.
von Mises, L. (1951). Socialism: An Economic and Sociological Analysis, trans. by
J. Kahane. New Haven: Yale University Press.
Samuelson, Paul A. (1981). "Schumpeter's Capitalism, Socialism and Democracy."
In Arnold Heertje (ed.), Schumpeter's Vision. New York: Praeger.
Schumpeter, J.A. (1928). "The Instability of Capitalism." Economic Journal (38):
pp. 361-386.
Schumpeter, J.A. (1942). Capitalism, Socialism and Democracy. New York:
Harper and Row (3rd ed., London: Allen and Unwin).
170 ECONOMIC THOUGHT AND POLITICAL THEORY

Schumpeter, 1.A. (1954). "The Crisis of the Tax State." In A.T. Peacock, et al.
(eds.), International Economic Papers, 4. London: Macmillan.
Singer, H.W. (1993). A Review of Joseph A Schumpeter: His Life and Work by
Richard Swedberg in Journal of Economic Studies. vol. 19, No.4, pp. 61-4.
Swedberg, Richard. (1991). Schumpeter: A Biography. Princeton: Princeton Uni-
versity Press.
Williams, Sir Bruce. (1983). Technology Policy and Employment. Discussion
Paper. London: The Technical Change Centre.
 7CULTURAL EVOLUTION,
COLLECTIVE LEARNING, AND
CONSTITUTIONAL DESIGN
Viktor Vanberg

Though our civilization is the result of a cumulation of individual knowl-

edge, it is not by the explicit or conscious combination of all this knowledge
in any individual brain, but by its embodiment in symbols which we use
without understanding them, in habits and institutions, tools and concepts,
that man in society is constantly able to profit from a body of knowledge
neither he nor any other man completely possesses.
-F.A. Hayek (1952b, pp. 149ft·)

Central to F.A. Hayek's theory of cultural evolution is the notion that the
rules and institutions upon which human social life is based have been
shaped in an evolutionary process of trial and error, a process in which
experience with the working properties of such rules is accumulated over
generations. This experience, it is asserted, is largely implicit in cultural
traditions and customary practices, and far exceeds the knowledge that its
present beneficiaries could be said to "possess," in the sense of being able
to articulate it. Cultural evolution is portrayed as a process of growth of

171
172 ECONOMIC THOUGHT AND POLITICAL THEORY

knowledge, not so much as a matter of individual persons becoming more

knowledgeable as individuals, but in the sense that the knowledge utilized
in the societal nexus grows. Cultural evolution is, in other words, viewed
as a process of social or collective learning, a process in which the problem-
solving capacity in society grows.
The merits and shortcomings of Hayek's evolutionary account of social
institutions have been extensively discussed, including by the present au-
thor (Vanberg, 1986, 1989, 1993). To add yet another to the long list of
already existing contributions on the subject can only be justified by the
fact that, on the one hand, the reception of Hayek's argument is still
subject to considerable ambiguity while, on the other, the explanatory
potential of his overall approach appears to be sufficiently large to merit
further attempts at clarification. It is in this spirit that I embark on the
present project. My purpose is twofold. It is, first, to outline and discuss
the general structure of a Darwinian theory of cultural evolution, that
is, a theory employing-in the realm of cultural phenomena-the same
explanatory logic that is characteristic of Darwin's approach to biological
evolution. In particular, the purpose is to examine how, within a Darwin-
ian framework, the notion of cultural evolution as a process of collective
learning can be properly specified. My second purpose is to examine what
a defensible theory of cultural evolution can be said to imply for the role
of deliberate institutional reform and constitutional design. In the process
of carrying out these two tasks, I hope to be able to clarify some of the
ambiguity that has surrounded Hayek's arguments on these issues. Let me
add that, although much of my argument is about Hayek's thoughts, my
interest is not in exegesis but, instead, in a systematic assessment of the
scope and limits of an evolutionary approach to social institutions.

Darwinian Evolution

The question of how sociocultural diversity and change can be explained

has always been among the fundamental concerns of social theorists. Since
Charles Darwin's The Origin of Species (1859), evolutionary accounts have
figured prominently among the theoretical perspectives advanced. Yet, the
label "evolutionary" has been claimed for a variety of approaches, which
are by no means all compatible with each other, or with the logic of Darwin's
argument.
Hayek (1967, pp. 103ft., 111; 1973, pp. 22ft.; 1978, pp. 264ft.; 1979, pp.
154ft.) has often stressed that, counter to common belief, the idea of evo-
lution was "older in the humanities and social sciences than in the natural
CULTURAL EVOLUTION, COLLECfIVE LEARNING 173

sciences" (Hayek, 1988, p. 24), that "Darwin's work was preceded by

decades, indeed by a century, of research concerning the rise of highly
complex spontaneous orders through a process of evolution" (ibid.). Hayek
refers, in particular, to what he calls the "Mandeville-Hume-Smith-Ferguson
tradition" (1978, p. 265n), a tradition that created an "atmosphere of evo-
lutionary thought in the study of society" (Hayek, 1978, p. 265) well before
Darwin developed his biological concept of evolution (Hayek, 1960, pp.
59ff.). As Hayek has also noted, this pre-Darwinian tradition has more in
common with the basic logic of Darwin's theory than much of the post-
Darwinian evolutionary thought that has become known as "Social Dar-
winism" (Hayek, 1960, p. 59). What makes much of Social Darwinism
"non-Darwinian"! is its preoccupation with the historicist notion of "laws
of evolution" that are supposed to describe stages or phases through which
sociocultural development passes (Hayek, 1973, p. 23; 1988, p. 26). Herbert
Spencer's "evolutionary" historicism was, in this regard, definitely not
Darwinian. 2 Darwin's theory of natural selection is not about the "course
of evolution"; it is about the process of evolution. It provides an account
of how, in principle, this process works. It is not meant to explain its par-
ticular outcomes or to predict its future "course."3
The social theory of the eighteenth-century Scottish moral philosophers
was genuinely evolutionary in the Darwinian sense. 4 In the same manner
in which, later, Darwin was to explain the seeming purposefulness of the
"products of nature" as the systematic outcome of a purposeless, "blind"
process, the eighteenth-century evolutionists explained how the appear-
ance of purposefulness in the "products of civilization" can be understood
as the outcome of a process that is not guided by foresight. In their view-
and contrary to the contemporaneously emerging continental philosophy
of history-the process of civilization has no predeterminable course, but
is "driven from behind" into an open future by the permanent efforts of
individual human beings to improve their lot, to solve the problems they
face, and to explore new opportunities. 5 In other words, like Darwin's theory
of "natural selection" the Scottish philosophers' evolutionary approach
reduced teleology to causation,6 by showing how seeming purposefulness
at the social-structural level can be explained as a largely unintended
outcome of a process of trial and error.7 The driving force behind the
cumulative process of civilization is seen in the continuous experimenting
of individuals who, in pursuit of their own purposes, constantly adjust to
new circumstances and modify-deliberately as well as unintentionally-
the ways in which they go about doing things. As, in the course of such
intentional and incidental experimenting, individuals happen to find better
"tools" or practices for solving recurrent problems, they will tend to retain
174 ECONOMIC THOUGHT AND POLITICAL THEORY

these superior solutions and others will tend to imitate their successful
innovations (Hayek, 1960, pp. 28, 32ff.).
The essential claims of Darwinian evolutionary theory are that in the
process of reproduction, inheritable variations are constantly generated,
that these variations tend to differentially affect the reproductive success
of the individual organisms bearing them, and that, as a consequence, the
distribution of variation within a population will be gradually shifted in
favor of those variations that confer greater reproductive success. 8 Or, as
Hayek (1967, p. 32) has put it: "The basic proposition ... is that a mechan-
ism of reduplication with transmittable variations and competitive selec-
tion of those which prove to have a better chance of survival will in the
course of time produce a great variety of structures adapted to continuous
adjustment to the environment and to each other." The theory shows
how adaptiveness or functionality in nature can emerge without foresight.
It provides, in other words, an "invisible hand explanation" (Ullmann-
Margalit, 1978) for the emergence of functionality. Furthermore, it is an
"individualist" account in that it explains changes at the aggregate or macro-
level of a population or species in terms of events at the micro-level,
namely, the variation and selective retention of characteristics of indi-
vidual organisms. And it is individualist in its emphasis on the uniqueness
of, and diversity among, individuals in a popUlation, an outlook refered to
as population thinking.9 Its focus is on the process in which, due to selec-
tive pressure, the distribution of individual characteristics within a popu-
lation-or, in other words, the composition of the population-changes over
time.
Darwinian "adaptiveness" is about an organism's capacity to successfully
cope with recurrent problems in its environment. To the extent that such
capacity correlates with transmittable properties that vary within a popu-
lation, and to the extent that the population's problem-environment
remains sufficiently stable over time, the distribution of properties will
gradually, over successive generations, shift in the direction of increased
adaptive fit or increased problem-solving capacity. Such gradual, cumula-
tive shift toward increased adaptive ness can be viewed as a process of
collective learning in the sense that it is the population or species, as a trans-
generational collectivity, whose problem-solving capacity increases over
time. The core principles of Darwinian evolution-namely, "(a) Mechan-
isms for introducing variation; (b) Consistent selection processes; and (c)
Mechanisms for preserving and/or propagating the selected variations"-
can, as D.T. Campbell (1974, p. 42) notes, be generalized to apply to all
processes which increase the "adaptive fit" of some system relative to its
environment (Campbell, 1983, p. 34). Biological and cultural evolution
CULTURAL EVOLUTION, COLLECfIVE LEARNING 175

both rely, as Hayek (1988, p. 26) suggests, "on the same principle of selec-
tion: survival or reproductive advantage. Variation, adaptation and com-
petition are essentially the same kind of process, however different their
particular mechanisms." They can, in particular, be applied to the study of
culture. 10
Cultural evolution can be regarded as a process of "collective learning"
in the sense that it consists in the transmission and accumulation, from
generation to generation, of knowledge and experience. It is a process of
"selective cumulation of skills, technologies, recipes, beliefs, customs,
organizational structures, and the like" (Campbell, 1975, p. 1104), "the
transmission in time of our accumulated stock of knowledge" (Hayek,
1960, p. 27). "Knowledge" is meant, in this context, in the broadest sense
in which it includes any kind of learned problem-solving capacity, pertain-
ing to whatever human beings confront or perceive as a "problem," from
the most basic needs of physical survival to the most abstract and refined
issues raised by man's intellectual and spiritual curiosity. Transgenerational
transmission of acquired (as opposed to genetically programmed) problem-
solving capacity is associated with group-life (Campbell, 1983, pp. 32ff.), and
traces of it can be found in various species for which group-life is charac-
teristic (Hayek, 1967, p. 66; 1973, pp. 74, 163ft.; 1988, p. 17; Bonner, 1980;
Vogel and Voland, 1988, pp. 103ft.; Mundinger, 1980).11 It is apparent,
however, that the role of culture in the human species sufficiently exceeds
its role even among the higher primates to make it a distinctively human
phenomenon.
The "wisdom" accumulated by "evolutionary learning" is, for obvious
reasons, "always wisdom about past worlds, a fittedness to past selective
systems" (Campbell, 1975, p. 1106). To the extent that the problem-
environment changes, what used to be "adaptive" may be rendered useless
or even dysfunctional. And such environmental changes are not confined
to events that are external to the respective population. Since to each
individual organism the composition of the population to which it belongs
is a relevant part of its environment, the very process of variation and
selective retention produces environmental change, by shifting the distri-
bution of characteristics within the population.
The "backward looking" nature of evolutionary adaptiveness implies
that the more specific-relative to the environment-the genetically in-
herited problem-solving capacity is, the more costly adjustments to changes
in the environment will be, costly in the sense that the required adjust-
ments in the population's gene-pool may be achievable only over numer-
ous generations, if at all. The reverse implication is that there should be
an advantage to a genetically inherited problem-solving capacity that is
176 ECONOMIC THOUGHT AND POLITICAL THEORY

less specific or more open, that relies more on the individual's capacity to
learn and to adapt to environmental changes. 12 This fact is the clue to homo
sapiens' singular position compared to other animals, and it is the clue to
the role of sociocultural evolution. 13
My principal concern in the present context is with the issue of how the
notion of "collective learning" can be meaningfully and consistently speci-
fied in a Darwinian framework without compromising the "original indi-
vidualistic emphasis of Darwin's theory" (Axelrod and Hamilton, 1984, p.
89). Or, stated differently, my interest is in the issue of how a Darwinian
theory of cultural evolution can be specified that allows for an explanatory
account of the "wisdom of culture" (Hayek, 1979, p. 155), in the same
sense in which Darwin's theory can be said to provide an explanation for
the "wisdom of nature.,,14 First, however, Iwant to examine, at least briefly,
the relation between evolution and learning more generally.

EvolutIonary Epistemology: Evolution as Learning

Popper has suggested a "Darwinian theory of the growth of knowledge"

(Popper, 1972, p. 261) that, together with contributions by F.A. Hayek,
D.T. Campbell (1965, 1974, 1987), and others (Radnitzky and Bartley,
1987), has stimulated a new field of study called evolutionary epistemology
(Hayek, 1988, p. 10; Popper, 1972, p. 67; Richards, 1981, p. 53). The central
claim of this approach is that from natural selection to the growth of
scientific knowledge the same basic principle can be found operating, namely
that of trial and error-elimination or conjecture and refutation (Popper, 1972,
p. 255).15 As Popper (1972, pp. 242ft.) summarizes the general concept: "All
organisms are constantly, day and night, engaged in problem-solving . . .
Problem-solving always proceeds by the method of trial and error: new
reactions, new forms, new organs, new modes of behavior, new hypoth-
eses, are tentatively put forward and controlled by error-elimination."
This general notion of trial-and-error elimination can, Popper argues
(1972, p. 288), "be applied not only to the emergence of new scientific
problems and, consequently, new scientific theories, but to the emergence
of new forms of behavior, and even new forms of living organisms." It
describes a general, Darwinian method of "learning" which-though its
particular manifestations may be different-is essentially the same at vari-
ous levels, from "the level of the enzyme and the gene ... up to the articu-
late and critical language of our theories" (p. 149).16 Such learning consists,
Popper argues, "throughout of corrections and modifications of previous
knowledge" (1972, p. 259)17: "(A)t every stage of the evolution of life and
CULTURAL EVOLUTION, COLLECfIVE LEARNING 177

of the development of an organism we have to assume the existence of

some knowledge in the form of dispositions and expectations" (ibid., p. 71).
Such expectations "which could be framed as hypotheses" (ibid., p. 258)
are, according to Popper, "genetically incorporated" in all sense organs as
a capacity to distinguish between typical situations that are of importance
to the organism. 18
Of particular interest in the present context are Popper's concepts of
objective knowledge and of an objectivist epistemology. We can, he sug-
gests, distinguish between subjective and objective knowledge, the first of
which requires a "knowing subject" (1972, p. 73), while the second has an
existence independent of such a subject. Knowledge in the subjective sense
consists, in Popper's definition, "of a state of mind or of consciousness or
a disposition to behave or to react" (p. 108). It could, he states, also "be
called organismic knowledge, since it consists of the dispositions of organ-
isms" (p. 73).19 By contrast, knowledge in the objective sense is defined as
"knowledge without a knowing subject" (p. 109), as knowledge in the
"impersonal sense, in which it may be said to be contained in a book; or
stored in a library;" or embodied in tools and other artifacts (p. 286).
Popper sees the distinctiveness of human evolution-as opposed to
the evolution of other animals-in its intimate interconnection with the
growth of objective knowledge (1972, p. 296), with the evolution of arti-
facts or "exosomatic organs" like "tools, or weapons, or machines, or
houses" (1972, p. 238). The world of objective knowledge originates, he
argues, "as a product of human activity" but it "transcends its makers" in
the sense that it is, to a large extent, "the unplanned product of human
actions" (1972, pp. 159ff), the "unintended by-product of actions which
were directed at other aims" (p. 117). And he suggests that a "Darwinian
explanation of the instrumental character of undesigned institutions" (1957,
p. 65n) can help us understand "how language and many other institutions
which are useful may arise, and how they may owe their existence and
development to their usefulness" (1972, p. 117).20

Cultural Evolution as Collective Learning

Popper's understanding of how the world of objective knowledge deVelops

and grows over time is, as both authors recognize (Popper, 1972, pp. 160n,
117n; Hayek, 1979, p. 157), very similar to Hayek's understanding of the
process of cultural evolution. A recurrent theme in Hayek's writings is the
notion that "the various institutions and habits, tools and methods of doing
things, which ... constitute our inherited civilization" (1960, p. 62) have
178 ECONOMIC THOUGHT AND POLITICAL THEORY

passed "the slow test of time" (1967, p. 111) and embody the experience
of generations. They are, Hayek argues, the "product of long experimen-
tation in the past" (1978, p. 136), of a "process of trial and error, in the
course of which more experience has been accumulated than any living
person is aware of' (1976, p. 135).21 Such accumulated experience is re-
flected in the "manner in which we have learned to order our day, to dress,
to eat, to arrange our homes, to speak and write, and to use the countless
tools and implements of civilization" (Hayek, 1960, p. 34).
We can, according to Hayek, equate the growth of civilization with the
growth of knowledge "if we interpret knowledge to include all the human
adaptations to environment in which past experience has been incorpo-
rated" (1960, p. 26). Knowledge in this sense includes, in addition to our
explicit knowledge, our "habits and skills, our emotional attitudes, our
tools, and our institutions-all ... adaptations to past experience which have
grown up by selective elimination of less suitable conduct" (ibid.).22
The process of accumulation and transmission of knowledge in this
comprehensive sense, the "selective cumulation of skills, technologies,
recipes, beliefs, customs, organizational structures, and the like" (Campbell,
1975, p. 1104), can be viewed as a process of collective learning not only
because the body of knowledge, the growth of which is the learning in
question, exists only dispersed in many individual minds. It is collective
notably in the sense that the storage of knowledge and experience is largely
done not in human minds but in cultural traditions that individuals adopt
without being aware of their significance and in products of culture which
they learn to use without knowing why they work.
Of crucial importance in this process of "cumulative embodiment of
experience in tools and forms of action" (Hayek, 1960, p. 33) is the learning
of language. Language is important not just as the medium through which
knowledge is communicated from generation to generation, allowing for
"a growth of explicit knowledge" (ibid.). More important, Hayek argues,
is the implicit learning (1967, p. 87) that takes place in the process of learn-
ing a particular language. The structure of language itself implies certain
views or theories about the world (ibid., p. 86). By learning a language, we
concurrently learn to adopt these views or theories, "we learn to classify
things in a certain manner without acquiring the actual experiences which
have led successive generations to evolve this system of classification"
(1952a, p. 150), we "acquire a certain picture of the world, a framework of
thinking within which we henceforth move without being aware of it"
(1967, pp. 86ff.), and we can make use of a body of experience that we do
not possess but which, without our knowing it, "has become incorporated
in the schemata of thought which guide us" (Hayek, 1973, p. 31).23
CULTURAL EVOLUTION, COLLECTIVE LEARNING 179

The learning of language, and cultural learning more generally, presup-

poses, as Hayek (1952a, p. 167) notes, the existence of a sort of accumu-
lated "knowledge" that is embodied, as a "pre-existing" system of
classification, in our sensory apparatus. 24 These theories about the world
that are built into our sense organs reflect, in a sense, the accumulated
experience of the species. It is on the basis of, and constrained by, such
hard-wired knowledge that individual and sociocultural learning take place.
In other words, one can look at biological evolution, individual learning, and
cultural evolution as separate, though interdependent, levels of learning.
In biological evolution the learning takes place at the level of the species.
It is the distribution of traits within the species that shifts in the direction
of increased adaptive fit. In individual learning it is the distribution of
behavioral propensities or dispositions within a person's acquired behavioral
repertoire which becomes more adapted to relevant aspects of the envir-
onment. Such learning is linked to biological evolution in the sense that
the capacity to learn is a matter of genetic endowment. Yet, what is learned
is dependent on the particular person's environment. Sociocultural evolu-
tion, finally, builds upon the capacity of individuals to learn, yet it is about
learning at the social or collective level in the sense that the distribution
of practices and problem-solutions within "social populations" or groups
shifts in the direction of increased problem-solving capacity.25 Sociocultural
evolution, again, conditions individual learning.26 As individuals find
themselves endowed with an unalterable genetic heritage that conditions
their capacity to learn, they find themselves born into the semi-permanent
framework of their sociocultural heritage that conditions what they learn
(Campbell, 1975, p. 1105).27
The learning that sociocultural evolution involves is "social" in a double
sense. It is social in the sense that individuals can learn not only from
their own experience but also from their direct or indirect knowledge of
experiences made by other persons. 28 And it is social in the sense that
it concerns, as explained above, the problem-solving capacity of social
populations or groups. To speak of collective learning in this context is, of
course, not meant to imply that there are knowing subjects other than
individual human beings.29 It is meant to point out that the accumulation
of knowledge that we describe as cultural evolution is not about individuals
as individuals becoming more knowledgeable but is, instead, a process that
occurs at the level of groups, societies, or cultural communities in which
individually possessed fragments of knowledge are meaningfully inte-
grated. 30 Along with the growth of knowledge goes a process of division
of knowledge that necessarily increases the gap between the knowledge
that individuals command individually and separately, and the body of
180 ECONOMIC THOUGHT AND POLITICAL THEORY

knowledge that they can benefit from through their participation in the
social nexus. 3l As Hayek (1960, p. 26) puts it: "The more men know, the
smaller the share of all that knowledge becomes that anyone mind can
absorb. The more civilized we become, the more relatively ignorant must
each individual be of the facts on which the working of his civilization
depends. The very division of knowledge increases the necessary ignorance
of the individual of most of this knowledge."

