I spent parts of my childhood in Argentina and took
several trips into the interior with my father to prospect for minerals.
My father was a confirmed free-market
enthusiast and never ceased praising the virtues of free enterprise.
On our travels through rural parts of the country,
as a matter of fact whenever we left the capital for the interior, we usually stayed at a chain of hotels that
was ubiquitous, clean and had good service and excellent food. The entire chain
was owned and operated directly by a department of the Argentine federal government,
I think it was called Dirección
General de Turismo. The few times we had to stay in private
hotels we found they were mostly pretty grungy outfits. We avoided private enterprise
hostelry like the plague whenever we could, in order to indulge in the comfort of
Pity I never realized the discrepancy between
my father’s theory and his practice until much later, when I studied economics.
Sometimes “Economics 101” is actually “Economics 000.”
Journal of Economics, volume 5, 1891, pp. 319-38.
Adolf Wagner was a prominent economist of the German Historical School, a
school of economic thought that flourished in Germany during the 19th
century. In 1891 he published a review of Alfred Marshall’s Principles of
was the top English economist of his time. He started out as a classical
economist in the mold of John Stuart Mill (1806-1873) but as he grew older he
adapted to the neoclassical "marginalist” fashion that still prevails
today and which the German Historical School polemicized against).
Thus this review reveals the main conflicts between the two schools of
thought. The German Historical School inspired the so-called “institutionalist”
current in American economics, which like its parent (G.H.S.) in Europe, was not very optimistic about capitalism. The best-known proponent of American
institutionalism, Thorstein Veblen, wrote witty satires of American capitalism
that can be read with profit even today.
In this review by Adolf Wagner we see three premonitions of Nazism --
which would take power in Germany
some four decades later: anti-Semitism, nationalism and a predilection for
state socialism. Thus the charge made by
Ludwig von Mises against the German Historical School of being chauvinists has
a certain ring of truth, although it cannot be applied to all members of the
School. Others like Max Weber were quite liberal. And the man generally
considered the founder of the German Historical School, Friedrich List (dates?)
was decidedly a progressive liberal in his day. List made no claim to
originality. After a stay in the USA
in the 1840s, he returned to his native Germany
singing the praises of the “AmericanSchool”, by which he
principally meant Carey, an unabashed proponent of industrial protectionism.
The current professor of economics at Cambridge Ju Jing Hao (or something like
that) shares the German Historical School’s critique of classical economics. He
and other empires of becoming powerful through protection of their home markets
and then becoming free-traders once it was to their advantage.
Wagner’s polemic against David Ricardo’s excessively neat logical
constructions jars loudly with Karl Marx’ unbounded admiration for Ricardo and
the Ricardian method. That is because Karl Marx shared many of the attitudes of
the German Historical School. Marx’ masterful (and seemingly accurate)
depiction in vol. 1 of Das Kapital of “primitive accumulation” in
England between the 13th and
17th centuries, when Parliament conducted a radical land reform through
the so-called enclosures in England that dispossessed the small holders and
made them landless laborers ripe for recruitment into the factories sprouting
up in the early 1800s,
I [i.e. Adolf
Wagner] protest against the belief that all German economists approve of the
patronizing and pretentious attitude towards English authors [i.e. Adam Smith,
David Ricardo, etc.] shown by some of the extreme German representatives of the
The most uncompromising representatives of the older
German historical school, Roscher and Knies, narrow opinions of the younger
historical school - Schmoller
are in so far members of the historical school that we point to the need of induction side by side with deduction; [This
criticism of Wagner’s against the English economistsI warranted, since
Ricardo tends to ignore many details in order to create a logical model. On the
other hand the German Historical School has certain methodological preferences
that cannot be justified by reference to induction vs. deduction. For example
the German Historical School’s aspiration to a comprehensive theory
encompassing the whole of society instead of just parts of it cannot be grounded
in terms of induction/ deduction. On the other hand the German Historical
School did do a good job of studying actual historical processes of economic
change and development, e.g. Schmoller’s study of the cloth industry in
Lorraine in the early modern age, which Schmoller pointedly entitled the “German"
cloth industry of Lorraine, fewer than 20 years after the German Empire had snatched traditionally German Alsace
and Lorraine from France in the Franco-Prussian War of 1870.]
