Hobson Biography Economic Ideas Theory

John Atkinson Hobson Biography and Summary

Hobson Economic Ideas and Theory

Although England was the citadel of orthodox economic theory from Smith through Marshall, with its main tenet being that unregulated markets will produce a maximum of social welfare, there have been legions of heretics. Possibly the most influential of these was John A. Hobson (1858-1940), whose heterodox ideas became the intellectual wellspring of the present English welfare state. Hobson's academic career was ended shortly after the publication of his first book on economics. He lost his job because of "the intervention of an Economics Professor who read my book and considered it as an equivalent in rationality to an attempt to prove the flatness of the earth."30 An independent income allowed him to continue his attack on orthodox theory, however, and he published nearly forty books as well as a large number of articles. His works were never well received in academic circles until Keynes praised him in the General Theory; and although Hobson's impact on pure theory has been almost negli­gible, he has been important in shaping English economic policy. Hobson is like many heterodox economists who had a vision of the inadequacies of orthodox theory and were able to describe them but who were never able to formulate a theoretical structure capable of overthrowing accepted doctrine.

In broad perspective, Hobson's heterodoxy was an attack on the accepted doctrine that laissez faire is the best policy, because markets will produce a maximum of social welfare. Orthodox theory held that competitive markets will, for the most part, produce the goods that sovereign consumers desire at the lowest possible social costs. The distribution of income that flows from these markets rewards the participants according to their productivity. Furthermore, the operation of these economic forces will produce a full utilization of society's resources. Because prices are, in general, good measures of the costs incurred and the utilities produced in the economy, they are indexes of the welfare achieved by a society.

Although Hobson accepted some of the major assumptions of orthodox theory, he came to quite different conclusions about the adequacy of a laissez-faire market economy. He found three major faults with the workings of the English economy of his time. First, it failed to provide full employment, because there existed chronic underconsumption or oversaving. Second, the distribution of income unjustly rewarded those in upper-income groups, largely because of their superior bargaining power. Third, the market is not a good measure of social costs and social utilities, for the entire price system is oriented toward monetary profit. Whereas orthodox thinkers found harmony in the economy and then built a theory to demonstrate that harmony, Hobson as­sumed the negative influence of the laissez-faire economy and then attempted to build a theoretical structure to remedy the faults of the existing industrial society. Hobson contended that if the goals of a society were clearly defined, a knowledge of economic theory would permit the society to achieve "the good life."

He objected to John Neville Keynes's position that we can distinguish between what is and what ought to be and to the orthodox tendency to confine activities to an analysis of what is. For Hobson, economic theory was useful precisely insofar as it would assist society to achieve "oughts." The normative-positive dichotomy attempted by orthodox theory was impossible, because the same facts are both ethical and economic. Hobson's attack on orthodox theory began in his co-authored first book, with a rejection of Say's Law:

We are thus brought to the conclusion that the basis on which all economic teaching since Adam Smith has stood, viz. that the quantity annually produced is determined by the aggregates of Natural Agents, Capital, and Labour available, is erroneous, and that, on the contrary, the produced, whilelt can never exceed the limits imposed by these aggregates, may be, and actually is, reduced far below this maximum by the check that undue saving and the consequent accumulation of over-supply exerts on production.

The argument in support of the contention that oversaving leads to depression is deficient largely because Hobson and his coauthor, A. F. Mummery, accepted the orthodox position that all saving is returned to the income stream as investment spending.

In subsequent writings, Hobson never wavered from his conclusion that capitalism tends to produce depression because of oversaving at full employment. In 1902 he published Imperialism, which asserted that the colonial expansion of the capitalist countries served largely as an outlet for the oversaving and excess supply of goods generated at full employment. Lenin borrowed heavily from Hobson's imperialism thesis. Hobson concluded that full employment could be achieved by imperialistic practices, by expenditures for war, by governmental expenditures designed to improve the conditions of the working classes, by a domestic increase in the consumption of luxury goods, and by a more equal distribution of income. The ethically correct alternatives were clear: a redistribu­tion of income by taxation combined with governmental expenditures to im­prove the condition of the poor.