Evolution and Success: Normative Implications of

Hayek's Theory of Cultural Evolution

So far, I have mainly sought to explicate the general nature and the under-
lying logic of a theory of cultural evolution in general, and its Hayekian
version in particular, without explicit discussion of the potential normative
implications of such a theory. Yet it is, above all, its perceived normative
thrust that has made Hayek's evolutionary approach a subject of contro-
versy, a controversy that centers around the issue of what this approach
implies for the role of deliberate institutional-constitutional construction
and reform. It is this issue that I want to discuss in the remainder of this
chapter.
That Hayek intends his evolutionary argument to have normative con-
tent, to have implications for how we should deal with the institutional
framework within which we find ourselves, is quite obvious throughout his
writings on the subject. It is, for instance, clearly implied when he talks
about cultural evolution as "a competitive process in which success de-
cides" (1988, p. 73), a process that is "guided not by reason but by success"
(1979, p. 166), or a process in which "rules become increasingly better
adjusted to generate order" (1988, p. 20). And it is equally apparent when
he suggests that evolutionary competition leads to "the survival of the
successful" (1960, p. 57) and the "selective elimination of less suitable
conduct" (1960, p. 26), "to the prevalance of the more effective institu-
tions" (1979, p. 154), to "successful adaptations of society that are con-
stantly improved" (1960, p. 34), or to "practices which have prevailed
because they were successful" (1973, p. 18). Yet, while it seems unques-
tionable that Hayek presumes the process of cultural evolution to select in
favor of rules and practices that are, in some sense, "beneficial" (1988, p.
136) or "desirable," it is far less clear what his precise understanding of the
working principles of this evolutionary process is, and precisely in what sense
he considers the outcomes of this process desirable. In fact, a closer exami-
nation of his arguments reveals considerable ambiguity.
CULTURAL EVOLUTION, COLLECfIVE LEARNING 181

There is a quite straightforward interpretation of what Hayek might

mean when he describes cultural evolution as a beneficial process, namely
that the rules and practices that "succeed" in evolutionary competition are
beneficial and desirable for the persons who adopt them. Such an indi-
vidualist interpretation would seem to be most consistent with the under-
lying classical liberal thrust of Hayek's philosophy, and it appears to be
implied, for instance, when he notes that most of the "steps in the evolu-
tion of culture were made possible by some individuals ... (who) simply
started some practices advantageous to them which then did prove benefi-
cial to the group in which they prevailed" (Hayek, 1979, p. 161), and when
he adds that the way in which such innovations come to prevail in a group
is "by gradually spreading acceptance" (ibid., p. 167).32
Yet, Hayek's arguments on cultural evolution by no means uniformly
support the above notion of a process in which individuals experiment
with alternative practices and tend to adopt and imitate those that they
find to be more advantageous for their purposes. Parts of Hayek's argu-
ment suggest a different interpretation, portraying cultural evolution as a
process that does not promote what individuals find desirable, but that,
instead, selects in favor of rules and traditions that make the groups in which
they are practiced "successful." Such interpretation is implied when Hayek
depicts cultural evolution as a process that does calculate in terms of group
success rather than individual benefit, a process in which practices "have
prevailed because they were successful-often not because they conferred
any recognizable benefit on the acting individual but because they in-
creased the chances of survival of the group to which he belonged" (Hayek,
1973, p. 18). The same interpretation is suggested when Hayek talks of
evolved rules as "the result of a process of winnowing or sifting, directed
by the differential advantage gained by groups from practices adopted for
some unknown and perhaps purely accidental reasons" (1979, p. 155).
Hayek's claim that cultural evolution selects in favor of rules and tra-
ditions that are "group-beneficial," but may run counter to what individu-
als wish (1960, p. 50), can itself, again, be given two different interpretations,
both of which find support in his writings on the subject. In one interpre-
tation, this claim can mean that cultural evolution promotes rules that are
not directly beneficial to the individual practicing them, but indirectly
beneficial in the sense that it is advantageous to be a member of a group
in which they are practiced. In other words, they are rules in which per-
sons can be said to have a constitutional interest (Vanberg, 1988, pp. 161ff)
in the sense that they would wish them to be practiced in the group(s) in
which they take part, even if they cannot benefit individually and sepa-
rately from following them. Hayek has, apparently, this case in mind when
182 ECONOMIC THOUGHT AND POLITICAL THEORY

he claims that evolved rules "help to make the members of the society
in which they prevail more effective in the pursuit of their aims" (1976,
p. 21), or when he notes: "The rules we are discussing are those that are
not so much useful to the individuals who observe them, as those that (if
they are generaLLy observed) make all the members of the group more
effective, because they give them opportunities to act within a social order"
(1978, p. 7).
If the notion of group-beneficial is interpreted in the above sense, that
is, in the sense of rules in which individuals have a constitutional interest,
it is compatible with the previously discussed individualist interpretation
in the sense that in both cases cultural evolution is claimed to select in
favor of rules that make individuals better off, in the first case because the
rules directly benefit the persons practicing them, in the second case be-
cause individuals benefit from being part of a group in which they are
practiced. Yet, there is a critical difference in the explanatory problems
that the two kinds of rules pose. It should be obvious that the straight-
forward evolutionary account that Hayek provides for rules that directly
benefit the persons adopting them, cannot be simply extended to rules in
which individuals can be said to have a constitutional interest but which do
not generate differential benefits to the persons practicing them. The latter
rules pose, in technical terms, a collective goods problem. Hayek did, in
fact, recognize the difficulty that the difference between the two kinds of
rules creates for his individualist theory of cultural evolution, and he sought
to solve this problem by recourse to the notion of group selection, that is,
by claiming that "cultural evolution operates largely through group selec-
tion" (Hayek, 1988, p. 25), that, separate and apart from individual human
choices, a selection process operates at the level of groups per se that
favors group-beneficial rules and, thus, solves that public goods problem.33
I have discussed elsewhere34 why I find Hayek's appeal to the notion of
group selection mistaken, and there is no need to repeat the details of my
argument here. 35 In the present context it is sufficient to note that nowhere
in his writings does Hayek specify the concept of group selection in a
manner that would, indeed, solve the collective goods problem, or, in other
words, that could explain how cultural evolution comes to select in favor
of group-beneficial rules that individuals "have to be made to obey," be-
cause, though all would benefit from general adherence to these rules, "it
would be in the interest of each to disregard them" (Hayek, 1973, p. 45).
The second interpretation of the notion of group-beneficial rules is
explicitly non-individualist in the sense that it is not linked, neither directly
nor indirectly, to individual benefits. Though such non-individualist inter-
pretation would seem to contradict Hayek's classical liberal philosophy, it
CULTURAL EVOLUTION, COLLECflVE LEARNING 183

seems implied when, in particular in his last book The Fatal Conceit (1988,
pp. 120ff.), he defines group success in terms of criteria like population size
or population growth, criteria that are clearly divorced from what indi-
vidual persons may find desirable. 36 He describes "beneficial traditions" as
those that enable "groups following them to grow" (1988, p. 136), and he
notes that evolved "rules were shaped mainly by their suitability for in-
creasing our number" (ibid., p. 134).37 To be sure, at times Hayek argues
as if he sees the "population size" criterion connected with individual
benefits, for instance, when he notes "that division of labor is limited by
the extent of the market, and that population increase is crucial to the
prosperity of a country" (ibid., p. 155), or when he asserts that groups
"following competitive market practices would, as they grew in numbers,
displace others who followed different customs" (ibid., p. 120).38 Yet these
are arguments not about population size as a success criterion per se, but
about the merits of market institutions. 39 And to claim that their produc-
tivity allows markets to support larger populations than less productive
economic orders is quite different from claiming that success in cultural
evolution is measured in terms of population size as such, irrespective of
what the persons involved might find desirable. It is, however, the latter
claim that Hayek seems to make in much of his discussion on the popu-
lation size criterion, for instance, when he argues that there is no real point
in asking whether we find the results of the evolutionary process "good",
or whether we like them,40 since, as he assures us, "(i)n any case, our desires
and wishes are largely irrelevant" (ibid., p. 134). And not only the criterion
of what we as individuals may find desirable, but any notion of desirability
seems discarded when Hayek declares, "I do not claim that the results of
group selection of traditions are necessarily 'good'-any more than I claim
that other things that have long survived in the course of evolution, such
as cockroaches, have moral value" (1988, p. 27). If that were, indeed, the
conclusion of Hayek's theory of cultural evolution, one could only wonder
why we should, in our efforts to organize our social life, care at all about
cultural evolution.
There is, as the above discussion was intended to show, an implicit shift
in the meaning that Hayek attaches to the claim that cultural evolution
selects in favor of successful rules, from an interpretation in terms of direct
individual benefits, to one in terms of group efficiency that indirectly bene-
fits individuals, and, finally, to an interpretation that sees group success
entirely divorced from individual benefits, or even divorced from any rec-
ognizable normative standard. It is helpful in understanding the signifi-
cance and causes of this shift in interpretation,41 to consider, at least briefly,
two related issues. One of them concerns the normative content of the
184 ECONOMIC THOUGHT AND POLITICAL THEORY

notion of success in a Darwinian theory of evolution. The other concerns

the normative connotations of Hayek's concept of the spontaneous order
of the market.

Conditional and Unconditional Evolutionary Arguments

In Darwinian theory the claim that evolution selects in favor of what is

successful has no normative content. There is no claim that what evolution
promotes is beneficial or desirable in any sense other than that it survives.
Success is measured in terms of survival; the two are simply not defined
independently. Note that the issue of the conceptual relation between
success and survival involves two separable problems. One concerns the
explanatory or predictive content of the notion of the survival of the suc-
cessful. This notion is, obviously, not more than a tautology if success can
only be measured in terms of survival. The notion can be given empirical
content, however, if other indicators of success can be identified, attributes
that are conceptually independent of survival yet are conjectured to pro-
mote survival. Such attributes can be identified if, and to the extent that,
we can specify the relevant selective constraints that prevail in a particular
ecological niche. As an example, we can conjecture that under desert
conditions the capacity to economize on water consumption is an attribute
relevant for survival, and organisms with such capacity can be predicted to
be more successful in coping with the problems of their environment than
those lacking such capacity. Or, to use an analogy, in a tennis tournament
we can conceptually distinguish between a competitor's abilities and his/
her survival, in the sense of advancing into the next round of competition,
even though, as a factual matter, the two are closely correlated. (They are
not perfectly correlated since such factors as pure luck may play some
role.)
The other problem concerns the normative content of the notion of the
survival of the successful. This notion is without normative content if the
merits of the successful are only seen in the fact that it survives. Under
such interpretation, it would amount to no more than the claim that what
survives has the virtue of surviving. Such claim can, obviously, not be
disputed, but it is, for the same reason, totally uninteresting. By contrast,
the claim that "the successful survives" is of normative content if two
conditions are met, namely, if what is "the successful" can, in the sense
discussed before, be identified in terms of attributes other than survival,
and if these attributes are claimed to be valuable or desirable for reasons
other than their mere survival. Different from its mute counterpart, such
CULTURAL EVOLUTION, COLLECfIVE LEARNING 185

a claim would not be true by definition, and it could be disputed. As an

example, the claim that cultural evolution selects in favor of successful
rules, would be an undisputable but empty claim if it were to mean that
selection is in favor of the rules that survive. By contrast, it would be a
contentful but also disputable claim, if it were to mean that cultural
evolution selects in favor of rules that are successful in the sense of allowing
the persons who live with them to be more successful in the pursuit of
their aims and interests.
As long as we speak of evolution in general terms, without specifying
the constraints that condition the evolutionary process, to say that the
successful will survive, does not tell us what success means, other than
survival, nor does it tell us whether what survives is desirable in any sense
other than that it survives. If we cannot say something substantive about
what it is that we expect to be successful, we cannot meaningfully discuss
whether what survives is desirable. I suggest that we call such statements
unconditional evolutionary claims. By contrast, to the extent that the terms
of evolutionary competion, that is, the nature of the selection constraints,
can be specified, we can distinguish, conceptually, between success and
survival. We can conjecture what, given specified competitive constraints,
is likely to be successful and is, therefore, likely to survive. And we can
meaningfully discuss whether what is predicted to be successful, is-in
terms of some standard-desirable. I suggest that we call the latter kind
of statements conditional evolutionary claims.
The second question to be examined here concerns the normative
element in the Hayekian notion of spontaneous market order. When
Hayek portrays competitive markets as desirable social arrangements, he
makes, in terms of the above distinction, a conditional, rather than an
unconditional, claim. His familiar argument concerning the capacity of
spontaneous orders to utilize dispersed knowledge, as well as his argument
concerning the role of competition as discovery procedure, are both essen-
tial building blocks of his case for markets, but they are not the full story.
Both these arguments can be made for all kinds of spontaneous order and
for all kinds of competition, not only for competitive markets. But Hayek
would not want to ascribe to all conceivable kinds of spontaneous social
orders and to all kinds of competition the desirable properties that he
attributes to markets. When he talks about markets, he does not mean any
kind of spontaneous order, and when talks about market competition he
does not mean competitive processes per se, irrespective of their terms.
By market competition, he means a specific kind of competition, compe-
tition "restrained by appropriate rules of law" (Hayek, 1978, p. 125),42
rules that are supposed to constrain competitive efforts to strategies that
186 ECONOMIC THOUGHT AND POLITICAL THEORY

serve consumer interests. Market competition is meant to be competition

constrained in a manner that ensures that success can only be had by
serving consumer interests better, rather than, for instance, by lobbying
government for protective privileges. The normative claims that are made
for market competition are conditional claims; they are only made for a
competitive order to the extent that it has the specified characteristics of
markets.
Unconditional claims about unspecified competitive processes can tell
us no more than that success will be with those who succeed. They do not
tell us on what success will depend, nor do they tell us whether what
succeeds is desirable. By contrast, the afore-mentioned conditional claims
about market competition do tell us that success will be dependent on the
ability to serve consumer interests. 43 To be sure, not all competitive set-
tings that we use to classify as "markets" are perfectly constrained in the
sense that better service to consumers is the only way to success. But the
relevant point in the present context is that Hayek's normative claims
concerning the working properties of markets make sense only if inter-
preted as conditional claims, as claims that are not meant to apply to each
and every kind of spontaneous competitive process, and not to everything
that is called "market," but only to competition if, and to the extent that,
it is constrained in the sense specified above.
It seems obvious to me that Hayek's arguments on cultural evolution
have to be interpreted in the light of the above distinction between con-
ditional and unconditional claims. Both kinds of claims can be found in
these arguments, and Hayek's failure to separate them clearly is, in my
view, the main source of ambiguity. Yet it is, as I suppose, only in its
interpretation as a conditional argument that Hayek's theory of cultural
evolution makes good sense. In the remainder of this chapter I want to
outline the basic contours of such an interpretation and discuss its im-
plications for the issue of institutional reform and constitutional design.

