14. After Mill: Bastiat and the French laissez-faire Tradition (continued)

0:005. Vilfredo Pareto, Pessimistic Follower of Molinari One prominent person rarely associated by scholars with the Bastiat-Ferrara laissez-faire school was the eminent sociologist and economic theorist Vilfredo Federico D'Amaso Pareto Pareto 1848-1923 Pareto was born in Paris into a noble Genoan family. His father, the Marchese Raffaele Pareto, a hydraulic engineer, had fled Italy as a Republican and supporter of Mazzini. The senior Pareto returned to Italy in the mid-1850s and gained a high rank in the Italian civil service.

0:48The young Pareto studied at the Turin Polytechnic where he earned a graduate engineering degree in 1869. His graduate thesis was on the fundamental principle of equilibrium in solid bodies. As we shall see in a later volume, Pareto's thesis led him to the idea that equilibrium in mechanics is the proper paradigm for investigation into economics and the social sciences. After graduation, Pareto became a director of the Florence branch of the Rome Railway Company and in a few years he became managing director of a Florence firm manufacturing iron and iron products. Pareto soon plunged into political writing, taking a fiery stand in favor of laissez-faire and against all forms of government intervention, defending personal and economic freedom and Attacking Plutocratic Subsidies and Privileges to Business with Equal Fervor to His Denunciations of Social Legislation or Proletarian Socialist Forms of Intervention.

1:56Pareto was one of the founders of the Adam Smith Society in Italy and also ran unsuccessfully for parliament twice during the early 1880s. Shortly influenced by Molinari, Pareto's writings came to the latter's attention in 1887. Molinari then invited Pareto to submit articles to the Journal des Economistes. Pareto met the French liberals and formed a friendship with Yves Gouillot, who was to be Molinari's successor as editor of the Journal, and who was to write Molinari's obituary in 1912. Shortly after getting in touch with Molinari, Pareto's mother died, and he was able to give up his manufacturing post, become a consulting engineer, get married and retire to his villa in 1890 to devote the rest of his life to writing, scholarship and the social sciences.

2:55Freed of his business duties, Pareto plunged into a one-man crusade against the state and and formed a close friendship with the laissez-faire neoclassical marginalist economist Maffeo Pantaleone, 1857-1924, who drew Pareto into technical economic theory. Having become a Valracian under Pantaleone's tutelage, Pareto succeeded Leon Valra as professor of political economy at the University of Lausanne. Pareto continued at Lausanne, also teaching sociology until 1907 when he fell ill and retired to a villa on Lake Geneva where he continued to study and write until his death.

3:44Pareto's shift into technical neoclassical theory did not for a moment abate his ardent battle for freedom and against all forms of statism, including militarism. An idea of his trenchant laissez-faire liberalism can be gained from his article on Socialism and Freedom published in 1891. So we can group socialists and protectionists under the name of restrictionists, whilst those who want to base the distribution of wealth solely on free competition can be called liberationists. These restrictionists are divided into two types. Socialists, who, through the intervention of the state, wish to change the distribution of wealth in favor of the less rich, and the others, who, even if they are sometimes not completely conscious of what they are doing, favor the rich. These are the supporters of commercial protectionism and social organization of a Military Type.

4:49We owe to Spencer the demonstration of the close analogy of these two types of protectionism. This similarity between protectionism and socialism was very well understood by the English liberals of the school of Cobden and that of John Bright, and was clarified in the writings of Bastiat. Pareto's writings, furthermore, are studded with appreciative and often lengthy quotes from Molinari, thus in the same article on Socialism and Freedom, Pareto praises Molinari for advancing a unique and bold system that proceeds towards the conquest of freedom using all the knowledge that is offered by modern science. In his Introduction to Marx's Capital in a book on Marxism, Marxism et Economie Pure, In 1893, Pareto was clearly influenced by the French libertarian Dunoyet-Compt concept of the ruling class as whatever group controls the state.

