The Constitution of Political Economy offers a compelling intellectual history and theoretical statement of what many economic historians do in practice, without the same level of methodological clarity. At the heart of the historical approach is precisely what Pabst and Scazzieri advocate: an analysis of the interconnection between the economic and political spheres, and how the economy and polity are embedded in society (Pabst and Scazzieri, Reference Pabst and Scazzieri2023, 4).
Pabst and Scazzieri briefly mention Karl Polanyi (Pabst and Scazzieri, Reference Pabst and Scazzieri2023, 22, 116–7) whose approach to The Great Transformation from traditional to modern society has influenced many economic historians. To Polanyi, markets are far from being ‘natural’ and are embedded in social and political relations. His account of British history is one of a double or counter movement. It starts with the initial destruction by a powerful state of older conceptions of society based on moral relations. In his view, Adam Smith did not advocate this new world but was the final defender of the economy as a set of moral relations. By the early nineteenth century, utilitarian political economy was in the ascendant with a reductive material view of humanity and a separation of society into political and economic spheres. There was then a counter movement, a spontaneous reaction as society sought to protect itself from the consequences of dislocation and the excesses of liberal capitalism. In his view, ‘the market economy was a threat to the human and natural components of the social fabric’ which led, ‘without any theoretical or intellectual preconceptions’, to ‘an urge on the part of a great variety of people to press for some sort of protection’ (Polanyi, Reference Polanyi1944, 76, 130, 132, 141–2, 144–150; Rogan, Reference Rogan2017, ch. 2). His analysis was necessarily brief and has been overtaken by 80 years of detailed historical research. Nevertheless, economic historians would agree with Polanyi that the economy is embedded in social and political relations, and they would avoid applying the assumptions of neoclassical economics to the past. They look instead for how social relations, family structures, legal systems and cultural assumptions shape decisions. Where they differ from Polanyi is in complicating a clear distinction between traditional and modern worlds. Medieval Europe had markets and even at the height of classical political economy in early nineteenth-century Britain, market relations involved notions of trust and reciprocity, gendered definitions of who could be an economic actor and moral assumptions about debt or thrift (Muldrew, Reference Muldrew1998; Finn, Reference Finn2003; Alborn, Reference Alborn2009).
In this contribution, I will focus on how historians now approach Polanyi’s counter movement, focusing on Britain in the later nineteenth century and placing it in a comparative perspective. Polanyi’s own account was sketchy, and even at the time, many readers doubted that his book was really a work of history (Rogan, Reference Rogan2017, 82). In developing an account of this counter movement, the approach advocated by Pabst and Scazzieri is particularly important. They wish to move beyond a duality of micro- and macro-economics to consider intermediate units—professional groups, unions and industrial sectors—as well as the state. The approach is what Roberto Scazzieri has termed meso-economics.Footnote 1 This article aims to build on their general theoretical account through a case study that applies their mode of thinking in particular circumstances. It transcends the division between economic and political science and between the economic and political spheres, and moves beyond rational choices of utility-maximising individuals. Instead, it considers how decisions were shaped by interpersonal relations and social dispositions in the context of intermediate institutions.
1. The counter movement in Britain
First, we need to interrogate the nature of the British state and, in particular, the relationship between central and local government. Since the early seventeenth century, parishes in England provided locally funded welfare through the old poor law for support of the elderly and those without work, often provided through payments in cash and kind to people living in their own houses. It was a nationally ordained system of locally funded and administered relief that allowed residents in one parish to move to another. In Scotland, poor relief for those in need was more limited and harsher, but parishes supplied basic education at an earlier date than in England. After 1834, the new poor law tightened the provision of relief as part of what Polanyi saw as the imposition of classical political economy (Polanyi, Reference Polanyi1944, 82–3). Relief was ‘less eligible’—that is, relief should be provided ‘indoors’ in a workhouse rather than through ‘outdoor’ relief at home, on conditions that were worse than available through independent labour. This outcome shifted by the end of the century. The Board of Guardians that operated the poor law only had sufficient money to build workhouses from the 1870s, when they could start to impose deterrent indoor relief on the able-bodied poor. However, the new workhouses increasingly provided institutional care for the elderly poor and sick for whom ‘less eligible’ treatment was hardly appropriate. The shift reflected a changing balance of power on the Boards of Guardians with the extension of voting to more working men, and a realisation that curative treatment was needed for the sick poor (Daunton, Reference Daunton2007, 524–532; Boyer, Reference Boyer2019, Chs. 2 and 3).
