Money is not true wealth (Part III – The British Empire and its demise: 1815-1945)

By Glenn Stehle

[Part 1] [Part 2] [Part 3] [Part 4]

Once rationalism raised the intellectual stakes, Catholics could not go on playing by older, more relaxed rules:  if formal rigor were the order of the day in physics and ethics, theology must follow suit….

In the Library of the Convent of Ste. Geneviève, near the Pantheon in Paris, is a manuscript entitled  Traité de l’autôrité et de la réception du concile de Trente en France.  It describes the struggle, after the Council of Trent, to uproot the “pernicious heresies and errors” of Protestantism, and paints a revealing picture of the intellectual position of the Catholic Church in early 18th-century France….  [I]ts final pages show how far the demand for “undeniable foundations” had made its way into Catholic theology by 1725.  Looking back, the author credits the Council with anachronistic motives, which are intelligible only if already, in the 1570s, it could invoke the principles of a philosophical rationalism that was invented in the 1630s.  The ambition of the Counter-Reformation, it tells us, was “to prove invincibly our most fundamental belief.”

–STEPHEN TOULMIN,  Cosmopolis:  The Hidden Agenda of Modernity

In my last post, I gave a short recounting of how, during the latter Dutch Enlightenment, the wheels started coming off the religious ideology which had been used to lend moral and intellectual legitimacy to Dutch capitalism.  The “most fundamental belief” of Dutch capitalism, I endeavored to demonstrate, was a combination of “love of gain” amongst the capitalists with the threat of unemployment and starvation for the sailors, industrial workers and agricultural workers.

If this fundamental belief of capitalism was to survive into Modernity and The Age of Reason, then its apologists, just like those of the Catholic Church who had come before and shown the way, would have to find “undeniable foundations” for their belief.  And these would have to be found not in the old revealed truths of Calvinism, but by invoking the principles of philosophical rationalism.  This chore fell to the new champions of British capitalism:   Adam Smith and his disciples.

In this way market fundamentalism was born, progress declared its offspring, and the “love of gain” of the capitalists rationalized.

Here’s how Wikipedia describes “the wonderful world of Adam Smith,” as Robert Heilbroner called it — “Smith’s panegyric of a free and unfettered market”:

Barter is characterized in Adam Smith’s “The Wealth of Nations” by a disparaging vocabulary: “higgling, haggling, swapping, dickering.” It has also been characterized as negative reciprocity, or “selfish profiteering.” By placing barter as the original “state of nature”, Smith is thus asserting that self-interest and greed are at the centre of all successive forms of economic exchange.

Peter Turchin elaborates in War and Peace and War:

During the twentieth century, the ideas of Mandeville, Smith, and many others have been developed and systematized into what is now known as “the theory of rational choice.”  The core of the theory is the postulate that people — “agents” — behave in such a way as to maximize their “utility function.”  In principle, the utility function could be almost anything, but in practice almost all applications of the theory in the mainstream economics equate utility with material self-interest.  In the most basic version, the utility is simply the dollar amount that an agent expects to get as a result of a certain action.  The agent then should perform the action that yields the greatest payoff — this is what “maximizing utility” means.  Agents that behave in ways that maximize their utility function are “rational.”

As Michael Allen Gillespie explains in The Theological Origins of Modernity:

What actually occurs in the course of modernity is thus not simply the erasure or disappearance of God but the transference of his attributes, essential powers, and capacities to other entities or realms of being.  The so-called process of disenchantment is thus also a process of reenchantment in and through which both man and nature are infused with a number of attributes or powers previously ascribed to God


By the end of the Enlightenment, many thinkers treated human beings as quasi-divine….  The Enlightenment (and post-Enlightenment) exaltation of human individuality is thus in fact a form of radical (although concealed) Pelagianism.  Divine or at least quasi-divine powers reemerge although always in disguise.  Nature is an embodied rational will; the social world is governed by an “invisible hand” that almost miraculously produces a rational distribution of goods and services; and history is the progressive development of humanity toward perfection.

