• Table of Contents

• Copyright and Permission to Use

• Survey of Economics Introductory Page

• Economics Courses Online

Capitalism is the social formation which began with the decline of feudalism in Western Europe between 1400 and 1800 and spread from there to most of the rest of the world. It is the dominant social formation today. Capitalism is defined in more detail in Chapter 2.

Economics is a 20th century term. In the 19th century it was called political economy. Some economists still prefer the old term.

There are two types of underemployment. We measure underemployment in terms of hours -- people working part-time who are seeking full-time employment -- but we do not measure underemployment in terms of skill or education such as people with college degrees doing clerical work.

In his essay "On Buddhist Economics" E. F. Schumacher takes economists to task for looking at everything in terms of ends vs. means -- for looking at work as simply an 'input' to reduce or eliminate whenever possible. That and other essays in Schumacher's Small is Beautiful provide an antidote to the limitations of the economist's outlook.

Does it take a whole chapter to define economics? Practically. Woody Allen can get away with "Economics is about money and why it is good," but an economist must take considerably more care in defining the subject. That is the main purpose of this introductory chapter — to examine why we need economics and to define economics. The purpose of this book is to help the reader understand capitalism. This chapter explains why this is best accomplished by examining the capitalist economy historically. There is also a brief introduction to the major themes we will follow as we trace the development of capitalism. One of the reasons to study economics is to develop a better understanding of where capitalism will be going in the future: this chapter closes with a brief look at what economics can contribute to our understanding of the future. This is a topic which we shall return to in the last chapter of this text.

We are surrounded by a sea of economic issues. Your senator is in favor of expanding the North American Free Trade Agreement to include other Latin American countries. Should you vote to re-elect her? A presidential candidate says we shouldn't try to reduce the budget deficit until the unemployment rate comes down. Should you support him? Another candidate speaks against industrial policy, saying that government cannot successfully identify which "industries of the future" to support and nurture, and that as long as we produce something in the United States it doesn't matter whether we produce microchips or potato chips. Should you vote against her? The auto parts company with a factory in the next town cut its local work force in half after opening a new plant in Thailand. Where will your children find jobs when they become adults?

All these issues involve the interplay of markets (labor is cheaper in Thailand than in the U.S., Canada, Japan or Western Europe); social, legal and political institutions (the managers of the corporation can legally close the factory and lay-off workers); and technology (modern telecommunications make it possible to manage a factory in Thailand from an office in Detroit). It is precisely this interplay of markets, institutions and technology that economics is concerned with.

Economic issues are always complex. But we are currently living through a period of remarkable transition. From the beginning of the Industrial Revolution to the present, capitalism has gone through extended periods in which our institutions have not been adequate for our technology. One of these periods was from the 1870s to the 1890s when both firms and society had to adapt to new production technologies that drastically increased the size and economic power of corporations. Another of these periods was the 1930s, a decade of severe depression in the industrialized world which led to a major government role in the steering of the economy and in the distribution of income. Not only were our economic institutions inadequate during these transition periods, but our economic theories were found wanting as well.

At present (early 2001), the U.S. economy, after several years of rapid economic growth, is suffering from a period of slow growth which most economists believe will be brief. There seem to be no persistent inflationary pressures. Large government deficits appear to be a thing of the past. Opportunities for increasing international trade abound. The massive burden of cold war defense expenditure is now behind us. New technologies hold out the promise of eliminating toil — mental as well as physical — from our workplaces. Yet the average working family is barely benefiting from all of this. Western Europe is still beset by high unemployment. Japan is suffering from its most serious recession since the end of W.W.II. In the United States there has been job growth with little wage growth for most families: virtually all of the economic gains of the last 20 years have gone to the best-paid fifth of the work force. The average U.S. worker produces 21% more in an hour's labor than he or she did 20 years ago, yet is paid only 5.3% more (even including fringe benefits and payroll taxes paid by the employer). And that is the mean average -- the lower-paying jobs pay less than they did 20 years ago.

