How Sailors Broke Economics

This is my second post in the ‘Economics is Broken’ series explaining why the institution of Economics has failed and should be abolished.

History has a habit of interrupting stories. As I write, news is arriving of the terrible conditions endured by sailors on the invincible warships that the USA has sent to impose its will on lands ten thousand miles from any of its citizens. The history of modern economics begins here.

In 1825 a British Navy Lieutenant-turned-journalist called Thomas Hodgskin earned notoriety in upper-class circles by denouncing the conditions of the seamen under the command of his contemporaries.

He then published a tract called Labour Defended against the claims of Capital.^[1] It’s well worth a read and starts with the following declaration:

In all the debates on the law passed during the late session of Parliament, on account of the combinations of workmen, much stress is laid on the necessity of protecting capital. What capital performs is therefore a question of considerable importance, which the author was, on this account, induced to examine. As a result of this examination, it is his opinion that all the benefits attributed to capital arise from co-existing and skilled labour. He feels himself, on this account, called on to deny that capital has any just claim to the large share of the national produce now bestowed on it. This large share he has endeavoured to show is the cause of the poverty of the labourer; and he ventures to assert that the condition of the labourer can never be permanently improved till he can refute the theory, and is determined to oppose the practice of giving nearly everything to capital.

Hodgskin applied the theory of the economists of his day, in particular the highly-respected David Ricardo, to the contest between Labour and Capital:

“The produce of the earth,” says Mr Ricardo — “All that is derived from its surface by the united application of labour, machinery and capital is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.” (Principles of Political Economy, Preface, p. 1, 2nd Ed.)

“It is self-evident,” says Mr M’Culloch, “that only three classes, the labourers, the possessors of capital, and the proprietors of land, are ever directly concerned in the production of commodities. It is to them, therefore, that all which is derived from the surface of the earth, or from its bowels, by the united application of immediate labour, and of capital, or accumulated labour, must primarily belong. The other classes of society have no revenue except what they derive either voluntarily or by compulsion from these three classes.”

Of this, he goes on to argue,

The labourer’s share of the produce of a country, according to this theory, is the “necessaries and conveniences required for the support of the labourer and his family; or that quantity which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.” Whatever may be the truth of the theory in other respects, there is no doubt of its correctness in this particular. The labourers do only receive, and ever have only received, as much as will subsist them, the landlords receive the surplus produce of the more fertile soils, and all the rest of the whole produce of labour in this and in every country goes to the capitalist under the name of profit for the use of his capital.

After a vigorous dissection of the arguments of the day against the rights of the labourers, including in particular the right to organize, he concludes with the following:

In the system of nature, mouths are united with hands and with intelligence; they and not capital are the agents of production; and, according other rule, however it may have been thwarted by the pretended wisdom of law makers, wherever there is a man there also are the means of creating or producing him subsistence. If also, as I say, circulating capital is only co-existing labour, and fixed capital only skill labour, it must be plain that all those numerous advantages, those benefits to civilisation, those vast improvements in the condition of the human race, which have been in general attributed to capital, are caused in fact by labour, and by knowledge and skill informing and directing labour. Should it be said, then, as perhaps it may, that unless there be profit, and unless there be interest, there will be no motives for accumulation and improvement, I answer that this is a false view, and arises from attributing to capital and saving those effects which result from labour; and that the best means of securing the progressive improvement, both of individuals and of nations, is to do justice, and allow labour to possess and enjoy the whole of its produce. [My emphasis – AF]

The deduction was perhaps the earliest clear economic statement of the political case against Capital. Its special brilliance was that it simply extended an argument that Ricardo, the most highly-respected political economist of the day, had first put forward in his analysis of rent, the money paid to the landowner for the user of the land. This was that since land was neither a source of new value, nor a source of the ‘circulating capital’ — goods consumed in production— it must be a deduction from profits. Hodgskin merely took this argument one step further; since labour was the source of all value, capital itself added nothing to the value of the product but merely transferred it from the goods consumed in one branch of production, to the goods produced in another. The only source of new value was labour; therefore, profit was a deduction from the produce of the labourer.

