Economic system
Chapter 2 - Society
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Welcome to the Economic systems page
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The term is ultimately derived from Ancient Greek οἰκονομία (oikonomia) which is a term for the "way (nomos) to run a household (oikos)", or in other words the know-how of an οἰκονομικός (oikonomikos), or "household or homestead manager".
The earlier term for the discipline was "political economy", by extension then, "political economy" was the way to manage a polis or state, but since the late 19th century, it has commonly been called "economics".
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Core ideas
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A (political economics) overview
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| Earth's biological capacity | ||
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| The Mecca of the economist lies in economic biology (Alfred Marshal) | ||
| Each spieces is a specialist with its own unique strategy for extractiong energy from the environment in order to survive | ||
| Everything that is good for the community is good for the individual | Everything that is good for the individual is good for the community | |
| The state is the leading 'agent' | The individual is the leading 'agent' | |
| Caring for the commons had to be a multiple task, organised from the ground up and shaped to cultural norms. (Elinor Ostrom) | ||
| Accounting is a worldwide network of balance sheets | The metabolism of civilisation | |
| Equity = assets minus liabilities | Human behaviour in relation to economic decision making (in person and in group) | |
| Capitalism can only be understood as an evolutionary process of continuous innovation and 'creative destruction'. (Joseph Schumpeter) | ||
| General Equilibrium Theoryː
All agents maximise profit, all markets clear and the atomistic interaction of self-interested idividuals in markets lead to a Parato optimal (efficient) allocation of resources. |
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| General Theoryː
Demand, not supply, is the key variable governing the overall level of economic activity. (John Maynard Keynes) |
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| Governments should be measured against the concrete capabilities of their citizens. (Amartya Sen) | ||
| The real debate is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place. (Joseph Stiglitz) | ||
| Although globalization has been positive on a whole, since the 1980s the process known as hyper-globalization has at least played a part in rising inequality. (Paul Krugman) |
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History of the societal / economical evolution
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The capitalist economy nor the plan economy did not come about in opposition to its religious past, as the followers of the secularisation idea thought. It was precisely created from religion.
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The high medieval church
The people of the high Middle Ages were agog with wonder at great mechanical clocks, new forms of gears for windmills and water mills, improvements in wagons and carts, shoulder harnesses for beasts of burden, the ocean-going ship rudder, eyeglasses and magnifying glasses, iron smelting and ironwork, stone cutting, and new architectural principles. Many new types of machines were invented and put to use by 1300.
However, without capitalism's growth, such technological discoveries would have been idle novelties. They would seldom have been put in the hands of ordinary human beings through swift and easy exchange. They would not have been studied, rapidly copied, and improved by eager competitors. Capitalism also provided local and regional administrative bureaucracies of arbitrators, jurists, negotiators, and judges, along with an international language, canon law Latin.
Even the new emphasis on clerical celibacy played a crucial capitalist role. Its clean separation between office and person in the church broke the traditional tie between family and property that had been fostered by feudalism and its carefully plotted marriages. It also provided Europe with an extraordinarily highly motivated, literate, specialized, and mobile labour force.
The Cistercians, who eschewed the aristocratic and sedentary ways of the Benedictines and consequently broke farther away from feudalism, became famous as entrepreneurs. Being few in number, the Cistercians needed labour-saving devices. They were a great spur to technological development. Their monasteries were the most economically practical units ever in Europe and perhaps the world.
Thus, the high medieval church provided the conditions for F. A. Hayek's famous spontaneous order of the market to emerge. This cannot happen in lawless and chaotic times; to function in capitalism, rules must allow for predictable economic activity.
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Scholastisism and capitalism
Numerous Catholic moral theologians, including Leonardus Lessius (1554 - 1623), laid the foundations for the modern capitalist spirit in the centuries before the Protestant Reformation in Europe. He is considered an important figure in the Catholic theological and philosophical system known as Scholasticism, which was active between the 12th and 17th centuries.
The notion of usury (which initially meant charging interest of any kind for a loan) is a delicate issue and an essential topic of Lessius’ work. Lessius takes the concern of those who condemn usury very seriously, that is, exploiting the weakest parts of the market. He reckons that a businessman must show solidarity and charity toward the participants in the market who are in need but don’t have enough knowledge of the world.