Hayek's Conditional Evolutionary Argument

An analogy that Hayek often uses in his discussion on cultural evolution

is that between rules and tools. Just as tools provide standard solutions to
recurrent problems-like a saw that we use to cut wood-rules can, as
Hayek suggests, be looked upon as devices that provide standard solutions
to problems that persons encounter in their dealings with each other, like,
for instance, the problem of deciding who gives way when two drivers
meet at an intersection. 44 For ordinary tools-for instance, a plow-we can
CULTURAL EVOLUTION, COLLECTIVE LEARNING 187

easily imagine a process in which continuing trial and error leads to steady
improvement from very primitive beginnings to highly developed instru-
ments, a process in which individuals constantly experiment-intentionally
and unintentionally-with "plowing-instruments" of differing material and
shape, adopting and imitating what they perceive as more suitable, and
creating inadvertently new variations as they seek to imitate the successful.
And we can understand how, in such a process, "learning without insight"
can occur, how the plow-instruments come to incorporate the experience
of generations of experimentors, without any of the persons using them
being aware of, or being able to articulate, the knowledge that is embodied
in the tool. Furthermore, because of the very nature of the process-with
individuals being the principal experimentors and selectors-we can expect
that it selects in favor of what the individuals involved find more desirable.
The purpose of the "rules as tools" analogy is, of course, to suggest that
we can think of the evolution of rules in essentially the same manner, that
is, in terms of a process in which individuals, by experimenting with alter-
native practices and adopting or imitating what they consider advanta-
geous, come to benefit from rules that embody experience and knowledge
far beyond what they would be able to articulate. Yet it is apparent that
the analogy can only support a conditional claim: if, and to the extent that,
rules can indeed be experimented with and selected upon like ordinary
tools, we have good reasons to assume that they evolve in a similar fash-
ion, in a process that is driven by separate individual choices and respon-
sive to individuals' interests. 45 Many of the rules that we follow in living
our lives can be looked at in this fashion. This is obviously true for what
one may call "personal" rules. Like diet rules, for instance, such rules
serve to solve problems that persons recurrently face in organizing their
own personal lives. And it is also true for many "social" rules, that is, rules
that help persons solve problems that they encounter in their dealings with
each other, as long as "individual experimenting" is possible and as long
as the principal benefits as well as the costs of a practice fall on those who
adopt it. 46 Hayek (1960, p. 62) apparently has such rules in mind when he
talks of "voluntary rules" and notes that they "allow for gradual and ex-
perimental change." Yet the analogy is clearly not applicable to all kinds
of social rules-for instance, not to what Hayek refers to as "deliberately
imposed coercive rules," rules which, as he notes, "can be changed only
discontinuously and for all at the same time" (ibid.). More generally, it is
less applicable the less the rules in question are susceptible to individual
experimenting and selecting. Also, the notion of cumulative storage of
experience in traditions that is so central to Hayek's theory of cultural
evolution is most plausible for rules or "behavioral technologies" that
188 ECONOMIC THOUGHT AND POLITICAL THEORY

individuals can separately experiment with and that generate direct bene-
fits to their users. It is less plausible for rules that can only be tried out in
collective experiments, in particular if the collective is a political commun-
ity as opposed to, for instance, a private organization operating in a market
environment.47
That there are limits to the rules as tools analogy has not been over-
looked by Hayek, and it is obvious that he does not want to confine the
claims of his theory of cultural evolution to these limits. Central to his
theory of cultural evolution, and to his notion of group selection in par-
ticular, is the idea that the process of experimenting with and competition
among alternative "ways of doing things" is not only a matter of individu-
ally chosen practices but is also about institutional characteristics of groups,
that is, about rules that have to prove their usefulness in a competition
among groups with different orders, rather than individuals with different
practices. As Hayek notes, the "competition on which the process of se-
lection rests must be understood in the widest sense" in which it "involves
competition between organized and unorganized groups no less than com-
petition between individuals" (1960, p. 37). Yet what exactly he means
when he talks of "competition between organized and unorganized groups"
is by no means unambiguously clear.
That some kind of group-level competition occurs, and that much of
cultural evolution has been played out "in arenas wherein different orders
contended" (Hayek, 1988, p. 20) seems unquestionable. What is at issue is
not whether some such competition occurs, but how, in what ways, it is
carried out, and what can be inferred about the outcomes that result under
different terms of competition. Competition among firms in a market,
rivalry among different crime gangs, and warfare among nations are all
subsumable under the label "competition among groups," and in all set-
tings there will be a "survival of the successful." Yet we would hardly
expect that the ingredients to success are the same in these different set-
tings. Group-level competition can be thought of in many different ways.
It can, as Hayek notes, be a matter of individual migration between groups,
of successful groups attracting outsiders (1979, p. 159). It can be a matter
of collective choice, one group deciding to adopt a successful practice
observed in another group. It can be a matter of warfare or it may happen
"entirely peacefully.,,48 Hayek can hardly have meant to claim that all
these conceivable modes of competition work out "beneficially." In fact,
he has expressed his profound doubts about the merits of some of these
processes, in particular of political collective choice processes. 49 And it is
obvious that he has a conditional argument in mind when he talks about
"coercive interference in the process of cultural evolution" (1988, p. 20),
CULTURAL EVOLUTION, COLLECfIVE LEARNING 189

or when, with reference to the example of monetary institutions, he argues

that "the selective processes are interfered with here more than anywhere
else: selection by evolution is prevented by government monopolies that
make competitive experimentation impossible" (ibid., p. 103).sO
To talk of "interference in the process of cultural evolution" or to argue
that the "evolution of rules was far from unhindered"S\ only makes sense,
of course, if Hayek has a process with specific characteristics in mind, if his
arguments on cultural evolution are meant as conditional arguments that
apply to an evolutionary process only if, and to the extent that, it exhibits
these characteristics. Hayek's claim cannot be that cultural evolution per
se, no matter what its selective constraints are, will produce desirable rules,
no more than he can claim that competitive spontaneous orders always
work beneficially, no matter what the terms of competition are. Nor can
his claim be that there is some "natural" process of cultural evolution that
should be left alone to work itself out, "unhindered." There is no cultural
evolution "per se"; the process always advances under conditions that
reflect human constitutional choices. Cultural evolution is about human
choices; it cannot even be imagined-like biological evolution, in princi-
ple, could-as something "not interfered with" by human choices. We can
only choose among alternative frameworks within which we let cultural
evolution proceed. If we were to impose no constitutional constraints on
the terms of competition, it would not mean that we would leave cultural
evolution unhindered. It would mean that we choose to let it proceed
under an "anything goes" constitution.
Any reasonable interpretation of Hayek's theory of cultural evolution
has to start, in my view, from this premise: that, just like his market argu-
ment, his argument on cultural evolution has to be understood as a con-
ditional argument about the workings of a constitutionally constrained
process, a process that is subject to constraints that serve to insure its
beneficial workings.
Yet what exactly is the conditional argument that Hayek's theory of
cultural evolution entails, what is the reasonable claim that can be distilled
out of his many ambiguous and conflicting comments on the subject?
Though Hayek never made an explicit effort to state carefully what the
relevant constraints of a beneficially working process of cultural evolution
are, they can, in part, be inferred from his writings, at least their general
nature, if not time-and-place-dependent specifics. The basic thrust of such
a conditional notion of cultural evolution is described by the idea of a
process that allows, at all levels at which rules and institutions emerge or
are chosen, for alternatives to be tried out, and to be exposed to a kind of
competition that makes for responsiveness to the interests of the individual
190 ECONOMIC THOUGHT AND POLITICAL THEORY

persons who are to live under these rules. This individualistic interpreta-
tion is, to be sure, in contrast to some of Hayek's arguments that I have
reviewed above. Yet it is, in my view, the only interpretation that is
consistent with the general classic liberal spirit of his life work.

Constrained Evolution and Constitutional Design

If Hayek's theory of cultural evolution is interpreted, in the above sense,

as a conditional theory, it has apparent implications for the issue of insti-
tutional reform and constitutional design. If we can specify the conditions
under which a competitive evolutionary process works responsively to
individual interests, and if we consider such responsiveness desirable, we
can seek to establish such conditions through suitable institutional con-
straints. Or, more generally, if we can identify the constraining conditions
on which the beneficial working of the process of cultural evolution
depends, it becomes a constructive task to assure that such conditions
prevail.
Interpreted as a conditional argument, a Hayekian theory of cultural
evolution is not only compatible with the notion of deliberate constitu-
tional construction, it would be incomplete without such a notion. It has
to assign an essential role to institutional-constitutional design in two re-
gards. First, deliberate institutional reforms are, on the one side, an essen-
tial part of the experimental input into the evolutionary process. Though
much of this input may indeed, as Hayek (1960, p. 32) suggests, consist of
"undesigned novelties that constantly emerge in the process of adapta-
tion," designed novelties certainly play an important part as well. There is
no contradiction between the notion of deliberate institutional design and
the notion of an undesigned evolutionary process in which institutional
experience and knowledge accumulate, just as there is no contradiction
between the notion of deliberate organized production and the notion of
a spontaneous market process in which such deliberate production experi-
ments compete. What is essential in order that the overall process be of
an evolutionary nature is not that the experimental novel inputs are
undesigned, but that the inputs are subject to competitive selection.
Indeed, Hayek's real concern is apparently not with the issue of delib-
erate design per se, but with the scope and the competitive nature of such
design. He emphasizes, on the one hand, that "although we must always
strive to improve our institutions, we can never aim to remake them as a
whole" (1960, p. 63).52 And he stresses, on the other hand, that his critique
of the constructivist mind set is not meant as an argument against deliberate
CULTURAL EVOLUTION, COLLECfIVE LEARNING 191

experimentation in institutional matters, but an argument "against all

exclusive monopolistic power to experiment in a particular field ... and
against the consequent preclusion of solutions better than the ones to
which those in power have committed themselves" (1960, p. 70).53
Second, deliberate constitutional design plays an essential role in shap-
ing the constitutional framework on which the desirable working of evo-
lutionary competition depends. Hayek recognizes this fact when he notes
that what we can reasonably hope to do is to "create the conditions in
which society can gradually evolve improved formations" (1979, p. 14).54
Yet, though recognizing that we can use our general understanding of the
evolutionary "process of cumulative growth ... to try to create conditions
favorable to it" (1960, p. 40), Hayek does not explicitly discuss what it
would mean, for the issue of deliberate institutional design, "to create
favorable conditions." It is certainly misleading to say, as Hayek (1988,
p. 74) does, about the evolutionary process of civilization that "by establish-
ing a framework of general rules and individual freedom it allows itself to
continue to evolve." Such a statement cannot be meant literally to say that
the evolutionary process itself "establishes rules and individual freedom."
Presumably it is through the efforts of human beings that these things get
established, and the central question is, under what conditions these efforts
can be expected to promote individual freedom and to be conducive to
cumulative evolutionary learning.
It is also misleading for Hayek to argue that people's attempt "to wrest
control of evolution-i.e., of the procedure of trial and error-and to shape
it to their present wishes ... only damages the functioning of the process
itself' (1988, p. 74). One can certainly say that the process of "evolution
cannot be guided by and often will not produce what ... [people] demand"
(ibid.), if this is supposed to mean that an evolutionary process of trial and
error necessarily will always lead into an unknown, open future. But such
a claim would, with equal certainty, be totally unjustified if it were sup-
posed to mean that we cannot and should not seek to create and to main-
tain framing conditions that promise to make the evolutionary process
work in a fashion that we consider desirable. Of course, we cannot "guide"
evolution in the sense of directing it toward a specific predefined goal. But
we can, and should, seek to guide the evolutionary process in the sense of
establishing a framework that secures its desirable working properties, in
the same sense in which we seek to guide the competitive market process
by an appropriate framework of rules, even though we cannot guide it in
the sense of directing it toward predetermined outcomes.
That such guidance of markets and cultural evolution by suitable con-
stitutional constraints is not only possible, but the principal instrument
192 ECONOMIC THOUGHT AND POLITICAL THEORY

that we have to improve our "social condition," is an insight that can

certainly be found in Hayek's work, yet one that he does not unambigu-
ously develop or consistently maintain. Neither the market nor cultural
evolution is "self-contained" in the sense that it would automatically pro-
duce, out of itself, the constraining framework that make it operate to the
benefit of the persons who live with it. As pointed out above, Hayek un-
mistakenly recognizes this for the market. Consistency requires that it be
also recognized for the process of cultural evolution.

Constitutional DeSign and Evolutionary Learning

The centerpiece of Hayek's theory of cultural evolution is the argument

that in all our efforts in problem solving we can never know in advance
what works best. All our problem solutions are tentative conjectures that
may be challenged and replaced by alternative, superior solutions. The
conclusion that Hayek suggests is that, in order to learn how things can be
done better, we should explicitly treat our problem solutions as the con-
jectures that they are, and place them into an environment in which they
can be effectively challenged by potentially superior alternatives.
The market is, from this perspective, an arena in which tentative solu-
tions/conjectures for a broad range of problems-whether concerning the
production of bread or the organization of large-scale enterprises-can be
tried out and challenged, within a framework of rules that define the terms
under which the alternative conjectures compete and are selected upon.
These rules are themselves conjectures, tentative solutions to the problem
of how, by what institutional framework, markets can be made to work
best, that is, to the greatest advantage of the persons involved. Here, too,
just as in other problem-solving efforts, we cannot know in advance what
works best: for instance, how certain property rights can be most suitably
defined, or what kind of patent laws are most advantageous. 55 And here,
too, if we want to utilize the potential of evolutionary learning, we need
to provide for a framework within which alternative conjectural solutions
can be tried out and compete in ways that assure responsiveness to the
interests of those who live under the arrangement.
Worked out to its logical conclusion, Hayek's evolutionary approach
suggests a thoroughly nondogmatic attitude to all dimensions and all aspects
of human problem-solving efforts, including, in particular, the various levels
of rules that define the terms of human sociallife. 56 If we take seriously the
insight that at no point can we be sure what, in the realm of rules, may
work best, and if we seek, therefore, to expose the rules on which we rely
CULTURAL EVOLUTION, COLLECflVE LEARNING 193

to a competitive environment and allow them to be challenged by poten-

tially superior alternatives, we can look at the institutional-constitutional
edifice of social life as a multilayered system of rules, in which the rules
at any particular layer are subject to competitive constraints that are de-
fined by rules at another level. As an example, since we cannot know what
the best way of producing cars is, we provide for a market framework in
which alternatives can be tried out under suitable competitive constraints.
Since we cannot know what rules may be most suitable for market com-
petition, we should seek to establish a framework-for example, in a fed-
eralist political system-that allows for alternative market rules to be tried
out, again under constraints that we expect to make for responsiveness
to the interests of the persons involved. And, since we cannot know in
advance what the best rules for the political choice processes are by which
we decide on rule matters, we should seek to expose these rules as well to
suitable competitive constraints.
A terminology suggested by Ludwig Lachmann (1963) seems useful to
capture the above notion of a multilayered sytem of rules and institutions.
With regard to the order of the market, Lachmann (ibid. , p. 67) distin-
guishes between what he calls internal and external institutions. External
institutions, in his terminology, are those that "constitute" the market;
they define the framework within which market activities take place. Inter-
nal institutions, by contrast, are those that result from the market process
itself; they are generated and shaped by market activities. The external
institutions, like the tax code or liability laws, define certain terms under
which market competition is carried out, and their appropriate main-
tenance is, as Lachmann (ibid., p. 76) notes, a political task. The internal
institutions, like financial instruments or forms of business organization,
are created and modified by market participants as they pursue their
interests within the constraints that market competition and the external
institutions impose.
As defined by Lachmann, the distinction between external and internal
institutions is an absolute distinction between two sets of market-related
institutions. Yet it can, of course, be generalized as a relative distinction
that applies to any adjacent layer of rules or institutions. For any institu-
tional setting we can distinguish between the rules that define constraints
within which other rules/institutions may be chosen or simply emerge. In
terms of the generalized evolutionary perspective outlined above, a prin-
cipal task of external institutions, at any level, can be seen in providing for
a suitable competitive arena in which alternative internal rules/institutions
can be experimented with. Whether the internal rules/institutions are
designed or undesigned experiments is of secondary importance, as long
194 ECONOMIC THOUGHT AND POLITICAL THEORY

as the external institutions insure a competitive environment in which

established practices are always exposed to the potential challenge from
superior innovations.
Interpreted in the above sense, Hayek's evolutionary argument is not,
as Hayek himself seems sometimes to suggest (1952b, pp. 162ft.), an argu-
ment against a rational approach to institutional matters. It is an argument
that can be rationally discussed and defended at the level of constitutional
discourse, that is, in discourse on the issue of how we should procede in
choosing the rules under which we live. Being aware of the limits of reason
and knowing that, in institutional just as in other matters, we cannot know
in advance what works best, we can rationally choose to adopt a frame-
work suitable for competitive evolutionary learning. The anti-constructivist
skepticism that informs Hayek's evolutionist outlook should not be under-
stood as an advice to abandon every effort to deliberately shape our insti-
tutional environment. It should, instead, be understood as an advice to
utilize, in our efforts in institutional construction, the explorative potential
of a competitive process of trial and error, a process through which we can
hope to achieve at least improvement, if not perfect solutions.
The recommendation to rely, in institutional as in other matters, on
competitive evolutionary processes, need not at all appeal to blind faith.
It can be argued on rational grounds, and Hayek has articulated many of
them. Yet these rational arguments can only be conditional arguments,
arguments about the working properties of competitive and evolutionary
processes that operate within certain constraints. They cannot be argu-
ments about unqualified processes of cultural evolution. A recommenda-
tion to rely on such processes could, indeed, appeal to nothing else but
blind faith.

Conclusion

Hayek's theory of cultural evolution is widely understood as being rel-

evant for the issue of how, according to what principles, we ought to
organize the socioeconomic-political order in which we live. Yet, as I have
sought to argue above, his account of cultural evolution can only have
such relevance if it is interpreted as a conditional argument, in the same
sense in which his account of the working properties of market competi-
tion is not an argument about competition per se, but a conditional argu-
ment about competition within the confines of "appropriate" rules.
Particularly in some of his later writings, Hayek has presented his theory
of cultural evolution as an unconditional theory, as a theory not about
how evolutionary forces can be expected to work under certain specified
CULTURAL EVOLUTION, COLLECfIVE LEARNING 195

conditions, but about cultural evolution per se, as an all-encompassing,

secular process that works itself out irrespective of any human effort to
establish a desirable institutional order. Such an unconditional theory of
cultural evolution can be of interest for various reasons, but it has little to
do with the enterprise that, quite clearly, is at the heart of Hayek's life
work, namely to contribute to the study of "the problem of an appropriate
social order" (Hayek, 1973, p. 4).
It may well be that "our desires and wishes are largely irrelevant" (Hayek,
1988, p. 134) for what will ultimately, in some distant future, survive in the
global process of evolution to which Hayek refers. And it may well be that
what will eventually emerge from this global process will be quite different
from what we, from today's perspective, would consider a desirable social
order. Yet, what does such insight tell us about how we should seek to
order our social affairs? Little, if anything at all.
We cannot know what will ultimately survive, if alone because the
evolutionary process will be affected by future knowledge that, for princi-
pal reasons, we cannot have today. Yet, even if we could know, or if we
were to believe we knew, would that be a good reason for us to adopt,
here and now, an institutional order that we do not find desirable? For
instance, if we were to believe that eventually, in some remote future, only
a totalitarian kind of social order would survive, should we, therefore,
decide to adopt such an order today? To answer this question in the nega-
tive is by no means the same as saying that we need not worry about the
workability of our plans for institutional reform. It would obviously be
naive if we should try to establish a social order that we consider desirable,
without examining whether it can be predicted to be sustainable in the
world as we know it. And it would be foolish to commit to an order that
is predictably not viable. Yet this is a simple matter of prudence that we
can appreciate without counseling the type of evolutionary theory at issue
here. Prudent institutional choices can only be made from the set of viable
alternatives.
Beyond what viability considerations can tell us, it would be futile to
speculate about-and adjust our institutional choices to-what might ul-
timately survive. Whether what we find desirable may ultimately survive
or not, within the limits of the viable we have no better criterion for
choosing than our preferences.

