History of Economics





3rd Liberalism





1st Preface

2nd Predecessor: The physiocratic teaching

3rd Main features of liberalism

4th Representatives of liberalism

5th Smith: The principle of division of labour

6th Smith: The invisible hand

7th Smith: The harmony model

8th Mandeville: The Fable of the Bees

9th Bentham: The teaching of utilitarianism

10th Hume: Moral sentiments

11th Cobden: Political implications



1st Preface


In this chapter we want to deal with liberalism. Liberalism emerged in the second half of the 18th century as a reaction to mercantilism. The main sphere of influence of liberalism was England, but liberal movements also emerged in France, Germany and other countries.


In this chapter we will mainly confine ourselves to the liberalism in England, as it was developed foremost by Adam Smith.


The works of Adam Smith cannot be classified only under liberalism, though. Adam Smith can also be regarded as the founder of the classical direction. In this sense, Adam Smith is often referred to as a representative of the early classics, in contrast to the later classical works mainly by David Ricardo. While with David Ricardo and Robert Malthus it must be spoken of a pessimistic view, the works of Adam Smith are characterised by a thoroughly optimistic teaching. Here, in this lecture we want to consider the works of Adam Smith only as far as Adam Smith can be ascribed to liberalism. The following chapter, which is devoted to classics, however, will essentially deal only with the works of David Ricardo and Robert Malthus.


In one point, however, this chapter will deviate from the confinement to English contributions to liberalism and will report on the work of the physiocrats, too. The doctrine of the physiocrats was essentially confined to France and can be regarded as a predecessor of liberalism. In and of itself, physiocratism does not contain any contribution beyond English liberalism. In a slightly different respect, however, physiocratism was extremely innovative insofar as it was probably the first to develop a tableau that describes the complete cycle of production within an economy. In this respect, the physiocrats anticipated important insights of the circulation theory developed primarily by John Maynard Keynes.




2nd Predecessor: The physiocratic teaching


The founder of physiocratism was Francois Quesnay, who lived from 1694 to 1774 and was the personal physician of the French king Louis XV. Quesnay was in favour of a 'laissez faire', a principle according to which citizens and entrepreneurs should be granted the greatest possible freedom of self-determination. In this respect, physiocratism can indeed be classified as the predecessor of liberalism.


Of greater interest at this point is, however, his work on a 'Tableau Economique' published in 1758. Here, the cycle connections of the flows of goods between the individual sectors of the economy are illustrated.


Quesnay assumes free trade in his statements, where the price of a good is formed from the price expectations of suppliers and demanders on a free market. Three classes are distinguished in the sense of economic sectors:


The first class includes the farmers, which mostly produce agricultural products not on their own land but on leased land. According to Quesnay, they are the only class that is productive in the sense that they contribute to economic value added. The class is therefore also called 'classe productive'.


The second class is described by Quesnay as 'sterile' and includes merchants, traders, but also craftsmen. They are classified as sterile to indicate that their contribution consists only in bringing the goods produced from the producer to the consumer. This class does not add any value to the actual value of the individual goods. This view may still be possible as far as the group of traders is concerned.


Although we are convinced today that traders and transporters also make a real contribution to the value added, that the overall benefit which the end consumer receives from the consumption of the individual agricultural products does not only depend on the actual benefit that he receives from the consumption of a good in the narrower sense. Benefits increases occur also when the trade takes over the very time-consuming as well as costly search for suitable products, so that the trade contributes to avoiding a reduction in consumer benefits. The transport sector also generates benefit increases insofar as it transports the products from the place of production to the place of consumption, a service which would in turn reduce the benefits for consumers if they had to purchase the products directly from the farmer who produces them. Obviously, Quesnay overlooked these services of trade and transport and assumes that the only important benefit that the good produces is directly at the consumption of it.


It is quite incomprehensible from today's point of view that even the craftsmen who process the agricultural raw materials in a variety of ways and thus also produce completely new products from the agricultural raw materials are described as sterile. In this case, the direct consumption of a hand-crafted product is likely to be of much greater benefit than if the consumer had to obtain the raw materials and, before consuming these goods, would first have to carry out the processing of these raw materials into end products by himself through manual labour.


