John Atkinson Hobson (1858-1940)

Aptly self-described in his later years as an economic heretic, John Atkinson Hobson (1858-1940) made two substantial contributions to economic analysis, one major and one relatively minor.

His major contribution was to revive interest in the underconsumption theory. His relatively minor contribution was as a critic of the marginal productivity theory of distribution. These contributions were initially unrelated, though later the distribution of income came to play an important part in Hobson’s exposition of the underconsumption theory.

Hobson was “born - on 6 July 1858 - and bred in the middle of the middle class of a middle-sized Midland industrial town” (Hobson 1931: 13), to wit, Derby, where his father was the founder, joint proprietor and editor of The Derbyshire Advertiser and Journal. After proceeding to an open scholarship at Lincoln College, Oxford, and graduating in 1880, he was employed by schools in Faversham and Exeter, where he taught classics for seven years; during that time, in 1885, he married Florence Edgar, who hailed from New Jersey. In 1887 he abandoned school teaching in order to take up journalism, moving for that reason to West London. After this move he became a university extension lecturer, offering a course in political economy from 1888, and was thereafter a prolific writer on matters economic and societal. The best account of his life is to be found in Lee (1972).

Hobson’s first contribution to economic analysis came with the publication in 1889 of The Physiology of Industry, of which the businessman A.F. Mummery (who died while mountaineering in 1895) was co-author (Mummery and Hobson 1889). By Hobson’s admission it was Mummery who converted him to the theory of underconsumption, which although it had already been advanced more than 50 years earlier by Malthus among others had since then been rejected by economists on the ground that for an economy as a whole supply can never exceed demand.

In their version of the underconsumption theory Hobson and Mummery assumed not only a given technology at any one time, but also fixed coefficients of production. On this basis, to summarize their theory, they argued that if the output of consumption goods were constant, a given quantity of capital stock would be required to produce it. From this it followed that if the output of consumption goods were growing, the capital stock required to produce it would grow at the same rate. In other words, the required addition to the capital stock, that is to say, the investment required, is determined by the rate of growth of demand for consumption goods. Additions to the capital stock in excess of this amount were referred to by Hobson and Mummery as “overinvestment”, reflecting “over-saving”, alternatively described as “underconsumption”. Hobson and Mummery argued that since such excessive capital stock is unprofitable it would be allowed to run down, leading to an economic depression such as that of the mid-1880s, with accompanying unemployment whose ultimate cause is underconsumption. They noted that remedies for this unemployment include war expenditure, luxury consumption and public works.

The only reviews of The Physiology of Industry, by Edgeworth (1890) and by W.A.S. Hewins (1891), were both highly critical, and the unorthodox views expressed in the book led to Hobson being refused inclusion on the London Society for the Extension of University Teaching’s list of lecturers in the field of economics, because of an adverse reference written by Foxwell (not by Edgeworth, as was once supposed). The reputation of The Physiology of Industry was, however, eventually retrieved by Keynes, who devoted six pages of the General Theory (Keynes 1936) to praise of its general line of argument. Nonetheless, Keynes rejected the view that unemployment is due to excessive investment, arguing instead that unemployment is due to investment falling short of full employment saving, a more inclusive demand-deficiency explanation.

Subsequently, however, in comparing Hobson with Keynes, Domar (1947: 52) argued that Hobson was dealing with a “different, and possibly also a deeper problem.... suppose savings are invested. Will the new plants be able to dispose of all their products?” Hobson thus pointed the way to the Harrod-Domar growth theory, as Joan Robinson (1949: 79) implied when she stated that “Mr. Harrod’s analysis provides the missing link between Keynes and Hobson”.

Between 1889 and 1938 Hobson continued to be a strenuous advocate of the underconsumption theory, in numerous books and articles, though he expanded his exposition in two ways. First, as argued by Craig Medlen (2012), from The Evolution of Modern Capitalism (Hobson 1894) onwards Hobson attached increasing importance to the economic consequences of institutional change from competitive to monopolistic industrial structures, contending in particular that monopolistic firms engage in investment in excess of that needed to produce their output which they restrict in the interests of profit maximization. Second, and more important, The Problem of the Unemployed (Hobson 1896) marked the beginning of Hobson’s association of underconsumption with the unequal distribution of income, the remedies recommended in that book including taxation of “unearned income” (see below) and a rise in wages through trade union action. Over time Hobson’s political views also changed, moving to the left, his resignation from the Liberal Party in 1916 being followed by membership first of the Independent Labour Party and then, in 1924, of the Labour Party.

In an 1898 Contemporary Review article entitled “Free trade and foreign policy” Hobson used his underconsumption theory to develop a then innovative theory of imperialism, which he attributed to pressure on governments by capitalists who thereby hoped to relieve the domestic glut of consumption goods by obtaining exclusive access to markets overseas. C.P. Scott, the editor of the Manchester Guardian, having had his attention drawn to this article by L.T.

Hobhouse, in 1899 sent Hobson as a correspondent to South Africa shortly before the outbreak of the Boer War, an outcome being the expansion of Hobson’s theory of imperialism to be found in Imperialism: A Study (1902), which in turn was an acknowledged major source of Lenin’s Marxist theory of imperialism.

Hobson’s other substantial contribution to economics was in the field of income distribution. In “The law of the three rents”, published in the Quarterly Journal of Economics in 1891, Hobson extended the Ricardian theory of rent so as to make it equally applicable to all three factors of production. He argued that rent is payable not only on intra-marginal land, but also on intra-marginal capital and intra-marginal labour. This provided the basis of a theory of income distribution advanced notably in The Economics of Distribution (Hobson 1900). Hobson divided the income received by a factor of production into three parts, namely, reward for effort or sacrifice, and two forms of what Hobson termed “unearned income”. One form of unearned income he named monopoly rent (later renaming it marginal rent) received by all owners of a particular “grade” of a factor of production, explained by lack of competition between factor grades. The other he named differential rent, received by those who are more productive than the least productive owners of that factor “grade”.

More provocative was the criticism of the marginal productivity theory of distribution to which this theory led. In The Economics of Distribution Hobson argued that the withdrawal of a unit of a factor of production reduces the productivity both of the remaining units of that factor of production and of the other factors of production with which it was previously combined, and that the separate contribution of a last unit of a factor therefore cannot be calculated. Unfortunately none of Hobson’s attempts to illustrate this criticism by an example was successful; Marshall rightly criticized one such attempt on the ground of inappropriate choice of numbers representing factor units, an assessment with which Joan Robinson, otherwise sympathetic to Hobson, agreed, pointing out that merely allowing for half-units of factors would undermine the criticism.

However, Hobson’s principal objection to the marginal productivity theory was that in reality very few factors of production conform to its assumption of infinite divisibility; an example dropping this assumption so as to illustrate a Hobsonian scenario is to be found in Schneider (1996: 55-6). Hobson’s criticisms notwithstanding, the marginal productivity theory of distribution survived, no doubt due to the absence of a better alternative.

In conclusion, to adapt Keynes, these contributions to economic analysis indicate that while not a general, Hobson was at least a major in the brave army of economic heretics.

Michael Schneider

John Atkinson Hobson (1858-1940)

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