On the other hand, there is a significant change in tradition in the work of Lessius and other Jesuits of his time. We notice a more lenient understanding of what happens in practice. In Lessius’ case, such understanding was based on the Bourse of Antwerp (the first world financial exchange), which he observed empirically. He saw prudent and experienced Christian people in business evaluate the price of money. After seeing them doing this widespread practice, he eventually accepted it; tradition appeared no longer in line with empiric reality. There is a very optimistic anthropology behind his approach: If such custom is so widely spread, even among decent business people, it cannot be evil.
His perspective goes against the intuitions of many people, and even people within the Church, even though they are full of good intentions. Lessius thinks that, in seeking the common good, we are interested in implementing a credit system, for instance, which works very well and implies a system of return on capital. Otherwise, those with savings will never be willing to invest their capital in projects that will be interesting and profitable for everyone in society.
So his notion of public utility, of common good, doesn’t only imply solidarity, which he expresses through the essential notion of charity. Beyond this necessary duty, the common good means that we stimulate business people’s industry and investment mechanisms that enable capitalists to grow rich relatively safely.
Lessius legitimated these legal tools of commercial capitalism precisely for utilitas publica (public utility) and bonum commune (common good). He believed they could favour prosperity for the whole community. His witness at the Bourse of Antwerp confirmed this belief: Its success was accompanied by great prosperity for the public community in this city.
The so-called late Scholasticism of the 16th and 17th centuries developed the idea that divine Providence ensured that people in different parts of the world didn’t have everything they needed for their own subsistence.
Therefore, they legitimated international trade by referring to divine Providence. Some theologians very explicitly praised these encounters between businessmen from different cultures and countries because they thought it contributed to their mutual understanding.
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Calvinism (and capitalism) (16th century)
Since no Calvinist knows for sure whether or not he was chosen, he must work hard and get ahead in life to avoid losing his place next to God if he happens to be chosen.
Capitalism is not so much greedy as rational, orderly, and focused on getting ahead in the world. John Calvin (1509 - 1564) may have meant getting ahead in the world more 'spiritually', but his followers explained it materially. In addition to working hard, Calvinists had to be reliable, diligent, honest, serious, and obedient to authority. These qualities made Calvinists reliable business partners, which further reinforced their success.
The ascetic life of Calvinists (working hard, rationally and systematically, but not being allowed to enjoy the money they earned) generated much profit, which could then be used to invest in new activities. Moreover, given their religious duty to work hard, workers could easily be exploited.
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Dutch Golden Age (17the century)
The Dutch Golden Age was a period in the history of the Netherlands that lasted from 1588, when the Dutch Republic was established, to 1672, when the Rampjaar occurred. During this period, Dutch trade, scientific developments, art and overseas colonisation were among the most prominent in Europe. The first half of the period spanned from the beginning of the Eighty Years' War until its conclusion in 1648, with the second half lasting until the outbreak of the Franco-Dutch War. During the period, Dutch colonialists, affiliated with the East India Company and West India Company, established trading posts and colonies in the Americas, Southern Africa, and Asia, which the powerful Dutch States Navy protected. The Dutch also dominated the triangular and Atlantic slave trade during this period.
Energy by wind
During the Age of Sail, the particular routes were also shaped by the powerful influence of winds and currents. For example, from the leading trading nations of Western Europe, it was much easier to sail westwards after first going south of 30° N latitude and reaching the so-called "trade winds", thus arriving in the Caribbean rather than going straight west to the North American mainland. Returning from North America, following the Gulf Stream in a northeasterly direction using the westerlies was easiest. Inland, a necessary condition was a supply of cheap energy from windmills. The invention of the wind-powered sawmill enabled the construction of a massive fleet of ships for worldwide trading and for military defense of the republic's economic interests.
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Industrial revolution (18th - 19th century)
During the Industrial Revolution, cities became urgent centres of production and were able to offer a wide variety of manufactured goods to rural areas, becoming vital centres of production as well as consumption. Europe experienced the development of its major cities during this period. In England, for example, in 1800, only 9 per cent of the population lived in urban areas. By 1900, some 62 percent were urban dwellers.
There was a necessary trade-off in the Industrial Revolution for the working class. Material standards of living were, in some ways, improved, and more material goods were produced, so they were available at lower costs, and factories provided various employment opportunities not previously available. At the same time, working conditions were often horrible, the pay was terrible, and it was often difficult for unskilled workers to move to higher skill levels and escape the working class. The traditional protections of the medieval and early modern eras, such as guilds and mandated wage-and-price standards, were disappearing.
