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...the basic problem of production is to devise
social institutions that will mobilize human energy for productive
purposes....the economic institutions of society must also assure
a viable allocation of that social effort. |
No society can survive without successfully pursuing its material life. Yet material life does not organize itself. Every society must find a method of assuring that its members cooperate in the pursuit of material life. Thus far, human societies have relied on three major methods of organizing their material lives: tradition, command and the market. After a brief look at the roles of tradition and command, this chapter examines the emergence of the market as a primary force in the orchestration of material life. It will then provide our first look at the nature of capitalism.
Humans, whether as individuals or as societies, have needs, wants and drives that can only be met by goods and services which themselves must be produced. The production and distribution of these goods and services constitutes our material life. Material life may not be among the most noble aspects of life, but it is certainly among the most necessary. While our material life unquestionably involves the technologies by which we produce our goods and services, it is also deeply embedded in the structure of society itself.
At one time it was fashionable to begin economics textbooks by observing Robinson Crusoe on a deserted island. Presumably, certain economic principles could be learned by observing how Crusoe divided his time among the various tasks associated with survival. Unfortunately, while observing Crusoe might teach us something about technology - if we learn that it takes as much time to catch and skin a rabbit as it does to plant ¼ acre of corn - there is no economics involved. Crusoe produces everything that he consumes. There is no trade, no money and no prices. Moreover, the Crusoe examples are much too far from reality: how many totally self-sufficient people do you know?
Material life is social for two very good reasons. First, human life is social. Hermitry is a pathological condition, not a norm of human behavior. Second, isolated individuals are not capable of producing very much. The material life of all known peoples involves cooperation and specialization. This is obvious when we are examining the abundant material life of a modern industrial society. Hundreds of workers must be working at the same time to assemble an automobile - their work must be coordinated. Moreover, each specializes in one tiny part of the assembly process, while the unit as a whole specializes in the assembly of autos. We could make a similar observation in an insurance office or a fast-food outlet.
The social nature of material life is less immediately obvious, but just as essential, when we examine the narrower material life of pre-industrial peoples, or even of pre-agricultural peoples whose material life consists primarily of hunting and gathering. While the division of labor (specialization) is limited - in some cases there is only a simple division of labor by gender - most production requires cooperation.
Since production is social our knowledge about production - our technology - is also social. In the mid-1960s small bands of Yuquí Indians were discovered wandering about the Amazon backlands of Bolivia. The Yuquí were a puzzlement to anthropologists. They had neither stories nor oral history. They neither wove nor made pottery. Their only tools were crude bows and arrows and the scraper, made from boar's teeth, with which they fashioned them. Although surrounded by rivers, they could not swim. Nomads who could not make fire, they had to carry their valuable embers with them wherever they wandered. Their hunting and gathering technology was so far below the levels of other hunters and gatherers that their very survival was constantly threatened.
The current hypothesis about the origins of the Yuquí is that they are the descendants of a more agriculturally advanced society that lived in the area where the current borders of Brazil, Paraguay and Bolivia meet. When slave traders raided their villages in the early 18th century, some escaped into the forest. Constantly on the run, they could neither plant crops nor make pottery. Reduced to smaller and smaller bands, their technology gradually disappeared. And their technology was much less complex than the technology of advanced economies today. Imagine how far our technology could regress if our society were to disintegrate.
It is due to the social nature of material life that every society must incorporate into its basic social fabric some method of organizing its material life. Each society must produce the goods and services that are deemed useful and/or desirable by the society, must find appropriate ways to produce these goods and services and must distribute the goods and services in such a way that the society can continue.
Societies have accomplished the management of material life in vastly different ways. We may even classify societies according to the ways in which their material lives are managed. The feudalism of Western Europe in the middle ages, the centralization of production and distribution decisions in the Soviet Union, and the capitalisms of modern Japan, Western Europe and the United States are examples of different social formations.
One of the ways in which social formations such as feudalism, capitalism or Soviet-style socialism differ is in the control and use of the social surplus. There is a social surplus whenever a society is able to produce more than is needed to sustain material life at the established standard of living. The pyramids of ancient Egypt, the public buildings and vast armies and navies of the Roman Empire and the ornate cathedrals of medieval Europe are all evidence of the abilities of these societies to produce a social surplus.
When we begin to examine different social formations and look for the method that each has used to orchestrate its material life a surprising patter emerges. We can only identify three basic methods of organization: tradition, command and the market.