5:53He ended the chapter with a lengthy and admiring quote from Molinari, who carried through this libertarian class doctrine. Pareto ended the Molinari quote with this sentence, Everywhere, the ruling classes have one thought, their own selfish interests, and they use the government to satisfy them. Pareto's first great treatise on economics, the Cour d'Economie Politique, 1896, was heavily influenced by both Molinari and Herbert Spencer. In every polity, he points out, there is a minority ruling class exploiting the majority, who are the ruled. Tariffs Pareto treats as an example of legal spoliation, plunder and theft.

6:41Pareto left no doubt that his objective was to eradicate all such legalized plunder. As Placido Buccolo points out, Pareto did not, as some analysts claim, Adopt a Marxian view of class struggle in his cours. Instead, he adopted the French libertarian class doctrine. Thus Pareto says in the cours, the class struggle assumes two forms at all times. One consists in economic competition, which, when it is free, produces the greatest ophilimity, utility. For every class, like every individual, even if it only acts to its own advantage, is indirectly useful to the others.

7:27The other form of class struggle is the one whereby every class does its utmost to seize power and make it an instrument to despoil the other classes. Laissez-faire liberalism had been a genuine mass movement in much of the 19th century. Certainly in the United States and Great Britain and partially in France, Italy, Germany and throughout Western Europe. Much of the time in the latter half of the century, the socialist idea was considered less of a threat to liberty by classical liberals such as Pareto and Spencer than the existing system of militarist and warlike statism dominated by privileged businessmen and landlords, The system to which Pareto would give the vivid and contemptuous name, Pluto-democracy.

8:18By the turn of the century, however, it was becoming clear to laissez-faire liberals that the masses had been captivated by socialism, and that socialism would pose an even greater threat to freedom and free markets than had the older, neo-mercantilist, Pluto-democratic system. System Laissez-faire liberals throughout Europe had been gloriously optimistic during most of the 19th century. It was obvious that liberty provided the most rational, the most prosperous system, the system most attuned to human nature, the system that works for the harmony and peace of all peoples and nations. Surely the centuries-long shift from statism to freedom, from status to contract, and from The comeback, first of aggressive business statism in the 1870s, followed by expanding Putting mass support for socialism in the 1890s, however, put a rude end to the ingrained optimism of laissez-faire liberals.

9:43The perceptive laissez-faire thinkers saw that the 20th century would bring the shades of night and put an end to the great civilization, the realm of progress and freedom that had been the product of 19th century liberalism. Pessimism and despair began to grip the slowly vanishing breed of laissez-faire liberals, and understandably so. They foresaw the growth everywhere of statism, tyranny, collectivism, massive wars and social and economic decline. Each of the aging laissez-faire liberals reacted to this momentous and fateful new trend in his own way. Peter continued to fight on to the end, placing greater emphasis on what he considered the main threat of socialism as against the business statism that he had previously combated.

10:36Pareto's path was to change radically into a stance of bitter cynicism. The world, he concluded as he saw the inexorable decline of libertarian ideas and movements, is governed not by reason, but by irrationality, and it now became Pareto's role to analyze and chronicle those irrationalities. Thus, in an article in 1901, Pareto notes that everywhere in Europe, both socialism and nationalism-imperialism are on the increase, and that classical liberalism is being ground down between them. All over Europe, the liberal party is disappearing, as are the moderate parties. The extremists stand face to face.

11:22On one side, socialism, the great rising religion of our age. On the other side, the old religions, nationalism and imperialism. Faced with the failure of his hopes and with the looming statist hell of the 20th century, Vilfredo Pareto, in the words of his perceptive biographer S. E. Feiner, decided to retreat to Galapagos, a remote island that, in the Argo of Pareto's day, served as a metaphor and vantage point for a totally detached analysis and critique of the folly looming around him. The final push for Pareto on the road to Galapagos came in 1902, when the Italian Socialist Party abandoned its opposition to the protectionist policy of the bourgeois-statist government.

