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THE WORLDLY PHILOSOPHERS
Notes
including

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Life and Background of the Author A Brief Synopsis Critical Commentaries Essay Topics and Review Questions Selected Bibliography

by Mary Ellen Snodgrass, M.A. Appalachian State University

LINCOLN, NEBRASKA 68501 1-800-228-4078 www.CLIFFS.com ISBN 0-8220-7230-0 © Copyright 1990 by Cliffs Notes, Inc. All Rights Reserved

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LIFE AND BACKGROUND OF THE AUTHOR
A summa cum laude, Phi Beta Kappa graduate from Harvard, Robert Louis Heilbroner (born 1919) is an influential economist and prolific writer, reviewer, consultant, and lecturer. Raised in luxury and educated at private schools, he claims to have patterned his liberal economic views after the family chauffeur, who served as a father figure after the author's father died in 1924. Heilbroner was assigned to the Intelligence Service during World War II, interrogating Japanese prisoners of war. He rose to the rank of first lieutenant and earned the Bronze Star. Following the war he obtained his doctorate from the New School for Social Research in New York City, where he served as the Norman Thomas Professor of Economics beginning in 1972. As a practicing economist, Heilbroner has lectured before business, university, and labor groups. Among his awards and honors are the Guggenheim fellowship (1983); membership in the executive committee of the American Economic Association, Council on Foreign Relations, and the Century Association; and honorary degrees from La Salle College, Ripon College, Long Island University, and Wagner College. Outside his profession he cultivates an interest in Oriental art, the eighteenth century, bird watching, and piano. Heilbroner achieved immediate recognition as a writer and economist with his first book, The Worldly Philosophers. Published in 1953, it was revised many times. The most recent revision reflects Heilbroner's evolving views and contains backnotes as well as alterations to the final chapters, which deal with the modern economists. The book has been printed in over twenty foreign editions and is respected and utilized in American colleges and universities as a standard introductory text. In 1956, Heilbroner published The Quest for Wealth, which describes the origin and nature of the human drive for acquisition and its role in today's money-directed society. The Future as History followed in 1960, a work attempting to predict future trends in U.S. and world economics. In this book, the author questions American optimism concerning conflicting world ideologies. Not entirely pessimistic, he warns Americans to assert themselves and halt long-term trends that may prove disastrous. In 1962, Heilbroner examined the development of economic societies from past to present in The Making of Economic Society. This overview includes inquiries into slavery, feudalism, the Industrial Revolution, and the market system. The following year, the author published The Great Ascent, a survey of economic development in a hundred emerging nations and the relationship of these nations to the modern Western world, particularly the United States. In this work the author favors foreign aid only as a means of promoting trade among nations. In An Inquiry into the Human Prospect (1974), Heilbroner stresses present dangers, especially overpopulation, depletion of natural resources, and the threat of nuclear disaster. Rejecting the label of pessimist, Heilbroner says of his book: "We all learn to live on two levels and yet there are dreadful contradictions between them. This troubles thoughtful people. But here history helps. If you know something about the past, then you know this contradiction is not new."

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A BRIEF SYNOPSIS
The Worldly Philosophers is a useful book--not only to college students, but to any person wishing an understanding of economics. Basically the book offers three benefits: 1. A simple but comprehensive explanation of the ideas of the Great Economists. It gives the reader an insight into the lives of these economists and the history of economics. Robert L. Heilbroner places their concepts in a proper context, thereby explaining how their philosophies evolve along with historical events. Throughout the book, the author weaves into the narrative the freshness of language, wit, and originality which makes for interesting reading. He discusses economic concepts in plain, understandable language. A valuable introduction to any course in economics. Students will find a basic explanation of capitalism, socialism, communism, prosperity, depression, and the practical workings of an economy. In marked contrast to the dry, technical, and theoretical treatment of economics by most textbooks, The Worldly Philosophers offers a vibrant, practical explanation of the world of economics--past, present, and future. A student will find it extremely profitable to study the book along with these notes prior to enrolling in a course or taking an exam in economic principles and problems. An overview of the political, social, and ethical concepts of economic thought. For the person pursuing an education on the history of the lives, times, and ideas of the great economic thinkers of the Western world, this book contains a capsulized version of the major tenets.

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DEFINITIONS OF SIGNIFICANT TERMS AND CONCEPTS
The following definitions and explanations of significant terms and concepts are arranged in the order in which they appear in each chapter.

CHAPTER 1
Worldly Philosophers Philosophers who concern themselves with economics.

CHAPTER 2
Economics The study of the ways in which people make a living; the study of human wants and their satisfaction; the science of production, distribution, and consumption of goods and services. Economic System The rules, laws, customs, and principles which govern the operation of an economy. Each economic system has its own peculiar problems and therefore produces its own solutions. Economic Activity All action concerned with the creation of goods and services to be in some way consumed.

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Consumption The process by which goods and services are utilized in satisfying human needs and wants. Production The process of creating the goods or services to be consumed. Distribution 1. "Physical" The process of getting goods and services into the hands of consumers. 2. "Personal" The division of income among individuals. "Functional" The division of income according to different types . . . wages rent, interest, profit.

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Basic Agents (Factors) of Production Land, labor, capital, and management 1. Land Natural resources. Labor Human effort. Capital The physical necessities for production--buildings, machinery, tools, equipment, and supplies. This term commonly refers to the money used to purchase these necessities. Management The planning, coordination, and direction of production.

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The Economic Revolution The development of historical factors which culminated in the adoption of the market system (capitalism). Factors Responsible for the Economic Revolution 1. The Renaissance (1350-1600)--the era which saw the decay of a restrictive religious spirit in favor of a spirit of skepticism and inquiry. The Scientific Revolution (1500-1700)--the period of scientific experimentation and discovery which laid the foundation for the Industrial Revolution. The Emergence of Nation-States (l5th-l7th centuries)--a period giving rise to royal patronage for favored industries, maritime trade, common laws, standard measures, and common currencies.

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" when profits depended on the transportation of goods. stressing no governmental interference in the operations of the market economy. The Protestant Reformation (l500-1648)--a time period encouraging enterprise and the investment of capital. Industrial Revolution The transition from the stable agricultural and commercial society of the Western world to the modern industrialized society. Physiocrats A group of thinkers during the Age of Enlightenment who opposed mercantilism. and exploitation of colonies. which could be acquired by an excess of exports to imports. Third Stage (1880-present) "Financial Capitalism. Three Historical Stages of Capitalism: 1. 5. Laissez Faire Literally. believing instead that the true source of wealth derives from land and agriculture. silver. This stage coincides with the Industrial Revolution. they advocated the doctrine of laissez faire. a philosophical outgrowth which made interest and profit respectable. The Age of Exploration and Discovery (l5th-l7th centuries)--an era which provided natural wealth from the colonies in the form of gold. Mercantilism The doctrine which dominated European economic policies from 1500 until the advent of laissez faire through a program which stressed that the real wealth of a nation resulted from its stores of gold and silver. Francois Quesnay (1694-1774) French economist who founded the school of Physiocrats and greatly influenced Adam Smith. Cliffs Notes on The Worldly Philosophers © 1990 5 .cliffs." under which profits are derived from the investment of money. and social thought was dominated by an optimistic faith in reason and in the progress of the human race. CHAPTER 3 Age of Enlightenment A period (roughly 1700-89) when political. "let [it] function"--the economic doctrine founded by Quesnay and the Physiocrats and expounded by Adam Smith. Second Stage (1750-1870) "Industrial Capitalism." when profits depended on manufacturing. and other raw resources. economic. 2. the second stage of capitalism. self-sufficiency of the nation. First Stage (1450-1750) "Commercial Capitalism. 3.com 4.www.

as well as factories--with the profits going to the people as a whole rather than to capitalists or landlords. Founder of French Socialism Saint-Simon. they earned the scorn of Karl Marx. intellectual. Patron Saint of Free Enterprise Adam Smith. the nationalization of all land and minerals." Cliffs Notes on The Worldly Philosophers © 1990 6 . consumption. and banking. Neo-Malthusianism A name originally denoting birth control. trade. CHAPTER 5 Founder of British Socialism Robert Owen. Utopian Socialists Reformers inspired by the Age of Enlightenment and the French Revolution who believed in progress and human perfectibility. public transportation.cliffs. a reference to ideal states peopled by perfect human beings. Classical Economists The economists who preached the doctrine of laissez faire and stressed that the production. This movement caused a shift of the poor in England from farms to cities. because of the worker's tendency to produce more children. Utopia A name which classifies any social. (David Ricardo) Malthusian Doctrine Thomas Malthus' thesis that population. or natural price.www. CHAPTER 4 Iron Law of Wages Labor's wages must remain at the subsistence level. Father of Modern Economics Adam Smith. Also. grows at a greater rate than the means of subsistence and will result in starvation. who dismissed them as visionary idealists and labeled them "utopian socialists. and distribution of goods and wealth are determined exclusively by economics laws and principles.com Enclosure Movement The practice of fencing off lands formerly subject to common rights in order to provide pasture land for sheep. unless checked. Because these theorists wished to reform society by voluntary means. which is obtained through peaceful evolution without loss of personal liberty. Socialism State ownership of the means of production. or political scheme which is impractical at the time when it is conceived.

and teachers--and the "haute bourgeoisie. when challenged by a new and opposing idea (antithesis). class struggle. controls. Marxism Communism according to the exact words and predictions of Karl Marx. and the inevitable downfall of capitalism with the eventual triumph of workers over the moneyed class. (Bourgeois is the spelling of the adjective form. Historical Materialism Marx's economic interpretation of history. Father of Anarchism Pierre Proudhon.com CHAPTER 6 Hegelian Dialectics The philosophical concept that in the world of ideas. known as the "haute bourgeoisie. Bourgeoisie The middle class. capitalists are the upper class of the bourgeoisie. results in a new concept (synthesis) which is somewhat closer to the truth than the initial two ideas. Dialectical Materialism Karl Marx's application of Hegel's dialectical method to an explanation of all world events. or coming together of opposing forces: a given idea (thesis). government officials. change occurs as the result of a synthesis. scientific laws explaining the economic determination of history." The term is generally used by Marxists to describe the owners of private property. Cliffs Notes on The Worldly Philosophers © 1990 7 . Technically.cliffs. Prophet of the Proletariat Karl Marx." or high middle class. Scientific Socialism What Marx and Engels called the ideas contained in The Communist Manifesto and Das Kapital." or small middle class--the small shopkeepers. the belief that government. lawyers.) Proletariat Lowly wage earners. the most hated class under Marxism. it includes the "petite bourgeoisie. or workers.www. Technically. which stresses economics as the basis for all human actions and historical events. particularly by class warfare. Capitalists The class which provides or controls the money that underwrites the production of goods. Communism A belief in the achievement of socialism by revolutionary means. and authority are oppressive. Anarchism The support of no system of government. independent farmers. doctors.

and Cornelius Vanderbilt. finance and industry. and Reform" were enacted into law. Jim Fisk. The era extended from 1930-39." CHAPTER 8 Robber Barons Unscrupulous titans of U. when the basic measures of "Relief. with the depths reached in 1933. Conspicuous Consumption The use of material goods to flaunt a person's belonging to a moneyed or privileged class. Cliffs Notes on The Worldly Philosophers © 1990 8 . The period between 1870 and 1914 is known as Europe's "Golden Age of Imperialism. when the New York Stock Exchange collapsed after a selling wave in which stock values tumbled in a panic following an all-time high. The Hundred Days The period of remarkable cooperation between President Roosevelt and Congress. with money replaced by work units of currency. CHAPTER 9 The Great Crash The Wall Street Crash of October 1929. or control. Technocracy Government run by technical experts. Imperialism The extension of authority. of one nation over another. 1933.cliffs.com CHAPTER 7 The Victorian Age The period associated with the reign of Queen Victoria of Great Britain. Roosevelt between 1933 and 1939 to combat the Great Depression. The New Deal Social and economic reforms carried out by President Franklin D. Economic Imperialism The economic and/or political domination of underdeveloped countries by powerful nations. 1837-1901. beginning with a special session on March 9.S. The term was derived from the title of a book by Matthew Josephson. The Great Depression Worldwide depression triggered by the Wall Street Crash.www. Recovery. Compulsory Savings A deferred savings plan by which a government finances a war through a required deduction from all wages to pay for war bonds. including Jay Gould.

From this compulsion is derived the concept of worldly philosophers. notably the scientific revolution.www. in the business world. such as competition and demand. The organization of this guide simplifies materials through chapter summary. art. This guide is designed to supplement the book in order to instruct students in unfamiliar basic concepts. They began in the latter part of the eighteenth century with the work of Adam Smith. and statecraft. philosophy. Renaissance. finally. "single seller". CRITICAL COMMENTARIES FOREWORD The Worldly Philosophers is an engaging. and the Great Depression. A particular challenge is the bridging of gaps as the author leaps from idea to idea. Cliffs Notes on The Worldly Philosophers © 1990 9 . As such. Indeed. science. an economic situation in which one firm controls an entire market. and. or innovator. Surprisingly. predicting change. these men have swayed and shaped the world. further explanations of relevant points in each chapter. the guide seeks to sharpen the reader's comprehension of economics as a science. Overall. The title of the book comes from their common interest: the human drive for worldly wealth. such as mercantilism. Preanalytic Creative. it presents readers with a comprehensive explanation of the development of modern economic philosophy.cliffs.com CHAPTER 10 Plausible Capitalism A capitalistic system that perpetually renews itself through growth. politics. as well as in periods of historical development in the social sciences. an overview and evaluation of the book as a whole. the great economists. commercial revolution. CHAPTER 11 Behavioral Regularities Predictable aspects of the marketplace. covers those theorists whose words and thoughts concerning the creation and distribution of wealth have had a major impact on society. readable text. Entrepreneur A risk-taker. commentary on background information. these economists did not appear on the scene of world events until long after the advent of history. The text of this guide offers many insights into the realm of basic economics. Monopoly Literally. Circular Flow A static system which channels productivity and profits into an endless exchange. CHAPTER 1: Introduction Summary The subject of The Worldly Philosophers.

Another name for this arrangement is capitalism. Since individuals are notably self-centered. if the interdependence of human workers should fail at any vital point in the economy. however. one or the other of these two methods has solved the problem of survival. there has been no need for economists. or Central Authoritarian Rule The enforcement of economic survival by absolute rule or dictatorship. Command. This reliance on tradition for the selection of a life's work was especially true of the Middle Ages and is still true in many underdeveloped areas of the world. they are described by such intriguing characterizations as madman. In summary. and tramp. the world would suffer. Throughout most of history. or jobs. from generation to generation through custom--a carpenter's child becomes a carpenter or a farmer's offspring take charge of the family farm. are these: a philosopher--Adam Smith a parson--Thomas R. the economy would break down. Malthus a stockbroker--David Ricardo a nobleman--Saint-Simon a madman--Charles Fourier a revolutionary--Karl Marx an aesthete--John Maynard Keynes a tramp--Henry George a skeptic--Thorstein Veblen CHAPTER 2: The Economic Revolution Summary From the beginning of civilization. Because the methods are simple and need no economic explanation. An example of this principle is the building of the pyramids in ancient Egypt and the carrying out of the Soviet Union's Five-Year Plans in the post-World War II era. skeptic. During the early portion of civilized life. or if an insufficient number of students studied medicine or engineering. human beings have faced the challenge of survival. which depends upon two factors--work and cooperation with others. the possibility that humans will not remain faithful to work has threatened society's existence. Since the Economic Revolution. freely conduct business with the goal of making profits. Cliffs Notes on The Worldly Philosophers © 1990 10 . if farmers should decide to fish instead of plow and reap. motivated by self-gain. Among the identifications.com Commentary Even though these economists are not yet named.www." free markets are motivated by a single factor--the human urge to acquire goods. The Market System A system where buyers and sellers.cliffs. Tradition The passage of tasks. If there are not enough miners to work the mines or if most miners should decide to follow another line of work. Prompted by neither the "pull of tradition or the whip of authority. which become apparent in subsequent chapters. the evolution of a third method--the market system--has presented a more challenging economic puzzle. only two methods safeguarded against such an outcome--tradition and command.

