7. Review of John Chamberlain, The Roots of Capitalism

7. Review of John Chamberlain, The Roots of Capitalism

July 5, 1959

Dr. Ivan R. Bierly

William Volker Fund

Dear Ivan:

John Chamberlain’s The Roots of Capitalism⁵² is divisible into two parts: the prologue and chapters 1–3, which deal with political philosophy and its history, and the remainder (chapters 4–12 and the epilogue), which deal with economics. When I had finished reading the first three chapters, I thought that this was going to be one of the best introductions to libertarianism and capitalism—to the whole complex of history, political philosophy, and economics that makes up the libertarian picture—that had ever been published. When I finished reading the entire book, I realized that this book essentially fails. Since the excellent political chapters constitute only one-fourth of the book, they cannot offset the thundering failure of John’s economic chapters, which are the meat of the book.⁵³

First, as to the beginning chapters, they are an excellent guide to the historical and political backgrounds of libertarianism and capitalism. One particularly fine thing about them is that they approach history in a truly libertarian manner: it is anti-George III, pro-Leveller, pro-Locke, pro-smuggling in England, etc. This is particularly welcome because this sort of historiographic attitude has been unfortunately passé on the Right for quite some time—especially ever since Russell Kirk has befogged the political philosophy of our time. The current fashion has been to be pro-Metternich, pro-Tory, anti-Leveller, and pro-Stuart, etc., and the prevalence of this fashion makes John’s approach all the more refreshing.

Another excellent quality is John’s grounding himself on natural rights of the individual, on natural and common law, on property right, and on the preeminent importance of man’s freedom of choice. And John rejects the current fashionable deprecation of the Magna Carta, and rightly defends John Locke’s libertarian credentials against the interpretations of Bertrand de Jouvenel and Willmoore Kendall.

Some of the other good points in these first chapters: they show the planning propensities of George III, the fact that the road network built in eighteenth-century England was privately owned, the libertarian implications of the Ten Commandments, and a brief slap at the Sixteenth Amendment.

In these first chapters, there are just two important errors made by Chamberlain. One is in overly excusing the statist restrictions and dictations of the feudal system on the ground that they were somehow necessary because the “Christian Order” was in a “state of siege” against the heathens without: this is the old fallacy of using a vague foreign threat as an excuse for all manner of domestic tyranny. The second is Chamberlain’s gratuitous and jejune use of Locke to try to justify a policy of outlawing the Communist Party. Not only is this a vulgar use of history, it is also a whopping non sequitur: for if Locke’s constitution did not grant any group the “liberty of attempting to coerce others to its beliefs,” this does not simply mean outlawing Communists, but, presumably, any socialist group, even if “democratic.”

But now for the bulk of the book. What, precisely, is the failure of Chamberlain’s economics? I think, basically and profoundly, it is a failure to understand economics and economic theory. And since the bulk of this book deals with economics and economic theory, this failure is disastrous for the impact of the book as a whole.

Before getting to the content of these chapters, a word should be said about the organization. Chamberlain is, of course, a superb stylist, and this is true in everything he writes. But the organization of a book reflects one’s understanding of the subject matter and is not a question of style; and here, already, Chamberlain is poor.

The organization of the economic chapters is slipshod. After discussing contract, Chamberlain suddenly talks of unionism, and then he goes back to Ricardo and Malthus. Next, suddenly, Chamberlain devotes a whole chapter of his book to the rather unimportant Robert Owen, and then another whole chapter to the also unimportant Francis Amasa Walker. Suddenly, we find ourselves dealing with Henry Ford, and then we are up discussing the modern question of monopolistic competition (in the only really good economic chapter, by the way), then back to unions and on to Keynesianism. And that’s it!

The allocation of space is inchoate and peculiar. There is not one word, for example, about the great flowering of American capitalism in the late nineteenth century, about the whole problem of the robber barons. Not one word, while a couple of chapters are devoted to Robert Owen and Francis Amasa Walker. There is almost no mention of Karl Marx, which is almost as incredible, and none of Veblen until the epilogue, when Veblen suddenly pops up, as if by afterthought.