For all of human prehistory and much of human history, tradition has been the primary conductor of material life. You became a hammock-weaver because your mother was a hammock-weaver. The men set out the fish traps during the first full moon following the spring floods because it has always been done that way. These traditions obviously work or the society would not have survived.
But neither the pyramids of ancient Egypt nor the armies of the Roman Empire were products of tradition alone. In both cases, some people within the society had the power to command others to do their bidding. The stone-hauler on a pyramid project was doing the job because the alternative could be death. Getting the right number of stone haulers for the project was a matter of planning and administration, not something - as in a traditional society - that evolved over centuries.
We should also note that the power to command labor for armies, pyramid-building or cathedral-construction is itself dependent on the ability of the society to produce a social surplus. If it took all of a society's labor just to produce enough food to get by, pyramids or cathedrals would be out of the question.
Now we can jump to the computer programmer in the United States of today. What motivates her to spend her working hours in this manner? Were her mother and grandmother computer programmers? Not likely. Did the government simply mandate that all persons with a particular level of mathematical ability will become compute programmers? Would she have gotten the education and training necessary for this craft if computer programming were a minimum wage occupation with no job security and no opportunity for advancement? And how does the society assure that there are enough (but not too many) computer programmers?
Our computer programmer is responding to market forces. Given her own tastes and abilities, she has decided that computer programming is the best way to meet her own material needs and desires; if her house needs painting, for example, she will probably take on some extra programming work and hire a painter rather than do the painting and scraping herself. And if too many people attempt to become computer programmers, employers will take advantage of the oversupply of labor to reduce wages and benefits. This will have the effect of "automatically" discouraging some of the potential programmers from pursing that occupation.
In the modern world, every actual social formation is to some degree a mixture of all three organizational principles. Modern capitalism is market-based social formation because the market is the primary organizing principle, yet we can find plenty of examples of command and some examples of tradition even here.
For example, you may select an occupation based on family traditions. Most farmers have farmers for parents. Even in the trendy restaurant business, tradition plays a major role. Some offspring of restauranteers try to escape the family tradition, but many return. Joseph Bastianich, a son of restaurant owners, earned a master's degree and worked as a bond broker before being drawn back to the restaurant business. "I missed the people, the excitement," he said, adding "A restaurant is not a job. It's a way of life. And if you've ever felt that pulse, been a part of that life, it's hard to do anything else."
And there are certainly elements of command in modern capitalism. Government commandeers, through its power to tax, the resources to provide for defense, a system of courts, education and much of our infrastructure (such as roads and harbors). In extreme cases, such as major wars, government may commandeer labor directly through the military draft.
This may also be the appropriate place to define capitalism. Like feudalism, or the slavery-based systems of the ancient world, or socialism, capitalism is a set of social relationships which organize the material life of a society. It is a particular social formation.
We can define a social formation in two ways: historically, and by identifying the major features which distinguish it from other social formations. It is best to do both.
Historically, we can define capitalism as the social formation that began to replace feudalism in parts of Western Europe between 1400 and 1800. With the Industrial Revolution, which started in Great Britain in the mid-1700s, capitalism became the dominant social formation in the world - partially through conquest (India, for example) and colonization (Latin America, for example) and partially due to the drive of national leaders to achieve power through industrialization (Japan, for example).
We can also identify three major features of capitalism which set it apart from other social formations. First and foremost is capital itself and the inexplicable drive of capitalists to amass more capital. Capital differs greatly from the forms of wealth that were common before capitalism. A feudal baron's ornate castle was certainly a form of wealth, but it was not capital. It did not produce anything - in fact its construction and maintenance absorbed workers who could have been producing more agricultural goods instead. A microchip fabrication plant is different. It is both wealth and capital. It will produce goods which will more than recompense its owners for the costs of building and operating it (or so they hope and expect). And this 'extra' compensation, called profit, will enable the owners to build more chip factories.
Second, markets provide fundamental order. If prices and profits fall in one sector of the economy, production will fall in that sector. If prices and profits increase in a sector of the economy, production will increase in that sector. If one type of skilled labor is scarce, increasing wages will induce more workers to acquire that skill at the same time that they will induce capitalists to look for new ways to replace this type of labor with machinery or computer programs.
Third, capitalism has two forms of power: market and state. As we noted above, there is a command element in modern capitalism. But what separates capitalism from other social formations, is the way in which the market element and the command element have been separated. We even have different social sciences for each of the sources of power: economists study the power that emanates from the market while political scientists study the power that emanates from the state. Note that this would not be true of feudalism or of Soviet-style socialism.