By the end of the nineteenth century, the costs of the poor law and public health were putting pressure on local government finance, which relied on a regressive property tax. A major decline of around 40% in-house prices and rentals from around 1900 led to serious difficulties, as the rising demands of local authorities collided with declining yields from landlords (Offer, Reference Offer1981; Englander, Reference Englander1983). Local authorities had a number of options to resolve this financial problem. One was to take over profitable utilities, above all private gas companies, which were already unpopular with urban consumers who had mounted campaigns against high prices and poor service. Another was to reduce the large discount that local authorities paid to house landlords who agreed to collect property tax from working-class tenants whose frequent change of address made direct collection difficult and expensive. This attempt to cut the discount was deeply unpopular with landlords who were already facing a squeeze on their profitability (Daunton, Reference Daunton1983; Millward and Sheard, Reference Millward and Sheard1995).
This crisis within local government finance then collided with a debate over the preferred solution to the problem of poverty and unemployment, and the worry that British workers were unfit to fight or to be productive workers. The competing solutions of the Conservatives and Liberals had one thing in common—to move the provision of social care from the locally funded poor law to a national system. Britain had an efficient system of national taxation with high levels of compliance and a positive relationship between economic growth and revenue. National taxation was increasingly used to supplement local taxation and to remove some of the costs of social security to the national state (Daunton, Reference Daunton2002). Where political parties differed was over how to achieve this shift.
To Joseph Chamberlain, the Conservative Cabinet minister and former Lord Mayor of Birmingham who had municipalised the gas company, the answer was tariff reform or imperial preference. By imposing duties on imports of manufactures and food from outside the empire, he aimed to create steady work and higher wages, and to raise revenue for social reform and especially old age pensions. To Liberals committed to free trade, his approach was anathema. They were forced to adopt another solution: progressive income taxation that could fund a noncontributory old age pension, which they introduced in 1908. Here, another political problem arose. The higher levels of income tax threatened to alienate middle-class voters, and at the same time, the Labour Party was pressing for a more radical programme of a ‘right to work’. After the elections of 1910, the Liberals needed support from Labour MPs but did not want to offer a right to work that would be costly and impractical. An alternative was needed that could contain Labour’s demands. The adoption of social insurance in 1911 was a response both to the demands of the Conservatives for tariff reform and of Labour for the ‘right to work’, without needing an increase in income tax. Unemployment insurance was introduced for a specific group of occupations, and health insurance was adopted for those below an income threshold. Employers and workers each paid weekly contributions, with a small supplement from the state to fund a self-financing scheme that offered benefits in proportion to contributions. In some cases, industrialists objected that increased costs made them less competitive in international markets. Others accepted that social reform improved the quality of their workers and helped the domestic market (Harris Reference Harris1972; Hay, Reference Hay1977; Harris Reference Harris, Bentley and Stevenson1983; Trentmann, Reference Trentmann2008).
The new insurance schemes of 1911 drew on existing institutions that had emerged from working-class associational life in the course of the nineteenth century. Unemployment insurance was based on the schemes of trade unions in industries with cyclical patterns of employment, such as engineering and shipbuilding. The state scheme covered the same trades where there was available data to calculate the likely costs. In other trades with endemic underemployment rather than cyclical unemployment, the solution was to organise the labour market through Labour Exchanges to replace the chaos of casual hiring. Above all, the case rested on William Beveridge’s analysis of casual labour on the docks. Here, trade union officials saw the advantage of a regular workforce that was easier to organise; many dockers resented tighter control over their employment. The result on the Liverpool waterfront was a stand-off between dockers opposed to the scheme and union leaders who worked with officials in implementing the Labour Exchanges (Phillips and Whiteside, Reference Phillips and Whiteside1985).
