I have recently been reading the writings of the pre-marginalist anti-Ricardians, the school of thought referred to by Henry Dunning Macleod as the Third School of Political Economy, the leading lights of which included the Frenchman Frédéric Bastiat and the American Arthur Latham Perry. These economists resisted the siren song of the Labor Theory of Value, and promoted a subjectivist foundation for value. They were basically proponents of a catallactic approach to what was in those days still called “political economy.” Macleod pushed the name “Economics” for the science; Perry called the approach “The All-Sales School.” Macleod put everything neatly in place with a definition:
Economics is the science which treats of the laws which govern the relations of exchangeable quantities.
These are very interesting theorists, though not one of them was a complete success, missing marginal utility theory, if sometimes coming fairly close. Macleod was both the most ingenious and least reliable member of the school, with opinions ranging all over the map. But as the school’s chief historian, he is always interesting:
That was from The Principles of Economical Philosophy, a fascinating work. Below is a longer passage from a shorter treatment, On the Modern Science of Economics, showing his daring in criticizing classical economics, from Smith-Say to Mill:
You can see what Macleod is up to: reinterpreting the main concepts of economics in terms of trade. He was very careful of the transactional nature of his science, and tried not to introduce explanatory concepts that prescinded out the transactions upon which markets were based. Indeed, his discussion of the original meaning of production, distribution and consumption, above, is the clearest I’ve yet come across.
During the course of my readings, I’ve had occasion to provide forewords to new, ebook editions of Bastiat’s works, including the Economic Harmonies. If you haven’t read Bastiat, I heartily recommend these Laissez Faire Books editions.
I was pleased to see links to those editions in a recent Common Sense squib by Paul Jacob, on the Swiss minimum wage plebiscite. Mr. Jacob referred to a great passage in Bastiat, about the nature of interventions into exchanges:
Unlike in America, this minimum wage would have affected a huge hunk of the population. One out of ten Swiss workers earns less than the proposed minimum. In America, only about a single percentage of workers earns close to the national minimum.
This matters, as Frédéric Bastiat clearly explained, because price regulations can have two effects: a loss of production, or none at all — “either hurtful or superfluous.” No effect, when the price floor (as in a minimum wage) is set lower than the level most prices are already at (or, for which workers already work). But when the price floor gets set higher, goods go off the market — with too-high wage minimums, workers with low productivity cease to get hired.
Swiss voters could scarcely afford to risk the jobs of ten percent of the workforce.
Paul Jacob quotes the passage in his sidebar:
Legislation that limits or hampers exchanges is always either hurtful or superfluous.
Governments that persuade themselves that nothing good can be done but through their instrumentality, refuse to acknowledge this harmonic law.
Exchange develops itself naturally until it becomes more onerous than useful, and at that point it naturally stops.
The reason for that natural stopping point in trade is because, at root, trades are engaged in to serve both sides, each trader expecting a gain by each trade. When no further gain can be obtained by either one side or both, the series of trades stop.
Unfortunately for economic theory, it was Dunning Mcleod, not Bastiat, who reasserted Condillac’s principle that, in each exchange, both parties gain. Bastiat, like J.B. Say before him, had difficulty with the idea of reciprocal advantages, that people traded because their values differed enough to make a trade advantageous to both parties. Bastiat’s confused repudiation of the principle, like Say’s before him and Karl Marx’s after, is one of the great embarrassments of pure economic theory.
And yet he understood, like Say did — but unlike Marx — that on some practical level trade is productive.
Implied in Bastiat, also, is the idea of a schedule of demand, of a scale of values. But it is only implied in the above principle, not in his attempt to define value itself.
The great lacuna of the proto-marginalists.
But Bastiat did understand an important thing: the idea that a price floor (or, also, a price ceiling) either did no harm (if too low; or, conversely in the case of ceilings, too high) or was indeed harmful (when set above the rates at which some trades are made; or the reverse, in case of mandated price ceilings). There is no possible positive benefit to both sides of exchanges. Only to one side. In only some subset of exchanges.
This is important not only to explain why some minimum wage increases have little obvious effect, but also to help understand why some people advocate this form of regulation.
The possibility (even likelihood) of superfluity across most employees helps the advocate bury the actual effects of the wage floor. It allows them not to see.
It helps them forget the unemployed. Ignore them.
Yes, raising the minimum wage serves, on some level, as a cynical upping of voters’ packets of self-righteousness, while risking so little of their own possible wealth.
Mostly, voters pretend they’re doing no harm; they choose bad faith. But, at some level, a lack of interest in who is unemployed betrays a narrow vision of concern. It is not the poor workers they are trying to help. It is their own “moral standing” they are trying to raise. And the reason they do not gulp and double the minimum wage is that they would then have to confront what the Swiss confronted the other day: decreasing employment levels, harming lowest-skilled workers, and creating a business-negative environment.
In other words, current debate about the minimum wage is largely an exercise in political class luxury, sacrificing others while appearing to help those others. It’s quite a racket.
And one that members of the Third School of Political Economy, for all their faults, worked mightily to understand. Bastiat included.