At the turn of the nineteenth century, classical economics—as represented by Adam Smith in Britain and Jean-Baptiste Say in France—seemed unassailable. The American Revolution, to many people, demonstrated the failures of the old economic order of mercantilism and colonialism. The flourishing trade after the war proved protective tariffs useless, and the rise of industrial production encouraged the expansion of trade networks. Smith and his acolytes seemed proven right in their calls for free trade and economic competition.

Industrialization ushered in rapid increases in national productivity and, with it, the uncomfortable disruption of traditional ways of life. In 1815, English manufacturers had a surplus of stockpiled goods that they could not export during the War of 1812, forcing them to reduce production and lay off workers. The concept of unemployment was effectively unknown at this time, and displaced workers—following the 1811 example of Ned Lud and his Luddites—rioted and destroyed the industrial machines they blamed for their misery. In 1825, following a period of significant credit expansion, the market crashed, leading to the collapse of dozens of provincial banks. People began to question whether there were yet undiscovered flaws in the new economic system of industrialization and free trade.

Among the thinkers who developed an interest in these “commercial crises,” as he called them, was Simonde de Sismondi, a follower of Smith and Say. After observing the early economic crises in Europe, Sismondi began to question the prevailing economic doctrine. Although he did not become a socialist, strictly speaking, his critiques of laissez-faire laid the foundation for various socialist doctrines that would be developed later.

Sismondi began with a critique of the classical method. He offered the earliest criticism of David Ricardo’s abstract deductive method. Anticipating the German historical school, Sismondi argued that economics should be studied in historical and political context, that the consequences of government policies may vary according to time and place. Rejecting Ricardo’s use of Robinson Crusoe to derive the laws of human nature (a theoretical and pedagogical tool that survives today exclusively in Austrian economics), Sismondi believed that the study of isolated man was inadequate for understanding a complex industrial society.

With his new methodological approach, Sismondi took shots at two sacred concepts of classical theory: individual self-interest and free competition. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” Adam Smith famously wrote, “but from their regard to their own interest.” Sismondi agreed, but he believed Smith erred in only applying the concept of self-interest to production, without considering the distribution of property. Industrialization produced new economic classes, the proletariat (those who work) and the capitalist (those who possess). Free competition compelled capitalists to produce cheaper goods, but it also required workers to compete with each other for employment. Because lower labor costs meant cheaper goods, the interests of the capitalist and the wage worker were in conflict.

The classical economists celebrated the increase in production that self-interest and competition engendered, but Sismondi argued that the conflict between individual interests and the “general interest” of society yielded overproduction, which was the cause of economic crises. Free competition encouraged constant downward pressure on wages, as workers underbid each other for employment and producers constantly worked to lower the cost of production. As some capitalists drove their competitors out of business, former capitalists would join the ranks of the nonpropertied proletariat, and capital would concentrate in the hands of a dwindling number of property owners. To cure these ills, Sismondi called for state intervention—anathema to advocates of laissez-faire—to constrain competition and regulate labor.

Although Sismondi did not call for the abolition of private property, and therefore was not a socialist, his ideas offer the first expression of several concepts that would prove integral to socialist thinkers later in the century. The first is his notion that society had a collective, or “general,” interest that differed from the individual interests of its members. Second, he is the first expositor of the fallacy eventually named the “iron law of wages”—the idea that free competition will suppress wages to subsistence levels. He also formulated a class theory of the proletariat and the capitalist. Related to this was the “law of concentration” that would prove so integral to Marxism. Finally, Sismondi introduced the idea of labor legislation, which was the first modern reaction against laissez-faire absolutism. Although Sismondi’s proposed interventions were modest by modern standards, he opened the door for new ideas about the state’s function and duties that could logically be extended ad infinitum.

In addition to Sismondi, another thinker working at roughly the same time gave birth to other key elements of socialist theory. Henri de Saint-Simon is often considered the father of socialism, though it was his followers who truly produced the first formal socialist doctrine. One of them, Pierre Leroux, apparently even coined the term “socialism” to describe their system.