12:16The two long-standing enemies of laissez-faire liberalism had now joined forces. From that point on, Pareto's retreat to a detached and aristocratic Olympian bitterness was complete. The first book of Pareto's in which the new pessimistic stance becomes dominant is his Les Systèmes Socialistes, Two Volumes, 1901 and 1902

13:07are easier and hence more attractive than hard work for the acquisition of wealth. As Pareto mortally wrote in a passage that anticipated such 20th century libertarian theorists as Franz Oppenheimer and Albert J. Nock, social movements usually follow the line of least resistance. While the direct production of economic goods is often very hard, taking possession of those This facility has greatly increased from the moment when deprivation became possible through the law and not contrary to it. To save, a man must have certain control over himself.

13:52Tilling a field to produce grain is hard work. Waiting in the corner of a wood to rob a passerby is dangerous. On the other hand, going to vote is much easier. And if it means that all those who are unadaptable, incapable and idle will be able to obtain board and lodging by it, they will hurry to do so. Pareto unfortunately championed a positivist methodology in keeping with his reliance on the model of physics and mechanics. But this was more than offset by his supplying us a deathless anecdote in a brilliant defense of natural economic law as against the anti-economists of the German Historical School.

14:38It is an anecdote that Ludwig von Mises liked to relate in his seminar. Once during a speech which he was making at a statistical congress in Bern, Pareto spoke of natural economic laws, whereupon Gustav Schmoller, who was present, said that there was no such thing. Pareto said nothing but smiled and bowed. Afterward he asked Schmoller through one of his neighbours whether he was well acquainted with Bern. When Schmoller said yes, Pareto asked him again whether he knew of an inn where one could eat for nothing. The elegant schmoller is supposed to have looked half pityingly and half disdainfully at the modestly dressed Pareto, although he was known to be well off, and to have answered that there were plenty of cheap restaurants, but that one had to pay something everywhere, at which Pareto said, so there are natural laws of political economy.

15:406. Academic Convert in Germany, Karl Heinrich Rao While John Prince Smith and his colleagues were battling valiantly for laissez-faire in the court of business and public opinion, the most prominent academic economist in Germany was becoming a highly influential convert to the cause. Karl Heinrich Rao, 1792-1870, was the most important academic economist in Germany in the first half of the 19th century, and perhaps down to his death in 1870. Rao was born in Erlangen, a Protestant town in northern Bavaria, and his father was Lutheran pastor and professor of theology at the university there.

16:32Starting from Erlangen in 1812, Rao taught at secondary school and in 1818 became professor of political economy at the University of Gießen. Four years later, Rao became professor of political economy at the University of Heidelberg and held that post until his death nearly half a century later. In addition to being a widely liked and influential teacher, Rao played an active and influential In addition to being a long-time consultant to the Baden government, Rao became a court counselor upon accession to the chair at Heidelberg and became a privy counselor at Baden in 1845.

17:22Several times Rao served in the Baden Diet and in 1848 was elected a member of the Frankfurt Parliament Trained in German Cameralism, Rao, for the first two decades of his lengthy career, was a temporizing moderate in his views, attempting to balance the Smithian system of natural liberty with Cameralism, deductive theory with a compendium of facts and statistics. A cautious moderate, Rao was leery of abolishing the guilds, and defended an organicist view of the State as against Adam Smith. On the other hand, as time went on, Rao became increasingly laissez-faire liberal and less and less statist.

18:09The beginning of this gradual but accelerating conversion came in the early 1820s. In 1819 and 1820, Rao translated the six-volume treatise of the moderate Smithian Heinrich Friedrich von Stuch, a Baltic German teaching in Russia and writing in French, Rao's German translation of Stuch's Kurde-Ekonomie-Politik was published in three volumes. Particularly important, however, was Rao's multi-volume textbook on economics, the Lehrbuch der politischen Ökonomie. The first volume of the Lehrbuch was published in 1826 and the second in 1828.