Acknowledgments

I am grateful to Richard Adelstein and Wolfgang Kerber for their helpful

comments on an earlier draft.
196 ECONOMIC THOUGHT AND POLITICAL THEORY

Notes

1. Rindos (1985, p. 66), in "Social Darwinism was not Darwinian." It should be noted,
though, that the often stereotypical disdain for Social Darwinism does not do justice to, at
least, some of the authors who are usually subsumed under this label. That a more qualified
assessment is appropriate in particular for the work of W.G. Sumner is argued in H. Kliemt
(1985).
2. For a discussion of the differences between Spencerian and Darwinian evolutionism
see Rindos (1985, pp. 66ft) who argues that "(t)he evolutionary models of Spencer and Darwin
are based upon totally different sets of assumptions" (p. 68).
3. Hayek (1973, p. 24): "The pretended laws of overall evolution supposedly derived
from observation have in fact nothing to do with the legitimate theory of evolution which
accounts for the process. They derive from the altogether different conceptions of the histor-
icism of Comte, Hegel and Marx."
4. For the post-Darwin era Hayek singles out Carl Menger as the one whose "evolution-
ary account of the emergence of cultural institutions" (Hayek, 1988, p. 70) was in the pre-
Darwinian tradition: "Carl Menger ... restated the general theory of the formation of law,
morals, money, and the market in a manner which, Ibelieve, had never again been attempted
since Hume" (Hayek, 1978, p. 265n).
5. Lehmann (1960, pp. 99ft.) notes about the "evolutionism" of this period: "By
evolutionism ... is here meant an attempt to . . . trace the origin and gradual development of
social and political institutions and of civilization generally ... and to explain them by the
operation of forces or 'laws' inherent in the developmental processes themselves. Human
nature is such a force in man's attempt to adapt to his environment and to improve his
position. Any kind of 'Providential' order is excluded, and there is a playing down, at least,
of the rational factor, of leadership roles and of any over-all political planning... . (F)ew
ideas more deeply penetrated and more widely influenced the social, political and historical
thought of the time than this evolutionary idea. . .. It pervades much of the thought of such
major thinkers as Hume, Smith and Ferguson."
6. Popper (1972, p. 267): "Darwin's theory of natural selection showed that it is in prin-
ciple possible to reduce teleology to causation."
7. Hayek (1960, pp. 59ft): "(T)he evolutionists made it clear that civilization was the
accumulated hard-earned result of trial and error; that it was the sum of experience, in part
handed from generation to generation as explicit knowledge, but to a larger extent embodied
in tools and institutions which have proved themselves superior."
8. In the summary of Chapter 4 of his The Origin of Species, Darwin has stated this notion
in the following terms: "If under changing conditions of life organic beings present individual
differences in almost every part of their structure, and ... if there be ... a severe struggle for
life ... , it would be a most extraordinary fact if no variations had ever occurred useful to
each being's own welfare .... But if variations useful to any organic being ever do occur,
assuredly individuals thus characterised will have the best chance of being preserved in the
struggle for life; and from the strong principle of inheritance, these will tend to produce
offspring similarly characterised. This principle of preservation, or the survival of the fittest,
I have called Natural Selection."
9. Mayr (1982, pp. 46f[.): "This uniqueness of biological individuals means that we must
approach groups of biological entities in a very different spirit from the way we deal with
groups of identical inorganic entities. This is the basic meaning of population thinking. . .. (H)e
who does not understand the uniqueness of individuals is unable to understand the working
CULTURAL EVOLUTION, COLLECfIVE LEARNING 197

of natural selection." See also Mayr's (1976, p. 28) contrast between the outlook "of the
population thinker and of the typologist."
10. Witt (1987, p. 116) suggests that biological evolution and cultural evolution can both
be viewed as processes through which information is transmitted, information embodied in
the gene pool of a population in one case, information transmitted as cultural heritage in the
other. Boyd and Richerson (1985) similarly base their "dual inheritance theory" of cultural
evolution on the notion that genetic and cultural inheritance are two channels along which
two kinds of information are transmitted.
11. In the absence of cultural transmission, experience acquired by individual learning is
lost with the death of the learning organism. Learning WOUld, in a sense, have to start from
zero in every new generation.
12. Campbell (1965, p. 41): "Thus instinct-formation involves a trial-and-error of the life
and death of whole mutant animals. A learning process may end up providing a very com-
parable behavioral repertoire, but does so by trial-and-error responses within the lifetime of
a single animal, and using memory rather than genetic structure as the storage process."
13. Rindos (1985, p. 72) refers to culture "as a peculiar manifestation of genetic plasticity."
14. Menger (1985, p. 232) has talked about "(t)he 'intuitive wisdom' in organically de-
veloped social institutions" as posing an explanatory challenge to the social theorist, not
"unlike the 'suitability' which in natural organisms strikes the admiring attention of the
expert natural scientist." On Menger, see note 4.
15. Popper (1972, p. 112): "(T)here is a close analogy between the growth of knowledge
and biological growth; that is, the evolution of plants and animals."
16. Popper (1972, p. 261): "From the amoeba to Einstein, the growth of knowledge is
always the same: we try to solve our problems, and to obtain, by a process of elimination,
something approaching adequacy in our tentative solutions."
17. Popper (1972, p. 71): "All acquired knowledge, all learning, consists of the modifica-
tion (possibly the rejection) of some form of knowledge, or disposition, which was there
previously, and in the last instance of inborn dispositions." For a similar argument on the
primacy of conjectural knowledge or the "primacy of the abstract" see Hayek (1967, pp. 23ft·;
1978, pp. 41ft.). With regard to such implicit knowledge Hayek talks about the "theorizing"
that is "done already by our senses" (1967, p. 24), and he notes that his views in these matters
are related to "Karl Popper's argument against 'inductivism'-i.e., the argument that we
cannot logically derive generalizations from particular experience, but that the capacity to
generalize comes first and the hypotheses are then tested and confirmed or refuted according
to their effectiveness as guides to actions" (Hayek, 1978, p. 43).
18. Popper (1972, p. 72): "(T)here is no sense organ in which anticipatory theories are not
genetically incorporated. The eye of a cat reacts in distinct ways to a number of typical
situations ... : these correspond to the biologically most important situations between which
it has to distinguish. Thus the disposition to distinguish between these situations is built into
the sense organ, and with it the theory that these, and only these, are the relevant situations for
whose distinction the eye is to be used." For a very similar view of the "theory-impregnated"
(ibid.) nature of our sense organs, see Hayek's reflections on "the intuitive capacity of our
senses for pattern recognition" (1967, p. 23).
19. Popper (1972, p. 71): "Knowledge in its various subjective forms is dispositional and
expectational. It consists of dispositions of organisms."
20. As an analogy for such unintended, evolutionary growth of institutions Popper (1972,
p. 117) mentions the example of animals who "unintentionally" create a path in the jungle,
by following-because of its greater ease-an existing track paved by others, and by doing
so contribute to making the lane even more convenient for those who come later.
198 ECONOMIC THOUGHT AND POLITICAL THEORY

21. Hayek (1960, p. 62): "(T)he evolutionary view is based on the insight that the result
of the experimentation of many generations may embody more experience than anyone man
possesses." Hayek (1967, p. 88): "(T)hose rules which have evolved in the process of growth
of society embody the experience of many more trials and errors than any individual mind
could acquire." For similar statements, see Hayek (1967, p. 92; 1973, pp. 11, 119; 1976, p.
135).
22. Hayek (1978, p. 10): "This sort of 'knowledge of the world' that is passed on from
generation to generation will thus consist in a great measure not of knowledge of cause and
effect, but of rules of conduct adapted to the environment .... Like scientific theories, they
are preserved by proving themselves useful, but, in contrast to scientific theories, by a proof
which no one needs to know .. .. This is the true content of the much derided idea of the
'wisdom of our ancestors' embodied in inherited institutions ... "
23. On the embodiment of knowledge in language see also Hayek (1956/57, pp. 517ft.).
24. About such "pre-sensory experience" Hayek (1952a, p. 167) notes: "A certain part of
what we know at any moment about the external world is therefore not learnt by sensory
experience, but is rather implicit in the means through which we can obtain experience .
. . . All that we can perceive is thus determined by the order of sensory qualities which
provide the 'categories' in terms of which sense experience can alone take place." Hayek's
thinking in these matters has been influenced by Lorenz's (1983, orig. 1941) biological
interpretation of Kant's categories a priori.
25. Mundinger (1980, pp. 190ft.) suggests as a "population definition of culture": "(C)ulture
is a set of populations that are replicated generation after generation by learning-on overt
population of functionally related, shared, imitable, patterns of behavior (and any material
products produced), ... and simultaneously, a covert population of acquired neural codes for
those behaviors. ... By populations I do not mean populations of organisms, but rather two
non-organism populations: a population of ideas (neural codes), and an associated popula-
tion of motor patterns (behavioral models)."
26. On the interaction between the processes of individual learning and sociocultural
evolution see Langton (1979, 1982).
27. Boyd and Richerson (1985, p. 34) comment on this issue: "The essential feature of
culture is social learning, the nongenetic transfer of patterns of skill, thought, and feeling
from individual to individual in a population or society. . . . (S)ocial learning can create ...
socially transmitted traditions that are not directly attributable to genetic factors and imme-
diate environmental contingencies. To understand the evolutionary process of ... cultural
transmission one must understand the forces that affect the frequency of different culturally
transmitted variants in a population."
28. Campbell (1965, p. 44): "(O)ne of the most obvious economies of social life is the
economy of cognition, i.e., of processes whereby the trial-and-error explorations of one mem-
ber serves to save others the trouble of entering the same blind alleys."
29. As Hayek (1960, pp. 24ft.) notes: "Knowledge exists only as the knowledge of indi-
viduals. It is not much better than a metaphor to speak of the knowledge of society, as a
whole. The sum of the knowledge of all the individuals exists nowhere as an integrated
whole."
30. As Hayek (1952b, p. 161) argues: "(T)he only 'reason' which can in any sense be
regarded as superior to individual reason does not exist apart from the interindividual pro-
cess in which, by means of impersonal media, the knowledge of successive generations and
of millions of people living simultaneously is combined and mutually adjusted, and that this
process is the only form in which the totality of human knowledge ever exists."
31. Hayek (1960, pp. 25, 30): "(C)ivilization enables us constantly to profit from knowledge
CULTURAL EVOLUTION, COLLECTIVE LEARNING 199

which we individually do not possess.... It is through the mutually adjusted efforts of many
people that more knowledge is utilized than anyone individual possesses or than it is possible
to synthesize intellectually."
32. Such an individualist interpretation of cultural evolution is also suggested when Hayek
(1960, p. 63) notes that it is the "flexibility of voluntary rules which ... makes gradual evo-
lution and spontaneous growth possible, which allows further experience to lead to modifi-
cations and improvements. Such evolution is possible only with rules which .. . can be broken
by individuals who feel that they have strong enough reasons to brave the censure of their
fellows."
33. Hayek (1988, p. 136) claims for "the evolution of moral orders through group selec-
tion" that "groups that behave in these ways simply survive and increase." Such wording is,
of course, misleading, since groups per se do "behave" according to moral rules; individuals
in groups do. What needs to be explained is, therefore, how individuals in a group come to
follow rules that make the group successful. If there is a collective goods problem involved,
the simple argument that the respective rules are group-beneficial is per se not sufficient for
an explanation.
34. Vanberg (1986). For a differing view see Hodgson (1991).
35. The principal argument against the group selection thesis is that, because of the
collective goods problem, the group-beneficial consequences of an individual's behavior are
per se not sufficient to explain the exhibiting of such behavior if it is costly to the respective
individual. Though individuals who exhibit group-beneficial, yet self-sacrificial, behavior will
share, as group members, in the group-benefits that they produce, other group members who
do not share in the costs of the group-beneficial behavior will have an even greater net-
advantage. As long as no additional factors come into play, factors that correct the distribu-
tion of payoffs between the group-benefectors and the free-riders to the advantage of the
former, selection works against group-beneficial behavior. This is true for genetically
transmitted behavioral programs, as well as for learned behavioral programs. In genetic
evolution, the free-riders would-other things being equal-have better prospects to repro-
duce. (An exception are "social insects," like ants, that reproduce as groups and among
which, therefore, interindividual genetic competition is absent.) And this is also true for the
transmission of learned rules, on which cultural evolution is based. If no compensating factors
are at work, free-riding will generate higher payoffs, and will, therefore, find stronger re-
inforcement than group-beneficial behavior. In human groups the instruments of deliberate
social organization and rule-enforcement can be, and often are, used to provide such com-
pensating factors.
36. The various interpretations of what group beneficial may mean that I try to distinguish
here are, by no means, always separated in Hayek's arguments. They often appear intermixed
as, for instance, when he notes about the evolutionary process: "(T)hough it clearly produces
also much that we ... do not like ... , it does bring for ever-increasing numbers what they
have been mainly striving for .... Man has been civilized very much against his wishes. It was
the price he had to pay for being able to raise a larger number of children" (1979, p. 168).
37. 1n Hayek's The Fatal Conceit, heavily edited by W. Bartley-one can even find the
extremely strange claim that" (i)t is not the present number of lives that evolution will tend
to maximise but the prospective stream of future lives" (1988, p. 132; emphasis in original).
38. See also Hayek's (1988, p. 23) argument about rules that evolved, "not because men
recognised by reason that they were better but because they made possible the growth of an
extended order ... in which more effective collaboration enabled its members, however blindly,
to maintain more people and to displace other groups." See also ibid., p. 120.
39. Hayek (1988, pp. 20ff.): "While it [an understanding of cultural evolution] cannot
200 ECONOMIC THOUGHT AND POLITICAL THEORY

prove the superiority of market institutions, a historical and evolutionary survey of the emer-
gence of capitalism .. . helps to explain how such productive ... traditions happened to
emerge."
40. Hayek (1988, p. 133): "Yet, as with every organism, the main 'purpose' to which
man's physical make-up as weU as his traditions are adapted is to produce other human
beings. ... There is no real point in asking whether those of his actions which do so contrib-
ute are reaUy 'good', particularly if thus it is intended to inquire whether we like the results."
41. The confusion that this shift tends to cause is reinforced by statements like the fol-
lowing from The Fatal Conceit: "It would however be wrong to conclude, strictly from such
evolutionary premises, that whatever rules have evolved are always or necessarily conducive
to the survival and increase of the populations foUowing them. We need to show, with the
help of economic analysis ... how rules that emerge spontaneously tend to promote human
survival. Recognizing that rules generaUy tend to be selected, via competition, on the basis
of their human survival-value certainly does not protect those rules from critical scrutiny.
This is so, if for no other reason, because there has so often been coercive interference in the
process of cultural evolution" (Hayek, 1988, p. 20). In evaluating this argument, or others,
from The Fatal Conceit, one should keep in mind, though, that this last major publication of
Hayek was, as I mentioned before, heavily edited by W. Bartley.
42. Hayek (1988, p. 19) points to an elementary requirement when he notes: "Competi-
tion is a procedure of discovery, a procedure involved in aU evolution .... To operate ben-
eficiaUy, competition requires that those involved observe rules rather than resort to physical
force. Rules alone can unite an extended order." See also Hayek (1967, p. 12; 1948, pp. 101ff.;
1978, p. 135).
43. And they teU us that what succeeds in market competition can be considered desir-
able, at least, if we agree with A. Smith's (1979, p. 660) argument that "(c)onsumption is the
sole end and purpose of aU production," a maxim which, he thought, "is so perfectly self-
evident, that it would be absurd to attempt to prove it."
44. Hayek (1960, p. 27): "(W)e command many tools-in the widest sense of that word-
which the human race has evolved and which enable us to deal with our environment. These
are the results of the experience of successive generations which are handed down. And,
once a more efficient tool is available, it will be used without our knowing why it is better,
or even what the alternatives are.
These "tools" which man has evolved and which constitute such an important part of his
adaptation to his environment include much more than material implements. They consist in
a large measure of forms of conduct that he habituaUy foUows without knowing why; they
consist of what we caU "traditions" and "institutions". . .. Man is generaUy ignorant ... of
why he uses implements of one shape rather than of another. .., He does not usuaUy
know to what extent the success of his efforts is determined by his conforming to habits of
which he is not even aware." See also Hayek (1956/57, p. 519; 1973, p. 113; 1976, p. 21; 1979,
p. 163).
45. Whether the image of a process in which individuals are the principal experimentors
and selectors is, in fact, appropriate for aU kinds of "tools" in the ordinary sense is an issue
that can be left aside in the present context. Of relevance here is the issue of whether such
an image is appropriate for aU kinds of rules.
46. On the distinction between personal and social rules, see Vanberg (1988, pp. 158ff.).
47. On this issue see Vanberg (1992, pp. 114ff.). Phillips (1945, pp. 255ff.) refers to one
aspect that is relevant here, when he talks about the role of individual experimenting: "In
some fields, however, this cannot be done . . . . An illustration of this is government ... . The
essential difference is that an individual can perform an experiment in physics, whereas it
CULTURAL EVOLUTION, COLLECfIVE LEARNING 201

requires a whole nation to perform an experiment in government." On the difference be-

tween technological and social-institutional evolution, see also Campbell (1975, pp. 1105ff.).
48. Hayek (1988, p. 131): "Although the displacement of one group by another, and of
one set of practices by another, has often been bloody, it does not need always to be so .
. . . Many of these processes may then have happened entirely peacefully, although the greater
military strength of commercially organised people will often have accelerated the process."
49. See, for instance, Hayek (1960, p. 110): "We have no ground for crediting majority
decisions with that higher, superindividual wisdom which, in a certain sense, the products of
spontaneous social growth may possess." See also Hayek (1960, p. 111; 1979, pp. 76, 167;
1988, pp. 19, 730).
50. Hayek (1988, p. 103) adds the complaint that "so little private experimentation and
selection among alternative means has ever been permitted." See also Hayek (1979, p. 163):
"The basic tools of civilization-language, morals, law and money-are all the result of
spontaneous growth and not of design, and of the last two organized power has got hold and
thoroughly corrupted them."
51. Hayek (1988, p. 20): "The evolution of rules was far from unhindered, since the
powers enforcing the rules generally resisted rather than assisted changes conflicting with
traditional views about what was right or jUst."
52. For similar statements see Hayek (1967, p. 92; 1973, p. 65; 1978, p. 19; 1979, p. 167).
53. Hayek (1960, p. 37): "The relevant distinction is ... between conditions, on the one
hand, in which alternative ways based on different views or practices may be tried and
conditions, on the other, in which one agency has the exclusive right and the power to
prevent others from trying."
54. This role for "constitutional design" appears also to be recognized when Hayek (1952b,
pp. 160f[.) contrasts two "fundamentally different" attitudes towards institutional reform:
"(O)n the one hand the essential humility of individualism, which endeavors to understand
as well as possible the principles by which the efforts of individual men have in fact been
combined to produce our civilization, and which from this understanding hopes to derive the
power to create conditions favorable to further growth; and, on the other hand, the hubris of
collectivism, which aims at conscious directions of all forces of society" (emphasis added.)
55. Hayek (1988, p. 35): "The institutions of property, as they exist at present, are hardly
perfect; indeed, we can hardly say in what such perfection might consist. Cultural and moral
evolution do require further steps if the institution of several property is in fact to be as
beneficial as it can be."
56. Hayek (1960, p. 23): "If we are to advance, we must leave room for a continuous
revision of our present conceptions and ideals which will be necessitated by further experience."