Hobson wrote extensively about the distribution of income. He rejected the marginal productivity theory of distribution on the grounds that it is impossible to impute marginal products to the separate factors. In a modern complex economy, he held, production is a social or cooperative enterprise; we beg the ethical questions surrounding the distribution of income if we attempt to identify the marginal contributions of the various factors of production by means of differential calculus. Furthermore, in its analysis of factor price determination, orthodox theory implicitly assumes that the various factors of production have equal bargaining power; but observation of the economy, he averred, reveals that labor's bargaining position is relatively weak, and this results in low wages. Payments to the various factors of production can be analytically separated into three parts: (1) a payment that will just permit the factor to maintain itself; (2) a payment that will allow the factor to increase in quantity and productivity; and (3) a payment in excess of what is necessary for maintenance and improvement, which Hobson called "unproductive surplus." The modern industrial economy produces an output that is more than sufficient to pay for the maintenance of the various factors, and it is the bargaining process of factor market pricing that determines which factors receive an unproductive surplus. Hobson claimed that land receives an unproductive surplus because of its natural scarcity and that capital receives an unproductive surplus because of its superior bargaining power and the artificial scarcity that flows from monopoly power. A more equal distribution of income, one that grants higher wages for labor, not only would be more just but would also increase the productivity of labor. Furthermore, greater equality would increase consumption and reduce saving, thereby ena­bling the economy to avoid depression.

Hobson was not content to rest his case against orthodox theory at this point. He went on to make a fundamental and sweeping attack on the orthodox analysis of the meaning of the price system. Orthodox theory, according to Hobson, erroneously holds that prices are a reflection of the social costs of producing goods and the social benefits received from consuming goods. Hobson found prices to be inadequate measures of welfare on both the cost and the benefit side. "A science which still takes money as its standard of value, and regards man as a means of making money, is, in the nature of the case, incapable of facing the deep and complex human problems which compose the Social Question."

Hobson's solution was that we should calculate human costs, which are different from costs expressed in prices, and human utility, which is not the same as market prices. In this analysis, Hobson addressed what modern welfare theory refers to as externalities, on both the supply-cost side and the demand-benefit side. His analysis of the demand side reflects the influence of Veblen; he pointed to the waste created by conspicuous consumption and to the fine art of sales­manship as practiced in the modern economy. Hobson's solution was to remove the laissez-faire approach of government and the profit-oriented nature of the modern economy. "The substitution of direct social control for the private profit-seeking motive in the normal processes of our industries is essential to any sound scheme of social reconstruction."

This brief look at Hobson does little more than give the flavor of his broadside attack on orthodox theory. He rejected Say's Law, objected to the orthodox theory of distribution, found the price system an inadequate measure of social welfare, rejected the normative-positive dichotomy of orthodox theory, explicitly called for the injection of ethical considerations into economic analy­sis, found the profit motive to have negative effects on society, and, above all, called for the end of laissez faire. He suffered the fate of many seminal heterodox thinkers: he was unable to obtain employment in an academic community controlled by orthodoxy. His ideas were usually rejected without close examina­tion. In 1913 J. M. Keynes remarked that "One comes to a new book by Mr. Hobson with mixed feelings, in hope of stimulating ideas and of some fruitful criticisms of orthodoxy from an independent and individual stand­point, but expectant also of much sophistry, misunderstanding and perverse thought."

Later, as Keynes rejected Say's Law and moved from the orthodox position, his evaluation of Hobson changed accordingly. In 1936 he praised Hobson's Physiology of Industry as "the first and most significant of many volumes in which for nearly fifty years Mr. Hobson has flung himself with unflagging, but almost unavailing, ardour and courage against the ranks of orthodoxy. Though it is so completely forgotten today, the publication of this book marks, in a sense, an epoch in economic thought."35 Keynes went on to contend that Hobson belongs to an important group of underconsumptionist heterodox econo­mists "who, following their intuitions, have preferred to see the truth obscurely and imperfectly rather than to maintain error, reached indeed with clearness and consistency and by easy logic, but on hypotheses inappropriate to the facts."
As with most heterodox writers, Hobson's intuitive insights did not lead him to a consistent, well-ordered theoretical structure. Thus, there are no identifiably Hobsonian elements in present orthodox theory. He exposed issues that the orthodox economist was content to sweep under the rug. When these issues finally had to be addressed, the solutions were proposed by economists other than Hobson. Nevertheless, Hobson had an important effect on British economic policy, as his ideas became the dominant intellectual influence in the Labour Party. With its social control of industry and full-employment policies, the British Labour program in the post-World War II period was rooted in the economics of John A. Hobson.