This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Epoch of the dismal science. § 2. Communism and value theory. § 3. The single-tax doctrine. § 4. Optimistic theories of wages. § 5. An organic theory of value. § 6. Labor and its environment. § 7. Aspects of wealth. § 8. Welfare. § 9. The paradox of value in practice. § 10. Conflict of individual and general interests. § 11. Business economy and social economy.
§ 1. Epoch of the dismal science. A preliminary word. The foregoing survey of the dynamic forces and changes in economic society (Part VI), incomplete as it is, may yet serve in some measure to broaden and to extend our understanding of the study that preceded (Parts I to V). This chapter concluding the outline of economic principles will give: first (sections 1-4), a suggestion of some of the far-reaching conclusions which economic students have in the past drawn from their theories of value in respect to the trend of popular welfare; secondly (sections 5-6), a general summary of the positive theory of value that has been developed in its details throughout this volume; and thirdly (sections 7-11), a brief outline of the relations between wealth and welfare, value and utility, individual advantage and the general good.
The value-theory one holds is sure to affect one's view of economic progress and one's attitude toward projects of social reform. The theories from the middle of the eighteenth to the middle of the nineteenth century, however varied they were in other respects, nearly all gave a gloomy view of the condition of the masses. Such were the theories of the physiocratic school in France, consisting of a small group of highly educated and aristocratic men of liberal sympathies in the generation preceding the French Revolution of 1789; of the so-called "orthodox" or "classical" economists in England composed of the writers from about 1800 to 1850 that were in sympathy either with the landholding or with the commercial classes; and of the socialistic or laboring-class theorists, from 1789 to the present. It was the prevalence of such a view which caused Carlyle to characterize political economy by the term still sometimes heard, "the dismal science."
However greatly these various groups of thinkers differed in other respects, they united in the belief that the labor incomes of the masses must remain near the starvation point. Indeed, this was little more than a generalization of the observed conditions of the time. The population of Europe was increasing, the pressure for food was strong, and the cultivated area was not increasing proportionately. While all the forms of industry most common in cities were increasing, while the wealth of the cities and the rents of rural landlords were increasing, poverty was growing among the peasantry. Owing to exceptional conditions this was especially true in England during the Napoleonic wars, 1793-1815. (See Chapter 34, section 8.)
In this situation the thinkers of that period confused the truth of the limited powers of agricultural land with the false inference and prophecy of a necessarily decreasing relative food supply and decreasing wages. The economic theory of the "classical" economics centered around this fact and the false inference from it. The condition of the masses was believed to change rhythmically, rising from time to time, only to return, through the pressure of population, to its former level. Their pessimism was all due to their view of the food problem. They doubtless underrated the forces operating for volitional control. In another regard they were too optimistic, for they had no thought that timber, mineral, and other natural stores might be exhausted, with the result of decreasing prosperity. The things made from these materials were thought to be the "product of labor," and capable of unlimited increase. It is just these materials whose increasing scarcity is one of the greatest economic problems that society has now to face. (See Chapter 35.)
§2. Communism and value theory. The "orthodox" economists gave currency to two erroneous doctrines: (a) that labor is the sole source of value; and (b) that the laboring classes must forever be reduced to a bare subsistence. They were quite heedless of the use that would be made of these doctrines in political discussion to attack the existing order of society. They did, it is true, modify and qualify both these doctrines, sacrificing thus the consistency of their reasoning, while gaining in common sense and in harmony with the facts. The communists, however, accepted these doctrines in their most unqualified form, and drew from false premises the false conclusion most natural for the human mind, that the existing order was fundamentally unjust and hopeless for the masses. For if wages were always to be forced to a bare minimum of subsistence, it followed that the other shares (incomes of landlords and of other owners) must absorb all the benefits of improved machinery, better methods, and general industrial progress.
The communistic theory of value is akin to the "classical" theory in holding that capitalists absorb all the benefits of progress. But the communists refused to recognize that any useful and necessary service in social production is performed by the owners of wealth, or by the savers and lenders of capital, or by the employers of labor. They did not even attempt to distinguish the part in the production of value due to manual labor from the part due to brains, to science, to art, to supervision, or that part in turn from the part due to the saving, conserving, and provision of the agents of production. The whole elaborate industrial environment and its skilful management that made possible modern industry they took for granted as at the laborer's command and credited to him the whole value of the product. All profits made by employers were called robbery, and capital was looked upon merely as the weapon by which the act was committed. They accepted the conclusion of "orthodox" economic theory and magnified it, declaring that under a competitive condition of society the laboring man, tho he produces everything, must be forever ground down in hopeless misery. This they called "the iron law of wages." They held, therefore, that the only hope of the laboring masses was to do away with competitive society and to substitute for it the governmental control of all industry.1
§ 3. The single-tax doctrine. The single-tax doctrine of Henry George was likewise built upon a value theory. Tho George eloquently denied the law of diminishing returns (including the principle of proportionality applied to land uses), he accepted the conclusions that the classical economists drew from it, that ground rent must be an ever-increasing share of the national income. He believed that the landholders get all the gains that come to society as a result of science, invention, and machinery. Hence his belief expressed in the title of his work, "Progress and Poverty," that, with private property in land, the outlook for the laboring classes is hopeless. In George's opinion neither wage-earners nor such capitalists as are not landholders have any share in the benefits of industrial progress. He saw no problem on monopoly anywhere except in connection with land ownership. The evil, as George saw it, called for a radical measure of reform, namely, the taking of all the rent of land (a single tax), for public purposes as a common instead of an individual income. This, he believed, would be enough to replace all other forms of taxation.
1 The communist theory of that period was originated or elaborated by such men as Karl Marx, Friederich Engels, and Ferdinand Lassalle, labor leaders and political agitators, who found a ready weapon in the bungling economic analysis of the time. The claim of a scientific basis for communism (now usually called social-democracy or socialism) has continued to be made by their followers, most of whom still boast that it is nothing but the (now admittedly defective) orthodox theory of value carried to its logical conclusion.