Finally, the third class is the group of the 'propriétaires', i.e. landowners and the nobility, who owned most of the land at that time, where the farmers either carried out their work as bondsmen of the landowner or on land leased by the owners to the farmers under the condition that they had to make a certain quantity of products available to the owner free of charge. However, the farmers were still able to produce more and to consume themselves the products which did not have to be paid to the owner or to resell them to traders.


Quesnay now assumes - probably to simplify the connections, less than a statement of fact - that the prices and also the exchanged quantities remained constant for one year at a time, so that the flows of money and goods could also be regarded as constant year after year. One can therefore also speak of a stationary circulation model. The producers deliver their goods to the merchants and craftsmen and these sell their goods to the nobility. Thus, the cycle is closed.


Let us now take a more detailed look at the economic cycle of Quesnay. The three rectangles symbolise the 3 classes, the green rectangle the productive class of the farmers, the blue rectangle the class of the nobility and the landowners and the grey rectangle finally the class sterile, the merchants and craftsmen:




It is assumed that the class of farmers, the only productive class, produces food (N) for 3 million monetary units. Here, goods are sold to the nobility for 1 million; in return, the farmers receive income of 1 million monetary units (GE). The monetary flows running here are shown in yellow, they are the payment for the food sold to the nobility.


Food with the value of a second million GE is sold to the traders and craftsmen; thus, a flow of money (yellow) also flows from the sterile class to the productive class. The remaining food with a value of 1 million GE finally remains in the productive class. On the one hand, the farmers receive fictitious monetary units with the value of 1 million GE for the sale of these foods, but they also must pay 1 million GE to buy these goods.


Besides food, the productive class also produces raw materials (R) worth 2 million GE. Raw materials worth 1 million GE are sold to the sterile class, and therefore the farmers receive GE worth 1 million. The remaining raw materials with a value of 1 million GE remain in the productive class, so they are sold to themselves again.






Now we consider the class sterile. As shown, they purchase raw materials for 1 million GE and for a further million food products and produce manufactured goods worth 2 million for this. As we mentioned above, the sterile class does not add value, so the value of the output just equals the input. Here, manufactured goods are paid to the landowners for 1 million GE and the remaining million is paid to the productive class:







Our previous considerations have shown that the productive class sells goods for a total of 5 million GE (3 million foods and 2 million raw materials), generating revenues of 5 million GE, and from these 5 million GE received again it buys 2 million goods (1 million foods and 1 million raw materials each), and spends 1 million GE on the purchase of manufactured goods. The remaining residual 2 million proceeds are to be paid by the farmers to the landowners as a land lease.


We have already seen that the landowners buy goods worth a total of 2 million (1 million from the farmers for food and 1 million from the craftsmen for manufactured goods). Thus, the budgets of all three classes are balanced: The productive class receives 5 million and spends it again. The landowners receive a lease worth 2 million and spend it on goods (food and manufactured goods). Finally, the merchants and craftsmen receive a total of 2 million for the sale of manufactured goods and spend these amounts again on the purchase of food and raw materials.






While Quesnay founded physiocratism, Anne Robert Jacques Turgot, who lived from 1726 to 1781 and was the finance minister of Louis XVIII, had put this doctrine into practice. It was only logical that Turgot demanded the abolition of compulsory labour. Because if the farmers are the only class that contributes to the added value of the nation, the wealth of the nation can only be increased by increasing agricultural productivity. Turgot had correctly recognised that farmers who work as free men and whose diligence is of direct benefit to them perform generally better than serfs.


Turgot's demand that only the soil should be taxed, since only the soil is productive, also results directly from the physiocratic teachings. If, on the other hand, one tries to tax artisanal production, the tax burden must necessarily be passed on, since supposedly no values are produced in the sterile class.


Turgot furthermore recommended the repression of trade monopolies. The formation of monopolies enabled the monopolists to raise the price of the goods sold, even though it was according to the assumption that no value would be added in this area and consequently the profits made by monopolisation were not justified.