Middle managers and other white collar employees of large firms are finding themselves as expendable as most blue collar workers have always been. From the end of the Great Depression to the mid-1970s economic growth was rapid and its benefits were widely spread throughout the society. From the mid-1970s to the mid-1990s, economic growth was been moderate and only benefited the richest fifth of families while the poorest 40% of families have actually fallen behind in spite of working more hours. Growth picked up substantially in the second half of the 1990 and unemployment fell to 1960s levels (four to four-and-a-half percent). But wage growth still lagged behind productivity growth.

Periods of transition such as the present are particularly troublesome. Our dominant economic theory tells us that productivity growth should lead to wage growth, but this is not occurring. Transitions of the economy usually lead to transitions of economics, but this does not happen quickly. Even our economic statistics are becoming outdated. We measure unemployment — with some difficulty and considerable lack of accuracy —, but the major labor market problem today, at least in the United States, is underemployment. Unfortunately, we have no adequate measures of underemployment. Evolving technologies make the distinction between goods and services increasingly blurry, but our current economic statistics are based on such distinctions. It is an interesting time to study economics.

Economics is the branch of social science in which we study economies. That leaves several open questions. What is an economy? And why do we need economics in order to understand it instead of sociology, anthropology or political science?

Before we can define what we mean by an economy, it is necessary to start at an even more basic level — at the level of material life. Material life involves the production and distribution of goods and services. Material life is as old as humankind. It exists even in societies in which most "production" is more a form of appropriation of goods provided by nature — as in hunting and gathering societies.

Material life, of course, is only one aspect of life. But it is one of the more basic aspects of life; basic in the sense that a society's material life provides a base on which its social life, political life, religious life, artistic life, etc. can be built. The production and distribution of at least rudimentary goods and services — food and shelter, for example — is a precondition for the survival of human society.

Although material life is necessary, it is not really an end in itself. Material life is primarily purposeful. It serves particular ends, but is not generally an end in itself. The particular purposes material life serves may be as fundamental as the purposes served by a loaf of bread or as frivolous as the purposes served by the lace on a rich lady's gown, but it is the eating of the bread or the wearing of the lace — or perhaps even the social status one gains by wearing the lace — that is the purpose, not the baking, delivery and purchase of the bread or the tatting of the lace. Material life is primarily one of life's means, not one of life's ends. This is, of course, an oversimplification. The skilled weaver may derive pleasure directly from the act of weaving, even though the cloth so woven must be sold in order that the weaver eat. But when we are examining material life, we are examining something that is predominantly instrumental. We should develop the habit of looking beyond any particular product of material life to try to understand its end purpose.

The Orchestration of Material Life

One might think that material life could be understood from a knowledge of technology alone. But it is not so. We pursue our material life as a society. This is partially due to our social nature. But it is also partially due to the limited productive capacity of the isolated individual or isolated family. Even societies with the most narrow of material lives engage in cooperative production (when all the men go out on the hunt or work together to trap and catch fish) and benefit from a simple division of labor (when some members of the society specialize in potmaking or hammock weaving).

Since production is social, every society must have a means for the orchestration of material life. There must be some method of motivating the potmakers to make more pots than they themselves will consume. There must be some method of coordinating production — the potmaker needs to make enough pots for the entire clan; and the fishing expeditions need to bring back enough fish for the entire clan; the fish traps need to be completed before the fishing expedition can start. Since individuals are not self-sufficient, there must be some basis for the distribution of goods and services. If the potmaker is not directly engaged in hunting or fishing, how will the potmaker eat? If the hunters and fishers do not make their own pots, how will they get pots?

If we are to understand the material life of any society, it will not be sufficient to understand only the various technologies of production. We will have to understand the social relationships in that society, or at least those social relationships that affect production and distribution. We are going to need some form of social science. How does this society choose who is to be the potter? How does this society decide how much land to clear to plant cassava? How do they decide how much of the grain crop to turn into bread and how much to turn into beer?

