Monday, January 21, 2008

Schools of Political Economy Part One

by E.J. Burke, S.J.

The Mercantile System. Before entering upon the enumeration of the various schools of Political Economy, it will be well to make mention of the system which held sway almost universally before the rise of the Liberal School in 1765. That system is known as the Mercantile System.

It held that wealth consisted exclusively of money. The more actual money a country had, the more wealth it had. The main purpose of the state was to increase the store of money, and the chief means of increasing this store was commerce. Hence, commerce was to be encouraged. The export trade should surpass the import trade, and the amount of the surplus of the former over the latter would indicate the gain in specie or coin.

Thus, if goods produced within a country be sold within the country, the money remains within the country, but there is no increase in wealth ; if, on the contrary, the goods be sold abroad and cash be received for them, there is an increase in specie.

Imports show an outgoing of coin, for we must pay money for the foreign goods we receive, and the money thus goes abroad. If imports equal exports, there is no gain. The state, therefore, according to the Mercantile System, should encourage export trade by any means possible. It might do so by bounties ; e.g. if a firm produces for export trade $100,000 of goods, then for every $10,000 more it exports, the government might pay it $1000 bounty. The state should discourage import trade by duties, except where the import trade would bring in raw material which would be manufactured at home into the finished product and exported again under the new form. The "balance of trade" was to be secured for the country. The balance of trade is in favor of a country when the exports exceed the imports.

Colbert, minister of Louis XIV, carried out the principles of the Mercantile System in France, and it prevailed in England during the sixteenth, seventeenth, and much of the eighteenth centuries.

The system is discredited to-day, because some of the fundamental principles of the system are either not accepted at all or are accepted in a very modified form. Thus, the importance of specie is changed through the introduction of instruments of credit. Gold is recognized as a medium of exchange rather than as an object that is to be sought after and stored away. The balance of trade is not to-day the sole indication of the prosperity of a country. There are other items that balance accounts between nations besides their exports and imports. (Cf. p. 239.)

The chief modern schools of Political Economy are four : the Liberal, the Socialist, the Catholic, the Historical.

Tenets. The Liberal School has for its motto "Liberty." It demands absolute individual liberty in economics, and abstention of the state from all interference not absolutely necessary in the affairs of the individual. Liberty, it says, is the great, the only, source of progress, of harmony, and of social peace. In further detail, the tenets of the Liberal School are as follows:

There must be freedom for the laborer to determine for himself the nature, the duration, and the place of his labor, to make whatever kind of labor contract he may find most advantageous to himself.

Through this freedom of labor there will result a natural distribution of the labor forces among the different trades and businesses, a just equilibrium between the factors supply and demand, the greatest amount of diligence and energy on the part of labor, and finally the greatest possible productivity of all the different labor forces.

There must be freedom for the landowner to use his land as he pleases, to dispose of it as may suit his own profit or convenience, by sale, mortgage, division, bequest, or gift, to dispose of the product of his land so as to derive the greatest possible returns.

There must be freedom for the capitalist in matters of loans, capitalist associations, the formation of stock companies and trusts, the undertaking of new industries, the employment of labor, the amount of wages paid, and the duration of labor hours.

The rate of the wages of the laborer is to be determined by the law of supply and demand. Labor is a commodity and its price is to be fixed, according to the Liberal School, by the same laws that regulate the prices of every other exchangeable product. No ethical or humane considerations should enter into the labor contract formed between employer and laborer.

Self-interest is the fundamental' motive of all men's actions, and if unrestrained will infallibly lead men to act for the common good.

The present state of society, with its laws, institutions, capitalists, laborers, and wage system, is the outgrowth of nature. The world is the best possible. The present conditions are the best not only relatively but absolutely. If all the various forces of production, consumption, distribution are left to themselves, they will ultimately and infallibly work out the perfection of the individual and the community, by virtue of inherent and necessary laws by which their energies and the relations that subsist between them are determined.

To give full play to this absolute liberty demanded by the Liberal School, the government must not interfere in matters economic except when liberty itself is menaced. Hence the famous saying : Laissez faire, laissez passer?- which has become the shibboleth of the Liberals.

To the principle of freedom of the individual is added the principle of free competition. Competition must be allowed full sway among individuals and corporations, in home and foreign trade. This latter principle, it is claimed, will bring about the highest degree of perfection in all kinds of industries. It is a providential law of harmony. It will be productive of a supply of commodities suited to the demand, of the best kinds of commodities, of low prices.

The Liberal School is conservative, argumentative, aprioristic, metaphysical, deductive. From general principles, it arrives at conclusions which are supposed to have the force of immutable laws.