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 8 HEALTH AND CHOICE:
THE CONTRIBUTION OF
JAMES BUCHANAN
David Reisman

A.L. Macfie, looking to the future, anticipated a renewed need for the
unique combination of the analytical and the philosophical, the social and
the psychological, that is the lasting gift of the Scottish giants: "If there is
a future for sociological economics and politics-and if there is not we
shall have to make it-then there is an opportunity for the resurgence of
the Scottish tradition and the Scottish genius" (Macfie, 1955, p. 17).
Buchanan on health and choice provides convincing proof that the oppor-
tunity has indeed made the man and that the Scottish method lives on in
the political economy of an influential contemporary who has had the
courage to take the wider view.
This chapter is concerned with the contribution of James Buchanan to
the collective choice of the optimal health care policy. Divided into two
sections, it first examines Buchanan's views on the inconsistencies of the
National Health and then considers his analysis of the American private-
sector alternative. The conclusion is reached that Buchanan's box of tools
is in truth an extension of Enlightenment attitudes and that Adam Smith
lives on in the public choice posture of agnosticism and negotiation, con-
sensus and compromise without which "we would surely fight" (Buchanan,
1985, p. 3).

205
206 ECONOMIC THOUGHT AND POLITICAL THEORY

The two sections of this chapter demonstrate that the Mecca of the
consistent Virginian is properly to be sought in the methodological indi-
vidualism of Adam Smith. Logically so, since it is the essence of Buchanan's
public choice that good procedures are always and everywhere to be ranked
above specific endstates: "As Adam Smith recognized so clearly, ... there
is no agreed upon objective for the participants in an economic nexus, each
one of whom seeks only to pursue his or her own privately defined aims
(which mayor may not reflect narrowly defined economic interest). Absent
such agreement, there is simply no external standard by which alternative
structures can be evaluated" (Buchanan, 1989a, p. 25). The point of de-
parture is revealed preference. Buchanan, being as skeptical of Samuelson's
Social Welfare Function as Smith was of Rousseau's General Will, neither
could have had any other: "Agreement is all" (Reisman, 1990, p. 117).

The National Health

Buchanan's first major contribution to the debate about health care and
health policy was his Institute of Economic Affairs paper of 1965 on The
Inconsistencies of the National Health Service. Pro-market thinking in Britain
in the eighteenth year of the NHS (and the first year of American Medicare)
then centered around user charges, occasionally around means testing,
very occasionally around re-privatization. What pro-market thinkers actually
found in Buchanan in the first year of Harold Wilson's new Labour
government is very likely to have been what they expected to find. There
can be no doubt that there is much in Buchanan's paper that is broadly
consonant with the views that were then being expressed by John Jewkes,
Dennis Lees, Lionel Robbins, Arthur Seldon, and Jack Wiseman. Yet it
cannot be denied that there is much as well that would have been more at
home in the Italian public finance tradition of Puviani and Einaudi than it
was then in the British political culture of vintage Butskellism. The insights
that seemed familiar were cited and absorbed. The insights that seemed
far-out were neglected and ignored. The result of selective reading in a
complacent era was as predictable as it was partial: Buchanan was taken
to have written a plaidoyer for competitive pricing and commercial top-
ups when the true novelty of his analysis lay in the critique of a unidisci-
plinary orthodoxy more at home with the idealized abstractions of welfare
economics than ever it was with the far more relevant "problems of collec-
tive decision-making" (Buchanan, 1965a, p. 8). Pro-market thinkers praised
Buchanan for praising the market. Anti-market thinkers attacked Buchanan
for failing the poor. Three years after the publication of The Calculus of
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 207

Consent, one would have expected a greater appreciation of the distinction

that Buchanan was trying to draw between good rules on the one hand,
picking winners on the other, when he came in 1965 to examine the In-
consistencies of the National Health Service.
Demand was greater than supply in the social health sector, Buchanan
said, and the consequence had been a deterioration in the standard of
care: "The failures are exhibited by breakdowns in the quality of the ser-
vices themselves due to the disparity between the facilities supplied and
the demands made upon them" (Buchanan, 1965a, p. 9). Failures are es-
sential to the diagnosis of Inconsistencies: no consistent democrat would
feel that the Service had a case to answer if long waiting times were merely
the socially preferred rationing mechanism, if limited availability were only
another name for economic scarcity in a world of nonfinite resources, if
doctors' complaints were simply the bargaining ploy of rent seekers doomed
forever to seek rents. Buchanan's examples of crowding and congestion
are not in themselves robust enough to bear out his contention that the
system was overloaded virtually to the breakdown point. Besides that,
indicators of success exist which go some way toward counterbalancing
the illustrations of failure: thus the tendency of a socialized system to rely
heavily on preventive medicine in preference to costly cure will ceteris
paribus damp down the long-term demand for care, while the redistribu-
tion of a fixed budget in favor of the geographically underdoctored and the
occupationally underprivileged might be consensually regarded not as
breakdown but as felicity by a generous nation prepared to put up with
longer waits in exchange. Failures are essential to the diagnosis of In-
consistencies, but whether Buchanan actually proves that there has in fact
been a breakdown is another matter. Being fair to Buchanan, of course,
one would have to concede that no generally accepted statistic on systemic
breakdown has as yet been constructed. Objective data on morbidity and
mortality are less than ideal from the perspective of the methodological
individualist who accepts the logical possibility that unanimity of consen-
sus might rank other goals above health status at the margin. Subjective
data are vastly preferable but also seldom available: the deficiency is
especially acute in cases of socialized provision or insured payment where
negotiated prices cannot be relied on to supply a proxy for intensity of
need. One should not, therefore, be too hard on Buchanan for measuring
breakdown on the basis of complaints. Perhaps the patients should be
more patient about waits, perhaps the doctors should be less greedy about
payment-but perhaps qualitative indicators such as complaints are, after
all, good grounds for the supposition that the Service is falling victim to its
own Inconsistencies.
208 ECONOMIC THOUGHT AND POLITICAL THEORY

The cause of the mismatch between demand and supply in the Health
Service was not, in Buchanan's view, administrative slack or bureaucratic
inefficiency-a public choice concern with which he was all too prepared
to identify himself in the Preface (published in the same year as the In-
consistencies) to Gordon Tullock's The Politics of Bureaucracy. The cause
was not the result of technical shortcomings, Buchanan said, but rather
something as fundamental as the very "structure of the institutions" (Buch-
anan, 1965a, p. 4). Rational choice in a socialized system must compel the
maximizing consumer to expand hislber demand up to the point where
marginal utility equals price equals zero. Rational choice in a socialized
system must also compel the maximizing voter to restrict the supply of
taxation that slbe imposes on him/herself. Rational choice impels the
typical consumer to demand more· and more: even if fully aware of
overconsumption relative to non-zero opportunity cost, still it would be
irrational for one among many to forego benefits when the resources saved
will not make a measureable difference to total quantities. Rational choice
also impels the typical voter to supply less and less: however strongly she
is committed to health and care, still slbe will want it to be the others who
pay the piper while she him/herself plays the free rider on the tune. As
consumer, the typical individual wants to consume more; as voter the typi-
cal individual wants to taxpay less; and thus the incompatibility between
the private and the public choice of one and the same individual turns out
to be the fundamental reason why, in Buchanan's view, the representative
calculator will rationally press both for an expansion in services and for a
reduction in the taxation that supports the services.
The representative calculator's lot is evidently not a happy one. Even
less happy, however, is the lot of the representative politician in a Downs-
type economic theory of democracy: whether s/he expands or whether
slbe reduces, still slbe would appear to be trapped in an Arrow-type im-
possibility bind from which no voter-pleaser can expect to emerge success-
ful. And all of this due not to a lack of wisdom on the part of the leadership
but simply because of a conflict of roles in a specific institutional environ-
ment. Adam Smith, writing of the East India officials, had said that it was
the perverse incentives and not the rational individuals that he had most
wished to censure for the shortcomings of the corporation. James Buchanan,
writing of the National Health Service, has provided no less institutional
an account of the intrinsic excess of demand over supply which he regards
as the beacon that lights the way to failures on a good day, breakdowns
on a bad one.
As ingenious as Buchanan's explanation quite obviously is, nonetheless
there are reasons for thinking that the Jekyll and Hyde model of schizo-
phrenia by consent somewhat overstates the gravity of the threat.
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 209

On the demand side, it must never be forgotten that medical attention

even at a zero user-charge always imposes the nonnegligible costs of time
and travel, to say nothing of the nonpecuniary burdens of pain and danger.
Care in itself only yields utility, Buchanan has conceded, to "the 'little old
ladies'-of both sexes-who literally enjoy trips to the clinic" (Buchanan,
1990a, p. 6); while no one but an extreme hypochondriac would put in for
an unnecessary appendectomy merely because it was free. Also, the loy-
alty of the doctor to the Service as well as to the patient is likely to mean
that urgent demands will automatically be ratified (a broken bone will
be set, a difficult pregnancy smoothed) but that discretionary treatments
(cosmetic surgery, perpetual psychoanalysis) will remain vulnerable to the
societal gatekeeper's strict refusal. Such a sensitivity of resource allocation
to consensual criteria is one of the most attractive features of the social-
ized option to the pure constitutionalist. Even, however, where morally
unacceptable (perhaps because it refuses treatment for nonmedian com-
plaints), still it undeniably performs the useful function of imposing a limit
on demand-led utilization. Since the line must be drawn somewhere, one
is compelled to reflect that there are worse decision-making mechanisms
that might be employed than the reliance on professional ethic and societal
priorities in preference to the overconsumption that is the undesired out-
come of uninformed patients' unbridled sovereignty. Had Buchanan
acknowledged the crucial role of the doctor as gatekeeper, he would have
pleased both the constitutional political economists (provided only that
the filters employed by the practitioners be broadly acceptable to ex ante
unanimity of consent) and the National Health supporters (provided only
that the consensus remember the invisible, the inarticulate, and even the
unsavory). Had he done so, of course, his imputation of Inconsistencies
would have been significantly weakened and he would have had to choose
a different title for his paper. Worse things can happen.
On the side of supply as well as on that of demand, there too forces
would seem to be operative such as suggest that Buchanan's theory of
Inconsistencies may somewhat have overstated the gravity of the problem.
Buchanan's concern would seem to be the reluctance of taxpayers to pay
for the public goods which they as citizens are keen to consume. At one
level the fear is as well founded as the saloon-bar commonplace that the
meal is the utility, the bill the dolerosa. At another level, however, the fear
is as meaningless as the reductio ad absurdum that the rational citizen in
a democracy will consistently press not for low taxes but rather for no
taxes at all. Talking realism, the payment of tax is not optional but com-
pulsory: it was in the very year of the Inconsistencies that Mancur Olson
(who had built on Baumol, who had built on Hume) had demonstrated
the value, in The Logic of Collective Action, of coercive coordination,
210 ECONOMIC THOUGHT AND POLITICAL THEORY

consensually imposed, as a means of bringing order to an n-persons'

Prisoner's Dilemma. Talking legitimacy, the bundle of benefits is selected
according to agreed-upon procedures: the voter in the democracy who
participates in the game (who, in the limit, actually supports the services)
has in that sense no greater a moral right to opt out of the costs than has
the diner who plays the free rider immediately after the sweet. Buchanan
is in the circumstances placing himself in a difficult position when he pre-
dicts that rational supply will fall short of rational demand: assuming that
the consumer is aware both of the bundle and of the price, the most that
can be said is that we are here in the realm of the might but not of the
must.
Package deals are, of course, unsatisfying compromises; and an entirely
separate explanation of the underfunding of the Health Service might
have been the British practice of funding health out of general and not
hypothecated taxation. General taxation can be applied to the provision of
health care. Equally, however, it can be employed to provide education
and defense. It might thus have been the case that the underfunding rela-
tive to demand which Buchanan identified in the NHS was not the result
of the rational health calculus which he infers so much as the outcome of
a differently focused calculus on the part of passionate minorities such as
childless couples and militant pacifists. Hypothecated taxation, visible and
nonfungible, might have been capable, in the Britain of the 1960s, of
reducing voter alienation and augmenting tax revenues-very much as
Buchanan had suggested in a celebrated defense of earmarking published
in 1963. There he had shown, using a two-service illustration, that compart-
mentalization and unbundling could lead to an increase and not a decrease
in the supply of public finance: "Not only will the favored service be
allotted a larger share of each budget dollar, but also total spending on
both services increases" (Buchanan, 1963b, p. 118). Earmarking, Buchanan
said in 1963, was efficient, precisely because "the reference system be-
comes that of the individual citizen" (Buchanan, 1963b, p. 108). Segrega-
tion, Buchanan said in 1963, was sensitive, precisely because it was "one
means of insuring more rational individual choice" (Buchanan, 1963b, p.
108). Both in terms of aggregate revenues and of individual participation,
in short, the British supporters of a service-specific National Health tax
would have had good grounds to look to the Buchanan of 1965 to take a
lead. They would have looked in vain: whatever the explanation of the
excess of demand over supply, Buchanan in 1965 apparently saw the fiscal
regime as forming no part of the story.
Buchanan in 1965 diagnosed an excess of demand over supply that he
believed to be the result of marked Inconsistencies between the demand
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 211

side and the supply side of a single choice calculus. He also explored
reforms that he saw as potential techniques for transcending the arbitrary
duality that was the cause of the perpetuated imbalance.
On the side of demand, Buchanan drew attention to the elimination of
shortages and surpluses through markets: "Prices would be set by competi-
tive forces and the services finally made available would be determined
not through a collective-political decision but by the private decisions of
many suppliers responding to expressed demands" (Buchanan, 1965a, p.
17). Taxes being nonzero, the advantage of nonzero prices would be at
least to bring demand and supply within the same framework of discourse.
Such a restructuring of institutions would reduce the congestion that inevit-
ably arises when consumption is allowed to proceed to the point at which
marginal utility becomes equal to zero. It would bring the opportunity cost
to the community of the health care inputs in some measure into the
individual's own calculus. It would allow positive statements to be made
about the optimality of care: clearly, "zero user prices are not demonstra-
bly optimal in themselves" (Buchanan, 1965a, p. 22), and nor are revealed
preferences about quantities demanded in an Eden-like environment where
the consumer pays no cost in exchange for hislher benefit.
Pricing of care was frequently opposed in Britain in the 1960s with the
argument that a flat-rate charge is always a disproportionate burden on a
lower income. Buchanan's position is different. It is also characteristic of
his attitude to entitlements.
Looking backward, Buchanan shows no interest in the historical origins
of the status quo endowments. We start from here, not from there, Buch-
anan is fond of stressing; and "rectificatory redistribution, if effectuated,
must, as a process, involve violation of the contractarian or agreement
criteria for fairness" (Buchanan, 1988, p. 206). Property rights are so
important in themselves, Buchanan says, that they can only be defined as
constitutional matters, not to be settled save behind a veil of ignorance,
not to be altered without unanimity of consent such as effectively rules out
what socialists would describe as the retributory correction of a past injus-
tice. What exists is where we are now, Buchanan would argue; and con-
fiscation by consent, the veil drawn aside but unanimity retained, is less
than likely to occur in a world of rational homines economici.
Yet redistribution might still occur, Buchanan would maintain; and the
reason is that, bygones being forever bygone with respect to the wins and
the losses of the historical past, all individuals are truly situated behind a
veil of uncertainty when they contemplate the future. Looking forward if
not looking backward, in other words, claims can be rethought on an
impartial basis and allocations reconsidered in the certain unknowledge
212 ECONOMIC THOUGHT AND POLITICAL THEORY

that the crippled beggar paying the crippling user charge might turn out
one day to be oneself. Rawls would be confident enough about anxiety
actually to predict a deliberate policy of skewing economic command in
favor of the least advantaged. Buchanan, wavering nervously between
agnosticism and indeterminacy, would be prepared to say only that
oughtness is whatever good procedure throws up as best: "Any set of
arrangements of implementing fiscal transfers, in-period, meets the consti-
tutional stage Wicksellian test, provided only that it commands general
agreement" (Buchanan, 1987, p. 312). Buchanan's tolerant individualism
will not be as reassuring as Rawls's Difference Principle to the members
of the lower-income groups in some doubt as to how to react to the proposal
for prices. What must be stressed is that there is no reason to suppose that
the allocative decision (to introduce user charges) will not be accompanied,
in Buchanan's case, by a separate, redistributive decision (to top-up pur-
chasing power with cash transfers or health vouchers). There is, of course,
no reason to think that it will be; but that is somehow not Buchanan's
point. Buchanan's point is that an optimal decision on user charges should
not be delayed merely because of the impact of that decision on the
distribution of income. The distribution of income, he would say, is im-
portant enough to warrant treatment other than at the back door-and
nonzero prices are potentially of some value in solving the demand-side
problems that had led to the Inconsistencies.
As with demand, so with supply, where Buchanan searched for institu-
tional reforms likely to bring the two blades of the scissors into a more
viable relationship one with the other. With the underlying problem being
an excess of supply over demand, it might have been expected that he
would propose not only deterrent charges on the demand side but also an
expansion in the supply of resources that was actually being devoted to
health. Perhaps this was his proposal and perhaps it was not. With hind-
sight, and in the light of his later reservations concerning the escalation of
costs, his position in 1965 can best be described as perceptively ambiguous.
Thus, in the case of the private sector, his proposal was for the unre-
stricted growth of parallel provision. The state had never come clean about
limited entitlements in Britain, Buchanan implied: rather than admitting
that the NHS simply did not have the money to live up to the unrealistic
expectations it had engendered, it had relied on nonprice rationing through
waits and criteria such as had led inevitably to frustration and dis-
appointment. Abandoning open-ended commitments that could not be
honored, Buchanan suggested, the state should pre-specify the per capita
entitlement to care (in physical units or, employing shadow prices, in eco-
nomic values) and then rely on "a market or market-like set of institutions
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 213

to emerge which supplements the publicly-funded, publicly-supplied facil-

ities" (Buchanan, 1965a, p. 18). Such top-up protection would cater both
for minority wants (say, for a private room) and abnormal needs (say, for
an expensive drug not available in the state scheme). It would also have
the attractive philosophical property that it would encourage individuals
to put their money where their mouth is with respect to the supply of
resources devoted to care. Yet Buchanan never says precisely how the
growth in the top-up sector is best to be stimulated. His underlying pre-
mise being failure and breakdown, it is by no means clear that the pre-
specification of state entitlements (even if in the form of "relatively absolute
absolutes," constitutionally protected against the competitive bidding of
practical politics) will be sufficient to promote the desired expansion in
supply: the perception of failure and breakdown in the Health Service had
demonstrably not led to a significant expansion in private protection in the
years leading up to 1965, and few things can be less conducive to health
status than are failure and breakdown. Tax relief would have been a pos-
sibility, but it is one that Buchanan has elsewhere rejected as burdensome
(since selective exemptions prevent across-the-board reductions) and in-
equitable (since tax deductions are regressive, worth more at higher
marginal rates): "What is needed for efficiency is a pattern of effective
price reductions varying with incomes" (Buchanan, 1970a, p. 300), Buchanan
has said, and clearly, the price discrimination built into tax relief is the
inverse of the desired effect. All of which then raises doubts as to whether
Buchanan has in practice isolated the trigger mechanism by means of which
the incremental growth in private sector supply is effectively to be brought
about.
With respect to public sector supply, Buchanan's position is no less
difficult. The economic approach to politics would seem to point to demo-
cratic overexpansion of collectivised provision-but the facts speak elo-
quently in support of containment and control: "Since 1948, total outlay
on medical-health care has increased less in Great Britain than in the
United States, where it is supplied largely in the market" (Buchanan, 1965a,
p. 8). The homo economicus orientation would seem to point to self-
interested conduct on the part of cynical politicians keen only to please
their voters-but the evidence is better compatible with a hypothesis of
moralistic self-denial and normative non-individualism: "Responsible
collective, i.e., governmental, decision-makers have not expanded invest-
ment in supplying health services to the levels of expressed individual
demands" (Buchanan, 1965a, p. 9). The market mechanism is often credited
with superior economic efficiency-but where spillover benefits are involved
(the case of coordinated immunization) or where economies of large scale
214 ECONOMIC THOUGHT AND POLITICAL THEORY

arise (the case of capital-intensive medicine), there the collectivized option

may well prove the more cost-effective one: "If there were no municipal
fire departments, it is likely that total outlay for fire protection would
exceed the costs of maintaining the fire departments" (Buchanan, 1963a,
p. 205). The positive economist is often said rationally to value the precise
prediction-but where the payoff from the budget simply cannot be estab-
lished with any accuracy, there it would be wrong to pretend that one is
indeed in a position to say whether it was the land of Shakespeare or the
land of Lincoln that had spent more prudently in the area of health: "We
can infer nothing at all concerning the 'correctness' or 'incorrectness' of
the collective decisions that have been made as regards aggregate levels
of provision. The observed facts are consistent with either non-optimal or
optimal levels of investment since 1948" (Buchanan, 1965a, p. 22). Under-
supply might accompany Inconsistencies-and National Health expendi-
tures ought in such circumstances to be expanded. Alternatively, optimal
quantities might accompany Inconsistencies-and the premium in such a
case would be on the leaner pig, not the fuller trough. Overdevelopment,
finally, might accompany Inconsistencies-and then the task would be to
weed out inputs that were no longer dancing to any recognisable tune.
Buchanan's conclusions are evidently not as single-valued as the formula
for liquid nitrogen. Nor, however, is the complex social kaleidoscope to
which they relate.

