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The Living Wage: Lessons from the History of Economic Thought

Author(s):Stabile, Donald R.
Reviewer(s):Carden, Art

Published by EH.NET (July 2009)

Donald R. Stabile, The Living Wage: Lessons from the History of Economic Thought. Cheltenham, UK: Edward Elgar, 2008. viii + 163 pp. $100 (hardcover), ISBN: 978-1-84844-197-2.

Reviewed for EH.NET by Art Carden, Department of Economics and Business, Rhodes College.

Donald R. Stabile introduces his interesting and accessible treatment of the concept of the living wage in the history of economic thought by motivating it with an anecdote that will probably be familiar to many readers: students at his institution (St. Mary’s College) staged a protest advocating a “living wage? for college employees in the name of social justice. Nonetheless, he attempts to ?move the debate over the living wage away from a debate over the definition of ?social justice? towards a consideration of the economic issues involved in the debate? (p. vii). He explicitly lays aside questions of justice and explores why some of the great minds in the history of economic thought might (or might not) think that paying a living wage would be a good decision.

According to Stabile, many eighteenth and nineteenth century economists were among the social reformers who supported the idea of a living wage because they were, like Adam Smith, Plato, and Thomas Aquinas, ?partly motivated by an ideal of a moral economy? (p. 8) in which workers were paid a ?subsistence wage? or, in modern parlance, a living wage. Stabile argues throughout that the subsistence wage considered by the classical economists was not merely a wage sufficient to prevent death; ?decency? was an important part of the moral economy, as well.

Stabile leads us through self-contained discussions of how economists like Smith, Bentham, Mill, Marx, Marshall, Clark, Veblen, Ely, Schumpeter, Mises, Hayek, Seligman, and others addressed the social costs of low wages. He focuses his discussion of the case for government intervention on possible market failure. Three issues have lent credence to the idea of a living wage in the history of economic thought: ?the sustainability and capability of the labour force and the externality effect of not ensuring that sustainability and capability? (pp. 3-4).

As I read the ?sustainability? argument, an incomplete contracting environment and bargaining strength on the part of employers implies that workers can be exploited, overworked, and/or underpaid. What is privately optimal is not socially optimal, which suggests either a plausible case for intervention or an appeal to the employer?s virtue.

The ?capability? approach is more suspect: it concerns the worker?s ability to be a meaningful and active participant in the society in which he lives, which suggests that needs are relative and social obligations are moving targets. I defer to Paul Heyne and ask what this is but ?the sanctification of envy.? The knowledge problem and various public choice issues are also relevant. How do we know the standard? What are the costs of implementation? Stabile defines the capability approach in terms of an anthropomorphized ?Society? which ?has a number of objectives in mind for its human workers? who should be ?given something more than sufficient nutrition to survive? (p. 5). Given what? And by whom?

The third argument is that insufficient wages generate externalities. The externality argument is imprecise in some respects because the problem (for example) of a public health infrastructure burdened by underpaid workers is a result not of a market failure as classically defined but of the existence of redistributive institutions themselves (p. 7).

Some of these quibbles are secondary in light of Stabile?s larger goal, which is to ask questions about a living wage in terms of economics rather than social justice. From the very outset, Stabile sets an admirable goal for the text: ?In drawing out those lessons I want to avoid any suggestions that we should follow those lessons in the spirit of asking, ?What would Jesus do??? Ultimately, this is precisely what the idea of a ?living wage? demands: someone, somewhere must be blessed with sufficient knowledge, insight (and, I presume, sufficient communion with the Holy Spirit) to be able to divine the correct wage for a particular kind and class of labor and substitute his or her judgment for the impersonal result of the market process. This is discussed to some extent in pages on Mises (pp. 44-47) and Hayek (pp. 48-50), and he states eloquently that ?Mises would not have given [living wage advocates] any privileged standing as having the wisdom to supersede whatever results human choice created in the marketplace.? This is a point that deserves to be stressed in greater detail but that might have been outside the scope of the purely historical inquiry. These issues are alluded to, but a chapter in which they are spelled out and addressed completely would have been a very useful addition.

