Let’s Go Back In Time – A Brief, Stylized History
For a moment let’s go back in time. Let’s go back say 300-400 years ago to Europe and North America. This is the era of absolute monarch Kings and the feudal system in Europe. Think castles, manors, kings, nobles, armies fighting, and dirt-poor serfs working to grow the food for everybody. In Europe there were some small (very small, as in 1-10 workers) businesses beginning to manufacture products, primarily in the cities. In North America, there are some small colonies of settlers along the Atlantic coast, but most of the continent is populated by native Americans and First Peoples. Both of these types of societies had what we call a traditional economic system. In a traditional economic system, the economic problem isn’t really “solved” except for maybe the King. The fundamental questions of what to produce? how much? who gets the goods? are all answered the traditional way: do them the way society has always done. If your parents were rich nobles, you got to be a rich noble. If your parents were serfs growing wheat and tending sheep, then you were too. And you did it the same way they did using the same tools and methods.
Gradually, the Renaissance, Enlightenment, and exploration of the “New World” led to a growth of science and technology and new resources. This led to a rivalry between European countries. Nations competed to see who could be wealthiest. Unfortunately, for the 99+% of people living in these systems, “wealthier” generally was interpreted to mean more wealth for the King and upper classes with a small but growing “merchant” class.
Note: I know this brief history is very Euro- and dead-white-males centric, but unfortunately the dominant players in Economics of the past 250 years have been mostly dead white males. (well, they were alive at the time, but they’re dead now). No reason it has to stay that way in the future, though.
As the industrial revolution took hold and as trading with the New World expanded, the feudal system gradually gave way to a new economic system called “mercantilism”. Under mercantilism, the wealth of the nation was understood to be how much “treasure” or “money” or gold the nation could accumulate and how much territory it could command. Wars were fought, industries expanded, more goods produced, and trade flourished. But the thinking that “wealth” consisted of treasure led governments to pursue a policy of importing only natural resources and discouraging the import of manufactured goods. Colonies and possessions were to be exploited for the benefit of the central government.
At least until the late 1700’s. In 1776 to be specific, things began to change. The English colonies in America, of course, declared independence. Thirteen years later in France, the people would revolt and decapitate the King. But in 1776 in another English possession, Scotland, a man publishes a book that sets economics onto a new path. His name was Adam Smith and the book was “An Enquiry Into the Nature and Causes of the Wealth of Nations”, .commonly referred to as just The Wealth of Nations.
Smith accomplished three things with his book. First, he established the idea that the real wealth of a nation consisted of the living standards and productivity of the nation’s people. Smith established what we now call GDP as the best measure of how well off a country truly is. Second, he powerfully described how markets work and incentives work. Finally, he eloquently overturned the rationale for mercantilism and argued for a freer system.
Note: Smith, like Karl Marx nearly a century later, are probably two of the most powerful authors of the past few hundred years. To this day, millions of people claim to be followers of some doctrine they believe Smith or Marx said. Unfortunately very few of these modern followers have ever actually read either Smith or Marx. Smith, were he alive today, would most definitely NOT be a free market capitalist and opponent of government regulation. Likewise, near his death, when millions of people claimed to be promoting “Marxism”, Marx was quoted as saying “I am not a Marxist”.
Long After Smith: Capitalism Emerges
Long after Smith died, the industrial revolution and even better technology led to dramatic increases in national incomes and overall national wealth. The system we call Capitalism began to emerge in the 19th century in what we now call “the West”. In particular this means England, France, Germany, Holland, the U.S., and Japan. In 19th century these nations evolved economic systems that were a mix of the old mercantilism mixed with free trade (as promoted by Smith and others) mixed with a new type of heavily industrialized, private property, market-oriented system. This new system came to be called Capitalism. During this period, those nations that were most Capitalistic and had the free-est markets came to grow the fastest. Capitalism itself then came to be dominated by a new institution: large, privately owned and privately managed corporations who say their primary mission (often only mission) is to maximize profits. Along with the rise of corporations and Capitalism came an expansion of banking and the widespread use of paper money.
While “the West” was growing rapidly and getting richer, the rest of the world wasn’t. Much of it came under the imperialist domination of these few nations. The U.S. and Spain dominated South America. Britain dominated what is now Canada, Australia, New Zealand, Egypt, South Africa, and India. The Europeans split up the domination of China and Africa. Elsewhere, major nations that weren’t colonized by “the West”, such as Russia and the Ottoman Empire (now Turkey) were mired in older traditional, feudal systems.
In the late 19th century and early 20th century, the Capitalist system gained strong advocates and theorists among economists. Indeed most of what we consider the mainstream economists of that period became strong advocates. Eventually, in the 20th century free-market Capitalism would find its greatest and most powerful advocates in two groups of economists called The Austrian School and The Chicago School, led by Friedrich Hayek and Milton Friedman. You will learn more about them in the videos in a few later assignments.
