14.2 The Philosophical Response to Industrialization

Adam Smith (1723 - 1790): The Economics of Laissez-faire 

        The thinking of the Enlightenment, with its emphasis on rational understanding of natural laws, was first effectively applied to economics by the Scottish philosopher Adam Smith.  Among the Enlightened thinkers were several French philosophes who felt that the mercantilist system, with its emphasis on governmental regulation of a nation's commerce, actually hindered rather than promoted economic growth.  These physiocrats, as they were called, advocated a "laissez-faire" (meaning government should keep its "hands off") approach to economics.  Under a system of unrestricted free enterprise, the natural laws of economics would guarantee continued economic growth and prosperity through which both humanity and nations would benefit.  Adam Smith would give free enterprise its philosophical foundation.

            In 1776 Smith published The Wealth of Nations, a treatise on economic theory that has become one of the most influential books of Western Civilization.  In it are contained the two great theories of capitalist economic thinking: the Law of Supply and Demand (actually, this is two laws: that of supply and that of demand) and the Law of Competition.  Both form the philosophical basis upon which the modern capitalist free enterprise system operates.

     The Laws of Supply and Demand

            The prices charged and profits made through the provision of all goods and services are, Smith maintained, determined by the relationship of supply to demand.  If a commodity is in great demand, but it is in limited or low supply, its price will be high.  Conversely, if a commodity is in great supply, but the demand for it is low, its price will be low.  Manufacturers and distributors will, therefore, provide the goods and services that are in the greatest demand and will charge high prices (and make good profits) for as long as there is high demand for their products.  When the production of the commodity reaches the point where it is in great supply and the demand for that product diminishes, the producer will be compelled to sell the item at a lower price. 

     The Law of Competition

            The laws of supply and demand influence the production of goods and services and regulate their prices.  The Law of Competition enables economic growth and prosperity.  Manufacturers and distributors will, of course, face other manufacturers and distributors competing for the same market.  In order to get people to buy a product, the manufacturer or distributor must lower the price or improve the quality of the product or both.  If too many manufacturers or distributors enter the same business, the price will decrease to the point where some will not be able to meet their costs and be forced out of business.  Smith saw this happening to those businesses that were poorly managed and inefficient in their production methods.  Businesses that understand market forces (the law of supply and demand), are efficient, keep current with changes in technology, and are well managed will survive and continue to make profits by providing for the consuming public what the public wants.  Competition, therefore, is a good thing as it assures business efficiency and guarantees production of the best goods – and through the law of supply and demand – at the best price.

            If governments allowed their economies to be free, Smith saw the laws of supply and demand and of competition leading to unparalleled economic growth and prosperity.  People would use their wealth to increase their wealth by investing in new businesses.  Competition would stimulate greater efficiency in production and availability of both needed and wanted commodities.  Nations would become more dependent upon each other for needed resources and products.  Free trade between nations would lessen international tensions and reduce the cause of war.  As a reflection of Enlightened thinking, Smith's theories of free enterprise promised a better world for all.  As for government? Smith saw its only significant role as providing protection against foreign invasion.

The Classical Economists

            Taking inspiration from Adam Smith and other Enlightened philosophers attempting to understand the rational basis of economics, there developed a school of thought called the "classical economists."  The classical economists saw the capitalist free enterprise system of "laissez-faire" as the result of natural laws at work.  Smith's laws of supply and demand and of competition seemed to promise unlimited production of the best quality goods at the best price by the most efficient means.  Yet something did not seem right.  The agricultural and industrial revolutions, while producing new sources of wealth and reflecting tremendous scientific and technological progress, did not seem to be working to the benefit of all.  The bourgeois middle class, being the owners of capital and business seemed to be benefiting greatly.  However, the new working class, working long hours under unsafe factory conditions and living in crowded and unhealthy urban slums, was poor and miserable.  How could this be?  As the classical economists continued to study the new economic conditions, they came to the conclusion that natural laws do not always produce the best conditions for all people.  Laissez-faire will benefit some but not all.  To their critics, the classical economists became known as "dismal scientists."  The two most famous dismal scientists were Thomas Malthus and David Ricardo.

The "Dismal Scientists:" Pessimism in Economic Forecasting

Thomas Malthus (1766 - 1834) - The Dilemma of Overpopulation

            Wages will be low when the supply of workers is great, i.e., when the working class population is high.  Conversely, wages will be high when labor is in short supply.  This "iron law" would work according the following pattern.  A period of high wages will attract workers to industry.  This will lead to large families as workers seek to take advantage of the good times by having more children. (A child could enter the work force as early as age five.)  The growth in working class population will, however, lead to an overabundance of labor and cause increased competition for existing jobs.  With the supply of labor being high, wages will decline as the factory owners can be confident that there will always be someone wanting work.  With wages declining, Ricardo maintained, working class parents will have more children in order to bring in more wages.  These additional wages are necessary to counter the loss of earnings and meet the growing expenses of food, clothing and housing.  The result is a never-ending downward cycle of growing population and declining wages dooming the working class to eternal poverty. 