Too often, debates on living wages or minimum wage policy devolve into exchanges (or shouting matches) between economists on one side and enthusiasts for ?social justice? who are openly hostile to the economic way of thinking on the other. Stabile does us a valuable service by laying aside nebulous questions about justice and focusing on specific economic issues. In the process, he offers a compact, well-organized tour of the idea of a living wage in the history of economic thought. It is a book that deserves the attention of economists and scholars working on the history of ideas, as well as anyone contributing to debates over wage policy.

Art Carden is the author (with Charles Courtemanche and Jeremy Meiners) of a series of papers on Wal-Mart and an essay on Southern economic history for the Oxford Handbook of Southern Politics (in progress).

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe

Author(s):Wright, Robert E.
Reviewer(s):Stabile, Donald R.

Published by EH.NET (July 2008)

Robert E. Wright, One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe. New York: McGraw-Hill, 2008. ix + 409 pp. $28 (cloth), ISBN: 978-0-07-1543934-0.

Reviewed for EH.NET by Donald R. Stabile, Department of Economics, St. Mary’s College of Maryland.

As the public debt of the United States heads for the $10 trillion level, Robert E. Wright’s book reminds us that a high public debt in the U.S. was not always treated as inevitable. In so reminding us, Wright, a clinical associate professor of economics at New York University’s Stern School of Business and curator of the American Museum of Finance, provides a wealth of information about the history of the public debt during the early years of the U.S. There was much debate in those early years over whether the public debt needed to be paid off, and Wright’s aim is tell both sides of the history of those debates. To give context to those debates, Wright employs a model of the development diamond. The diamond he refers to is from baseball and the four bases are government (home plate), the financial system (first base), entrepreneurs (second base), and business management (third base). In this book Wright stresses the crucial first step of getting to first base, that is, the creation of the U.S. government including the funding of its public debt and the part that debt played in the establishment of financial markets.

The book contains nine chapters. The first chapter presents an overview and sets forth the development diamond model. Chapter 2 describes how the Netherlands and England established a regular system of funding their debts through the use of financial securities, especially interest paying bonds that traded in financial markets, to be paid off from future tax receipts. In Chapter 3, Wright details how the individual colonies in America followed this pattern but with a difference; they issued non-interest bearing bills of credit that circulated as paper money until they were collected as payment for taxes. The Continental Congress used bills of credit to finance the revolutionary war but did not have the power to levy taxes that might have called in the bills of credit. Congress’ failure to establish a better system of funding led to the formation of a new government under the Constitution, the topic of Chapter 4, where Wright tells the story of the debates that took place during the writing and ratification of the Constitution.

Once the Constitution and the government it created were in place, its leaders had to fashion an effective administration and begin to manage the public debt. In Chapter 5 Wright details how Alexander Hamilton copied (or pretended to copy) parts of the European debt management plans and how he innovated new methods on his own. He also describes the financial markets of the U.S. at the time and how the funding of the debt helped them expand by offering them securities to trade. Hamilton’s proposals were hotly contested, notably by James Madison and Thomas Jefferson, as Wright outlines in rich detail.

Up to this point, Wright has told a story that is well known to scholars of the history of the public debt. In his next two chapters he makes his own scholarly contribution by describing in detail the way financial markets responded to the public debt. In Chapter 6, he researches Treasury Department records to show that bonds were held and traded by a broad cross-section of the population. These transactions took place quite readily due to the sophistication that quickly developed in U.S. financial markets and the marketability of U.S. government bonds in European financial markets. This ready marketability of bonds proved valuable when the U.S. faced the War of 1812, another subject of Chapter 6.

As another window into the functioning of those financial markets, in Chapter 7 Wright uses archives from the Virginia Historical Society to tell the stories of a broad array of bondholders in Virginia during the historical period his book covers. By establishing the way financial markets had developed to the point where government debt was liquid and easily traded, Wright shows how the first leg of the development diamond was set in place, the topic of Chapter 8. By following the Hamilton system, the federal government had established itself as a non-predatory government able to protect its citizens and their property; it also offered sound financial securities that nurtured the growth of financial markets that could trade the corporate securities needed for the development of business. Entrepreneurs thrived and by the 1830s the U.S. was on its way to becoming a developed economy.

