Edwin Cannan: An Economist Who Protested against Big Government

Published August 2, 2021

One hundred years ago, the countries of Europe were trying to recover from the consequences of the First World War. It was not only the cost in human life (estimated to be more than 20 million people) and the military expenditures of nearly $5 trillion in today’s dollars. It was the political and ideological legacies of the war, as well.

The relatively classical liberal institutions that had generally prevailed in many of the Western nations before the war had been weakened by the wave of wartime controls and central planning introduced by the belligerent governments. Socialists were calling for the end to capitalism and its permanent replacement with government peacetime central planning. Others called for a new “social liberalism” of extensive and intrusive government interventions and welfare state redistributions.

Few were the voices still emphasizing the importance of a free-market order and the value of personal liberty from overbearing government. One of those voices was the British economist Edwin Cannan (1861–1935), who taught at the London School of Economics from 1895 to 1926 and continued to lecture and publish until his death in the mid 1930s. He influenced an entire new generation of British economists to be critical of any unreflective advocacy of socialism, nationalism, and interventionism. While not an advocate of laissez faire, he strongly emphasized the importance and superiority of the competitive free market, and he drew attention to the power of markets to bring about a global system of peace and prosperity.

A master of the history of economic ideas

Cannan was a master of the history of economic thought. His two major works, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848 and A Review of Economic Theory, have long been considered penetrating critical studies of the “classical” labor theory of value and its implications, from Adam Smith through John Stuart Mill. His 1904 edition of Adam Smith’s Wealth of Nations, with detailed annotated footnotes and references, has long been considered to be an outstanding version of that work for the interested and scholarly reader. It is still widely used today.

Most of Cannan’s analysis of the classical economists in those works focused on questions of “pure theory” concerning the value and role of labor, land, and capital in the economy. He insisted that whatever may be the shortcomings in their writings, the classical economists offered a penetrating analysis of the dynamic and competitive workings of the market system that served well in the nineteenth century. They helped to bring about invaluable political changes with the end to many domestic government interventions and the victory of the free-trade movement in place of the long-prevailing forms of trade protectionism.

If politicians often criticized the classical economists and some of those who came after them for not showing how government controls and regulations could be practicable and effective, Cannan insisted that: “The truth is in reality that the economist refuses to take a side when both sides are wrong, and declines to say Yes or No to a question when both the affirmative and the negative answer would make him admit what he knows to be untrue.” In other words, the proper role of the economist is to tell the truth about how markets work and not to serve as rationalizer and apologist for the purposes of those in political power.

Teaching the “miracle” of the market

What stands out in Edwin Cannan’s writings is a simplicity and clarity in explaining the “miracle” of the market in a world-encompassing division of labor that connects multitudes of people for mutual improvement and peaceful cultural gains. His style, therefore, makes his volume, Wealth, for instance, an entertaining pleasure to read as he takes the reader through the various facets of the working and elements of the market order. While he did not presume to assign to the state only a minimalist place in society, he emphasized the power and productivity of free and creative initiative and incentive that comes only when people have a wide latitude of economic liberty.

He warned against some of those who called for laissez faire, not because the case for free markets did not have a reasonable rationale, but because too often, “To the practical men, the precept ‘Laissez-faire,’ never really meant ‘Leave everything alone’ … but simply ‘Leave alone certain things which I think ought to be left alone’.” That is, some said, let’s have economic liberty when I want it, and some government intervention when I’ll benefit from it. The case for free markets should not be judged by the inconsistencies and hypocrisies of some, but it should be judged on its own logical and historical grounds.

Protesting against planning and inflation

Cannan was also an early con­tributor to applying the logic of marginal analysis to the theory of money in his books — Money: Its Con­nection to Rising and Falling Prices and Modern Currency and the Regulation of Its Value — and espe­cially in his article, “The Applica­tion of the Theoretical Apparatus of Supply and Demand to Units of Currency” in the Economic Journal.

He was scathing in his criticisms of the British government in going off the gold standard during the First World War. Rather than telling people the truth about what the actual financial cost was to fund the war by simply taxing the citizenry the full amount needed for military expenditures, it was so much easier to resort to the monetary printing press.

To issue more paper currency is an easier expedient for securing increased spending power than borrowing and very much quicker than taxation…. But no less important, it is supposed that if money incomes increase, the people will be less discontented with a diminished amount of material well-being which seems to them to come from high prices, than they would be with that diminished amount of material well-being if it seemed to come from diminution of spendable money income.

Indeed, throughout the war years of 1914 to 1918, Cannan wrote articles, delivered talks, and submitted letters to the editor deploring government planning of production, controls over prices and wages, restrictions on personal freedom, and budget deficits covered by what he once referred to as a “diarrhea” of British pound notes created by the Bank of England to finance war expenditures and the resulting price inflation. Many of his writings from this period were collected in a volume titled An Economist’s Protest. In the preface, he said, “What should I answer if anyone had the impertinence to ask me, ‘What did you do in the Great War?’ … The best answer I can think of is ‘I protested’…. The greater part of my effort was directed to combating some extraordinary delusions which took possession of the minds of the people and their governors.”

