Before beginning this selection taken from the Britannica, it is of value to once again (as in the previous page on Capitalism), point out the existence of a "threes" phenomena which continues to crop up in different subject areas as an expression of a dominant type of cognitive structure. It is extremely important for the reader to acknowledge the presence of the recurrence because... if it is due to an environmental influence on our biology and physiology, there will be transitional changes in human cognition as the environment continues to deteriorate, and this will affect the Market because it is one of the "Market Forces" which alters supply, demand, distribution, costs, resources, government policy, business ethics, perception and analysis, etc...
↓ Changes in social Cognition can affect/effect↑
↓ Changes in the Market can affect/effect↑
↓ Changes in social Cognition can affect/effect↑
↑Changes in the planetary/social environment affect/effect↑
Poetically stated in the abstract: the hourglass outline in the above visual prose... though perhaps initially presumed to be a circularity of activity set in a hierarchical fashion, reveals the X-shaped configuration as a typical horizontal infinity standing on end; thus enabling an impression imbued by the circularity of the global dynamic irradiated by the 3-moment (dawn, noon, dusk) branding iron event called Solar activity.
(Top T.O.C. = Tropic of Cancer
Middle T.I.C. = Tropic Internal Center
Bottom T.O.C. = Tropic of Capricorn... and thus like an old time piece that is winding down; gives us tic-toc, tic-toc, tic-toc.)
Whereas many feel that many deteriorations are relatively inconsequential because they take place in an almost imperceptible incrementalism over long expanses of time; which give us ample opportunity for adaptation as a means of being able to effectively reset our mode of equilibrium, we should not allow ourselves to indulge in this luxury because unexpected (non-uniform) environmental events can occur which require us to make drastic changes in our behavior. For example, although it is appreciably inconceivable that everyone on the planet will wake up one morning and discard their phone and computer, such an event is analogical to an event such as the unexpected occurrence of a 500 or 1,000 year flooding event, solar storm, drought or house-size asteroid slamming into the Earth despite all our efforts placed towards creating a means to enhance predictability.
And nor should we conclude from past extremes of environmental events that have taken place during a brief period of time and then followed by calm... that this will be the same scenario that occurs for all future events whether we predict them or not. For example, the typical earthquake comes and goes over a relatively short interval of time and may or may not be followed by additional tremors called after-shocks, reverberations or subsiding undulations. Such a recurrence should not be the expected norm to the point we become unduly complacent which sets us up for a socially disabling level of shock because we became stressed by an earthquake lasting an hour or for several days... which precipitates human errors of thought expressed in theological or teleological contemplations of doom and destruction and the after-math, based on superstitious inclinations meant to conceal the insecurities practiced by a given culture's immaturity. Assaults on our senses do not have to occur by the means and methods typically associated with changing seasons. The same goes for "Market Forces" as any recession or depression will attest to.
Subtle changes in the environment are occurring but go unrecognized because of humanity's long-term habituations embraced by our anatomy, biology and physiology that can become conveyed in our ideologies. (For example, see the recurring "threes" pattern compiled in Dr. McNulty's list of threes in human anatomy. While some readers might conclude such a pattern is normal and natural, it may be little more than a type of survival mechanism (like so many religions are); consistent with being exposed to this particular planet's changing environmental circumstances which are on a course of deterioration. (The Earth's rotation is slowing, the moon is receding, and the Sun's energy is being extinguished this very moment.) Predictable weather patterns just as mapped-out geological events do not have to occur as humans have catalogued them according to established repetitions of occurrence from which we are inclined to interpret as predictive patterns. There is nothing to guarantee that we will be right in our estimations that, when honestly looked at; are guesstimations based on intellectualized approximations... and in other words means we simply do the best we can under our current type of brain activity and sensory amplifying technological aptitude.