This extremely poor organization reflects Chamberlain’s lack of understanding of economics, as we shall now see. The basic problem, I believe, is this: Chamberlain absolutely fails to understand the nature and the importance of economic law. To Chamberlain, all economic science—and not just the Ricardians whom Chamberlain criticizes at excessive length—is “static,” “gloomy,” repressive. Chamberlain somehow thinks of all economics as gloomy and European, and thinks of the achievement of American capitalism as “refuting these gloomy laws by the dynamic technological breakthroughs of our practical men.” Now this is absolute nonsense, and yet again and again Chamberlain returns to the theme of scoffing at the “iron” laws of economists, and of the saga of how American technology and mass production was supposed to have shown the world how to conquer these laws. Actually, the two are unrelated; economic laws are not “refuted” by technological improvement or capitalist development.

It is because of this flouting of economics that Chamberlain devotes so much time to Owen and Henry Ford; to Chamberlain, they somehow founded modern capitalism because they showed that what employers should do is to give their employees high wages; this will increase their efficiency, or as with Robert Owen, give them welfare programs and do the same. Now, this, as a general principle, is nonsense; the payment of wages is not up to the employers, who are guided by market laws and pay market wages. Any welfare payment of the Owen variety simply comes out of the wage the employer would have paid; which means the worker gets less money and more “medical benefits” from his employer. And to go further and to imply, as Chamberlain does, that the reason European capitalism never developed is because the other employers were not as humanitarian and farsighted as Owen, is pure mythology. For the same reason, Chamberlain overvalues and distorts Henry Ford’s achievement; Henry Ford was not the founder of American capitalism or of some great new economic principle.

Chamberlain’s paeans to Robert Owen as manufacturer are sheer romantic absurdity and display profound ignorance of economics: Owen, he said, gave “tangible proof that money could be made... without grinding the faces of the poor”—obviously implying that all the other manufacturers of the day were so grinding; Owen “went into the coal business to keep his employees from being gouged on fuel” (gouged by whom?); “he offered medical attention to all”; Owen knew—again in contrast to other manufacturers—“that there was no long-term profit in the sheer exploitation of one’s help.” Owen’s good gray father-in-law was one of the first industrialists who “chose to flout... the ‘iron law of wages’.” Owen anticipated “modern ‘consumer capitalism’”—whatever that is supposed to mean: when didn’t a market economy rest on consumer demands?

One of the great “iron” bogeys of Chamberlain, which he deals with almost continually in this book, is the terrible bleak “wages-fund theory.” Hence, his enthusiasm, expressed at length, for Henry Ford, who like Owen “walked boldly up to the ghost [the wages-fund theory] and proved its insubstantiality.”

“It was Henry Ford’s decision to pay $5 a day without raising the price of his car that proved the wage fund and the other preconceptions of British economics had little to do with industrial realities in a dynamic world.” Chamberlain doesn’t seem to realize that a businessman’s actions of this sort cannot refute an economic theory like the wages-fund theory; they are two orders of discourse.

Chamberlain fails utterly to realize that the whole point of economics rests on an analysis of scarcity: the fact that means are scarce (and always will be), in relation to human ends. In his bog of fallacy, Chamberlain says this: “Always, before Eli Whitney and Frederick Taylor and Henry Ford, the world struggled with scarcity. And when economics ceased to be wholly a matter of the deployment of scarce means...” it is now, because of Whitney and Taylor and Ford, based on “contrived fecundity” rather than “contrived scarcity.” Rarely have more critical fallacies been packed into so short a space: economics has, still does, and will continue to be wholly concerned with “scarcity,” and so will the world, notwithstanding Whitney, Taylor, Ford, or whatever other heroes Chamberlain dredges up. Here again, we see Chamberlain’s fatal lack of understanding of what economic science is all about, and his naïve belief that economic principles can somehow be refuted by some dynamic new manufacturer.

Another example of Chamberlain’s failure at economics is his discussion of rent theory as if it were somehow up to the landlord how much rent he will charge, and that rents depend solely on the landlord’s humanitarian or miserly traits. That there is a market and market prices for rents, and therefore that there are economic principles determining these prices, is completely overlooked.

