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Jun 19, 2012

Thomas Hodgskin: Libertarian Extraordinaire, Part 4

Smith continues his discussion of Thomas Hodgskin by exploring some of the key arguments in his neglected book on economics, Popular Political Economy.

In my last essay, I discussed some general features of Thomas Hodgskin’s Popular Political Economy (1827). I will now explore this book in more detail.

Despite some theoretical shortcomings, Popular Political Economy contains a number of insightful discussions, such as Hodgskin’s defense of free-market currency and banking. Perhaps most valuable is Hodgskin’s discussion (which anticipates later insights by F.A. Hayek and other Austrian economists) of the role of prices in transmitting vital information in a free market.

According to Hodgskin, variations and fluctuations in prices are crucial economic indicators that “regulate consumption.” For instance, if the price of bread did not rise when farmers anticipated a poor wheat crop, “no persons would be admonished in time to lessen their consumption, or seek for other food than wheaten bread; and before the next harvest famine might ensue.” Conversely, if prices did not fall during an abundant crop, a good deal of bread would be wasted.

Prices are therefore “the index to the wants of society”; they indicate “to all men how they may employ their time and talents most profitably to themselves, and most beneficially for the whole of society.”

In characterizing retailers and wholesalers as “indispensable agents, in adjusting the supply of commodities to the demand and to consumption,” Hodgskin gave us one of the finest treatments of the market as a coordinating process to be found in the literature of nineteenth-century economics.

Hodgskin set up the problem of market coordination by noting two things in regard to agricultural products. First, some commodities take longer to produce than other commodities; second, some commodities will last longer than other commodities, before they spoil and become useless as food. Nevertheless, people need to eat every day.

So how is it that a free market can provide a regular supply of food, despite these dramatic differences in various agricultural commodities? Hodgskin wrote:

But though the products of different species of labour are completed in unequal times, and are of such unequal durability, that some must be immediately sold and consumed, while others can be kept from the market for months, the appetite of each labourer is renewed daily, and must every day be satisfied. If we were aware of these natural laws, influencing both us and the materials of our subsistence, and if we at the same time knew that the great majority of the operations carried on in society, were, in the long run, of equal utility, each being necessary to the completion of the others, and that civilized society probably could not exist, and certainly could not flourish, wanting any of them, should we not think ourselves bound to take measures by which he whose useful task could not be completed and its produce brought to market for several months, might be able to obtain his daily bread?

As if anticipating later criticisms of central economic planning, Hodgskin expressed mock surprise that “our parliament-men” have not yet claimed to possess the near-omniscience that would be needed to enable “us to produce every commodity in the precise form, and at the precise time it is wanted; and have not taken measures to ensure all classes of labourers, however long a time may be required for their products to reach the market, their necessary daily subsistence.”

No such overall knowledge of markets is possible, nor is it needed. The ability of free markets to coordinate supply and demand “grows up unperceived and uninfluenced” by legislators. Indeed, this crucial function is performed by retail and wholesale merchants, who are motivated by nothing more than their own economic interests.

Dealers…know very well the utility of different commodities, and they conjecture, with tolerable accuracy, the different periods in which a given quantity will be consumed. They buy, therefore, from the various classes of labourers or manufacturers their different products, and share them out as is most suitable to the wants of all. They reconcile the apparent incongruity of nature, and while labouring for themselves are useful to others. The important business of actually distributing the wealth of society in such proportions as individuals can buy it, so that the daily wants of all classes, even of those whose produce is not completed for months or years, may be conveniently supplied, is, in fact, performed by retail dealers. They take to their business, I am aware, with no such high object in view; they are led to it by an instinctive view of their own interest; and they are just as unobserving of those great natural circumstances which give rise to their occupation, and as ignorant of the great utility to society at large of that sub-division of labour they carry into practice, as those individuals who pretend that nature regulates nothing, and that, but for their ordering wisdom, society could not exist.

According to Hodgskin, in all cases when trade “is voluntarily carried on, we may…be sure that it is beneficial to all parties.” Voluntary exchanges permit each person to pursue his own interests according to his own judgments. Although retail dealers, in their pursuit of profit, “are sometimes described as sucking the marrow out of the bones of the poor labourers,” this depiction is wholly inaccurate.

Retailing is a species of labor, and the retailer can profit only if he exercises “the greatest economy in distributing commodities” to consumers who want them. Retailers have “a direct interest in performing their task well, and strong motives for that watchfulness which is beneficial to the whole of society.” Hodgskin concludes:

Under the influence of self-interest, buying and selling only with a view to their own profit, retail dealers distribute the whole wealth of society in the most economical manner possible. They find customers even for refuse….

Popular Political Economy continues with a similar analysis of wholesale merchants, who were widely condemned for hoarding grain and then selling it for high prices during times of famine. Although Hodgskin’s defense is similar to that found in Adam Smith’s Wealth of Nations, Hodgskin stressed more than Smith did the role of wholesalers in coordinating economic activity. Space does not permit me to explore this aspect of Hodgskin’s book, so I leave it to readers to discover his brilliant treatment for themselves.