The "threes" phenomena is being pursued by different researchers from different perspectives involving multiple interpretations spanning different time periods and applied interest. If you do not agree with any resulting interpretive conclusion concerning the "threes" (in in many varieties), then you should document your perspective so that other researchers can make use of it. For those interested in this phenomena, though without mentioning it the following usage of threes in the article below might well be overlooked, you can begin your survey at the Threesology Research Journal. However, it should be emphasized that while the "threes" phenomena does not take place in a cognitive vacuum, there is a recurring conservation of number—quantity, even when a 1-2-3 (and 3 -to- 1 ratio) maturational development sequence is noted. In other words, we do not see large quantity of phenomena within this enumerated scheme of organization. For example, there are 3 sentence-ending punctuation marks (period, question mark, exclamation point) and not 17, 44, or 183. Likewise, DNA and RNA have triplet codes and not 5,689 codes. And as a third example, we are on the third planet from a Sun, and not the second, fourth, or ninth. Analytical efforts often take on a tripartite characterization which appears to represent more than just a cultural contrivance.
(Economics systems refers to) the way in which humankind has arranged for its material provisioning. One would think that there would be a great variety of such systems, corresponding to the many cultural arrangements that have characterized human society. Surprisingly, that is not the case. Although a wide range of institutions and social customs have been associated with the economic activities of society, only a very small number of basic modes of provisioning can be discovered beneath this variety. Indeed, history has produced but three such kinds of economic systems:
The very paucity of fundamental modes of economic organization calls attention to a central aspect of the problem of economic “systems”—namely, that the objective to which all economic arrangements must be addressed has itself remained unchanged throughout human history. Simply stated, this unvarying objective is the coordination of the individual activities associated with provisioning—activities that range from providing subsistence foods in hunting and gathering societies to administrative or financial tasks in modern industrial systems. What may be called “the economic problem” is the orchestration of these activities into a coherent social whole—coherent in the sense of providing a social order with the goods or services it requires to ensure its own continuance and to fulfill its perceived historic mission.
Social coordination can in turn be analyzed as two distinct tasks. The first of these is the production of the goods and services needed by the social order, a task that requires the mobilization of society's resources, including its most valuable, human effort. Of nearly equal importance is the second task, the appropriate distribution of the product. (See distribution theory.) This distribution not only must provide for the continuance of a society's labour supply (even slaves had to be fed) but also must accord with the prevailing values of different social orders, all of which favour some recipients of income over others—men over women, aristocrats over commoners, property owners over non-owners, or political party members over nonmembers. In standard textbook treatments, the economic problem of production and distribution is summarized by three questions that all economic systems must answer:
All modes of accomplishing these basic tasks of production and distribution rely on social rewards or penalties of one kind or another. Tradition-based societies depend largely on communal expressions of approval or disapproval. Command systems utilize the open or veiled power of physical coercion or punishment, or the bestowal of wealth or prerogatives. The third mode—the market economy—also brings pressures and incentives to bear, but the stimuli of gain and loss are not usually within the control of any one person or group of persons. Instead, the incentives and pressures emerge from the “workings” of the system itself, and, on closer inspection, those workings turn out to be nothing other than the efforts of individuals to gain financial rewards by supplying the things that others are willing to pay for.
There is a paradoxical aspect to the manner in which the market resolves the economic problem. In contrast to the conformity that guides traditional society or the obedience to superiors that orchestrates command society, behaviour in a market society is mostly self-directed and seems, accordingly, an unlikely means for achieving social integration. Yet, as economists ever since Adam Smith have delighted in pointing out, the clash of self-directed wills in the competitive market environment serves as an essential legal and social precondition for the market system to operate. Thus, the competitive engagement of self-seeking individuals results in the creation of the third, and by all odds the most remarkable, of the three modes of solving the economic problem.