18:54The Lehrbuch promptly became the standard economics text in Germany, going through eight editions in Rao's lifetime, with the ninth edition of volume one published six years after Rao's death. Moreover, Rao's Lehrbuch was translated into no less than eight languages. Rao's increasingly classical liberal views were reflected in the successive editions of the Lehrbuch. Still more were they reflected in the pages of the economic journal, the Archive der politischen économie und politische Wissenschaft, which Rao founded in 1835. The culmination of Carl Rao's conversion to laissez-faire came at the height of libertarian and Economic Opinion in Europe in the years around 1847.

19:45In his address to the university community at Heidelberg in November 1847, Raud denounced state intervention as the creation of ever-increasing special privileges to the aid of selfish interest groups. State intervention, then, can only benefit one person or group at the expense of another. Moreover, government intervention, instead of curing social problems, creates many new problems of its own. Rao warned in his Heidelberg address of the liberties endangered by government planning and controls, and particularly warned of the spread of socialist and communist fantasies. In the absence of private property and private enterprise, only force could be used to induce 7. The Scottish Maverick, Henry Dunning Macleod Henry Dunning Macleod, 1821-1902, was an exuberant and prolific Scottish maverick who, in the teeth of the million monolith dominating Britain after 1848, never received his due from British For British economists or British academics, MacLeod was born in Edinburgh, the son of a Scottish landowner, and studied mathematics at Trinity College, Cambridge, graduating in 1843.

21:15He became an attorney and was admitted to the bar six years later. Two years afterward, MacLeod wrote a report on the administration of poor relief in several Royal Scottish Parishes, and went on to establish the first Poor Law Union in Scotland. In 1854, MacLeod was made a director of the Royal British Bank, and this immediately sparked a lifelong fascination with economics, and specifically with matters of money and banking. MacLeod wrote prolifically on monetary matters, his Theory and Practice of Banking, 1855, becoming influential and going through five editions. MacLeod took a firm gold standard and free banking position, unfortunately adopting also the banking school apologia for inflationary fractional reserve banking.

22:09MacLeod was the one who introduced the term Gresham's Law into economics and also contributed an important analysis of the ways in which fractional reserve bank credit operates, in and, in particular, how bank loans create deposits, which then function on the market as money substitutes in the same way as banknotes. If MacLeod had confined his economic work to money and banking, he might have earned considerable respect among British economists, Although he differed from the mainstream in favoring free banking, his pro-gold standard and anti-bimetallist views, as well as his banking school orientation, were close enough to the reigning orthodoxy to bring him the acclaim he deserved.

22:59But MacLeod ran into a wall of opposition in Britain because he stood squarely against The British Smith-Ricardo Mill labor theory of value and material concept of wealth. As a result, MacLeod's dream of becoming a professor never materialized. Inspired by Archbishop Wheatley, MacLeod went back to the late 18th century and discovered the Abbé de Cognac, whom he exuberantly declared to have been the true founder of economics, In contrast to the labor theory and materialist doctrine of Adam Smith, enthusiastically adopting the weighty concept of catallactics as the genuine method of economics, Macleod argued that Condiac, with his focus on economics as the science of exchanges rather than wealth, was the founder of the catallactic approach.

23:56Condiac noted Macleod, like the Italian economists of the 18th century, places the origin and source of value in the human mind, and not in labor, which is the ruin of English economics. Furthermore, Macleod asserted, Condiac was correct that exchange value stems from value conferred upon goods by consumers, so that value and demand derive solely from mental Contrary to Smith and Ricardo, who believed that the labor of producers confers value on products, value does not spring from the labor of the producer, but from the desire of the consumer.

24:41Since value stems from subjective valuation by consumers, it follows, declared Macleod, that man engage in exchange precisely because each man values what he gains more than what he gives up, else he would not have embarked on the exchange. Hence, echoing scholastic and continental theorists from Jean Bourdin onwards, both parties to any exchange must gain in value. McLeod went on, in the Proto-Austrian spirit, to declare that anticipated market prices determine costs that will be incurred in production, rather than the other way round. It is indisputably true that things are not valuable because they are produced at great expense, but people spend much money in producing because they expect that others will give a great price to obtain them.

