Two examples: slavery and the small-scale firm
Two examples may illustrate Roscher’s ‘world view’ of historical development. According to Roscher, economic development takes place in three stages. In the first stage, the factor nature predominates in production, in the second, labour and in the third, capital.
Only in the third stage does a society become ‘fully developed’. The second and third stages depend on the increase in supply of certain factors of production. (Note how Roscher turns the three classical factors into a theory of economic development, the third stage being the result of a marked accumulation of capital, a notion of Adam Smith’s.)Roscher then asks why the economy of classical antiquity never reached the third stage and thus stopped in a stage of ‘immaturity’. For him, as for David Hume, the distinguishing characteristic of antiquity is slavery. (Note the similarity to Marxist periodization: slavery-feudalism-capitalism.) The further analysis is then purely theoretical economics, using, without saying, the concept of a substitutive macroeconomic production function: Roscher says that slave labour in antiquity is cheap labour; therefore there is no incentive to substitute capital for labour (numerous examples are given); consequently, capital is not accumulated, credit is not developed and the rate of interest remains high; therefore the ‘third stage’, which depends on a large accumulation of capital, is never reached. Slavery is thus explicitly less the consequence than the cause of a low stage of economic development. If, on the other hand, capital accumulation takes place, together with technical improvement in instruments and machines, labour relations are transformed first to medieval serfdom and subsequently to modern wage labour.
The article in question was first published in 1849 and republished in an easily available essay collection in 1861. It certainly predates Marx.
It also predates Thunen’s publication of marginal productivity theory in 1850, which Roscher implicitly uses. A little later he says of himself that he has developed Thunen’s ‘natural laws’ in the direction of their ‘social and legislative’ consequences. One might also say that Roscher extends Thunen’s purely microeconomic assertions into macroeconomic conclusions.Roscher adds that in antiquity, slavery also inhibited the development of a mass market for consumption goods and thus prevented their mass production and the development of the division of labour. On the other hand, he is, with Adam Smith, of the opinion that slave labour is always low-quality labour, inefficient because of a lack of incentives. With the high price of slaves under modern production conditions, slave labour is, in contrast to the case in antiquity, by now uneconomical and ‘the freeing of slaves becomes imperative merely from properly calculating self-interest’ on the part of their lords. Slavery is unprofitable or will soon be so in the United States (this was written in 1849 and repeated in 1861, before the American Civil War began), so that it will soon break down: a pretty, though unfortunately wrong forecast of the ‘invisible hand’ type and a mark of Roscher’s basic belief in the beneficial nature of economic ‘progress’.
Also in 1849, Roscher published his articles on ‘Industry on a large and a small scale’ and ‘The economic importance of machine using industry’, in which he develops his idea of cost functions in industrial production demonstrating declining unit cost. Large plants (implicitly in their production optimum) are characterized by relatively low fixed cost. For this statement Roscher gives the ‘engineering’ argument: a furnace that is ten times larger than another one will certainly not need ten times as much fuel and building it will not need ten times as many bricks, and so on. He presents a large number of statistical cost calculations, gathered from the empirical literature.
They imply (in modern terms) scale elasticities between 1.065 and 1.175. Roscher draws the interesting conclusion that the greater competitiveness of English industrial products is to no small degree simply due to economies of scale. Quoting numerous statistics from around 1850, he shows that English enterprises are on average larger than those on the continent. Of course, economies of scale lead to a displacement of handicraft firms by factories. But Roscher shows his superb judgement by pointing out that, in general, handicraft or artisan firms will not be fully replaced. They will continue to be active in sectors with a highly individualized, localized or temporally variable demand and, in particular, in service and repair firms. (Roscher shows that, at his time, in the industrially most advanced parts of the developed countries, the number of employees in small handicraft plants still exceeded by far that of factory workers.) Fascinating is his forecast (in 1849!) that, as a result of greater specialization in large firms, university-trained professionals ‘without capital’ will find new types of careers in the management positions of large joint-stock companies (while formerly careers had been available to them only in the civil service, the army and the church), so that these firms evidently open up ‘a new and important moment of national liberty’.Thus Roscher’s whole discussion of economies of scale in industry runs only in terms of economic change and technical conditions in production causing socioeconomic developments. The legal arrangements making these developments possible are hardly mentioned. In fact, as Roscher frequently states, more rapid economic change and greater competition create the need for more economic freedom and for liberal institutions, not the other way round. (This argument is later repeated by Carl Menger.) Also, as Rau had already said, industry is too various and complex, so that government lacks sufficient information for effective regulation. Thus liberalism is ‘produced’ by economic development: Marx would have spoken of the substructure producing the superstructure.