Authors: Michael Perelman
Workers began identifying themselves as an oppressed majority. They courageously expressed their dissatisfaction, even though the state would regularly call on the National Guard and the police to violently repress their protests.
The elites faced other signs of unrest. Poor farmers, protesting against business excesses, proved that they could organize, shocking the nation when their populist movement won a successful wave of congressional and gubernatorial elections in the South and Midwest in the late nineteenth century.
The Challenge to Economics
Economists also faced a serious theoretical challenge. In 1867, Karl Marx published a powerful case for workers’ rights,
Capital
. Marx followed traditional economics in using an analysis of value based on labor, but he argued that economists failed to see the logical consequences of their own theory. Workers are supposed to enjoy the fruits of their labor, but according to the rules of the market (and given that workers must work for the capitalists because the latter own the means of production necessary for life), the working class must work many more hours beyond the time required to produce its own consumption goods. This extra labor time, which produces profits, interest, and rent, represents exploitation.
Political events made the challenge that Marx posed more pressing. A dramatic uprising culminated in the Paris Commune in 1871, only four years after his book appeared. The Commune’s takeover of Paris shocked much of the world by demonstrating workers’ revolutionary potential. The British bourgeoisie credited Marx, a heretofore unknown German refugee residing in London, with an exaggerated influence on the uprising.
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Just a few months after the formation of
the commune, the British journalist John Rae, best known for his 1895
Life of Adam Smith
, warned the public:
It is a curious and not unmeaning circumstance that the country where Karl Marx is least known, is that in which he has for the last thirty years lived and worked. His word has gone into all the earth and evoked in some quarters echoes which governments will neither let live nor let die; but here, where it was pronounced, its sound has scarcely been heard.
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Rae later included this essay in a book,
Contemporary Socialism
, which made enough of an impression on the influential Cambridge economist Alfred Marshall that he included it in a relatively short list of books recommended for students in his newly reformed program in political economy.
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Rae was partially mistaken in his assessment of Marx’s reputation among economists. For example, in 1879, the Radical Republican Senator George from Massachusetts credited a meeting of the International Working Man’s Association led by Karl Marx with keeping England from joining the Confederate cause during the Civil War, thereby significantly contributing to the preservation of the Union:
The International Association of European and American Workingmen has this title to respect among others, that it has established among the nations of the world a relation, that it has recognized a kindred between man and man, growing out of the common bond of labor, greater, more powerful, more binding than any mere national attachment, or than any tie which connects the subject to the sovereign. America is the last nation that ought to be ungrateful for that sublime accomplishment.
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In addition, the bright young U.S. economists who formed the American Economics Association all studied in Germany. They were not only familiar with Marx but also quite respectful of him. For example, the twenty-three-year-old Arthur Hadley, who was about to launch an illustrious career, wrote:
I have lately been much interested in Karl Marx, though I am very far from agreeing with him. His book seems to me to have a higher scientific aim than almost any work on political economy in the last half century. Like Ricardo, he seeks natural laws, not artificial maxims. Much of what he advances is I think a legitimate development of Ricardo’s position. Holding some of the worst errors of the socialists, he is singularly free from others.
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Hadley was not unique in this respect. These economists could not help but be influenced by the repeated bankruptcies of the railroads, and they advocated measures to control the competitive forces that led to these. Marx’s economics was more relevant to this phenomenon than mainstream economics. Without acknowledging Marx, these economists advocated the creation of trusts, cartels, and monopolies, as well as government regulation to protect the railroads from the ravages of competition.
Ironically, these same economists were simultaneously defending and refining mainstream economics rather than the railroads. They published articles and textbooks to “prove” that an unimpeded market economy is both just and efficient. In effect, they produced one kind of economics for political and business leaders and other economists and another for workers, telling them why they should accept the market.
Thus, after many decades in public obscurity, considerable attention turned to attacking the theories of Karl Marx. The major economists of the day turned their back on the grievances of workers and set out to answer workers’ protests by “proving” that even if the system was not equitable, at least it was just.
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Consumers in Command
In the 1870s, three leading economists—William Stanley Jevons in Britain, Leon Walras in Switzerland, and Carl Menger in Austria—independently concocted a new kind of economics. In their theory,
“the new starting point became, not the socioeconomic relations between men as producers, but the psychological relation between men and finished goods.”
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In Jevons’s words, “The theory presumes to investigate the condition of a mind.”
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The economy is viewed as a collection of individual firms and consumers, each of which has an initial endowment of capital or wealth, which they use to make voluntary exchanges. Transactions occur only when both seller and buyer think they will be better off by completing the exchange. Jevons explained how this new theory reinforced the exclusion of work, workers, and working conditions: “Value always depends upon degree of utility and labour has no connection with the matter, except through utility.”
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As we shall see, even appending the slight concession to the role of labor earned Jevons strong rebukes.
Accordingly, business, subject to the harsh discipline of the market, has no choice but to submit to the dictates of the all-powerful consumers. Jevons explained this reasoning:
The capitalist, like the merchant, is but an intermediary, who gets goods ready for the consumer, and presents him in the price a complete bill of costs…. The supposed conflict of labour with capital is a delusion. The real conflict is between producers and consumers. The capitalist employer is a part of the producing system, and his conflict is naturally with the consumer who buys from him. But his function of acting as discounter of the labourer’s share gives rise to a further conflict with the labouring class. Thus it comes to pass that the capitalist is buffeted about and bears the whole brunt of the economic battle, while the consumer always smarts in the end.
