George H. Smith discusses Thomas Hodgskin’s most controversial work, Labour Defended Against the Claims of Capital.

George H. Smith was formerly Senior Research Fellow for the Institute for Humane Studies, a lecturer on American History for Cato Summer Seminars, and Executive Editor of Knowledge Products. Smith’s fourth and most recent book, The System of Liberty, was published by Cambridge University Press in 2013.

In Part 1 of this series, I discussed Thomas Hodgskin’s advocacy of radical individualism and laissez‐​faire. Hodgskin’s libertarian views were so extreme that he has frequently and understandably been called an “anarchist,” though he expressly repudiated the label.

If you consult standard histories of economic thought, you will find a more curious label attached to Hodgskin, namely, “Ricardian socialist.” This label has been used because Hodgskin supposedly took the labor theory of value defended by the free‐​market economist David Ricardo (1772–1823) and developed it into a full‐​scale critique of “capital” and “capitalists”–most notably in Labour Defended Against the Claims of Capital (1825).

This tract is far from the best of Hodgskin’s writings, but it is the most famous. Why? Primarily because it was repeatedly cited and praised by Karl Marx, who was influenced by some of its key arguments. Indeed, in the first volume of Capital, Marx praised Hodgskin as “one of the most important modern English economists.”

We thus are presented with the anomaly of a radical advocate of private property and laissez‐​faire being called (by some historians) an English forerunner of Karl Marx. But we should not be misled by how the ideas of one intellectual were used by another intellectual. The fact that Marx cherry‐​picked a few arguments and concepts from Hodgskin and adapted them to his own socialistic agenda does not transform Hodgskin into a socialist or into a forerunner of Marx.

As Murray Rothbard pointed out in Classical Economics: An Austrian Perspective on the History of Economic Thought, p. 401:

There is no doubt that Hodgskin’s ultra labourism influenced Karl Marx, but his extreme labor theory of value does not make him a Ricardian, much less a socialist. In fact, Hodgskin was highly critical of Ricardo and the Ricardian system, denounced Ricardo’s abstract methodology, and his theory of rent, and considered himself a Smithian rather than a Ricardian. [Adam] Smith’s natural law and harmony‐​of‐​interest free market doctrine was also far more congenial to Hodgskin.

Consider these comments that Hodgskin made in a letter to Francis Place in 1820, just three years after Ricardo published Principles of Political Economy and five years before Hodgskin published Labour Defended Against the Claims of Capital:

I think I never saw a book more destitute of facts than Mr. R’s [Principles] which, at the same time, has had so much weight. To me it appears to rest on arbitrary definitions and strange assumptions. The first two sentences of the book are radically false…. [His] definition of value is wrong…. His explanation of the manner in which fixed capital tends to lower the prices of all commodities into which it enters, I hold to be the best and only good part of his book.… [I]t does appear to be built on no sort of facts, to contradict many and to have little more merit than a “bewildering subtlety.”

In early 1823, Hodgskin moved from Edinburgh to London, where he became the parliamentary reporter for the Morning Chronicle (whose editor was a friend of the Benthamite James Mill). Within months of arriving in London, Hodgskin started the Mechanics’ Magazine, an educational journal aimed at factory workers and other laborers. At a time when many workers were demanding minimum wage laws, Hodgskin argued that all economic regulations, including minimum wage laws, should be repudiated in favor of a free, unregulated market.

Legislators, Hodgskin warned, are not the friends of workers. Indeed, “legislators have always belonged to the non‐​labouring classes of society, and it seems bad, therefore, for the poor man to have any law of this kind emanating from them.” Members of the ruling class already have too much power, and to grant them the right to regulate wages would enhance their power even more. Even if such regulations might prevent wages from falling in the short run, laborers would be better served in the long run by looking after their own interests in a free market, rather than depending on legislators, whose principal concern is preserving their own power.

In 1824, while working as a parliamentary reporter, Hodgskin observed debates in the House of Commons that led to the repeal of the Combination Laws, which had outlawed trade unions by prohibiting combinations of workers who wished to pressure employers for shorter hours or more pay. These Combination Laws were a chief target of the Benthamites and other free‐​market advocates, who argued that workers should be permitted to negotiate freely with their employers, so long as no coercion was used.

Although some free‐​market types, such as Francis Place, predicted that the wholesale repeal of the laws prohibiting trade unions would diminish the frequency of strikes, this is not what happened. Repeal was immediately followed by an outbreak of strikes, some of which were violent. Thus, no sooner had the old laws been repealed than alarmed legislators passed the 1825 Combination Act. This new legislation, while permitting collective bargaining in matters pertaining to wages and conditions of employment, stated that union members could not “molest”, “obstruct”, or “intimidate.” It was unclear, however, how terms like “obstruct” would be interpreted by English courts.

This historical background is essential to understanding Hodgskin’s political purpose in writing Labour Defended Against the Claims of Capital, which carries the subtitle: Or the Unproductiveness of Capital proved with Reference to the Present Combinations amongst Journeymen.