Saint-Simon had something of a messiah complex, and what he founded was less of an economic theory than a religious cult. A child of the Enlightenment, he was fascinated by Newton’s law of gravity, which Saint-Simon held as the single “universal law” from which all truths—material and spiritual—could be deduced. If God is the center of the universe, gravity was the “law of God,” that governed all phenomena. Saint-Simon believed that the purpose of religion was to direct the masses toward the improvement of society. Christian leadership had served this function before industrialization, but Saint-Simon—after God spoke to him in a vision—called for replacing the antiquated Christian clergy with a “Council of Newton,” consisting of experts from various fields of science.

If Newton was God’s prophet for physics, Saint-Simon was the prophet for the social sciences. Anticipating the positivists, he thought that the empirical method of physics should be adopted for the study of man. By observing the past, social scientists should be able to anticipate the future, thus allowing them to scientifically derive the best political policies. Saint-Simon also theorized that society would progress through specific stages of development. Although a predictive philosophy of history was nothing new—the Christian philosophy of history had long held such a view in anticipation of the return of Christ—Marx, among other socialists, would adopt a similar stages doctrine of history to argue the inevitability of socialism.

Unlike Sismondi, Saint-Simon was an apologist for industrialization. As industrialization expanded, all classes would disappear until society was left with only workers and idlers. Although this seems similar to Sismondi’s proletariat-capitalist distinction, Saint-Simon’s “idlers” were not the capitalists but the landowners of the feudal past. Eventually, they would disappear, and the world would consist only of workers. Related to this, Saint-Simon criticized property, by which he specifically meant landed property. Society under the new system should be modeled after the factory, operating as a “national association,” and the state’s function should be limited to protecting workers from the indolent and securing the freedom of producers.

The genuine socialism of Saint-Simonianism came from the modified doctrine espoused by his acolytes. Saint-Simon criticized the privilege of feudal landlords—his idlers—but his followers extended this logic to the owners of capital. Private property in capital, even more than land, privileged capitalists at the expense of the workers. Land and capital are both tools of production, so there was no need to distinguish between the landlord and the capitalist; both were idlers, the Saint-Simonians said: the capitalist earned interest just as the landlord earned rent. Thus, the new worker-idler dichotomy more closely resembled the proletariat-capitalist model of Sismondi. With industrialization, workers were exploited by the capitalists just as serfs were exploited by landlords.

The Saint-Simonians thus established the first formal doctrine of socialism (though socialistic ideas have existed since at least the ancient Greeks). They laid the groundwork for important elements of socialist theory. One is their theory of exploitation, in which proprietors live off the labor of their workers. More importantly, though, was the Saint-Simonian critique of private property in both land and capital. They called for the abolition of private ownership by way of private inheritance. If the state were the sole heir, then eventually all property would be controlled by the Council of Newton, who would know best how to manage production and distribution in the national workshop of society. Finally, with Saint-Simon’s philosophy of history, they founded the tradition of preaching the ordained inevitability of socialism according to stages of human development.

While Sismondi was theorizing and Saint-Simon was evangelizing, other early socialists were working to put their ideas into practice. Although they are most often referred to by the label Marx bestowed on them—utopian socialists—they have also been called associative socialists, as their theories were based on collective associations that we would today recognize as communes. The two most influential representatives of this category of socialism are Robert Owen and Charles Fourier.

Most early socialist thinkers were French, but Robert Owen was British. If we looked for the precedents for his ideas, we might turn to William Godwin, whom Murray Rothbard considered (by inference) the first communist anarchist. Godwin called for abolishing the state, law, and property. Like all preindustrial socialists, Godwin was concerned with justice, as he understood it, rather than economics. Owen, although his ideas lacked sophistication, was concerned with both morality and economics.

Owen was a wealthy British industrialist, and it would be wrong to call him anticapitalist. He believed that capitalists should use their wealth to establish better societies. To his credit, Owen put his money where his mouth was. He purchased land in the United States and Great Britain to establish cooperative communities based on the principles of communism. Owen called his communes “parallelograms,” and the basis of his economic system was the equitable exchange of labor via labor notes.