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Within this theory, introspection—in this case, the consumer’s subjective evaluations of consumer goods—drives the economy rather than the actual process of production. Production continues, as it must in any economy, but within this framework it does so in the background. Given the technology of the firms and the preferences of the consumers, economists take for granted that the firms somehow combine their labor, capital, and raw materials (their factors of production)
to produce a mix of commodities that suits the tastes of their customers.
Contemporary economists have gone further, treating the imbalance between workers and employers in the workplace as a voluntary arrangement rather than an exercise of power. Two respected economists—one of whom was the instructor in my freshman class in economics—compared the relation between employer and employee to that between shopper and grocer:
The firm has … no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people…. He [an employer] can fire or sue, just as I can fire my grocer by stopping purchases from him or sue him for delivering faulty products…. To speak of managing, directing, or assigning workers to various tasks is a deceptive way of noting that the employer continually is involved in renegotiation of contracts on terms that must be acceptable to both parties. Telling an employee to type this letter rather than to file that document is like my telling a grocer to sell me this brand of tuna rather than that brand of bread.
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It did not occur to these economists that individual retail customers are unlikely to traumatize grocers merely by threatening to “fire” them.
Other economists take this sort of thinking to a still more absurd level by claiming that workers preferred what were obviously coercive measures. One proposed that “factory discipline [was] successful because it coerced more effort from workers than they would freely give…. The empirical evidence shows that discipline succeeded mainly by increasing work effort. Workers effectively hired capitalists to make them work harder.”
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Another economist, Clark Nardinelli, declared that children in the factories would voluntarily choose to have their employers beat them. In Nardinelli’s words: “Now if a firm in a competitive industry employed corporal punishment the supply price of child labor to that firm would increase. The child would receive compensations for the
disamenity of being beaten.”
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Similarly, Steven Cheung maintains that riverboat pullers who towed wooden boats along the shoreline in China before the revolution of 1949 agreed to hire monitors to whip them to restrict shirking.
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Using such far-fetched analyses, economists can present capitalism as a harmonious system devoid of conflict, since exchanges are actions in which both parties presumably improve their situation and can walk away if they do not. As economist Abba Lerner, observed, “An economic transaction is a solved political problem.”
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Exchanges are actions in which both parties presumably improve their situation, since each has the alternative to walk away.
Exploitation is nowhere to be found in this narrative, nor is labor. Potential workers may only be seen bargaining for a wage before work commences and collecting a wage after work has ceased, when they are ready to begin exercising their role as consumers. What happens in the workplace falls outside the boundaries of economics.
Unfortunately, economists still had a problem. They could not measure tastes or the pleasures of consumption. For this reason, economists fell back on that flat-sounding, unmeasurable term, utility. Economists conceive of utility as a quantitative measure by which consumers can compare the degree of satisfaction of eating an apple with the pleasure of hearing a symphony.
Economists do not consider their inability to measure utility to be a problem. Instead, they assume that consumers are rational beings, aware of the relative utilities of the many choices they face. Given the assumptions of the model, if producers do not offer consumers what they want at a price they can afford, their potential customers will purchase different goods that provide higher utility per dollar. In light of their need to sell their products, producers have no choice but to make every effort to supply what consumers want: good-quality merchandise at an affordable price. Any producer that violates this market imperative will be driven from the market.
In the imaginary world of economic theory, utility comes only by way of purchasing commodities on the market. In effect, work, workers, and working conditions have no place in this theory, with one
exception. The theory does allow that workers sacrifice leisure by being on the job. The lost utility of leisure—the disutility of work—is independent of the actual experience on the job, even though work may involve being maimed or killed.
Economists seldom realize that, like work, leisure can be productive and that fulfilling work might actually create more utility than leisure. None of this matters within the theory because economists simply assume that work is nothing more than the loss of leisure.
Economists’ Theoretical Barricades
At the time this new—neoclassical—theory was emerging, economics was not held in high regard. In 1870, Jevons opened the meeting of Section F (Economic Science and Statistics) of the British Association for the Advancement of Science with his somber presidential address, complaining:
There is no one who occupies a less enviable position than the Political Economist. Cultivating the frontier regions between certain knowledge and conjecture, his efforts and advice are scorned and rejected on all hands. If he arrives at a sure law of human nature, and points out the evils which arise from its neglect, he is fallen upon by the large classes of people who think their own common-sense sufficient; he is charged with being too abstract in his speculations; with overlooking the windings of the human heart; with undervaluing the affections. However humane his motives, he is lucky if he escape being set down on all sides as a heartless misanthrope.
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A worldwide economic crisis began in 1873, three years after Jevons’s talk, sinking the reputation of economics still deeper. Walter Bagehot, longtime editor of London’s
The Economist
, wrote:
Political Economy is not altogether satisfactory. It lies rather dead in the public mind. Not only does it not excite the same interest as formerly, but there is not exactly the same confidence in it. Younger men either do not
study it, or do not feel that it comes home to them, and that it matches with their most living ideas. New sciences have come up in the last few years with new modes of investigation, and they want to know what is the relation of economic science, as their fathers held it, to these new thoughts and these new instruments. They ask, often hardly knowing it, will this ‘science’ as it claims to be, harmonise with what we now know to be sciences, or bear to be tried as we now try.
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