Finally, Turgot recommended a taxation of the nobility. This demand can also be derived directly from physiocratic teachings. As our cycle diagram has shown, the entire added value of production flows to the landowners. It is therefore logical that the group which collects the remaining value should also be taxed.




3rd Main features of liberalism


Liberalism is widely understood as a world view that emphasises the freedom of citizens towards the state and, above all, demands that the state should refrain from any interventions in economic life. The state must principally not be concerned with the distribution of material resources.


The emergence of liberalism goes back to several roots. First and foremost, the economically oriented liberalism was a reaction to the absolutism of the 16th to 18th centuries. Absolutism, particularly in France, had initially contributed that modern industrial economies could emerge at all. Thus, mainly through numerous infrastructure investments, a transport network was built up and investment aid was granted, which made it possible in the first place to build modern industrial enterprises; finally, by protective measures against foreign enterprises, it was ensured that domestic enterprises could assert themselves against foreign competition.


But very soon, with the expansion of the protectionist state, the initial support for the enterprises turned into its opposite, the protection degenerated into bureaucratic paternalism, which obstructed the further development of the enterprises. Against this obstruction the liberal movement arose, which demanded freedom for enterprises in the domestic economy and the complete abandonment of protectionist measures abroad. This was the beginning of the free trade movement in England. In 1776, Adam Smith, in his 'Wealth of Nations', developed a very optimistic concept of the free development of a national economy liberated from the state. He thereby provided not only the basis for the emergence of modern economic science, but also the foundation of an economic conception to defend liberal views.


In the philosophical discussion about freedom, a distinction is made often between the themes of freedom 'from what' and freedom 'for what'. Regarding this distinction, liberalism has always been primarily about defending the freedom of citizens from attacks by outsiders, especially the state.


Old liberalism turned against the dirigiste economic policy of absolutism respectively its economic policy variant of mercantilism. In contrast to neo-liberalism, older liberalism did not see the freedom of individuals threatened by the monopolistic power of private market partners. The state would find its limitation in the individual freedom, which includes particularly freedom of belief and opinion as well as the freedom to engage in economic and political activity.


Like hardly any other idea, liberalism contributed to the development of industrialisation worldwide. It is also not surprising that, in the attempt to shake off the state fetters, also justified protective measures, especially for workers, were initially thrown overboard and, in the course of industrialisation, caused mass misery among the workers. With the decay of the feudal structures in the countryside and the mass migration to the cities, a proletariat of workers emerged, who, without protection from exploitation, disease and misery, often had to spend their lives in inhumane conditions with child and female labour, with extremely low wages, whereby not even the physical subsistence minimum was guaranteed.


According to liberal ideas, however, the freedom of the individual ends where individual action impairs the freedom of another. In this respect, these grievances could actually not be accepted even according to liberal basic understanding. With John Stuart Mill we therefore also find the first approaches already for a governmental social policy, which tries to remedy the worst excesses. The state power monopoly is not called into question here.


Although the freedom of all individuals (all citizens) is also demanded, the attention is directed towards the freedom of entrepreneurs especially within the framework of liberal ideas. The reason for this is primarily that entrepreneurial freedom is not only demanded for its own sake, but because, according to liberal ideas, only a free market organisation, though sustained by competition, would ultimately align production with the needs of the consumers in the best possible way. Only an entrepreneur who is free to compete would have an interest in making all possible cost reductions and quality improvements; the competition and the free market automatically ensured that production is aligned with the needs of the consumers precisely when the entrepreneur also achieves his maximum profit.


In its original constitution, liberalism strictly rejected any form of state intervention in the market development; the social question as well as questions of fair distribution were matters which concerned people themselves had to regulate.


This rejection of any kind of distributive policy motivated intervention by the state has several roots. Friedrich August von Hayek, for example, refuses to deal with questions of justice, among other things by saying that this is a 'weasel word' and that everyone in the literature would understand this term in a different way. Now this may be true, but does this reproach not also apply to almost all political aims such as freedom or democracy? An examination of questions of justice is quite reasonable if, as e.g. John Rawls has done, the term 'justice' is specified at the beginning of the discussion.

