Development Through Wage-Led Growth
Henry C.K. Liu

Part I:    Stagnant Worker Income Leads to Overcapacity
Part II:  Gold Keeps Rising as Other Commodities Fall
Part III: Labor Markets de-linked from the Gold Market
Part IV: Central Banks and Gold
Part V:  Central Banks and Gold Liquidity
Part VI: The London Gold Market
Part VII: Weak Political Response to Ineffective Financial Regulation

Part VIII: Gold and Fiat Currencies

Part IX: International Gold Agreements- Historical Political Context
Part X: The Rise and Decline of Institutional Economics  
Part XI: Critical Theory

This article appeared in AToL on April 22, 2011

Institutional Economics is a branch of Critical Theory which,
when focused on examination, analysis and critique of society and culture, draws concepts and data from across the entire range of social sciences and humanities. The term Critical Theory has two related but different meanings with separate epistemological roots. One meaning of critical theory originates in sociology and the other in literary criticism, but the term has been use constructively in association with new critical ways of looking at political ideology, economic theory and even theology. This has led to the literal use of “critical theory” as an umbrella term to describe any theory founded upon critique of the unthinking intuitive, the blind conventional or the out-dated traditional.
For example, critical theorists view the Western concept of the rule of law in democratic political systems operating under market capitalism as merely a method by which the ruling class, members of which exclusively own and/or control capital or enjoy special benefit from the access to and control of capital, can justify its rule over the rest of society, as they alone command the financial resources to determine what laws get passed to preserve its own narrow interest, which is to secure the perpetuation of capitalism and the control of capital by the ruling class to set market conditions conducive to the maximization of return on capital as the operating rule of the economic system. The rule of law has become a high-sounding cover for attempts of the ruling class to rule by law.
Critical Theory re-evaluates rationally the integrity and morality implied historically by the contingent nature of the culture that has spawned it. Critical theorists adopt fresh hypothetical stances against accepted traditions, and on that basis, form new insights on cultural relativity and hypothesis. Participants in the formation of critical theory take questioning stances toward commonly accepted attitudes while nonetheless avoiding the judgment paralysis associated with limitless moral relativism. The coercive application of Western ideals on non-Western societies, such as democracy, rule of law, individual freedom and market fundamentalism, concepts that have evolved in the historical and social context of the West as universal truth make it a legitimate target of critical theory, to expose these concepts as components in the battle plan for a Western campaign to establish cultural hegemony globally. (Please see my July 11, 2003 AToL article: The Abduction of Modernity – Part II: That Old Time Religion).
Modern critical theory arose from a growth trajectory extending from meta-positivist studies (meta – Greek word for beyond) of neutral positivist data collection and observation to include a focus on critical interpretative analysis of data in the sociology of ideas - the view that social scientists must necessarily go beyond empiricism and scientific methods of analysis in the development of social theory and in the conduct of social research, and most importantly, the production of new concepts that have no historical precedent, as required by new social conditions.  Meta-positivism relates to the historical discourse on the philosophy and sociology of social science, issues long since settled in natural science with the coming of the Age of Science after physics jumped from Newtonian mechanics to Einstein relativity.
In modern practice, meta-positivism relies more on qualitative analysis with a critical view on ideology, while positivist research involves more on quantitative analysis to discover and understand what exists. Positivists typically rely on quantitative research methods such as statistical analysis, aimed at the identification of causality. On the other hand, meta-positivists use research methods that rely more on testing new theoretical hypothesis with unstructured interviews to collect data on market participant behavior and reaction to construct simulation models. With the availability of high-speed and high-power electronic digital computers to handle, organize and manipulate vast amount of quantitative data and with advances in digital behavioral modeling of complex economic phenomena, the gulf between quantitative digital analysis and qualitative heuristic analog processes has been largely bridged on the operational level.
Still, data can only be collected and organized usefully according to particular concepts and theories, and theory unsubstantiated by data is mere fantasy. Without organizing concepts or theoretical structures, data are as uninformative as inert masses of sand on an undisturbed beach. The most advanced computer will remain impotent of utility without sophisticated mission oriented software to turn raw unstructured input into useful purposeful output. Even rigidly organized data can appear to different analysts armed with different theoretical frameworks as differently as a Rorschach test can be for different test subjects with varying psychological constructs. The message buried in any data set can only be released with the subjective interpretation of the viewer. And different messages can be extracted by different viewers from the same set of data.
Milton Friedman and Positive Economics
In economics, positive economics focuses on understanding of existing phenomena while normative economics focuses on creating an ideal state by changing what is undesirable in the existing world.
In his 1953 essay: The Methodology of Positive Economics, Milton Friedman argues against the “basic confusion between descriptive accuracy and analytical relevance that underlies most criticisms of economic theory.”  The paper asserts that complex realities can be scientifically reduced to simple fundamental structures. And the test of this hypothesis is its fruits. Theory is the way through which we perceive “facts” and we cannot perceive “facts” without theoretical context.