Not surprisingly, these three principal solutions—of tradition, command, and market—are distinguished by the distinct attributes they impart to their respective societies. The coordinative mechanism of tradition, resting as it does on the perpetuation of social roles, is marked by a characteristic changelessness in the societies in which it is dominant. Command systems, on the other hand, are marked by their capacity to mobilize resources and labour in ways far beyond the reach of traditional societies, so that societies with command systems typically boast of large-scale achievements such as the Great Wall of China or the Egyptian pyramids. The third system, that in which the market mechanism plays the role of energizer and coordinator, is in turn marked by a historical attribute that resembles neither the routines of traditional systems nor the grandiose products of command systems. Instead, the market system imparts a galvanic charge to economic life by unleashing competitive, gain-oriented energies. This charge is dramatically illustrated by the trajectory of capitalism, the only social order in which the market mechanism has played a central role. In The Communist Manifesto, published in 1848, Karl Marx and Friedrich Engels wrote that in less than a century the capitalist system had created “more massive and more colossal productive forces than have all preceding generations together.” They also wrote that it was “like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells.” That creative, revolutionary, and sometimes disruptive capacity of capitalism can be traced in no small degree to the market system that performs its coordinative task. (For discussion of the political and philosophical aspects of capitalism, see liberalism. For discussion of the political and philosophical aspects of Communism and socialism, see Communism and socialism.)
Prehistoric and preliterate economic systems
Although economics is primarily concerned with the modus operandi of the market mechanism, an overview of premarket coordinative arrangements not only is interesting in itself but throws a useful light on the distinctive properties of market-run societies. The earliest and by far the most historically numerous of economic systems has been that of primitive society, for which tradition serves as the central means of bestowing order. Such economic forms of social organization are likely to be far more ancient than Cro-Magnon people, although a few of these forms are still preserved by such groups as the Eskimo, Kalahari hunters, and Bedouin. So far as is known, all tradition—bound peoples solve their economic problems today much as they did 10,000 years or perhaps 10,000 centuries ago—adapting by migration or movement to changes in season or climate, sustaining themselves by hunting and gathering or by slash-and-burn agriculture, and distributing their output by reference to well-defined social claims. Elizabeth Marshall Thomas describes this distributive system in The Harmless People:
It seems very unequal when you watch Bushmen divide the kill, yet it is their system, and in the end no person eats more than the other. That day Ukwane gave Gai still another piece because Gai was his relation, Gai gave meat to Dasina because she was his wife's mother... No one, of course, contested Gai's large share, because he had been the hunter... No one doubted that he would share his large amount with others, and they were not wrong, of course; he did.
Besides the shared property that is perhaps the outstanding attribute of these hunting and gathering societies, two further aspects deserve attention. The first concerns their level of subsistence, long deemed to have been one of chronic scarcity and want. According to the still controversial findings of the anthropologist Marshall Sahlins, this notion of scarcity is not true. His studies of several preliterate peoples found that they could easily increase their provisioning if they so desired. The condition usually perceived by contemporary observers as scarcity is felt by preliterate peoples as satiety; Sahlins describes preliterate life as the first “affluent society.”
A second discernible characteristic of preliterate economic systems is the difficulty of describing any part of their activities as constituting an “economy.” No special modes of coordination distinguish the activities of hunting or gathering or the procedures of distribution from the rest of social life, so there is nothing in Eskimo or Kalahari or Bedouin life that requires a special vocabulary or conceptual apparatus called “economics.” The economy as a network of provisioning activities is completely absorbed within and fully inextricable from the traditional mode of existence as a whole.
Very little is known of the origin of the second of the great systems of social coordination—namely, the creation of a central apparatus of command and rulership. From ancient clusters of population, impressive civilizations emerged in Egypt, China, and India during the 3rd millennium BC, bringing with them not only dazzling advances in culture but also the potent instrument of state power as a new moving force in history.
The appearance of these centralized states is arguably the single most decisive alteration in economic, and perhaps in all, history. Although tradition still exerted its stabilizing and preserving role at the base of these societies—Adam Smith said that in “Indostan or ancient Egypt...every man was bound by a principle of religion to follow the occupation of his father”—the vast temple complexes, irrigation systems, fortifications, and cities of ancient India and China and of the kingdoms of the Inca and Maya attest unmistakably to the difference that the organizing principle of command brought to economic life. It lay in the ability of centralized authority to wrest considerable portions of the population away from their traditional occupations and to use their labour energies in ways that expressed the wishes of a ruling personage or small elite.
