Controversies within French liberal thought

Some controversies divided the liberal school even more. One concerned methodo­logical issues, another the theory of value and distribution, and a third one money and credit.

Methodological issues

Is political economy a science?

The first methodological debate regarded the status of political economy as a sci­ence, a subject that split the liberal school.

A small minority, however, adopted the opposite view, defending the deduc­tive approach and accepting as a consequence the existence of economic laws of general application, on the model of Malthus’s law of population and Say’s law of markets. In this respect a few names stand out: Rossi, Courcelle-Seneuil and Molinari^[40] for example, but also Garnier and Dupuit. As Leon Walras did later, Rossi distinguished three categories of economic knowledge: rational economics, applied economics and social economics (Beraud 2018).

Political economy, considered as a science, is concerned with the level of wealth of human societies, or rather... of humanity: it seeks the general causes by which humanity... finds itself more or less wealthy.... Consid­ered as an art, political economy has the purpose of increasing the state of wealth of mankind... and it seeks the general processes and means by which this purpose can best be achieved.

(Courcelle-Seneuil 1858, I, 6)

Thus, as a science, it is legitimate to set out the principles of political economy in the most general and abstract framework possible. In 1863, a vigorous exchange between Dupuit and Baudrillart took place in Journal des economistes, illustrat­ing the animosity caused by this issue. “Is economics a science or just a field of study?” asked Dupuit. He reproached the economists (his chief target was Roger de Fontenay) for criticising in a non-rigorous manner the fundamental principles of classical political economy set out by Smith, Ricardo, Malthus, Say and Rossi, and for considering that economics was only a field of study. Challenged by Dupuit’s attacks, Baudrillart, then editor of the Journal, replied in a letter: “the ideal of M. Dupuit is that of economic science becoming a dogma” (Journal des economistes, February 1863, 249). In response, Dupuit considered the characterisation of “moral and political science” given to political economy - as opposed to the physical and mathematical sciences - to be irrelevant: “the double meaning of the adjective moral is misused in order to make political economy a branch of philosophy and to apply to the former the rules, principles and privileges of the latter” (Journal des economistes, March 1863, 475).

Finally, some authors did not feel comfortable with this antagonism and devel­oped an ambiguous position. This is the case, for example, for Charles Dunoyer. He promoted a method that can be described as positivistic, emphasising the observa­tion of facts and induction, but he did not apply it in his own work. This contro­versy over the scientificity of political economy was continued in two other ways: by discussing the merits of the mathematical and historical methods.

Mathematical methods

The use of mathematical methods in political economy provoked substantial dis­cussions among liberal economists. This was obviously not the first time that the opportunity of using mathematics in political economy had been discussed in France (see Volume 1, Chapter 8). During the first half of the nineteenth century, an increasing number of economists started to use mathematics more extensively. The best known of these were Antoine-Augustin Cournot, Jules Dupuit, Camille Esmenard du Mazet, Jules Du Mesnil-Marigny,²6 Gustave Fauveau, Mathieu Wolkoff and, of course, Leon Walras. Both Dupuit and Cournot argued that the use of mathematics was legitimate in the analysis of phenomena and relationships involving quantitative variables (Breton 1992):

The use of mathematical signs is a natural thing every time relationships between quantities are to be discussed; and even if they are not strictly neces­sary, if they can facilitate the exposition, make it more concise, put us on the way to more extensive developments, and prevent us from the deviations of a vague argument, it would be unphilosophical to discourage them because they are not equally familiar to all readers and because they have sometimes been misused.

