Political economy in the faculties of law

In the faculties of law, professors of economics were a rather heterogeneous group in terms of analysis, methodology and ideology. Most of them were eclectic, but some were distinctly associated with certain pronounced traditions.

Charles Gide

Among them, Charles Gide played an important role both institutionally - he initi­ated the creation of the Revue d’economiepolitique - and theoretically. The posi­tions he held, while sometimes criticised, appeared to most to be an acceptable starting point. Gide’s influence was clearly evidenced by the wide circulation of his books, notably the Principes d’economiepolitique (1884), the Cours d’economie politique (1909) and the Histoire des doctrines economiques depuis les physi­ocrates jusqu’d nos jours (1909) that he wrote with Charles Rist (1874-1955). There were, for instance, 26 editions of the Principes, which were translated into 19 languages and became the standard textbook in the late nineteenth and early twentieth centuries.

While the liberals argued that only one view could exist in a science - a scien­tific proposition being either true or false - Gide admitted that there were several schools of thought in economics, which differed in the methods employed and the policies they advocated.

Gide published his first articles in the Journal des economistes, but soon his relations with the liberals deteriorated and his Principes were severely criticised by them. They reproached him for making too many concessions to protection­ists and advocates of State intervention. In the Principes, he explained that the doctrine of the liberal school could be summarised in three points: (i) “Human societies are governed by natural laws - which we could not change even if we wanted to, because we did not create them, and which, moreover, we have no inter­est in changing even if we could, because they are good or at least the best pos­sible”; (ii) “These laws are not contrary to human freedom; on the contrary, they are the expression of the relationships that spontaneously arise between men living in society”; (iii) “The role of the legislator, if he wishes to ensure social order and progress, is therefore limited to developing as much as possible these individual initiatives... and consequently the intervention of the authority must be reduced to the minimum indispensable for the security of each individual and the security of all, in a nutshell to laissez-faire” (Gide 1884, 24-5). He was very critical of these propositions. To him, social order is not natural because the institutions on which it rests are the result either of acts of war - he was thinking of land ownership - or of positive laws that certain classes of society enacted for their own benefit. Social institutions, in particular the system of wage labour, are not as permanent as liberals claim they are. But even if one admits that the laws governing society are natural, this does not imply that they are sound.

No doubt, when we consider the economic organisation of a society and the institutions which underlie it, we are entitled to conclude that they are good, at least in some respects, since they have at least sufficiently shown their relative worth by the very fact of their existence and durability...

(Gide 1884, 26)

While criticising the liberals’ optimism, Gide only supported State intervention in areas principally limited to social protection. In particular, he concluded his exten­sive analysis of the benefits and shortcomings of protectionism in favour of free trade at a time when it was often questioned.

To elaborate their analyses, some classics relied on the deductive method, start­ing from a small number of axioms or hypotheses suggested by very general obser­vations in order to deduce their propositions. At the end of the nineteenth century, this method was criticised by the historical school: only history could reveal the real character of social facts, by teaching us how economic and social institu­tions were shaped and how they evolved. Louis Wolowski’s preface (1857) to the French translation of Wilhelm Roscher’s Die Grundlagen der National Okonomie had triggered a debate among French liberals on the historical method (see Chap­ter 3). Most liberals rejected this method, but some of them - Louis Wolowski (1810-1876) and Leonce de Lavergne (1809-1880) - found it noteworthy. Among the economists opposed to the classics, many, such as Cauwes and Le Play, with­out necessarily adopting all the theses of the historical school, were nevertheless inspired by them. Gide remained sceptical. The belief that the inductive method could be as effective in social sciences as in physical and natural sciences was, in his view, an illusion: firstly, because observation is more difficult there, and sec­ondly, because direct experimentation is impossible. In his view, historicists would be deluded if they imagined that the mere observation of facts could allow them to develop a new political economy. The scientific method must combine induction and deduction: the main scientific laws are nothing more than hypotheses that have been confirmed.

Among the professors in the law faculties, Charles Gide was one of the first to consider the work of the marginalists.

The study of price determination did not constitute a central part of Gide’s anal­yses and was awkwardly divided between an account of value and a presentation of the law of supply and demand, without any connection between the two approaches being made explicit. On the first point, Gide concluded that value is founded on a dual basis of enjoyment and pain. On the second point, he wrote: “The ancient economists had a simpler explanation of exchange value, which for a long time remained classical. They said that value varies as a direct function of demand and as an inverse function of supply” (Gide 1884, 74-5). He pointed out that, in this formula, supply and demand have no intelligible meaning but, unfortunately, he did not explain how contemporary economists have given them one by inferring supply and demand functions from the behaviour of the agents.