Behavioral economist Andrew W. Lo, Professor and Head of Finance at the Sloan School at MIT, quipped in an intelligent and entertaining lecture: Warning: Physics Envy May Be Hazardous to Your Wealth, to economists who envy physicists, because in physics, 3 laws explain 99% of the physical world, while in economics, 99 laws explains about 3% of economic phenomena.

Hume on Unobservable Phenomena
David Hume (1711-86) pointed out in his Inquiry into Human Understanding published in 1748 that since the conclusion of a valid inference could contain no information not found in the premise; there could be no valid conclusion from observed to unobserved phenomena. That of course is not to say that unobserved phenomena must be false. It's just that their truth cannot be validated by observable facts.
Notwithstanding denial by positive economists, economics as a science deals mostly with unobservable facts, as observable facts are self-evident and require no further analysis. Unobservable facts can only be surmised by conjecture which are subsequently tested on their validity. For example, unemployment is easily measured while the cause and effects of unemployment in the economy continues to be a matter of debate centuries after the emergence of the industrial market economy. Further, even the definition of unemployment itself is still subject to debate.
The Invisible Hand of the Market
In neoclassical economics, the “invisible hand of the market” is a term used to describe the self regulating nature of free market and market’s tendency toward an equilibrium state. The metaphor was coined by Adam Smith in The Theory of Moral Sentiments, to describe the conjunction of the forces of self interest, competition and the law of supply and demand, to produce the optimum allocation of resources in a market economy.  The concept is the founding justification for laissez-faire economic philosophy. The wide spread acceptance of the concept of the unseen hand is the coup de grace that proves the flaw in positive economics.
The Theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. The concept of the invisible hand was at first considered a “natural inclination” in a free market, not yet a social mechanism as it was later classified by Leon Walras (1834-1910) and Vilfredo Pareto (1848-1923).
Borrowing concepts from physics, Walrus proposed the General Equilibrium Theory as a branch of theoretical economics to explain the behavior of supply, demand and prices in an economy with many markets to settle in a general equilibrium in prices, supply and demand.
Pareto developed the concept of Pareto Optimum, which asserts that resources are optimally distributed when an individual cannot move into a better position without putting someone else into a worse position. Much welfare economics is based on the concept of the Pareto Optimum. In an unjust global society, the Pareto Optimum will perpetuate injustice in the world.

Immanuel Kant (1724-1804) emancipated man’s command of knowledge from Humean skepticism. In his Critique of Pure Reason (1781), Kant emphasized the contribution of the knower to knowledge. An uncultured person looking at a sausage sees a delicious meal while an art critic would see Cubist painter Picasso. Since economists can only collect but not create economic data, the economist’s contribution to the science of economics is economic theory, without which economics will stay outside of the realm of discourse.
While acknowledging that the three great issues of metaphysics - God, freedom and immortality - could not be logically determined, Kant asserted that their essence is a necessary presupposition. In his subsequent publications, Critique of Practical Reason (1788) and Critique of Judgment (1790), Kant asserted as a moral law his famous categorical imperative, requiring moral actions to be unconditionally and universally binding to absolute goodwill. Similarly, in the moral law of economics, there is a categorical imperative requiring moral economic actions to be unconditionally and universally binding to good will.
Yet goodwill is singularly absent in market fundamentalism not by default but by design. God and immortality appear to have been claimed by some market fundamentalists on the basis of their flawed logic on the issue of freedom of market participants to do harm to others to enhance their individual self interest, and that if large number of market participants are free to do harm to others in a free market, social good would somehow result. John Stuart Mill’s view on individual freedom is limited to a person’s freedom to do only that which does not harm others. 
Positive/normative questions are distinguished by the “is/ought” dichotomy. John Neville Keynes, lesser known father of John Maynard Keynes, divided economics into “positive” (the study of “what is”, and the way the economy actually works), “normative” (the study of “what should be”), and the “art of economics” (applied economics – how to make “what should be” into “what is”). Intervention, be it by government or by market participants, is inescapable for progress.
In his essay on positive economics, Friedman tried to deny the ‘is/ought’ dichotomy by arguing that answers to ‘ought’ questions necessarily depend on a prior establishment of ‘what is’. Nevertheless, most critics of Friedman’s positive methodology feel he was arguing against normative economics and thus assume that he was not only arguing in favor of positive economics but also condoning what exists as valid.
Yet “what is” affects “what ought to be”, reflecting the value judgment of applied economics. Thus positive methodology must precede normative prescriptions. But if positive methodology is used to justify “what is” without proceeding to “what ought to be”, then positive investigation becomes superfluous to human progress.
The claim of the Chicago School that prosperity will spring from markets left free of government interference has been challenged by developing facts in recent decades. Recurring financial crises in free market economies appear to have jelled into a pattern of 10-year cycles, as evidenced by the crashes of 1987, 1997 and 2007. By now, after three decades of hegemonic dominance by anti-government policy penchant and a philosophy of unchallenged faith in the efficacy of private enterprise, the Chicago School theology can no longer rest on the secure platform of political sponsorship provided by those who directly benefited from a rigged market disguised as manifestation of economic freedom.