(Cournot 1838, viii-ix)

However, the use of mathematics was strongly rejected by most liberal econo­mists.^{[41] [42] Cournot’s work was largely ignored or despised (Breton 1992),[43] and Dupuit’s formalised contributions - published outside the Journal des econo- mistes - were also neglected.}

Secondly, the liberals might have found a concomitance between the use of mathematical methods and the rejection or criticism of their ideas (Etner 1989). Those using mathematics were criticised for an “excess” of liberalism or for being too accommodating towards state intervention. Dupuit, for example, was criticised for defending absolute free trade, without nuance or adjustment, while Cournot and Du Mesnil-Marigny were criticised for the opposite reason, that is, their protectionist views. Walras’ mathematics also coexisted with socialist inclinations. In sum, it seems that it was not so much the formalisation that posed a problem for liberals, but the fact that it was associated with ideas considered too far-removed from the liberal orthodoxy - or associated with other theories they rejected, like the classical theories of population, rent or costs of production. Most commentators, however, pointed to a simpler explanation for the disqualification of mathematics by the liberals: their lack of knowledge of mathematics - with the exception, obvi­ously, of some engineers trained at the Ecole Polytechnique, Ecole des Mines or Ecole des Ponts et Chaussees (Etner 1989, Breton 1992).²⁹

This climate of general hostility induced the economists using mathematical methods to remain on the fringes of the liberal group: their mathematical con­tributions were either reserved for other circles (this was the case for Dupuit, for example, who published his formalised texts elsewhere than in the Journal des economistes), or they inspired nothing but distrust and disdain and remained unheeded, at least until the last decades of the nineteenth century.

Yet, a singular voice emerged: Garnier, who gradually became a moderate defender of mathematical methods. In the fifth edition of his treatise, published in 1863, Garnier added a note titled “Sur l’emploi des formules et figures mathe- matiques en economie politique”. Distancing himself from Jean-Baptiste Say, he timidly affirmed his agreement with Dupuit and also cited Karl Heinrich Rau and Wolkoff.³¹ And when he was the editor of the Journal des economistes, some math­ematical content found a place in the periodical, including papers on the currency system by Walras (Breton 1992). Garnier’s death in 1881 and his replacement by Molinari marked the end of this tolerance.

29 It should be noted that it was not uncommon to see scientists who were themselves hostile to the use of mathematics in social sciences. The case of Joseph Bertrand (1822-1900) is one illustration of this.

30 Fauveau’s contributions to the Journal des economistes were collected in a booklet published by Guillaumin and Gauthiers-Villars in 1886, titled Etudes sur les premiers principes de la science economique.

31 Garnier was much more critical of other authors:

in recent times M. Esmenard de Mazet and M. Du Mesnil Marigny [sic] have also misused, it seems to us, algebraic formulae, and M.

- mangling the title of Cournot’s book in passing.

In the end, the rejection of mathematics by the majority of economists had seri­ous consequences for the future of political economy in France from the second half of the nineteenth century onwards. The mathematisation of French political economy was delayed, as Charles Gide lamented, compared to what happened in British, American, Italian or German universities, which embraced mathematisa- tion earlier. Influential scientific journals and publishing houses, mostly held by the liberals, were also slow to make room for mathematical economics (Breton 1987; Le Van-Lemesle 2004).

The rejection of historicism

Until the mid-nineteenth century, the anti-historical approach of Jean-Baptiste Say permeated French liberal thought (Gislain 2001). Yet two liberal economists even­tually presented an original analysis of historicism: Louis Wolowski and Leonce Guilhaud de Lavergne (1809-1880), a specialist in economic history. Wolowski’s 1857 translation of Wilhelm Roscher’s second edition of Grundlagen der National Okonomie was the starting point of the debate on the historical method, which lasted two decades. This translation made historicist ideas accessible to liberal economists and attracted more criticism than the works of Bruno Hildebrand (Die Nationalδkonomie der Gegenwart und Zukunft, 1848) or Karl Knies (Die Politische Oekonomie, vom Standpunkte der geschichtlichen Methode, 1853), which remained untranslated. Guillaumin published the translation of Roscher’s Grundlagen with annotations and a long preface - “De l’application de la methode historique a l’etude de l’economie politique” - by Wolowski. The publisher ini­tially seemed enthusiastic about the novelty of Roscher’s work, although he care­fully pointed out that Wolowski’s “opinions were not entirely in agreement with those of Mr. Roscher” (Roscher 1857, vii). In fact, for Wolowski, history must be taken into account in order to avoid the lures of deductivism: historical analysis of the economy makes it possible to include the moral and social dimension of indi­vidual behaviour and phenomena - which pure political economy fails to do - and also (Gislain 2001) to confirm the validity of the fundamental principles of politi­cal economy. It thus differed from Roscher’s original thesis, where history has a more fundamental heuristic role:

We renounce building purely ideal constructions. What we pursue is the sim­ple description of the economic nature and needs of the people, as well as of the laws and institutions intended to provide for the satisfaction of these needs; finally, of the greater or lesser success with which these have been applied.