Cannan also had a biting wit, as was shown in a 1925 review that he wrote of The State Theory of Money, by the German professor George Knapp. In it he amusingly hammers away at the ignorance, errors, and logical absurdities of the author in thinking that anything a government declares to be money will be passively accepted by the citizens and that regardless of the quantity of such a paper money created by that government, the political authority may arbitrarily set its value at any level and market buyers and sellers will just accept and use it on that basis. Or as Cannan says, “This book may fairly claim to the most obsolete work ever published by a scientific association during the lifetime of its author.”

Emphasizing the prosperity and peace from the free market

Before the war, Cannan had already considered it his duty as an economist and a citizen of a free country to challenge the growing collectivist delusions creeping into the public mind. One of my favorites of his many works is a collection of essays published in 1912, The Economic Outlook. In a presidential address delivered before the British Association in 1902 entitled “The Practical Utility of Economic Science,” Cannan said that the first and most important lesson a professor can give “is to try to open the eyes of his pupils to the wonderful way in which people of the whole civilized world now cooperate in the production of wealth.”

He will ask them to consider the daily feeding of London. There are, he will point out, six millions of people in and about London, so closely packed together that they cannot grow anything for their own consumption, and yet every morning their food arrives with unfailing regularity, so that all but an infinitesimal fraction of them would be extremely surprised if they did not find their breakfast ready to hand.

All of this comes about through the incentives and opportunities of free-market exchange in a system of division of labor that covers the world, with each participant guided by his own self-interest and the hope of personal gain in this global arena of voluntary association. Or as he expressed it in another place, “Modern civilization, nearly all civilization, is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so, and whatever defects this principle may have, it is better than none.”

Among the benefits from a knowledge of economics, Cannan stated, is that the unfettered market creates the profit opportunities and incentives to produce those things wanted more urgently by the consumers and to offer them for sale. Government subsidies and other types of interventions, on the other hand, only wastefully misdirect the use of the scarce resources on which all of our well-being is dependent.

Likewise, an understanding of the basic principles and insights of economics “has great practical utility in promoting peace and goodwill between classes and nations.” How very important it is to appreciate that all of humanity benefits from the peaceful processes of specialization and division of labor, so all may benefit from the productive possibilities of their fellow human beings through the processes of market exchange. “What jealousies, heart-burnings, and unfounded terrors leading to hatred would be extinguished if only these elementary facts were generally understood,” he said.

Socialism and nationalism reduce wealth and create conflict.

Another essay in the same volume is “The Incompatibility of Socialism and Nationalism.” The idea here was to bring out the fact that socialists talked about betterment for all humanity, but the world is divided up into nation-states. In a global free-market order, economic cosmopolitanism prevails, in that human association and production and exchange are private matters of the citizens of the world. Political borders do not prevent a global cooperative integration of the economic activities of everyone anywhere in the world.

But socialism within nation-states means national central planning. Each socialist government would claim control and use over the resources and labor force under its own political jurisdiction. The only goods and resources allowed to be traded between national socialist regimes would be those that the respective national central planners were willing to part with or accept as part of their respective central plans. The worldwide gains from international specialization and trade that are taken for granted under private enterprise in a global free market would be lost, since the only allowed transactions would be those agreed to by the socialist governments of each country.

That would also mean that if the government of one socialist nation wanted and could not get the resources or finished goods that were available in a different socialist country, the only recourse would be to go to war or permanently be less well off than wanted by the authorities in the frustrated centrally planned nation. Thus, looking over mankind as a whole, a world of national socialist regimes would mean either accepting reduced standards of living or constantly facing the threat of international conflicts leading to warfare, with one socialist state trying to gain the collectivized property of another socialist country.

Explaining economic complexity in understandable terms

The great power of economic ideas in clarifying the nature, logic, and working of the market order within which we all live and benefit can get lost within the economics profession. Cannan lamented, with an overdevelopment and excessive reliance on narrow technical tools of economic analysis that obscure the real-world application of economic reasoning, in his presidential address before the Royal Economic Society, “The Need for Simpler Economics,” published in the Economic Journal.

He said that too often the simple and common-sense truths of economics “are not expressed in plain language understood by the people,” but, instead, they “have been treated as a classroom plaything to be illustrated by lines and curves on a blackboard, which like the stone and wooden idols of the more degraded religions, come to be revered for themselves rather than for the things they were originally intended only to represent.”

Cannan bemoaned the economic stupidity of too many in society who considered the exporting of goods a good thing in protecting domestic employments, while considering imports a bad thing that benefits only the foreign sellers. Here, too, a clear and convincing presentation of basic economic truths needed to be offered:

What is required is a much more simple, vigorous, and convincing exposition of the fact that employment is only a means to the attainment of an end, which is the acquisition of goods and services, and that we trade with foreigners, as we trade with those whom we serve and those who serve us at home, not to give ourselves employment, but in order to get the things and services we want more easily
— cheaper, if you like — than if we produced them for ourselves.

