Political Economy: The Evolution of Capitalism with Utilitarian and Socialist Thought

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This essay is part of a series of essays for ChatGPT-generated economics class titled The History of Modern Economic Thought. Read more about the project here and become a subscriber to get updates.

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Exchange is at the heart of society. The governments we elect and the implicit rules we live by are shaped by the social, political, and economic interactions we have with one another.

Economics existed in practice, first, through social exchange. It wasn’t until Adam Smith published The Wealth of Nations that a discipline called economics was formally recognized and the system of exchange that we know as capitalism today was officially given a name

By the middle of the 19th century, the economy of Europe was being molded to fit the needs of the time. While Smith’s thesis on capitalism articulated the new system of exchange and commerce that emerged out of feudalism, it couldn’t provide a framework for understanding the social and political systems that would take shape around it.

While capitalism made it possible for a new middle class to emerge, the benefits that capitalists experienced weren’t felt across society. The working class that was employed in capitalist’s urban factories still struggled just as much – if not more – than when they worked on feudal farms. The difference now, however, was that they were completely removed from the ability to produce food. Without work, Europe’s peasantry couldn’t survive.

New economic theories emerged to reconcile the benefits of capitalism with the growing disparity between the rich and the poor. Socialism argued that wealth ought to be redistributed to the workers while utilitarianism suggested that the market would maintain an equilibrium, deciding the fair share of rewards due to workers for their efforts.

Whether it was intended or not, both theories gave rise to the need for an impartial arbiter – the government – to play a greater role in managing the economy. Utilitarian and socialist thought transformed capitalism from a purely economic system to a system of social organization and governance.

The foundational principles established by these theories gave rise to the political economy that shapes how society, the government, and culture work together to this day.

Utilitarianism and socialism emerged as a response to squalid working conditions in Europe.

The Industrial Revolution marked a new period of wealth and influence for Europe’s nascent capitalist class but it didn’t benefit everyone equally. Workers – the backbone of production – were the ones who were expected to pay the social costs for capitalism’s success.

The transition out of feudalism meant everyday people lost access to the land they would otherwise farm to support their feudal lord and feed themselves. They moved to cities to find work in rapidly emerging factories, trading their time for a wage in order to purchase food they could no longer grow for themselves.

Under capitalism, value is measured by profit, wages, and rent. Human labor is an essential component that takes raw materials, transforming them into finished products that could be exchanged on the market, often for a higher amount than was needed to produce the finished goods in the first place.

After Adam Smith published The Wealth of Nations, newly minted economists began augmenting his theory on value and the role of labor in producing value. One such economist was David Ricardo.

Ricardo argued that wages and rent within a capitalist system are more or less fixed, if not predictable. There is a bare subsistence that workers need to earn in order to stay alive. As the population grew, fertile land became more valuable. Owners of fertile land could command higher rents, driving up competition and thus the cost to use that land.

That left profit as the main variable capitalists had to work with. A higher profit could only come from optimizing the inputs of production – aka labor. Unsurprisingly, capitalists tried to extract as much output from their workers as they could. Workers – especially women and children – were forced to work long hours in less than ideal conditions to meet the insatiable demands of their employers:

A sixteen-hour day was not uncommon, with the working force tramping to the mills at six in the morning and trudging home at ten at night. (Heilbronner 106)

Once the Napoleonic Wars ended, Europe entered into a period where it was trying to establish a new status quo. Monarchies were out and new forms of government were in. But the new social and political structure of Europe hadn’t caught up with the economic facts on the ground.

While the elites saw the working class as uneducated and immoral barbarians, workers were acutely aware of their condition. Economic downturns in the early 19th century led to insurrections against the rich. But instead of focusing their anger against the landed aristocracy as they had done in the past, workers turned their anger toward their capitalist employers. They blamed them for hoarding the wealth created by the sweat of their brow.

A class conflict was brewing in Europe. It would foreshadow what was to come in the 20th century. In the meantime, this conflict revealed inherent flaws in the capitalist system that had to be resolved.

One solution was socialism. Utopians like Robert Owen envisioned work communities that shared in the fruits of their labor. Rather than being socially isolated by the long hours and atomistic nature of factory work, workers could live in shared quarters, engaging in direct non-economic exchanges with one another.

One of the most well-known attempts at turning this vision into reality took place in New Harmony, Indiana. Owens purchased the town in 1825 but failed to implement a leadership structure that could attract skilled labor while deterring grifters. Some form of governance was desperately needed. Within two years the experiment failed.

In its place another theory emerged – utilitarianism. Promoted by the likes of Jeremy Bentham, Jean-Baptiste Say, and John Stuart Mill, utilitarianism attempted to define how the government and society should be structured within a capitalist economy. It gave individual economic participants agency while defining the roles institutions should play in managing the economy.

According to the theory’s founder, Jeremy Bentham, individuals are rational, calculated beings motivated to take action that maximizes pleasure while reducing pain:

Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. (Hunt & Lautzenheiser, 130)

Utilitarianism’s theory of value argued that humans made rational, calculated decisions incentivized by the pursuit of pleasure. Because pleasure is subjective, it’s ultimately up to each individual to determine what that pleasure (and pain) means for them.