            Thus, Ricardo is seen as a "dismal scientist" who saw the natural laws governing economics leading to a future of massive working class poverty and human degradation wherein one's value was determined by the cost of one's labor.  Capitalist businessmen tended to see the brighter side of the picture.  The human suffering and despair were the results of natural laws at work.  Therefore there was no purpose to modifying wage and working conditions nor was there need for government to interfere with or regulate conditions of doing business.

            Time and circumstance have proved the "dismal scientists" wrong in their predictions.  Malthus did not foresee 19th century improvements in agricultural methods and technology that would lead to greater output in food production.  Railroad and steamship transportation systems enabled foodstuffs from distant sources to reach large cities with relative speed and at increasingly affordable cost.  Population pressure was also relieved through increased emigration from the crowded European cities to lightly populated America.  Ricardo's premise seemed less threatening as the overall economy continued to expand and industrial wages, while remaining low, did not seem to be automatically spiraling even further downward.

Nonetheless, the working poor did not appreciate the idea that laissez-faire meant the freedom to be overworked, underpaid, malnourished, ill-housed, and often unemployed (Brinton et al. 202).  Was unrestricted laissez-faire liberalism the only direction for an expanding industrial society?  The classical economist purists reluctantly said yes.   Seeking a more humane response, their critics sought modifications of and alternatives to the free enterprise system.  One response would be socialism, which will be considered in another reading.  The other would be the development of political liberalism.

The Development of Political Liberalism

            The injustices and inequities produced by the unrestricted development of laissez-faire business practices caused increased humanitarian concern for the plight of the working poor.  Writers such as Charles Dickens called public attention to the alarming distress and degradation of the urban poor through novels on early 19th century city life.  The major philosophical question was: could laissez-faire be modified to the benefit of all without destroying the free enterprise system?  The philosophical answer took two forms: utilitarian and democratic.

Utilitarianism:  Jeremy Bentham (1748 - 1832)

            Thought by his contemporaries to be brilliant but eccentric, Jeremy Bentham was an English scholar, philosopher, and economist.  While a founder of the University College of London and "inventor" of words (for example, international, codify, and minimize), the scholarly Bentham immersed himself in projects intended to improve the quality of human life.  Concerned that degradation and misery should not be part of the human experience, Bentham developed a social theory called Utilitarianism.  Bentham and his philosophical followers were labeled “Radicals” by their critics.

           Voltaire, Rousseau, Adam Smith, Thomas Malthus, and David Ricardo were all contemporaries of Bentham; and in spite of the profound influence of the Enlightenment, Bentham rejected its thought.  In fact, he rejected all the philosophical, spiritual, and cultural justifications for human institutions and practices.  Natural laws, social contracts, religious doctrine, traditions – all were meaningless.  What Bentham saw as the sole philosophical foundation for human thought and action was utility.  Utility gave social institutions and practices their validity.  By utility Bentham meant that usefulness that provided the greatest good for the greatest number.  Laws, religious teachings, economic practices, and government policies all must be in the interest of the greatest number of people and at no time deprive the individual of what is his or her individual good.  Thus, unlike Rousseau's general will, wherein the good of the individual is subjugated to the will of the community, Bentham's utilitarianism links the good of the community to that of the individual. 

            The factory owner who exploited the energy, will, and spirit of his laborers by subjecting them to unsafe and unhealthy working conditions for extremely low wages because the natural laws of supply and demand or the "iron law" of wages justified so doing, was, Bentham and utilitarians would argue, in error.  Such practice was not useful and increased the "pain" of both the individual and society.  Government, Bentham maintained, had an obligation to act as a "passive policeman" to protect the many against abuse by the few.  The "few," in this case, were those who controlled the economic life of society.  Bentham wanted government to be "omnicompetent," that is, able to do whatever is necessary for the general welfare of the people.

            If government were to be "omnicompetent," it had to have a citizenry that was aware of what was useful and what was abusive.  Thus, Bentham argued that public education was necessary as the means of wakening social awareness.  Bentham did not himself put forward a scheme for public education but was confident it would come at some time in the future.

            Bentham's contributions to liberal thinking, therefore, were based on the utilitarian principle that the greatest good for the greatest number should be the foundation for all social thought and action.  In relation to this principle, government must undertake to educate its citizens and act on their behalf if their wellbeing is threatened.  Such ideas would be adopted by 19th century liberals who would seek ways to make them practical reality.  The most influential of those who advocated means whereby the general human condition might be improved was the English philosopher John Stuart Mill.

 (author's comment: Bentham's will required that his clothed embalmed body be on public display as an "auto-icon" at the University College London (UCL). In the display he was seated in a wooden cabinet, his actual head at the base between his feet, the head on the seated figure being wax.  Later, his actual head would be preserved in a secure location at the university. Today his seated body is still on display, now in a glass case, in the UCL Student Center. There he certainly continues to inspire intellectual aspiration.  My former students will remember our "Jeremy Bentham in a box doth slumber. It's the greatest good for the greatest number.")

John Stuart Mill: The Transformation from Utilitarianism to Democratic Liberalism

            John Stuart Mill (1806 - 1873) was a political economist who more than any philosopher would give effective voice to the need for reform.   Because his father had been a close friend of both Bentham and Ricardo, Mill from an early age had been familiar with the ideas underlying economic liberalism.