Herodotus recounts how the pharaoh Khufu used his power to this end:
[He] ordered all Egyptians to work for himself. Some, accordingly, were appointed to draw stones from the quarries in the Arabian mountains down to the Nile, others he ordered to receive the stones when transported in vessels across the river... And they worked to the number of a hundred thousand men at a time, each party during three months. The time during which the people were thus harassed by toil lasted ten years on the road which they constructed, and along which they drew the stones; a work, in my opinion, not much less than the Pyramids.
The creation of these monuments illustrates an important general characteristic of all systems of command. Such systems, unlike those based on tradition, can generate immense surpluses of wealth—indeed, the very purpose of a command organization of economic life can be said to lie in securing such a surplus. Command systems thereby acquire the wherewithal to change the conditions of material existence in far-reaching ways. Prior to the modern era, when command became the main coordination system for socialism, it was typical of such command systems to use this productive power principally to cater to the consumption or to the power and glory of their ruling elites.
Moral judgments aside, this highly personal disposition of surplus has the further consequence of again resisting any sharp analytic distinction between the workings of the economy of such a society and that of its larger social framework. The methods of what could be termed “economic coordination” in a command system are identical with those that guide the imperial state in all its historical engagements, just as in primitive society the methods that coordinate the activities of production and distribution are indistinguishable from those that shape family or religious or cultural life. Thus, in command systems, as in tradition-based ones, there is no autonomous economic sphere of life separate from the basic organizing principles of the society in general.
Preconditions for market society
These general considerations throw into relief the nature of the economic problems that must be resolved in a system of market coordination. Such a system must be distinguished from the mere existence of marketplaces, which originated far back in history. Trading relations between the ancient Levantine kingdoms and the pharaohs of Egypt about 1400 BC are known from the tablets of Tell el-Amarna. A thousand years later Isocrates boasted of the thriving trade of Classical Greece, while a rich and varied network of commodity exchange and an established market for monetary capital were prominent features of Classical Rome.
These flourishing institutions of commerce testify to the ancient lineages of money, profit-mindedness, and mercantile groups, but they do not testify to the presence of a market system. In premarket societies, markets were the means to join suppliers and demanders of luxuries and superfluities, but they were not the means by which the provision of essential goods and services was assured. For these purposes, ancient kingdoms or republics still looked to tradition and command, utilizing slavery as a basic source of labour (including captives taken in war) and viewing with disdain the profit orientation of market life. This disdain applied particularly to the use of the incentives and penalties of the market as a means of marshaling labour. Aristotle expressed the common feeling of his age when he declared, “The condition of the free man is that he does not live for the benefit of another.” With the exception of some military service (see mercenary), nonslave labour was simply not for sale.
The difference between a society with flourishing markets and a market-coordinated society is not, therefore, merely one of attitudes. Before a system orchestrated by the market can replace one built on obedience to communal or authoritarian pressure, the social orders dependent on tradition and command must be replaced by a new order in which individuals are expected to fend for themselves and in which all are permitted—even encouraged—to improve their material condition. Individuals cannot have such aims, much less such “rights,” until the dominant authority of custom or hierarchical privilege has been swept away. A rearrangement of this magnitude entails wrenching dislocations of power and prerogative. A market society is not, consequently, merely a society coordinated by markets. It is, of necessity, a social order with a distinctive structure of laws and privileges.
It follows that a market society requires an organizing principle that, by definition, can no longer be the respect accorded to tradition or the obedience owed to a political elite. This principle becomes the generalized search for material gain—a striving for betterment that is unique to each individual. Such a condition of universal upward striving is unimaginable in a traditional society and could be seen only as a dangerous threat in a society built on established hierarchies of authority. But, for reasons that will be seen, it is accommodated by, and indeed constitutive of, the workings of a market system.
The process by which these institutional and attitudinal changes are brought about constitutes a grand theme—perhaps the grand theme—of economic history from roughly the 5th to the 18th and even into the 19th century in Europe. In terms of political history, the period was marked by the collapse of the Roman Empire, the rise of feudalism, and the slow formation of national states. In social terms, it featured the end of an order characterized by an imperial retinue at the top and massive slavery at the bottom, that order's replacement by gradations of feudal vassalage descending from lord to serf, and the eventual appearance of a bourgeois society with distinct classes of workers, landlords, and entrepreneurs. From the economist's perspective, the period was marked by the breakdown of a coordinative mechanism of centralized command, the rise of the mixed pressures of tradition and local command characteristic of the feudal manor, and the gradual displacement of those pressures by the material penalties and rewards of an all-embracing market network. In this vast transformation the rise of the market mechanism became crucial as the means by which the new social formation of capitalism ensured its self-provisioning, but the mechanism itself rested on deeper-lying social, cultural, and political changes that created the capitalist order it served.