Thomas Hodgskin used the new law against trade unions as an opportunity to criticize the theory of capital that had been defended by David Ricardo and his followers. The Ricardians, such as economist J.R. McCulloch (whom Hodgskin specifically mentioned), were peculiar targets in a way, since they had spearheaded the movement to repeal the prohibition against trade unions and collective bargaining. Nevertheless, Hodgskin believed that these free‐​market economists had fostered, if unwittingly, the widespread prejudice against trade unions by investing “capital” with productive powers that it did not in fact possess.

Hodgskin’s critique of “capitalists” was severe and unremitting. He denied “that capital has any just claim to the large share of the national produce now bestowed on it” “One is almost tempted to believe that capital is a sort of cabalistic word, like Church or State, or any other of those general terms which are invented by those who fleece the rest of mankind to conceal the hand that shears them.” The “evil effects of capital” are seen in the fact that the laborer must give a “large quantity” of the produce of his labor to the capitalist, which keeps “the labourer in poverty and misery.” Capitalists “can grow rich only where there is an oppressed body of labourers,” and they “have long since reduced the ancient tyrant of the soil to comparative insignificance, while they have inherited his power over all the labouring classes. It is, therefore, now time that the reproaches so long cast on the feudal aristocracy should be heaped on capital and capitalists.”

Readers familiar with the Austrian theory of capital can easily identify the serious flaws in Hodgskin’s theoretical attack on capital and capitalists. (See Rothbard’s discussion, cited above, for a brief but incisive critique.) But in fairness to Hodgskin, three points should be kept in mind.

1) Labour Defended should be read, in part, as a criticism of “crony capitalism,” to use a modern expression. Hodgskin believed that laws against trade unions and collective bargaining had created an unfair advantage against workers in favor of capitalists. Hence the large profits reaped by capitalists were not the result of natural economic forces but were generated by the coercive laws of government.

2) Hodgskin distinguished between different economic functions that are sometimes included within the label “capitalist.” Although he stressed that “whatever labour produces ought to belong to it,” he also emphasized that “labor” does not refer to physical exertions alone but also to mental activities and skills. “I therefore would caution my fellow labourers not to limit the term labor to the operations of the hands.”

The production of a commodity requires the joint labor and cooperative efforts of many different people with many different skills, including the “knowledge and skill of the master manufacturer, and of the man who plans and arranges a productive operation, who must know the state of the markets and the qualities of different materials, and who has some tact in buying and selling….” These “masters,” “employers,” and “contrivers and enterprising undertakers of new works” are authentic laborers, so they have a just claim to their share of profits. “The labour and skill of the contriver, or of the man who arranges and adapts a whole, are as necessary as the labour and skill of him who executes only a part, and they must be paid accordingly.”

3) Another point is even more significant, for it clearly separates Hodgskin’s critique of capitalists from socialistic proposals. If it is true that the laborer should receive the full product of his labor, it is also true that commodities in an advanced society are the product of a complex division of labor wherein many people contribute to the manufacture of a single economic good.

So how can a particular laborer receive just compensation, when it is impossible to separate his contributions from those of many others? There is only one way, according to Hodgskin, namely, to allow laborers (including employers, manufacturers, entrepreneurs, and others) to compete freely in a competitive market. As Hodgskin put it:

There is no principle or rule, as far as I know, for dividing the produce of joint labour among the different individuals who concur in production, but the judgment of the individuals themselves; that judgment depending on the value men may set on different species of labour can never be known, nor can any rule be given for its application by any single person. As well might a man say what others shall hate or what they shall like.

At each stage of production a person must decide how much he is willing to pay for the materials and services needed to produce his share, and many such subjective evaluations are reflected in the value of the final product. Hence when something is finally produced under an advanced division of labor, “there is no longer any thing which we can call the natural reward of individual labour.”

Each labourer produces only some part of the whole, and each part having no value or utility of itself, there is nothing on which the labourer can seize, and say: “This is my product, this will I keep to myself.”

Given the many different people and skills that are required to produce even a simple commodity under a complex division of labor, how should we determine the reward that should go to a particular laborer? Hodgskin answers this question as follows:

I know of no way of deciding this but by leaving it to be settled by the unfettered judgments of the labourers themselves. If all kinds of labour were perfectly free, if no unfounded prejudice invested some parts, and perhaps the least useful, of the social task with great honour, while other parts are very improperly branded with disgrace, there would be no difficulty on this point, and the wages of individual labour would be justly settled by what Dr. Smith calls the “higgling of the market.”

We thus see that Thomas Hodgskin was not a “Ricardian socialist,” or a socialist of any kind. Quite the reverse is true. Rather than draw socialistic conclusions from the labor theory of value, Hodgskin employed it as an underpinning for laissez‐​faire. Only in a free market, he maintained, can laborers of every kind receive just compensation for their work.

It would be impossible to explore the many problems in Hodgskin’s critique of capital and capitalists without simultaneously discussing the labor theory of value on which it depends. But it should be noted that leading proponents of the labor theory of value, most notably Smith and Ricardo, were unable to provide an altogether satisfactory account of the profit generated by capital.

Although it was generally understood that the capitalist advances wages to workers, and thereby foregoes present for future consumption, most classical economists failed to understand the crucial relationship between time preference and the interest that accrues to capital. Although Hodgskin appreciated (and praised) the risk‐​taking role of the entrepreneur, he also separated this role from that of the pure capitalist in an artificial manner. All capital investment in a free market is attended with some degree of profit‐​generating risk.