His presentation of the theory of distribution is a superimposition of arguments taken from the classical tradition and more recent marginalist ideas. It was not until his wage analysis that Gide, in his Cours and in some editions of the Principes, came to discuss marginal productivity as it had been put forward by Johann Heinrich von Thunen and reformulated by John Bates Clark. Although he stressed its interest, he argued that it was not very enlightening. In his view, income distri­bution is not solely or even primarily determined by economic factors involving individual rationality. Other elements, moral factors, contribute to the determina­tion of wages, the most important of which are the perception that the workers have acquired of their social value and the means of action that they have found, in trade union and political organisations, to defend their rights. Gide and his col­leagues had certainly read Jevons, Marshall, Bohm-Bawerk and sometimes even Walras; they tried to incorporate some of their ideas into their analyses. But as their theoretical framework is different, the reference to the notions of marginal utility or marginal productivity has little effect, and this is all the more true as they simultaneously introduce into their works elements borrowed from historicists and institutionalists. Most professors of economics in law faculties did not believe that the analysis of price formation and distribution could be based on study of the rational behaviour of individuals. They therefore made little attempt to build sup­ply and demand functions by studying utility-maximising or income-maximising behaviour.^[128]

The analysis of crises

Crises were one topic frequently discussed in the publications of these professors. Their contributions were influenced by their reading of Clement Juglar (1819­1905) and the classical economists. In his Principes (1884, 224-7), Gide began by questioning how Say’s text should be interpreted. To the widely held idea that commodities would be difficult to sell because of overproduction, Say argued that an excess of production should never be feared if the increase in production occurs simultaneously and proportionally in all sectors.

Albert Aftalion (1874-1956), who had defended his thesis on Sismondi’s economic work (Aftalion 1899), broke with this tradition. Of course, he did not deny that “purchasing power always equals the amount of production, that income, demand and production are equivalent quantities, that a general decline in exchange values is logically inconceivable” (Aftalion 1908, 701), but he intended to demonstrate the theoretical possibility of general crises of overproduction. More precisely, he wanted to show that Say’s market analysis was not incompatible with a general overproduction, that is, with a fall in the general price level. To achieve this, he referred to the principle of diminishing marginal utility: as the quantity of goods increases, their utility decreases. While a general fall in exchange values is unthinkable,^[130] a general fall in “use values” - in Aftalion’s language, “use value” means marginal utility - is not only possible, but almost inevitable as a result of the increase in the quantity of consumer goods available. If the quantity of money and its marginal utility remain unchanged, the prices of goods fall.

As long as the production facilities are not completed, the production of addi­tional consumer goods cannot be started. The latter are in short supply and prices rise, which stimulates the production of new capital. But when the production facil­ities are completed, the multiplication of consumer goods leads to a fall in their marginal utility, which causes prices to collapse. Aftalion argued that it is “possible to prove that the fall in prices is not due to monetary causes, but clearly reveals the general decline in the use value of goods” (1908, 702). Jean Lescure (1882-1947) rejected Aftalion’s thesis (1910, 158). To him, overproduction means not only a decrease in values, but also a breakdown of the equilibrium. However, if the reduc­tion in values is the same for all commodities, the equilibrium will not be affected.

From Juglar, these economists first retained a methodological principle: crisis analysis had to be based on a precise study of empirical data, which should not be limited to analysis of aggregate statistics but should look at the specific evolution of various economic sectors. The methods employed remained basic and essentially relied on graphic representations. Aftalion and Lescure took up Juglar’s definition of crisis: it is characterised by the end of price increases. They therefore drew on the observation of price indexes to determine the timeline of crises. Certainly, their thesis was based on what was, for them, empirical truth: “times of price increases are also times of increased production” (Lescure 1912, 469). Despite the increase in production, and therefore in supply, prices rise because the growth in demand, during these periods, precedes that of supply. This time lag leads one to wonder whether the increase in supply is the effect of technical factors, increased produc­tivity or the consequence of a rise in demand. Finally, they learned from Juglar that prosperity, crisis and depression are successive episodes of the same industrial drama. Even if they continued to refer to crises, French economists considered that the distinctive feature of economic movement was the cycle’s periodicity, and they sought the origin of this periodicity not in accidental events but in endogenous mechanisms: to use Lescure’s term, they were trying to develop an organic theory of the cycle (1906, 337).

However, Lescure and Aftalion differed from Juglar on one essential point. Juglar had developed a monetary theory of the cycle in which the evolution of credit and the structure of bank portfolios played a crucial role. His followers, by contrast, elaborated real theories of cycles. Aftalion built his theory around the con­cepts of marginal utility of goods and length of the production process: production is cyclical because it takes time to build production facilities. The income received by the producers of a good could arise before the good in question is available for sale. As a result, aggregate income could be different from the aggregate value of the products. For instance, if workers are paid for the work they have done before the good produced is available, aggregate income and expenditure will exceed the production-priced value of the products. The general price level will rise. This is how Aftalion explained the cyclical behaviour of prices. As for him, Lescure (1906) emphasised two ideas: the evolution of profits plays a crucial role in the cycle and the interdependence of industries is such that if a crisis occurs in a par­ticular sector, it spreads throughout the economy. At the end of the expansionary period, the costs in some key industries rise faster than the selling prices. Although incumbent firms still earn high profits, some new firms make losses because they had to pay high prices for their tools, borrow at high interest rates and pay high wages to hire a workforce which is often of lower quality. The bankruptcy of some of these companies is the cause of the crisis.