Mercantilism
Many fundamental economic changes occurred during the 16th and 17th centuries, resulting in rising incomes and advancing industrialisation. After 1600, the North Sea Region became the leading economic centre of Europe from the Mediterranean, which, before this date, particularly in northern Italy, had been the most highly developed part of Europe. Great Britain, together with the Low Countries, profited more in the long run from the expansion of trade in the Atlantic and Asia than the pioneers of this trade, Spain and Portugal, fundamentally because of the success of the mainly privately owned enterprises in these two Northern countries in contrast to the arguably less successful state-owned economic systems in Iberia.
Mercantilism was the basic policy imposed by Britain on its colonies. Mercantilism meant that the government and the merchants became partners to increase political power and private wealth to exclude other empires. The government protected its merchants—and kept others out—by trade barriers, regulations, and subsidies to domestic industries to maximise exports from and minimise imports to the realm.
Money system
The key features of the growth pattern included specialisation and structural change, as well as increases in market participation. The new supply of specie (silver and gold) increased the money supply. Instead of promissory notes paid off by future promissory notes, specie supported business transactions. This reduced transaction costs, increased market coverage, and opened incentives and opportunities to participate in cash transactions. Demand for luxury goods from Asia, such as silk and pepper, created new markets. The increased species supply made tax collection easier, allowing the government to build fiscal capacity and provide for public goods.
Poverty
About one-third of the population lived in poverty, with the wealthy expected to give alms to assist the impotent poor. Tudor law was harsh on the able-bodied poor, those physically fit but unable to find work. Those who left their parishes to locate work were termed vagabonds and could be subjected to punishments, often suffering whipping and being put in the stocks. This treatment was inflicted to encourage them to return to their "mother parish".
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Enablers of change
Energy by coal
- Plentiful in England and Western Europe.
- Used in enormous quantities as a source of power – particularly for the steam-powered machinery in textile factories and locomotives.
Iron
- When Englishman Henry Cort created a way to make iron cheaper and stronger, England no longer needed to import iron ore from other countries.
- Essential to the development of new machines in factories and transportation.
Agricultural revolution
- Increased food production to support an increasing population
Scientific revolution
- Encouraged scholars and craftspeople to apply new scientific thinking to mechanical and technological challenges.
Government policies
- Legal reforms that allowed corporations to own and operate businesses.
- Patent laws allowed inventors to benefit financially from the “intellectual property” of their inventions.
- Expanded the Navy to protect global trade.
- Granting monopolies – exclusive rights – to companies who agreed to explore the world and find resources.
British empire
- The basis of the British Empire was founded in the age of mercantilism, an economic theory that stressed maximising the exports to and minimising imports from countries outside the empire, and trying to weaken rival empires.
- The British Empire was based upon the preceding English overseas possessions, which began to take shape in the late 16th and early 17th century, with the English settlement of islands of the West Indies such as Trinidad and Tobago, the Bahamas, the Leeward Islands, Barbados, Jamaica, and Bermuda.
- The sugar plantation islands of the Caribbean, where slavery became the basis of the economy, comprised England's most lucrative colonies.
| Content sources |
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| https://open.library.okstate.edu/culturalgeography/ |
| https://en.wikipedia.org/wiki/Economic_history_of_the_United_Kingdom#The_age_of_mercantilism |
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Utopian socialism (18th - 19th century)
Early socialism, or utopian socialism, is socialism with utopias of a just ideal state, early forms of collective ownership, and socialist movements and theories that arose between the end of the 18th century and 1848. Well-known early socialists were Henri de Saint-Simon, Robert Owen, and Charles Fourier.
François Noël Babeuf (1760-1797) was probably the first author who advocated socialism as a form of government. He founded a conspiratorial association during the French Revolution. He influenced Louis Auguste Blanqui. Henri de Saint-Simon considered only people who provided services and produced goods useful members of society and called the others (the nobility and rentiers) unproductive.
The German-Jewish philosopher Moses Hess (1812-1875) founded the socialist wing of Zionism, the movement that wanted to lead the Jews to Palestine. The German economist Karl Rodbertus (1805-1875) is seen as the founder of state socialism.