While any social formation must develop a certain degree of stability, social formations have also changed. Feudalism waned and was replaced with capitalism. The Soviet Union disintegrated and its former components are now in a transition phase. Economic historians will probably never agree on the fundamental causes of such momentous shifts, but we can still shed some light on them.
One of the more valiant attempts to explain such shifts came from the 19th century worldly philosopher Karl Marx. First Marx made the argument that any social formation was actually a combination of two very different elements: the technology (including the society's knowledge about production as well as its tools and infrastructure) and the social institutions under which this technology was utilized. The institutions may include traditions, customs, laws and even expectations. For any social formation to be viable, Marx claimed, its technology and institutions had to be appropriate to each other. For example, Boeing could not build aircraft in an institutional environment based on serfdom and craft guilds.
The more controversial part of Marx's argument was that any viable social formation operated primarily to the benefit of a particular social class (or, perhaps, an interlinked set of social classes). The social formation of feudalism enriched the landlords, the bishops and the princes. Capitalism enriches the capitalists.
But technology changes. Humans are inventive and since a good part of our time is spent tending to our material life, much of our inventiveness is turned toward finding better ways to produce goods and services. Our institutions may discourage such inventiveness (as did the craft guilds of feudal society) or may promote such inventiveness (as under capitalism); our technology of production may advance slowly or it may advance rapidly; but advance it will.
As the technology advances, it destabilizes the institutional arrangements. New technologies of weaving that allow unskilled labor to replace skilled labor threatens the weaver's guild. The growth of labor markets in the towns threatens the feudal lord's ability to hold onto his serfs. The new technologies may advance the interests of a new class just as the existing institutions hamper the development of the new technologies. The merchant-capitalists are brought into conflict with the landlords, princes and bishops. Eventually, the class that can best utilize the new technologies will displace the old institutions with new ones which are more appropriate to the new methods of production.
Capitalism is a particular type of market system, so we must examine the nature of markets and market systems before we can understand capitalism.
Human societies have always produced goods and services. But they have not always produced commodities. This is an important distinction. A commodity is a good or service that is produced in order to sell it. If you paint your own house, you have produced a service. But if you paint someone else's house for a fee the house-painting service has become a commodity.
The market can only orchestrate the production and distribution of commodities - so the market can only become a major orchestration force when most goods and services have become commodities. So we must not confuse the existence of markets with market systems. For most of history, markets have existed on the fringes of society while command and tradition supplied most of the orchestration of material life.
Most goods and services require three elements for their production. Of course they require labor. Most also require some contribution from nature. Growing wheat or mining coal require both labor and land. And most goods and services also require time. I plant in the spring and harvest in the fall. We load the coal into freighters and it takes two weeks to ship it to its final markets.
The wheat and the coal in the examples above are clearly commodities. The service provided by the shipping company of hauling the coal is also clearly a commodity. But what about the labor, the land and the time? The capacity of the land to grow wheat or to be mined of its coal are part of the natural world. They are gifts of nature. The capacity to labor is part of the human condition. Time is simply time, at least until modern physicists get through with it.
Yet for a market system to function, labor, land and time must all be treated like commodities. It is not enough that the farmer be willing to sell his wheat to the highest bidder; a market system will only work when the farmer is willing to let the price of wheat determine what he grows and even determine whether he is to be a farmer at all instead of a coal miner or an autoworker. The use of land too must be directed by market forces. Land that is more valuable as a trailer park than as a tomato farm must become a trailer park. And time itself becomes money. If I can shorten the time it takes to get the coal to market from two weeks to ten days I can turn over my "capital" 36 times a year instead of 26 times a year and earn a greater profit.
So capitalism cannot proceed until land, labor and time become "factors of production." This is one of the stumbling blocks of capitalism and will be examined in more depth in later chapters. It is one of the points at which conflict develops between the market and society. The market principle demands that wages be allowed to fall until all available workers are hired, but our social concepts of fairness and equity drive us to halt the process with a legal minimum wage. Your suburban lot would be more valuable as a gas station than as a home, but we establish zoning laws to prevent it.
While markets have been around a long time, market systems have not. For most of their history, markets have been on the periphery of material life, not at its center. The center of material life was dominated by work on the land. Only since the beginning of the industrial revolution has it been possible for societies to feed themselves with anything less than 80% of their populations working the land. And the agricultural work of the pre-market societies was carried on according to the dictates of tradition or command or some combination of the two.