It will be noted, incidentally, that while Chamberlain is of course severe on Robert Owen’s later communal utopias, he says nothing of his hero Henry Ford’s persistent penchant for cranky funny-money.

For quite a while I was puzzled about the problem of why Chamberlain singles out, among all the economists, only the rather obscure and not too important Francis Amasa Walker for praise—indeed, for rhapsodic eulogy. He mentions a few times the Austrians J.B. Clark and Ludwig von Mises, but only very perfunctorily and ritualistically. Almost his entire enthusiasm for economists is poured out for Walker. But, in the context of the book as a whole, the reason seems clear: Walker was the first American to be critical of the wages-fund theory. He was also the first to stress entrepreneurship, but it is clear that the paeans are referred mainly to his attack on the wages-fund theory.

And the grandiloquent title to this chapter, “Prometheus Unbound,” is to be explained as part of Chamberlain’s eternal war against “iron” economic laws, for Walker was supposed to have destroyed the hated (by Chamberlain) wages-fund theory. Actually, the singling out of Francis Amasa Walker of all the economists for lengthy eulogizing is impermissible. Walker’s theory of entrepreneurship and profit was interesting, but hardly deserves mention when the author omits the equally important, or better, theories of Böhm-Bawerk, J.B. Clark, Frank Knight, and Ludwig von Mises, or, for that matter, of the German von Mangoldt.

We come now to Chamberlain’s bête noire, the wages-fund theory. It would come as an enormous shock to John, I’m afraid, but actually the wages theory was substantially correct, despite its crudities. Walker and Chamberlain to the contrary, it is not refuted by the productivity theory of wages—again, the two explain different things. The wages-fund theory explains the aggregate amount of money wages at any given time. It is correct that, at any given time, there is a certain fixed capital fund, determined by saving and investment, from which employers can pay wages, and the old classical “iron” law that union pressure for wage increase can only reduce the amount of wages paid to workers elsewhere in the economy, is also substantially correct.

The productivity theory of wages explains, in the first place, each individual’s wage, rather than the wage level in general; and, second, it explains his real wage, how much output the worker will receive for his wages. The wages-fund theory explains the money wage received by the average worker. Actually, the wages-fund theory is a crude one, it should be called a wage-and-rent fund, etc., but the essence of it is correct, as Böhm-Bawerk and Wicksell point out. Needless to say, Böhm-Bawerk is hardly mentioned in this volume, and Wicksell not at all.

Furthermore, Walker’s statement of wage theory was a highly crude one; he did not really have a good statement of marginal productivity theory; that was left, in America, to J.B. Clark.

And finally, one would never know from Chamberlain’s rhapsodic discussion that Walker, while quite conservative, was a bitter opponent of laissez-faire.

In the light of all this, it seems to me sheer presumption for Chamberlain to criticize textbooks in the history of economic thought for underrating Francis Amasa Walker. Such a charge is hardly viable coming from someone with Chamberlain’s lack of economic knowledge.

Chamberlain’s other leading error in economic theory is his critique of Keynesianism, which occupies the last chapter of the work. This is a very weak, fumbling critique, giving away a large part of the case, making hardly any dent in the Keynesian structure. Chamberlain concedes a good bit of the Keynesian case: that inflation is really just as good as a cut in wages, economically, which is not true; that liquidity preference and hoarding really may be a generator of depression, which is untrue; and that a failure of consumer demand may be a cause of depression, also untrue.

Chamberlain also has the colossal effrontery to try to modify a Mises critique of Keynes, saying that when Mises says that Keynes is dead wrong, this is true—but only for the long run. But, Chamberlain warns, Keynes may be right for the short run, and the long run may even be Keynes’s by a series of cumulative short-run troubles. Here again, Chamberlain is wrong, period, and it seems to me effrontery for someone with as little grasp of economic theory as Chamberlain has to presume to correct an economist like Mises.

At the end, Chamberlain simply throws up his hands and admits that he doesn’t know whether Keynes is right or wrong economically, but he is certainly wrong politically, because the government will never check inflation in a boom enough to make “cyclical compensatory spending” work.