We warn against
exclusive reasoning on the basis of economic self-interest. [This
has always been a grave defect of theEnglish school and remains so
today.It presumes a non-existent rationality of economic behavior,
Disproved by Daniel Kahnemann’s behavioral economics in the 1980s, and by John
Maynard Keynes in the 1930s with his General Theory of Employment, Money and
Interest, where he denounces the irrational herd behavior of the traders on the
London financial markets. ]
but we do not
want to do away with all abstract thought or abstract statements.
among economists of different nationalities, whose thought has developed in
entire independence of each other, is doubtless much more general than one
would expect if attention were paid only to the extremists.
I doubt Marshall’s proposition
that the main characteristic of modern industry is not free competition, but
free industry and enterprise.
Marshall does not mention the
fact that England
enjoyed the favorable strategic position resulting from its insular location.
discovery of America, the
situation of the BritishIslands
has been a
factor of prime importance in the economic
development of Great Britain,
because military expenditure absorbed a much smaller proportion of its strength
than in continental Europe. Germany by
contrast was sandwiched between bitter enemies like the Russians and the French.
[Here a German nationalist tone surfaces, That was typical of the right wing
of the German Historical School.]
geographical position and natural security England owes more than to
Englishmen’s hard work.
with the praise bestowed [by Marshall]
on the German Jew, whether in economic theory or in industry. In the
intellectual field, as in others, the Jew is much more apt to be a middleman
than an original producer; and in German industrial life his activity is
statement is not supported by historical fact. As a matter of fact Jews
published the first newspapers in Germany. On the other hand it would
be accurate to say that there were no Jews in heavy industry, e.g. Krupp steel,
which enjoyed pride of place in the hearts of German nationalists of the time. ]
German historical school is guilty of confused thinking upon this point also;
and its extreme opposition to the abstract political economy of authors like
Ricardo is in part a consequence of this confusion.
of the younger German school refuse to speak of "economic laws" at
all, that being unscientific. [On the contrary, it is unscientific to deny
the existence of something without proof. And it is generally quite difficult
to prove that things don’t exist.]
Discussion of the whole subject of socialism.
Mistake in Marshall: wrong
definition of the term "net income," -- a mistake which results
partly from the failure to distinguish sufficiently between the industry of
the people as a whole and the industry of any private individual. [Here
Wagner is quite right, this lack of theoretical moorings is a hallmark of English
thinking. Marx too deplored some English thinkers' “brutal obsession with the
issues", at the expense of any clear theoretical consistency. Neglect of
fundamental issues is characteristic of sloppy thinking that can turn a
respectable theory into a tool of
Marshall's third book begins at once the separate discussion of demand,
production, and similar topics of detail. I find here the same gaps
which exist in the writings of English economists and in those of the older authors
and the continent. To my mind, a series of fundamental discussions should be
inserted at this point. There should be a consideration of industry in
general, of the industry of a given community, of population and industry in
their mutually dependent relations, of the organization of industry, the State,
and the legal foundations which underlie industrial life, slavery, freedom of
person, the law of property. In Marshall's book, as in
that of most previous systematic authors, discussions of this sort are
either entirely omitted or else not put in the proper place.
the laborer is
regarded as a means for production, not production as a means for the laborer. [This
critique by Wagner puts him very close to socialist thought.]
Human life and
human development are, after all, the objects of all production. [Just
replace “human” with “Germanic” and we get close to Nazi ideology.]
Marshall says nothing of the organization of industry, or of law and the
legal foundations of society.