In Chapter 9 Wright describes how, briefly, Andrew Jackson as president was able to eliminate the public debt. He did so because he thought it important for the government to be debt-free. Wright argues that Jackson’s efforts were overdone but that his belief that the debt should be kept within bounds was important. It was a belief that held among politicians in the U.S. at least until World War II. Since then, politicians have used the public debt to fund programs designed to gain them the loyalty of their constituents. What is needed, Wright insists, is a return to the arguments of Jefferson and Jackson that paying off the debt is a worthy objective of all government.

As the many secondary sources Wright draws on and lists in his references will attest, the history of the public debt of the U.S. had been often told. Wright adds to that history by including an analysis of the way financial markets handled the public debt. The book is worth reading by anyone troubled by the current disregard over the burgeoning of the public debt in the U.S., because Wright serves to remind us of a debate over the public debt that no longer takes place. He thus raises an issue that is as old as the country and as pertinent now as it was at the beginning.

Donald R. Stabile is Professor of the College at St. Mary’s College of Maryland and the author of The Origins of American Public Finance: Debates over Money, Debt and Taxes in the Constitutional Era, 1776-1836 (Greenwood Press, 1998). His next book, The Living Wage: Lessons from the History of Economic Thought, is forthcoming from Edward Elgar.

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century

Civil Happiness: Economics and Human Flourishing in Historical Perspective

Author(s):Bruni, Luigino
Reviewer(s):Noell, Edd

Published by EH.NET (March 2007)

Luigino Bruni, Civil Happiness: Economics and Human Flourishing in Historical Perspective. New York: Routledge, 2006. xv + 169 pp. $135 (hardcover), ISBN: 0-415-32628-1.

Reviewed for EH.NET by Edd Noell, Department of Economics, Westmont College

Economists, along with psychologists, sociologists, and neuroscientists, are at the forefront of modern research on happiness (Layard, 2005). Over the past three decades economists have been wrestling with the quandary posed by Easterlin’s Paradox, namely that individuals do not report an increasing level of happiness despite increases in personal income over time. Through an analysis of developments in the history of thought on “economics and human flourishing,” Luigino Bruni’s Civil Happiness finds that mainstream economics has lost its reliance on the civil happiness tradition and thus is ironically ill-equipped to explain the paradox. Bruni, an Associate Professor of Economics at the Universita degli Studi di Milano Bicocca in Italy, claims that happiness invariably involves interpersonal relationships yet this consideration is excluded by economics. While there is some hope in the work of behavioral economists, for the most part modern economics lacks the methodological tools to appreciate the role of sociality as a source of happiness. Bruni suggests that economics will be better served by appreciating the insight that happiness understood in a civil sense does not necessarily rise and fall with changing income levels.

Why and when did economics lose sight of the interpersonal dimension of happiness? Bruni points to Adam Smith and Antonio Genovesi as crucial figures in the late eighteenth century who took similar yet fundamentally different approaches to addressing happiness in the emerging market society. Smith’s approach of treating economic relations instrumentally was employed by “the Cambridge civil tradition” of Malthus and Marshall in the nineteenth century (pp. 88-89). In the same era Bentham’s utilitarianism shaped a hedonist approach to economics which eventually reduced happiness to pleasure in the works of Jevons. By the twentieth century the influence of Wicksteed and Pareto had eliminated even this subjectivist approach to happiness, excluding civil happiness from legitimate consideration. The eleven chapters of Bruni’s book examine both well-known and somewhat overlooked primary works in the history of economic thought to describe the manner in which this banishment occurred and the consequences of these developments for “happiness” as understood in modern economics.