Thus, Chamberlain: “an honest commentator must admit that there are analytical phases of the General Theory that are hard to laugh off. Given enough cumulative short-term failures of Say’s Law,” etc. And: “The whole of Keynes [sic] General Theory remains in the realm of logical deduction from premises that may or may not be true.” And: “From the standpoint of pure economics his analyses of the failure of demand in a depression era... do have a general correspondence with the ‘feel’ of the facts.”

Enough of Chamberlain’s utter failure as an economist. We now turn to several grave politico-economic errors and biases displayed by Chamberlain in this book. The worst and most persistent is on trade unions. Again and again, Chamberlain identifies the only aspect of trade unions that he deems “coercive” as the closed shop. The closed shop, he maintains, interferes with a worker’s “freedom of choice.”

Actually, while we may abhor the closed shop, it does not interfere with a worker’s freedom of choice, unless we assume, as Chamberlain tacitly does, that any loss of a job is “coercion,” or “interference with freedom.” Actually, the important question is the employer’s freedom of choice, for he is the fellow who is paying out his money for certain tasks, and therefore he should have the right to set whatever terms of employment he wishes; he should, therefore, have the right to insist on workers belonging to a closed shop if he should be perhaps foolish enough to want to.

The critical problems about unions are (a) their habitual use of violence, (b) their nature as parasitic organizations, and (c) their monopoly privileging through the Wagner Act. Yet, oddly enough, Chamberlain not once mentions union penchants for violence and not once mentions such grants to unions of monopoly privileges as the Wagner Act.

Furthermore, he attacks the old-style management opposition to all unionism. This opposition was actually cogent and proper, because unions can only be trouble-making, production-lowering organizations. But instead, Chamberlain bitterly criticizes the “old habit of union baiting,” which Chamberlain wrongly considers “interference with workers’ freedom of contract.” He criticizes employers calling federal troops to break strikes, without once considering why such troops were even considered necessary: no troops ever forced any strikers to work! So what did they do? Obviously, their only function was to protect employer property and personnel, to protect strikebreakers from the characteristic goon-squad violence of organized labor. The troops were, then, perfectly called for. Yet Chamberlain’s reference to violence in labor disputes is to attack management!

Because British labor unions have never stressed the closed shop, Chamberlain’s exclusive emphasis on the closed shop as the only union evil actually leads him to praise the British unions, the mainstay of the British Labour Party, as being somehow conservative and devoted to collective bargaining contracts. (Actually, Chamberlain also does not see that collective bargaining “contracts” are not true contracts in the libertarian-law sense, for (1) they do not specifically agree to transfer property—just to set a certain wage or terms should any property be transferred; and (2) the workers’ end of the “contract” is invalid, anyway, because workers cannot be forced to keep working against their will.) Chamberlain’s weakness for labor unions also leads him to say that Philip Murray was tending away from left-wing unionism.

Thus, Chamberlain’s outrageously weak attitude toward unionism leads him to make such statements as the following:

the English union man has always returned to his Ernie Bevin... the English worker has lived in the tradition of John Locke.... Possibly the willingness to compromise that has characterized English and Swedish big ownership has enabled labor in the two enlightened North European countries to have faith in the possibilities of the contractual way.

This in two countries that have gone the farthest down the road to welfare socialism and Labour Party activity! And the comparison between Ernie Bevin and John Locke is peculiarly inapt, to say the least.

Chamberlain also wrongly stigmatizes the “yellow dog” contract as “coercion,” and equivalent to a closed shop. But perhaps Chamberlain’s worst and most outrageous statement on the union question is the following:

If management should return to the old habit of union baiting, which amounts to an attempted interference with a worker’s freedom of contract, or if it refuses to bargain with open unions on an above-board basis, then we shall get the universal closed shop or a condition of chaos and industrial slavery....

In either case the state must walk in.... In the case of chaos and industrial slavery the state must intervene to guarantee social security to the underdog. (It must go far beyond such things as minimum wage laws and forced unemployment payments, which are themselves minor and absorbable infringements of free contract.)