Smith’s apotheosis of man and nature thus allowed him, as Robert Heilbroner explains, to “rationalize selfish instincts into social virtues.”   This led Smith to formulate “the laws” of the market.   “What he sought,” Heilbroner adds, “was ‘the invisible hand,’ as he called it, whereby ‘the private interests and passions of men’ are led in the direction ‘which is most agreeable to the interest of the whole society’. ”  If one “left the market mechanism alone and allowed it and the great social laws to work themselves out, it was inevitable that progress would result”  (Robert Heilbroner, The Worldly Philosophers).  Or as David Sloan Wilson put it, “Adam Smith’s metaphor of the invisible hand has long been used to convey the idea that a well-functioning society can be forged out of individual self-interest” (“The new fable of the bees:  Multilevel selection, adaptive societies, and the concept of self interest”

Here’s how Jeff Weintraub describes Smith’s panegyric of a free and unfettered market:

As we all know, Smith believes that the long-term process of socio-economic development, driven by the dynamics of the market and the division of labor, will steadily increase the overall productivity, prosperity, and “opulence” of societies over time. He also believes that the benefits of this increasing prosperity will be spread throughout the society (though, of course, unequally). In particular, he expects that, given the “natural progress of opulence,” the standard of living of the poor—by which he means the great majority of people in society—will increase steadily and significantly (as long as the market is allowed to operate unhindered). From Smith’s point of view, that consequence is one of the strongest justifications for the whole market system and its long-term developmental logic (e.g., WN pp. 22-24, 95-96, etc.). After all, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (WN p. 96).

Smith further believes that, broadly speaking, he has plenty of historical evidence for expecting an ever-increasing “universal opulence that extends itself to the lowest ranks of the people” (p. 22), and he appears confident that this conclusion follows plausibly from the overall logic of his theory. However, it’s fair to raise the question of whether or not Smith has provided an adequate and convincing theoretical account to explain how and why this happy outcome should occur.


=> OK, here are some of the ways that Smith tries to deal with these issues.

So why aren’t workers stuck at a subsistence wage, even as the productivity and prosperity of the society around them continues to increase?

Smith does acknowledge (e.g., on pp. 85-86 of WN) that wages can sometimes sink to this subsistence level (though, for obvious reasons, they can’t stay below that level for an extended period). However, he adds (p. 86), there are “certain circumstances” that allow the normal rate of wages to go “considerably above that rate”. Clearly, he expects (and hopes) that these “circumstances” will be common, not exceptional. What are they?

Basically, he argues that labor will command a higher price, and therefore workers will have a better standard of living, whenever the (effective) demand for labor outstrips the supply of labor. Are there any “circumstances” in which this might be a steady rather than merely transitory condition? In general, that is most likely to happen in periods of continuous economic growth (the more rapid the better). And one of the factors driving this process, by the way, is that as long as the economy is humming along pretty well, every increase in the accumulation of capital will produce an increase in the demand for labor (since the capitalist who has accumulated those resources will want to put them to profitable use, for which he needs workers). Under these circumstances, the actual price of labor will remain above its natural price—not in a temporary or fluctuating way, but systematically.

(For these arguments, see especially WN pp. 86-89 & 99-104.)

All of Smith’s speculations concerning a rational, all-knowing and benevolent market – the same traits which the Scholastics had assigned to God – sounded great in theory.  But in practice they proved chimerical.  

Following the defeat of Napoleonic France in 1815, Britain enjoyed a century of almost unchallenged dominance and expanded its imperial holdings across the globe.  Between 1820 and 1870 per capita GDP almost doubled.   Fabulous fortunes arose in Britain.  George Dangerfield, in The Strange Death of Liberal England, 1910-1914, described 1911 as the year of London “climbing towards its peak of plutocratic splendor, and tales of ballrooms banked high with the loot of hothouses, of champagne flowing like a sea, of bare backs, jeweled bosoms and fabulous expenditure.”