The rejection of old liberalism against all efforts in distribution policy is secondly connected with the fact that the efficiency of distribution policy measures was doubted and undesirable side effects on allocation, employment and growth were feared. These fears apply - certainly with good reason - only for the traditional measures of distribution policy, which consisted in direct interventions in the market. However, there are also forms of distribution policy that are largely allocation-neutral and in line with the market.


Sometimes, it is questioned in the framework of liberalism in general whether the market leads actually to injustices, whether the injustices that actually occur are not precisely due to the fact that the market results would be distorted, e.g. by allowing monopolies. Imperfections would exist in every economic system; it is doubted whether the market would actually yield worse results in terms of danger and justice compared to bureaucratic solutions.


Although old liberalism was generally sceptical about distribution issues, there are significant exceptions. John Stuart Mill - one of the founders of liberalism - had already advocated numerous reform measures, for example, in 1869, for an active right of women to vote.


It must also be considered that the aim of freedom always has an aspect of distribution policy. An expansion of the freedom of one person can also lead to a restriction of the sphere of freedom of another. But it is in keeping with liberal tradition that freedom finds its limits where it violates the freedom of another. Later on (especially in the context of ordo-liberalism), however, social policy measures of the state were advocated if they prevented workers from descending into poverty and if they mainly consisted in helping people to help themselves.


If we compare liberalism with other worldviews of the time, a first difference in this question is already whether the possibility respectively probability of such a conflict of aims is affirmed. The reason why liberals are less concerned with questions of justice is, among other things, because they start out from the idea that although both a market economy as well as a bureaucratic economic system always have imperfections, but only the market presented the system by help of which both aims (freedom and justice) could be realised.


It is the competition that is responsible for solving the allocation problem in the best possible way, but it is also thanks to competition, i.e. the absence of monopolistic power influences, that the distribution of wealth between suppliers and consumers is reasonably fair.


For these reasons, liberalism assumes in general that in the reality in a functioning market economy no serious conflicts between the aim of freedom and the aim of justice occur at all. Moreover, within this model, the concept of social policy is almost exclusively associated with dirigiste measures with the attempt to correct the distribution of income out of considerations of justice. These are rejected, however, not only because they impede the allocation of the market, but also because inefficient solutions to the allocation problem are accompanied with a decline in general material welfare, and at the same time less financial resources are available for the remaining social aims and thus ultimately, precisely due to the distribution policy measures, the distribution aims are also solved unsatisfactorily.


Let us finally turn to the question of how liberalism differs from other models in the choice of its means. In concrete politics, the different positions are often based less in the aims than in the required use of means.


Old liberalism in its most radical form was based on the idea that it was sufficient to introduce a competitive order once only - above all by abolishing all external trade restrictions and all paternalism of the entrepreneurs domestically - and that the competitive order would maintain itself and that the market would always lead to optimal results by its own efforts without the intervention of the state. Later - especially with neo-liberalism, but to a certain extent also with John Stuart Mill - this attitude was corrected. In individual cases, the market may quite fail, so that sometimes measures by the state were necessary to avert these dangers. The state not only has to establish a competitive order, it rather required numerous measures to defend this competitive order once it has been established.


However, it is always emphasised that the state must not intervene in the markets directly, that the state must rather limit itself to indirect measures and that only in the case of such a restriction the market will remain preserved. We will deal with these questions in great detail later, in the chapter on neoliberalism.




4th Representatives of liberalism


The most important representative and founder of liberal economics is considered Adam Smith, who lived from 1723 to 1790. Adam Smith was one of the first scientists who, at the end of the 18th century, drew up a complete overview of the operating principle of a free market economy. This includes particularly the work published by Adam Smith in 1776 on 'Inquiry into the nature and causes of the wealth of nations'.


