John Locke

Published: Jan 2013

The tumultuous age in which John Locke grew up would profoundly shape his thinking on philosophical and, by extension, economic matters. Locke was born in Somerset, England in 1632, the eldest child of a puritan country lawyer who had once served as a cavalry commander on the side of republican forces during the English Civil War. After having attended Westminster School, at that time one of England’s most distinguished public schools, in 1652 Locke earned a scholarship to Christ Church College Oxford, where he gained first a Bachelor’s followed by a Master’s degree in 1659.

Locke then began to develop an interest in medicine which he would study during his spare time. His interest in medical matters led to his appointment as personal physician to Lord Ashley, Chancellor of the Exchequer, a role which would soon develop into that of personal assistant. As Lord Ashley’s assistant, Locke was given insight into the prominent financial issues of the day, including issues relating to trade with the British colonies and interest rates. The expertise he gained from this association would eventually be put into practice when he was awarded the post of Secretary to the Council for Trade and Plantations in 1673.

After a two-year spell, Locke retired from government office to focus his time on another passion: his philosophical writings. In the subsequent years Locke worked on two manuscripts which would eventually establish his reputation as a great philosopher – An Essay Concerning Human Understanding and Two Treatises of Government.

But despite his retirement from government office, Locke retained a keen interest in the important economic issues facing the country in the late 17th Century, continuing to involve himself in debates concerning issues of financial policy until his death in 1704.

Locke is recognised as having made four important contributions to the development of economics as a science – two of which are philosophical in nature and two others specific to our understanding of currencies and interest rates.

The right to liberty, labour and property

The principle for which Locke has become known was his assertion, now a central tenet of modern libertarian thought, that “government has no other end but the preservation of private property”. Although much less contentious today, Locke’s justification of private property was exceptionally radical for the age. In 17th Century England much of Europe remained under the rule of theocratic monarchs, in which the divine right of kings as rulers and owners of all property was the prevailing philosophy, conditions which made it very difficult to justify private ownership.

This feudal social structure was, however, beginning to be supplanted by a new economic system. The capitalist economy, as Locke was writing, was expanding at a rapid pace; an advance which was bringing it into conflict with the traditional feudal economy and the religious institutions upon which feudalism was based.

Whenever the legislators endeavour to take away and destroy the property of the people, or reduce them to slavery under arbitrary, they put themselves in a state of war with the people who are thereupon absolved from any further obedience.

In order to make the case for private ownership of property, Locke began by promoting his belief that all men had a right to the fruits of their own labour. Individuals, he argued, were able to obtain land through their own labour, and therefore had an entitlement to ownership of the land. This premise, it is important to note, was on the provision that one man’s appropriation of land is not of “any prejudice to any other man” – meaning that there remained enough land for others – and that there was no possibility that the land would ‘spoil’ before it could be consumed.

Developing this premise into a more comprehensive defence of property rights, Locke argued that money or capital, when looked at in basic terms, could be viewed simply as the product of past labour. Accumulating money could, therefore, be morally justified on the grounds that the principle way of accumulating wealth was through one’s own toil. Since money by its very nature cannot spoil before it is consumed, the only limitation that Locke envisaged on the accumulation of capital was that the practise should not infringe on the right of the poorest to income at times when a scarcity of land or jobs produces severe economic hardship.

In his work the Two Treatises of Government, Locke turned his pen to defining a moral argument for the involvement of the state, albeit limited in scope, in the emerging capitalist economy. “Whenever the legislators endeavour to take away and destroy the property of the people, or reduce them to slavery under arbitrary law,” he argued, “they put themselves in a state of war with the people who are thereupon absolved from any further obedience.” In this statement, echoes of which would be heard in the American Declaration of Independence, Locke is arguing that the ultimate source of political authority in any given society, according to their conception of natural law, is the individual. Government exists in society, Locke believed, purely by the consent of the governed. All citizens in a capitalist society have a common interest in giving their consent to the rule of government – protection of life, liberty and property – and are hence entitled to reject any state which fails to protect – or indeed deliberately contravenes – this fundamental right.