A New Alternative: Socialism
The 19th century wasn’t all roses and rising incomes though. The industrialization and urbanization of the western economies led to grinding poverty of many workers in the cities. The economies, while growing over the long-term, were prone to terrible instability. Periods of depression, recession, or financial panics occurred frequently. Some depressions, such as in 1871, lasted for years. Capitalism had its critics. Some of the critics were literary and motivated by compassion, telling the story of the poor in books and novels. Charles Dickens, the author of “A Christmas Carol” and “Oliver Twist”, was one of these critics. Other critics attempted to create or advocate the formation of small communities that would share all property and work for a common welfare. These critics took the name of “Socialists”.
Eventually an extremely powerful economist by the name of Karl Marx became the most famous of the critics of capitalism. Together with his friend and backer Friedrich Engels, Marx published two powerful documents: The Communist Manifesto and Das Kapital between 1848 and 1868. Many political movements grew up around Socialism. The followers of Marx named themselves Communists.
The several varieties of Socialism became extremely politically popular. However, Socialists never really gained control of any major government politically until the 20th century. Nonetheless, the political popularity of Socialist ideas forced governments to adopt many partly socialist policies such as welfare, public education, legalization of unions, and worker protection laws.
The Stage is Set and New Systems Emerge
The growing popularity of socialism and the rising wealth of capitalism set the stage for monumental confrontations in the 20th century that would change the economic system of virtually every country on the planet. Quite unfortunately, many of these changes were introduced violently through war or revolution. Four events in set the confrontation in motion. First, the First World War began in 1914 among the European powers and soon involved most of the world, destroying much of the economies that had been built up in the previous 50 years. (except for the U.S. which thrived during the war since the war was fought elsewhere) Second, this same war led to revolution in Russia and the establishment of the first avowedly communist system, the USSR. After the Russian revolution, a Communist system was no longer a theoretical option – there was an actual example of it.
Next the failure to successfully rebuild the world economy following the war combined with another of Capitalism’s frequent financial crises in 1929 to create the Great Depression of the 1930’s. Poverty and unemployment soared. The capitalist countries struggled and failed to restore prosperity in the 1930’s while the USSR boomed and industrialized. Capitalist countries were filled with fears of Socialist revolution and Capitalist theories were seemingly unable to provide any guidance on how to end the Depression. Then, a great British economist, John Maynard Keynes, emerged to explain the crisis and describe a way out. What he outlines is a kind of modified Capitalist system with a large over-sight role for government. His ideas are quickly dubbed Keynesianism.
At the same time, the post-World War I crises gave rise in Italy, Japan, and Germany to yet another type of economic system. It is called Fascism in Italy and National Socialism in Germany but lacks a name in Japan. The new system is variant of capitalism, in that it depends on private ownership and corporations, but the economic activity is strongly directed by the central government and monopolies encouraged. Fascism is, in effect, a strong alliance between big government and big business with a heavy dose of militaristic nationalism added.
By 1940, the world has a choice of five clearly different types of economic systems: Capitalism, Socialism/Communism, Keynesian Mixed Capitalism, Fascism/National Socialism, and traditional systems.
At this point, I won’t go into the details of how the confrontation between economic systems played out in the second half of the 20th century. I will leave that story to the Commanding Heights videos in Assignments 5-7. However, I will say that by the end of the 20th century, it was widely believed that Free-market Capitalism with a dose of socialist government welfare programs had won the battle. Political elites from both the “liberal” and “conservative” ends of spectrum widely believed that this was the “best” system and would soon be the “only” system. As the 20th century drew to a close, it was widely believed that Free Market Capitalism had triumphed. This supposed triumph of Free-market Capitalism, led by the U.S., became known as Globalization.
All is Not Well in the 21st Century
However, the events of the early 21st century have shown
the contest between economic systems is far from over. Several events and emerging trends have brought the supposed triumph of Free Market Capitalism, especially as implemented in Corporate Globalization into question. Among these developments are:
- Developing nations have chafed under what they consider simply a new version of colonialism and have failed to grow or thrive, despite doing what they were told.
- China emerged as a major power and is pursuing its own type of economic system – a mix of state communism with limited capitalism.
- Strongly Islamic countries have strived to develop their own economic systems that would be compatible with the beliefs of the Koran.
- Environmental issues of pollution, non-renewable energy, and global climate change have challenged the sustainability of Capitalism long-term.
- Increasing numbers of people worldwide challenge the moral and ethical foundations and goals of capitalism. In essence, they are challenging whether the sole goal of life should be to produce and consume more stuff.
- Increasing disparities in income distribution and wealth have contributed to terrorism and increasing violence.
- The entire global financial and banking system supporting Global Capitalism underwent a major crisis starting in 2007 and that continues. The crisis threatens an economic collapse on par with the Great Depression.
And, so we find ourselves back at the present. Our world today can be described as “interesting times”. Governments and economic systems are changing. But to what? Why?And what do we want? Before we can begin to intelligently form opinions on what we want, we need to better understand the variety of options available to us. We start that discussion at a rather theoretical level on the next page.