Fundamentally, it is a stretch of logic to assume that numerous individual market participants each acting in strict self interest and by definition at the expense of the common interest (otherwise it would not be self interest by definition if self interest is congruent with the common interest), would mysteriously lead to an aggregate contribution to the common good.
The collapse of market fundamentalism as a valid theory and the damage it has done to economies everywhere have put the Chicago School theology on the defensive. Its big lie has been exposed by facts on two levels. The Chicago Boys’ claim that helping the rich is the only way to help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways.
When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing to provide liquidity under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman’s test are in – and they are all rotten.  Using unemployment (zero wages) and under-employment (inadequate wages) to fight inflation created by central bank monetary excess (misapplied liquidity) is a policy of economic suicide. (Please see my September 5. 2008 AToL article: Milton Friedman and the Money Matters Controversy)
Critical Theory in the Social Sciences
The social sciences are fields that study society through scientific methodology. The term refers to a number of fields outside of the natural sciences. The social sciences include: anthropology, archaeology, business administration, criminology, development studies, economics, geography, history, law, linguistics, political science, sociology, international relations, communication, and other fields that straddle social science, natural science and behavioral science.
The term social science may be used, however, in the specific context of referring to the original science of society established in 19th century sociology. Karl Marx (1818-1883), Émile Durkheim (1858-1917) and Max Weber (1864-1920) are generally referred to as the principal architects of modern social science.
Positivism refers to a set of epistemological perspectives and philosophies of science which holds that the scientific method is the most suitable approach to uncovering the processes by which both social events and human activities occur. Though the positivist approach has been a recurrent theme in the history of Western thought from ancient Greece to the present time, the concept was defined in modern terms in early 19th century by French philosopher Auguste Comte (1798-1857). Comte, widely recognized as a founder of the modern sociology and a leading framer of the modern doctrine of positivism, was strongly influenced by utopian socialist Henri de Saint-Simon (1760-1825) to whom Comte, 38 years younger, served as secretary for a time when latter was a teenager. 
Henri de Saint-Simon and State-Technocratic Socialism
Henri de Saint-Simon advocated a form of state-technocratic socialism in which industrialists would lead society and found a new national community based upon cooperation and technological progress, which would be capable of eliminating poverty for the masses to replace historical feudalism. Replacing the Church as the sole spiritual guardian for society, Siant-Simon felt the guidance of society should be given to men of science qualified to organize a new society which only productive labor is entitled to rule.
One wonders what Saint-Simon would have to say were he confronted with Robert Louis Stevenson’s The Strange Case of the Dr. Jekyll and Mr. Hyde or its modern real life version in the ideological conflict and dishonorable personal betrayal between nuclear physicists J. Robert Oppenheimer and Edward Teller on the controversial  question of further post-war development of nuclear weapons with building hydrogen bombs, and the ignoble role Teller played in the government’s revoke of security clearance for Oppenheimer in the early phase of the Cold War. Teller’s shameful betrayal of an innocent colleague by testifying that Oppenheimer might be a security risk led to Teller’s being ostracized by practically all of his colleagues in the scientific community for the rest of his life. Teller was widely recognized as the real-life model of Stanley Kubrik’s 1964 anti-war black comedy film: Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, based on Peter George’s Cold War thriller novel Red Alert.
Saint-Simon did not address the issue of the adversarial relationship between management and labor in the modern industrial economy, since he viewed productive labor as the rightful ruler of a non-exploitative socialist order constructed by men of science. In such a socialist society, confrontation between labor and management would be structurally nonexistent.
Saint-Simon  was so impressed by the absence of hereditary aristocratic titles and social privileges he saw in the US in its early society that he renounced his own aristocratic title in Europe and came to favor a form of scientific meritocracy for organizing society, becoming convinced that modern science was the key to progress and that it would be possible to develop a society based on objective scientific principles. As the global economy developed, except for a brief period when the likes of Thomas Edison and Alexander Bell were financially successful inventors, scientists and engineers would come to be dominated by manipulators of capital to serve the principle of maximum return on capital.
Saint-Simon’s early publications, such as his Introduction aux travaux scientifiques du XIXe siècle (Introduction to scientific discoveries of the 19th century) (1803) and his Mémoire sur la science de l'homme (Notes on the Science of Mankind) (1813), being a eulogy to the policies of Napoleon in support of science, demonstrate his (Saint-Simon’s) faith in science as a means to regenerate society.
Saint-Simon envisioned the present-day European Union in his 1814 essay De la réorganisation de la société européenne (On the Reorganization of European Society), written in collaboration with his then secretary, historian Augustin Thierry, who enthusiastically embraced the socio-political ideals of the French Revolution and Saint-Simon’s vision of an ideal future society. However, Saint-Simon expected Britain to be the lead in forming a continent sharing the same laws and institutions. As it turned out, British legal and institutional mismatch with Napoleonic Continental Europe emerged as the main obstacle  in Britain’s joining the EU.
