-27- III. THE TRANSFORMATION OF THE BRITISH ECONOMY The economy that J.S. Mill saw during his later years was not the same economy that David Ricardo had seen sixty years earlier. During the lifetime of classical' political economy Great Britain industrialized: the British economy was transformed. From what to what? The transformation was not from "feudalism" to "capitalism": feudalism had disappeared as a form of economic organization centuries before 1800. The transformation was not from a "static" economy to a "developed" one capable of "rapid self-sustaining growth": rapi.d self-sustaining growth had begun decades before Ricardo set pen to paper. The transformation was of a smaller kind: it was from one particular type of capitalist market economy to another. The capitalist market economy that existed in 1810 was agrarian; the capitalist market economy that existed in 1860 was industrial. As a result, the economy of 1860 operated very differently from the economy of 1810. These differences were largely concentrated in areas that fall under two particular concepts of political economy: "wages" and "capital." If classical political economy were to fulfill its claims to be a science and remain adequate to its selfappointed task of analyzing the British economy, its conceptions of wages and capital would have had to have been substantially modified between the beginning and the end of the classical school. This is not to say that because political economy was a "science" economic theory as of 1815 can reasonably be expected to rigorously reflect economic reality as of IB15. Considerable time is required to collect sufficient data and intuition-_the prerequisites for analysis. Furthermore, people largely live, ·in their ininds at least, in the World in Whichcthey were raised. It takes a long time to learn that major changes have taken place in the world and to mOdify one's habitual ways of thinking in response. On the other hand, the classical economists tried very hard to proceed as scientists. Scientists have an empirical bent; there are strong reasons to eXpect them to seek truth in nature rather than in tradition. These two currents work in opposing directions. I feel I can reasonably expect David Ricardo, wdting around 1820, to take into aCCOunt the structure of the British economy during the years 1790 to 1810. And J.S. Mill, revising his Principles for the last time around 1870, along with his successors, adopting Mill's framework from 1870 to 1890, can be reaSonably expected to take into accOunt the structure of the British economy between 1860 and 1875. The transformation from an agrarian capitalist to an industrial capitalist market economy took place substantially between these two periods, between 1810 and 1860. In 1810, the British economy Was far less centered around agricUlture than it .had"been in the Middle Ages. In 1810 only four-- rather than eight--out of every ten people Were still on the land. But agriculture still dominated economic life. The agricultural sector accOunted for slightly under two-thirds the aggregate value of commodity production. Leaving aside the "tertiary" sectors-_ government, profesSions, domestic and personal services-_the agriCultural sector was as large as jll the rest, as large as manufac- -29- turing, mining, building, housing, transport, and trade put together.l The agricultural sector was also by far the most technically advanced and economically dynamic. The hundred and fifty years before 1810 had seen England pass through an "agricultural revolu- tion." Agricultural productivity had been vastly improved through the adoption throughout England of efficient techniques that had before been limited to small areas. The organization of agriculture had become more economically rational as it became more capitalist. As a result, the agricultural sector had significantly greater out- put per worker than the rest of the economy, perhaps half again as much.2 English agric'ulture was so successful that one of the major objectives of the physiocrats was to turn Franc.e' s agriculture into a replica of England's.3 Since the agricultural sector was so large, a large part of the output of other sectors went to supply it with inputs. . 1 .. f h 4 Agrlcu ture was the malnsprlng 0 t e economy. The agricultural sector that dominated the economy was a market, mercantile, capitalist sector. Impediments to free trade and to market exchange had been gradually removed during the three centuries prior to 1800. The vast majority of rent payments had been monetized by the age of the Tudors. And the level of these rents had certainly been shifted from "customary" to "market" by the time of the transformation in legal property relations that accom- panied the twin overthrows of the stuarts.5 Royal authorities had suppressed public violence, courts had overturned guild privileges, the Reformation had increased the work year, and Parliament had en- closed common land. Well before 1800, the great majority of British ".-----~------------------------------------------------------------------------------------------------------------- -30- economic life had become capitalist.? Mercantile,capitalist. The characteristic mode of manufacturing production was most definitely not industrial. It was pettycommodi ty production, 'artisan production, home production through the putting-out system. This organization of manufactures required considerable amounts of mercantile capital: a merchant-entrepreneur would have intermediate products over which he had little control spread out over the entire landscape. But the capital required was circulating, not fixed. It could be quickly turned to some other use should market conditions so suggest.7 There was, however, one major. aspect in which the British economy of 1810 diverged from the theoretical ideal of the decentralized self-regulating market economy. Britain lacked a largescale nationwide labor market. True, most labor was wage labor. But the wage offered did not adjust to make supply equal to demand. And labor was not mobile. Most Britons died in the parish in which they were born--otherwise the Elizabethan Poor Law would have broken down long before it did.S There was neither enough flexibility in the wage nor enough mobility of labor for there to be, in any meaningful sense, a market for labor similar to the market for land or the market for mercantile capital. This broad outline of the British economy at the beginning of the nineteenth century has necessary implications for any adequate