Already in 1759, Adam Smith had developed his ideas about morality in his paper: 'Theory of moral sentiments', in which the moral consciousness was based on mutual and similar feelings of pleasure and suffering. It is not the benefit, but the feeling of decency that decides what is to be considered legitimate. Here it was also necessary for the individual to overcome its self-love. Through the construction of an 'impartial observer', one could finally decide which behaviour could be approved morally.


In his intellectual roots Adam Smith refers to the work of Jeremy Bentham (1789: An Introduction to the Principles of Morals and Legislation), furthermore to David Hume especially with his paper of 1740: 'A Treatise of Human Nature', and to Bernard de Mandeville with his famous 'The Fable of the Bees' published in 1714. We will deal with these intellectual premises in more detail below.


The readiness to accept liberal basic ideas had been prepared by the enlightenment in general and the work of John Locke (1632 - 1704), who, among other enlighteners, advocated for the free development of science, free from paternalism by church authorities, and who was the founder of empiricism, a science based on experience.


Besides Adam Smith, it was primarily James Mill, who lived from 1773 to 1836, and his son John Stuart Mill, who lived from 1806 to 1873, who endeavoured to gain a general overview of the operating principle of a free economy on a liberal basis. In his main work from 1820: 'Elements of political economy', James Mill anticipated the Say's Theorem (every supply creates its own demand), further transferred the application of utilitarianism to psychological areas and pointed out that one has to look through the money veil to recognise reality.


By contrast, John Stuart Mill, the son of James Mill, had systematically developed and expanded utilitarianism, attempting to provide an overview of all economic phenomena in his main work published in 1848, 'Principles of political economy'. In contrast to most of the old-liberals, demands can already be identified with John Stuart Mill, which were raised much later by the socialists and socialists of the chair, such as the demand for public ownership of the natural resources, furthermore the demand for equality for women, for compulsory education and for birth control.




5th Smith: The principle of division of labour


As I mentioned earlier, Adam Smith advocated a markedly optimistic view of economics. He trusted that if enterprises were allowed to decide what and how to produce, productivity would increase and with that the overall output. Adam Smith saw one of the main reasons for this increase in productivity in the division of labour and the accompanying specialisation.


Adam Smith explained this principle using his famous example of a pin. He assumed that a single worker entrusted with the production of pins could produce perhaps one, but certainly not more than 20 pins per day. If ten workers were now employed in the same factory and the total task of pin production was broken down into different steps, so that one would draw the wire, a second would cut the wire, a third would sharpen the tips, etc., the total daily production could perhaps be increased to 48,000 pins.


The real reason for this division of labour consists now on the fact that individual workers specialise. This specialisation can certainly help to increase productivity. It is precisely because the individual worker now only must perform one or only a few hand movements that allows him to acquire greater skill, firstly by constantly repeating the same hand movements. Furthermore, it is worthwhile for him to learn specialised knowledge that enables him to further increase production.


Adam Smith explained his example of the productivity-increasing effects of a division of labour using an internal process (the manufacture of pins). However, the division of labour between different enterprises gained much more importance. By restricting themselves to a few products, the individual enterprises were able to acquire specialist knowledge about the procurement of the necessary raw materials and the hiring of skilled workers, about the manufacture of these few products and about the possible distribution channels, and to improve their productivity in just this way.


Of course, specialisation also has its limits. If the individual tasks of a worker are simplified more and more and result in very few steps, the effect can very well overturn at a certain point of specialisation and again lead to a reduction in productivity. Monotonous work can easily lead to fatigue and in this way reduce production output. Particularly high output is achieved by workers who perform interesting and varied work.


Furthermore, Adam Smith did not entirely realise that an ever-increasing division of labour, down to single movements, opens up the possibility of transferring partial tasks to machines. These can perform their task much more efficiently than workers, whenever on the one hand clearly definable movements are involved, but on the other hand these must be performed with extremely high precision.



6th Smith: The invisible hand


In the works of Adam Smith, the idea of an invisible hand also plays a very decisive role. What is meant by this parable?