As a scientific thinker, Saint-Simon ironically and unscientifically relied on anecdotal evidence to support his findings, without developing a systematic theory. For example, he seemed to be unaware or unconcerned that feudalism, which he criticised as a non-merit-based hierarchical social system, was initially organized as a form of meritocracy. The aristocracy was initially made up of men of distinction, mostly warriors, on whom nobility status was conferred by the recognizing royal authority on behalf of feudal society. It was the attempt of meritorious individuals to perpetuate the earned privilege society granted to them by passing on the earned privilege to their offspring without their offspring having to earn it that led to the rise of hereditary feudalism.
Saint-Simon did not deal insightfully with the problem of how to prevent the natural social evolution from meritocracy to heritocracy as a new form of intellectual and economic feudalism in the modern scientific capitalist order. Yet Saint-Simon exerted great influence on modern thought, as the founder of French socialism, which influenced the thinking of Karl Marx, 58 years younger, and as a seeding for much of Auguste Comte’s theory of industrial progress, which in turn influenced Émile Durkheim who was forty years younger than Marx.
Auguste Comte and Positive Philosophy
Comte (1798-1857) developed his positive philosophy out of personal experience of the irrational social chaos during the French Revolution (1787-1799). He was born nine years after the Storming of the Bastille which
took place on July 14, 1789, marking the beginning of the French Revolution .
Comte as a philosopher sought a new social paradigm via rational scientific methods. As with Saint-Simon, Comte also exerted considerable influence in 19th century thought and socio-political economy discourse, influencing such intellectual giants as John Stuart Mill (1806-1873), eight years younger than Comte, and later, Karl Marx, born 12 year later  than Mill. Comte’s version of sociologie and his notion of social evolutionism set the tone for pioneering social theorists and anthropologists such as Harriet Martineau (1802-1876) and later, Herbert Spencer (1820-1903). Modern academic sociology was later formally established in the 1890s by Émile Durkheim (1858-1917) in his thirties, with a firm emphasis on objective social research.
Antinomy in Economics
The term antinomy (in Greek: αντι - meaning against, νομος -meaning law) literally means the mutual incompatibility, real or apparent, of two laws. It is a term used in logic and epistemology, the branch of philosophy concerned with the nature and limitations of knowledge. The term acquired special significance in the philosophy of Immanuel Kant (1724–1804), who used the term antinomy to describe equally rational processes that lead to contradictory conclusions, such as applying to pure thought the criteria of reason that is proper only to sensual perception or experience (phenomena). Empirical reason cannot play a causal role in establishing rational truth because rational truth goes beyond the realm of sensual experience; and because to do so would be applying empirical reasoning to the sphere of rational truth, a level that transcends empirical reasoning.
The concept of antinomy was part of Kant’s critical program of determining limits to science and philosophical inquiry, when a thesis contradicts an antithesis. These contradictions are inherent in reason when it is applied to the world as it exists, independently of one’s perceptions of it. Kant’s saw these contradiction as the distinction between phenomena (from Greek φαινόμενoν - observable occurrence by the physical senses) and noumena (from Greek νοούμενoν, present participle of νοέω - “I think”, to describe that which is known without involving the physical senses.
Noumena, a Greek word, is similar to the Latin word cogito, which was used in Cogito ergo sum (I think, therefore I am) by René Descartes (1596-1650), a key figure of the Enlightenment who preceded Kant by 128 years. The famous phrase: Cogito ergo sum was used by Descartes in his Discourse on the Method of Rightly Conducting One's Reason and of Seeking Truth in the Sciences (French title: Discours de la méthode pour bien conduire sa raison, et chercher la vérité dans les sciences), published in 1637.
Kant’s goal in his critical philosophy was to set limits beyond which claims could not be justified, and antinomy was a particularly illustrative example of his larger philosophical inquiry.
Survival of the Fittest as a Social Myth
Herbert Spencer coined the phrase “survival of the fittest” in a socio-economic context in 1864, six decades after Kant’s death, reportedly after reading Charles Darwin's On the Origin of Species, published in 1859.
From Darwin’s scientific law on natural selection, Spencer push the edge of the envelope beyond biological evolutionary phenomenon in its original context of the natural environment. Spencer’s claim of the validity of “the survival of the fittest” in a socio-economic context is a classic case of antinomy. Unlike the natural environment which is not subject to fundamental restructuring by animals that are born into it, and therfore must adjust to it, the human social environment is an artificial construct created by men who have the ability to modify it as humanity evolves towards higher social purposes. Mankind has the intelligence and power to create and modify his social environment to nurture the fittest survivors in an ideal image, and not let a diseased social environment dictate a malignant evolutionary destiny on mankind. It is a struggle symbolized by the conflict between Spartan and Athens, by the conflict between Carlyle and Spencer.
