Economic Myths of Early Capitalism; F. A. Hayek

That this was the case was at one time indeed widely taught by economic historians. A more careful examina tion of the facts has, however, led to a thorough refuta[192 ] tion of this belief. Yet, a generation after the controversy has been decided, popular opinion still continues as though the older belief had been true. False Interpretation Discussions of the effects of the rise of modern indus tryon the working classes refer almost always to the conditions in England in the first half of the nineteenth century; yet the great change to which they refer had commenced much earlier, and by then had quite a long history and had spread far beyond England. The freedom of economic activity which in England had proved so favorable to the rapid growth of wealth was·probably in the first instance an almost accidental by-product of the limitations which the revolution of the seventeenth cen tury had placed on the powers of government; and only after its.beneficial effects had come to be Widely noticed did the economists later undertake to explain the con nectionand to argue for the removal of the remaining barriers to commercial freedom. In many ways it is mis leading to speak of "capitalism" as though this had been a new and altogether different system which suddenly came into being toward the end of the eighteenth cen tury; we use this term here because it is the most familiar name, but only with great reluctance, since with its mod ern connotations it is itseH largely a creation of that socialist interpretation of economic history with which we are concerned. The term is especially misleading when, as is often the case, it is connected with the idea of [193 ] the rise of the propertyless proletariat, which by some devious process have been deprived of their rightful o,vnership of the tools for their work.

Survival The actual history of the connection between capital ism and the rise of the proletariat is almost the opposite of that which these theories of the expropriation of the masses suggest. The truth is that, for the greater part of history, for most men the possession of the tools for their work was an essential condition for survival or at least for being able to rear a family. The number of those who could maintain themselves by working for others, although they did not themselves possess the necessary equipment, was limited to a small proportion of the population. The amount of arable land and of tools handed down from one generation to the next limited the total number who could survive. To be left without them meant in most instances death by starvation or at least the impossibility of procreation. There was little incentive and little possibility for one generation to accumulate the additional tools which would have made possible the survival of a larger num ber of the next, so long as the advantage of employing additional hands was limited mainly to the instances where the division of the tasks increased the efficiency of the work of the owner of the tools.

It was only when the larger gains from the employ ment of machinery provided both the means and the [194 ] opportunity for their investment that what in the past had been a recurring surplus of population doomed to early death was in an increasing measure given the possibility of survival. Numbers which had been practically station ary for many centuries began to increase rapidly. The proletariat which capitalism can be said to have "cre ated" was thus not a proportion of the population which would have existed without it and which it had degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided. Rise of Modern Industry Insofar as it is true that the growth of capital made the appearance of the proletariat possible, it was in the sense that it raised the productivity of labor, so that much larger numbers of those who had not been equipped by their parents with the necessary tools were enabled to maintain themselves by their labor alone; but the capital had to be supplied first before those were enabled to survive who afterward claimed as a right a share in its ownership.

Although it was certainly not from charitable motives, it still was the first time in history that one group of people found it in their interest to use their earnings on a large scale to provide new instruments of production to be operated by those who without them could not have produced their own sustenance. Of the effect of the rise of modern industry on the [ 195] growth of population, statistics tell a vivid tale. That this in itself largely contradicts the common belief about the harmful effect of the rise of the factory system on the large masses is not the point with which we are at pres ent concerned. Nor need we more than mention the fact that, so long as this increase of the numbers of those whose output reached a certain level brought forward a fully corresponding increase in population, the level of the poorest fringe could not be substantially improved, however much the average might rise. The point of im mediate relevance is that this increase of population and particularly of the manufacturing population had pro ceeded in England at least for two or three generations before the period of which it is alleged that the position of the workers seriously deteriorated.