Markets and Capitalism

We do need social science to understand a society's material life, but we do not necessarily need economics. It is only when market forces begin to play a major role in the orchestration of material life that economics comes into its own. For most of recorded history, markets have existed on the periphery of society, not at its center. Material life was orchestrated by long-standing patterns of tradition, or by the power of the Pharaoh, Tsar, Caesar or Inca to command that particular tasks be accomplished. Markets began to come into their own as a major orchestrating force only as feudalism began to fade from Western Europe.

While markets are themselves a social institution, they are a peculiar social institution. Prior to the rule of markets, material life was deeply embedded in the social practices of any given community: the rules that orchestrated material life may have been the same rules that established kinship, for example. But markets tend to take on a life of their own; they exist in constant tension with other social institutions. Even today we can find examples of this. Think of the many market forces that impinge on the stability of family life. Moving to seek better employment destroys the extended family. Child care becomes a commodity purchased on the market rather than provided at home. New products such as TV, VCRs, video games and drive-through fast food outlets displace traditional family activities. When material life, through market forces, begins to break many of the ties it had with other aspects of social life we can speak of the economy as something somewhat separate from, although interlinked with, the community's social structure or political structure.

With markets also comes capitalism. Once labor has broken its traditional ties to the landed estate or to the craft guild and becomes something that is bought and sold on the market like a pound of pepper or a yard of cloth, the road is clear for capitalism. The merchant may have purchased the cloth where it was cheap and sold it where it was expensive; but the capitalist buys the wool, the labor and the loom and controls the production of the cloth. Guild traditions no longer govern the weaving of the cloth. The commands of the town council can no longer effectively determine who enters what craft. The market has come into its own, and with the market and capitalism comes economics, the social science that attempts to understand how these particular forces orchestrate our material life.

Penetrating the Veil

Our attempts to understand material life under capitalism led to the development of economics precisely because material life under capitalism is more mysterious -- less transparent -- than under previous social formations. The slave on a Roman Empire estate worked according to the dictates of the overseer. The product of his labor belonged to the slave-owner, and his standard of living was determined by the slave-owner. Modern workers, on the other hand, deliver themselves daily to the factory gate and allow supervisors or assembly lines to determine their pace of work. Their wage is determined by the puzzling forces of supply and demand, perhaps even by the supply of labor in distant countries, but also influenced by labor laws and by the presence or absence of a union. Then the purchasing power of their paychecks is itself affected by the same mysterious forces, possibly even by financial events in Tokyo or London which affect mortgage rates in Omaha.

And the forces that affect our modern worker's opportunities for employment are even more perplexing. In an article on firms that were resisting the 1990s trend of massive layoffs, the New York Times noted:

...even the companies that have avoided layoffs say they do not know how long they can hold out. They are beholden, now they maintain, to powerful forces beyond their control. Among them are technologies that undercut jobs and Wall Street investors who continue to reward layoff announcements.Yet another force, and one likely to become increasingly important, is pressure from foreign nations, notably China, for American companies to move jobs onto their soil in return for access to their growing markets.

Defining Economics

Nearly everything ineconomics is controversial, including how we define economics. Actually, the cognoscenti can tell which school of thought an economist belongs to as soon as he or she offers a definition. Neoclassical economists, the dominant school in the English-speaking countries today, like to claim that economics is about the allocation of resources in any society, not just capitalism. They define economics as "the study of how societies choose to allocate scarce resources among competing uses."

But this is not a neoclassical textbook. I offer the following definition of 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.

This is still not quite sufficient. We must further define institutions as structured patterns of social behavior as well as the social structures which reinforce this behavior. One example would be our constitution, laws and court system (institutions); another would be the expectation of an employer that an employee get to work on time as well as the habit of the employee of arriving at work on time (institutionalized behavior). One note must be added to this definition of economics: markets are themselves social institutions — but markets are specifically indicated in the definition above because of the particular importance they play in the capitalist economy.

Chapter 1: Economies, Economics and Economists