To attempt to trace these lineages of capitalism would take one far beyond the confines of the present subject. Suffice it to remark that the emergence of the new order was first given expression in the 10th and 11th centuries, when a rising mercantile “estate” began to bargain successfully for recognition and protection with the local lords and monarchs of the early Middle Ages. Not until the 16th and 17th centuries was there a “commercialization” of the aristocratic strata, many of whose members fared poorly in an ever more money-oriented world and accordingly contracted marriages with wealthy merchant families (whom they would not have received at home a generation or two earlier) to preserve their social and material status. Of greatest significance, however, was the transformation of the lower orders, a process that began in Elizabethan England but did not take place en masse until the 18th and even the 19th century. As feudal lords became profit-minded landlords, peasants moved off the land to become an agricultural proletariat in search of the best wages obtainable, because traditional subsistence was no longer available. Thus, the market network extended its disciplinary power over “free” labour—the resource that had previously eluded its influence. The resulting social order made it possible for markets to coordinate production and distribution in a manner never before possible.
The evolution of capitalism
From mercantilism to commercial capitalism
It is usual to describe the earliest stages of capitalism as mercantilism, the word denoting the central importance of the merchant overseas traders who rose to prominence in 17th- and 18th-century England, Germany, and the Low Countries. In numerous pamphlets, these merchants defended the principle that their trading activities buttressed the interest of the sovereign power, even when, to the consternation of the court, this required sending “treasure” (bullion) abroad. As the pamphleteers explained, treasure used in this way became itself a commodity in foreign trade, in which, as the 17th-century merchant Thomas Mun wrote, “we must ever observe this rule; to sell more to strangers than we consume of theirs in value.”
For all its trading mentality, mercantilism was only partially a market-coordinated system. Adam Smith complained bitterly about the government monopolies that granted exclusive trading rights to groups such as the East India or the Turkey companies, and modern commentators have emphasized the degree to which mercantilist economies relied on regulated, not free, prices and wages. The economic society that Smith described in The Wealth of Nations in 1776 is much closer to modern society, although it differs in many respects, as shall be seen. This 18th-century stage is called “commercial capitalism,” although it should be noted that the word capitalism itself does not actually appear in the pages of Smith's book.
Smith's society is nonetheless recognizable as capitalist precisely because of the prominence of those elements that had been absent in its mercantilist form. For example, with few exceptions, the production and distribution of all goods and services were entrusted to market forces rather than to the rules and regulations that had abounded a century earlier. The level of wages was likewise mainly determined by the interplay of the supply of, and the demand for, labour—not by the rulings of local magistrates. A company's earnings were exposed to competition rather than protected by government monopoly.
Perhaps of greater importance in perceiving Smith's world as capitalist as well as market-oriented is its clear division of society into an economic realm and a political realm. The role of government had been gradually narrowed until Smith could describe its duties as consisting of only three functions:
And if the role of government in daily life had been delimited, that of commerce had been expanded. The accumulation of capital had come to be recognized as the driving engine of the system. The expansion of “capitals”—Smith's term for firms—was the determining power by which the market system was launched on its historic course.
Thus, The Wealth of Nations offered the first precise description of both the dynamics and the coordinative processes of capitalism. The latter were entrusted to the market mechanism—which is to say, to the universal drive for material betterment, curbed and contained by the necessary condition of competition. Smith's great perception was that the combination of this drive and counterforce would direct productive activity toward those goods and services for which the public had the means and desire to pay while forcing producers to satisfy those wants at prices that yielded no more than normal profits. Later economists would devote a great deal of attention to the question of whether competition in fact adequately constrains the workings of the acquisitive drive and whether a market system might not display cycles and crises unmentioned in The Wealth of Nations. These were questions unknown to Smith, because the institutions that would produce them, above all the development of large-scale industry, lay in the future. Given these historical realities, one can only admire Smith's perception of the market as a means of solving the economic problem.