Japan. such as the breakup of the manorial system. Cliffs Notes on The Worldly Philosophers © 1990 11 . is named for its use of capital. the decline of guilds. bases itself on family. it was brought about through the most far-reaching revolution of the Western world--the Economic Revolution. the effects of the Renaissance. This capitalism. Inquiry into the Nature and Causes of the Wealth of Nations. By this system. or investment funds. within free enterprise there are obvious government-sanctioned monopolies. and it consumes all that it produces. exists in pure form. Japan. Systems practiced today in the United States. which is also called a free or private enterprise system. each unit produces all that it needs. the emergence of modern nation-states. For example. and the Protestant Reformation. scientific advancement. Unplanned and slow to evolve.cliffs. and capital. the question of who will work and what work will be assigned to whom is settled by custom. Many factors combined to cause the revolution. such as electric power companies. Nevertheless. In order to develop what is meant by the Economic Revolution and its roles in the remaining chapters of the book. what production methods to use. European voyages of discovery and exploration. In many rural areas of Africa. a work which helped society understand how changes in economics were leading toward a new plateau in human history. each household selects what to buy with its income. The planned economy under central authoritarian rule differs from tradition in that the means of production and the authority to make economic decisions belong to the state. or the Soviet Union are better described as mixed economies. None of the three methods. Nor is it a farm produce market or a stock exchange. bringing with it the economists who satisfactorily explained the complexities of the system. the communist nations which were formed after the Russian Revolution in 1917 have attempted the same large-scale operations as an outgrowth of a centralized authority. Great Britain. the study of human wants and their satisfaction. clan. In neither instance did individuals actualize their own ideas or goals. the acceptance of the concepts of land. as the profit motive became respectable. economic decisions are decentralized: Each member of the labor force chooses which job to follow. which sanctioned the concept of profit. or market economy. the market system took shape. a few definitions will prove helpful: Economics The study of the ways in which human beings make a living.www. and Great Britain.com The market system is not the simple exchange of goods which existed in primitive society. railroads. which contain elements of both the market economy and the planned economy. Adam Smith wrote his amazing masterpiece. Western Europe. the science of wealth. In more recent times. or tribe. Commentary Tradition. and communications systems. Asia. In 1776. nor the commercial fairs of the Middle Ages. labor. and Latin America. Modern examples exist in the United States. or systems. Examples existed in ancient Egypt and Babylonia. The market system emerged only after bitter opposition to change by the people who tried to maintain their role in the status quo. and where to sell the resulting product. where massive work projects were organized at the whim of the ruling class. or the subsistence economy. and each business decides what to produce. In the market system. The market system supports and maintains an entire society.

machinery. equipment. Economists call these basic agents "factors of production. Distribution a. Each economic system has its own peculiar problems and therefore produces its own solutions. tools. and directs production. However. customs. The market system involves a high degree of economic activity. we need a labor force to do the work. and labor in the form of human workers doing physical tasks. rent. society as a whole did not consider these terms as impersonal ideas in the modern sense of "Let's start a business--we need land for the location of the factory. and capital that provided funds for buying tools and maintaining the land. and profit. b. Basic Agents of Production of the Market System Land Natural resources. and capital--did not exist as abstract ideas until the Economic Revolution. interest. and supplies. laws. Production The process of creating goods or services to be consumed." They include a fourth factor--management. Of course. Personal The division of income among persons. Capital The physical necessities for production--buildings. which plans. labor. revolving around the production of goods and services. It is significant that the basic agents of production--land. Consumption The process by which goods and services are utilized in satisfying human needs and wants. there was land used for agriculture. Functional The categorization of income according to type--wages. coordinates." Cliffs Notes on The Worldly Philosophers © 1990 12 . Economic Activity All action concerned with the creation and distribution of goods and services.www.com Economic System The rules. c. Physical The process of transporting these goods and services to the people who need or want to consume them. and principles which govern the operation of an economy. and we must have the capital to finance our efforts.cliffs. although some economists label this factor a specialized high-level form of labor. Labor Human effort.

advertising was unheard of. and principalities. The serfs were bound to the land of their masters. was a radical change in the attitude of society toward profit. the concepts of money and profit are old. Plato. A good example is the Fugger banking family of Bavaria. the ownership of land provided the prestige and status around which social life revolved. were completely absorbed with the question of immortality. apprentices. the ancient philosophers denounced economics in favor of basic questions about truth. which represented a radical departure in commercial practices and concepts. These religious thinkers emphasized salvation as Cliffs Notes on The Worldly Philosophers © 1990 13 .com During the Middle Ages. Society in the Middle Ages was run by custom and tradition. Augustine and St. and currencies. but not with any idea of investing. There were serfs. especially St. land existed in the form of estates. The Protestant Reformation (1500-1648)--an era which encouraged enterprise. Emergence of Nation-States (15th-l7th centuries)--a process that gave rise to royal patronage for favored industries. silver. expanding. evil. The apprentices and journeymen served the master and were rigidly controlled by guild regulations. or self-gain. but there was no labor market--that is. Without land. good. Later. which failed to pursue the amassing of wealth begun by their patriarch. and the respectability of interest and profit. the basis of price was the just price.www. the lords. around 600 B. However. God. The goal of medieval landholders was to stabilize and protect the nation by financing wars and conquests and by underwriting the household expenses of kings. This system changed after the Economic Revolution. with the first coined money dating back to Lydia. The greatest single change necessary for the adoption of the market system. but it was not "for sale" in the modern sense. there would be no capitalism. and with such Greek philosophers as Xenophon. Anton Fugger. and capital there was no production in the modern economic sense and therefore no market system. Certainly. people who were looking for jobs. and life. measurements. People lived as their ancestors had lived--off the output of the family land.cliffs. Thomas Aquinas. The following factors were responsible for the Economic Revolution. rather than emphasize any economic considerations. manors. and the standardization of laws. and journeymen who worked.. Without the profit motive. The Scientific Revolution (1500-1700)--the discovery of scientific principles which laid the foundations for the Industrial Revolution. which ushered in the market system: The Renaissance (1350-1600)--when the weakening of restrictive religion produced a more skeptical. The Age of Exploration and Discovery (l5th-l7th centuries)--an era which saw the rise of wealth in gold. maritime trade. Under the medieval system. and raw resources from colonies in the New World. inquiring attitude. or capitalism. the Church and its philosophers. money. Instead. labor. and Aristotle. or taking risks. the investment of capital.C. or market system. and profit. who were well aware of wealth. Capital funds in the sense of private wealth existed.

the military." However. and "the late disturbances in the American colonies." The book's 900 pages are demanding reading. The Wealth of Nations. Some Calvinists saw prosperity as a sign of God's grace.cliffs.com the all-important concern of society and criticized the acquisition of earthly material goods or riches. The Renaissance encouraged a new individualism in economic affairs and contributed to the breakdown of the guild system and to the rise of enterprise. statistics. nervous. and poverty as evidence of damnation. who believed that wealth arises from production. While traveling. Samuel Johnson. An Inquiry into the Nature and Causes of the Wealth of Nations. the book is a masterpiece because it presents a comprehensive picture of economics--a revolutionary doctrine which views the economy as though it were a living organism. a quiet. How can society depend on capitalism. Consequently. scholarly Scottish bachelor. which resembles an encyclopedia." Among a host of topics. Gradually. or profit. the first law of the market is self-interest. ten years after his return to Scotland. waste. or the profit motive. He gained fame as a moral philosopher. which is an unregulated market system? Smith replies with two laws of the market. for Smith often belabors a point without drawing a conclusion. the brewer. Therefore. selfinterest. including Locke and Hume." Thus. these are Adam Smith's economic laws: 1.www. Smith met the leading thinkers of the Age of Enlightenment. particularly Quesnay. Protestantism became a strong force in the alteration of concepts. Cliffs Notes on The Worldly Philosophers © 1990 14 . "It is not from the benevolence of the butcher. Calvinism especially encouraged enterprise. the clergy. As Smith writes. an idea explained by Adam Smith. the loaning of money and the investment of capital became respectable. foreign trade. CHAPTER 3: The Wonderful World of Adam Smith Summary Adam Smith (1723-90). royalty. or the baker that we expect our dinner. the father of modern economics. is far more than a mere textbook on economics. and during his lifetime. but from our regard to their self-interest. During a three-year tour of Europe as traveling tutor of the stepson of Charles Townshend. motivates people to perform necessary tasks for which society is willing to pay. the factors listed above helped shape the market system. The author refers to more than 100 authors in developing his arguments. his book The Theory of Moral Sentiments earned the critics' appraisal as his best work. from whom he takes the doctrine of laissez faire. apprenticeship. and Western society as a whole adopted the profit motive. farming. including Benjamin Franklin and Dr. however. One critic calls it "a history and criticism of all European civilization. it discusses the origin and use of money. It is not actually original in the sense that its basic ideas are unique to Smith. landlords. Smith worked on his Wealth of Nations and completed the book in 1776. he was already well known before publishing his enduring masterpiece. which emphasized self-gain and profit rather than spirituality. or "leave it alone. And so it was that the New Testament phrase "For the love of money is the root of all evil" (I Timothy 6:10) blocked the development of the market system. He was particularly impressed with Francois Quesnay. He borrows heavily from the physiocrats. principal spokesman for the French physiocrats. Consequently. The desire for wealth permeates all human activity. Thus the Protestant Reformation obliterated the old concept of the just price and the ban against charging interest on loans. taught first at Oxford University and then at the University of Glasgow. Briefly.

there will be a brisk business in gloves. In addition. motivated by self-interest. the opposing forces of self-interest and competition balance the market. In the same way. the reverse is true--when profits or wages are too low. but they also determine the quantities of goods produced. the capitalistic world of today differs greatly with its giant corporations and massive labor unions." In his radical view. Cliffs Notes on The Worldly Philosophers © 1990 15 . As Smith explains. but little demand for shoes. Therefore. new producers begin manufacturing gloves. Therefore. for the business world was a world of atomistic. Workers move from shoe factories to glove factories. society was definitely improving. By the same token.cliffs. when the public demands more gloves than shoes. Since there are higher profits in the glove business and a greater need for gloves. workers will hire out to another employer who will pay more for their services. Does capitalism. At this point. By comparison. in the process of providing for personal interests. the market achieves a balance. under the market system each worker freely chooses a trade. The result is that glove production rises and shoe production falls. However. new producers are attracted to the business--until competition reduces the surplus of profit. division and specialization of labor greatly increased productivity. Thus. the price of gloves will rise as demand exceeds supply and pushes prices up. Competition for these tasks prevents the individual from over-charging society. As the supply of gloves grows to meet demand. the laws of the market not only insure that prices are competitive. Through such a multitude of choices. The individual who overcharges for products soon learns that competitors will take away business by offering more reasonable prices. the twin laws of self-interest and competition still form the basis of the market system. glove prices decrease. actually operate in this way? It did during Smith's time. According to Smith.com 2. Before long. He expressed enthusiasm after his visit to a pin factory which employed only ten people. selfish motives are tempered by interaction. The price of shoes will go down because the supply exceeds the demand. shoe prices rise." It is selfregulating if left alone (laissez faire) so that competition can operate freely without government control and without monopolies. The individual. Smith insisted that society could not flourish if "the greater part of the numbers are poor and miserable. Consequently. the laws of the market also regulate incomes of producers. But the key to the operation of the laws of the market is that the market is "its own guardian. Adam Smith was optimistic in his vision of the future. Thus. As the supply of shoes falls below demand. guaranteeing the survival of society. the second law of the market is competition. there was evidence that a large number of people did not profit from the system. society reaps the benefit of having all its necessary tasks filled. To him. the two laws of the market--self-interest and competition--react upon each other and form a balance. When profits in one type of business become unusually large. competition. Still. Yet. or the market system. resulting in ruthless exploitation by profiteers? Smith answers that the individual. resulting in social harmony. During his lifetime. self-interest becomes a factor. Finally.www. even though more than an eighth of England's population in 1720 was poor. the society of the market system was dynamic and progressive. selects a particular task. labor's wages are regulated--workers are attracted to higher paying industry until the labor supply lowers the pay scale to that of comparable jobs. If wages are too small. This price increase stimulates shoe production. unintentionally contributes to the economic wellbeing of society. producers or workers will leave that field for more lucrative areas. or elemental. But how can the individual's selfish desires benefit society? What stops greed from overwhelming the public.

and monopolies and made their profits from transporting goods. lives a more luxurious life as a result of the work of specialized labor. is subject to demand. one must know something of the economy and living conditions in England in 1776. pushing wages down. In England. According to Smith. Smith saw two additional fundamental laws which propelled the market system in an ascending spiral of productivity and away from the "avarice of private greed. additional machinery means more workers to work them. Wealth of Nations appeared in England just as the Industrial Revolution was beginning. Even though the Law of Population depresses wages toward a subsistence level.com Each worker specialized in a single operation. The second stage began about 1750 and was made possible by new sources of energy. Eventually this increased demand for workers leads to higher and higher wages until profits vanish. this stage is known as financial capitalism. known as commercial capitalism. but the economy. Commentary To comprehend fully why Smith's Wealth of Nations was a revolutionary book. known as industrial capitalism. Conditions steadily improve. and increase in overseas trade. As a result of lower wages. This stage. 3. 3. The law of accumulation refers to the accumulation of profits. which will stimulate further division and specialization of labor.000 pins. In his vision of society's economic progress. The third stage of capitalism began in the last quarter of the nineteenth century. further accumulations are impossible. the total daily output was over 48. the government controlled practically every Cliffs Notes on The Worldly Philosophers © 1990 16 . will ultimately reach its "promised reward" --a world where poverty and wealth balance each other. profits for the capitalist will rise again. What is the end result? Not a utopia. If each worker were to handle all steps involved in the manufacture of pins. The nation was entering the second of three stages of capitalism. a simple factory worker.cliffs. It was brought about by the five factors which produced the Economic Revolution and was affected by geographic discoveries. the total output per worker would fall to twenty pins per day for a total production of 200 pins. capitalists can purchase additional machinery. which are put back into production. The solution to this obstacle is Smith's law of population. The early capitalists were protected by government control. 2. in comparison with an African king. As the law of accumulation increases wages for workers. the numbers of the working class will increase. By accumulating profits. resulted as capitalists profited from manufacturing. thereby boosting productivity. these two evolutionary laws form an endless chain for society through which progress is inevitable. This invention enabled the factory system to develop through the use of machines for manufacturing and resulted in the rapid growth of wealth. it never arrives there. like any other commodity. with profits coming from investing. and accumulation will continue. 1. subsidies. resulting in further accumulation for further investment. At this point. primarily the steam engine. a fact unknown to Adam Smith and the capitalistic class of his day." These laws he called the law of accumulation and the law of population. 4. As the population of workers increases. The first stage. if left alone. Labor. However. Because of the control and direction of industry by financiers. occurred between 1450 and 1750. colonization. its size becomes a counterforce. which reached its height during the 1850s.www. Thus.