After the Revolutions of 1848 and political agitation in the United Kingdom, Carlyle published a collection of essays entitled "Latter-Day Pamphlets" (1850) in which he attacked democracy as an absurd social ideal, while equally condemning hereditary aristocratic leadership in favor of heroic meritocracy.
Spencer’s theory of  “cosmic evolution”, expounded in his Principles of Biology (1864), involves the scientific study of universal change. While cosmic evolution attempts to integrate within social science other scientific theories such as biological evolution, it is not itself a theory or a product of reproducible evidence that leads to acceptance by the scientific community.
Spencer connected the biological findings of Jean-Baptiste Lamarck (1744-1829) that an organism could pass on to its offspring physical traits that it acquired to enhance its survivability during its life span, with the positive philosophy of Auguste Comte, who had proposed a theory of socio-cultural evolution that society progresses by a general Law of Three Stages, which states that society as a whole, and each particular science, develops through three mentally conceived stages: (1) the theocratic stage, (2) the metaphysical stage, and (3) the positive stage. The Positivity stage refers to scientific explanation based on observation, experiment, and comparison. Positive explanations rely upon a distinct scientific method, for its justification.
Socio-cultural evolution is the process by which structural reorganization of society is affected through the passage of time, eventually producing a social form or structure which is qualitatively different from the ancestral social form shaped by a primitive man less able to control his environment. Spencer saw human progress as being propelled by primeval savage competitive human traits reinforced by technology and sanitized by rituals, rather than an evolution of a higher harmonious form of humanity conditioned by love and charity. To this regressive evolution of humanity, Spencer added the concepts of natural selection borrowed from zoological evolution as spelled out in Darwin’s influential 1859 book On the Origin of Species.
To Darwin, natural selection, a key mechanism of biological evolution, is the process by which desirable physical traits in living species become more common in a population, due to consistent effects from the reproductive survival of the bearers of such traits. The natural genetic variation within a population of organisms may cause some individuals to survive and reproduce more successfully than others in their contemporary environment. Natural selection is not connected to issues of morality, only to probability of survival in a hostile environment. If the environment requires aggressiveness as a prerequisite for survival, natural selection will create a race of aggressors.
To Darwin, species that evolve in harsh environments such as the desert, or the icy polar region, will produce species that would be more fit for such environments rather than gentle lamb on a peaceful perrie. Darwin was merely recording an observation, without moral preference. Evolution is a biological process, not a moral choice or value judgment for Darwin who saw every specie having a place in the sun and in the food chain as a fact of nature. Darwin certainly never advocated that human society should ape the natural environment. The entire history of human civilization involves human intervention on the natural to retain the good and to shed the bad.
One of the most important contribution made by science to human progress is the advancement of precise pharmaceutical counteraction to illnesses found in the natural environment, such as those caused by harmful bacteria. Medical intervention enable mankind to defy the law of the survival of the fittest by allowing the less fit to survive with the help of medicine and education. An analogy can be made between public health and socio-economic well being to show the preference for government non-intervention in a market economy as unjustifiable in terms of facilitating proper metabolism of human progress.
The Voodoo Science of Social Darwinism
Others who came after Darwin began to apply Darwin’s observation of nature as a natural philosophy for organizing human society under the banner of Social Darwinism, with an implied judgment that whatever survives is the outcome of progress and is above moral concerns. Survival of the fittest in a competitive social environment will eventually turn human society into a harsh and dangerous hell rather than a Garden of Eden. Survival of the fittest, as a human evolutionary process, will justify an escalating circular feedback loop of mutually reinforcement between increasingly more aggressive species and environments that increasingly require more aggressiveness for survival.
Darwin observed that natural selection acts on the phenotype, the observable characteristics of an organism, but the heritable genetic basis of any phenotype which gives a reproductive advantage will become more common in a population, a process known as allele frequency, which is the proportion of all copies of a gene that is made up of a particular gene variant allele, one of two or more forms of the DNA sequence of a particular gene. Each gene can have different alleles. Sometimes, different DNA sequences (alleles) can result in different physical traits, such as color and size, or non-physical trait such as intelligence and affinity. Other times, different alleles will have the same result in the expression of a gene.
Over time, this process can lead to adaptations by specialized populations for particular ecological niches and may even eventually result in the emergence of new species. In other words, natural selection is an important, though not exclusive process by which evolution takes place within a population of organism in an environment beyond the control of the specie.
Human Society and Natural Environment
As opposed to social selection, in which human societies favor and reinforce certain specific social traits over anti-social traits in the population through the social institution of marriage and other ritualistic institutions, in natural selection, the environment acts as a disinterested sieve through which only certain variations appropriate to environmental conditions can pass to fit into the environment. It is a process of surrendering the natural traits of a specie to the requirement of an unyieldingly rigid and hostile environment.
But unlike the natural environment, the social environment is created by man, and it can be designed to enhance man’s ideal existence. In a social environment that rewards aggression and greed, as societies that adopt capitalist markets do, aggressively greedy individuals will be the fittest to survive. Most religions, with the exception of Calvinism, try to influence the social milieu to be less aggressive and greedy, by encouraging the image of God as loving and charitable.