Adam Smith assumes that individual market participants generally act out of self-interest, that is - to use the language of the neoclassic - entrepreneurs strive to maximise their profits and consumers pursue the aim of optimising their own benefit. Despite this self-interested behaviour, the welfare of the entire population is usually promoted yet just in this way by the working of an invisible hand.


This idea can again be formulated more precisely if we use the language of modern welfare theory. The free market tends by itself to balance supply and demand. This equilibrium price now makes it possible - provided that certain conditions are met - to maximise overall welfare. Under the conditions of atomistic competition, the prices correspond to the respective scarcity conditions. Entrepreneurs reach their profit maximum precisely in the supply of the individual goods, at which households also maximise their benefits.


Expressed somewhat more simply, this theorem of the invisible hand states that entrepreneurs make a profit precisely when they align production with the wishes of consumers. Generally, no one wants to promote the public welfare of his own accord; rather, in his actions he thinks primarily of his own interests. Nevertheless, fate is steered by an invisible hand in such a way that in the final result the general welfare gets a chance, or at least is not violated.


The significance of this parable of the invisible hand becomes really visible when we realise what alternatives we have with regard to our motives. We know economic systems and state systems in which leaders are expected to work exclusively for the common good and to put their own interests last. It would be wrong to assume that in such a society the public welfare is always served actually. We always have to reckon with the possibility that the leaders only pretend to have an intension for the public welfare, since this is required of them, but that they actually want to increase their own benefit, their material profit or even their power.


We have to realise that the question whether certain actions benefit or harm the public welfare does not depend primarily on the motive that decided a leader to do certain things, but depends solely on the actual effects of the action with regard to the public welfare. It is the merit of liberalism to have pointed out that it depends on the order of a system determining by which actions the public welfare is preserved. Under conditions of competition (and we must add that under certain further conditions, such as the absence of external costs), a free market leads to the public welfare being achieved just when, and only when, everyone has his own advantage in mind. Here, forces emanate from the system which have the effect that the public welfare of the society as a whole is achieved precisely when the individual realises his own welfare in the best possible way.


It can be seen as a positive that such an order does not only work when all leaders have the public welfare in mind. It is positive to know that mistakes made by leaders, which occur in any order, are not always at the expense of the general public.




7th Smith: The harmony model


When assessing the mercantilistic system, we concluded that it can be described as a conflict model. The advantage of one (country) is always also the disadvantage of another (country). As a counter vision, liberalism develops a model of harmony. If we refrain from forcing an active balance of trade by means of import duties, thereby causing the other countries with which we conduct foreign trade to necessarily have to accept a passive balance of trade, can the hereby created free trade lead to the fact that all participating states benefit from it.


In our criticism of mercantilism, we have pointed out that import duties only lead to a temporary improvement in the country's own terms of trade, but that in the long term it must be expected that the import duties imposed with the help of trading partners will disturb production, with the consequence that while the terms of trade of the importing nation will improve, at the same time the volume of foreign trade will decline. In the long run, the disadvantaged countries will defend themselves by imposing import duties, too. This will inevitably lead to a regression in the terms of trade and a further decline in the trading volume. The positive effect of the first country will thus disappear again, while the contraction in the volume of trade will increase anew, to the disadvantage of both countries.


Thus, if one follows Adam Smith's recommendations and releases foreign trade, trade can recover and both nations benefit from the waiving of customs duties. Thus, with Smith one can say that the introduction of free trade ultimately helps all the economies involved, the advantage of one is accompanied by the advantage of the other.


In the discussion about mercantilism, I had added, however, that the differences between the two systems (mercantilism versus liberalism) are only described very imperfectly if we view one system, mercantilism, as a conflict model only, and the other system, liberalism, as a harmony model only. In reality, both systems know both harmonious and conflictual relationships, only just at different points.


The system of mercantilism is basically a system of state planning. A state authority prescribes what to do and what not to do. The requirements of the authority are fulfilled quasi harmoniously by the subordinates and by the private individuals. If the state grants an enterprise a shelf, e.g. for coal production, this enterprise can act as a monopolist. Conflicts then exist only in the result that is achieved by the individual enterprises or states. The profit of one country is reflected as a loss of the other country. Or the fact that the monopolist can increase his profit by artificially raising the price implies simultaneously that the consumer must accept a loss of benefit due to the excessive price.