Smith also saw that the competitive search for capital accumulation would impart a distinctive tendency to a society that harnessed its motive force. He pointed out that the most obvious way for a manufacturer to gain wealth was to expand his enterprise by hiring additional workers. As firms expanded their individual operations, manufacturers found that they could subdivide complex tasks into simpler ones and could then speed along these simpler tasks by providing their operatives with machinery. Thus, the expansion of firms made possible an ever-finer division of labour, and the finer division of labour, in turn, improved profits by lowering the costs of production and thereby encouraging the further enlargement of the firms. In this way, the incentives of the market system gave rise to the augmentation of the wealth of the nation itself, endowing market society with its all-important historical momentum and at the same time making room for the upward striving of its members.
One final attribute of the emerging system must be noted. This is the tearing apart of the formerly seamless tapestry of social coordination. Under capitalism two realms of authority existed where there had formerly been only one—a realm of political governance for such purposes as war or law and order and a realm of economic governance over the processes of production and distribution. Each realm was largely shielded from the reach of the other. The capitalists who dominated the market system were not automatically entitled to governing power, and the members of government were not entrusted with decisions as to what goods should be produced or how social rewards should be distributed. This new dual structure brought with it two consequences of immense importance. The first was a limitation of political power that proved of very great importance in establishing democratic forms of government. The second, closer to the present theme, was the need for a new kind of analysis intended to clarify the workings of this new semi-independent realm within the larger social order. As a result, the emergence of capitalism gave rise to the discipline of economics.
From commercial to industrial capitalism
Commercial capitalism proved to be only transitional. The succeeding form would be distinguished by the pervasive mechanization and industrialization of its productive processes, changes that introduced new dynamic tendencies into the economic system while significantly transforming the social and physical landscape.
The transformative agency was already present in Smith's day, observable in a few coal mines where steam-driven engines invented by Thomas Newcomen pumped water out of the pits. The diffusion and penetration of such machinery-driven processes of production during the first quarter of the 19th century has been traditionally called “the” Industrial Revolution, although historians today stress the long germination of the revolution and the many phases through which it passed. There is no doubt, however, that a remarkable confluence of advances in agriculture, cotton spinning and weaving, iron manufacture, and machine-tool design and the harnessing of mechanical power began to alter the character of capitalism profoundly in the last years of the 18th century and the first decades of the 19th.
The alterations did not affect the driving motive of the system or its reliance on market forces as its coordinative principles. Their effect was rather on the cultural complexion of the society that contained these new technologies and on the economic outcome of the processes of competition and capital accumulation. This aspect of industrialization was most immediately apparent in the advent of the factory as the archetypal locus of production. In Smith's time the individual enterprise was still small—the opening pages of The Wealth of Nations describe the effects of the division of labour in a 10-man pin factory—but by the early 19th century the increasing mechanization of labour, coupled with the application of waterpower and steam power, had raised the size of the workforce in an ordinary textile mill to several hundreds; by mid-century in the steel mills it was up to several thousands, and by the end of the century in the railways it was in the tens of thousands.
The increase in the scale of employment brought a marked change in the character of work itself. In Smith's day the social distance between employer and labourer was still sufficiently small that the very word manufacturer implied an occupation (a mechanic) as well as an ownership position. However, early in the 19th century William Blake referred to factories as “dark Satanic mills” in his epic poem Jerusalem, and by the 1830s a great gulf had opened between the manufacturers, who were now a propertied business class, and the men, women, and children who tended machinery and laboured in factories for 10- and 12-hour stints. It was from the spectacle of mill labour, described in unsparing detail by the inspectors authorized by the first Factory Act of 1802, that Marx drew much of the indignation that animated his analysis of capitalism. More important, it was from this same factory setting, and from the urban squalor that industrialization also brought, that capitalism derived much of the social consciousness—sometimes revolutionary, sometimes reformist—that was to play so large a part in its subsequent political life. Works such as Charles Dickens's Hard Times (1854) depicted the factory system's inhumanity and the underlying economic doctrines that supposedly justified it. While these works brought attention to the social problems stemming from industrialization, they also tended to discount the significant improvements in the overall standard of living (as measured by the increases in life expectancy and material comforts) that accompanied modernization. Country life of just a generation earlier had been no less cruel, and in some respects it was more inhuman than the factory system being criticized. Those critics who failed to compare the era of industrialization with the one that immediately preceded it also failed to account for the social and economic progress that had touched the lives of ordinary people.