Calvinism and Capitalism
Calvinism has been identified by social historians as the driving force behind the rise of modern capitalism in a revolt against the medieval condemnation of usury and, implicitly, of unearned or passive profit.
Richard Henry Tawney (1880 – 1962), English Christian socialist, economic historian and social critic, wrote Religion and the Rise of Capitalism (1926), in which he explored the causal relationship between Protestantism and economic development in the 16th and 17th centuries. Tawney “bemoaned the division between commerce and social morality brought about by the Protestant Reformation, leading as it did to the subordination of Christian teaching to the pursuit of material wealth.” Tawney took up Max Weber’s thesis on the causal connection between the appearance of Protestantism and the rise of capitalism. Weber’s book: The Protestant Ethic and the Spirit of Capitalism, appeared in German in 1904-05, and was translated into English for the first time by Harvard sociologist Talcott Parsons only in 1930, four years after the publication of Tawney book on the same subject.
Spencer’s Rationalization of Social Evolution
Spencer wrote that over time societies will progress, presumably towards Spencer’s vision of a higher state of civilization, and that human progress is accomplished through industrious competition. He defined progress narrowly as advancement of survival skills in a man-made socio-economic order, through technology and socio-political organization that will reward such skills, leaving unexplored the possibility that amoral technological skills could overwhelm the advancement of humanity to allow the malignant growth of cancerous agents that would metastasize the human spirit.
Spencer ignored factual evidence in history by labeling early human societies that survived through in-group cooperation and symbiotic co-existence with other species, and with the natural environment, as a “primitive” state, ignoring the fact that humanity as a whole has repeatedly enhanced its own survivability through cooperative arrangements among different human sub-groups and societies.
Spencer stressed the role of the self-centered individual acting narrowly in his self interest, rather than the harmonious collective, as the unit of analysis (the basic entity in the analysis of social studies) in social evolution. Social evolution through natural and social selection affects social as well as biological phenomena. The antinomy in the concept of individualist “survival of the fittest” in human society is that it can lead to the survival of the most socially unfit human beings and the evolution of increasing vile ecosystems that would eventually wipe out all that is good and graceful in humanity.
Scientific Darwinism Distorted as Political Philosophy
The publication of Darwin’s influential book: On the Origin of Species in 1859 unintendedly gave a holy bible to proponents of the controversial idea that socio-cultural evolution of human society is a process of survival of the fittest in the context of capitalist market fundamentalism. The idea of biological evolution of survival of the fittest in a hostile natural environment beyond the control of the biological inhabitants has been commandeered as convenient justification for the development of capitalistic market society for human beings whose natural traits are not naturally in sync with that society's requirements for survival.
The implication of the acceptance of the laws of nature as a destiny rather than a tool of progress is that whatever survives in nature is considered as morally valid and good, rather than whatever is good and moral should survive in civilized society constructed by man of vision. Human civilization under the law of survival of the fittest competitive market capitalism will evolve away from that which is morally good and socially desirable in human beings because such human traits are often the most fragile and unfit for survival in a society where ethics is not only perceived as weakness, but is actually a impediment to survival.
The revolutionary power of Mao Zedong rests not only on his political organizing skill, but on his unflinching belief that the oppressed, the poor, the underprivileged, the uncultured, the uneducated and the powerless, in other words, the socio-economically unfit, have an innate goodness and the invincible power to change society toward higher stages of civilization where oppression, poverty, inequality and ignorance will be vestiges of the uncivilized past because this group can be expected not to resist reform and revolution for they have little to protect or to lose. Marx places his faith in oppressed workers as the revolutionary force because they have “nothing to lose but heir chains”.
Kropotkin and Anarchism
Using cooperative symbiotic behavior found in animals as a model for organizing human society, Russian zoologist, evolutionary theorist and anarchist Peter Kropotkin (1842-1921), despite his privileged position as a hereditary prince in Czarist Russia, advocated a communist society free of private ownership and free from governmental authority, based on voluntary associations between productive citizens as outlined in his 1902 book,  Mutual Aid: A Factor of Evolution. 
In Freedom Pamphlets No. 1. (New Edition. 1920.) The Wage system, Kroputkin wrote:
“In their plan for the reconstruction of society, the Collectivists commit, in our opinion, a double error. Whilst speaking of the abolition of the rule of capital, they wish, nevertheless, to maintain two institutions which form the very basis of that rule, namely, representative government and the wage system.”
Kroputkin saw representative government as a system designed by the bourgeoisie to replace monarchism while maintaining and augmenting capitalist domination over workers. As people become conscious of their suppressed economic interests and latent political power, and as the variety of such interests expands, the capitalist political system becomes inoperative. Kroputkin asserted that the wage system should be abolished along with private property in favor of possession in common of the instruments of production.
Proudhon: Property is Theft!