But none of this great wealth seemed to trickle down to the workers as Smith’s theory had predicted.  It should come as no surprise, then, that it was the empiricists who would be the first apostates from the free market faithful.

Simonde de Sismondi “became the first, and for a time the only, heretic among Smith’s disciples” (Jacques Barzun, From Dawn to Decadence).  As Jacques Barzun explains, Sismondi

urged factual observation in what he was the first to call “the social sciences”; and when the Encyclopedia Britannica asked him for an article on political economy, further thought and documentation led him to question the validity of liberal economics…. 

Sismondi had visited England and had been struck by the misery resulting from industrial progress.  Why did the seemingly beneficial production of goods by machinery bring on “poverty in the midst of plenty”?  The answer was:  free competition keeps wages low, free enterprise makes for overproduction, which leads to recurrent “crises” – shutdowns or failure entailing unemployment and starvation.

His detailed criticism of the new society includes the observation that it splits labor from capital and makes them enemies, with all the power on one side.  The idea of their “bargaining” over wages is absurd.  Tyrant and victim describes the relation, yet without cruel intent of the one or knowledge by the other of who his oppressor is.  Again, with overproduction the capitalist must seek foreign markets and precipitate national wars, while at home a class struggle goes on without end.

More recent empirical studies confirm de Sismondi’s observations.  The quasi-religious adherence to the capitalist faith had the same impact on workers in Britain as it had had in the Netherlands in the 16th, 17th and 18th centuries.  As Şevket Pamuk and Jan Luiten van Zanden explain:

The fruits of the Industrial Revolution were spread very unevenly….  [S]ocial inequality exploded, in particular in those parts of Europe that profited most from the new industrial age (Williamson 1985). This increase in inequality came on top of an already rising inequality in distribution of income and wealth, the result of economic expansion and urbanization in the centuries before 1700. In particular in the most dynamic parts of the Continent, in England, Holland, France, levels of inequality in the 18th century were already very high – due to the concentration of land ownership and or mercantile wealth (Van Zanden 1995)….

“The share of British capital in the hands of the top 1 percent probably peaked in 1911-13, when that segment commanded a stunning 69 percent”  (Kevin Phillips, Wealth and Democracy).

The living conditions of the workers, meanwhile, suffered under the “new” capitalist faith.  Soaring inequality meant the workers’ standard of living would, at best, be stagnant for the next 100 years.  It would not be until after 1870, a full century after Adam Smith penned his Capitalist Bible, that the workers’ standard of living would begin to improve.  Whether quantified in terms of real wages or biological standard of living, adherence to the one true faith spelled stagnation and austerity for workers.    Charles H. Feinstein concluded that

For the majority of the working class the historical reality was that they had to endure almost a century of hard toil with little or no advance from a low base before they really began to share in any of the benefits of the economic transformation that they helped to create.

–Charles H. Feinstein, “Pessimism Perpetuated: Real Wages and the Standard of Living in Britain during and after the Industrial Revolution,” The Journal of Economic History, Vol. 58, No. 3 (Sep., 1998)

Sismondi was also correct in his observation that “with overproduction the capitalist must seek foreign markets and precipitate national wars.”    This again was 180º out of sync with classical economic theory.   “The apostles of free trade believed that commerce was a ‘grand panacea’ for the worlds ills,” Aaron L. Fridberg explains in The Weary Titan.  “By promoting global exchange they believed themselves to be unleashing a force that would eventually overwhelm national differences and unify mankind.”

So just like their Dutch counterparts before them, who also enjoyed the imprimatur of the reigning mythology, the British capitalists sought markets for their superfluous goods and capital in faraway lands. As Julia Bersch and Graciela L. Kaminsky point out:

Financial globalization is not a new phenomenon of the late 20th century. An important era of financial globalization and integration took already place in the 19th century….   London emerged as an important financial center following the Napoleonic Wars and became the undisputed international financial center in the 1870s.