building it into his exaggerated theory of "surplus value. For Smith. or in some diversion to raise prices . worked in dank mineshafts. and is valuable only for purchasing. production. 2. conditions were abominable. accumulation of gold and silver a favorable balance of trade through an excess of exports the self-sufficiency of the nation through the utilization of raw materials from either England or her colonies colonies to provide raw materials.com sector of the economy. Their program called for the following: 1. The House of Lords represented the noble families." Cliffs Notes on The Worldly Philosophers © 1990 17 . or landed aristocracy. and foreign trade. women. with thousands of tenant farmers thrown off the land in order to make room for the more profitable sheep. 5. It was not until the nineteenth century that the Wealth of Nations made its full impact. he avoided taking sides with any class. the rising industrial capitalists managed to disregard certain stinging accusations in Smith's philosophy. 6. When wool became a profitable commodity. protected by a strong central government. Karl Marx seized and expanded upon this idea. "Wealth does not consist in money. the real wealth of nations consists of the goods which they can produce and trade. ." Consequently. land owners enclosed new pastures to raise sheep. The process of enclosure. and children. Unfortunately. which controlled the vote as well as public office." Adam Smith. Adam Smith's Wealth of Nations launched a specific attack on the doctrine of mercantilism. 7. His observation that labor is the only real standard of value has been contradicted by most economists.cliffs. Yet the grasping aristocracy. 3. Some ninety years later. such as "People of the same trade seldom meet together but the conversation ends in a conspiracy against the public. he was influenced by the concept of "the greatest happiness of the greatest number. .www. was neither pro-capital nor pro-labor. or in gold and silver. without controls. Forget "balance of trade. Then Great Britain discarded mercantilism completely to become the world's wealthiest nation. who considered the poor a necessary segment of a stable society.5 million of England's twelve to thirteen million population suffered poverty. concerning himself with the promotion of wealth for all of England's classes. A principle which his contemporary capitalists chose to ignore was Smith's concept of labor value. This condition can be accomplished only by allowing production and commerce to develop freely." As opposed to the emphasis on agriculture by the physiocrats. he called for free trade and the abolition of economic restraints and monopolies. as well as a market for England's manufactured goods low wages and long hours for workers high tariffs to protect home industry and to discourage imports a strong merchant marine. opposed any suggestion of a more equitable distribution of wealth. wages. In his celebrated Book IV. upheld the view of government and business that real wealth consisted of gold and silver. Men. At the University of Glasgow. The replacement of mercantilism with the doctrine of laissez faire did not come immediately with the publication of Smith's views. hours of work. but widely adopted by socialist writers." he argued. Smith emphasized manufacture. reached its height in the nineteenth century. self-sufficient economy. mercantilists sought a strong. Since the reign of Henry VIII. For the poor. Only 3 percent of the population affected the election of members to the less static House of Commons. but in what money purchases. 4. Mercantilism. The masses struggled brutally for a meager existence. in fact. the dominant economic concept of the day. Over 1. which began in the sixteenth century. stripped to the waist and stooped over in semi-darkness. including prices.

manufacturers shackled children to machines. David Ricardo was a successful Jewish stockbroker who. CHAPTER 4: The Gloomy Presentiments of Parson Malthus and David Ricardo Summary Adam Smith's vision of the world demonstrated glowing optimism when he founded the school of Classical Economists. the soft-spoken scholar. Accordingly. In contrast. DAVID RICARDO (1772-1823) During the forty years following the publication of Adam Smith's Wealth of Nations.cliffs. Adam Smith's proposals for protective measures for workers. To quell child labor laws. Ricardo and Malthus violently disagreed with each other's economic views on practically every point except one--the dangers of overpopulation. and his social position ranked high. When one published a book or article developing a particular economic thesis. He founded the school of Classical Economists. Since capitalists had to pay at least a subsistence wage to workers. Of Dutch extraction. they justified resistance to government attempts at social legislation. Ignoring the philosopher's warnings about the dangers of monopoly. farmers. the two economists were congenial and held a high personal regard for each other. the Reverend Thomas Malthus had none of Ricardo's good fortune or social success. factory owners quoted Wealth of Nations in defense of deregulation. rivalry between the rising industrial capitalists and the conservative. his biographer called him "the best abused man of his age. consumers. particularly over the matter of food prices. Malthus was not at all practical in financial matters. He won widespread respect. During this era. by thoroughly describing and explaining the market system. despite differences of philosophy. Yet. they welcomed cheap.com What British capitalists stressed was Smith's gospel of laissez faire. Capitalists championed the Wealth of Nations as a vindication of corrupt business practices. To this end. Landowners and landlords naturally resented imports because they depressed prices and profits from their own grains. Adam Smith. and the control of monopolies were ignored. the other attacked it. the abolition of slavery." Spending most of his life in academic research. Cliffs Notes on The Worldly Philosophers © 1990 18 . He never enjoyed more than a modest income and was continually criticized for his ideas. and society as a whole. the chief spokesmen for that school--David Ricardo and Thomas Malthus--while accepting the principles which Smith laid down. by the age of 26. Ironically." His Principles of Political Economy (1817) helped shift the economic picture from Smith's optimism to a widespread pessimism. complacently landed aristocracy dominated the English scene. they were vitally interested in lowering grain prices. whose chief spokesmen were David Ricardo and Thomas Malthus. In fact. differed sharply from him in their pessimistic views of an ominous future. In later times. yet was most practical in his economic views. became the patron saint of free enterprise in the capitalistic world. including membership in Parliament where he earned the title. Adam Smith. became the father of modern economics. Ricardo was essentially a theorist who created a dry. became financially independent.www. "the man who educated Commons. imported wheat and corn. mechanistic picture of society. child labor was common in poorly ventilated and unsanitary factories. In this way. A practical man in financial matters.

One of Ricardo's main contributions to economic theory was his concept that rent rises from differences in the quality of land. This situation was a direct refutation of the physiocrats' concept that rent rose from the bounty of nature. While not called as such in the text. Commentary A little over twenty years after the death of David Ricardo. also suffered. which led to higher wages. This situation naturally reduced profits. Consequently. and the high price of grain always resulted in high food prices. Thus the capitalist. capitalist. The result was the passage of the Corn Laws. Thus. Ricardo explained rent--the landlord's income--as a very special kind of return which originated from the differences in cost between productive land and less-productive land. according to Ricardo. the capitalist was further squeezed by the landlord because profits depended largely on the amount of wages which had to be paid. the worker was doomed to gain no more than a subsistence level of wages. which imposed duties on imported grains. This situation pushed the selling price of grain up and increased the income of the landlord. of the three parties in this bitter struggle--worker. Ricardo saw them as eternally seeking profits but engaged all the while in fierce competition with other capitalists. society was a bitterly competitive contest. This difference in costs was represented in rent.com The landlords' resentment was translated into action in Parliament where they held the majority. for the selling price of the product--artificially high due to great demand and lack of competition from imported grains--was the same for both yields. Ricardo was himself a landlord. concluded Ricardo. Instead of raising the family standard of living when wages rose. more farming was needed to meet the increased demand for grain necessary to feed that population. As a result. However. To Adam Smith. Rent in the nineteenth century was not controlled or restricted by free competition because land did not change hands. Therefore. this fact did not prevent him from attacking what he saw as an evil. Observing the advantageous position of the landlord. the dismal future which Ricardo had envisioned did not come to pass. As the economy progressed and the population increased. offsetting the tendency for wages to rise as the supply met and exceeded the demand for workers. the Corn Laws were abolished (1846). As to the future. and the economic plight of the worker. he saw the landlord as a villain.cliffs. Worse. whose only human expression was an indulgence in sex. The landlords' political clout was so great that Parliament did not repeal the Corn Laws until thirty years later. the worker produced more children and thereby increased the labor supply. Ironically. is labor's natural price--the income which is necessary for the Cliffs Notes on The Worldly Philosophers © 1990 19 . it held little promise as the worker was doomed to a subsistence wage because of his growing family. Of greater importance. was Ricardo's theory of wages. This level. David Ricardo envisioned an unpromising future for capitalism. thereby effectively keeping low-priced grain out of England. however. Thus. but. As for capitalists. and he continually sought the abolition of the Corn Laws. In other words. He viewed the worker as little more than an automaton. to Ricardo. David Ricardo became the champion of the rising capitalists. and the industrial capitalists eventually broke the power of landlords and replaced them. the struggle of competing capitalists. the yield was so much greater from productive land that its cost of production was much less than that of less-productive land. While Ricardo considered the roles of the worker and the capitalist in the market system to be legitimate. Ricardo viewed land as a monopoly. who paid increased wages to the workers to enable them to live. and the capitalist had his profits gobbled up by the landlord. society appeared balanced and harmonious. this theory has been labeled the Iron Law of Wages--which states that wages must remain at the subsistence level. and landlord-only the landlord profited.www.

Ricardo argued that wages should be left to free competition and should never be controlled by government interference. While motivated by compassion for the poor. Malthus' thesis--known as the Malthusian Doctrine--states that population grows at a rate greater than the means to feed it.S. So. He reasoned that by keeping the poor alive. Capitalists agreed with his theory. explained Malthus. if unchecked.000-word pamphlet to a 600-page book. an incorrigible piece of optimism by William Godwin. Malthus praised them as ingenious capitalists. since his income was modest and he owned no land. by positive checks--war. Being the first economic statistician. The inspiration for Malthus' masterpiece came from his reading of Political Justice. By applying the doctrine of laissez faire. they would continue to propagate. the land. However. objecting to these measures on the grounds that charity is really cruelty in disguise. Malthus earned criticism by opposing relief and housing projects.www. It was not his articles on economics nor his Principles of Political Economy (the same title as Ricardo's book) which made Malthus famous. The effect changed Adam Smith's optimism to an outlook so bleak that Thomas Carlyle named economics "the dismal science. Although Ricardo refuted this logic. doubling itself from 1 to 2 to 4 to 8 to 16 to 32 times its original size until it reaches cataclysmic proportions. Malthus concluded. the world's population will double every twenty-five years. for David Ricardo substantiated Malthus' claims about the perils of rising population. THOMAS R. Thomas Malthus defended the landlord and attacked Ricardo's views. where a real census appeared before it did in England and revealed that the U. it's obvious that these age-old inhibitors cannot halt the disastrous population spiral. the means of subsistence can only increase arithmetically from 1 to 2 to 3 to 4 to 5 to 6 and so forth. Meantime. it was his anonymously published Essay on the Principles of Population as It Affects the Future Improvement of Society (1798). infanticide. when the process of saving might lead to a lessened demand for goods and thereby to an excessive quantity of products without enough buyers. population will continue to increase geometrically. whose reception was so great that Malthus expanded the original edition from a 50. Malthus was pessimistic over the future of capitalism. and famine. He warned of general gluts. Clearly. Cliffs Notes on The Worldly Philosophers © 1990 20 . Malthus expressed his dissension through his Essay on Population. population had doubled in twenty-five years. Yet approval came from an unexpected quarter. In other words. Godwin's vision of the future was a utopia containing neither war nor crime nor disease nor government--nothing but complete happiness. if population growth continues unchecked. How can population be checked? 1. Rather. Still. MALTHUS (1766-1834) Summary Oddly enough. Instead of viewing landlords as villains. Malthus based this estimate on the population growth of the United States. which cannot keep pace with subsistence. but for a different reason. First. the result will be too many people with not enough food--that is. is put into cultivation in units of one additional section at a time. disease.com worker to exist." Critics heaped scorn and derision on "Parson" Malthus. and. Malthus did demonstrate his foresight in predicting depressions. poverty.cliffs. producing more poor.

A sixteen-hour working day was common--from six in the morning to ten at night. Are Malthus' facts correct? Yes. doubted the ability of people to practice restraint. then. feared an insurrection of the poor against the rich. However. What Malthus advocated as the only possible solution is abstinence or "moral restraint. there are the preventive checks of sexual abstinence and vice--that is. especially in the Western world. alarmed by these disturbances. the nation had triumphed in the long struggle against Napoleon. By current standards. but the Malthusian Doctrine is still a specter that haunts the minds of an increasing number of modern theorists. but also the actual world of England in the 1820s. and preventive medicine has increased the problem of overpopulation by reducing high death rates. Children of ten years and younger labored in such industrial centers as Manchester and Birmingham in poorly ventilated buildings that lacked basic sanitary and safety measures. the Reverend. notably India. shelter. particularly in India and China. China. so he stressed the advantages of restraint. Malthus was not as incorrect in his analysis as modern economists would have us believe. the increased use of modern sanitation. The populace. working conditions were terrible. Malthus could hardly advocate vice. children were tortured and sexually abused and had to scramble with the pigs for food. but to stimulate efficiency. Why. but at home it wallowed in social evils brought on by the factory system. he disapproved of it on moral grounds. and mangling accidents were common. CHAPTER 5: The Visions of the Utopian Socialists Summary "Gloomy" describes not only the future described by Malthus and Ricardo. especially Europe and the United States. On the Continent. Machinery saved labor. paving the way for the Utopian Socialists. because of the widespread use of modern birth control methods. prostitution and homosexuality. if measured by the actual rate of population growth in much of the world. but wreaked havoc on workers. In any case. hygiene. The countries where population explosions occur are less technologically advanced areas in the Third World. Mobs known as "Luddites" rallied to wreck and burn mills as a means of expressing their hatred of factories. In some places. Commentary While the majority of economists and scientists consider the Malthusian Doctrine invalid. and treatment for workers presented additional problems. Being a minister. Food. With no workmen's compensation or health insurance. Consequently.com 2. which once served as a positive check. he predicted that the future of humankind will be starvation. Even though he was acquainted with birth control. Ironically.cliffs. Less than 20 percent of the world's people depend on preventive checks.www. has his prediction not come to pass? Basically. These people live in advanced areas of the world. and the wonderful world of Adam Smith became the gloomy world of Thomas Malthus and David Ricardo. Second. Many children spent their few hours of sleep on factory cots to save the long trudge home. It was not unusual for children to be whipped--not only for a slight mistake. the warnings of the chief spokesmen for the school of Classical Economists swayed the minds of the nineteenth century. which provides more than enough food in advanced countries." He called for late marriages because fertility lessens in the later years and passions cool. and Latin America. and the tremendous increase in agricultural technology. Cliffs Notes on The Worldly Philosophers © 1990 21 . New machines were not covered or fenced off. a realistic observer of human conduct. an injured employee was likely to be thrown into the streets. an increasing number of demographers (scientists who study population statistics) warn that it is very real indeed.

evolving from his teachings. By raising wages. the idea lacked funds and support. Finally. and sitting rooms be used in common. Having improved conditions through benevolence. Instead. he sold the land and tried in vain to interest President Jackson and Santa Anna of Mexico in another venture. 1826. if organized entirely for profit. Indiana. Bold for a small capitalist. Owen sold the New Lanark mill to finance New Harmony. he became factory manager of a large spinning mill. Owen lost 80 percent of his fortune. Naturally. What was his philosophy? Owen believed that humanity is no better than its environment. Returning to England. married the former owner's daughter. and began manufacturing machinery for the textile industry. Within five years. reducing hours of work. The community would carry on a variety of occupations insuring self-sufficiency. What survived was the consumer cooperative movement. and skeptics--even the Tsar of Russia. joining with the leaders of the movement. Young children would be boarded. reformers. particularly better wages and working conditions. older children would tend the gardens. Robert Owen revolutionized mill operation by eliminating the typical evils of the British factory system and transforming New Lanark into a model workers' community. Owen shocked business and government leaders by stating that the development of machine production. would inevitably lead to poverty and degradation for workers. Owen continued to stick to his views--notably that money and private property are trustworthy. Envisioning Villages of Cooperation--planned communities where 800-1200 persons worked together and lived in private apartments--Owen insisted that kitchens. on July 4. With New Lanark as a laboratory to test his hypothesis. Scotland. and the abolition of money. borrowed $100. and the end result was complete failure. he reversed the standard concept of labor relations. This forerunner of modern industrial trade unions called for broad social change. Since people are shaped by environment. he proved that a capitalist's concern for workers is profitable. His philosophy made a deep impression on workers. A few years later. His solution was cooperation. which was visited by writers. Owen. improving factory sanitation. some based on a moneyless system. who launched a moral crusade for the working class. even though he knew nothing about the trade. Undaunted. Nine years later. Owen's schooling ended at age nine when he was apprenticed to a linen merchant. By age twenty. and providing schools for employees' children.000 workers. improvement of that environment can produce a paradise on earth. ROBERT OWEN (1771-1858) The early life of Robert Owen resembles a Horatio Alger story. Cliffs Notes on The Worldly Philosophers © 1990 22 . One associate defrauded him and set up a whiskey distillery. a series of producers' and consumers' cooperatives developed throughout England. he formed a Grand National Moral Union in 1833 with a membership of 500. Because he chose poor associates. rebuilding workers' homes. a cooperative based in Posey County. with the concept of laissez faire in full vogue. Born into a poor Welsh family.com In the midst of this miasma appeared an unusual capitalist --Robert Owen. he bought a group of textile mills at New Lanark.www. reading rooms. Owen advanced to part owner. the setting up of cooperatives. he moved to Manchester. and made a fortune. becoming the boy wonder of the textile industry. rival communities sprang up. begun by twenty-eight backers who called themselves Rochdale Pioneers. Owen gained productivity and efficiency. with borrowed funds. inspired the Pioneers but was not directly involved with them. Owen's scheme lacked sufficient practical planning. At a distance from the commune would be the factory unit. few persons gave serious consideration to Owen's scheme.cliffs. In spite of David Ricardo's willingness to test the plan.