In contrast to this, we must assume that in a market economy system there is competition between the individual acting entrepreneurs. We even have to assume that there can be competition between enterprises not only in reality, but that it is precisely this competition that is an essential precondition for the system to operate smoothly, in other words that precisely those goods are produced that are also in demand by consumers. While for mercantilism applies that harmonious relationships lead to a conflict in the result, for liberalism is valid that the conflict between the individual entrepreneurs (i.e. competition) ultimately leads to a harmonious overall result.



8th Mandeville: The Fable of the Bees


Bernard de Mandeville (1670-1733) was a Dutch doctor, who tried to show in his writing on the bee fable in 1723 that just as in a bee colony the seemingly obscure and arbitrary activity of the individual bees would lead ultimately to the welfare of the beehive, similarly in a liberal economic order vices such as luxury and envy would contribute to an increase in the general welfare by providing incentives for enterprises to do exactly what is also in the interest of the public welfare.


Here we find similar trains of thought as in Adam Smith's model of harmony described above. Nevertheless, Adam Smith does not fully agree with Mandeville's statements. Whereas Mandeville's supposed virtues are ultimately based on vanity and selfishness, and thus it is vice and other amoral behaviour that ultimately bring about welfare for the entire population, Adam Smith only assumes that behaviour that is primarily oriented towards one's own interests can nevertheless - if certain conditions are met - benefit the general public. Here, nothing at all is said about how morally or even amorally certain individual aims are to be judged.


An individual may very well be primarily concerned with his own welfare and yet do things which are regarded as highly moral and desirable in the sense of the national community. It is decisive that it is not primarily a question of the motive whether certain actions lead to an increase in the overall welfare, but rather that it is only relevant to ask what effects emanate from a certain behaviour, and the answer to this question itself depends ultimately on the respective order in which these actions are carried out and not only on the motive.


Naturally, profit maximisation can certainly lead to economic damage, e.g. if a monopolist increases his profit by artificially scarifying the product. Only under competitive conditions (and some further conditions) the welfare enhancing effects occur. In the same way, however, an action that is motivated solely by altruism, i.e. where one person intends to do good to another, can nevertheless be highly undesirable and annoying from the point of view of the presentee. For example, it is possible that the altruistically acting person is simply mistaken about the effect of his action. Or the action is only a benefit in the eyes of the giver, but not of the presentee, it can even lead easily to harassment and paternalism.



9th Bentham: The doctrine of utilitarianism


Jeremy Bentham lived from 1748 - 1832 and was the founder of utilitarianism, British philosopher and economist. He wrote down his most important thoughts in 1789 in his paper 'An Introduction to the Principles of Morality and Legislation'. Jeremy Bentham came from the enlightenment and applied these ideas to economic issues. The enlightenment, as is well known, was directed primarily against the spiritual paternalism of the official church; it appealed to the human reason and to the unlimited possibilities of an enlightened person.


For Bentham, the highest moral principle is to bring the greatest possible happiness to the greatest possible number of people. This involves an equation of happiness and pleasure. Bentham also considers it possible to offset joy and suffering against each other.


This is how the movement of utilitarianism emerged, which postulated utility as the measure for economic activity and demanded the maximisation of this utility for everyone. But this did not always mean - as is often lamented - a renunciation of moral values. Joseph Alois Schumpeter, for example, took the view that although a large part of the early classical authors presented their ideas in the form of a utilitarian view, the core of the value and utility theory, which was basically completely independent of utilitarianism, was not betrayed by any of the classics of economics.


Within the framework of value theory, it was always about individuals formulating certain aims and correspondingly exercising demand for certain goods and striving to act in such a way that their aims are realised in the best possible way; such behaviour could be described as utility-maximising or even as pleasure-seeking and reducing suffering, as some early classics did indeed. But the actual theorems of household and value theory apply regardless of what aims a household will set itself. These may well be morally high-ranking aims.