Generally considered, Popular Political Economy is a sustained critique of the “principle of population” defended by the English clergyman Thomas R. Malthus (1766-1834). And this brings us to some economic arguments that, though they may fail to captivate modern readers, generated an enormous amount of interest and controversy in Hodgskin’s day.

Prior to what Hodgskin called the “unhappy celebrity” of Malthus’ arguments, economics had generally been viewed (especially by Adam Smith) as an optimistic enterprise, one that explained how no definite limits could be assigned to economic progress. After a theory of “indefinite progress” had been integrated by some Enlightenment philosophers (especially the anarchist William Godwin) into their futuristic utopian schemes, Malthus responded in 1798 with a terse critique, An Essay on the Principle of Population. (Although Malthus modified his views in later editions of this book, it was the first edition that generated most of the controversy.)

Malthus was widely regarded as having delivered the coup de grace to optimistic theories of progress. His refutation rested on the claim (which was not original with him) that population, “when unchecked, increases in a geometrical ratio,” whereas the food supply “increases only in an arithmetical ratio.”

The economic significance of this principle of population is that the constant tendency of a population to increase “tends to subject the lower classes of the society to distress and to prevent any great permanent amelioration of their condition.” The pressure of population growth relative to the food supply will impose severe limitations on economic progress. This means that there will always exist a significant number of workers who will never be able to acquire more than subsistence wages.

It would be difficult to overestimate the influence of Malthusianism on nineteenth-century thought, especially in Britain. It was partially owing to this influence that Thomas Carlyle dubbed economics “the dismal science.” When David Ricardo incorporated the principle of population into his own economic theory, it became a part of Benthamite orthodoxy.

According to Ricardo, wages, “like all other contracts…should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature.” This had been the view of Adam Smith as well, but Ricardo injected a pessimistic note into the long-term prospects for real wages that conflicted with Smith’s account, according to which the real wages of labor will tend to rise in a progressively expanding economy, along with the accumulation of capital.

In contrast, Ricardo maintained that the “natural price of labor is that price which is necessary to enable the labourers, one with another, to subsist and perpetuate their race, without either increase or diminution.”Ricardo did not deny that the market price of labor (“the price which is really paid for it”) will be determined by the market forces of supply and demand, but he also maintained that “however much the market price of labour may deviate from its natural price, it has, like commodities, a tendency to conform to it.” (When early economists spoke of “natural price,” they roughly meant what modern economists call the “equilibrium price.”)

One thing that differentiated Ricardo’s account from Smith’s is the fact that the former incorporated the Malthusian principle of population, and it was this factor that imbued Ricardo’s theory with pessimistic hue. Ricardo’s approach falls somewhere between the pessimism of Malthus and the optimism of Smith. When, according to Ricardo, the market price of labor exceeds its natural price, the condition of the laborer is “flourishing and happy.” But the long-term tendency is for the market price to gravitate to the natural price, because higher wages will motivate workers to have larger families, and this, by increasing the number of laborers, will eventually bring about lower wages. This is only a tendency, however; in fact, the market rate of wages “may, in an improving society, for an indefinite period, be constantly above” the natural rate.

Much of Popular Political Economy is a sustained critique of Malthusianism and of its use by Ricardo, especially in connection with his theory of rent.

Rent, Ricardo argued, arises from natural differences of fertility among different units of land. As more land is cultivated to meet an increasing demand for food, less productive land is brought under cultivation. Consequently, each unit of agricultural labor will become less productive, owing to the poorer quality of that land. (This is essentially a theory of marginal productivity applied to agriculture.) Thus as more labor is required to produce the same amount of food on less fertile land that could previously be produced on more fertile land, the real price of agricultural products will increase relative to other goods. This, Ricardo concluded, is a major reason why the food supply will never keep pace with population growth and why wages will tend to fall to the level of subsistence.

Hodgskin, while not denying that we must have recourse “to soils of less and less fertility,” nevertheless questioned the conclusions that Ricardo drew from his theory. For even Ricardo had conceded that various factors, such as technological improvements, will tend to mitigate the higher food prices generated by the diminished productivity of less fertile soil. Thus, given that “there are numberless circumstances which compensate for decreasing fertility,” Hodgskin could not understand how Ricardo could dogmatically conclude that these mitigating circumstances would not neutralize the effects of decreasing fertility in the long run.

Once again Hodgskin appealed to the optimism of Adam Smith over the (relative) pessimism of Ricardo. Smith had argued that the prices of almost all commodities will decrease with economic progress, owing to a greater division of labor and new technology. Hodgskin maintained that there is nothing unique about agricultural products that should exempt them from this general trend. He also called attention to the many innovations and machines that had appeared since Smith’s day, which “diminished to an almost inconceivable degree, the labour necessary to procure meat or make bread.” Hence the “opinion that the natural price of food, lessens rather than increases in the progress of society, seems borne out by facts,” because “in the progress of society food is obtained by less and less labor.”

Technical arguments aside, it is important to understand Hodgskin’s basic approach. He believed that the progress of knowledge is the mainspring of economic progress. The advance of knowledge will generate labor-saving inventions and technology—innovations that we cannot possibly predict or foresee. It is therefore impermissible for economists to stipulate necessary limits to economic progress, as if human creativity and innovation will never advance beyond their current state.

This is part of a series