Charles Fourier. At the age of sixty-four. is called the founder of French socialism. hazy religion. was altogether crazy. He believed that the earth was geared to life cycles lasting 80. Instead. The legacy of Robert Owen includes British socialism. whose leaders included George Bernard Shaw.000 years of "ascending Cliffs Notes on The Worldly Philosophers © 1990 23 . and consumer cooperatives. still optimistic. His search resulted in Saint-Simon's belief in the brotherhood of man. Reality proved that the opposite situation was true: non-working aristocrats received the greatest share of wealth and did the least work. Sidney and Beatrice Webb. dissipated his finances and led to a bungled suicide attempt.000 years--40. At the age of eighty-seven." CHARLES FOURIER (1772-1837) Summary If Saint-Simon was half-mad. known as the founder of British socialism. he created a concept of socialism that is quite different from Karl Marx's concept of class warfare. England. and strikes weakened the movement. Saint-Simon proposed to reorganize society along the lines of a factory. This half-mad utopian stressed the necessity of work. along with an unsuccessful marriage.www. realized that his utopian projects had ended in failure. but local unions failed to control their members. but he met failure because he encountered too many obstacles. then his fellow countryman. while quite impractical. and finally down to Britain's Labour Party. and H. After his death. Owen's philosophy passed down to the Fabian Society of Great Britain." he took as his motto: "Everything by industry. Wells. a moderate socialist party. Not only did government disrupt the movement with anti-union legislation. he died. Robert Owen. Owen and his lieutenants quarreled and ended their association. Renowned for his pigheadedness. the successful capitalist who disavowed capitalism. and capitalists. he publicized his ideas in tracts and wrote his Autobiography. However. But Saint-Simon offered only theory without working out practical details. technicians. modern trade unions. which evolved into an industrial religion. a French aristocrat. Defining a nation as "nothing but a great industrial society. But he did not give up. Owen traveled the countryside advocating unionism.cliffs. he determined to become a philosopher and launched a survey of human knowledge which. government should arrange for rewards to be allotted in proportion to each person's social contribution. everything for industry. G. and Germany. possessed the spirit of democracy and translated his convictions into action by fighting in the American Revolution. which led to his conclusion that workers deserve society's greatest rewards." and politics as "the science of production. SAINT-SIMON (1760-1825) Summary Count Henri de Rouvroy de Saint-Simon. Even worse. and idlers deserve the least. Rewards should go to active members and not to lazy onlookers. his ideas degenerated into a mystical. he influenced capitalism by proving that industry could sponsor humanitarian projects and still make profits. Commentary Saint-Simon.com For two years. with the function of government being economic rather than political. with churches in France. Commentary Robert Owen. first used the words socialist and communist. the passage of legislation to correct deplorable working conditions. With the aid of scientists. The most romantic of the Utopians.

However. Then the seesaw will tip and humanity will work its way backward to Confusion before beginning another life cycle. All would work according to ability." The advancement of humanity consisted of eight stages. but all else would be owned collectively. and Trumbull.S. intellectual. and banking--with profits distributed by the state to the people rather than to capitalists and landlords. transportation. Cliffs Notes on The Worldly Philosophers © 1990 24 . interest. and the style of life would vary with one's ability to pay. and Campanella's City of the Sun. Surprisingly. were ridiculous. In spite of his optimistic vision of the future. as in an ultra-modern hotel. while some lasted for several years. the modern concept of socialism. money. there were over forty phalanxes. Patriarchism. and craftworkers.cliffs. These thinkers were both utopians and socialists--economic reformers who attempted to create an ideal world by changing society. the idea spread. Sir Francis Bacon's New Atlantis. Each person would have privacy. all dared to be different and to present dreams to scoffers. of course. particularly Fourier's. mechanics. minerals. and Barbarousness--have already passed. rent. an explanation of several terms is in order: Utopia An impractical social. Commentary The one factor which utopian socialists shared was idealism: They dreamed of the betterment of humanity. This is.com vibrations" and an equal number of "descending vibrations. and land would be allowed the individual. Children would perform dirty work and tend flowers. Four stages--Confusion. Their solution is the nationalization of land. As a solution. he proposed to reorganize society into phalanxes. shelter. of which 120 years will be spent in unrestricted sexual delight. To understand their role. peaceable species of animals will evolve. Savagery. and 3/12 to ability or talent. which has evolved from the concept of common ownership. there would be farmers. Famous examples include Plato's Republic. which would be divided on the basis of 5/12 to labor. Socialism State ownership of the basic means of production. Private property in the form of clothing. Residents would labor a few hours each day at whatever job appealed to them. alone. of 1800 persons living under one roof. Since everyone would have to work. or political scheme. Everyone would be encouraged to become a part owner. and a leisure class would not exist. "Utopia" also refers to those ideal states which fail because they lack ideal human beings. Fourier believed that the phalanx concept would produce profits as high as 30 percent of the investment. A spirit of competition would exist. household goods. forests. 4/12 to capital. Some of these dreams. Fourier saw the practical world as utterly disorganized. Every member would share profits. Oneida. none proved permanent. Utopias are based on what the author thinks ought to be rather than what actually exists. Humanity now looks forward to Guaranteeism and eventually Harmony. Socialists believe that wealth should be distributed equally and that distribution under capitalism is unfair. New Icaria. including Brook Farm. These eight stages would repeat themselves endlessly. and people will live to 144 years. Sir Thomas More's Utopia (from which the name comes). factories. but Robert Owen's contributions were the most practical and the most lasting.www. or organized communes. Under socialism. but it takes dreams to stimulate people to progress. In the U. Of these utopian dreamers. the final stage when the sea will become lemonade. The fundamental objective of socialism is to prevent capitalists and landlords from exploiting workers. trade.

he fell in love with Harriet Taylor. Cliffs Notes on The Worldly Philosophers © 1990 25 . Because she was married. and wrote books on history. a famous economist. philosopher. particularly the belief in progress and the perfectibility of humanity. and differential calculus. who educated him on the subject of women's rights. and champion of laissez faire. until thirty years later. However. he added respectablity to the ideas of the utopian socialists. As already noted. Mill gained recognition as the greatest economist of his age. saying that these reformers were nothing more than impractical idealists. the term is taken from Karl Marx. But. as well as others. he mastered logic and read major works on economics. JOHN STUART MILL (1806-73) Summary The son of James Mill. In contrast to the despair of Malthus and Ricardo. he had read Greek and Roman classics in the original as well as English philosophy and history. learned Greek at the age of three and studied Latin at eight. however. the socialists believe in attaining goals by an evolutionary process through democratic means. Ironically. He absorbed geometry. Taylor's husband died. The significance of this work is that it dealt a severe blow to the concept of laissez faire. in doing so.com The whole idea of socialism dates to early utopian schemes. He believed that through education. algebra. This profound discovery meant that society could distribute its wealth on the basis of ethics and morality instead of cold. Thus they were named utopian socialists rather than his brand of practical revolutionary socialists. their romance remained platonic for twenty years. there was no right way to distribute wealth. Mill gradually approached the socialist point of view and. They did not preach class hatred but appealed to the intellectual and capitalistic classes to reform society voluntarily. In surveying the field of economics. By the age of twelve. which was a broad-minded view of the principles of laissez faire. workers would realize the impact of the Malthusian doctrine and would voluntarily regulate population. From the utopian socialists came the concept of the welfare state.www. because distribution depended on society's customs and laws. Utopian Socialists Reformers who were inspired largely by the ideas of the Age of Enlightenment and the French Revolution. held by modern socialists of Great Britain and Scandinavia. Mill discovered that laws laid down by classical economists applied to production but not to the distribution of wealth. They married after Mrs. impersonal laws. as contrasted with communism. a child prodigy. In the meantime. By the age of thirteen. The last economist to be taken up in this chapter--John Stuart Mill--was not actually a utopian socialist but rather the champion of democratic liberalism. He maintained that workers should form cooperatives and unions to seek higher wages. Mill envisioned hope. With the publication of his two-volume economic masterpiece. the term originated with Robert Owen. Mill did not write his philosophy of economics. Basically. He argued that. Communism Redistribution of wealth through revolution and class warfare.cliffs. Principles of Political Economy (1848). this belief differs from socialism in its method of attaining the same goal. even though they lived and traveled together. who used it scornfully. John Stuart Mill.

a radical newspaper which was suppressed because of his attacks on law and the Tsar of Russia. however.www. middle-class Jewish family. Cliffs Notes on The Worldly Philosophers © 1990 26 . The success of his book led to Mill's publication of a cheap. Consequently. then in Germany. again in Paris.com Opposed to government regulation and recognizing communism's threat to individualism. founder of utilitarianism. Hunger was never far from the Marx household. but to his father's dismay. priced to reach the working class. bloody clamor. in 1844. He called for taxes on inheritance and rent. written by Karl Marx. although his philosophy placed him somewhere between capitalism and socialism. he rejected the study of law. In Paris. Marx turned to journalism and edited the Rheinische Zeitung. the threat of revolution was everywhere. Commentary John Stuart Mill. despite all their zeal and furor. these stirrings failed because they were spontaneous. He was one of the first spokespersons favoring equal rights and education for women. which underwent several phases of reorganization as its members tried to reach a consensus. Their initial efforts proved insufficient against the reaction of European governments. he continued his journalistic career in Paris.cliffs. for amid this turmoil appeared The Communist Manifesto. His essay "On Liberty. Mill modifed the doctrine of laissez faire. but they presaged a turn of events in world economics which would make itself felt for years to come. The son of a wealthy German textile manufacturer. undisciplined. the subject of his "Enfranchisement of Women" and The Subjection of Women (1869). He found his ambition to teach blocked by authorities who rejected his liberal views. Germany. He later called himself a socialist. he began studying politics and economics. CHAPTER 6: The Inexorable System of Karl Marx Summary In 1848. In Brussels. which became the program of the Communist League. and Austria imitated the unrest of the French. The League eventually died and was replaced by the International Workingmen's Association. the two collaborated to produce The Communist Manifesto. he dedicated himself to philosophy and came under the influence of Hegel's ideas. the pattern of his life changed little--radical views always led to expulsion. is perhaps the finest piece written on individualism. born in Germany. dissolute king before fomenting riots. daughter of a Prussian aristocrat and his former next-door neighbor. one-volume edition. is known for contributing to political science and ethics. the second son of a liberal. Mill treasured his wife and the pursuit of knowledge. a loose organization of discontented workers who desired fundamental political and economic changes. However." a manifesto against despotism. particularly his belief in constitutional government and atheism. At this time. Married to the beautiful Jenny von Westphalen. The French endured a weak. The songs of workers and the poems of romanticists echoed the volatile rumblings of internal discontent. and disconnected. Yet. Brussels. with the collaboration of Friedrich Engels. Marx formed an immediate and lifelong association with Friedrich Engels (1820-95). the Belgians likewise found no strength in royal leadership. Engels lived a double life by associating with capitalists while devoting himself to socialism. Marx (1818-83). by favoring government intervention to remedy injustice. A peaceful and reasonable man. pursued a college education. Czechoslovakia. Uprisings in Italy. he believed legislation was necessary to protect women and children who worked in factories. From this fierce. a new voice made itself heard--the voice of militant workers who comprised the Communist League. At universities in Bonn and Berlin.