The followers of the Liberal School are, in England, Smith, Ricardo, Malthus, Senior, Stuart Mill; in France, J. B. Say, Bastiat, Cournot, J. Gamier.

Branches of the Liberal School. There are several periods in the development of the Liberal School, and in each period are found branches of the school, broadly similar but differing in details.

(i) Physiocrats. The firt branch embraces the Physiocrats. These are the disciples of Quesnay, physician of Louis XIV, who date their existence from 1765.

The principles of the Physiocrats are the outgrowth of the philosophy of the time. Rousseau had inaugurated a new code of ethics by the announcement that man, essentially good, has but to follow out the tendencies of his nature in order to reach perfection. Voltaire (d. 1778) and the Encyclopedists (1751-1780) had propagated their infidel doctrines, by which man was exalted and the state belittled doctrines that were influential in bringing about the French Revolution.

The principles of the Physiocrats more immediately affecting economics are as follows :

1. Agriculture alone is the source of the production of wealth. (Hence the Physiocrats are sometimes called the Agricultural School.)

2. Gold is a means of trade, not an end to be sought after.

3. A nation cannot in the long run sell more than it buys, nor would it be benefited if it did.

4. All government privileges and monopolies relating to business and commerce are wrong.

5. Trade, domestic and foreign, should be entirely free.

6. Government interference in matters of trade is to be tolerated only when necessary to protect individual liberty.

7. Taxes should be levied directly on land.

(2) Adam Smith and his Followers. The second branch of the Liberal School was founded in 1776 by Adam Smith, and it embraces many of the French economic writers. Smith differs in many points from the Physiocrats. He does not touch on the science of Sociology, but limits his discussion to the production of wealth.

Like the Physiocrats, Smith holds that self-interest is the fundamental principle which directs men in their economic relations. His main principles are as follows:

1. Industry is the source of wealth. (Hence Smith and his followers are sometimes called the Industrial School.)

2. Labor is the source of value and the determinant of price.

3. Trade should be free.

4. State interference should be reduced to a minimum.

Malthus and Ricardo are followers of Smith. It was Ricardo especially who propagated the doctrines of Smith in England.

The Liberal School triumphed in England in 1846, when, under Richard Cobden and John Bright, with the support of Robert Peel, it obtained free trade.

(3) French School. The third branch of the Liberal School is the French. Its principal exponents are J. B. Say, Rossi, Cherbuliez, Bastiat. They all hold the fundamental "laissez faire" doctrine of the school and deprecate state interference.

(4) Manchester School. Several other less important branches of the Liberal School exist under various denominations ; for example, the Manchester School, which, in so far as it touches on economic subjects, supports the principles of the Liberal School. Since 1820, it has strongly advocated the principle of free trade and has been opposed to the principle of protection. This school, however, does not confine itself exclusively to merely economic subjects. It deals in broader matters that come under Political Science.

(5) Moderate Liberal School. The Moderate Liberal School, like its parent, is optimistic and claims that man's nature, if left to itself, will dissipate all ills and attain to the perfection that lies within the compass of the human race. It advocates, however, a partial abandonment of the strict "laissez faire" principles of the older Classical School of Liberals. It permits a partial state intervention, and modifies the free trade principle so as to tolerate a certain amount of protection where protection is the only remedy for certain evils of free trade. It allows a broader scope to the study of facts which are admitted to have an influence on the trend of economic progress. This branch is gradually replacing the old Liberal School.

(6) Eclectic School. The Eclectic School, which has arisen lately and has for exponents Cauwes and Gide, allows state intervention.

(7) Austrian School. The Austrian School originated in the writings of several Austrian economists, Menger, Wieser, Sax, Boehm-Bawerk. It is really a branch of the Liberal School. It follows the deductive method of the older school, but differs from it in some important conclusions. It lays great stress on the marginal theory of value (p. 42). " Utility, the pleasure or satisfaction derived from consumption, is the ultimate cause and measure of value." (Ely, Outlines of Economics, 1908, p.13 674.) It has been called the psychological school, because it seeks the causes of things in the subjective disposition of men. It has exerted a certain influence on economic thought.

(8) Mathematical School. The Mathematical School, which deals largely in statistics, is still another branch. Supply and demand, value, wealth, and all the various factors that enter into economics, are submitted to statistics, and the law of probabilities is derived and held to be absolute. This method is practiced in France by Cournot, in England by Edgeworth, Wicksteed, Walras, Jevons, and Marshall, and in the United States by Irving Fisher.

End of part one

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