25:40Sellers do not give high prices because sellers have spent much money in producing, but sellers spend much money in producing because they hope to find buyers who will give more. As if Henry D. MacLeod did not give enough offense to mainstream 19th and 20th century economics, he kept his crimes by hailing the great libertarian and catallactician, Frederic Bastiat, whom he saluted as the brightest genius who ever adorned the science of economics. Bastiat, MacLeod declared, plucked up by the roots the noxious fallacies which are the economics of Adam Smith and Ricardo. He simply cleared away the stupendous chaos and confusion and mass of contradictions of Adam Smith.

26:33In his revolutionary work of 1871, which brought marginalism and at least a semi-Austrian position to England, W. Stanley Jevons issued a cry from the heart against the noxious influence of the stifling authority of John Stuart Mill over economics in England. Ever eager to find and rediscover neglected forerunners, Jevons hailed Bastiat and MacLeod, as well as Senior, Cairns and others. Unfortunately, as is evidenced by his treatment at the hands of the new Palgrave, MacLeod's reputation clearly needs to be resuscitated once again. 8.

27:19Plutology, Hearn and Donisthorpe Another forerunner and contemporary hailed by the revolutionary marginalist Stanley Jevons was the Irish-Australian economist William Edward Hearn, 1826-1888. Born in County Cavan, Ireland, Hearn was one of the last students of the great Wheatleyite economists at Trinity College Dublin, entering in 1842 and graduating four years later. There he learned an economics very different from the dominant million school in Britain, and Economics steeped in subjective utility theory and a catallactic focus upon exchange.

28:05Made the first professor of Greek at the new Queen's College, Galway, in Ireland at the age of 23, Hearn received an appointment five years later in 1854 as professor of modern history, logic and political economy, as well as temporary professor of classics at the The New University of Melbourne, Australia In a country otherwise devoid of economists, Hearn had little incentive to pursue economic studies. He became dean of the law faculty and chancellor of the university. Most of his scholarship was devoted to such diverse subjects as the condition of Ireland, the government of England, the theory of legal rights and duties, and a study of the Aryan and Household, on all of which he published books issued in London as well as Melbourne.

28:57Hearn also served as a member of the Legislative Council of the State of Victoria and as leader of the Victoria House. Hearn wrote only one book in economics from his area in Australia, but it proved highly influential in England. Plutology, or The Theory of the Efforts to Satisfy Human Wants, was published in Melbourne in 1863 and reprinted in London the following year. Plutology was a term that Hearn adopted from the French laissez-faire economist J.G. Courssel-Sonnoyle 1813 to 1892, in his Treatise on the Theory and Practice of Political Economy, 1858, to mean a pure science of economics, a scientific analysis of human action.

29:51There are, indeed, hints in Hearn that he sought a broad science of human action going beyond even the limits of catallactics or exchange. Herm's Plutology was patterned after Bastiat. Like Bastiat, Herm provided a Harmony Lara, demonstrating the unfailing rule that the pursuit of self-interest produces a flow of services on the market in the order of their social importance. Like Bastiat, Herm began with a chapter on human wants, the satisfaction of which is central to the economic system. Human wants, Hearn pointed out, are hierarchically ordered, with the most intense wants satisfied first, and with the value of each want diminishing as the supply of goods to fulfill that want increases.

30:45In short, Hearn came very close to a full-fledged theory of diminishing marginal utility. Since each party to every exchange gains from the transaction, this means that each person Herne gains more than he gives up, so that there is an inequality of value and a mutual gain in every exchange. The value of every good, showed Herne, is determined by the interaction of its utility with its degree of scarcity. Demand and supply thereby interact to determine price, and competition will tend to bring In all these doctrines, Hearn anticipated the imminent advent of the Austrian School of Economics, as well as echoing and building upon the best utility-scarcity-harmony-mutual-benefit analyses of common-sense economics.