This meticulous book required eighteen years of preparation. Marx evolved his economic interpretation of history. but. Marx declared. "I am not a Marxist. he pawned his shoes and overcoat to survive. making a total of 2500 pages filled with minute. Marx couldn't send his reports to New York because he lacked money for postage. Das Kapital is Marx's analysis of the means of destruction. Marx came into a small inheritance from an old friend. Marx determined that the inevitable next step was a revolt of the overwhelming majority of workers. only Volume I of his masterpiece had been published. each of which was written for a different purpose. Engels published Volume II in 1885 and Volume III in 1894. without monopolies. Marx suffered from chronic boils. or workers. unions. after two years of editing. he fled to England to spend the remainder of his life in London. with the main part-Volume I--published in 1867. Marx states that the value of a product is the amount of labor which goes into making it. is primarily the story of one class' exploitation of another. While The Communist Manifesto states the revolutionary aims of communism and maintains that capitalism must inevitably destroy itself. according to Marx. a German philosopher who believed that change occurs as the result of a blend of opposing forces. the final volume appeared in 1910.cliffs.www. By stressing the reality of materialism. Marx developed the principle of dialectical materialism from the dialectical method of Hegel. the capitalist wants a profit. Marx remained devoted to his family. Marx went further. The history of humanity. What kept his family going was Engels' generous financial aid. organized workers' movements and edited communist papers. a quarrelsome and intolerant activist. it is necessary to discover his basic concepts from a study of The Communist Manifesto and Das Kapital. Accepting this fundamental premise. or special advantages for anyone. his scientific arguments comprise irrefutable evidence prognosticating the doom of capitalism.com Wherever he went. Marx's writings interpret history in terms of a class struggle for survival. disgusted with feuding. He substituted realism for Hegel's idealism and used it to explain world history. Despite everything. This economic cataclysm would lead to communal ownership and a return to a classless society. As Marx did not make a systematic presentation of his philosophy. results in a new concept. Every product sells for its correct price or value. at times. Marx. Agreeing with Adam Smith and David Ricardo on the definition of value. His later years were filled with bickering over the validity of his interpretations among a motley assortment of dissidents. tedious points of economic theory. Marx endured not only poverty but also disappointment. he and his family and a faithful servant spent a miserable existence of abject poverty and near-starvation. when challenged by an opposing idea. and to add to his misery. He pored over books and manuscripts on economics. or antithesis. Marx sets the scene for his attack on capitalism by describing a capitalistic world of perfect competition-where the market is free. Jenny and two of their five children died. Eventually. Applying the theory of dialectical materialism." At his death. gathering and cataloging enormous amounts of data which formed the basis of his Das Kapital. or thesis. After selling the family silver and valuables. The worker wishes to sell labor-power. It is a critique of political economy which attempts to explain economics in coldly analytical and scientific terms. Undoubtedly. or synthesis. There. which determines everything else in human affairs. which is somewhat closer to the truth than the initial two ideas. Marx worked in the British Museum library from ten to seven each day. later. these years of extreme poverty account for much of Marx's bitterness. The given idea. To Marx. who would overthrow the ruling capitalists and establish a dictatorship of the proletariat. Cliffs Notes on The Worldly Philosophers © 1990 27 . At one point near the end of his life. His only steady income was derived from his reports on European political affairs to the New York Tribune.

and." Instead. for as the capitalist adds equipment. The value is translated into profits for the capitalist. grows larger. who steals what is rightfully the worker's. for awhile. the working class. Consequently. increasingly dissatisfied with its misery. On the other hand. profits fall. other capitalists compete in the same fashion. thereby increasing profits. Therefore capitalism. has no chance for survival. Machines are traded. However. answers Marx. consequently driving up wages. actual production for a workday results in extra units of products. At the same time he scornfully rejects the Malthusian Doctrine. 2. the capitalist defeats the purpose of the purchase but must continue modernizing because competitors are continually adding machines to increase production. while the worker receives only a daily wage equal to subsistence requirements. This situation serves to decrease profits. How can such a theft occur? Simple. however. Its value is what it takes to keep the laborer alive. both within the business cycle and outside it. the percentage of profit steadily falls until the point is reached where production is no longer profitable. Cliffs Notes on The Worldly Philosophers © 1990 28 . with its monopolies and imperfections. Surprisingly.com But how can there be profit if everything sells for an exact value? It would be simple for profits to arise if there are monopolies to set excessive prices. Marx demonstrates that in its most perfect form capitalism is unworkable. Capitalists ultimately dig their own graves. inventing. If workers lose their jobs. the worker must sell labor-power to the capitalist for its exact worth. his concept of surplus value was not as farfetched as it seems today. In short. surplus value and profits return. When finally only a few powerful capitalists remain. thus increasing the labor supply and decreasing wages. In Marx's view. These predictions he called the "laws of motion": 1. human labor is rehired by the remaining firms. The surplus value of labor gives rise to the capitalist's profits. destroyed itself. and experimenting. labeling it "a libel on the human race. Marx predicted trends which capitalism would follow. Therefore. the capitalist forces workers out of jobs. Not for long. the "solution" does not really solve the capitalist's problem.cliffs. or if capitalists pay less for labor than it is worth. labor is forced to accept cuts in wages. Because capitalists control all access to the means of production. As the economy expands. By substituting technology. business seeks new survival techniques by innovating. as this is a vicious cycle. most of them have come true.www. the capitalist strives to obtain more surplus value by expanding production. which has. However. for on one hand. It results when the capitalist monopolizes the means of production and forces the laborer to work a full day in order to remain employed. Marx rejects Ricardo's notions because he believes that workers are too enlightened to continue increasing their offspring. Marx concludes that labor actually produces more for the capitalist by working extra hours. hiring more people and bidding against other capitalists. Marx sees the capitalist providing a solution through the adoption of labor-saving machinery. As profits fall. the cost of each device inhibits the realization of any surplus value from them. the time comes for the proletariat to rise and sweep away capitalism. the capitalistic class grows smaller as larger capitalists gobble up smaller and weaker competitors. in a sense. Bankruptcies result and small firms go out of business. Das Kapital explains that profits arise from one product or commodity which is distinctive--labor. Since the typical factory work-week in England during Marx's time averaged slightly more than eighty hours.

China. Germany and Italy. During the most intensive rule of communism. economists have not derived an agreed-upon substitute measure of value. for it does not satisfactorily explain prices. However. even though indicators reflect Marxist philosophy. nationalism. even if it has partly disappeared in Western Europe. Japan.cliffs. inexorable variety of socialism. liberals and humanitarians cannot accept Marx's economic interpretation of history. these economists do not accept labor as the sole measure of value. medicines. Yet. Others are not so clear-cut. except for Czechoslovakia. 4. in no case where communism has triumphed has the revolution taken place in an industrialized nation at the hands of the workers themselves. However. Like the laws of gravity. For example. Marx made a sizable impact. From the impoverished nations of Latin America to the emerging nations of Africa and Asia. Likewise. Socialism has risen throughout the world since Marx's time--and communism is an unyielding. and Great Britain. Russia. Also. and Cuba were all primarily agrarian economies when the revolutions occurred. No communist nation or party fails to pay homage to his teachings. today exhibit both state capitalism and private capitalism working in partnership. and computers. the working class overcomes factory owners and capitalism disappears. but they do not fall as steadily outside the business cycle. such as improvements in the lives of workers. Further. such as Coca-Cola. Huge firms dominate the business scene and suppress smaller firms. he failed to predict many mitigating factors.www.S. they spurn the Marxian notion that the hero has a subordinate role in the motivation of historical events. and China are another matter.com 3. They deny that history evolves purely from economics--to the exclusion of religion. the communist banner of Karl Marx continues Cliffs Notes on The Worldly Philosophers © 1990 29 . capitalism has remained suppressed except for a trickle of imports from the West. until the time of Marx. with all the flaws in his predictions. and human will. the communist bloc countries. Undeniably. historians had all but overlooked the effect of economics in human affairs. 5. with the 1989 thaw in Cold War tensions. Business runs in cycles of depression and boom. drilling equipment. capitalism was one of the first aspects of Western democracy to penetrate the Iron Curtain as McDonald's brought "burgers and fries" to Moscow. he expected the weakening of capitalism to fall into place without the slightest deviation. capitalism continues to thrive in the United States. These nations did capitulate according to Marx's predictions. Non-communist economists find the weakest point in Das Kapital to be the theory of surplus value. On the other hand. socialism has been avoided largely as the result of support of competition through government anti-trust legislation and regulation of public utilities. Furthermore. profits do tend to fall within a business cycle. which chose fascism over communism during the late 1930s. Most significantly. Obviously.. Commentary Some of Marx's predictions have indeed come true. Marx's vision of the future has proved too inflexible. In the U. Another worthy consideration is the fact that each Communist country was taken over from without and during wartime. The same could be said for the satellite nations of Eastern Europe. While capitalism has not collapsed as Marx predicted. Finally. Russia. but largely from the work of professional revolutionaries. it has been forced to adapt. On the other hand. Some have risen instead.

government officials. the utopians. Cliffs Notes on The Worldly Philosophers © 1990 30 . In truth.com to wave--proof that his concepts cannot be lightly dismissed. anarchists are at the extreme "left" of all political groups. as opposed to the peaceful and democratic method of socialists. also called the "haute bourgeoisie.www. A term generally applied to people with private property. technically divided between rich capitalists ("haute bourgeoisie") and small shopkeepers." or high middle class. His theories. the Marxist accepts Marx's every word and explanation as the only way. The father of anarchism. Even Marx and Engels were forced to admit that the English proletariat was becoming more bourgeois because of the Victorian world's prosperity and optimism. Anarchists are not content to wait for the withering away of the state. Anarchism Rebellion against all forms of government. Bourgeoisie The middle class. is Pierre Proudhon (1809-65) who quarreled violently with Marx and whose book What Is Property? answered the question in the title by stating that "Property is theft. The recognized economists of the day expressed that optimism with little reference to Marx. In terms of "left" and "right. to the "left" of Socialists. who was dismissed as a crank. the class struggle. doctors.) Proletariat The workers. were confined to the underworld of economics. whose Political Justice (1793) expressed a utopian ideal. in time. however. They believe in ending government rule by assassinating public officials. Here are a few terms to help clarify Marx's philosophy: Marxism Karl Marx's version of communism. and the triumph of the proletariat. lawyers. Both forms of communism accept the concept of revolutionary socialism --the attainment of a classless society by violent and bloody revolution.cliffs. Capitalists Financial backers of production. 1837-1901). Marx is entitled to be called the Prophet of the Proletariat. While a typical Communist may believe that the final goal of communism will come into existence by a number of methods. for wages climbed upward while the working day grew shorter. in turn. (Bourgeois is the adjective form. the inevitable downfall of capitalism. and three of the five Victorian Age economists. became Marx's bitter enemy. CHAPTER 7: The Victorian World and the Underworld of Economics Summary Karl Marx's prediction that the working class would suffer increasing misery did not come to pass during the Victorian Age (the reign of Queen Victoria. teachers. and independent farmers. or the lowly wage earners. Scientific Socialism Laws evolved by Marx and Engels which explain the economic determination of history. along with those of Malthus. who are. The early modern theorist of the benefits of anarchism was William Godwin. who originally followed Marxism but." The anarchist who championed direct action through violence was Mikhail Bakunin. Because they disdain any type of government." Marxists are further left than Communists.

His weakness lies in ignoring the human factor. Cliffs Notes on The Worldly Philosophers © 1990 31 . George claimed. it was the height of injustice that landowners should enjoy huge incomes while they contribute nothing to society. printer. He failed at farming and estate management. as was evident in his time in California.www. Drafted to run a second time in 1897. Not only does rent work a hardship on the capitalist. Worst of all.cliffs. barely losing to Tammany Hall's candidate and running ahead of Theodore Roosevelt. a shy. To Henry George. and his book achieved immediate success. gold prospector. but he ruined his chances by declaring in a speech that "logical thinking was all that was needed for a study of economics. Part of his naive thesis contains a solution: a single tax on land equal to its rent. Wages would rise. In his Economic Sophisms. An active proponent for his beliefs. He applied mathematics to economics and derived his Mathematical Psychics (1881). he was labeled a crackpot. he was almost elected mayor of New York City. all other taxes could be eliminated. In developing his thesis. the University of California considered him for the chair of political economy. What was unique about Edgeworth was his use of mathematical formulation to prove his contentions. and politician. it also straps the worker and leads to speculation in land values. Essentially. the single tax would be society's magic cure. males are more endowed with sensibility than females. a passionate commentary which professes that the true cause of poverty is land rent.com FRANCIS YSIDRO EDGEWORTH (1845-1926) Edgeworth. sailor. bureaucrat. lecturer. likewise. and capital earnings would increase. he attacked Socialists. complicated algebraic expressions. during his lifetime he gained popularity--more in England than in the United States. based on mathematical formulas. he died on election eve. While perhaps helpful in focusing attention on the use of scientific inquiry as an aid to economics. in the Victorian world. At one time. leisure time. Beneath his wit lay the truth of his criticism--yet. journalist for the San Francisco Times and Post. pamphleteer. but the fact that he was not ridiculed by his contemporaries gives significant insight into his era. He won a conservative following among fellow Victorians. lives for pleasure. skilled and talented people are better "pleasure machines" than others. became interested in economics because it dealt with quantities. His best known work is Progress and Poverty (1879). but succeeded in adding deft touches of humor to economics. defended free trade. Edgeworth justified the divisions of sex and status numerically and denounced the future of trade-unions. much of Edgeworth's work is worthless. Of course. the French eccentric Bastiat heaped ridicule on the economic policies of his age. tramp. In short. and material goods. HENRY GEORGE (1839-97) With Henry George. for money would circulate more freely with no taxes for the non-landowner to pay. retiring professor and brilliant scholar. he was conservative and defended his philosophy through the use of long. and launched his most acerbic barbs for those who selfishly supported a protective tariff. rent is the cause of depression. which he considered imperfections. FREDERIC BASTIAT (1801-50) In sharp contrast to Edgeworth." Unlike his fellow dwellers in the underworld. By negating rent with one tax. the underworld of economics gained an American recruit--a rugged but unschooled individual who had been an adventurer. Its thesis stated that every man.

The chief topic of interest to England was Africa. and Russia grabbed up colonies and economic concessions in Africa and Asia. the laissez faire doctrine of free trade dominated. Otherwise. In his view. Capitalistic Cliffs Notes on The Worldly Philosophers © 1990 32 . leading to the destruction of the world. Bastiat. examining topical questions. Rudyard Kipling. Hobson injects his comment on imperialism. By coauthoring an economic treatise which suggested that savings might lead to depression and unemployment. JOHN A. a Study (1902). a nervous. various factors caused a drastic change in attitude and policy relating to colonial expansion. production leads to a glut on the market. Portugal. Hobson. the rich--both individuals and corporations--must invest the bulk of their income in savings.www. and foreign markets use the excess goods. The single tax became an obsession with him. he lost favor with orthodox economists and was banished from London University Extension Lectures. Notably. Into this setting appeared John A. But since there is no market for more goods. which are useless unless spent on further production of goods. Progress and Poverty received praise as the worthy successor to Smith's Wealth of Nations. neither the rich nor the poor can consume enough goods. Hobson journeyed to Africa. Therefore. they can consume only so much.com Regardless of George's lack of logic. Here. Hobson. and his research there convinced him that his warning of the results of oversaving was justified. in particular. The spirit of imperialism swept through the Western world. France. a devastating attack on capitalism as well as imperialism. From 1870 onward. Between the Napoleonic Wars (1803-15) and 1870. including the United States. praised its virtues. capitalism has an insolvable problem: the rich get richer and the poor get poorer. a non-Marxist. however. and George is the theme of the fourth economic heretic of the age--imperialism. which is a direct outgrowth of the capitalistic system. he quietly prepared a major work. he became a social critic. The Victorian Era was a time when Great Britain. stuttering little man who took a critical look at capitalism and imperialism. Foreign investments take off the excess capital. purchasing power dries up. However. Because of the vast inequality in the distribution of wealth. lack the income to purchase more goods. is the reason for modern imperialism. then. Belgium. Because the rich are few. As a result. nationalism. while large in number. he warns. Whereas Marx predicted that capitalism would destroy itself. which stressed human values over cold statistics. went even further than Karl Marx. The poor. its chief spokesman. he achieved overnight fame. But dire consequences lie ahead. Italy. and the Industrial Revolution. in which the effects of savings and imperialism were combined to form his thesis. This problem of excess. so Henry George was exiled to the underworld of economics. the desire for military bases. He published Imperialism. HOBSON (1858-40) Of greater importance than the theories of Edgeworth. for the only obvious answer to the problem is the utilization of savings in overseas investment. Germany. George won an international reputation after a lecture tour to England. imperialism became an extremely popular policy with virtually all classes of society. He adopted John Ruskin's humanistic viewpoint toward economics. Hobson declared that imperialism would become the road to war. as a result of the rise in Europe's population. Returning to England. the official world of economics decried his ideas. Holland. where the Boer War between Dutch colonists and the English in South Africa was brewing.cliffs. his book became a bestseller.