(Roscher 1857, 53)

The publication provoked numerous reactions from liberals. The first was that of Roger de Fontenay, who strongly criticised Roscher’s methodological choice in his book review for the Journal des economistes. To him, an interconnection between theoretical reasoning and historical facts was necessary, without the latter taking precedence over the former. But more than the historical method itself, Fontenay challenged Roscher’s and Wolowski’s rough opposition between historical method and method “by reasoning” or “idealist method” (Fontenay 1858, 64):

the two processes... operate in the same environment of facts and abstrac­tions, and are strictly bound, one as well as the other, to set up the agreement of facts and general formulae, - either by extracting the formulae from the facts, or by making the facts fit into the formulae.

(Fontenay 1858, 64-5)

Leonce de Lavergne entered the debate in the 1860s. He took up Rossi’s dis­tinction between science and art and stated that it is to the latter that the histori­cal method must be applied: science can well follow the idealist method, while applied economics is based on history. The critique of the historical school was of course taken up within the liberal group, especially by those who defended the existence of natural laws. The most fervent opponents of historicism were Baudrillart, Molinari and later Maurice Block (1816-1901), Leroy-Beaulieu and Guyot (Breton 1988).

Value and distribution

Although the theoretical issue was not their main concern, some French liberal economists positioned themselves in relation to the classical theory of value and distribution. Among the few who showed some interest in this issue, there was a fairly open division between, on the one hand, certain followers of Ricardo’s theory of value^[44] and, on the other, those who criticised it for a supposed incompat­ibility with “true” liberalism, that of “harmonies”.

Pellegrino Rossi was one of those who helped to introduce and spread Ricardian ideas in France (Breton 1984; Vatin 2003; Baldin and Ragni 2015; Beraud 2018). His lectures at the College de France proposed a synthesis between Say’s and Smith-Ricardo’s value theories, by combining a utility-based approach and an explanation of exchangeable value in which the cost of production and market conditions (supply and demand) played complementary roles (Baldin and Ragni 2015; Beraud 2018). Rossi also adopted some aspects of Ricardo’s theory of inten­sive rent, in particular the decreasing returns to land.

Criticism of the classical theory of value came from Frederic Bastiat, relayed by his disciple Fontenay. In his Harmonies economiques (1850), he moved away from the classical views of income distribution - those of Smith, Say and Ricardo. This was a prerequisite for demonstrating the “harmonies” of the interests of the different social classes. Bastiat rejected both the idea that the value of a good is determined by its utility and the idea that it is to be found in the amount of labour required to produce it. He argued that the value of a good depends on the labour saved by the person who purchases it (Bastiat 1850, 151). He also criticised the Ricardian assumption that the best land is farmed first, which - among other rea­sons - accounts for the upward trend in the prices of subsistence goods. How then could rent be seen as anything but an injustice? Thus, to him, Smith, Mill, Malthus, Ricardo, Senior, McCulloch and their followers “have led us to the negation of property.... The communists have never said anything else” (Bastiat 1850, 290). Bastiat naturally criticised the Ricardian analysis of the dynamics of distribution in a capitalist economy. To him, capital accumulation, far from being a cause of depletion of land productivity under the effect of demographic growth, would on the contrary allow an increase in production by improving agricultural productiv­ity. In this respect, the dynamics of capitalism produce harmonious results: the result will be rising profits as well as rising wages.