economic theory built to analyze it. First, economic theory was possible: the economy was a largely autonomous area of social life. Second, the analytical construct of the average level of wages was -31- not an economic variable. Since wages were, on average, set by cus- tomary and traditional forces and thus changed much more slowly than most economic variables, any adequate economic theory had to take the.average level of wages as determined before the levels of any economic variables. Third, Western Europe had not yet clearly escaped from the plenty-expansion-dearth-contraction cycle of pop- ulation and subsistence that it had regularly undergone since the days of the Roman Empire. The suspension of the Malthusian popula- tion principle due to technical progress was not yet apparent. Fourth and last, capital goods were not yet distinct from consumer goods. In fact, they were consumer goods; reproducible capital was largely the same as a generic "stock" of the necessities of life.9 Consider now the state of the British economy in 1860. The balance between the commodity-producing sectors had shifted. While the money value of agricultural production had barely increased at all, the value of manufacturing production had quadru- pled. Manufactures now accounted for more than two-thirds of the value of commodity production.10 Technical progress had become extremely rapid. The economy generat~d innovations at such a rate that actual technique in use was far behind the technologically efficient. Workers had largely been brought under factory discipline; with less freedom to choose their own pace, they were now forced to work harder. Output per worker in manufacturing now rivaled output per worker in agricul- 11 ture. The objects that were called capital had also undergone a major change. First of all, there was far more capital: the ratio -32- of reproducible capital to output was twice as large in 1860 as it had been at the beginning of the century. Investment in railroads alone had proceeded at well over 100,000,000 pounds sterling per decade from 1830 on.12 A far smaller fraction of capital was "cir- culating," was inventory, advances, and intermediate products. The typical element of capital had shifted from being a stock of food to feed the laborer until the harvest arrived to being a durable machine that multiplied the laborer's productivity.13 One sign of the change that this shift made in the operation of the economy was the beginning of the phenomenon of the industrial business cycle in the late 1820's.14 And labor had become much more like a commodity.15 Subs tan- tial numbers of Irish poured across the Irish Sea in search of work.16 While the agricultural labor force stayed constant through- out the first half of the nineteenth century, the total British labor force more than doubled. Clearly those working in 1860 were not working in the "traditional" occupations that their parents and grandparents had worked in before them. The entire increase in the labor force was absorbed in new sectors, where wages could not be set by tradition because there.was no traditional level of wages for factory workers--so they were left to "demand and supply. This triggered a reaction: those workers who could, mostly the highly skilled, formed unions. By 1860, wages were determined in the maan "" f " " d d" b ". 17 Y an lntrlcate weave 0 custom, competltlon, an lrect argalnlng. The shift that took place from 1810 to 1860 was not a funda- mental shift in the direction of evolution of the British economy. Such a shift had occured, but it had occured in the 1760's, 1770's, b -33- and 1780's. What 1810 to 1860 did see was the working out of the industrial revolution, the rise to dominance of those forces of industrial capitalism that had begun to show themselves in the late eighteenth century. The rapidly expanding "industrial" sector of the British economy grew from, in 1810, a minor appendage to an overwhelmingly agrarian capitalist economy to, in 1860, the dominating feature of an industrial capitalist economy. The nature of the wage changed. The nature of capital changed. The behavior of the individual actions and relations that are summed to create the economists' analytical constructs changed. Therefore if classical political economy were to continue to approximately reflect the actual structure of the British economy, the classical economists would have had to change their conceptions of wages and of capital. For Ricardo's theory was a good analysis of the structure of the British economy in 1810. The British economy was dominated by capitalist agriculture; therefore any adeq~ate economic theory had to take the peculiar institutional structure of the British countryside, with its landlords, laborers, and farmers, as the typical set of economic agents. Given, furthermore, that wages were largely set by custom and capital was largely circulating, something very close to Ricardo's theory naturally falls out of the structure of the British economy as of 1810. By that token, the Ricardian framework was a useful tool for the analysis of the British economy in 1810. And, owing to the transformations in what lay behind the aggregates of average wages and of capital, it was 'not a useful tool for the analysis of the British economy of -34- 1860. A classical economic theory that sought to be adequate to the analysis of the economy of post mid-century Britain would have had to include an economic theory of the determination of wages. The determinants of the average level of wages were complex and confused, but it was certain that wages were no longer primarily determined by tradition. Therefore any analysis that excluded the short run determination of wages from the sphere of economic action would go badly awry. A shift to a theory that based the determination of wages on the institutional structure of the economy was called for. The collection of objects called "capital" in 1860 bore little relation to the collection that had the same name in 1810. Capital could no longer be shifted quickly from sector to sector. Capital was no longer merely a shorthand word for wages advanced. Capital had become, to a large degree, the embodiment of technology. And the durability of capital made the state of capitalists' expectations crucial to an understanding of the economy. Ricardo's concep.tion of capital as primarily circulating could no longer aid in analysis. A shift to a theory that recognized the special problems raised by industrial capital for economic analysis was called for.