Similarly, health insurance rested on existing friendly societies—working-class bodies that combined sociability and ritual with the payment of sick pay. Although these societies valued their independence from the state, attitudes were shifting. By the end of the nineteenth century, many societies were experiencing an actuarial crisis with rising life expectancy and increased costs of relief. To some societies, the offer of state support was a threat to their autonomy; to others, it was an escape from insolvency (Thane, Reference Thane1984). In 1911, the friendly societies became ‘approved societies’ that administered the scheme on behalf of the state. The intention was that social welfare would be provided by self-administering bodies. In 1911, the government explained that ‘The Scheme is so worked that the burden of mismanagement would fall on the workmen themselves’, which would discourage misuse. The approved societies would, so it was hoped, be ‘subject to the absolute control of the members, and with provision for the elections of all committees, representatives and officers by the members’. This aim was subverted by another intermediate body—large commercial insurance companies that offered small life insurance schemes. They saw a threat to their position and successfully campaigned to become approved societies, thus introducing a different set of values into the scheme. In addition, medical practitioners who had been paid a modest sum by the friendly societies saw an opportunity to demand better remuneration (Gilbert, Reference Gilbert1966; Hennock, Reference Hennock1987, 189–196).
The nature of state intervention, therefore, reflected the structure of intermediate institutions and patterns of associational life. Before long, things started to change as a result of the compromises made in 1911. The provision of social services by associations run by their members gave way to a more centralised, state-run system of health provision and benefits. This had been precisely what the Liberal government had wished to avoid as redolent of Prussian bureaucracy rather than British associational life. In fact, it turned out that the German welfare system after the Second World War gave a greater role to associations to provide services than was the case in Britain, which became more ‘Prussian’. The explanation for this unanticipated outcome is partly the decision of 1911 that commercial insurance companies could become approved societies that were not accountable to their members. Further, the autonomy of friendly societies was undermined by the state. Societies might wish, depending on their finances and the preferences of members, to offer additional benefits. This created two problems. One was that the government actuary could refuse permission on the grounds that benefits were unaffordable and would create demands to expand provision across the board. The second issue was that members of different societies, living on the same street, had different coverage. As a result, attitudes in the Labour Party shifted in favour of a state system where the government could establish a uniform system of provision that could transfer money between poorer and more prosperous regions. If the approved societies were in any case controlled by government regulations, why not go a stage further to a single national scheme that would be democratically accountable through parliament (Whiteside, Reference Whiteside1983)?
The willingness of Labour politicians to move from the provision of welfare through the associational life of trade unions and friendly societies was predicated on the belief that the political system provided a level playing field and that the state was neutral between classes. This belief that the state was fair between capital and labour was a rhetorical strategy by the ruling elite, but it had a practical effect in constraining action that would expose the rhetoric as a sham. The rules of the game had to be followed by both sides. Engels saw that as soon as the ruling class made politics a matter of contract, the use of coercion was rhetorically impossible and politically risky. His point was true of Britain more than other European countries and had practical outcomes. By 1875, the British state had largely withdrawn from industrial bargaining, and trade unions had more freedom of action than anywhere in Europe. The Taff Vale decision of 1901, requiring the railway workers’ union to pay damages to cover the company’s losses, was reversed by parliament in 1906. Unions secured immunity from being sued—an extraordinary extra-legal status that did not apply to any other body (McKibbin, Reference McKibbin and McKibbin1990, 26–31).
