The Economy as an Organic Mechanism

In European medieval society, all economic and social relationships were interpreted through the prism of Christian theology and Aristotelian “natural law”. These relation­ships were regarded as both “natural” and divinely inspired, and were regulated by the church.

Gradually, over some centuries, this society of custom and tradition disinte­grated. The forces of disintegration were various (for example, the commutation of feudal services for a monetary rent, technological progress in agriculture and the expansion of trade), and their effects were to widen the sphere and scope of mon­etary transactions. This process tended to break down the religious bonds of society, encouraging the growth of individualism in order to take advantage of the opportu­nities offered by the growth of markets for material advancement. The development of early forms of capitalism, based on the individual pursuit of monetary gain, accel­erated these tendencies. However, the growth of individualism posed a problem: if society was not held together by divine providence, by what, if anything, was it held together?

Hobbes’s answer, written in the mid-seventeenth century against the background of the English Civil War, was that society was held together by a “social contract”, whereby the people transfer some of their rights to a strong central authority in order to guarantee their protection. Otherwise, in the natural state of mankind characterized by no strong central authority, war would ensure that:

there is no place for industry; because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no com­modious building; no instruments of moving, and removing, such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.

The drive to war was part of human nature; the human instinct of acquisitiveness, greed or selfishness expressed through competition “maketh men invade for gain” (Hobbes 1651 [2010]: ch. 13, para. 7). So what holds society together in the face of such human nature, averting anarchy, is the politics of a social contract.

In the early eighteenth century the emphasis changed when Mandeville (in his Fable of the Bees, in a variety of editions between 1714 and 1724) argued that “vice” rather than “virtue” was the foundation of prosperity. By “virtue” he meant cooperative behaviour in conscious pursuit of the good of others, in contrast to “vice”, which was the selfish pursuit of greed. This latter, if wisely channelled by skilful politicians, would generate public benefits. In contrast to the Hobbesian view that human nature was vicious and could only lead to anarchy unless politically controlled, Mandeville proposed that the greed of human nature, provided it was politically guided, consti­tuted the fabric of social intercourse and progress. It was then a short intellectual step, after another 50 years, for Adam Smith to advocate the removal of political guidance and to focus on the benefits of a laissez-faire state to the operation of an invisible hand.

Political philosophers and nascent “political economists” in this period gave a great deal of attention to the problem of understanding how decentralized pursuit of self­interest might lead to organized and socially beneficial outcomes. In particular, political economic discourse of this period evolved the idea that self-regulating standards were latent in the competitive hurly-burly of the marketplace. Behind the constantly fluctu­ating market prices at which commodities actually exchanged lay “natural prices” or “values” to which market prices were tethered and around which they “gravitated”. To the degree that these natural prices represented socially beneficial guides to allocation of resources (such as land, other non-labour inputs, and labour), this process of competitive gravitation would act as an “invisible hand” in regulating social production.

The idea that order emerges from spontaneity was a powerful “grand narrative” that was not confined to political economy. However, Smith’s intuition that the innumerable actions of competing individuals in pursuit of self-interest could generate something other than chaotic anarchy set an intellectual agenda that remains contemporary. Since trading activity in decentralized markets appeared to characterize the process of the invisible hand, it threw a particular focus on what was brought to the market, what was taken from the market, and the prices at which these trades took place. It was therefore critical to give an account of the forces influencing both market prices and natural prices, which poses the questions a theory of value has to answer.