The degradation of the physical and social landscape was the aspect of industrialization that first attracted attention, but it was its slower-acting impact on economic growth that was ultimately to be judged its most significant effect. A single statistic may dramatize this process. Between 1788 and 1839 the output of pig iron in Britain rose from 68,000 to 1,347,000 tons. To fully grasp the significance of this 20-fold increase, one has to consider the proliferation of iron pumps, iron machine tools, iron pipes, iron rails, and iron beams that it made possible; these iron implements, in turn, contributed to faster and more dependable production systems. This was the means by which the first Industrial Revolution promoted economic growth, not immediately but with gathering momentum. Thirty years later this effect would be repeated with even more spectacular results when the Bessemer converter ushered in the age of steel rails, ships, machines, girders, wires, pipes, and containers.
The most important consequence of the industrialization of capitalism was therefore its powerful effect on enhancing what Marx called “the forces of production”—the source of what is now called the standard of living. The Swiss economic demographer Paul Bairoch calculated that gross national product (GNP) per capita in the developed countries rose from $180 in the 1750s (in dollars of 1960 purchasing power) to $780 in the 1930s and then to $3,000 in the 1980s, whereas the per capita income of the less-developed countries remained unchanged at about $180–$190 from 1750 to 1930 and thereafter rose only to $410 in 1980. (This seemingly persistent gap between the richest and the poorest countries, which contradicts the predictions of the standard theory of economic growth, has increasingly occupied the attention of contemporary economists. Although the question is answered in part by explaining that the rich countries have experienced industrialization and the poor ones have not, the question remains why some have experienced industrialization and others have not.)
The development of industrialization was accompanied by periodic instability in the 18th and 19th centuries. Not surprisingly, then, one side effect of industrialization was the effort to minimize or prevent economic shocks by linking firms together into cartels or trusts or simply into giant integrated enterprises. Although these efforts dampened the repercussions of individual miscalculations, they were insufficient to guard against the effects of speculative panics or commercial convulsions. By the end of the 19th century, economic depressions had become a worrisome and recurrent problem, and the Great Depression of the 1930s rocked the entire capitalist world. During that debacle, GNP in the United States fell by almost 50 percent, business investment fell by 94 percent, and unemployment rose from 3.2 to nearly 25 percent of the civilian labour force. Economists have long debated the causes of the extraordinary increase in economic instability from 1830 to 1930. Some point to the impact of growth in the scale of production evidenced by the shift from small pin factories to giant enterprises. Others emphasize the role of miscalculations and mismatches in production. And still other explanations range from the inherent instability of capitalist production (particularly for large-scale enterprises) to the failure of government policy (especially with regard to the monetary system).
From industrial to state capitalism
The perceived problem of inherent instability takes on further importance insofar as it is a principal cause of the next structural phase of the system. The new phase is often described as state capitalism because its outstanding feature is the enlargement in size and functions of the public realm. In 1929, for example, total U.S. government expenditures—federal, state, and local—came to less than one-tenth of GNP; from the 1970s they amounted to roughly one-third. This increase is observable in all major capitalist nations, many of which have reached considerably higher ratios of government disbursements to GNP than the United States.
At the same time, the function of government changed as decisively as its size. Already by the last quarter of the 19th century, the emergence of great industrial trusts had provoked legislation in the United States (although not in Europe) to curb the monopolistic tendencies of industrialization. Apart from these antitrust laws and the regulation of a few industries of special public concern, however, the functions of the federal government were not significantly broadened from Smith's vision. Prior to the Great Depression, for example, the great bulk of federal outlays went for defense and international relations, for general administrative expense and interest on the debt, and for the post office.