31:39In all these doctrines, Hearn anticipated the imminent advent of the Austrian School of Economics, as well as echoing and building upon the best utility-scarcity-harmony-mutual-benefit analyses of continental economics. Also anticipating the Austrian School and building upon Turgot and various 19th century French and British writers, including John Ray, was Hearn's analysis of entrepreneurship. The entrepreneur contracts with labor and capital, that is, lenders, at a fixed price, attains full title to the eventual output, and then bears the profit or loss incurred by eventual sale to the particular entrepreneur at the next stage of production.

32:30Hearn also showed that capital accumulation increases the amount of capital relative to the supply of labor, and therefore raises the productivity of labor, as well as standards of living in the economy. He saw that capital could accumulate, and therefore living standards could increase in the economy without limit. In addition, Hearn generalized the law of diminishing returns, expanding it from land to all factors of production, A champion of free trade, William Hearn called for the removal of Catholic disabilities in Britain, the freeing of the Irish wool trade, the abolition of usury laws and entail, and the removal of all restrictions on transactions in land.

33:26Opposing government intervention, Hearn declared that government's only function is to preserve order and enforce contracts, and to leave all other matters to individual interest. Hearn's Plutology was used as an economics text in Australia for six decades, until 1924. Indeed, it was virtually the only work on economics published in Australia until the 1920s. While the book went unnoticed upon its publication in London in 1864, it soon drew high praise from several economists, especially Jevons, who hailed it as the best and most advanced work on economics to date. Jevons featured Plutology prominently in his path-breaking Theory of Political Economy 1871.

34:19Apart from these citations, however, Hearn's work gave rise to only one plutological disciple. The attorney and mine owner, Wordsworth Donisthorpe, born 1847, published his Principles of Plutology, London, Williams and Norgate, 1876, which apparently was mentioned by no economic work from that day until the publication of the New Pallgrave in 1987, either in the literature of the time or in any of the histories or surveys of economic thought, while scarcely an earth-shattering work, Donis Thorpe's 206-page book certainly did not deserve to sink without trace.

35:05Most of Principles of Plutology was devoted to ground-clearing methodology, discussion of Definitions and Attacks on Plutology's Great Methodological Rival, Political Economy. But yet, there was much valuable substantive discussion in Donis Thorpe, a lucid writer who admirably wanted to forge a scientific economics that would clearly distinguish between analysis and ethical or political advocacy. Defining Plutology as the purely scientific investigation of the uniformity or relations between values, Donis Thorpe went on to point out that values are all relative, and that these values, including the value of money, vary continually and unpredictably, in contrast to units such as weights which remain fixed and unvarying.

36:02There are different intensities of wants and different degrees of utility, and the interaction of these utilities and relative scarcities determine values. In a proto-Austrian manner, Donisthorpe also distinguished between directly useful and indirectly useful goods, and showed how the latter had varying degrees of remoteness from the pleasure-giving stage of goods. In short, Donis Thorpe engaged in a sophisticated analysis of the time structure of production. He also had a pioneering analysis of the influence of substitutes and complements, co-elements upon values. While Donis Thorpe's discussion of demand curves, that is, schedules, supply and price, was interesting but hopelessly confused.

36:56For example, he denied that an increased desire of consumers for a product would raise their demand for the product. He did present a remarkably clear foreshadowing of Philip Wicksteed's insight of four decades later that withholding the stock of a product by suppliers really amounts to the supplier's reservation demand for that product. S. Donisthorpe In the first place, sellers and buyers are not two classes, but one class. To refuse a certain price for an article is to give that price for it. A proprietor who refuses to sell a horse for fifty guineas virtually gives fifty guineas for the horse, in the hope of getting more for him another day, or else because he obtains Perhaps from disappointment at the reception of his book, Wordsworth Donisthorpe, like Hearn before him, abandoned economic theory and plutology from then on, and spent the for the next two decades battling on behalf of libertarianism and individualism in law and political philosophy.