The period to which this refers is also the period when the problem of the position of the working class became for the nrst time one of general concern. And the opinions of some of the contemporaries are indeed the main source of the present beliefs. Our first question must therefore be how it came about that such an impression contrary to. the facts should have become widely held among the people· then living. Social Conscience One of the chief reasons was evidently an increasing awareness of facts which before had passed unnoticed. The very increase of wealth and well-being which had been achieved raised standards and aspirations. What for [196 ] ages seemed a natural and inevitable situation, or even as an improvement upon the past, came to be regarded as incongruous with the opportunities which the new age appeared to offer. Economic suffering both became con spicuous and seemed less justified because general wealth was increasing faster than ever before. But this, of course, does not prove that the people whose fate was beginning to cause indignation and alarm were worse off than their parents or grandparents had been. While there is every evidence that great misery existed, there is none that it was greater than or even as great as it had been before.

The aggregations of large numbers of cheap houses of industrial workers were probably more ugly than the pic turesque cottages in which some of the agricultural laborers or domestic workers had lived; and they were certainly more alarming to the landowner or to the city patrician than ,the poor dispersed over the country had been. But for those who had moved from country to town it meant an improvement; and even though the rapid growth of the industrial centers created sanitary problems with which people had yet slowly and pain fully to learn to cope, statistics leave little doubt that even general· health was on the whole benefited rather than hanned. More important, however, for the explanation of the change from an optimistic to a pessimistic view of the effects of industrialization than this awakening of social conscience was probably the fact that this change of opinion appears to have commenced, not in the manu[197 ] facturing districts which had firsthand knowledge of what was happening, but in the political discussion of the English metropolis which was somewhat remote from, and had little part in, the new development.

It is evident that the belief about the "horrible" con ditions prevailing among the manufacturing populations of the Midlands and the north of England was in the 1830's and 1840's widely held among the upper classes of London and the south. It was one of the main argu ments with which the landowning class hit back at the manufacturers to counter the agitation of the latter against the Corn Laws and for free trade. And it was from these arguments of the conservative press that the radical intelligentsia of the time, with little firsthand knowledge of the industrial districts, derived their views which were to become the standard weapons of political propaganda. LaborDisplacementFallacy It may seem obvious that the introduction of machinery will produce a general reduction of the demand for labor. But persistent effort to think the problem through shows that this belief is the result of a logical fallacy, of stress ing one effect of the assumed change and leaving out others. Nor do the facts give any support to the belief.

Yet anyone who thinks it to be true is very likely to find what seems to him confirming evidence. It is easy enough to find the early nineteenth century instances of extreme poverty and to draw the conclusion that this must have [198 ] been the effect of the introduction of machinery, without asking whether conditions had been any better or per haps even worse before. Or one may believe that an in crease of production must lead to the impossibility of selling all the product; and when one then finds a stagna tion of sales, regard this as a confirmation of the expecta tions, although there are several more plausible explana tions than general "overproduction" or "underconsump tion." There can be no doubt that many of these misrepre sentations were put forward in good faith; and there is no reason why we should not respect the motives of some of those who, to arouse public conscience, painted the misery of the poor in the blackest colors. We owe to agi tation of this kind, which forced unwilling eyes to face unpleasant facts, some of the finest and most generous acts of public policy-from the abolition of slavery to the removal of taxes on imported food and the destruction of many intrenched monopolies and abuses. And there is every reason to remember how miserable the majority of the people still were as recently as a hundred or a hun dred and fifty years ago.

But we must not, long after the event, allow a distor tion of the facts, even if committed out of humanitarian zeal, to affect our view of what we owe to a system which for the first time in history made people feel that this misery might be avoidable. The very claims and ambi tions of the working classes were and are the result of the enormous improvement of their position which capi talism brought about. [ 199] SELF-INTEREST: VICE OR VIRTUE? tg ofeonarJ G. ReaJ SELFISHNESS, as far as I can discern, exists in one of us about as much as in another. The difference in persons is not so much a difference in selfishness as it is a dif ference in their interpretation of what really constitutes self-interest. The pickpocket may have little to distinguish him from an honest worker when it comes to promoting his own interests. But the pickpocket is so lacking in intelligence that he foolishly thinks his self-interest is best served by methods which bring him small returns at great risk and eventual destruction.