Socialism on Life Support – The Revolution of 1848 and the Incentive Problem

Louis Blanc’s ideas started to circulate in France in 1841 with the publication of his treatise on French social organization and the working class. Blanc was greatly influenced by Simonde de Sismondi. He accepted that competition was destructive and resulted in the iron law of wages (a term still not coined). He also believed in the necessity of state intervention. Blanc’s belief in the necessity of a strong state arguably makes him the father of state socialism, though earlier thinkers of lesser influence had already proposed similar ideas. Blanc is also sometimes classified with Owen and Fourier as an associative socialist, and he shared the important similarity of social determinism. He believed, in common with Owen, that human nature could be changed through proper education.

But the nature of Blanc’s “association” was very different from that of the utopian commune, and it is here that we find his original significance. Blanc advocated for “social workshops,” in which workers were associated by industry. To prevent the evils of competition, though, the state should regulate production, acting as the sole entrepreneur, and oversee the distribution of profits back to the workshops. The workshops themselves, though, were to be run democratically by the workers. In Blanc’s unique conception of association, we find the seeds of syndicalism and British guild socialism.

Around the same time that Blanc was earning notoriety, Pierre-Joseph Proudhon was making a name for himself with the publication of What Is Property? In this work, he popularized the phrase “property is theft,” and until Marx published Das Kapital, Proudhon was the most influential socialist in France. His system, known as mutualism, did not advocate the abolition of property; Proudhon, instead, wanted to abolish the privilege that he believed property granted to its owners. He thus advocated usufruct, which meant the right for people to use somebody else’s property, so that the proprietor—capitalist or landlord—could not live off the fruits of somebody else’s labor. To later socialists, Proudhon’s influence was marginal; the slogan Property Is Theft! became a nice platitude, but it circulated without the theoretical nuance of usufruct laws. He is instead most famous today as the father of anarchism, and his critiques of the state influenced anarchists throughout Europe and the United States.

The French Revolution of 1848 offered both Blanc and Proudhon an opportunity to try to implement their ideas. In late February, Louis Blanc, on behalf of the revolutionary Provisional government, drafted a “right to work” decree claiming that the first duty of every government was the guarantee of employment for its citizens. The following day, he announced the formation of national workshops according to the theories he had outlined earlier in the decade.

Instead of solving the economic crisis, the national workshops invited unemployed laborers into Paris. The Provisional government grossly underestimated how many workers would enroll in the program—they anticipated ten thousand enrollments, and instead they received nearly a hundred thousand. When they could not find work for all of them, Blanc’s plan effectively turned into unemployment welfare, with the government offering modest pay for idle workers. To worsen matters, the surplus of unemployed men they unwittingly drew into Paris used their spare time for political agitation.

Proudhon saw the revolution as an opportunity to pursue his ideas as well, though he was even less successful than Blanc. In considering the most immediate practical reform for abolishing proprietor privilege, Proudhon came up with the idea of an “exchange bank,” backed by existing commodities, that would provide unlimited interest-free loans. The theory itself was rife with fallacies, but Proudhon believed that it would eliminate the unjust income of capitalists—the interest earned on capital. Instead of workers accepting immediate payment from the capitalist, who later enjoyed the returns on selling the commodity produced, workers could accept loans from the bank that would be paid back without interest. The idea of the exchange bank led to the public debates between Proudhon and Frédéric Bastiat on the ethics of charging interest on loans.

However, Proudhon’s bank never came into existence. The Revolution of 1848 had, to many people, thoroughly discredited socialism. With the exception of Robert Owen in Britain and a handful of other thinkers of marginal influence, socialism had been almost entirely a French product. The decline of socialism in France might have signaled the death knell of socialism everywhere, but there were two men in Britain who, with the publication of a pamphlet in 1848, would resuscitate socialism and give it the most complete (if utterly fallacious) theoretical framework the world had yet seen: Karl Marx and Friedrich Engels.

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