The American Experience

At the University of Virginia in the mid-1960s Buchanan secured a re-

search grant from the National Center for Health Services Research and
Development. His collaborators were two promising doctoral candidates,
then unknown except for the names of Mark V. Pauly and Cotton M.
Lindsay that were subsequently to be associated with such distinguished
work in the field of health economics.
Mark Pauly secured his Ph.D. in 1967: his thesis (entitled "Efficiency
in Public Provision of Medical Care") was later to become his standard
reference on Medical Care at Public Expense, to say nothing of "The
Economics of Moral Hazard" that appeared in the American Economic
Review in June 1968. Cotton Lindsay obtained his doctorate a year after
Pauly, submitting a dissertation on "Supply Response to Public Financing
of Medical Care in the United States" and then departing on a NATO
postdoctoral fellowship for the year's study at the London School of Eco-
nomics that was to culminate in "Medical Care and the Economics of
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 215

Sharing," published in Economica in November 1969. Lindsay (by then at

University of California at Los Angeles) was clearly more than conversant
with British conditions when he prepared, together with his former super-
visor, the report for the British Medical Association on "The Organisation
and Financing of Medical Care in the United States" that appeared in 1970
in the BMA's compendium on Health Services Financing. Buchanan (by
then at the Virginia Polytechnic Institute) was himself no stranger to the
National Health: Fulbright Visiting Professor at Cambridge from 1961-1962,
Visiting Professor at the London School of Economics in Spring 1967, the
author of the Inconsistencies, a frequent visitor to Britain, he like Lindsay
was well placed to make cross-cultural comparisons of rules and institutions.
The contribution to Health Services Financing was written at a time
when the United States was the world leader in care per capita: the United
States in 1970 was devoting 6% of its national product to medical care, and
this had risen from 4% in 1929 (when, of course, the Gross National Prod-
uct was itself lower). The resourcing was impressive, Buchanan and Lindsay
said, but the record for all that was disappointing. Medically, the age-
specific mortality rates were unsatisfactory and deteriorating. Socially, the
large numbers of doctors trained in subsidised medical schools were, in
Lyndon Johnson's Great Society, demonstrably not supplying an adequate
service for the poor, the elderly, and the isolated. Economically, opportun-
ity costs were being neglected, medical prices were inflating at twice the
general rate, and scarce potential was flagrantly being wasted despite the
fact that it could so easily mean the difference between life and death. All
was apparently not well in the United States at the time when Buchanan
and Lindsay published their paper.
Being methodological individualists and not militant ideologues, the
general conclusion of Buchanan and Lindsay was that there was a good
case to be made in favor of balance: "Essentially," they said, "we remain
pragmatists" (Buchanan, 1970b, p. 584). Buchanan and Lindsay were able
to see some scope both for the collective and for the private. It may
accordingly prove helpful to examine their analysis with respect to each of
the two sectors in isolation.

Collective Action

The starting point for collective action is the rational choice of the indi-
vidual citizens that togetherness is indeed preferable to separability. Their
choice will refer exclusively to their own nation, quintessentially unique
as each historically delimited aggregate must necessarily be. Their very
216 ECONOMIC THOUGHT AND POLITICAL THEORY

ability to reach agreement without prohibitive transaction costs and side

payments will in itself be proof that they as a nation possess the requi-
site homogeneity of consensus to be capable of action as a unit. Some
collectivities will be too divided even to contemplate the possibility of such
action: "The problems become almost unmanageable when it is admitted
that different segments of society may have different attitudes toward the
appropriate goal of collective action" (Buchanan, 1970b, p. 567n). Divided
collectivities will forever be condemned by the democratic standards of
methodological individualism to private purchase, however deficient. United
collectivities will at least possess the option of choosing to socialize and
to nationalize. This is not to say that they will inevitably opt for collec-
tive action, only to say that a consensual society like Sweden will enjoy a
genuine choice between the shared and the individualized that will effec-
tively be denied a conflictual society like India, dependent willy nilly on
economic exchange because of a general inability to agree on a viable
alternative.
Buchanan and Lindsay chose to treat the United States as a single
decision-making unit. In that way they de facto precommitted themselves
more to the India than to the Sweden model. Fiscal federalism and the
theory of clubs would have done much to alter the balance. Devolution of
power (not excluding the exit option and the right to secede) had been a
longstanding concern of the farm boy from the Deep South who, warning
the British in 1990 against "regulatory 'Brusselsization'" without respect
for local diversity, informing them in addition that "Lincoln's decision to
fight to preserve union can be viewed as a breaking of the implicit contract
that had established the federal structure" (Buchanan, 1990b, pp. 6, 18),
was only harking back to the case for "a truly decentralized political struc-
ture in the power sense" that he had first made so eloquently no less than
four decades earlier: "As the need for an ever-expanding scope of public
services increases, with especial emphasis on the social services," he had
cautioned the readers of the American Economic Review in 1950, "the
laissez-faire result will be the ultimate centralization of effective political
power" (Buchanan, 1950, p. 189). Alarmed by this concentration, he had
therefore put forward proposals intended to stem the encroachment of the
carpet-bagging monolith. Buchanan was in the circumstances more than
favorably disposed to Charles M. Thiebout's Journal of Political Economy
paper on "A Pure Theory of Local Government Expenditures" that, in
1956, developed a theory of locally supplied public goods selected through
the personal mobility of rational migrators. Ultimately he was to judge the
Thiebout model of voting with the feet somewhat of a "pseudo-paradigm,"
incomplete, "indeterminate," and "nihilistic," unable to incorporate the
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 217

feedback effects on the competing localities of the ever-changing revenue

base, weak on the locational rents that arise in the private sector and that
make the real choice one of simultaneous maximization subject to a dual
constraint: "The criterion for optimality is that individuals should locate
themselves in space in such a fashion that each person's contribution to
total value, private and public, is the same in all locations" (Buchanan,
1972a, pp. 249, 260). Although he undoubtedly had reservations, Buchanan
also found much that was much to his taste in Thiebout's idea of indivi-
duals with similar demand functions who band together to share non-
excludable public goods on a local basis: thus he has expressed the view
with respect to differentiation and autonomy, that it must be "the primary
purpose of federalism" to "create competition between jurisdictions" (Buch-
anan, 1980, p. 183). His work on the theory of clubs may in that sense be
read not simply as an account of the swimming club but as an interpretation
of the fiscal club as well. Larger than the individual but smaller than the
nation, the noncentral "consumption ownership-membership arrangement"
(Buchanan, 1965b, p. 207) represents a self-selected pool, a voluntarily
espoused circumscription that is committed by its charter to the revealed
preferences of the local electorate. With local policies being more finely
tuned than national, one would have expected methodological individual-
ists like Buchanan and Lindsay to have factored their interpretation of
American health policy down to the smallest economic level of analysis.
Perhaps because American health policy tends in practice significantly to
be formulated at the center, they chose in the event to forego the normative
in favor of the positive and to treat the United States as a single decision-
making unit. Yet the United States is a large and a complex country; and
to that extent the commitment of Buchanan and Lindsay to the analysis of
the what is may have had the unintended effect of building an India into
the account when possibly the nation, broken down into component clubs,
might more fruitfully have been described as a series of Swedens.
India or Sweden, what may at least be said about America is that there
is some perception in that country of interlinked destinies in the specific
area of health: "Some individuals are willing to pay something to see that
others consume more medical care than they privately would choose to
consume if left to their own devices" (Buchanan, 1970b, p. 563). Some
individuals are apparently convinced that private provision unsupplemented
leads inescapably to underallocation-and that collective action, necessary
and welcome, is best orchestrated through state compulsion and not through
voluntary charity: "Each individual may keep his own contribution arbit-
rarily small if he expects others to provide the balance. A more desirable
state of affairs may be attained if all persons collectively agree upon the
218 ECONOMIC THOUGHT AND POLITICAL THEORY

amount each is to 'contribute'. This provides an 'economic' rationalization

of what governments do through the taxation/expenditure process. Via
the political process, each person 'agrees' to contribute a certain amount
through taxes paid" (Buchanan, 1970b, pp. 563-564). The free rider is the
reason for coerced coordination; individuals' agreement alone can legit-
imate the collective intervention; and the generalization from "some" to
"all" indicates that, whatever may be said about the Indians or the Swedes,
the Americans at least would seem to have had an openness to public
programs that the "natural proclivities" of the rational vote-seeker may
have encouraged him/her to exaggerate but for the origination of which
the practical politician can him/herself in no significant way be held
responsible.
Only political economy (through the calculus of consent) and not wel-
fare economics (the prisoner of objectification and abstraction) can meas-
ure the spillovers and interdependencies that cause "all persons" to opt for
intervention in the area of health. The perceptions identified, it is helpful
if they can be explained; and this Buchanan and Lindsay seek to do in
terms of two clusters of externalities.
The first case-the more selfish case-may best be typified by immun-
ization against communicable disease. The higher the percentage of the
population protected, the smaller the chance that anyone person will
catch the disease; but the greater, too, the costs of negotiating agreement
and bribing backsliders. Thence the argument that the rational individual,
anxious to economize on the curative treatments that are the burdensome
tax levied by contagious neighbors, will press the state to take over the
task of preventive coordination that, left to the private sector, would have
proved to be a prohibitive expense. Economies of scale only reinforce the
result, earlier derived by Buchanan in collaboration with Tullock, that
collective action in certain circumstances can easily prove the better buy:
"Collectivization produces both a greater degree of immunization and a
lower cost per person than that which would be present under independ-
ent or market adjustment" (Buchanan, 1965c, p. 117). Which is not, of
course, to predict that collective action will in actual fact prove the com-
modity that the consumers choose. Perhaps they will be discouraged by
the allocative and disincentive effects that are the excess burden of the tax:
"It is possible ... that the external costs imposed by tax collection would
eliminate altogether any net advantages of collectivization" (Buchanan,
1965c, p. 127). Perhaps they will be ignorant of the costs and benefits
associated with immunization because of a rational choice made to econo-
mize on information and search: "The problem is the familiar one of
choosing one's doctor. To choose one's doctor rationally may, in the limiting
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 219

case, require the acquisition of sufficient information as to make the seek-

ing of the doctor's advice totally unnecessary" (Buchanan, 1989c, p. 141).
Perhaps, indeed, the consumers will choose by intuition and prejudice and
not employ rationality at all. The most that can be said by way of predic-
tion is that the consumer of policies could do worse than to buy collective
action in instances of externalities such as that typified by immunization
against communicable disease.
The second case-the more altruistic case-involves the Good Samaritan-
ism that some have called Christian charity and others have associated
with the Kantian's commitment to other-regarding conduct, ideally recip-
rocated. Such a separation of the quid from the quo is a familiar occur-
rence in the real world, where starving children in developing countries
are seldom asked to pay a user charge in exchange for their famine relief.
In the real world, Buchanan has frequently indicated, "we do observe
individuals giving up 'goods' to others, including the set of 'others' where
the individual units remain unidentified to the donor and wholly outside
meaningfully drawn boundaries of personal relationship" (Buchanan, 1972b,
p. 19). Stranger gifts of this kind are fully compatible with Buchanan's
methodological individualism, which is absolutely consistent in its refusal
to conflate perceived self-interest with hedonistic selfishness. Unwilling to
"place economic interest in a dominating position" or to impute "evil or
malicious motives," Buchanan's consumer-orientated calculus has con-
sistently proceeded on the basis that only revealed preferences, impartially
observed, can provide any guidance at all as to the extent to which persona
economica is also mean and greedy. Nothing can be known in advance of
listening and learning save perhaps this, that there is simply no need a
priori to "assign net wealth or net income a dominating motivational in-
fluence on behavior in order to produce a fully operational economic theory
of choice behavior in market or political interaction" (Buchanan, 1987, pp.
306, 307). People's goals are people's goals, but still, Buchanan has re-
peatedly emphasized, it would be less than likely if the textbook economist's
rational pursuit of private gain actually described the whole of human life:
"Care must be taken to distinguish between the self-interest assumption,
as the basis for a 'logic of choice', and the self-interest assumption as the
basis of a predictive, explanatory theory of human action" (Buchanan,
1962a, p. 175n). Nowhere is this call for cautious eclecticism more appo-
site, it would appear, than in the case of medical care, where Buchanan
and Lindsay established that people do care about others-and "are
willing to express this through political process" (Buchanan, 1970b, p. 583).
Privatizers will tear their hair and socialists will dance in the street, but the
position of the methodologist individualist will remain absolutely clear: the
220 ECONOMIC THOUGHT AND POLITICAL THEORY

other-orientated consumer apparently ranks some collective action above

radical laissez-faire, and it would be intolerant and undemocratic to refuse
to satisfy the reasonable demand.
Altruistic externalities established, Buchanan and Lindsay seek to
account for popular attitudes with respect to the humanitarian spillover.
Their task is more difficult than it was in the case of contagion and epi-
demic, their explanation a mix of the absolute and the relative. The abso-
lute dimension is picked up by the popular sensitivity to the "quality of
suffering": "Individuals may be compassionate and seek, simply, to reduce
'suffering' in others" (Buchanan, 1970b, pp. 563, 564). The relative dimen-
sion, the more complex with respect to consensus, relates not to isolated
illness but rather to the "distribution of suffering": "Special attention to
shares of medical care may be warranted if this sense of 'fairness' is active.
Those concerned to see all enjoy an equal chance to live may be legiti-
mately concerned to see that all are provided with an equal opportunity
to obtain medical care" (Buchanan, 1970b, pp. 564, 567). The different
dimensions in turn spotlight the disparities between the different popu-
lations. The Americans, fundamentally independent in attitude, have
adopted a mode of collective action that relies upon medical subsidisation
targeted on the absolutely deprived. The British, more concerned with
comparative standards and equality of access, have opted instead for com-
mon institutions and zero prices. Both countries have developed networks
of transfer and delivery that rely on the state to fill the gap where the
"typical individual values-hence is willing to pay for-something for which
no institution of the private sector can readily arrange. Private unilateral
action cannot be counted upon to satisfy these wishes" (Buchanan, 1970b,
p. 565). Both countries have departed from spontaneous processes and
done so, gains from trade being reaped and no party being made worse off
by the rearrangement, in a manner which is clearly "Pareto-relevant"
(Buchanan, 1962b, p. 101). Yet neither country has in the event opted for
precisely the same institutional response to a market failure in the specific
area of health that each has perceived, but also perceived in a slightly
different manner.
The neoclassical economist will presumable seek to rank the alternative
approaches to collective action in terms of objective criteria such as those
of equilibrium and endstate. The constitutional political economist will
not. As long as good decision-making rules are employed, he will say, what
is chosen by the Americans can only be regarded as that which is efficient
for the Americans, what is chosen by the British can only be described as
that which is efficient for the British. Methodologically speaking, the indi-
vidualist can have no other benchmark other than the outcome of "free
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 221

and periodic elections, open franchise, open entry for parties, candidates,
and interests, majority or plurality voting rules" (Buchanan, 1986, p. 55)
and the myriad of supplementary mechanisms by means of which the
consulting democracy strives sensitively to choose. In the words of Agnar
Sandmo: "Buchanan strongly emphasizes that politics is not a process of
fact finding or identification of truth but rather of conflict resolution be-
tween individuals. This view has strong implications for the way in which
economists conceive of their own role in society. Rather than attempting
to find 'optimal' solutions to economic problems they should concentrate
on finding good decision rules, which all individuals and interest groups
will find it in their own long-run interest to adopt for the solution of still
unidentified conflicts over resource allocation" (Sandmo, 1990, p. 52). The
social engineer, the omniscient robot, and the benevolent despot go out.
The cohesive community, the negotiated compromise, and the spontane-
ous procedure come in. Buchanan "repeatedly emphasises the view that
economics is the study of exchange and not the science of choice and
optimization" (Sandmo, 1990, p. 55)-and agreement is all.

