A Myth Shattered: Mises, Hayek, and the Industrial Revolution

By Dr Tomas E Woods Jr

Thomas Woods Jr holds a PhD from Columbia University and is a professor of history at Suffolk Community College in Brentwood, New York.

The standard view of the Industrial Revolution among the general public is that it led to the widespread impoverishment of people who had hitherto been enjoying lives of joy and abundance. For at least the past several decades, however, alternative interpretations of this critical period have grown so abundant that even Western civilization textbooks, always the last to adapt to new trends in scholarly thinking, have been forced to concede the existence of what is referred to as the “standard of living debate” surrounding the Industrial Revolution. Already in the 1940s and 1950s, the great Austrian economists F. A. Hayek and Ludwig von Mises were among those who advanced an alternative view.

One of the reasons that so many falsehoods and fallacies had come to surround our understanding of the Industrial Revolution, according to Hayek, was that the historians who had studied the matter had been blinded by their own ideological preconceptions. Many of them were Marxists, who believed as part of their creed that industrialization simply had to have made the workers miserable. As Hayek puts it: “[B]ecause the theoretical preconceptions which guided them postulated that the rise of capitalism must have been detrimental to the working classes, it is not surprising that they found what they were looking for.” In short, they had not approached the evidence in the spirit of impartial rationality that befits a scholar, but rather with the ideological ax to grind that characterizes the propagandist. [1]

Economist and philosopher Leopold Kohr was far from alone among intellectuals suspicious of capitalism when he suggested in his book The Breakdown of Nations (1957) that the tremendous rise in reform movements and social criticism in the wake of the Industrial Revolution must have been an indication of worsening conditions. “[A]n increase in reform movements,” wrote Kohr, “is a sign of worsening, not of improving, conditions. If social reformers were rare in former ages, it could only have been so because these were better off than ours.” [2]

But according to Hayek, this is not necessarily so; in fact, the exact opposite is more likely the case. The very fact that we hear complaints in the late eighteenth and early nineteenth centuries about the appalling conditions in which many people lived and worked is, ironically enough, a point in the Industrial Revolution’s favor. Before the Industrial Revolution, everyone fully expected to live in abject poverty, and what is more, they fully expected a similar fate for their descendants. The astonishing wealth that the Industrial Revolution brought forth now made people impatient with any remaining pockets of poverty. Before the Industrial Revolution, when everyone lived in grinding poverty, no one noticed or expressed outrage. Thus, as Hayek notes, we see in the eighteenth century “an increasing awareness of facts which before had passed unnoticed.” He goes on: “The very increase of wealth and well-being which had been achieved raised standards and aspirations. What for ages had seemed a natural and inevitable situation, or even as an improvement upon the past, came to be regarded as incongruous with the opportunities which the new age appeared to offer. Economic suffering both became more conspicuous and seemed less justified, because general wealth was increasing faster than ever before.” [3]

One might also mention in this context the famous observation of the great economist Joseph Schumpeter. He offered the additional argument that more than anything else the stupendous wealth which capitalism created was, ironically, what enabled the critics of capitalism to occupy the position of full-time intellectual, enjoying the comforts of leisure and civilization that the system they so decried made possible. Schumpeter feared, in fact, that this development would prove fatal to capitalism. The rise of a distinct class of intellectuals, utterly ignorant of economics, who blame capitalism for every social ill would tend over time to wear down the public’s attachment to the system and would ultimately lead to the replacement of capitalism by an avowedly socialist economy. In short, Schumpeter feared, the very success of capitalism sowed the seeds of its eventual destruction.

Capitalism Creates the Proletariat

Hayek goes on to say that the “actual history of the connection between capitalism and the rise of the proletariat is almost the opposite of that which these theories of the expropriation of the masses suggest.” [4] In Hayek’s view, capitalism created the proletariat in the sense that the new opportunities for work that it created meant that many more people could survive. “The proletariat which capitalism can be said to have ‘created’ was thus not a proportion which would have existed without it and which it had degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided.” [5] Before the Industrial Revolution a person unable to make a living in agriculture, or who had not been provided by his parents with the tools necessary to go into an independent trade, found himself in dire straits indeed.