Money, credit and the metallic standard

Intense debates also took place on monetary issues. Two main concerns preoc­cupied economists in relation to the contemporary economic situation in France. On the one hand, the liberals debated whether the right to issue money should be assigned to a monopoly or whether banking competition should prevail. On the other hand, they also discussed the appropriate type of monetary system to adopt: a monometallic standard or a bimetallic regime. From the beginning of the nine­teenth century, France had implemented a singular monetary and banking system: in 1803, a bimetallic monetary regime was established by Bonaparte’s government, giving gold and silver the function of legal tender simultaneously, the value of the franc being defined by both a gold weight and a silver weight.^[45] 1803 was also the year in which the Bank of France, a private institution created three years earlier with the support of the Treasury, was given a monopoly on banknote issuance by the government. Every time the monopoly reached the end of its term, discussions took place as to whether it should be renewed or whether there should be a transi­tion to banking competition. These two debates show the extent to which the appar­ently intangible main liberal principles (individual property, freedom) could collide with the materiality of facts.

Issuing money: monopoly or competition?

From 1803, the monopoly of the Banque de France had only been strengthened, particularly following the absorption by the Banque of the departmental banks in 1848. The “question des banques”, as economists called it, reactivated the debate in 1860 on the occasion of the annexation of Savoy, which had had its own central bank until then. Should two central banks be allowed to coexist? Or should the monopoly of the Banque de France be protected at all costs? Contrary to what one might imagine, liberals were far from unanimous in their opposition to the monop­oly of the Bank of France. Of course, many of them were fervent advocates of the freedom to issue money: Chevalier for example, or Coquelin, Garnier, Juglar, and at the forefront, Courcelle-Seneuil, whose book La banque libre, published in 1867, was a seminal work in this regard. To them, free banking was merely an extension of the freedom to work, and issuing money was considered to be an activity like any other, falling within the scope of commercial law, which could be opened up to competition. The incentive of competition between banks would pre­serve the economy from both over-issuing (by encouraging prudence) and insuffi­cient money creation - many economists reproached the Banque de France for the overcautious management of its assets, to the detriment of the access to financing. Nor would a free banking system be prone to a resurgence of commercial crises, which find their causes elsewhere.

The monopoly of the Banque de France therefore presents various disad­vantages, the most apparent of which are... to allow the Bank... to raise or lower the discount rate arbitrarily, with no opportunity for competition to rectify its errors...; to place the Bank in such a situation that, if it makes mistakes, it is the public and not the Bank that suffers the consequences of its errors...; to allow the Bank to create artificial crises at will and to benefit from them, which is impossible for free banks...; and to expose, as a con­sequence, the public to the alternatives of overabundance and scarcity, either of money or of circulating capital.

(Courcelle-Seneuil 1867, 89)

Banking competition and free issuance of money appeared as two sides of the same coin. The fundamental arguments in favour of free banking were coupled with an empirical critique of the French experience since 1803: they suspected that the Banque de France had both lent itself to arrangements hand in hand with the government - cheaper financing of the Treasury in exchange for extensions of the monopoly - and pursued a too-conservative policy, incapable of financing France’s industrialisation and commercial and agricultural development.

Among these authors in favour of banking freedom, two developed a singular analysis of crises. Charles Coquelin, whose book Le credit et les banques (pub­lished in 1848) was an indictment of the government regulation of money issuance which emphasised how the bank’s monopoly can increase the intensity of crises. For him, excess credit is the determining cause of crises. But banks lend exces­sively because one of them has a special and exclusive privilege to issue banknotes. Competition is then unequal because the privileged bank can discount at a lower rate than its competitors. This inequality leads to a congestion of the capital market, as the available capital cannot be invested at a profitable rate. It then falls prey to “project makers”, thus fuelling risky speculation.

Clement Juglar, on the other hand, abandoned the crisis approach, preferring an analysis in terms of business cycles, with an emphasis on periodicity (see Besomi 2010). His 1862 book Des crises commerciales et de leur retour periodique en France, en Angleterre et aux Etats-Unis undertook the first empirical and system­atic study of this issue. Juglar pointed out that in the expansion phase, the increase in credit (especially commercial paper) enables an increase in the exchange of products, generating a rise in prices in the process. Inflation slows down the sale of products in both domestic and foreign markets. When commodities have not been sold by the due date, traders have to rediscount to finance their operations. At the same time, rising prices lead to a depreciation of the exchange rate and a draining of metal currency. The banks, in order to slow down the movement, raise the dis­count rate in a hurry, adding to the general worry. The increase in the discount rate and the banks’ rejection of loan applications from the most risk-taking companies hinder the movement of business and make the development of speculation impos­sible. It is then necessary to sell out and lower prices. For Juglar, the ending of price rises signals the downturn in the economy and the beginning of the crisis.