Further, capital and labour often worked together in the management of industry. A good example was the Lancashire cotton industry. In the 1830s, industrialists wished to break the hold of male workers in cotton spinning by introducing new powered machines that could potentially be operated by cheaper women workers. This was precisely what happened in New England, where identical spinning machines were operated by women under the oversight of male supervisors. It did not happen in Lancashire, where the introduction of the spinning machines coincided with a period of recovery from depression. Industrialists opted to seize the opportunity of expanding markets rather than engage in a costly dispute with the workers, which would be difficult to win because of the fragmented nature of the industry and problems of maintaining a solid front. The outcome was a system of subcontracting. Unionised adult male spinners (minders) were paid by output, and employed two younger, non-unionised, male piecers who were paid on a time rate. It was in the interests of the spinner to increase output and drive the piecers who hoped in time to become spinners. The owner of the mill had essentially delegated management of the shopfloor to the unionised workers. From 1853, the employers and the union reached collective agreements for wage scales that applied to all mills in the district. This approach mitigated the destructive effects of competition between a large number of firms and created a more stable economic environment. Of course, serious labour disputes could arise at the point of renegotiation of the collective agreement, but workers and their unions had a fundamental role both in management on the shopfloor and in setting wages within the district. This outcome was not determined by technology, as is apparent from a different pattern of employment in New England. Rather, it reflected the contingencies of the 1830s that led to male control of the workplace—something that industrialists had not intended but soon accepted (Lazonick, Reference Lazonick1981).
Although workers were incorporated into the management of firms, they still considered their interests as distinct. The strong associational life of unions, friendly and cooperative societies, brass bands and pigeon racing created a working-class culture that was cohesive but not integrated with the middle-class culture. Given the sense of fairness in the institutions of society—the legal system, parliament and monarchy—any resentment between the two cultures did not spill over into politicised hostility (McKibbin, Reference McKibbin1998, 527–8).
These responses to the uncertainties and disruptions of an urban industrial society—Polanyi’s double movement—reflected competing assumptions about the economy, between free trade and tariff reform, internationalism and imperialism, that were as much about identity as economics. They also involved intermediate bodies, as suggested by Pabst and Scazzieri: local gas consumers, ratepayers, house landlords and industrialists. Furthermore, the shape of the insurance schemes reflected the nature of existing intermediate bodies, which in turn reflected the structure of relations between capital and labour within firms. Other countries differed because of their distinctive forms of state and intermediate institutions that shaped the relationship between politics and economics. It is only possible here to make a few observations about the differences in Germany, France and the United States: a full account would require a book rather than a brief article.
2. Comparisons
When the Liberal government was considering social reform after it returned to office in 1906, it looked to Germany, where Bismarck had already adopted social insurance. The outcome was not a simple process of copying. What stands out is a major difference. In Germany, the state supported the repressive approach of large employers against trade unions, and social insurance was adopted as an anti-union measure. There was nothing like the compact with organised labour that we noted in Lancashire or in the legal protection of unions. Conflict was displaced to the political realm, where it was again difficult to resolve. In Prussia and other states, the electoral system divided the electorate into three classes by their wealth, so that a small number of rich men had as many votes as a large number of poor voters. By contrast, the Reich had equal, universal male suffrage, which was wider than in Britain. However, this wide franchise did not lead to a greater sense of fairness or legitimacy. There was nothing like the alliance between workers and Liberals that emerged in Britain, and the Social Democratic Party was committed to revolutionary socialism, unlike the Labour Party, which accepted that it could secure its aims by working through parliament. This difference reflected deep scepticism in Germany about parliamentary government. Unlike in Britain, party leaders did not form the executive, and the Chancellor was not responsible to the Reichstag. Instead, he was selected by the emperor and presided over the upper chamber or Bundesrat. The intensity of politics on the ground was not turned into effective action in the Reichstag (Blackbourn and Eley, Reference Blackbourn and Eley1984,105–117, 122, 256–7, 275–6).
The German social insurance system was clearly unlike the Liberal strategy of incorporating unions and friendly societies. Further, the German state lacked fiscal capacity compared with Britain. Although individual states had income taxes, and some had progressive rates earlier than Britain, the Reich only adopted an income tax in 1913. Unlike in Britain, there was more fiscal capacity at the level of the constituent states than at the level of the Reich. The use of contributory insurance in Germany was necessary in the absence of a federal income tax; in Britain, insurance was a means of containing Labour’s demands for still more tax-funded welfare.