In the first three chapters Bruni sets out to demonstrate the deficiencies of economics’ understanding of happiness and the consequent shortcomings of current explanations of Easterlin’s Paradox. Bruni highlights the direct relationship “between individual well-being and sociality-as-relationality” found in ancient Greek philosophy but absent in the mainstream literature of economics (p. 17). Distinguishing between hedonism and Aristotle’s eudaimonism, he affirms the latter concept as superior in that it provides an ethical approach to happiness by seeing it as the realization of an individual’s potential. Aristotle proclaims that wealth, health and other goods are merely means for achieving eudaimonia (classical happiness), which is only achieved indirectly through the practice of relational virtues of intrinsic value such as friendship and participation in civic life. After being supplanted by Neo-Platonism for over a thousand years, eudaimonia was revived in the form of civic humanism during the Renaissance. Civic humanists describe man as a “civil animal” pursuing civic virtue. However, the bitter civil strife in Europe generated reflection on a different view of human nature, dubbed by Bruni the “uncivil animal” tradition and represented by Machiavelli, Hobbes, Mandeville, and Hume. Each have in common “an asocial and selfish anthropology” (p. 39).

One of the particularly strong contributions of the book is Bruni’s discussion in chapters 4-6 of the lesser known eighteenth-century Italian Public Happiness tradition and its attempted reconciliation of the civil and uncivil perspectives on human nature. Misunderstood as a concept imported from the French Enlightenment, the notion of “public happiness” instead stems from the natural law tradition of Scholasticism and Civic Humanism. A key element in this tradition is that “there is no happiness outside society and there is no society without civil virtues and intentional love for the public good” (p. 42). Genovesi is most significant here as a leader of the Neapolitan School of Civil Economy, which identifies happiness with reciprocity, in that “happiness and positive interpersonal relationships are … two sides of the same coin” (p. 67). The reconciliation of civil and uncivil perspectives draws on the crucial role of marketplace reciprocity. Bruni asserts that for Genovesi “engagement in economic relations is an exercise of civil virtues” (p. 70) because “making oneself happy doesn’t mean impoverishing others, but means making them rich as you enrich yourself and thus you become happier together” (p. 76). At the same time Genovesi does not facilely identify wealth and well-being as identical measures.

In Chapter 7, Bruni turns to the British classical school and finds both continuities and discontinuities with the Italian school in understanding civil happiness. Both Smith and Genovesi claim that “wealth is a means for obtaining the distinction and admiration from others, upon which our happiness chiefly depends” (p. 80) but wealth is not an end in itself. Yet Smith does not see “civil virtues as a precondition for markets” (as Genovesi does), but instead depicts commerce as “the ‘creator’ of civil virtues” (p. 83, emphasis in the original). For Smith market relationships don’t depend on the classic relational virtues of friendship, benevolence and/or sympathy. Bruni acknowledges that Smith views them as “natural sentiments” and “fundamental features of human beings, just because the human being is naturally social and needs cooperation to survive.” Still, he states that in Smith’s estimation “the market itself doesn’t require them, and works even better without them” (pp. 87-88, emphasis in original). Instead of Genovesi’s approach to sociality in the market, it is Smith’s conception of the market as a place for instrumental yet civil relationships which shaped nineteenth-century classical economics.

“The Cambridge civil tradition” is examined in Chapter 8 and is contrasted in Chapter 9 with a “parallel stream” of thought also flowing in late eighteenth and nineteenth-century England, Bentham’s Utilitarianism. Here Bruni focuses particularly on the works of Malthus, Marshall, and J.S. Mill. While Malthus and Marshall acknowledge that wealth is merely a means to happiness, and that happiness depends on elements in life such as friendships, leisure, and religion, they also consider these components of happiness to be “external” to economics. Malthus finds them “… to be too ill-defined for inclusion in the economic domain, since economic analysis needs data and objective measurement …” (p. 91). At the same time, Mill’s particular recognition of the public, relational dimension of happiness places him close to the civil economy tradition and in opposition to Bentham’s reduction of happiness to hedonist utility. Bruni moves on to helpfully discuss the rise and influence of the hedonist and individualistic version of utilitarianism. He highlights the manner in which hedonic utility penetrates neoclassical economics in England (Jevons, Edgeworth) and Italy (Pantaleoni) so that the meaning of happiness is shrunk and “all connections with civic virtues” are severed. Bruni observes “Once Economics broke away from the classical idea of happiness, happiness became pleasure and Public Happiness became the sum of individual pleasures” (p. 104).