Finally, the defenders of banking freedom crossed swords with a smaller but influential group of economists^[46] who defended the Banque de France and its monopoly. Their leader was Wolowski, who was largely inspired by the posi­tion taken by Rossi a few years earlier in his 1840 report on a bill to extend the monopoly of the Banque de France (Wolowski 1864). Their arguments were in every respect opposed to the supporters of free banking: money creation is not an ordinary activity, and certainly not a commercial one, insofar as unregulated issu­ance could affect the security of transactions and therefore of property. It is pre­cisely for the sake of protecting individual property that the issue of money should be removed from competition and entrusted to a single and controlled institution. The greatest danger would be the risk of overissue, which would be a necessary consequence of banks in competition, seeking to increase their profits to satisfy their shareholders. In La question des banques, Wolowski also emphasised the sta­bilising role that the Banque de France had been able to play since 1803, thanks to what he described as “prudent wisdom” (1864, 199), whereas at the same time other countries, such as Great Britain, experienced a strong instability, marked by bankruptcies and episodes of inconvertibility:

[Rossi] has highlighted the widespread services for which the State and com­merce were indebted to the Banque de France before 1840; what would he have to say of those for which the Banque can claim credit since that time? If its counters did not remain closed during the dangerous moments of 1817 and 1818, in 1825 and 1826, and in the second half of 1830, can we not also attribute to the wisdom of the Bank’s direction and the energy of its assis­tance a part of the admirable decisiveness with which the country passed through the great crisis of 1848?.... This praise, well deserved in 1840, is much more so now.

(Wolowski 1864, 197-8)

Finally, the opposition between supporters of free banking and defenders of the monopoly was mirrored by a theoretical divergence on the nature of money and banknotes; the former (Chevalier, Coquelin, Courcelle-Seneuil, Garnier, Molinari) considered banknotes as a credit tool, that is, as a substitute for commercial bills of exchange, which cannot be equated with money, while the latter defined the banknote as a component of money, to which strict issuing rules must therefore be applied.

In the end, the supporters of free banking never succeeded in imposing their views, as the monopoly of the Banque de France was systematically extended.

The monetary regime: a monometallic or bimetallic standard?

Another debate, in some ways related to the controversy over banking monopoly, raged within the liberal school: the debate over bimetallism. Wolowski, again, Laveleye and an Italian financier, Henri Cernuschi (1821-1896), held a very minor­ity position^[47] in the Societe d’economie politique, defending the existing bimetallic regime, while the vast majority of liberals called for a transition to a single standard (gold or silver, depending on the economists).

The minority view attributed to bimetallism the virtue of great monetary sta­bility, allowing monetary circulation to adapt more smoothly to changes in the market prices of both metals.^[48] In fact, great monetary stability had been observed in France during the first half of the nineteenth century, seemingly supporting this analysis. Bimetallism, it was argued, also allowed France to position itself as a pivot between the gold and silver standard countries, and the French regime was also supposed to be extended through a system of international bimetallism^[49] - a position which was later advocated by Laveleye (1891) and enjoyed renewed inter­est following the experience of the monetary Latin Union in which France was a driving force (Silvant 2012).

However, in the face of the monetary instability caused by successive waves of discoveries of precious metals - alternately gold and silver - the voice of the opponents of bimetallism became louder. Chevalier was their main spokesman, alongside Parieu, Puynode and Baudrillart: they denounced the arbitrariness and unscientific nature of the fixing of the legal parity between the two metals, arguing that the success of bimetallism before 1848 was only due to fortuitous circumstances. Chevalier advocated a move to the silver standard, while most of his fellow economists wanted to adopt a gold standard modelled on that of Great Britain.

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