William N. Goetzmann and Andrey D. Ukhov elaborate further:

The vast sums of capital invested by the British in overseas enterprises in the late 19th and early 20th centuries has been the focus of more than a century of economic discourse….  While exact estimates of British overseas investment in the 19th century vary, there is general agreement that by 1914, Britain had acquired a historically unprecedented position as a global creditor.  Between 1865 and 1914 as much British investment went to Africa, Asia, and Latin America as to the United Kingdom itself. Between 4 to 8 percent of the gross national product annually was exported annually by British investors in the years 1871—1913, a number significantly higher than the capital export of other developed nations at the time.

And as I noted in Part I of this series,  “After the financiers had opened the channels of capital export to the superfluous wealth, which had been condemned to idleness within the narrow framework of national production, it quickly became apparent that the absentee shareholders did not care to take the tremendous risks which corresponded to their tremendously enlarged profits.  Against these risks, the commission-earning financiers, even with the benevolent assistance of the state, did not have enough power to insure them:  only the material power of a state could do that”  (Hannah Arendt, The Origins of Totalitarianism).

Here’s how Jonathan Schell explains it in The Unconquerable World:

From Laissez-Faire to the Military Revolution

A parallel process of militarization occurred in the evolution of the industrial revolution….  The early champions of the free market, most of them British, had in fact looked to industry mainly to create the wealth of nations, as the title of Adam Smith’s classic book had it, not the power of nations, which had been the preoccupation of their mercantilist predecessors.  The advocates of laissez-faire declared the independence of economics from state power.  (The eventual coining of the word “economics,” identifying a distinct realm of human activity subject to its own laws, was one sign of their faith in that independence.)  The market worked best, the worldly philosophers of the late eighteenth century believed, when the government kept its hands off it.  Classical economics, in fact, “had no place for the nation, or any collectivity larger than the firm.”

Smith’s successors proceeded even further in this line of thinking.  In the early nineteenth century, the most prominent champions of the market, including the British champions of laissez-faire Richard Cobden and John Bright, contended that free trade, by breaking down or ignoring national boundaries, naturally tended to foster world peace.  The market, they ardently believed, was a solvent of national units and a pacifier of national conflicts.  “I see in the Free Trade principle,” Richard Cobden said in a speech in 1846, “that which shall act on the moral world as the principle of gravitation in the universe, drawing men together, thrusting aside the antagonism of race, and creed, and language, and uniting us in the bonds of eternal peace.”….  An unbroken thread of faith in free trade as an abettor of peace runs through the entire tradition of liberal internationalism, surviving many disappointments and continuing, if in attenuated form, to this day.


However, events did not proceed as the liberal imperialists expected – neither in Asia nor in Africa nor in the Ottoman Empire.  The economic arrangements forced upon those lands did not strengthen their governments but undermined them and drove them, one after another, toward collapse.  The Egyptian government, for example, accepted loans from Europe, spent the funds on large but unproductive public projects, and, when those failed, sought to keep up payments on the loans by raising taxes on the poor, who great discontented and rebellious.  The imperial powers then were faced with what seemed a drastic choice:  between withdrawing entirely and imposing direct rule.  They chose direct rule.

Making the world safe for “absentee ownership,” “commercialized imperialism,” “the security of property rights” or “that Democracy of Property Rights,” as Thorstein Veblen had variously called it, was costly, and became increasingly so as the empire aged.  Between 1887 and 1907, military spending doubled from 30.7 to 59.4 million pounds, and in 1907 made up 53% of all government spending outside of debt service.   Furthermore, in 1907 almost half (48.9%) of tax revenues were derived from regressive indirect taxes, rather than progressive direct taxes on property, income, profits and capital gains.  (Friedberg)

As Friedberg goes on to explain, arranging taxes so that they mostly fell on the lower orders of society was part and parcel of the capitalist faith.  “As much as in the realm of trade, contemporary arguments about fiscal policy were littered with pious references to the wisdom of the ‘ancients’,”  Friedberg notes.  “The economic historian H.V. Emy has written that the principles of British taxation ‘had remained the same from Adam Smith to John Stuart Mill’ and that the latter was still the principal authority in the last decade of the nineteenth century.  An examination of both the public record and intragovernmental sources confirms this assertion.”