Thirty-three years before Kropotkin, Pierre-Joseph Proudhon (1809-1865), French mutualist philosopher and socialist member of the French Parliament, was reportedly the first philosopher to proudly wear the label “anarchist”. After the Revolutions of 1848, Proudhon began to call himself a federalist.
Proudhon’s best-known assertion is that Property is Theft!, contained in his first major work, What is Property? Or, an Inquiry into the Principle of Right and Government (Qu'est-ce que la propriété? Recherche sur le principe du droit et du gouvernement), published in 1840. The book’s publication attracted the hostile attention of the French authorities. It also attracted the sympathetic scrutiny of Marx, who started a correspondence with its author.
Proudhon and Marx influenced each other: they met in Paris while Marx was exiled there. Their friendship finally ended when Marx responded to Proudhon's The System of Economic Contradictions, or The Philosophy of Poverty with the provocatively titled The Poverty of Philosophy. The dispute became one of the sources of the ideological split between the anarchist and Marxist wings of the International Working Men's Association.
Proudhon favored workers associations or co-operatives, as well as individual worker/peasant possession, over private ownership or the nationalization of land and workplaces. He considered that social revolution could be achieved in a peaceful manner. In The Confessions of a Revolutionary Proudhon asserted that, Anarchy is Order, the phrase which much later inspired, in the view of some, the anarchist circled-A symbol, today “one of the most common graffiti on the urban landscape.” He unsuccessfully tried to create a national bank, to be funded by what became an abortive attempt at an income tax on capitalists and stockholders. Similar in some respects to a credit union, it would have given interest-free loans.
Proudhon published his own perspective for reform which was completed in 1849, Solution du problème social (Solution of the Social Problem), in which he laid out a program of mutual financial cooperation among workers to transfer control of the economy from capitalists and financiers to workers. The central part of his plan was the establishment of a bank to provide low interest rate credit with the issuing exchange notes to replace money based on gold.
Proudhon ran for the constituent assembly in April 1848, but was not elected. He was successful, in the complementary elections of June 4, and served as a deputy during the debates over the National Workshops, created by the February 25, 1848, decree passed by Republican Louis Blanc. The Workshops were to give work to the unemployed. Proudhon was never enthusiastic about such Workshops, perceiving them to be essentially charitable institutions that did not resolve the unemployment problem of the economic system. But he was against their elimination unless an alternative could be found for the workers who relied on the Workshops for subsistence.
As a consequence of his opposition to profit, wage labor, worker exploitation, ownership of land and capital, as well as to state property, Proudhon rejected both capitalism and communism. He adopted the term mutualism for his brand of anarchism, which involved control of the means of production by the workers. Proudhon opposed the charging of interest and rent, but did not seek to abolish them by law.
Proudhon was a revolutionary, but his revolution did not mean violent upheaval or civil war, but rather the transformation of society. This transformation was essentially moral in nature and demanded the highest ethics from those who sought change. It was monetary reform, combined with organizing a credit bank and workers associations, that Proudhon proposed to use as a lever to bring about the organization of society along new lines. He did not suggest how the monetary institutions would cope with the problem of inflation and with the need for the efficient and equitable allocation of scarce resources.
Co-evolution of mutualistic systems in nature have been thoroughly studied, such as he interdependence between the swollen-thron acacias and their ant inhabitants. In this species pair, the ant is dependent on acacdia for food and domicile, and the acadia is dependent on the ant for protection from phytophagous insects and neighboring plants.
Post-Cold War international relations are built on the principle of interdependence of independent sovereign states. Emerging in 1815 from a generation of Napoleonic wars, Europe went through a period of spectacular material progress. The post-war European economy had to adjust to the sudden end of war production, and to market readjustment from the collapse of Napoeon’s Continental System, to repayment of enormous war debts and to war inflation. The task of post-war reconstruction was easier because, unlike the two world wars, the Napoleonic wars did little collateral damage to European cities and farming villages due to the fact that much of the fighting had taken place on open battle fields, and the Clauswitzian concept of demolishing the will of the enemy population to resist has not taken root fully until WWII.
But the most important cause for the Europan ascendance was the Industrial Revolution, which began first in Britain, that changed the lives of people and traditional socio-economic relationships in society that created new diametrically opposite conflicts between two new classes the had emerged in society in the form of capitalists and the proletariat. On the one hand, the socio-economic forces of industrialization brought about the rise of capitalism to check reactionary attempts to reverse the socio-political consequences of the French Revolution back to the ancien régime. On the other, it ushered in the rise of Western Europe in the Age of Imperialism.     
The Rise of Industrial Economy
Before 1800, wealth in the European economy was largely trapped in land that was relatively evenly owned by a large number of small farmers. These small land owners had little incentive to risk their wealth through investment in new ventures. The setting up of a concentration of machine production in factories required major shift in land use as well as mass relocation of population from rural areas to cities that resulted in a broad reorganization of the ownership of the means of production and distribution of the resultant wealth.