Whoever complains about the morality of liberalism, especially utilitarianism, should also consider that with the liberal movement it was abandoned for the first time to identify the welfare of the national community with the welfare of the absolutist ruler. Whereas Louis XIV still coined the phrase 'the state, it is me', now, within the framework of liberalism, the public welfare is equated with the welfare of all the individual citizens of this national community, and this is certainly also from a moral point of view a huge progress.




10th Hume: Moral sentiments


Adam Smith was influenced much more by the ideas of David Hume than by those of Jeremy Bentham. David Hume lived from 1711 - 1776, was a Scottish philosopher and economist and had a lively interchange of ideas with Adam Smith, with whom he was friends. The major works of David Hume which are most important in our context are the 'Treatise on Human Nature' published in 1740 and 'An Enquiry Concerning Human Understanding' published in 1748.


David Hume held the view that reason consisted merely of associations of certain sensory perceptions. He discarded the causal principle, saying that there were no natural laws at all. The highest moral good was the consideration for general welfare; this could very well be reconciled with individual happiness.


David Hume advocates a moral sentimentalism. Morality, he says, is rooted in people's feelings, in the so-called 'moral sense'. The human being was looking for the pleasant as well as the useful, both as an individual and regarding the community of people.


For David Hume, moral actions always take place on two levels: On the one hand, morality is always emotionally defined, but on the other hand it can very well be corrected by the mind. "Human nature simply consists of two main factors that are necessary for all its actions, namely inclinations and the mind; only the blind actions of the former, without the guidance of the latter, make people unsuitable for society" (Treatise on Human Nature).


Attention was also paid to David Hume's thesis that an 'ought' can never be derived directly from the 'is'. Reason alone was not able to derive moral rules. Moral ideas were always evoked by feelings. The reprehensibility of a murder, for example, did not result from rational considerations alone, but first and foremost from the feeling of disapproval.



11th Cobden: Political implications


Liberalism knows as well as we have seen with the idea of mercantilism and physiocratism, researchers who have developed the fundamental ideas and practitioners who have turned these ideas into reality.


Among the mercantilists, it was mainly Jean Bodin in France and William Petty in England who developed the basic principles of mercantilism. It was then primarily Jean Baptiste Colbert who implemented these ideas as finance minister of Louis XIV.


Similarly, the ideas of physiocratic teaching were developed by Francois Quesnay, the personal physician of King Louis XV, while Anne Robert Jacques Turgot, in his capacity as finance minister of Louis XVIII, implemented these ideas between 1774 and 1776.


In the same way, we can now also observe for liberalism that on the one hand we know theoreticians who developed the liberal ideas, but that on the other hand practitioners made the attempt to realise these ideas.


Among these practitioners was Richard Cobden, who lived between 1804 and 1865 and founded the Anti-Corn Law League in 1839, which aimed to abolish grain duties. Soon afterwards (1841) Cobden was also elected to the House of Commons and was able to campaign for the abolition of grain duties also in parliament.


Cobden advocated free trade in numerous speeches and in this way achieved that the free trade movement was very well received by the population. The conservative government under Robert Peel was thus under strong pressure to abolish grain duties, which then also happened in 1846. The result was a huge drop in grain prices with the further consequence that the previously extensive famine quickly came to an end.


Subsequently, further duties fell as the Corn Laws became a model for almost all imported goods. The so-called Cobden-Chevalier Treaty was concluded under Cobden's leadership in 1860, which provided for a bilateral agreement between Great Britain and France in which, from the British point of view, far more than 300 individual customs duties were abolished.


While the Methuen Treaty concluded between England and Portugal in 1703 still had the aim of preventing imports of goods from France as far as possible, the Cobden-Chevalier Treaty was about enabling free trade by reducing international trade restrictions. The Cobden-Chevalier Treaty was followed by other trade treaties in Europe, which introduced an era of free trade. The characteristic feature of these liberal trade agreements was the most-favoured-nation clause. It provided that all advantages granted to other countries would automatically be granted to the trading partner.