In France, industrialists were also hostile to unions and turned to employer-operated schemes, which became a major component of welfare. They were also influenced by social Catholicism and natalist policies to stimulate the low birth rate. The system of family allowances in France had its origins in the private caisses de compensation that were created and controlled by employers. The result was a social welfare system that was matriarchal or parental. By contrast, the British system of insurance rested on a male breadwinner or patriarchal model that supported the wages of men as heads of the household. The introduction of family allowances was slower in Britain, in part because male trade unionists saw a threat to their case for higher wages as the main breadwinner (Pedersen, Reference Pedersen1993).
In the United States, as in Germany and France, fiscal capacity was limited by the lack of a federal income tax until 1913. Even so, the United States did have a major welfare policy with a sizeable bureaucracy in the late nineteenth century: tax-funded pensions for those who had fought for the Union in the Civil War. However, this administrative capacity served to delegitimise government action rather than to provide the basis for old age pensions. The Civil War pensions were not available to those who had fought for the Confederacy, and they were used in a system of ‘patronage democracy’ to bolster support for the Republican Party.
As in Germany, and unlike in Britain, the United States had a wide male franchise. One consequence was that American politicians did not need to compete, as did their British counterparts, for support from successive extensions of the franchise. The United States did not have a parliamentary system and differed from Germany in having an elected president. There was less sense of the political system being biased against workers (although it was obviously biased against Afro-Americans). The United States was closer to Germany in the limited voice for organised labour. Many industrialists were fiercely opposed to trade unions and had the backing of the state until the New Deal. The strategy of many industrialists was not only to use force against organised labour but also to offer company schemes—a form of welfare capitalism that was much less evident in Britain, where most industrialists were happy to delegate provision to workers’ associations or the state. Not only were unions weaker in the United States, but there was also a difference in the nature of self-help bodies. Friendly societies to provide sick pay and medical care were much less common than in Britain, and the most popular form of self-help was building and loan associations that facilitated home ownership as a route to self-sufficiency and independence (Daunton, Reference Daunton and Daunton2008).
Organised labour was weaker in the United States than in Britain; it was also more wary of supporting public provision by a state that they saw (with justice) as dominated by courts hostile to their interests. In any case, trade unions were concentrated in a few cities and organised in occupational groupings, rather than following the hierarchical structure of local, state and federal politics that limited their ability to shape policies. Neither did the unions form effective alliances with social reformers. By contrast, middle-class women had greater access to higher education than in other countries, yet they did not have the vote that was available to (less educated) men. They embarked on a mission to extend the moral value of social care from the household to the nation, forming alliances with other social reformers. Their organisational structures mimicked the local-state-federal system so that they were more politically effective than the unions. In the absence of an organised working-class political campaign for a patriarchal welfare system, women were able to press for policies for women and children. For different reasons from France, the initial development of social welfare in the United States was maternalist rather than patriarchal (Orloff and Skocpol, Reference Orloff and Skocpol1984; Skocpol, Reference Skocpol1992, 41–57, 317–9).
3. Conclusion
This brief outline of the different forms taken by the counter movement attempts to provide a concrete example of the more theoretical approach of Pabst and Scazzieri. Although historians are notoriously suspicious of theory, their approach arrives at a similar position of probing the relationship between production regimes and modes of association, questioning the role of intermediate institutions that are differently constituted depending on local conditions, and interrogating the different relationship between the political and economic spheres. It is an approach that assumes that both politics and economics are embedded in interpersonal relations that take many different forms of reciprocity and social solidarity, of competition and rivalry. It is far removed from the approach of economists who rely on economically rational utility maximising individuals. Such an approach ignores the many ways in which communities in the industrial towns of the north of England, the Ruhr or New England operated within their distinctive political, economic and social structures and institutions. The Constitution of Political Economy offers a more sophisticated account. However, when economists do take note, it can only be hoped that they will also incorporate the insights of historians.