Private Action

Buchanan and Lindsay have significantly less to contribute concerning the

market for health than they do with respect to the state. The main reason
is their conviction that medical care is a commodity with unique proper-
ties. Medical care can mean the difference between life and death-and
no one would want survival itself to be rationed by price to the highest-
income bidder. Information about symptoms, treatments, and qualifica-
tions is asymmetrically distributed-and the consumer "often ignorant of
the quality of the product he is purchasing" (Buchanan, 1970b, p. 547).
Anxiety and the option demand lead rationally to precautionary oversup-
ply-and many individuals who never visit the local hospital "would prob-
ably be willing to pay something to have a hospital available" (Buchanan,
1970b, p. 574). Future needs are uncertain and unpredictable-and the
risk-averse able to hedge their bets through insurance pooling such as
makes moral hazard an intrinsic part of the health care story. Buchanan
and Lindsay will no doubt be accused by extreme free marketeers of
exaggerating the dissimilarities between the market for care on one hand,
the market for pins on the other. Oversympathetic though they may
well be to the rhetoric and romance of a glamorous area of social activity
seldom asked to prove that it is indeed value for money, still Buchanan
222 ECONOMIC THOUGHT AND POLITICAL THEORY

and Lindsay, in inferring the uniqueness of care, are likely only to be

echoing the views of the vast majority of their readers. Such a state of
affairs is unlikely be entirely unacceptable to radical subjectivists such as
are the members of the Virginia school.
Yet radical subjectivists tend to be more than comfortable with decen-
tralized decision-making mechanisms. Buchanan and Lindsay like other
epistemological libertarians tend to have an innate sympathy with the
economic exchange. Their conviction that competitive markets are by and
large good procedures with fair rules is well illustrated by the following,
which refers specifically to success-indicators in hospital capitalization:
"Replacing economic signals (though they be in error) with administrative
fiat is akin to throwing away the only timepiece in town because it runs
five minutes fast. Thus it would seem that basing hospital investment on
market signals is likely to lead to more efficient allocation than basing it
on no signals at all or on the desires and wishes of a small committee
representing a small minority of the community served" (Buchanan, 1970b,
p. 561). Perhaps it would, but we start from here; and the American hos-
pital industry, then as now, was dominated by the nonprofit voluntaries
that, under little pressure from management or trustees to economize, had
in effect cut themselves off from market discipline in order to pursue the
blinkered objectives of the medical professionals. Making a market where
no market exists is never an easy task; and certainly it cannot be made any
easier by the unique characteristics of a commodity that Buchanan and
Lindsay believe to be unlike any other. Many would no doubt sympathize
with Buchanan and Lindsay when they complain that the voluntaries,
properly subject neither to plan nor to rivalry, "combine the worst of
both words" (Buchanan, 1970b, p. 585) and ought to be phased out. More
difficult, however, is to say how the cat is best to be belled. The hospital
service is differentiated and localized. The outside surgeons who contract
in are in favor of uneconomic excess capacity lest waits deprive them of
fees. The community as a whole is widely believed to be morally opposed
to profits put before patients. The process of marketization (which in the
case of the voluntaries does not presuppose de-nationalization) is likely in
the circumstances to prove so complicated an undertaking as to cause the
opponents of hospitals' overcapitalization ultimately to retreat from com-
petition and return to controls. It is by no means easy to say precisely how
the hospitals are to be made more cost-conscious through pricing, and
Buchanan and Lindsay do not fully spell out what ought to be done. In
identifying the allocatively inefficient practices of an overregulated,
overprofessionalised industry, however, at least they draw attention to the
problem of deadweight wastefulness such as they clearly believe could be
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 223

reduced in a laudably Pareto-like manner through the restructuring of the

rules in favor of a more competitive game.
Patients, too, Buchanan and Lindsay indicate, ought to become part of
the new and cost-conscious order. Thence re-emerges the nonzero user
charge that had earlier figured so prominently in the context of the In-
consistencies. The proposal to reject the "everything free" orientation of
the National Health and to rely on the deterrence of pricing-described
as "the normal process usually counted upon to check consumption"
(Buchanan, 1970b, p. 570)-strongly resembles in 1970 the suggestion made
in 1965. Yet there is a significant difference between the British paper and
the American one. The British paper, apparently treating token contribu-
tions as if they equalled marginal or average costs, gave the rather mis-
leading impression that an author who regards medical care as unique
somehow wanted the market for care to resemble the supplying and de-
mandiilg of apples and pears. The American paper, on the other hand, had
the advantage that, acknowledging the ongoing reality of prepayment and
insurance, it recognized that charges in the case of care are never likely to
go beyond the deductible threshold or the co-insurance proportion to
become the textbook price. The American paper, in short, made clear
what the British paper had obscured, that cost-sharing will be a disincen-
tive to "whimsical" consumption but to little else-and that the sovereign
nail-biter is unlikely to regard with any warmth any attempt to make co-
insurance rates so high as to frustrate the purpose for which the insurance
was purchased in the first place. Clearly, "one must ... choose between
having uncertainty on the one hand or moral hazard on the other"
(Buchanan, 1970b, p. 571). Textbook economists will presumably opt for
deterrence but ordinary people demonstrably want protection. Faced with
this conflict of loyalties, Buchanan and Lindsay as methodological indi-
viduals have no choice but to side with the nervous and the anxious against
the rationing and the allocative. They are fully aware of the overconsump-
tion that will be induced by their moderation: an individual expected to
pay 20% of the cost might be prepared to spend $10 on an extra day in
the hospital but not $50, and to that extent the use of $50 of society'S
scarce resources to satisfy a want that the consumer him/herself values
at $10 self-evidently involves a social welfare loss. They are fully aware of
the problem. By the same token, being democrats, they see that there is
no obvious solution. If Ulysses and his crew unanimously reveal a strong
preference for cast-iron insurance (public sector or private sector), there
is not a great deal the friend of liberty can do to protect them from
themselves.
Buchanan and Lindsay, writing about hospitals and patients, are better
224 ECONOMIC THOUGHT AND POLITICAL THEORY

at identifying problems than at finding solutions: their approach would

seem better suited to the analysis of collective than it is to private action.
Much the same must be said about their views on doctors, where they
nonetheless make interesting proposals for a greater diversity of schools
and standards in an attempt to extend the range of consumers' choices:
"Those who desire (for income or other reasons) to purchase the services
of less highly qualified physicians (at lower fees) are going to be dissatisfied
if relatively high standards are set, with price consequently high as well"
(Buchanan, 1970b, p. 578). Freer entry could increase the numbers of
practitioners-but greater variety could increase the burden of becoming
informed. More doctors could mean lower fees-but greater availability
could boost the utilization of medical services. Both in terms of search
costs and in terms of treatment costs, in other words, the liberalization of
supply could provoke an unwelcome upward displacement in the share of
care that is not really anticipated by Buchanan and Lindsay, whose approach
to care inflation is couched more nearly in terms of limited than of excessive
supply: "More and more dollars are bidding against each other for a very
limited amount of medical resources" (Buchanan, 1970b, p. 557). The search
costs could be kept down, of course, through the occupational licensure of
a professional body, while limitation of supply could be reconciled with
limitation of demand by means of state manpower policies applied to
medical schools in tandem with National Health budgets, stringently capped.
The adoption of the British status quo would almost certainly have some
success in keeping down the cost of care. Cost containment was not in any
case a major concern of James Buchanan when, with Cotton Lindsay, he
sent in his report to the British Medical Association.
But things were to change. In 1970 the share of the American national
product that was committed to the medical service industry stood at 6%.
By 1990 it had doubled and seemed poised to double again before the end
of the century. Buchanan by 1990 had reached the conclusion that health
care was threatening to crowd out other claims on scarce resources-and
that a public bad called out for a collective constraint.
Buchanan did not say that he wanted the ceilings and the priorities to
become the responsibility of a British-type National Health Service. What
he did say is that the maxima and the criteria, however enforced, should
emerge bottom-up from consensus and not be imposed top-down by lead-
ership. Laissez-faire, Buchanan concluded in 1990, did not "offer, for me,
a satisfying resolution" (Buchanan, 1990a, p. 17); Leviathan would only
stem the escalation at the cost of democracy; and thus the need for the
"politics-as-complex-exchange derivation" (Buchanan, 1989b, p. 39) such
as alone could make the limitation of freedom an intervention that would
HEALTH AND CHOICE: THE CONTRIBUTION OF JAMES BUCHANAN 225

popularly be regarded as morally legitimate. Political market or economic

market, in short, it is catallactic process, negotiated contract, and revealed
preference that alone can tell right from wrong in the ethically charged
environment of Buchanan's political economy.
Buchanan's political economy is a "forum for dialogue" (Buchanan,
1990a, p. 5) and an intellectual framework for collective choice. It is
also a civilized humanistic contribution in its own right. So much of
unidisciplinary economics being narrowly technocratic and often aridly
abstract, it is eminently refreshing to encounter a free spirit who, situating
himself in the grand tradition of intellectual discourse, is not afraid to
postulate links between values and exchanges, cooperation and budgets,
spontaneity and property, conflict and constitution. As John Gray has so
accurately pointed out, "Buchanan's thought is political economy in the
classical sense-the sense in which it was practiced by the Scottish School,
and in which it encompasses social philosophy as well as positive or ex-
planatory economic theory. For, as with Smith, Ricardo or indeed Marx,
Buchanan's thought composes a system of ideas and comprehends a dis-
tinctive perspective of man, government and society" (Gray, 1990, p. 149).
Buchanan on health and choice well illustrates the strength of Gray's
intuition that in Buchanan the Scots will rise again.

Acknowledgments

The author would like to thank V.J. Vanberg and J.M. Buchanan for their
support. This chapter is based on a paper written while the author was a
Visiting Fellow at the Center for Study of Public Choice, George Mason
University.

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Index

Absolute monopoly, 74-75 Atlantis, 24

Adaptiveness, 174 Auctions, 135-136
Adequacy of demand, 55 Austrian school, 151
Adhesion contracts, 141 Autocracy, 22
Age of Cronus, 23 Automatic process, x
Agoge, 10, 15, 16, 21, 31n. Average wage, 84
Agricultural estates (kleroi), 13; see also
Kleroi Balance of powers, Spartan, 16
Agricultural productivity, 69 Balance of trade, 50, 51, 52, 54, 58n.
Alienation passage, 110-111 Bankruptcy, 140-141
Alms-houses, 107 Barriers-to-entry, 74
Andreia, 33n. Beer, Max,S
Anglo-American public corporation, Bellicosity, 14
138 Bentham school, 67
Animal Farm, 161 Beyond the Market Place, 121n.
Antitrust law, 140 BiblicallGraeco-Roman-Scholastic/
Aquinas, Thomas, 115 Medieval thought, 107
Arete, 18, 19, 28, 32n.-33n. Biological evolution, 179
Aristocracy, 20 Bounties on the exportation, of the
hereditary, 21 surplus, 51
Aristocratic value system (ancient Breach of contract, xi
Greece), 13 Brzezinski, Zbigniew K., 113
Aristoi, 19, 29, 31n. Buchanan, James, xi, 205-225
Aristotle, 18, 27, 39, 55, 56, 115 Bush, George, 159
Arrow, Kenneth J., 133 Business Cycles, 148
"Art of government," 55 Business cycles, 133
Ascetic, 32n. Business strategy, 139
"Aspiration effect," 49 Butskellism, 206
Assembly, Spartan, 16
Association for the Employment of Staff The Calculus of Consent, 206-207
(APEC), 117n. Cameralism, 106-107
Atheism, 115 Campbell, D.T., 176

229
230 ECONOMIC THOUGHT AND POLITICAL THEORY

Capital China, auctions and complex

accumulation, lOOn. coordination, 136
accumulation, rapid, 95 Chremacracy, 114
exportation, 92-93 Christian Political Economy, 118n.
idle, 91 Christifideles Catholici Orbis Universos,
private ownership of, 152 116
Capitalism, xi, 83, 97 "City of words," 19, 21
bankruptcy and, 140-141 Civil society, 111
classical, 108, 162 Civil War (American), 32n.
concept of pure capitalism as an Class hierarchy, 14
abstraction, 149 Classical theory of growth, 69
controlled, 166 Class structure, 3, 4
decline of, 152-165 Spartan, 20
definition, 152 Clientelism, 115
fettered, 148, 157, 158, 160, 166 Clinton, William, 159, 161-162
gradual change to socialism, 168 Closely held private corporation, 138
gradual extinction of, 147, 151-165, Clubs, theory of, 216, 217
168 Coase, Ronald, 136-137
income distribution, 160-162, 167 Coercive coordination, 209-210
main problem, 80 Coined precious metal, for money, 14
on brink of destruction in Austrian Collective action, 215-221, 224
school,151 Collective learning, 172, 174, 175, 176,
organization of the economy, 155-160, 179
167 Collectivist state, 151
ownership of means of production, Collectivization, 218
154-155 Collusions of producers, 45
pure, 152-153, 160, 162 Colonization, 94, lOIn.
socialization of the labor market, Command economies, 129, 130, 131-132
165-166 Commerce, regulation of, 25, 26
unfettered, 160, 164 Commercial law, 134, 135, 137
values and culture, 162-165, 167-168 Commission, act of, 134
Capitalism, Socialism and Democracy, Common good, 40
147, 148, 150-153, 166 Common Market, 108
Caribbean Basin Initiative, 116 Common property, 26
Catechism of the Catholic Church, 108 Communism, 88
Catholic, 114; see also Roman Catholic crude, 3, 28
Church Durkheim's use of term, 4-5
Catholic/Christian socialism, 12On. higher phase of, 4
Catholic doctrine, x Plato as source of argument, 2
Centesimus Annus, 108 real,3On.
Central command and selective upper-class,S
enablement, 130 utilitarian lineage of, 6
Central Europe, 116, 121n. Community, 3
Centralized economies, 131 Company law, 137-139
Chalmers, Thomas, 89 Comparative cost theory, 69
Chandler, Alfred, 139 Competition, advantages, 75-76
"Cheap money," 45 Competitive cost price, 84
Childlessness, 11 Competitive model, 95-96
Chiliastic socialism, 5 Competitive pricing, 95, 96
INDEX 231

Competitive principle, 64, 73 Defeatism, 150

Competitive wage, 84, 86 Deferred gratification, 163
Complex coordination, 135-136 Deficit, federal U.S., lOIn., 156-159, 160
Composition of causes, 66, 97n. Delphic Oracle, 18
Conditional evolutionary argument of Demand elasticity, 99n.
Hayek,186-190 Demos, 16, 31n.
Confederation of Independent States De Principatibus, 12On.
(CIS), 107-108 Deregulation of privately-owned
Conjecture and refutation, 176 industries, xi, 156, 166
Constitution (Spartan), 9, 12 Desposionautai, 12
Constitutional design, 201n. Development theory, 136-137, 143
and conditional evolution, 190-192 Devolution of power, 216
evolutionary learning, 192-194 Dictatorship of the proletariat, 27
Constitutional interest, 181, 182 Diminishing returns, law of, 97n.
Constitutionally constrained process, 189 Distribution, laws of, 64, 77-81, 82
Constitutional polis, 19, 22 Division of labor, 3, 4, 21, 26-29, 111,
Contract law, 137, 141-143 152, 183
Contracts, partially performed, 142 Djilas, Milovan, 161
Contracts of adhesion, 141 Downs-type economic theory of
Cooperative forms of ownership, 154 democracy, 208
Com-hog cycle, 133 Drucker, Peter, 157, 158-159, 160, 162
Com Laws, 69-70, 72, 98n. Dual inheritance theory, 197n.
Corporal works of mercy, 104, 107 Durkheim, Emile, 4-5, 28, 29
Corporate governance, 139-140 Duties on importation, 51, 53
Corporate shares, interest-bearing, 139 Dynamism, xi
Corporatism, 119n., 122n.
Corprativism, 115 Eastern Europe, 130, 142, 154, 156,
"The Crisis of the Tax State," 157 166-167
Critias, 24 failure of conventional socialism, 168
Critique of the Gotha Program, 3 ruling group's privileges, 161
Cronus,24 social economy and church role, 114,
Crude communism, 3, 28 115-116, 119n., 121n.
Cultural evolution theory of Hayek, Economic and Philosophic Manuscripts
171-172, 175, 176, 179-192, 194, 195 of 1844,3
Cultural heritage, 197n. Economic inequality, Spartan, 15
Culture Economics
population definition of, 198n. method's "universality", 64
role of, 175 scientific character of, 64
Cumulative storage of experience, Economics of control, 56
187-188 Economics of direction and stimulation,
Currency controls, 129 42
Cyclical fluctuations, 91-92, 94, lOIn. Economics of prevention and control,
Czech Republic, 107-108, 139 42
Economies of scale, 133
Darwin, Charles, 172-176, l%n. Economizing, 131-133
Darwinian theory of evolution, 172-176, Economy, institutional foundation of,
183-184 131
core principles of, 174-175 Economy!household-management, as
Debt-to-income ratio, 159, 160 subsystem of social system, 104, 105
232 ECONOMIC THOUGHT AND POLITICAL THEORY

Effective demand, 56 "Free-rider" problem, 65, 87

Effectual demand, 45, 47, 48, 54, 57n. Free trade, 53, 69
diminution of, 43 French S.A., 138
Efficiency, 81-83 French S.A.R.L., 138
Ekelund, Robert B., Jr., 6 Friedrich, Carl J., 113
Emigration, government funding of, 94, Full employment, 42, 43
lOIn. Functionality, xi, 174
Entrepreneur, 168
innovation and, 152, 153 General good, 40
role of,46 General private property, 3
Ephorate, 10, 16, 23 General symbolic medium (GSM), 104
Ephors, 10, 16, 23 The General Theory, 147-148
Epitadeus, Law of, 13 General Will, 206
Equity capital, 138 Genetic heritage, 179
Eros, 18 German AG, 138
Eunomia, 16-17, 19, 21-22, 25 German GmbH, 138
European Community (EC), 108, 118n. The German Ideology, 3
European Economic Community German Social Democratic Party, 3-4
(EEC)(Common Market), 108 Germany, 108, 134, 158, 159
Euthyphro, 28 active role of banks in corporate
Evolutionary competition, 180 development, 135
Evolutionary epistemology, 176-177 contract law, 141
Evolutionary historicism, 173 hostile takeovers, 138-139
Evolutionary learning, 194 hours worked by labor, 165
Evolution theory of Darwin, 172-176, taxation, 159
183-184 worker participation in corporate
core principles of, 174-175 boards, 140
Excess capacity, 133 Gerousia, (council of 30 elders), 9, 16,
Exchange and Price mechanism, 80 23
External institutions, 193-194 Glasnost, 114
Good Samaritanism, 219
Family, 104, 105 Gorgias, 19
The Fatal Conceit, 182-183, 199n., 200n. Government control, increase and its
Field, Alexander, 136 main forms, 153
Firms, increasing size concentration, 150 Government expenditure, 95, lOIn.
First Messenian War, 8, 9, 14, 3On. Government funding of emigration, 94,
Fiscal federalism, 216 lOin.
Foreign trade, 49-53, 54, 58n. Government intervention, 152
decay in, 51-52 Gray, Alexander,S
Franco/Roman-Catholic (Fr/R-C) Gray, Cheryl W., 139, 140
paradigm, 104-108, 115, 119n. Gray, John, 225
Fr/R-C patronisme, 118n. Green, Christopher, 158, 159
Freedom of contract, 149 Gross public debt, 158-159
Free labor market, 96 Group-level competition, 188
Free market, 38, 54, 156 Group selection, 182, 188, 199n.
function of, 55 Growth-decay thesis, 51, 58n.
Free market economy, 42 Guardian class, 21-22, 29
Free production and trade sectors, 22 Guild socialism, 154
Free rider, 208, 210, 218 Gymnastics, 20
INDEX 233

