Chapter 1: Economies, Economics and Economists, Part 3

1. Capitalists decide what to produce and how to produce it.

2. The production of goods and services generates incomes. Workers earn wages, bondholders are paid interest, landowners are paid rent, capitalists receive profit.

3. The incomes that workers, landowners and capitalists receive forms the basis of their demand for goods and services.

4. The goods and services that have been produced are now purchased, allowing the production/income/demand flow to continue.

In a 1930 essay entitled "Economic Possiblities for our Grandchildren," John Maynard Keynes looked 100 years ahead and concluded that our major problem will be making use of our leisure.

Whether we are describing the capitalisms of the past, analyzing the capitalisms of the present, or predicting the capitalisms of the future, we are essentially examining the interrelationships among markets, institutions and technology. As we explore these interrelationships, it is useful to keep in mind several of the main features of the institutions of capitalism: (1) capitalists direct the production of goods and services in hopes of earning profits; (2) the payments made by capitalists for labor, land, and the use of money make up the income of workers, landowners, and moneyowners; (3) the income thus generated by production allows the income earners to exert a demand for goods and services; and (4) as the goods and services that have been produced are purchased, the cycle of production/income/demand can continue.

These basic interrelationships are represented in the diagram below. The diagram will appear as you run your cursor over the steps in the left margin. The arrowheads indicate the direction of the flow of money.

Neither capitalism nor economics will last forever. While we can only speculate as to the time frame over which this will occur, the technological trends become clearer with each new generation of the microchip: society will at some time in the future (50 years? 100 years? 150 years?) be able to produce an abundance of goods and services with little need for human labor. Markets will no longer be relevant. The drive for profit will become a topic of historical novels and be regarded as a quaint pathological condition that afflicted people of the pre-abundance past. Society will continue to develop and change, but the partially-predictable behavior that we associate with markets and capitalism will fade away and with it economics.

Economics is the investigation of the evolution of market, institutional and technological forces as they affect production and distribution within a capitalist social formation. One of the best ways to understand capitalism is to examine it historically. But capitalism has two histories: economic history and the history of economic thought. Since our knowledge -- or our theories -- about capitalism lead to changes in the way in which capitalism works, these two histories are intertwined.

This historical drama contains a number of major themes. The central theme is the evolution and growth of capitalism. Another is our attempt to understand and control the forces that determine the distribution of income among the major actors: capitalists, workers and land owners. There is also the search for the basic guiding star of the system -- how does it maintain microeconomic and macroeconomic order, and why does this order sometimes break down? Then we have our two powerful protagonists, capital and state, who cannot live without one another but seem constantly locked in combat. And finally there is technology itself, which sometimes appears to be a deus ex machina dropping out of the sky but is in reality part and parcel -- sometimes cause, sometimes effect, sometimes both -- of the growth and evolution of capitalism.

Questions for Thought and Discussion

Terms Introduced in This Chapter

Parallel Readings