The Glorious Revolution of 1688 in England confirmed the political ascendance of a class of large land owners allied with a capitalist class of merchants and financiers concentrated in London. The Industrial Revolution was the sparked by a sudden burst of applied science and technology in the 1800s that enabled the invention of machines powered by combustion fuels to produce an economy which required intensive and massive use of capital to enhance the productivity of industrial workers. Early industrialization took hold first in textile manufacturing. England’s wealth from the Agricultural Revolution gave her the ability to finance industrial development that faced higher risk than farming and that required a long-time frame before profit could be forthcoming. 
This transformation of the economic order from agriculture to industry was the economic consequence of the political order that emerged after the Glorious Revolution, with Parliament captured by a few large land owners who introduced and passed new legislation in the form of “enclosure acts” to suspend the ancient common rights of open fields in rural villages based on Common Law. Ownership of land fell into the hands of a small class of the large land owners to rented land to tenant farmers. This resulted in increased farm production with fewer farm workers, and the release of surplus labor for newly established industrial enterprises and for war. This socio-economic order reach its height of development after the Napoleonic wars.
The dark side of the Industrial Revolution in England was the rise of urban slums vividly described by Charles Dickens in his novels of social realism and by Oliver Goldsmith in The Deserted Village:
            Ill fares the land, to hastening ills a prey,
            Where wealth accumulates, and men dcay:
            Prices and lords may flourish, or may fade
            A breath can make them, as a breath has made;      
           But a bold peasantry, their country's pride,
           When once destroyed, can never be supplied.

English yeomanry (samll land owners), the bold peasantry, disappeared as a class to become wage laborers for large land owner, merchants and later for factory owners. Low wages prevented the full development of a domestic market and the gap was filled by international trade in search of foreign markets were luxury imports were bought by the local financial elite overseas and later low-price manufacturing goods were bought by the general consumers. 
The Agricultural Revolution in England caused a population explosion, with Great Britain and Ireland tripling in population between 1750 and 1850, rising from 10 million to 30 million. In 1785, there were only three cities with more than 30,000 people. By 1855, seven decade later, there were 31 cities of that size.
The Manchester School on Free Trade
Manchester was the pre-eminent new city in the Industrial Revolution, focusing mainly on textile manufacturing for export since the domestic market was under-developed due to insufficient purchasing power as a result of low wages. The rise of international trade was fueled directly from the economic effects of low local wages. Thus rose the Manchester School of economics of international free trade.
Manchester was the hub of the world’s textile manufacturing industry, and had a high portion of its population earning its livelihood as factory workers, who were disadvantaged by the Corn Laws, the protectionist policy that imposed tariffs on imported wheat that kept the price of food high. The Corn Laws were supported by the land-owning aristocracy, because by reducing foreign competition through tariffs, landowners could keep grain prices high and therefore, as the population expanded, increase agricultural profits denominated in local currency.
However, the operation of the Corn Laws also meant that the factory workers in the textile mills in the textile cities of northern England were faced with higher food bills; consequently the mill owners in turn suffered higher wage bills and therefore higher prices for finished-goods which restricted their competitiveness in foreign trade denominated in gold.
Manchester became the headquarters of the Anti-Corn Law League from 1839. The League campaigned against the Corn Laws to reduce food prices by allowing low price food imports and increases the competitiveness of English manufactured goods abroad. Manchester Trade Liberalism grew out of this economic order. Manchester capitalism, based on mercantilism, challenged the existing agricultural economic order in 16th–18th century Europe.
Mercantilism holds that a country’s prosperity is dependent on surplus trade through exports denominated in gold while limited free imports to raw material and food. At the beginning of the 19th century, trade in Britain was still subject to import quotas, price ceilings and other state interventions. This led to shortages of certain goods and, in particular, corn and wheat on British markets as the economy shifted by argicultural to industrial production.
The Manchester Trade Liberals argued that free trade would lead to a more equitable society, making essential products available to all. Theoretically, Manchester Trade Liberalism was founded on the economics writings of David Hume, Adam Smith and Jean-Baptiste Say. (Please see my May 1, 2002 AToL article : Big Money and Corn Laws)
Britain enjoyed a monopoly in textile manufacturing and machine tools production unchallenged in international trade until 1870. Equally importantly, London became the center of world finance and insurance to facilitate the rapid rise of international trade. England was the first FIRE (finance, insurance and real estate) economy. The FIRE Economy operates by extracting economic rents, such as interest on debt and asset price appreciation from the production side of the economy in amounts that exceed the value of productivity.  The FIRE economy is a malignant form of market capitalism.
The term “capitalism” did not appear in the English speaking world until 1854, while the term communism was used in German by Karl Marx in 1848.
According to the Oxford English Dictionary (OED), the term capitalism was first used by novelist William Makepeace Thackeray in 1854 in The Newcomes, where he meant "having ownership of capital”.  Also according to the OED, Carl Adolph Douai, a German-American socialist and abolitionist, used the term private capitalism in 1863.

April 18, 2011


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