Fiscal orthodoxy demanded “that direct taxes, and especially the levy on incomes, be tightly constrained,” Friedberg continues.  “Taxes on profits would, Mill warned, be ‘extremely detrimental to the national wealth’.”  “It was also generally accepted that the incomes of the wealthy should be left untouched in all but the gravest emergencies.”  Friedberg adds that:

Mill and others pointed out that attention had to be paid not just to the rate at which taxes were levied but also to the manner in which they were applied.  Arbitrary, unpredictable taxes assessed against profits and savings could disrupt the process of economic growth even if they were not imposed at an especially high rate.  Still, the greatest danger came from “excess of taxation,” which could “be carried so far as to discourage industry by insufficiency of reward.”  Even before this point had been reached, Mill warned, such excess could “[prevent] or greatly [check] accumulation, or [cause] the capital accumulated to be sent for investment in foreign countries.”


Whatever their other qualities, the different varieties of taxation did not weight equally on all segments of the population.  As a confidential Treasury Department memorandum pointed out in 1895, indirect taxes [e.g., value added taxes] tended to fall “on the consuming masses” while direct taxes were those “levied on property or persons, of which (at any rate) by far the greatest part falls on the propertied classes.”….  The view of Conservative politicians tended to be that direct taxes should be kept low and that the two classes should essentially contribute in proportion to their numbers.  Equality of burdens, by this definition, required that indirect taxes make up the largest fraction of total resources.

But once again, the predictions of the classical economists proved wrong, stunningly so.  Beginning in 1870, and despite Great Britain’s religious-like adherence to the commandment that “thou shall not tax the rich,” its share of world manufacturing production went into a long and permanent relative decline, as this chart from Friedberg illustrates:

Percentage Shares of World Manufacturing Production





































Great Britain’s government spending at the end of the 19th century, by today’s standards, would be considered quite modest.  By one estimate the “public sector” (including government expenditure for both civilian and military programs) accounted for between 10 and 11 percent of national income during the 1880s and 1890s.  In the first decade of the twentieth century, due largely to the 94.2 million pounds spent on the Boer War, that portion had risen to 14 or 15 percent.  And yet, as Friedberg observes, on

28 April 1904, the new chancellor of the Exchequer, Austen Chamberlain, warned his colleagues that they did not “even yet realize the stringency of the financial situation.”  Chamberlain called for real reductions in spending and especially for cuts in the army and navy estimates.  He warned that “however reluctant we may be to face the fact, the time has come when we must frankly admit that the financial resources of the United Kingdom are inadequate to do all that we should desire in the matter of Imperial defense.”

These and other similar declarations by Britain’s leading financial authorities were to have a powerful impact on all aspects of national policy.


Given their assumptions about what the economic and political traffic would bear, it is not surprising that the Conservatives chose…the “sovereign remedy of retrenchment.”  As the phrase suggests, cutting spending in order to bring budgets into balance was the time-honored way of dealing with financial distress.  In this sense the Conservative response was traditional and truly “conservative.”


Government spending, in the orthodox view, was a necessary evil that was to be kept strictly limited and financed out of taxes rather through borrowing.  All taxes were believed bad, but because of their harmful effect on the process of accumulation, direct taxes on income and profits were the worst.  Indirect levies on imports that acted to protect domestic manufacturers were to be assiduously avoided.  Within these constraints resources could safely be generated without disrupting the productive mechanism.