Money and currency

During the nineteenth century, French economists, but also the directors of the Banque de France, had expressed their reticence towards the Currency School’s interpretation of the quantity theory of money. They often seemed closer to the ideas advocated by the Banking School and they were particularly critical of the way the Peel Act had organised the banking system. This tradition was continued after 1870, at least among the professors in the faculties of law.

The idea that money is a commodity and that banknotes should be convertible at a fixed rate in gold or silver was challenged, notably by Gide (1884). According to him, metallic money has no viable future; it is likely to be replaced by fiat money until a system develops where money is entirely scriptural. Not only would such an organisation save the capital and labour spent on producing gold, but it would also be better than metallic money at ensuring price stability. An artificial money, rationally managed according to principles derived from the quantity theory, would be better than the natural money whose value necessarily fluctuates.

While Gide, in defence of fiat money, relied on the quantity theory, many French­speaking economists - notably Alfred de Foville (1842-1913) - questioned its validity on the basis of empirical work (Foville 1896). To Foville, it would hardly be possible to explain annual price changes solely by variations in the quantity of

Tradition and innovation at the turn of the twentieth century 181 money. Bertrand Nogaro (1880-1950), in his thesis (Nogaro 1904), developed a radical critique of it. Not only did he reject the idea that price changes are caused by a change in the quantity of money, but he also disregarded the analysis of inter­national trade balance by classical economists such as David Hume, David Ricardo and John Stuart Mill. For him, the classical theory of international trade is mistaken because it views trade as a barter. If “money breaks the barter”, this is in a specific sense: not only does the intervention of money allow a difference to be established between the value of imports and exports, it makes these two operations totally independent:

The exchange value in international trade is no more determined by the recip­rocal demand for exports and imports... than the exchange value of a pair of shoes and a hat, equally priced at 10 francs, is determined by the ratio of the demand for hats from shoemakers to the demand for shoes from hatters.

(Nogaro 1904, 55)

Departing from Mill’s theory of international values, Nogaro criticised Hume’s and Ricardo’s analyses of balance of payments adjustments. The classical thesis stated that an excess of imports over exports led to an outflow of currency, which in turn led to a fall in prices. Nogaro observed that if the imbalance was minor, it would only cause a change in the exchange rate between the import and export gold points. Nogaro’s main argument was that securities play the role of money (1904, 97): capital flows can compensate for an imbalance in the balance of trade.

When he attempted to develop a “realistic theory of money”^[131] (Nogaro 1906), he first attacked the quantity theory. He especially criticised the specific version given by Albert Aupetit (1876-1944) in his thesis (Aupetit 1901), inspired by Walras. His main critique concerned the dichotomy. Prices express two types of relation: first, an exchange relation between goods and then an exchange relation between goods and money. Thus, variations in the general level of prices would depend on the relationship between the volume of transactions to be made and the amount of circulation. This assertion would be the “logical outcome [of a] theory that bases price variations on need, hence on the supply and demand for the instru­ment of exchange” (Nogaro 1906, 686). He criticised Aupetit and Walras for their approach to the problem, in which the general price level is determined in a market in which all goods and the stock of money face each other. To Nogaro, the notions of “exchanges to be made”, “desired cash” and the correlative notions of “supply and demand of money” would then be meaningless, and it would be wrong to think that the determination of monetary prices is a process in which first the relative value of goods and then the value of money are determined. In fact, exchange relations only exist between goods and money, and the relative value of goods can therefore be deduced from them.

Money is in no way an object of supply and demand - apart, of course, from on the foreign exchange market. What needs to be analysed is not the supply and demand of money as distinct from the supply and demand of goods, but the demand for goods by individuals who are holders of money. What needs to be explained is the influence of the money stock on the supply and demand of goods. It was not until later, in 1924, that Nogaro developed this programme.

Finally, the professors who emerged in the 1870s in the faculties of law gradu­ally gained influence at the expense of the liberal group who wrote in the Journal des economistes. At the turn of the century, when the first economics theses were written and a specific competitive exam for economics professors was created, this evolution was almost complete. However, there were hardly any economists in this group whose work had a lasting impact on the development of economic analysis. This relative failure is undoubtedly due to the way in which econom­ics was introduced into the law faculties, but the question of method was also of importance. The professors often criticised classical and marginalist theories as abstract and accused them of neglecting the lessons of empirical observation. The path they followed proved to be all the more difficult as they only had access to elementary statistical tools to observe facts. It was not until 1928 that the first statistics course was taught in a law faculty by Aftalion. It is therefore not sur­prising that most of the French-speaking economists who left a legacy in their contribution to economic analysis came from the smaller group of engineers and mathematical economists.

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