This argument was logically impeccable, yet was dismissed in fear and anger by his contemporaries, for the simple reason that it represented a mortal threat to the rights of the capitalists. According to Dobb^[2] James Mill, a part-time though famous economist, responded that whether or not these ideas were true, if they spread, “they would be subversive of civilised society.” Therein lies the whole explanation of what Economics was created to do: not to extend knowledge, but to ensure that it could not lead to subversion.

The collection of ideas, theories, institutions and practices that I call ‘Economics’ first saw light as a concerted sophistical effort to defend ‘civilised society’ against the logically impeccable conclusions that Hodgskin drew from the theories of the most respected economist of his day. It was not designed to understand the world we live in, but to manage it without subverting it.

In consequence, we can only grasp why Economics has failed by studying what it was trying to do: namely, to escape from a reality which it mistakenly assumed it could control. Its purpose was to reconcile the contradictory goals of managing and justifying an inherently unjust and self-destructive social system. This project is gradually coming to an ignominious end; yet its very failure exposes the paradox which this book seeks to address: at no point in history has the need been greater for the economic understanding that Economics was designed to suppress.

The solution I propose, as outlined in my first post on Economics, is that this branch of knowledge should become a general requirement of being a citizen. Just as Victorian society, for all its ills, was compelled to establish literacy and numeracy as a duty, and by laying the foundations of universal education to grant it however grudgingly as a right, so the societies of the future should provide to, and require of all children, a basic understanding of how the producers, sellers and buyers of commodities affect the world they will grow up in, and the choices genuinely available to them, should they freely choose for that world to be otherwise.

The first barrier to such a change is the very idea, assiduously cultivated by Economics, that the complexity of their task places it beyond the grasp of ordinary mortals. In fact, once we realise that Economics is not a theory but a moral philosophy, it loses its mystery. And when we grasp how this philosophy mutated into a dogma, we can recognise its obscure mathematics and technical jargon for what they are: rhetorical shields against the ridicule its follies deserve.

For this reason, the first task for any reader who finds economic theory intimidating is not to let it scare you. It can be grasped with zero mathematics and a minimum of jargon, and with no prior knowledge of the subject. It is not logically simple, so the reader may have to work to follow its arguments, but it does not call for superhuman abilities. That is the reason for this project, whose purpose is to equip non-specialists to understand how economists really think, and why they get so many things wrong. If my fellow economists recognise themselves in this mirror so much the better, but it is neither offered for their instruction nor submitted for their approval.

To this end, we have to study what economists do by asking what made them do it. How did they respond to the circumstances they found themselves in? These include the object of their enquiry which was, basically, capitalism, but also, crucially, the institutionalised systems that filtered and ultimately decided how to make the results acceptable to the policymakers and their paymasters.

The method of enquiry I propose is therefore historical, which is to say, it studies what economists think by asking how their ideas evolved. It is anchored in three periods, each shaped by a ‘systemic economic crisis’, meaning a set of economic events that confronted governments with difficulties on a scale that threatened their existence. These were the ‘First Great Depression’ of 1870-1890, the Depression of 1929-1942, and the prolonged stagnation of the nations of the global North which started in 1974 and has yet to be resolved. Each such systemic crisis gave rise to a polarised political response. One body of thinkers sought to replace the system that produced it with something substantially different; the other, to reconstitute it in a new form.

Economics, these posts will show, evolved as a series of attempts to rationalise the second option at the expense of the first.

It failed because of these aims. Their desire to rationalise the intrinsically irrational led the participants to construct a watertight alternative to the adversary who first put Hodgskin’s conclusions on a rigorous scientific foundation – Karl Marx. The result is dissected next and described using the name which attracted the special ire of John Maynard Keynes: ‘Laissez-faire’ economics. I will call it Free-Market economics, which means the same thing.
My next posts will, I hope, clarify all these points. To Thomas Hodgskin, defender of workers and sailors, belongs the first word.

^[1] https://www.marxists.org/reference/subject/economics/hodgskin/labour-defended.htm

^[2] Dobb, Maurice. 1973, Theories of value and distribution since Adam Smith, Cambridge: CUP.