The best-known English early socialist was Robert Owen. Born poor, he worked his way up to become an entrepreneur. Unlike most other early socialists, Owen was not only an author. For example, he influenced legislation to protect workers and tried (unsuccessfully) to establish a socialist colony in America.
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Communism (1848 - )
The Communist Manifesto (1848) concisely explains Marx and Engels' ideas on economics, class struggle, and revolution, which would later be further developed in Das Kapital and ultimately form the basis of Marxism. Its style is based on the Gothic novel: the Industrial Revolution is presented as a sorcerer who cannot control the forces he has conjured up (the modern working class and explosive population growth), a clear reference to Goethe's The Sorcerer's Apprentice and Mary Shelley's Frankenstein.
Capital: Critique of Political Economy (German: Das Kapital: Kritik der politischen Ökonomie) is the main work of Karl Marx. In this book, which is divided into three (or four) parts, Marx develops a critical theory of the modern capitalist economy, emphasizing the organisation of production. The first part of Capital was published in 1867. The second part appeared in 1885, two years after Marx's death, and the third, both edited by Friedrich Engels, appeared in 1894.
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The Communist Manifesto
The Communist Manifesto, written by Karl Marx and Friedrich Engels in 1848, outlines several core ideas that form the basis of communist ideology:
Class Struggle
The manifesto argues that all of history is defined by class struggle between the ruling class (bourgeoisie) and the working class (proletariat). This conflict is seen as the driving force behind historical developments and social change.
Critique of Capitalism
Marx and Engels present a scathing critique of capitalism, arguing that:
- It leads to the exploitation of workers by the bourgeoisie
- It concentrates wealth and means of production in the hands of a few
- It is inherently unstable and prone to crises
- It alienates workers from their labor and human nature
Historical Materialism
The manifesto proposes that economic systems and social structures evolve through historical stages, driven by changes in the means of production.
Inevitability of Revolution
A central tenet is that capitalism will inevitably lead to its own destruction due to its internal contradictions, resulting in a proletarian revolution.
Abolition of Private Property
The manifesto calls for the abolition of bourgeois private property, arguing that it only benefits a small minority while the majority are deprived of ownership.
Communism as the Solution
Marx and Engels present communism as the solution to the problems of capitalism, envisioning:
- Collective ownership of the means of production
- Abolition of social classes
- A classless, stateless society where "the free development of each is the condition for the free development of all"
Internationalism
The manifesto emphasizes the international nature of the communist movement, famously concluding with the call: "Workers of the world, unite!"
Transitional Measures
The manifesto proposes several transitional policies to achieve communism, including:
- Progressive income tax
- Abolition of inheritance rights
- Centralization of credit and communication
- Free public education
- Abolition of child labor
| Content source |
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| https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ |
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Do you want to know more?
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Economic/political movements
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| Link | |
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| https://en.wikipedia.org/wiki/Economic_system | |
| Capitalism | https://en.wikipedia.org/wiki/Capitalism |
| Socialism | https://en.wikipedia.org/wiki/Socialism |
| Communism | https://en.wikipedia.org/wiki/Communism |
| Adam Smith | https://en.wikipedia.org/wiki/Adam_Smith |
| Jeramy Bentham | https://en.wikipedia.org/wiki/Jeremy_Bentham |
| John Stuart Mill | https://en.wikipedia.org/wiki/John_Stuart_Mill |
| Karl Marx | https://en.wikipedia.org/wiki/Karl_Marx |
| Friedrich Engels | https://en.wikipedia.org/wiki/Friedrich_Engels |
| Thorstein Veblen | https://en.wikipedia.org/wiki/Thorstein_Veblen |
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| History of economic thought |
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| https://www.hetwebsite.net/het/home.htm |
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The Nobel Prize in Economic Sciences (The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel)
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| Link to the Nobel Prize in Economic Sciences | |||
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| 1978 | Herbert Simon | https://www.nobelprize.org/prizes/economic-sciences/1978/simon/facts/ | |
| 1998 | Amartya Sen | https://www.nobelprize.org/prizes/economic-sciences/1998/sen/facts/ | |
| 2002 | Daniel Kahneman | https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/facts/ | |
| 2009 | Elinor Ostrom | https://www.nobelprize.org/prizes/economic-sciences/2009/ostrom/facts/ | |
| 2024 | Daron Acemoglu
Simon Johnson James A. Robinson |
Power and institutions |
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