In Chapter 10 Bruni discusses “the solipsistic foundations of contemporary Economics” for which even the hedonist approach to happiness is abandoned. At the turn of the twentieth century, Pareto and Wicksteed play a key role in excluding “non-instrumental interpersonal relations”; Bruni makes a convincing case that in their work we find the reasons for “the passage from happiness/pleasure to purely instrumental choices without any reference to the psychology of the subject” (p. 108). Where Pareto drops consideration of motives and focuses exclusively on rational choice, Wicksteed understands economics to be “compatible with any motive, including altruism” and indeed holds that “most non-selfish behaviour is instrumental” (pp. 115, 117). Bruni ends the chapter with a short discussion of two examples of modern research agendas which continue to rely on an instrumental framework and exclude interpersonal relationships, i.e., game theory and Becker’s extension of economic logic to a very wide range of human behavior.

In the concluding chapter, Bruni names deficiencies in modern economic methodology yet lauds some recent developments. While many economists explain “genuine sociality” as a positive externality, they don’t see “family life, friendships, and close relationships” (p. 122) as relevant for happiness. While they expound positional theories of happiness, for the most part they don’t recognize relational goods “which cannot be produced, consumed or acquired by a single individual, because they depend on interaction with others and are enjoyed only if shared with others” (p. 124). Yet particular fields of economics are emerging which emphasize the significance of interpersonal relations. Bruni is hopeful that developments recognizing the role of “reciprocity, trust, intentions, fairness, esteem and similar concepts” in both behavioral and experimental economics indicate “a new season of interest for the interpersonal dimension” (p. 123).

Historians of economics will likely find in Civil Happiness both useful insights and certain gaps in the thesis that call for further explanation. For example, researchers on Smith should benefit from Bruni’s largely careful comparison of the Scottish moral philosopher and the Italian Genovesi on the market and civil life. Bruni’s observation that the term “happiness” rarely is found in either of Smith’s two major works and his interpretation of Smith’s position on “happiness as deception” could well generate a new line of inquiry for Smithian scholarship. Yet one wishes that Bruni had more fully explored the role of sentiments, passions and instincts lying behind rational decisions which are emphasized by Smith and others prior to nineteenth-century classical and neoclassical economics. In addition, Bruni’s argument leaves out any sense of why Bentham’s identification of happiness with pleasure is so influential upon Jevons, Edgeworth and Pantaleoni. Further exploration of the transformation of economic thinking on motivation and choice with respect to happiness is needed here; pursuit of the analysis provided by Schabas (2005) on how economists came to more narrowly depict individuals as rational utility-maximizing human agents would be particularly helpful.

Nonetheless, Civil Happiness presents an important addition to the economics literature on happiness through an analysis of the key turning points in economic thought. Bruni is particularly helpful in demonstrating the implicit connections between earlier sources in economics and two quite different facets of modern thought. One is the work of behavioral and experimental economists which draws on nineteenth-century utilitarianism; as Bruni notes, “the approach of the contemporary scholars working on happiness is Benthamite or Jevonsian, an approach where it is also allowed that people get happiness/pleasure from social interactions” (p. 118). The other feature is characteristic of mainstream economics. It relies upon the “methodological move performed mainly by Pareto and Wicksteed” to exclude subjectivist considerations and thus “has tremendous difficulties in understanding the interpersonal matter that is happiness” (pp. 108, 118). This turn in economic methodology needs to be reconsidered. Bruni is probably correct in asserting that an “economic theory more open to genuine sociality could better understand not only the ‘Easterlin paradox’ but also those interactions (that are growing more and more in postmodern market societies) characterized by the presence of relational goods” (p. 123). Civil Happiness challenges economists not to reify a narrow concept of happiness but rather re-examine its nature in order to realize greater progress in our research on a number of substantial dimensions of civil society.

References:

Richard Layard (2005), Happiness: Lessons from a New Science. New York: Penguin Books.

Margaret Schabas (2005), The Natural Origins of Economics. Chicago: University of Chicago Press.

Edd Noell is Professor of Economics at Westmont College and an editor of the journal Faith and Economics. His current research is directed towards developments in economic thought on the living wage in Adam Smith and in early twentieth-century British and American economics. He is the author of ?Smith and a Living Wage: Competition, Economic Compulsion, and the Scholastic Legacy,? History of Political Economy 38 (Spring 2006): 151-74.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):Medieval