Taiwan. especially in the cases of Hungary and Afghanistan. was both accepted and respected for his Principles of Economics (1890). bitter competition and rivalry promote the possibility of war. The U. for example.www. from one quarter there came a warm response. race each other to partition the world. his book analyzed capitalism and imperialism through logic. His thesis was equilibrium--the self-adjusting and self-correcting nature of economics. Cliffs Notes on The Worldly Philosophers © 1990 33 . Korea. He was puzzled over periods of history when capitalism showed little interest in imperialism. Lenin declared that war was a certainty if capitalism and imperialism remained unchecked. Hobson avoided class favoritism and refrained from turning thesis into dogma. Not only did Stalin share this view. Yet. noting that the best example of a powerful country looting weaker nations is given by the Soviet Union itself. the Highest Stage of Capitalism (1916). On the other hand. Needless to say. He was dismissed into the same backwater with Bastiat and Henry George. interest in underdeveloped countries was actually motivated by imperialistic designs. the economist must consider both supply and demand as equally important as two blades of a pair of scissors. economics was an engine for the discovery of truth concerning the cause and cure of poverty. Lenin. During the height of the Cold War. he did not maintain that imperialism inevitably leads to war. showing that imperialism is the final stage in a downward spiral. for there must be political interference and economic exploitation to justify a claim of imperialism. For Marshall. He carried Marx's prediction of the doom of capitalism even further. the foundation of his economics was the concept of time. He contrived an elaborate system of economics which delighted established thought and which satisfied business. a Russian exile. Both have to be weighed in answering the question of value. or Mexico undersell similar products produced by the motherland.cliffs. For Lenin.S. The U. in the long-run. differentiates between profit and plunder.S.S. ALFRED MARSHALL (1842-1924) Summary Alfred Marshall. The problem of imperialism has proven that it inevitably lashes back against the nation which created it. The antithesis of Lenin. it is demand which makes them expensive. imperialism is capitalism's death knell. Introductory economics courses in England and the U. augmenting it and wrapping it in a glittering package--Imperialism. reply to this charge has been that foreign investment and foreign trade alone do not represent imperialism. With diamonds. whether that interest was shown by private corporations or the Peace Corps. Communist countries charged that all U. Further. a refined academician and the most famous economist of the Victorian Age. With each nation trying to grab the biggest slice. a tremendous success that is still used as a textbook. In point of fact. in the short-run. it is the cost of production. a remarkably compassionate scientist. Hobson disdained communism. Another aspect to consider in the internationalization of capital is the fact that cheap goods manufactured in Hong Kong. Hobson's indictment of capitalism hardly dented the official economic thought of his day. To determine price. but hard-line communists today still hold to its truth. American foreign policy results from a defense of ideology--to protect less sophisticated nations from the intrusions of socialism. Such an intensification of competition ironically threatens American interests. To Marshall. read Hobson's work and appropriated its thesis.com nations each suffering the same glut.S. even though his thesis points to the likelihood of war. there is a short period and a long period to consider.

Spain. The gentleman's rapier gave way to the roughneck's brass knuckles. and money became the passport for entrance into the upper classes. Holland. John Maynard Keynes. and J. but they are independent and defiantly aggressive. therefore. took place from 1870-1914. Yet. Commentary Imperialism refers to the extension of authority or control. P. At the height of imperialism. France. the Age of Discovery ushered in a period when the nation-states of Europe raced to stake out colonies and to monopolize overseas trade. His economics. made a large splash in the world of economic thought. for practically every form of imperialistic holding has reverted to the original owners.com incorporate his system. Vanderbilt. The entire continent of Africa was so partitioned that only two nations remained independent by 1944--Ethiopia and Liberia. the free enterprise atmosphere of the United States became a far different thing from the European practice of laissez faire. In this sense. mostly in Africa and Asia. is a world of theory. Asia was a fertile hunting ground for Europe. In other words. Even more important is the fact that his most brilliant pupil. In their public dealings. Jim Fisk.S. devoid of sportsmanship. Rockefeller. do capitalism and imperialism naturally go together? Communists charge that they do. CHAPTER 8: The Savage Society of Thorstein Veblen Summary As the full effects of the Industrial Revolution spread from Europe to America. The key question--and the reason for Hobson's importance to economics--is whether the defiantly aggressive majority will be swayed by Marxism. extended its power over the peoples of Asia and Africa. imperialism is as old as history. They gave no quarter. In modern times." Cliffs Notes on The Worldly Philosophers © 1990 34 . The game of making money in the United States was rough and savage. the poor five-sixths are still impoverished. John D. and intellectual life." By 1914.cliffs. P. During the early days of Western civilization. these robber barons were guided by J. military might. nothing that he said went far enough. A new period of imperialism. of one people over another. This staking out of colonies led to bitter rivalry among European nations and was a strong factor leading to the outbreak of World War I. Current developments today differ. The formerly rich one-sixth is still rich. In the United States. Western Europe. either directly or indirectly. Today. Portugal. and vast but weak China soon became known as a "ripe melon. The time which he wrote about is an abstract. or economic imperialism. commerce. This was Europe's golden age of imperialism. motivated by the effects of the Industrial Revolution and characterized by economic and political domination of underdeveloped nations. Greece and Rome furnished worthy examples. The U. Morgan dedicated themselves to ruining competitors. Morgan's sentiment: "I owe the public nothing. some 283 million whites controlled over 900 million non-Europeans. but on the defensive. Jay Gould. and Western Europe say otherwise. and England formed a keen rivalry which provoked colonial wars in the early part of the eighteenth century and continued through the Napoleonic Era. referred to as new imperialism.www. fivesixths of the world was needy and defenseless. as is evident in South Africa's struggle against apartheid. any man could prove his worth through business success. brilliant as Marshall was. Men such as William H. Then interest weakened as the doctrine of laissez faire replaced that of mercantilism. regardless of his ancestry. and those theories are hopelessly unrelated to reality. The basic question raised by Hobson was whether this stage of imperialism is inseparably related to capitalism. which controlled most of world finance.

it is his most famous work. and when the dishes were dirty. mumbled lectures. and consumption. After transferring to Yale. A practical demonstration was William Rockefeller and Henry Rogers' purchase of Anaconda Copper Company by paper manipulation and without a cent of personal investment--resulting in a $36. and buried himself in political science. His austere childhood reflected the drab farm life. in 1884. he accompanied the head of the department when the latter moved to the University of Chicago. and his wife divorced him. At the age of thirty-five.D. Veblen felt that there were too many students. born of immigrant Norwegians in Wisconsin. Veblen earned a reputation among his students for refusing to take roll and assigning the grade of "C" to all students. he hosed them down. and then the academy closed. He went to Stanford and then to the University of Missouri. he was lazy and unassertive. THORSTEIN BUNDE VEBLEN (1857-1929) Veblen. He found no immediate success in his teaching career. He refused to make his bed. His appearance at the office of the economics department of Cornell in 1891 must have shocked the conservative department chairman. his immense knowledge led to an annual salary of $1000 by 1903. he was forced out of his job. He titled his method "A Plea for Cannibalism. their thoughts wrapped up with such terms as enterprise. where he promptly threw the faculty into an uproar when it came his turn to suggest a way of converting the heathens. While Cliffs Notes on The Worldly Philosophers © 1990 35 . in spite of his rambling. At the age of seventeen. He grew up remote and aloof. remarried. with a salary of $520 a year. His first book. his learning impressed the older man. which was ultimately filled by the most aloof of skeptics. an alienated. An overnight success. Veblen possessed an unusual fascination for women. At best. he read. for Veblen refused to accept the assumptions underlying classical economic thought.www. he converted the niece of the college president to agnosticism and. and anthropology. thrift and accumulation. which never materialized. Nevertheless. His first job lasted a year. Returning home. Still. There.000. Bad luck tagged Veblen.cliffs. and finally retired at the age of seventy. He enrolled at Johns Hopkins on the expectation of a scholarship. Actually. for Veblen was wearing corduroy pants and a coonskin cap. The Theory of the Leisure Class (1899). He chose to live alone in a small. The following year. and Veblen received a fellowship. he engaged perpetually in affairs. although he upgraded the "C" to an "A" when a student needed to qualify for a scholarship. What was needed was the disinterested. Official economists viewed this scene unperturbed. the better. By normal standards. and the stock market a private casino which the public financed. where he could meditate without distraction." To add to his apostate behavior. due primarily to the fact that readers took it to be a satire of aristocratic foibles.000 profit. Thorstein Veblen. appeared when Veblen was forty-two. he established a national reputation in the academic world as the result of two major books and a series of essays. the investor a gullible fool. married her. The fewer he had. the book was much more. he yielded to family pressure to resume graduate studies. dishonesty was a virtue. loafed. detached view of an outsider. His eccentricity extended to his disdain for the telephone. enigmatic man whose chief pattern of behavior was nonconformist. economics. grew up in a pioneer Norwegian community in Minnesota. they apologized only slightly and shared the common blindness: They were too close to the scene to judge objectively. His isolation continued for seven years until at the age of thirty-four. sociology. he died. aloof from society. he received a Ph.com From 1865 through the early part of the twentieth century. Veblen's family sent him to study religion at a pious Lutheran college. Even though Veblen was a failure in his personal life. several years later. After he made a trip to Europe with one of his lovers. western-style cabin.

but it was not an idle class. To Veblen. but Veblen maintained that what was inherent in human nature was pride in work. Instead. Veblen probed deeper. So Veblen arrived at a thesis: the leisure class advertises its superiority through conspicuous consumption--enjoying leisure more fully by being able to display it before the public. but machines care nothing for profit. As men plundered. Veblen explained why a proletariat revolution. Carrying the theme a step further. business people are no longer needed. He doubted that self-interest held society together or that people preferred leisure over work. This time. and the shogunate system of feudal Japan revealed a different kind of society. continued Veblen. he discovered that there was no leisure class among American Indians. the modern U. the middle-class citizen. Everyone in these cultures worked--not for profit. Classical economists considered the desire for leisure inherent in human nature. . It was simply that workers did not seek to overthrow the upper class. ancient Icelanders. machines dominate society. The book shocked readers. the barbarian his conquests of war. As he explains.S. they are replaced by technicians and engineers. What was significant was that they prevailed with the approval of their community. and the capitalist--seeks through conspicuous expenditure and even the waste of money to prove status. or Australia's bushmen. consequently. Also. savage human nature. the Ainus of Japan. but for the accumulation of money and its lavish display. Veblen wrote: ". this fact marked a fundamental change in the attitude of the savage toward work. A leisure class existed in each. Rejecting earlier theories that the capitalist is the driving force behind economic progress. While established economists explained human actions entirely by self-interest and competition. His study of Polynesians. had not occurred in the United States. The savage displayed numerous wives. but it failed to make the splash of his earlier work on the leisure class. Published in 1904. but its goal remained the same--the accumulation of goods without productive work. The Theory of the Leisure Class examines the nature of economics and the meaning of leisure. As societies progressed. its members worked hard at seizing riches through force or cunning and didn't contribute to the actual production of wealth. Thus. and must indefinitely continue to be. by heredity human nature still is. Veblen dug to the root of the economy to discover the nature of his society. only economists and scholars read it. businessman. everyone--the worker. there was no mistaking the book as satire. in the same vein. but because of pride in workmanship and a common concern for their children's welfare.com orthodox American economists accepted European teachings. approval transferred from the once-honored way of life to the spirit of plunder--and the leisure class gained respect.www. as Marx predicted. Veblen charged that the businessperson is the saboteur of business. Veblen's The Theory of Business Enterprise established his concept of business at the turn of the century. seized booty and women. This ambition explained the nation's social stability. Eliminated by the machine. Therefore." Modern plunder did not exist for booty or women. but rather strove to join it themselves. Cliffs Notes on The Worldly Philosophers © 1990 36 . . What had once been a source of pride had become degraded by the transfer of approval to the plundering and predatory ways of the leisure class.cliffs. by seeking and accumulating money and then displaying it--either subtly or conspicuously--is the modern counterpart of a savage heritage. but by seizure. the leisure class changed its occupation and refined its methods. Applying his findings to the United States. Furthermore. modern savages displayed wealth. and received admiration for their prowess.

Thorstein Veblen has been largely ignored by many economists. as members of the leisure class. Consequently. Veblen's "savage world" was savage on two counts. however. However. First. well-ordered production machine. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. Veblen predicted the end of the capitalist--not through the action of Marx's proletariat. by Matthew Josephson. Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics. Veblen charged that the U.000. but by a tougher force: the machine. human nature itself is savage. Looking to the future. loans. in his examination into the nature of economy. Lear jet.S. Veblen foreshadowed "technocracy"-the belief in government by technical experts. Being on the inside. Also highly descriptive of these titans of Big Business is Ida M.000.000. Tarbell's History of the Standard Oil Company (1903)." which has proven correct.www. Veblen hoped for the day when a corps of engineers would take over the running of the economy. He remained a skeptic as he probed society's problems. the efficiency of production remains continually off-balance. As the alternative. or yacht. Thus. Veblen concluded that by heredity. compared with office work.cliffs. at one time. Business executives continue to accumulate money beyond their normal needs. the entrepreneur cunningly builds up credits. None of Veblen's later works received the acclaim of his two earlier books. The phrase "robber barons" comes from the definitive and highly readable The Robber Barons (1934).S. Veblen believed that the robber barons were interested in producing profits for themselves rather than in producing goods. And if this didn't come to pass.com Entrepreneurs. An example of artificially high capitalization is the founding of U. Their only opportunity of gaining profit is to cause breakdowns in production so that values fluctuate. government wanted to use it for propaganda. almost twice that amount of stocks and bonds were issued--at a capitalization cost of $150. along the lines of a huge. with the use of work units of currency to be substituted for Cliffs Notes on The Worldly Philosophers © 1990 37 . the executive and the financier enjoy a high prestige. Unfortunately. the post office. exemplifies the concept of conspicuous consumption. As for his second major work. and typical of his thinking is his Imperial Germany. businesspeople then make a profit during the resulting confusion. In the book. and artificially high capitalizations. Americans look down on physical work. In his Theory of the Leisure Class." and he anticipated the rash of current writings on "status symbols. it is fair to note at least two facts. barred it from the mails because it was uncomplimentary towards Great Britain and the United States. the U. he greatly underestimated the ability of American democracy to correct these abuses. the practices of the actual business world which he observed were predatory. all of which was paid for by public investors.000. face-lift. Commentary Veblen's two major works formed a keen description of the robber barons and their savagery. such as the sable coat. So there was justification for Veblen's scorn of the American entrepreneur. For example. The Theory of Business Enterprise. are still acutely interested in the accumulation of profit. Steel in 1901. for a time. The recurring business crisis brought about by the entrepreneur would show to all the inability of the system to remain in balance.S. centers of learning were being transformed into centers of football and high-powered public relations. however. Against real assets of some $682. While given to extremes. Although the book is so critical of Germany that. in the process. Second. Veblen coined the term "conspicuous consumption. then eventually the plundering spirit of Big Business would increase until the system gave way to fascism. The modern-day status symbol.

as well as the fact that not only blue collar workers are being dispossessed from their jobs by the machine. as well as titans of finance. Working women labored for 10-25 cents per hour. What no respectable economist admitted could happen seemed a reality--a permanent depression. Keynes proved adaptable enough to make a practical attempt at solving the problem of permanent depression. Keynes studied the meaning of interest at age four. If alive today. Nine million savings accounts vanished as banks failed by the thousands. Born into an old traditional English family. Reminiscent of John Stuart Mill's intellectual powers. for they all could buy "on margin"--that is. from President Hoover down to the lowly clerk. The crash occurred in late October. It was easy to do. losses in stock value were awesome. In fact. He won a scholarship to Eton.000 people a day. Magazines featured articles on how everyone could get rich--the formula was to save a portion of one's earnings and invest regularly in good common stocks. There were two million unemployed. The economy lay like a fallen giant as a feeling of hopelessness swept the land. Banks failed at the rate of 700 a year. however.000 individual businesses were wiped out. the national income had dropped by almost half. one would expect a radical like Marx to appear to attack the plight of the unemployed and to offer a drastic remedy.com money.000 families at the upper level of income.www. On the contrary. for as little as 10 percent in cash. and expert economists. optimism was the keynote. The "Great Depression" loomed. bootblacks. but barbers. Ominously. Cliffs Notes on The Worldly Philosophers © 1990 38 . and clerks all rushed to place their orders on the stock exchange. CHAPTER 9: The Heresies of John Maynard Keynes Summary Veblen died a few months before the "Great Crash" of 1929--when stock values reached an all-time high before tumbling down. JOHN MAYNARD KEYNES (1883-1946) In contrast to Veblen. In New York City. but business executives find their positions increasingly threatened by computers. where he earned superior grades and won numerous prizes. There were 14 million unemployed. government officials. Beneath this surface boom. it caught the public by surprise. he attended the best schools. There were no official warnings that such a financial catastrophe could occur. The public listened.cliffs. In the United States there were 45 million jobs. Veblen would undoubtedly observe. the average standard of living declined to the level of 1913. a total income of $77 billion. suicides rose in number. and some 6 million at the bottom--a ratio of 1 to 250. lay disturbing. and not only bankers and businesspeople. Fortunes were lost. the distribution of income placed 24. the average American family was heavily mortgaged from excessive installment buying. John Maynard Keynes was Alfred Marshall's most brilliant pupil. Nevertheless. and the average American family enjoyed the highest standard of living in history. quite the contrary. Forty billion dollars of value disappeared. In this situation. The downward trend continued. the latest trend in the development and use of computers and robotics. breadlines formed at the rate of 2. In this era of prosperity. John Maynard Keynes' life was characterized by good fortune. with justification. Prosperity was everywhere. Within two months. a respectable Englishman offered a solution. Wellschooled in the theories of orthodox economics. but unnoticed facts. When the crash came. By 1933. Over 85.