What the Industrial Revolution made possible, then, was for these people, who had nothing else to offer to the market, to be able to sell their labor to capitalists in exchange for wages. That is why they were able to survive at all. The Industrial Revolution therefore permitted a population explosion that could not have been sustained under the stagnating conditions of the pre-industrial age.
Hayek and Mises dispute the suggestion that that age was prosperous and satisfactory. The standard tale, of course, is well related by Mises:

The peasants were happy. So also were the industrial workers under the domestic system. They worked in their own cottages and enjoyed a certain economic independence since they owned a garden plot and their tools. But then “the Industrial Revolution fell like a war or a plague” on these people. The factory system reduced the free worker to virtual slavery; it lowered his standard of living to the level of bare subsistence; in cramming women and children into the mills it destroyed family life and sapped the very foundations of society, morality, and public health. [6]

Mises joins Hayek in suggesting that conditions prior to the Industrial Revolution were in fact catastrophically poor. The economy on the eve of the Revolution was hopelessly static, and possessed no outlet whatever for the increasingly sizable number of people for whom a living in agriculture or domestic manufacture was impossible.

As Mises argues, the very fact that people took factory jobs in the first place indicates that these jobs, however distasteful to us, represented the best opportunity they had. (This is an illustration of Murray Rothbard’s concept of “demonstrated preference,” according to which an individual’s preferences, when expressed in voluntary action, provide the only absolutely reliable indicator that he has substituted what he believes will be a more satisfactory state of affairs for a less satisfactory one.) “The factory owners,” Mises writes, “did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them, in the strict sense of the term, from starvation.” [7]

Mises concedes that in the first decades of the Industrial Revolution “the standard of living of the factory workers was shockingly bad when compared with the contemporary conditions of the upper classes and with the present conditions of the industrial masses. Hours of work were long, the sanitary conditions in the workshops deplorable. . . . But the fact remains that for the surplus population which the enclosure movement had reduced to dire wretchedness and for which there was literally no room left in the frame of the prevailing system of production, work in the factories was salvation. These people thronged into the plants for no reason other than the urge to improve their standard of living.” [8]

Mass Production

Another central point is that industrial capitalism is dedicated to mass production. “The processing trades of earlier ages,” Mises explains, “had almost exclusively catered to the wants of the well-to-do. Their expansion was limited by the amount of luxuries the wealthier strata of the population could afford.” [9] Factory production, on the other hand, was geared toward the mass production of inexpensive goods for the common man. This represents an extraordinary step forward in everyone’s standard of living. And it is this principle on which the entire capitalist system is based:

The outstanding fact about the Industrial Revolution is that it opened an age of mass production for the needs of the masses. The wage earners are no longer people toiling merely for other people’s well-being. They themselves are the main consumers of the products the factories turn out. Big business depends on mass consumption. There is, in present-day America, not a single branch of big business that would not cater to the needs of the masses. The very principle of capitalist entrepreneurship is to provide for the common man. . . . There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for. [10]

Our understanding of historical events necessarily influences our political views here and now. Our view of the Industrial Revolution indirectly colors our perception of present-day economic issues. Does capitalism, when left undisturbed, tend to increase everyone’s well being, or is government intervention necessary to prevent widespread impoverishment? This is what is at stake in the ongoing debate over the Industrial Revolution, and in this undertaking F. A. Hayek and Ludwig von Mises were noticeably ahead of their time.

Notes

1. FA Hayek (1954) “History and Politics” in Capitalism and the Historians, published by University of Chicago Press, Chicago; p 22.

2. Leopold Kohr (1957) The Breakdown of Nations, published by Rhinehart & Co, New York; p 155.

3. Hayek (1954); p 18.

4. Ibid; p 15.

5. Ibid; p 16.

6. Ludwig von Mises (1949) Human Action: A Treatise on Economics, 3rd revised edition, published by Henry Regnery, Chicago, 1966; p 618.

7. Ibid; pp 619–20.

8. Ibid; p 620.

9. Ibid.

10. Ibid; p 621.

Originally published in Ideas on Liberty by the Foundation for Economic Education.