Too little attention is paid to the historic development of
industry, and to those developments, already
foreshadowed for the future, beyond the system of simple free exchange and
private industry, [Here Wagner seems actually almost Marxist in his
belief that socialism is a natural outgrowth of capitalism. Which likewise seems
to have no clear historical confirmation.]
this is the
point of view of the GermanState
socialist[i.e. Adolf Wagner.
See? I told you!],
who is used
to government intervention and disposed to favor it,
relation between the theory of marginal or final utility, as developed by
Jevons, Menger and Böhm-Bawerk
doctrine of cost of production
historical economists occasionally treat law of diminishing returns as an
between individual capital and property, and social capital and property ...
economic changes have brought about an absolute improvement in the condition of
the masses [About the same time the Marxist leaders of the German Social Democratic
party like Bernstein and later Kautsky were saying the same thing, that
capitalism had become more benign and that social welfare made life
There is one
shining point of light on the bleak African continent:
Botswana has pursued goals of good governance and preserves a democratic
tradition from the time before Europeans arrived. It has known no coups d’état,
hyperinflation, famine or civil war. Its growth rate has been steady throughout
the years, in dramatic contrast to declining per capita incomes in most other
black African countries.
So, have we found
the philosopher’s stone, Hayek’s oh-so-spontaneous social harmony by virtue of
impersonal market forces?
isn’t ENTIRELY off the track. There is a vague family resemblance between Botswana’s
successful political and economic policies and Hayek’s recommendations, in that
both are embedded in 19th-century liberal democratic traditions like rule of
But in Botswana there
is nothing to be seen of the drastic privatization that is often recommended
invoking (not always accurately) Hayek’s ghost.
Botswana stands out because it is the only Sub-Saharan African country that
has become steadily more prosperous for 35 years, while almost all other
Sub-Saharan countries have had negative long-term growth rates. It has had no
civil wars or coups d’état. Democratic elections are held regularly. There is
When Botswana became
independent in 1965 it was very poor and had almost no educated citizens. 84% of
the land is sandy desert. Its only business was cattle. It was much poorer and
far worse educated than Uganda
But it is now richer than either of them.
factors have been named as responsible for this exceptional stability and
colonialism did not destroy pre-existing tribal political structures. The
British basically ignored their colony of Botswana, since it had no apparent
mineral wealth and was not attractive for European settlers. It served principally
as a buffer state to prevent expansion of German colonialism and Boer
the native Tswana people have had political institutions that enabled free
discussion of public affairs by ordinary people, and even allowed criticism of
tribal chiefs. These institutions were integrated into the republic that became
independent in 1965. The chief of the most powerful tribe was elected
president, but he did not particularly favour his own tribe. He later greatly
reduced the power of the tribal chiefs and increased the power of government.
3. Law and
order have prevailed. This legal security afforded large segments of the population
security in their property rights, encouraging people to be productive and
4. After independence
mineral wealth was discovered in the form of diamonds, whose export provides a
steady income. In other African nations mineral wealth has been a factor of
discord, rivalry and corruption, but not here.
confirm Hayek’s thesis in The Road to Serfdom? In other words, was Botswana successful because the government
is small and does not meddle with the economy?
Botswana has indeed strong restraints on the executive and property rights
are secure. It has followed sound economic policies, has had low inflation,
avoided budget deficits and has protected private property (of both rich and
However it has
in no way followed a free-market ideology.
played a big role –- but not an overwhelming one -- in the country’s economic development.
The government is the sole owner of all mineral wealth. On independence the government
nationalized the only industry in the country –- a slaughterhouse, and has
since built two new government slaughterhouses. The government heavily
subsidises veterinary medicine, vaccines and agricultural extension services for
cattle ranchers. The government’s revenue from diamonds is prudently invested
in productive projects.
To put it in
polemical terms, Botswana
is a triumph of central planning.
Of course, Botswana has not known central planning in the striuct sense of the term, namely all production and
consumption of all goods and services are planned by a central board 5 years in
advance, down to the last tiddlywink. However free-market enthusiasts
deliberately smear all government intervention in the economy as “central