On the other hand. However.cliffs. for an abundant supply of savings reduces interest rates. Keynes returned to Cambridge. Earlier writers accounted for this phenomenon by such theories as mental disorders of the economy or the effect of sunspots. his view was the first written version which encouraged a complete revision of the treaties. no upswing of investment occurred. which represent the portion that is removed from the even flow of income. one part of income which does not flow in daily transactions is savings. mountain climbing. it is necessary to grasp the meaning of prosperity in market economy. such as the Great Depression of the 1930s. savings flow into the economy. bridge. modern and classical art. savings goes up when investment goes down. In this event. the see-saw theory has one shortcoming--its failure to explain a prolonged depression. prosperity returns.com At King's College in Cambridge. Keynes concluded that depression arises from a decline of investment on one side and an increased accumulation of savings on the other. Shortly afterward. he mastered debate. Keynes' diverse interests made him the exception to the saying "jack-of-all-trades and master of none. currency and finance. becoming available when business wishes to expand production. is known as the see-saw theory of savings and investment." Indeed. Thus. Resigning his position. his grasp of economics was such that Marshall urged him to follow an academic career--which he declined in favor of something more lucrative. he also operated a profitable theater. Keynes attained national fame with the publication of his book The Economic Consequences of the Peace (1919). The chief characteristic of income is its flow from pocket to pocket via daily purchases and sales. it serves no useful purpose. If that portion is hoarded. While interest rates declined during that period. To understand Keynes' thesis. He placed second in civil service examinations for a position in the India Office but despised the work. While he was not the sole possessor of this observation.www. which is the total of all individual incomes in a country. He stated that peace treaties are unjust and unworkable. Keynes' line of reasoning. leading to a higher rate of return to be gained from investment. Recognizing this shortcoming. but its national income. but only helped to explain. depression is only temporary. he became Lord Keynes. this movement is largely natural and arises from the use and consumption of goods. and economics. The increased capacity for production of more goods assures jobs and greater prosperity. where he began a thirty-three-year stint as editor of the Economic Journal. with their apparent solutions ending in fiasco. Depression arises when savings are not invested into capitalistic expansion but are allowed to lie idle. In his polished examination of the see-saw theory. Keynes pondered the problem and published a Cliffs Notes on The Worldly Philosophers © 1990 39 . The true measure of a nation's prosperity is not gold and silver nor physical assets. Keynes returned to Malthus' warning--saving can result in depression. he made a fortune of over $2 million by spending half an hour in bed each day studying and speculating in the international markets. which he did not invent. no harm comes from the act of saving in modern nations because savings are usually put into banks and invested in stocks and bonds. England's most influential economic periodical. and international developments confirmed his thesis. The reverse is also true. Thus. His greatest opportunity came with World War I when he undertook key roles in the Treasury and the Paris Peace Conference of 1919. Keynes' A Treatise on Money (1930) attempts to explain how the economy operates and to examine in particular the problem of unexplained bursts of prosperity followed by lows. As a see-saw go up and down. Significantly. and while serving as a director of the Bank of England. The book succeeded. Unfortunately. Baron of Tilton. In later life.

Understandably. The number of unemployed still amounted to around 9 million. There is nothing automatic in economic developments which will relieve a depression. however. can stall at any level. So capital expansion does not move at an increasing rise. original book. as it depends on the expansion of production. Otherwise.www. He provided a cure-government needs to "prime the pump" by deliberately undertaking heavy government investment to stimulate the economy. capital expansion of any business is restricted by that business' market. Ironically. there is no savings accumulation available. to avoid depression. and Money (1936). a descending spiral will result in depression. 3. cannot continue to accumulate. with every surge followed by a low. An economy in depression can remain so indefinitely. Keynes next attacked one of the chief problems of World War II with his simple. Unfortunately. Keynes described how savings.cliffs. reduced to a trickle rather than a flow. This practical demonstration of Keynes' thesis became a defense for such policies. How to Pay for the War. He proposed a compulsory savings plan for wage-earners for the purchase of government bonds during wartime. In this way. to be reduced at the war's end. Keynes visited Washington in 1934 and observed President Franklin Roosevelt's New Deal methods to combat depression. governments should incorporate judicious spending programs into their permanent plans. Even worse. Prosperity depends on savings being put to use. government can insure a high level of economic movement. 2. The entrepreneur cannot be expected to increase production beyond demand for goods. Yet. must continually expand. the failure of pumppriming measures did not invalidate Keynes' thesis because government did not have enough funds to stem the tide and because opposition from the private sector feared government intervention in the economy. So the seesaw theory is invalid--replaced by the elevator theory. like an elevator car. The WPA (Works Progress Administration) and a host of other New Deal projects existed specifically to "prime the pump. a depression is a natural development. Keynes' book proved as revolutionary as those of Adam Smith and Karl Marx. he made the following pessimistic diagnosis of capitalism: 1. Prosperity at the end of the war would be stimulated by the flow of money available for the purchase of consumer goods from the cashing in of bonds. Therefore. Savings actually dry up. In it. so the capitalistic economy continuously lives in the shadow of collapse. in a time of depression. Of course. However. When funds are needed for investment to stimulate the economy. This phenomenon occurs because the economy. for political leaders Cliffs Notes on The Worldly Philosophers © 1990 40 . Keynes' vigorous mind did not halt on a dismal outlook for the future." Such measures increased the national income by fifty percent and made a large dent in unemployment rolls. Keynes turned the classical view that depression is only temporary into the bleak conclusion that depression is inherent in the system itself and can be permanent. Investment cannot be counted on.com revolutionary solution: The General Theory of Employment. Interest. Nothing came of the plan. New Deal projects failed in the long run. this cure was just the opposite of Keynes' cure for depression because a wartime situation is just the reverse of an economic low. The elevator concept maintains that the economy. What finally ended the Great Depression was World War II. By absorbing capital goods and spending whenever private enterprise is unable to expand. but in spurts. inflation would be defeated by putting into savings the extra war income.

the total value of stocks had been $87 billion. unemployment. By March of 1933. Exports fell. Civilian Conservation Corps (CCC). Austria. 6. in a typical U. it dropped to only $19 billion. 1933 saw the turning point. High tariff policies produced a decline in international trade. Residential construction fell off by 95 percent. 3. by November 13th. industrial city. By the end of two months. 4.com preferred to use the old method of taxation and rationing. The less favored nations. In major cities. Overexpansion of credit led to stock market speculation and installment buying. Industry overexpanded with too many factories and machines to meet demand for goods. By October 29. Federal Emergency Relief Administration. along with the purchase of bonds on a voluntary basis. and Japan. Keynes believed in a policy of managed capitalism. notably Germany. the doomsday of Wall Street prosperity arrived without warning on October 24. waiting for the new president to take action. By 1930. In the United States. While labeled a radical by conservative economists. president from 1929-33. and Rumania. John Maynard Keynes had nothing but scorn for socialism and communism. he was a conservative with one major aim--the creation of a capitalistic economy in which its greatest threat.www. would be forever eliminated. leading countries abandoned the gold standard. Agricultural overexpansion resulted in surpluses. one which would invigorate and save capitalism. one out of four workers had lost their jobs. He immediately called a special session. This crash triggered the Great Depression for these reasons: 1. Italy. many workers slept in public parks because they could not afford housing. Italy. National Recovery Cliffs Notes on The Worldly Philosophers © 1990 41 . and Reform. Consequently. 1929. and workers suffered mass unemployment. producing an inequality in income distribution. 2. as in Germany. embarked on territorial expansion. Recovery. Herbert Hoover. Capital surpluses were created. which began emergency legislation under the slogan of "Relief. congressional leaders stood helpless. 5. with over 16 million workers unemployed out of a total population of better than 120 million. foreign debts went unpaid. 7. against the background of the Roaring Twenties and the legacy of Coolidge prosperity.cliffs." Suddenly. Stunned like the rest of America. promised "two chickens in every pot and two cars in every garage. Commentary John Maynard Keynes observed a world sick with widespread depression which almost ruined trade and brought nations to the brink of bankruptcy. national banks failed. Just prior to the crash. The result in Europe was a definite tendency toward dictatorial forms of government." Under Roosevelt's leadership the following acts became law: the Emergency Banking Act. the air was filled with optimism. the figure had increased to $40 billion. he engineered a plan to foster a living and growing capitalism. $30 billion in capital values vanished. 16 million shares had been sold at staggering losses. Basically. This was the situation when Franklin D. Roosevelt was inaugurated in March 1933.S. Political unrest contributed to defaults on foreign debts. Labor-saving machines replaced workers and produced more goods. Opposed to Marx's view that capitalism was doomed.

plus a host of other New Deal measures. the book describes a capitalist economy which lacks accumulation of capital. Home Owner's Loan Corporation (HOLC). and the Tennessee Valley Authority (TVA). The General Theory of Employment. In like manner. In his Economic Possibilities for Our Grandchildren. which led to the SEC (Securities and Exchange Commission) to regulate the stock market. Educated amid the upper crust at an exclusive school. Capitalists would obtain nothing except their wages as managers. American workers turned out over five times the goods per hour in comparison with their forebears a century earlier. would. has no momentum. he moved to England. cannot accept this cheerful prognostication without further delving. grounded in inertia. Basic to the New Deal philosophy was the concept of "priming the pump" through federal action. he predicted that by the year 2030. Federal Deposit Insurance Corporation (FDIC)--which guaranteed savings deposits in banks. in a changeless economy. for a complete analysis of modern times requires a thorough study of more than Marx and Keynes. like a toy train maneuvering around a hearthside track. Keynes envisioned a rosy future for his native England. John Maynard Keynes looked forward to better times for capitalism in the twenty-first century. the age-old problem of equal distribution of wealth might be solved. FDR saved American capitalism by using the goals and objectives of John Maynard Keynes. in time. born of solid. the model. Joseph Alois Schumpeter was a native of Austria. The result of the New Deal was that while the measures failed to end the Great Depression. Relying on a circular flow. the nation would produce seven and one half times the wealth of the past century. Instead he lauded the ability of factory workers to utilize technology. While in her employ. Certainly he could not attribute the easing of hard times to the bounties of nature. A third spokesman is necessary: the brilliant gadfly Joseph Alois Schumpeter.www. and Money. thereby making each succeeding generation more productive. For example.com Administration (NRA). From being a brainy enfant terrible who challenged his teacher at the University of Vienna. profit does not exist. yet undistinguished stock. Interest. Federal Securities Act. histrionic Viennese aristocrat and Harvard professor.cliffs. Surprisingly. yet he relegated it to destruction in the long run. a spirited. since the supply of raw materials was quite obviously finite and dwindling. In answer to the age-old stumper of where profits originate. in the 1960s. an unassuming overview of capitalistic growth. who saw capitalism in the twentieth century in terms of dynamic growth. Schumpeter declares that capitalism. Agricultural Adjustment Act (AAA). JOSEPH ALOIS SCHUMPETER (1883-50) A contemporary of Keynes. which Keynes so ably defended in his major work. CHAPTER 10: The Contradictions of Joseph Schumpeter Summary Unlike Thomas Malthus and Karl Marx in the previous century. Thus. receive full remuneration for their toil while owners will derive value equivalent only to the resources they contributed. where he served successfully as a financial adviser to an Egyptian princess. he predicted. The canny student of economy. Workers. never altering or expanding. the downward trend of the economy was halted and national confidence bounced back. In a world beset by communism and fascism. remains static and predictable. however. calculating that by the year 2060. he developed elitist airs that followed him throughout his life. Cliffs Notes on The Worldly Philosophers © 1990 42 . in later years he deduced that capitalism would continue its upward climb. the twenty-seven-year-old Schumpeter published The Theory of Economic Development (1912). Even though Keynes did not foresee the panacea immediately after World War I.