Why members of the voting public failed to fully understand such basic economic truths rested not only on the citizens’ “feeble mind, but in large measure on the unnecessarily complicated expositions offered by the economists.” They should not shun developing ways of making such things clear and intelligible by, instead, trying “to find peace and contentment
in neat equations and elegant equilibria.”

Say’s law and free markets for full employment

Cannan was a strong and articulate defender of Say’s law of markets, and that if idle resources and unemployed workers widely exist in society it is not because of a deficiency in “aggregate demand,” but because of wrong (or disequilibrium) pricing of goods and factors of production. His analysis of the problem of economy-wide unemployment is found in his 1932 presidential address, “The Demand for Labor,” before the Royal Economic Society, published in the Economic Journal, and reprinted in his collection of essays Economic Scares under the changed title of “Not Enough Work for All.” He proves it is never the case for labor and other factors of production to be unemployed when they are rightly priced in the market.

There is always work to be done, since the wants and desires of human beings are never completely fulfilled, since the achievement of some goals soon sets men’s mind moving in new directions, and shifting any point of satiation further out to new points of a never-reachable horizon of human well-being.

If we start with Robinson Crusoe alone on his island, it is clear that his labor, time, and efforts are never redundant, with plenty of work to still attend to, if not in one direction than in another to satisfy his own wants. It is no different when Friday comes along on his island. Crusoe may now be able to get some things from Friday that he cannot produce at all for himself or not as cheaply in terms of his own labor, time, and resource use as he can get them from his new companion. By devoting more of his own efforts to make things he can do better or less expensively than Friday, he can offer them in trade.

The same applies within the greater complexity of a modern, money-using economy, in which many people offer their labor services to employers who pay them salaries for work that the entrepreneur directs into lines of production he believes will result in the manufacture of products that can be profitability sold to consumers. If demands shift or supplies change, some workers may have to change what they do, and where they do it, and possibly at a lower wage than they previously earned. But if the needed adjustments are made in terms of work and wages, everyone wanting employment may successfully find it with no idle hands left unemployed.

Cannan delivered this address during the depth of the Great Depression, when it seemed that there were plenty of hands looking for employment but too little demand for all those wanting employment. But even in a situation like that in the early 1930s, Cannan insisted, “General unemployment appears when asking too much is a general phenomenon….” And if employment was to be restored, “Money-wages and salaries should be allowed to be reduced without resistance,” if employers are to once again find it profitable to increase hiring. In other words, a competitive market needed to determine prices and wages to successfully restore full employment.

Cannan also pointed out the perverse effects from unemployment insurance in creating disincentives for the unemployed to search for new and available employments by reducing the cost of being out of work, an argument that he offered in his article “The Post-War Unemployment Problem” in the Economic Journal.

Cannan as influential teacher for economic liberalism

Finally, one of his students and later colleagues at the London School of Economics, the monetary theorist Theodore E. Gregory (1890–1970), recalled Cannan, the man and the teacher, in a recollection shortly after Cannan’s death, in his article “Edwin Cannan: A Personal Impression” in Economica,

I first heard Edwin Cannan lecture in the Autumn term of 1910…. Cannan was then already nearly fifty…. My main recollection, since I have lost what must have been exceedingly bad notes, is that of a small stocky man with a black beard, a habit of propping up a leg upon the large chair which stood upon the platform, a very difficult delivery and a habit of looking over our heads into a distant corner of the room, so that much of what he said was altogether missed by us, in both senses of the word….

However that may be, by the end of the two years we were all — specialists and non-specialists alike — sworn disciples…. I doubt if any teacher of the last few decades has performed a greater service than did Cannan in all the years that he was at the [London] School [of Economics] in “debunking” vague language and vaguer ideas by his use of the Socratic method. The question was put without the slightest arrogance of voice or manner: we felt we were being “put through it” because we were young and ignorant: indeed, I doubt whether any great scholar has ever shown himself more willing and eager to encourage the slightest sign of originality on the part of his students.

Austrian economist Friedrich A. Hayek once praised Cannan’s writings in his article “The Transmission of the Ideals of Economic Freedom,” because of their pointed “simplicity, clarity and sound common sense [which] make them models for the treatment of economic problems, and even some that were written before 1914 are still astonishingly topical.” Because of his writings and his influence on that generation of British economists at the London School of Economics, he helped to create an “important center of the new [classical] liberalism” in the English-speaking world.

That is what makes reading and learning from an economic “protester” such as Edwin Cannan as relevant and useful today in the cause of economic liberty as when he first wrote his books and articles, and influenced that earlier generation.

[Originally posted on Future of Freedom Foundation (FFF)]