Locke’s second philosophical contribution would help to establish economics as a reputable science. At the time in England, the prevailing religious view was of individuals as altruistic souls who acted on either what they saw as the common good or by exclusively following the teachings of the church. Locke came to quite a different conclusion in his writings. Individuals, he argued, were rarely, if ever, motivated by altruism. On the contrary, it was self-interest that counted more when explaining why individuals behaved in certain ways. From this premise – that individuals act on the basis of what they believe to be in their own interests – Locke realised that certain economic laws could be developed. For instance, Locke was the first to observe that as the price of a certain commodity increased consumers would typically respond by purchasing cheaper alternatives. In a similar vein, merchants would, he noted, react to greater scope for profit by increasing production and endeavouring to sell more goods.

Money and interest rates

Much of Locke’s best-known economic writings were drafted in response to great political questions of the era. In the late 1660s, Locke came into a conflict of opinion with a group of mercantilists, led by Josiah Child, who introduced a bill to Parliament proposing that the state should limit interest rates to 4%. Their argument, which Locke refuted, was that lower interest rates would be beneficial for all merchants who required credit to put to productive purposes and, by extension, be good for the country as a whole.

In a pamphlet entitled Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money, Locke set out his reasoning for why this strategy would be ineffective, working not for the greater good of the nation and society, since where the borrower gains, the lender loses out. Not only was this redistributive effect contrary to Locke’s limited conception of the state’s remit, the measure could, he argued, potentially restrict the flow of credit if some people were unwilling to lend money at the lower rate. It would be much preferable, Locke argued, to continue to allow interest rates to be determined by laws of nature, rather than arbitrary dictates from government. Although there is no way of knowing just how decisive Locke’s contribution to the parliamentary debates concerning interest rates was, the bill was eventually thrown out by the House of Lords in 1669.

Locke also assumed an important role in the debates concerning the Great Recoinage which were taking place in England as the 17th Century was drawing to a close. His response is credited as being one of the first coherent explanations setting out the relationship between the quantity of money and the price level. In the 1690s, England faced a predicament concerning the value of its currency. Merchants had been deceptively clipping the sterling crowns that were in circulation in order to siphon off the metal to make silver bullion. The diminishing metal content of England’s silver currency became a subject of intense anxiety and disagreement in Parliament. One solution put forward at the time was to reduce the weight of silver in all coins – a currency devaluation, in essence.

Locke strongly opposed this solution, instead arguing in favour of recoining the currency to its original metal content. There was little point, Locke argued, in reducing the silver in England’s sterling crowns because their value was determined not by government legislation, but by the quantity of precious metal they contained. Debasing the currency, therefore, would only work to push up prices; merchants would inevitably demand increasingly more coins for the same quantity of goods in order to compensate for reduced silver content.

As with the debate concerning whether to lower the rate of interest, Locke’s arguments would ultimately prevail and the government took what was a controversial decision: not to devalue and to recoin the currency to the accustomed level of silver.


There is little doubt regarding the profound influence John Locke had as a philosopher. With his philosophical writings Locke laid out the fundamental arguments for the liberal capitalist state. Individuals, he believed, have natural rights that exist prior to the formation of government. The purpose of government is to protect those rights, and should be dissolved if it happens to violate them – an argument that, 300 years on, remains part of libertarian political discourse today.

Locke’s reasoning on economic matters can also be said to have stood the test of time. Today we often hear the same objections from economists regarding the control of interest rates as set out in Locke’s pamphlet.

Furthermore, the argument he made during the Great Recoinage debates, specifically that reducing the silver content of each coin and producing more coins would lead to price inflation, provided the theoretical groundwork for the quantity theory of money and, later on, the work of the influential 20th Century economist Milton Freidman.

Further reading:

John Locke, An Essay Concerning Human Understanding (1690), OUP, 2008.

John Locke, Two Treatises of Government 3rd edition, Cambridge University Press, 1988.

John Dunn, Locke: A Very Short Introduction, OUP, 2003.

Roger Woolhouse, Locke: A Biography, Cambridge University Press, 2007.

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