Cliffs Notes on The Worldly Philosophers © 1990 43 . the unstable times did not permit his creative beacon to shine very far. In rapid order. A short cycle. An additional surmise of Schumpeter's Theory of Economic Development is his explanation of the business cycle. profits disappear. He based his explanation on a description of three distinct types of business cycles: 1. investment spending leads to a short-lived economic boom. forces prices down." For the entrepreneur. During this trying period. Unlike people who are motivated by the urge for riches or title. A fifty-year cycle evolving from blockbuster inventions like the steam engine or automobile. the carrot at the end of the stick is not the monetary reward but the challenge itself. one who is a business trailblazer. Ultimately. which stands out from the norm of economic ups and downs.www. Like a huge. the entrepreneur prefers instead to found a dynasty. 3. As a rule. the collapse of Europe's financial structure led to huge personal debts. As a swarm of imitators follows the trail blazed by the business pioneer. the author appends a small hope that there are still three decades in which capitalism will struggle before dying out completely. the entrepreneur is not necessarily the receiver of the profit generated by an innovative idea. Ironically. 2. or "knight errant of the system. with the entrepreneur forced out of the picture by the dynamics of the new process. whom he had groomed for her role as his helpmeet. Schumpeter rebounded. Goaded by the will to conquer. two-volume Business Cycles. Schumpeter's young and charming wife. the entrepreneur resides outside the limelight. innovation becomes the standard operating procedure. Schumpeter served as commissioner on the nationalization of industry. the system swallows up ideas. to climb to the top of the heap. this creator resembles a paladin. Treated by society as an upstart or social pariah. Schumpeter awards them the title of entrepreneur. Because the introducers of these changes differ from the norm. Germany. After the publication of his ingenious work. was the cataclysm that erupted when a series of all three cycles hit bottom simultaneously. as always. died in childbirth. Schumpeter's conclusion produced a major economic contribution: the belief that capitalism. The Great Depression. he allowed his creative juices to flow at will. he married economist Elizabeth Boody. Such ephemeral profit disappears after competitors emulate the innovation. Unfortunately. He built a career as a visiting professor in Japan. Like the fabled phoenix. After Schumpeter moved into a position as bank president in Vienna. the only explanation for profits occurs when the static economy fails to follow its circular path.com As Schumpeter elaborates. and the United States. insatiable maw. a situation which occurs when capitalists introduce innovative technology or organizational changes. Schumpeter paints an unappealing picture of the life of an entrepreneur--a talented specialist who differs markedly from the military leader or politician. In his thousand-page. an arm of the socialist German government. A second span lasting 7-11 years. Even though his prediction emphasizes a moribund state of the economy. profits tend to go to the business owner. as well as finance minister of Austria. the vacuum into which innovation falls. Schumpeter attempted to account for the Great Depression. was losing its steam. or risk-taker.cliffs. Renewed. which evolves from the values of the civilization itself. Competition. turning them into the well-digested fuel of everyday productivity. At Harvard.

from the vantage point of his cleverly constructed soapbox. whose genius expresses itself in the proverbial "better mousetrap. From his perspective. less stultifying when interpreted as an outgrowth of wit. The driving force in Schumpeter's world-picture is his accolade to the talented few. the idea people who render service to an otherwise not-very-engaging business machine set in the well-worn ruts of sameness. who will form the dynamic core of an otherwise inert society. in which the author mounts an offensive thrust against his arch-enemy. tended to fall between the cracks. Unlike Marx's paradigm. in past overviews. which describes capitalism as an economic success but a sociological failure. Whatever his motivation. and Morgans of the previous generation. An even more intriguing possibility is that Schumpeter. opting to lay out a vision of future generations than to muck about with the nuts and bolts of mundane money matters. Instead of stressing the inevitability of money following money or of workers locked into a predetermined social stratum. which centralizes a disgruntled proletariat in the heart of change. the fabric of his logic is weakened in fiber. Schumpeter fastens onto the bourgeois nature of the capitalist. imbued with elitist notions from childhood. The whole breastwork of logic carries some measure of significance in that it predicts the bureaucratization of business and government as well as the ebb and ultimate foundering of the middleclass ideal. Schumpeter's evaluation leaves hope that there's always room at the top for the tinkerer. In guessing which way the tide of history will direct itself. or the risk-taker. an Cliffs Notes on The Worldly Philosophers © 1990 44 . Departing from his predecessor's obsession with the antagonism between capitalist and worker. the future of capitalism appears less the function of an inevitable movement toward some predetermined end and more like a shapeless lump of clay in the potter's hand. A truly humanistic approach. it is riddled by the disease of rationalism. even though Schumpeter's scenario plays well on the surface. dog-eat-dog Vanderbilts. which has. The system bogs down in a bureaucratic nightmare of red tape. Karl Marx." Certainly. Yet. Still. economics is less dry.com A more complete economic vision appears in Schumpeter's Capitalism. and Democracy (1942).www.cliffs. and innovation. The mood of Western capitalism did indeed follow his predicted trends through the 1960s. seeing himself as the swami of elitism. where entrepreneurial input counts for little. Schumpeter's contribution to economics places an emphasis on the part of the whole. In his scheme of things. Schumpeter begs the whole question of economics by reducing it to a single quibble: Is the function of economics analytic or predictive? Do economists merely compartmentalize facts about life as we know it or do they serve as visionaries? In other words. talent. is it better to know where the market has been rather than where it's going? Obviously. However. Socialism. he lends credence to a belief in a noncapitalist elite. Crucial to his denouncement of the wearer of the lounging suit is the author's depiction of plausible capitalism. but the Lee lacoccas and Donald Trumps. the world beckons perpetually to a Walt Disney. which gobbles up its own reason for being. Rockefellers. Schumpeter himself chose the latter role. The overwhelming weakness of "the world according to Schumpeter" is that the prognosis is more social and political than economic. may have set up this paradigm as a means of self-glorification. appears to defeat Marx at his own game. Schumpeter. it has not resigned itself to the benign socialism he envisioned. he opens a window on the spectrum of creativity. the Sam Waltons and Ray Krocs. he has produced a passionate interest in the captains of industry--not the grasping. Commentary Like the consummate poker player shoving the whole pot into a grandstand showdown. the visionary. To Schumpeter. Schumpeter's model places a changing cast of creative movers and shakers at the lead position of capitalistic innovation.

most theorists narrowed their perspectives. such as astronomy or physics. Economists like Adam Smith were unable to foresee how factory systems would change following revolutionary discoveries. These economic generalizations. their actions would lead to a class war and the inevitable collapse of capitalism. Karl Marx believed that if capitalists continued oppressing the working classes. Cliffs Notes on The Worldly Philosophers © 1990 45 . a Steven Jobs. These "givens" allow the economist to create "if . How useful have their writings been in interpreting actual events? Has prediction been the economist's aim? Is this undertaking a worthy endeavor? Among the economists described in the book. In summary. Thus. In comparison to the rest. Conversely. John Stuart Mill came closest to functioning as an economic prognosticator. Economists as a group share the common belief that how people spend their money affects the "overall shape of things to come. Likewise. which replaced the lowly pin factory. In similar fashion. exist in a kind of historic vacuum." Because money is an integral part of the totality of society. apart from other social sciences. is able to predicate laws of any kind. the savvy student of economics expects some ambiguity in predictions and knows to apply common sense to any grand schematic design. David Ricardo did not envision improvements in nineteenth-century agricultural productivity. economists are willing to forecast only a generalized picture of future trends rather than particular details. Because society exists in a state of flux. Therefore. . Significantly. its behavior is less predictable than the motions of the planets or the status of atoms in a molecule.com Estee Lauder. or a Liz Claiborne. Unlike Mill. the student will notice immediately the limitations of time. it is remarkable that economics. He believed that a change would occur in human nature. In assessing how well the laws of economics describe actual behavior. such as Thomas Malthus' surmise that if workers continue to expand their families during boom times. offering little more than a single option for the future.www. These two conditions clarify how Schumpeter arrived at the conclusion that capitalists would evolve into hidebound bureaucrats. then" statements. even Keynes' and Schumpeter's theories have already suffered major setbacks as events have moved in directions neither man could foresee. Behavioral regularities must govern the lives of individuals. prognostication is possible only on two conditions: 1. 2. especially definitive laws which describe how buyers and sellers will react in the marketplace. without recourse to inevitable changes in background situations. nor did John Stuart Mill or Karl Marx clearly predict innovative changes in the political control of economics. CHAPTER 11: Behind the Worldly Philosophy The concluding chapter addresses the achievement of economists as a whole. such as the steel-making process. . The outcome of the economy will influence society as a whole. however.cliffs." remained cautious about carving his predictions in stone. In more recent times. whose brain children never capitulate to mundane limitations. he was the first economist to declare that economics was less crucial to human history than politics or sociology. In its normal state. it cannot be overlooked in any analysis of civilization as a whole. The reason that economic prediction remains nebulous and hazy is that economics differs from more scientific studies. or laws. then world population will soon outstrip necessary resources to feed the multitudes. Karl Marx. the "Great Predicter. Thomas Malthus' Essay on Population is the most limited and dogmatic in its prediction of doom from overpopulation.

these market seers failed to understand how machines could displace labor. who questions how the random behaviors of individuals in the marketplace manage to provide for the entire community. Lowe contends that economics can no longer be governed from within. Moreover. the new function of economics is not to predict but to control. the will to maximize personal finances is waning as capitalism develops. Human lives are so well furnished that modern capitalism resorts to advertising to convince the public that it needs the new products which factories are turning out. they must not be dismissed as whimsical or unimportant. These aforementioned alterations in capitalism are therefore producing a less predictable market behavior. it is still only one view of a complex and ever-changing world picture. There are tens of thousands of practicing economists who influence decisions in banks. Lacking the scope of an Adam Smith. At this point. cannot be reduced to a list of mathematical formulae. Even though these projections derive from the personalities and backgrounds of the economists themselves. economic vision has been bounded by turns and twists in the historical path.www. Changes in society's attitudes and behavior. such as Schumpeter's cadre of entrepreneurial elite or Mill's vision of human improvement. In short. a Thorstein Veblen. David Ricardo had no inkling how drastically steam power would alter production. particularly the sophisticated robotics that bolsters the automotive industry. these professionals concentrate on smaller spheres of interest. such as Paul Samuelson's work in mathematical economics. While economics is a thrilling study of one aspect of what it means to be human. they merit distinction for being penetrating. and government. The old philosophical system. which enables the economist to recognize coming trends. Adolph Lowe. in fact. or a John Maynard Keynes. Only Karl Marx surmised that machines might replace workers and even he would be astounded at modern computer-driven machinery. because it is rooted in human behavior. In summary. However.com Most significant to the trouncing of economic prediction is the fact that economists as a group have not been able to predict three trends: 1. failed to see that workers could resolve their differences with capitalists within the confines of a democratic society. Economic exchange functions as a single building block of the total social picture. must give way to an upgraded version--political economics. such as tax inducements. The growth of technology. In general. Each economic theory has reached only so far as the prevailing technology and lifestyle of the times allowed it. one of the dependable "givens" of the economic equation is no longer a sure thing. courageous. Thus. Adam Smith was unable to guess that mass production would vastly alter the factory system. economics. and intellectual acts. assuming that human outlook would remain static. Karl Marx. Rather. the field of vision among today's economists is greatly reduced. for which he won a Nobel prize. they became more militant. Cliffs Notes on The Worldly Philosophers © 1990 46 . In a demonstrative break with his predecessors. reveals that people establish economic order because of their singleminded acquisitiveness. Commentary The role of economics in society has never seemed more crucial than it does today. now completely out of date. In order to maintain a balance. the economy requires active interference. corporations. However.cliffs. 3. Thus. 2. Adam Smith assumed that workers would remain complacent when. More profound than the other two trends is the fact that regularities of economics are no longer regular. one quality of economic prognostication seems more pertinent than at any other time-Schumpeter's "preanalytic" grasp.

and John Maynard Keynes. such as the dearth of labor during wartime. the passage of child labor laws. competitive price wars between nations. spokesperson for the free market. the displacement of human workers by robots. Discuss how John Stuart Mill's economic laws differed from those of his predecessors. Explain how economists such as Paul Samuelson and John Kenneth Galbraith can evolve economic theories that oppose each other diametrically. Under the stimulus of massive change--globalization of the marketplace.com Breaking with earlier traditions. the day of the worldly philosophers appears to have ended." 3. the exploration of outer space. Discuss why division and specialization of labor are beneficial to society. 6. ESSAY TOPICS AND REVIEW QUESTIONS 1.cliffs. 9. Contrast the family and educational backgrounds of Thorstein Veblen. 8. as it appeared to do in Adam Smith's day. 2. 13. potential ecological disaster. Explain the common interest that bound the worldly philosophers under a single heading. the creation of new fuels. the increase of women workers. their role in teaching humanity how to assess a major cog of civilization has brought about a worthwhile reaction--a better understanding of itself. Consequently. 10. depletion of natural resources. modern economics lauds such figures as Milton Friedman. Whatever the area of interest.www. 5. economists at present suffer no lack of problems to solve. whether depression or inflation. and threats to the industrial order as Japan faces off against the American giant-economists look out on a host of possibilities. such as cotton or soybeans. whose philosophy runs counter to Friedman. 4. Analyze how modern consumers resemble their prehistoric ancestors. 12. 11. Explain Keynes' philosophy of "priming the pump. Never again will the market chug along on its own steam. third world starvation in an era of affluence. and the failure of a major crop. What mixed blessing will technology bring? Will the earth survive the pollutants produced by industry? Has ecology gone too far toward destruction to be rescued? Will the depletion of fossil fuels spell the end of the factory system? Is a global depression possible? Will technology extend into outer space? In none of the above troubling situations will economics bear the final resolution. Joseph Schumpeter. and John Kenneth Galbraith. Show how recent events in world affairs indicate major flaws in Karl Marx's predictions about the downfall of capitalism. Cliffs Notes on The Worldly Philosophers © 1990 47 . Explain why utopian philosophers fail to achieve their goals. Describe current attempts to solve the twofold problems of overpopulation and world hunger. David Ricardo. Explain why "laissez faire" was a significant concept in Adam Smith's time. Yet. The citizen of tomorrow will find the role of politics encroaching more heavily on economic growth. Explain why World War II helped to end the Great Depression. Forecast how the market system is affected by significant change. 7.

E. Marx and the Missing Link: Human Nature. The Economics of Unemployment. Sharpe. New York: W. ROBERT L. E. Intro. Characterize Thorstein Veblen's comments on technology. 18. On Economic Knowledge: Toward a Science of Political Economics. Armonk. 1988. HELBURN. 1986. 19. Atlantic Highlands. 1986. GALBRAITH. Inc. JOHN A. Explain the differences and similarities between socialism and communism. New York: Garland Publishing Co. Kelley Publishers.. by Robert Lekachman. Schumpeter. 16. Boston: Houghton Mifflin Co. PETER W. JOHN KENNETH. Inc. New York: The Robert Schalkenbach Foundation. HEILBRONER. New York: M. 1989. Essay on the Principle of Population. or a View of Its Past and Present Effects on Human Happiness.. SELECTED BIBLIOGRAPHY ARCHIBALD.. Cliffs Notes on The Worldly Philosophers © 1990 48 . HENRY. Inc. The Great Crash of 1929. Explain why economics differs from the other social sciences and why it can never be reduced to simplistic formulas. AND DAVID BRAMHALL. The Principle of Economics. 1985. 17. Unconventional Wisdom: Essays in Honor of John Kenneth Galbraith. Explain how President Franklin D. New Jersey: Humanities Press. JOHN MAYNARD. and Keynes: A Centenary Celebration of Dissent. Norton & Co. 15. Marx. SUZANNE. Eds. ---. Inc.. 1982." Explain why David Ricardo described the landlord as a villain. W. 1982.com 14. 1988. 1983. MARSHALL. et al. BOWLES. Debate the pros and cons of Pierre Proudhon's belief that "property is theft.. GEORGE. The Economic Consequences of the Peace. Eds. 1989. Economics in Perspective: A Critical History.cliffs.. SAMUEL. Sharpe.. HOBSON.. 1988. THOMAS. 20. Boston: Houghton Mifflin Co. The Land Question: Property in Land and the Condition of Labor. ADOLPH.. Roosevelt dealt with the problems of the Great Depression.www. New York: Augustus M. Boston: Houghton Mifflin Co. Discuss the role of the entrepreneur. ALFRED. MALTHUS. Behind the Veil of Economics: Essays in The Worldly Philosophy. 1989. New York: Penguin Books. LOWE. International.. Philadelphia: Porcupine Press. New York: M. Armonk. KEYNES.

. Cliffs Notes on The Worldly Philosophers © 1990 49 . RICARDO. Albuquerque. ADAM.cliffs. JOHN C. Stigler. 1988. New Brunswick. George J. WOOD. Illinois: Harlan Davidson. VEBLEN. Principles of Economic Analysis. Eds. New Mexico: Institute for Economic and Financial Research. Wealth of Nations: Selections. On Liberty: With the Subjection of Women and Chapters on Socialism. Paul A. Engineers and the Price System. AND RONALD N. 1989. 1989.. DAVID.com MILL. Ed. WOODS. SMITH. JOHN STUART. 1987. New York: Routledge. THORSTEIN. New Jersey: Transaction Publishers. Samuelson: Critical Assessments. New York: Cambridge University Press. Chapman and Hall. Inc.www. Arlington Heights. 1983.

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