Self-interest guided how individuals participated in the economy. Capitalists would do what was necessary to meet their self-interests just as the working class.

This theory pinned the blame on the working class for their own misery. Utilitarians agreed with Thomas Malthus’s assertion that workers struggled because of their predilection for debauchery and vice. The landed elites were entitled to the positions they held in society due to the virtue of their moral character.

This logic shaped how utilitarians viewed the role of capital in society. Rather than being something that should be doled out to the workers as a benefit – as the socialists would have advocated – utilitarians argued that workers needed a strong incentive to work.

One of the reforms that was shaped by utilitarian thought and codified into law during this time was the Poor Law Amendment Act of 1834. Unemployed workers were provided with the bare minimum to survive and kept in a state of perpetual insecurity in order to bring awareness to the fact that at any moment they could be reduced to a state of total poverty.

In other words, utilitarians didn’t want workers to get too comfortable, otherwise they risked becoming lazy.

If this sounds similar to today’s conservative appeals to limit the scope of the welfare state that’s because it is. Utilitarian theory that emerged in the 19th century created the foundation of neoclassical economics that is still practiced today.

Utilitarianism gave shape to the emergence of a new political economy. It not only built off of the work of classical economists like Adam Smith and David Ricardo, it expanded the scope of economics to include what rules that should govern society and the role that the government should play in enforcing those rules.

Utilitarianism was part of a larger current that restructured the social and political order in Europe. It shed light on capitalism’s flaws but didn’t make much headway in solving the conflict that had emerged between workers and their capitalist employers.

One of the most important ideas to emerge out of capitalism was the ability for the middle class to own property. Under feudalism, land was apportioned to the nobility. You couldn’t buy land or become a noble on your own accord, it was something you were born into.

Capitalism changed all of that. Any entrepreneurial peasant could build wealth and command a seat at the table alongside the aristocracy. The established elites, naturally, did not like this. It necessitated change to both the social and political balance of power in Europe. It’s not an accident that as capitalism emerged in the late 18th century, revolutions also took place to renegotiate the terms of governance.

Private property – and the means of production – became one of the focal points around which new governments emerged. But there were disagreements as to the role the government should play in upholding property rights.

Socialists like Henri de Saint-Simon took the position that capitalists and landowners represented an idle class. They used property to extract wealth from workers that they did not rightfully earn:

It is the workers–les industrials–of all ranks and hierarchies who merit the highest rewards of society, and the idlers who deserve the least. But what do we find?...Those who do the least get the most. (Heilbronner 120)

This was affirmed by John Stuart Mill who recognized the inverse relationship of labor and ownership when it came to the distribution of wealth in his work Principles of Political Economy:

If the institution of private property necessarily carried with it as a consequence, that the produce of labour should be apportioned as we now see it, almost in an inverse ratio to the labour–the largest portions to those who have never worked at all, the next largest to those whose work is almost nominal, and so in a descending scale, the remuneration dwindling as the work grows harder and more disagreeable. (Heilbronner 130)

The vast majority of workers didn’t own property. Even with capitalism, it was held in the hands of a small elite. In his work What is Property?, socialist-anarchist Pierre Joseph Proudhorn argued the role of government was coercive in nature in order to protect property rights of a minority of the population. Those who owned property were able to extract rent – or in his terms “legally steal” – from the workers and the government used force to uphold that.

While socialists and some utilitarians acknowledged the role of government in protecting property rights and the need for it to act as an objective arbiter of wealth distribution, most utilitarians wanted the government to stay out of the economy entirely.

Jean-Baptiste Say argued that when capitalism was governed by the free market a system of social harmony would inevitably emerge. The laws of supply and demand would automatically utilize all resources, constantly bringing the economy back to a state of equilibrium.

In that sense, the free market was an inherently fair and just system. It didn’t need government intervention. Say believed everyone receives from society an amount commensurate with the effort they put in. It’s a system that distributes fairness rather than inequality.

While workers didn’t acknowledge the suffering of capitalists, utilitarians argued that capitalists made sacrifices that warranted the profits they received. Workers weren’t the only ones struggling to earn their keep. Where they differed is that workers were paid a wage to meet their immediate needs up front. Mill writes:

If a capitalist supplies a party of labourers with [food, clothing, materials, and tools], on condition of receiving all they produce, they will, in addition to reproducing their own necessaires and instruments, have a portion of their time remaining, to work for the capitalist. (Hunt & Lautzenheiser, 189).

Capitalists, on the other hand, had to wait for a return on their investment. They had to practice abstinence or what we would refer to today as delayed gratification. Under the utilitarian logic that all participants in the economy seek to maximize pleasure, forgoing short-term wants to put capital to work for future gains, was an act of pain. Say argued:

Capital, or accumulated produce, is the mere result of human frugality and forbearance to exercise the faculty of consuming. (Hunt & Lautzenheiser, 136)

In turn, the choice capitalists made to forgo their own pleasure benefited the whole of society. Landowning aristocrats were too preoccupied with their own vanity projects or employing workers as service providers. Workers were too poor to do anything but work. That left capitalists – and their profit – to finance the industrialization of Europe and the economic growth that would follow.