Haberler, Gottfried, 148, 150 Individualism, 18

Hammond, N.G.L., 7 Buchanan's tolerant, 212, 219
Haney, Lewis, 5 Individual learning, 179
Hanson, Rebecca J., 140 Infallibility, 116
Hasebroek, Johannes, 14 Infanticide, 11
Hayek, Friedrich A., xi-xii, 132, 151, 169, Infant industry argument, 50
171, 172-173, 174-175, 176, 177-178, Inflation, 45, 69, 166
180, 181-183, 184, 185, 186-190, 191, Information costs, 132
192, 194, 195, 196n.-201n. Inheritance customs, Sparta, 14-15
Health care policy, 205-225 Innovation
Health economics, 214-215 competition and, 152
Health Services Financing, 215 definition, 152
Hebert, Robert F., 6 An Inquiry into the Principles of Political
Hedonism, 164 Economy, 37
Hegel, Georg Wilhelm Friedrich, 111, Integration, x
115-116, 12On. Inter alia, 122n.
Helots, 12, 13, 14, 16, 32n. Interest-bearing securities, 139
Hieracracy, 114 Intergenerational transfer, 159
Historical evolution, xi Internal institutions, 193-194
Historical inevitability doctrine, 149 International Monetary Fund (IMF),
Historical materialism argument, 3 134
Hoarding, 43, 47, 48 "Interprofessional minimum wage
Homo faber, 116 growth," 117
Homoioi, 8-9, 11-14,20-22, 26-27, "Intrinsic value" of goods, 45
31n.-33n. Inverse deductive method, 98n.
attrition of, 15 Inverse profit-wage relation, 79
Homois ("equal"), 8 Inverse wage-profit theorem, 69
Hostile takeovers, 138-139 "Invisible hand," x, 42, 107, 111, 115,
Humean quantity theory of money, 45 121n.
Hungary, 139 Iron spit money, 32n.
civil code, 141 "Islands of Separateness," 113
contract law, 141 Island trade, 54
enterprise councils in, 140
Huxley, G.L., 7, 14, 31n.-32n. Japan, 134
Hypomeion, 11 hostile takeovers, 138-139
Hypomeiones, 12 hours worked by labor, 165
John Paul II, Pope, 109-110, 111,
Ianachkov, Peter G., 140 112-113, 115, 116, 119n.
Ideology, 104, 105 Joint stock company, 138
Immunization, 218, 219 Just polis, 22
Implicit learning, 178
Income (wealth), production and Kata (forms), 10
distribution, 66 Keynes, John Maynard, Baron, x, 56,
Income maximization, 66, 67 59n.,148
Incomplete contracts, 135 Keynesians, 56
The Inconsistencies of the National Health Kiertsu, 134
Service, 206, 207, 209, 210, 212, Kleroi (allotments), 8, 14- 15, 22-23, 27,
214-215, 223 31n.-32n.
India, health services, 217, 218 Kleroikic system, 17
234 ECONOMIC THOUGHT AND POLITICAL THEORY

Kleros, 11, 13 Malthus, Thomas Robert, 85, 87, 88, 89,

Knowledge, division of, 179-180 96, lOOn.
Kumite, 10 Malthusianism, 78, 85
Managed demand, 43-44
Labor, price of, 166 Managed economy, 38
Labor market, 64, 84, 96 Managed-market system, 37-56
socialization of, 165-166 Managed supply, 43-44
Labor supply, downward trend in hours Mandeville-Hume-Smith-Ferguson
worked, 165 tradition, 173
Lachmann, Ludwig, 193 Manpower allocation, 64
Laesio enormous, 141 and competition, 83-84
Laidler, Harry, 5 Marital arrangements, Spartan, 14
Land tenure, 82 Market capitalism, 134
Law of Markets, 65, 69, 91, 94, 96, lOOn. Market competition, 186, 193, 200n.
Laws, 17-29 Market economy, 130, 134, 135, 139, 142,
Laws of distribution, 77-81, 82 143
Laws of production, 77-81, 82 free-standing, 113
Lectures, 54-55 Market exchange, 130
Lehmann, William c., 196n. Marketization process, 222
Lenin, Vladimir Ilich, 4, 154 Market price, 43, 45
Leo XIII, Pope, 110 Market rate of interest, 47
Le Play, Fr., 118n. Market system, 113
Less developed countries (LDCs), Marx, Karl, 2-3, 4-5, 28, 69, 78, 110, 111,
114-115 114, 115, 12On., 149, 151, 153, 154,
Liberalism, 37 155, 160, 162, 164, 167-168, 225
Limited entitlements, 212 Marxism
Limited liability company, 138 income distribution, 160
Lindsay, Cotton M., 214-215, 216, 217, ownership of the means of production,
218, 221-222, 223-224 154, 155
Living standard, 46, 47, 57n., 86, 87 religious, 114
adequate, 38, 43 social analysis, 115
governing political class (Communist Marxist socialism, 155, 156, 165
party) vs. rest of society, 161 Meaning system, 104
working-class, 96 Medical Care at Public Expense, 214
The Logic of Collective Action, 209-210 Menger, Carl, 151, 196n.
Luxury goods, consumption of, 46, 49 Mercantilism, x, 37, 40, 56, 59n., 106-107
taxation on, 46-47, 49 Minimalist state perspective, 129-130
Lykourgos of Sparta, 5, 7-10, 15, 59n. Minimum capital requirement, 138
Ministry of Trade and Industry (Japan),
Maastricht Treaty, 118n. 134
Macfie, A.L., 205 Mixed economy, 112, 148, 149, 166
Machiavelli, Niccolo, 12On. demand for public services, goods, and
Macro-economic policy, 91-95, 96-97 transfer payments, 168
"Magic of the marketplace," 116 operation in the labor interest, 150
Magisterium (teaching office) of Catholic Mill, John Stuart, x, 63-101
Church, 109, 113 Moderation, 18
Magnesia, 23, 24 Mondale, Walter, 159
Maldistribution, 55 Monetary policy, 129
Malina, Bruce J., 112, 115 Money, circulation of, 47
INDEX 235

Money supply, 47-48, 69 Obes,9

as instrument of economic policy, Objective knowledge, 177
44-45 Objectivist epistemology, 177
Monolithic state-socialism, 108 Oeconomica, 39
Monopolies, 129 Oligarchy, 20
Monopolistic competition, 73, 74 Olson, Mancur, 209
model,99n. Omission, act of, 134
Moral responsibility, 109 Opportunity cost, 132
Mortgage lending, 140 Organisations syndicales et patronales,
Mothakes, 12 117n.
Motivation, x Organismic knowledge, 177
Multifunction firms, 140 Organization system, 104
Multilevel governments, 131 The Origin of Species, 172, 196n.
Mun, Thomas, 119n.-12On. Orwell, George, 161
Municipal socialism, 154 Ostas, Daniel, 141
Murrell, Peter, 132, 133 Ozanam, Frederic, 118n.-119n.
Mythology, 17
Paganism, 115
National Agency for Employment Paedeia (civic cultural education), 18, 19,
(ANPE), 117n. 20,21,25
National Center for Health Services "Papal Social Teachings," 116
Research and Development, 214 Pareto, 162
National churches, non-Roman, 113 Parsonian-Malina-Nitsch model of the
National Conference of Catholic Bishops, social system (P-MIN), modified, 106,
112 115
National debt, lOIn., 156-159, 160 Parsonianlmodem-sociologica1 (PIM-S)
National Health Service, 205-214, 223 paradigm, 104-105, 119n.
pricing of care, 211 Pastoral Letter on Catholic Social
rationing and the allocative, 223, 224 Teaching and the U.S. Economy, 112
spillover benefits, 213-214 Pastorium (pastoral office), 113
Native Americans, 121n. Patronacracies, 115
Natural and artificial monopolites, 84 Pauly, Mark V., 214
Natural law, 17 Peasant proprietorship, positive impact
Natural selection, 173, 196n.-197n. on productivity, 82, 83
Nazism, 151 Pedagogy, 26
"Negotiated economy," 119n. Pederasty, Spartan, 33n.
"Neocorporatist" construct, 119n. Pekkarinen, 116
Neo-corporatist model, 116 Peloponnesian War, 14, 25
Neodamodeis (mercenaries), 12 Perestroika, 114
Nitsch, Thomas 0., 112, 115 "Perfect" statesman, 38, 41, 51, 54, 55
Noblecourt, Michele, 117n. existence of one is rare, 56
Noncompeting industrial groups, 84 intervention of, 49, 52, 55, 56, 58n.
Nonguardian class, 21-22, 29 Perioikic tribute, 15
Non-individualist interpretation, 182 Perioikoi, 8, 12, 13, 14, 16, 20, 32n.
Non-zero opportunity cost, 208 Persuasion, church sanction of, 113
Nonzero user charge, 223 Pesch, Heinrich, S.J., 109, 115
North, Douglass, 136 Petr, Jerry L., 116
Notary publics, and company law, Phratry, 9, 11, 12,27, 31n.
137-138 Plaidoyer, 206
236 ECONOMIC THOUGHT AND POLITICAL THEORY

Plato, ix-x, 1-29, 55, 56, 58n.-59n. Privatization of state-owned industries, xi,
Ploutocracy, 114 155, 156, 166
Pluralism, 122n. Production
Plutarch, 10-11, 31n., 32n. efficiency of, 55
P-M/N paradigm, 106, 115 laws of, 64, 77-81, 82
P/M-S paradigm, modified, 104-105, means of, 4
119n. Productive organization and motivation,
Poland, 115, 121n., 139 81-83
company law, 137-138 Productivity, 64
contract law, 141 Profit, 80
joint stock company, 138 capital exportation and, 92-93, 94
self-management, 140 maximization, 68, 75, 81-82
Poleis, Greek, 7-8, 9, 14 motive, 53
Political economy, 65-67, 122n. rate, 92
axiomatic foundation of, 67, 68 reasonable, 43
economic growth desirability, 88-90 Profit-rate equalization process, 90
macro-economic policy perspective, Profit-technology relation, 76
91-95 Progress, 72-73, lOIn.
progressive change in human condition, economical, 99n.-l00n.
72 Property, lack of, 25
scientific classification and Property concept, 149
interpretation, 68-71 Property relation, 3
scientific interpretation, 68-71, 96 Property rights, X-Xi, 131, 132, 134-137,
universal method, 76-77, 96 211
Political Oeconomy, 38-39, 43 Proscription of pederasty, 24
Political order, among homoioi, 16 Public corporation, 138
Political transition period, 4 Public debt, 48, 57n.-58n.
Politicians, self-interest, 55-56 Public education of youth, 10-11, 18, 23,
Politics, 18 24,26
Politics and Markets, 121n. Public expenditures, 44, 96
Politics-as-complex-exchange derivation, Public finance, 65
224-225 Public good, promotion of, 40
Politics, Economics, and Welfare, 121n. Public money, abuse of, 42
The Politics of Bureaucracy, 208 Public ownership, 167
Polity/state, 104, 105 Public responsibility, 163, 164
Popper, Karl R., 176-177, 197n. Public utilities, regulation of, 74
Population control, 78, 81-83, 86-88, 96, "A Pure Theory of Local Government
lOOn. Expenditures," 216
Population growth, 65
Population thinking, 174, 196n.-197n. Quadragesimo Anno, 108-109, 110
Positive social order, 113 Quantity theory approach, to price level,
Poverty, problem of, 87 69
Premiums, 51, 52 Quasi-abundance, 164, 165
Price, inflexibility of, 46 "Quasi labour theory" of value, 57n.
Price controls, 129
Price cutting, 74 Radical subjectivism, 222
Pricing, 74, 75, 129 "Range of the calculable," 153
Private action, 221-225 Rate of interest, 47-48
Private property, 88 Rationalism, 151-152
INDEX 237

Rawls's Difference Principle, 212 Slovenia, 140

Reagan, Ronald, 115-116, 156-157, 158, Small-scale farming, 68, 98n.
160, 161, 166-167, 168 Smith, Adam, x, 38, 42, 54-55, 56, 64, 81,
Real estate cycles, 133 84, 85, 110, 111, 115-116, 12On.,
Real wage rate, 46, 58n. 200n., 205, 206, 208, 225
Recession, 148 Social Catholicism, 115, 12On.
remedial, 148 Social corporatism, 1190.
taxation and government spending Social corporatist model, 116
criticism, 157-158 Social Darwinism, 173, 196n.
Reformed capitalism (Ref-Cap), 111 Social discrimination, 12
Regulation of demand and production, 44 Social-economic democracy, 117n.-118n.
Republic, 5-6, 17-29 Social economy, 104, 114, 118n., 121n.
Republic and Laws, 3 Social hierarchy, 11, 12
Rerum Novarum, 108-109, 110, 121n. Socialism, 2, 4, 56, 64, 88, 166
Resource allocation, 152 chiliastic, 5
Return on capital, 92, 95, lOOn. classical, 108, 155, 165
Return on domestic capital, 90 competition advantages, 75-76, 83, 86
Revised socialism, (Rev-Soc), 111 control as test of, 153
Ricardian analysis of machinery, 89 Marxist, 155, 156, 165
Ricardo, David, 89, 225 municipal, 154
Ricardo-Malthus-Mill growth model, 69 postwar, 151
Right of association, 119n. pricing schemes, 96
Rheinische Zeitung, 2 sole criterion of, 154
Rhetra, Great, 9 state, 4
Roll, Eric, 5-6 as successor state to capitalism, 147,
Roman-Catholic Church, 104-116, 121n. 149, 152-165
Romanian Constitution, 129 vulgar, 3, 28
Rousseau, Jean Jacques, 39, 46, 206 Socialist Economies in Transition,
Rules, 186, 187, 188 107-108
Socialists, 64, 75, 76, 83, 86
St. Francis Xavier, 118n.-119n. Social law, 17
Saint-Simonian socialism, 4 Social learning, 172
St. Vincent de Paul, Societies of, Social market economy, 115
118n.-119o. Social Marxism, 115
Sandmo, Agnar, 221 Social partners, 117n.
Samuelson, Paul A., 151, 206 "Social Policy," 118n.
Schumpeter, J.A., xi-xii, 6, 147-169 Social Protestantism, 12On'
Scottish Enlightenment, x "Social Question," 118n.-119o.
Scottish School, 225 Social responsibilities, 107
Second Messenian War, 9, 13 Social science, secular prediction, 71-72
Selective elimination, 178 Social stasis, 15
Self-help organizations, x Social stratification, x
Self-interest, 39-40, 48, lOOn. Social system, four subsystems (or basic
Semi-transition, 165 institutions), 104
Serfs, 20 "Social System of Labour," 115
Shafarevich, Igor,S Social Welfare Function, 206
Shares of medical care, 220 Sociocultural evolution role, 176
Slaves, 12, 16, 33n. Sociocultural heritage, 179
Slovakia, 107-108, 139 Soiicitudo Rei Sociaiis, 115
238 ECONOMIC THOUGHT AND POLITICAL THEORY

Solidarity, 119n. Tax relief, 213

Soviet bloc countries, former, 107-108, "Tax state," 157, 166
137, 140, 154, 156, 167 Tendencies, economic, 63
Sparta, 1-30 Thatcher, Margaret, 156, 158, 160, 161,
Dorian tribes, 8 162, 165-167, 168
kings, 16 Thebes, 14
marital arrangements, 14 Theocracy, 114
political order, 7-12 Theology of liberation, 115
Special interest groups, 160 Theory of government, 67
Specific experience, 98n. Thiebout, Charles M., 216, 217
Spencer, Herbert, 173 Third World, 114-115, 116
Spirit of accumulation, 93, 95 "The Thirty," 25
Spontaneous market order, 185 "Thousand-handed deity," 115-116
Stagnation, 91 Thucydides, 7, 14
Stalin, Joseph, 4 Timocracy, 19-20
Stamp duties, 138 Tithe, percentage, 14
Stasis (social strife), 9 Tito, Josip Broz, 154
State-market nexus, 129, 136-137 Tools, 186-187, 188, 200n., 205
State property, privatization, 129 Total revenue function, 74-75
Statesman, 22, 24 Trade unions, 155, 156
Statesman, Steuart's definition, 57n. Transaction costs, 136-137, 215-216
State socialism, 4 Transfer of title, x-xi
Stationary state, 65, 88-90, 95, lOOn., 164 Transfer payment, 134
Status, politically defined, 16 Transition, 161
Statutory incomes policies, 166 process features, 153
Steady-state growth theory, 152 Trial and error-elimination, 176
Steuart, James, Sir, x, 37-56, 57n.-59n. Tribal membership, 8
Strict monopoly, 74-75 Tribute, 15, 33n.
Subaltern society, 41 Tribute extraction, 15
Subsidies, 129 The True and Practical Means of Helping
Subsistence goods, importation of, 52 the Working Class, 118n.
Supply and demand, 42-43, 58n., 86, 208 Tullock, Gordon, 208, 218
Supply price, 43
Survival of the fittest, 99n. Unbridledllaissez-faire capitalism, 108
Sweden Underallocation, health care, 217-218
health services, 217, 218 Unemployment, 43, 44, 46, 54, 56, 96
taxation rates, 161 manpower allocation and competition,
Syssitia, 20, 26, 27, 31n., 33n. 84
monthly obligatory contribution to, 15 problem getting worse with time, 166
Syssition, 11, 12, 13, 32n. United Kingdom, 158, 159
"System of Needs," 12On. capitalism suffocated by regulations,
155-156
Takeovers, unfriendly (hostile), 138-139 contract law, 141
Taxation, 44, 57n., 156-157, 208 goverrunent expenditure, 158, 159
burden as element of transition, 161 hours worked by labor, 165
funding of Health Service, 210 public values (1875-1910), 162-163
on luxury goods, 46-47 public values today, 163-164
progressive, 65 recession, remedial, 148
Tax rates, lowering of, xi socialization of industries, 150
INDEX 239

state-owned companies removed to Warrior guardians, 20, 21

private sector, 156 Warrior state, 10-11
taxation rates, 161-162 Wealth
United States redistribution of, 47
capitalism suffocated by regulations, vibration of, 49
155 Wealth-maximization hypothesis, 66, 67,
church in, 114 77
contract law, 141 The Wealth of Nations, 54, 110-111
federal deficit, lOIn., 156-159, 160 Weberian Protestant Ethic of Calvinism-
hostile takeovers, 138-139 Puritanism, 107
taxation rates, 161-162 Welfare state, 134
Universal, 114, 118n. Welfare-state capitalism, 115
Universal landlord, 77 Wickse1lian test, 212
Universal moral law, 17 Winspear, Alban, 5
Universal social order, 114 Women
ordination of, 1200.
"Viable social economy," 119n. Spartan, 15, 16, 21, 24, 32n.
Virginia school, 222 Women's earnings, factor labor, 84, lOOn.
Visible hand, 111, 121n. Work effect of individuals, 50
Voluntary organizations, x Worker participation in management,
Von Ketteler, William Em., 118n. 140
Von Mises, L., 151, 168-169 Work ethic, 163, 164
Vulgar socialism, 3, 28 Working-class values, 163-164, 168
World War I, decline of capitalism and,
"Wage-fund" approach to labor market, 168
85
Wage-rate determination, 79 Xenophon, 27
Wages fund, 89
Wage structure, 64-65, %, 97 Yugoslavia, 107-108
War expenditures, 15 communist state in, 154, 155