In 1904, in a speech to a group of bankers in the City of London, Joseph Chamberlain issued the following warning and urged a change of course:

Granted that you are the clearing-house of the world, but are you entirely beyond anxiety as to the permanence of your great position?…. Banking is not the creator of our prosperity, but is the creation of it.  It is not the cause of our wealth, but it is the consequence of our wealth;  and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance, and all that finance means, will follow trade to the countries which are more successful than ourselves.

Chamberlain’s warning and advice were ignored.

After 1913 Great Britain would experience two world wars, a Great Depression and an unprecedented surge of popular, democratic governance.   The combined effect of these would be to finish off Britain’s rein as the world’s great hegemonic empire.   What this meant for the British plutocrats, at least until Margaret Thatcher staged their renaissance in the 1980s, was that their eye-popping day in the sun was over:

The share of British wealth in the hands of the top 1 percent began a half century of decline – from two-thirds in 1914 to just one-third by the 1960s.  During the “long” weekend of the twenties and thirties, elements of the upper class could pretend that times had not changed, but the six painful years of World War II would all but eliminate overseas investments, force the postwar devaluation of the pound, and complete the collapse of British world economic leadership.

The embarrassments of the late 1940s – liquidation of overseas assets, the perils of sterling, and financial dependence on the U.S. – made Edwardian prowess ancient history despite the passage of little more than three decades.  The size of the principal British fortunes continued the shrinkage visible in the 1930s.  In 1947, a trying year when the British current account deficit of 600 million pounds represented a brutal 6 percent of GNP, the economy was so austere — food and clothing were strictly rationed – the Princess Elizabeth got no waiver for her wedding, just an extra hundred ration coupons.

Such were the postwar levels on British wealth that dukes opened their ancestral castles to well-paying tourists.  Other formerly affluent Britons simply gave up.  John Harris, a British writer, “discovered a situation that had no parallel elsewhere in Europe:  a country of deserted country homes, many in extremis, most in surreal limbo awaiting their fate.”  He wrote – and also captured by camera – their embarrassing portrait in a book called No Voice from the Hall. (Phillips)

The classical, and now neoclassical, faithful have clung to their theories throughout all this as to a life raft in turbulent waters.  Their artful ignoring and debasement of, and at times outright hostility to, empirical data should have been the first clue that their newfound secular-scientific ontology and epistemology had some serious shortcomings.  John Maynard Keynes, writing in The General Theory of Employment, Interest and Money, put it this way:  “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight.”  On another occasion he commented that capitalism is “the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds.”  Philosophical rationalism had no special immunities, as the Enlightenment thinkers had imagined, to the same sorts of corrupting influences that had undone the old religion.

In 1851, on the eve of the Crystal Palace Exposition held in London in 1851, Queen Victoria confided to her diary:  “We are capable of doing anything.”   Underlying this self-confidence, providing the most visible evidence of Britain’s superiority to other nations and giving the country the means and the desire to exert its will overseas, was the awesome productive engine of the British domestic economy.   Britain was “the workshop of the world,” able to produce and profit more prodigiously than any other nation in the world.  “What reasons did contemporary British observers give for their superior material success?” asks Friedberg.  “[J]udging by the outcome of some of the more important public debates of the period, most of them…believed their good fortune resulted in the first instance from wise policy, in particular from the triumph of laissez-faire notions of political economy.”

One hundred and thirty years later, on the eve of the Falkland Wars, Margaret Thatcher would express a similar self-confidence to what Queen Victoria had:   “Defeat? I do not recognize the meaning of the word.”  But unlike in Queen Victoria’s time, Britain’s awesome productive engine had long been extinguished, and in lieu of this reality Thatcher urged faith:  “Where there is doubt, may we bring faith,” she exhorted.  And the faith she evangelized was none other than a throwback to that same old-time religion of Queen Victoria’s day:  the laissez-faire notions of political economy.   So now we are left with a question:  Will this atavistic faith of Thatcher’s serve her any better than it did Queen Victoria?

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