The competing beliefs over what was fair and just in capitalism put workers and capitalists at odds with one another. Mill believed that social harmony could be achieved by elevating workers’ moral standing through education and getting capitalists to find contentment with their existing wealth. Neither has been accomplished. Class conflict continues to be an unresolved issue to this day.

This conflict has in turn, shaped government and politics. As the textbook’s authors E.K. Hunt and Mark Lautzenheiser point out, property owners and property protectors have become bedfellows with the former financing the latter to ensure the established status quo prevails:

If all people act exclusively from self-interest, then we must endeavor to find what would be in the self-interest of politicians in a capitalist system…Money is, and always has been, the lifeblood of politics in a capitalist system. To come to power requires money and money perpetuates such power. (Hunt & Lautzenheiser, 199)

While utilitarianism provided a new interpretation of the labor theory of value and introduced marginal value into economic lexicon, its biggest contribution was in giving shape to political economy. If capitalism represented a framework for understanding profit derived out of mercantilist trade, then utilitarianism is a framework for understanding the social and political order that emerged within capitalist economies.

While utilitarians argued for laissez faire policies, this was at odds with their desire for the government to protect private property. The need for the government to exert force to protect property rights solidified its role as an economic arbiter. The extent to which the government would play that role, however, is left up to interpretation and is something that continues to be hotly debated to this day.

Final takeaway.

Much of the economic theory we take as fixed laws of nature were shaped by interests that didn’t represent the average worker. Utilitarian economic thinkers were several degrees removed from the working class. Thinkers like Jeremy Bentham and John Stuart Mill came from wealthy, educated families. They had ideas about production and the value of labor but it’s not something they had experienced first hand.

Even though utilitarians believed that individuals were capable of making rational choices, this belief didn’t fully extend to the working class. While some thinkers like Mill were optimistic that the poor could ascend out of poverty, the vast majority of thinkers did not believe the working class could overcome their own moral fallibility. The desire to keep the poor destitute and in their place shaped policies that emerged in halls of government.

Unsurprisingly, workers began to take action to challenge capitalists. Workers unions took shape and protests erupted throughout the 19th century. Around the same time the utilitarians were bringing their theories to light, another economic theorist – Karl Marx – was putting his own theories to paper.

Capitalism offered an alternative to the monarchal, aristocratic order that had governed Europe for centuries, but it wasn’t a perfect system. It was clear labor was a central part of the production process but what constituted labor and how the value of labor was determined was unclear.

These were some of the questions socialists and utilitarians were trying to solve. They offered theories that established the role of government and integrated within the social order to denote what workers ought to be entitled to as a result of their labor.

Distribution of wealth and access to property were core issues during the Cold War and are still contentious issues to this day. As we move into an economy dominated by smart algorithms and artificial intelligence, it’s unlikely these questions will be resolved anytime soon.

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Notes

ChatGPT scored this essay as an A and provided the following feedback:

Understanding of the Reading: 5 Demonstrates a deep and nuanced understanding of utilitarianism as articulated by Bentham, Mill, and others. Integrates historical context and engages with major works and thinkers in political economy.

Critical Thinking: 5 Exhibits strong critical engagement with the material, including insightful critiques of utilitarian assumptions and their socio-political implications. Draws meaningful parallels to modern economic and political structures.

Clarity of Writing: 4 The writing is generally clear, organized, and engaging, though some minor restructuring (e.g., paragraph transitions or streamlining arguments) could enhance flow.

Use of Evidence: 5 Strong use of historical examples and direct quotations from primary and secondary sources. Evidence is well-integrated and interpreted thoughtfully.

Reflection: 5 Demonstrates a high level of reflection, linking past economic theories to present-day economic and political challenges. The final takeaway is particularly strong in this regard.

Score: 24/25

Grade: A

This is the eighth response paper I’ve written for this project and the highest score ChatGPT has given to me. I’m going to be honest, I felt like I rushed through this essay. I made up a bunch of bullshit and somehow tied it all together.

I also felt that way throughout my whole college career so go figure.

I’m starting to see the structure of the course more clearly. I know that sounds strange being halfway in it, but I can see how different theories interact with one another and how the development of these theories relates to macro political and social issues of the time.

As an American, I’ve taken all of this economic history for granted. America didn’t really industrialize until after the Civil War. When socialism began to emerge in Europe, America was embroiled in a political conflict over slavery while engaging in small military skirmishes with Native Americans. So much of our understanding of the world today is from a European perspective but it hadn’t really dawned on me until now how distinct America is.

Capitalism and the political economy that emerged in Europe is based on a class system that was in the process of coming undone. While Americans have borrowed heavily from all the theorists I’ve covered so far, I don’t think it’s sufficient. America needs to develop it’s own philosophy and to be honest, I don’t think we’ve done that yet.

Maybe that’s what we’re in the process of dealing with now. We’re reconciling European systems — to include socialism — with the outcome being a wholly new American political economy.

If you’ve been following along with these essays I’d love to know what you think. How much of your understanding of the world is predicated on a European interpretation of history?