The Great Depression radically altered this limited view of government in the United States, as it had earlier begun to widen it in Europe. The provision of old-age pensions, relief for the hungry and poor, and a dole for the unemployed were all policies inaugurated by the administration of President Franklin D. Roosevelt, following the example of similar enlargements of government functions in Britain, France, and Germany. From the 1970s onward, such new kinds of federal spending—under the designation of social security, health, education, and welfare programs—grew to be 20 to 50 percent larger than the traditional categories of federal spending.
Thus, one very important element in the advent of a new stage of capitalism was the emergence of a large public sector expected to serve as a guarantor of public economic well-being, a function that would never have occurred to Smith. A second and equally important departure was the new assumption that governments themselves were responsible for the general course of economic conditions. This was a change of policy orientation that also emerged from the challenge of the Great Depression. Once regarded as a matter beyond remedy, the general level of national income came to be seen by the end of the 1930s as the responsibility of government, although the measures taken to improve conditions were on the whole timid, often wrongheaded (such as highly protectionist trade policies), and only modestly successful. Nonetheless, the appearance in that decade of a new economic accountability for government constitutes in itself sufficient reason to describe capitalism today in terms that distinguish it from its industrial, but largely unguided, past.
There is little doubt that capitalism will continue to undergo still further structural alterations. Technological advances are rapidly reducing to near insignificance the once-formidable barriers and opportunities of economic geography. Among the startling consequences of this technological leveling of the world have been the large displacements of high-tech manufacturing from Europe and North America to the low-wage regions of Southwest Asia, Latin America, and Africa. Another change has been the unprecedented growth of international finance to the point that, by the beginning of the 21st century, the total value of transactions in foreign exchange was estimated to be at least 20 times that of all foreign movements of goods and services. This boundary-blind internationalization of finance, combined with the boundary-defying ability of large corporations to locate their operations in low-wage countries, poses a challenge to the traditional economic sovereignty of nations, a challenge arising from the new capabilities of capital itself.
A third change again involves the international economy, this time through the creation of new institutions for the management of international economic trade. A number of capitalist nations have met the challenges of the fast-growing international economy by joining the energies of the private sector (including organized labour) to the financial and negotiating powers of the state. This “corporatist” approach, most clearly evident in the organization of the Japanese economy, was viewed with great promise in the 1980s but in the 1990s was found to be severely vulnerable to opportunistic behaviour by individuals in both the public and the private sectors. Thus, at the onset of the 21st century, the consensus on the economic role of government in capitalism shifted back from the social democratic interventionism of the Keynesian system and the managed market economies of the “Asian tigers” (countries such as Hong Kong, Singapore, Malaysia, and South Korea that experienced rapid growth in the late 20th century) to the more noninterventionist model of Adam Smith and the classical economists.
It is not necessary, however, to venture risky predictions concerning economic policy. Rather, it seems more useful to posit two generalizations. The first emphasizes that capitalism in all its variations continues to be distinguished from other economic systems by the priority accorded to the drive for wealth and the centrality of the competitive mechanism that channels this drive toward those ends that the market rewards. The spirit of enterprise, fueled by the acquisitive culture of the market, is the source of the dynamism of capitalism. The second generalization is that this driving force and constraining mechanism appear to be compatible with a wide variety of institutional settings, including substantial variations in the relationships between the private and public sectors. The form of capitalism taken also differs between nations, because the practice of it is embedded within cultures; even the forces of globalization and the threat of homogenization have proved to be more myth than reality. Markets cater to national culture as much as national culture mutates to conform to the discipline of profit and loss. It is to this very adaptability that capitalism appears to owe its continued vitality.
Robert L. Heilbroner: Norman Thomas Professor Emeritus of Economics, New School for Social Research, New York City. Author of The Worldly Philosophers; The Nature and Logic of Capitalism; and others.
Peter J. Boettke: Associate Professor of Economics, George Mason University, Fairfax, Virginia. Editor of The Review of Austrian Economics and New Thinking in Political Economy.