Aside from the fact that minimum wage laws and unemployment insurance are not simply minor and absorbable, Chamberlain has gone to the length of pure leftist demagogy here by characterizing a system where employers determinedly refuse to have anything to do with unions as “chaos and industrial slavery,” requiring massive state intervention and guarantees. This sort of statement in any book would be cause for chastisement—but in a book by a purported libertarian?

There are other important political aberrations and biases in the book. Chamberlain comes out flatly in favor of the SEC; he also declares that railroad rebates to oil companies, etc., were political. He says that there must be a minimum amount of interference of political power with social power and uses as his bolstering argument the hoary old fallacy about the necessity for traffic regulations, which Mises so brilliantly exploded in Human Action (anyone who owns the roads must regulate them, so if private enterprise owned the roads, etc.).

He also looks too benignly toward consumer cooperatives, at one point saying that they may be called for “to protect living standards.” This is nonsense; a consumer cooperative (1) is an inefficient form of business enterprise; and (2) the actual movement has boasted of trying to replace capitalist enterprise. None of these salient points are mentioned by Chamberlain.

Chamberlain’s discussion of the problem of monopoly, competition, and “monopolistic competition” in chapters 9 and also 10 are the only really valuable parts of the economic sections of the book. There is much excellent material here. And yet, while Chamberlain says that “in the days of the classical economists ‘monopoly’ had a clear and simple reference: it was what happened when the state gave an individual or a trading company the sole right to exploit a given market. Monopoly was a grant of privilege by government,” he inconsistently, in several places, praises the Sherman Act as a combater of monopoly. He also misconceives the common law, by repeating the old error that the Sherman Act “elevated the common-law tradition to federal dignity”—a myth exploded five years ago by William Letwin. And this flowery rapture: “the Sherman Antitrust Act continues to work its overall watchdog magic.” Magic, indeed!

Turning to the concrete political problems of our day, what does Chamberlain approve? He overly praises the West German recovery and its neoliberalism, for while giving the West Germans their just due, he also says that the “government has still been able... to behave in a generally humane way.” Also, these resurgent “true liberals” of Western Europe are hardly “true” but much diluted.

Finally, in his proposal as to what to do next in America, Chamberlain actually comes out and says that a gradual dismantling of the welfare state would be better than none at all. It is perhaps true that a gradual dismantling would be better than no dismantling at all, but to say that it is better than rapid dismantling is to give away a good part of the case against the welfare state, and to concede short-run practicality to the collectivists as he halfway conceded it to Keynes. In actual fact, libertarianism, laissez-faire, is more practical in the short as well as in the long run. And yet, Chamberlain concludes by first praising the Committee for Economic Development plan for the federal government to compensate marginal farmers out of tax funds while they are learning new trades, and goes on: “Some of them [methods of returning to voluntary action] would require the temporary continuation of government aid”; otherwise, as he indicated in another place, rapid removal is “brutal.” (Contrast this attitude with an excellent leaflet once written by Leonard E. Read: I’d Push the Button.)

I think I have demonstrated why John Chamberlain’s book must be set down as a flat failure, despite the good intentions of the author, and despite some valuable material. (If it be perhaps objected that not every writer can be expected to be a knowledgeable economist, the answer of course is that nobody forces him to write about economic problems.) It is a token of the intellectual failure of our time that the failure of this book will not be made known in any of our “right-wing” journals of opinion, for apparently it is felt that if an author is a certified right-winger and member of the club, then his book receives an automatic rave review by some other club member—in many cases, a reviewer who hardly needs to read the book before grinding out his formula review. (Left-wing reviewers will not assess the book properly either, if they discuss it at all, for they will simply attack it as too procapitalist.)

While this situation is, I suppose, understandable among a Right that considers itself in perpetual battle and therefore never to criticize one of “their own” in public, this is a most unfortunate situation. For not only does it betray the truth, which is the ultimate value for which the Right is supposed to be battling, but it is not even “practical” in the long run. A knowledgeable and open-minded economist who reads, let us say, a typical rave review of the Chamberlain book in some right-wing journal, or by some rightist, and then proceeds to read the book and discover its true lack of worth, will, after that, have little respect for either the reviewer or the magazine.