When the mostly self-sufficient peasant was the 'typical' producer, there was little room for markets. Whether the peasant family's material life was just sufficient to get by or was more abundant, they produced most of the things they consumed and consumed most of the things they produced. The market was a thin layer on top of their material life, and did not penetrate deeply into material life. The 'extra' eggs or pigs were taken to the village market, sold for coin, and the money was used to buy cloth or to pay the village blacksmith to fix the plow. There may have been a market for eggs and pigs, but there was no real market for the labor and land that were required to produce them.
Gradually, the agriculturist began to depend more on the market. In the Western Europe of 1400 markets existed on the periphery of material life; by 1800 markets had penetrated so deeply into material life that we could speak of a market system and even recognize capitalism. The peasant whose ancestors took their extra produce to market is now specifically producing goods for the market. Instead of spinning and weaving their own cloth and making its own wine, the peasant family - we can probably call them small-scale commercial farmers by now - is raising pigs for the market and buying their cloth and wine on the market.
Both the pig and the peasant have been transformed in the process. The peasant no longer looks at the pig and sees tomorrow's bacon. Now he looks at the pig and sees the money that will buy tomorrow's bread and wine. The pig is now a commodity (a good or service produced for sale). More importantly, the use of the peasant's labor and land is now directed by the market. Land has a market value that depends, in turn, on the value of the commodities that can be produced on the land. Outside of agriculture, and to a lesser degree within it, labor has become a quasi-commodity that can be bought and sold for a price.
Once everyday goods such as pigs and eggs and yarn and cloth have mostly moved out of the self-production for self-use sphere into the market sphere and once land can be leased, labor can be hired and money can be borrowed at interest we have moved into the era of the market system. Market prices can now direct production, move labor from one occupation to another, shift the use of land from one crop to another and shift the use of money from one business to another. The merchant, who made profit by buying cheap and selling dear, can now be replaced by the capitalist, who makes profit by organizing the factors of production (land, labor and capital) in order to produce commodities for sale.
Note that there are three steps on the road to capitalism. First, the market must penetrate material life, turning the pig as the peasant's bacon into the pig as the peasant's income. Second, labor and land must themselves become subject to the market process. Only then can the third step proceed: the capitalist can hire labor and rent land in order to reduce costs by operating on a larger scale than the peasant family.
We must be careful not to confuse the farmer who produces commodities for markets with the capitalist. Our current social formation is certainly capitalism, but there are actually very few capitalists. Most of us, as workers and/or small businesspersons, produce commodities. The self-employed plumber may produce the commodity plumbing services and sell it directly to the final consumer. This can be indicated in symbolic notation as CMC. The plumber produces a commodity, exchanges it for money, then exchanges the money for the commodities which the plumber's family will consume. The plumber will expect that the C (the commodities) purchased at the end of the process will have the same value as the C (plumbing services) that were produced and sold at the start of the process.
The capitalist is quite different. The capitalist's starting point is money, some of which may be borrowed. The money is then used to produce a commodity which will in turn be sold for money. In symbolic notation, it looks like MCM. Unlike the plumber, however, the capitalist will be quite disappointed if the M at the end of the process is simply the equivalent of the M at the start of the process. For the capitalist to be successful, the process must look like MCM', with M' greater than M.
But where did the difference between M and M' come from? Somehow, the good or service produced by the capitalist was worth more than the labor, raw material and other inputs that had to be purchased in order to produce it. The reasons are complicated and there is no agreed-upon answer. This subject will be explored in some depth in Chapter 6. For now we can just put a name on this difference between M and M'. It is the social surplus and in a capitalist economy it takes the form of profit.
The 1984 film, The Mission (Roland Joffe, Director), tells the story of the slave raids and of the unsuccessful efforts of the Jesuits to protect these Indians.
Capitalism
Command
Commodity
Factors of Production
Market
Market System
Material Life
Social Formation
Social Surplus
Tradition
History of Economic Thought - The Worldly Philosophers,
Chapter ii, "The Economic Revolution."
Economic Theory - Economics Explained, Chapter
1, "Capitalism: Where Do We Come From?"
Economic History of the United States - The Economic Transformation
of America, Chapters 2-4, "Out of the European Cradle,"
"The Colonization of America," and "Setting the
Economic Stage."
Economic History of the Western World - The Making of Economic
Society, Chapters 1-3, "The Economic Problem,"
"The Premarket Economy," and "The Emergence of
Market Society." ; Economic Development of the North
Atlantic Community, Chapters 1-5.
Further Reading
The Nature and Logic of Capitalism,
New York, W.W. Norton, 1985. Chapter one examines the logic of
economic systems.