Economics and its Beginnings

Studying economics' early history can help make clear the origin of unstated methodological values that in many cases are still present in the discipline. These values tend to be impervious to change, generally remain hidden, and in some case unquestioned, by economists. For instance, the early-held belief that economics was the study of the naturally harmonious business world is still an underlying premise of the present neoclassical paradigm. This view is sharply contrasted to the Neo-Marxist contention that conflict between the capitalist and working classes dominates all other relationships. The contrasting values of harmony and conflict are still prevalent in the worldview of their respective economic paradigms. Thus, to really understand economics, one must understand where and how these values originated.

Early scholars were generalists in comparison to the specialization of today's scholars. Due to this broad scope of the early scholars, changes or discoveries in any area had wide impacts throughout the educated world of the sixteenth and seventeenth century. Important early changes that took place in astronomy had, for example an important impact on the discipline of economics.

Copernicus and Newton

Before Nicolaus Copernicus (1473-1543) most educated people believed that the sun revolved around the earth. This view came from the early Greek astronomer Claudius Ptolemy (AD. 140), and seemed obvious from the simple observation that the sun and stars always moved in the sky from the east to the west. This Ptolemaic paradigm could not easily explain, however, the movement of the two planets, Mercury and Venus. Copernicus (the founder of modern astronomy) discovered that placing the sun in the center and having the earth rotate on its axis gave astronomers better results in predicting these planetary movements. Gradually Copernicus’ new paradigm replaced the older Ptolemaic worldview. This is an example of how a new paradigm challenges the old and by so doing makes advances for science. This process can and should ideally take place in all sciences.

Later, Isaac Newton (1642-1727) built a model of the universe using the building blocks left by Copernicus, Kepler and Galileo. His model lasted for nearly three hundred years. Newton had an indirect but profound influence on the early development of economics by formulating the law of universal gravitation. This law states that forces of attraction and repulsion among bodies in space keep them in motion and balance. There is a balance between the forces of gravity and the centrifugal force that keeps planets predictably revolving around the sun. The planets will neither fall into the sun nor fly off into outer space. Newton also discovered the mathematics necessary to follow and predict these movements. In his theory of gravitation, Newton thought he had found a cosmic law (science no longer believes it to be true) equally applicable to the smallest and the largest of objects in the universe, and completely subject to mathematical proof.

Where God was always necessary in the past to explain the movement of the planets, now it seemed that man, using the rigor of mathematics, could not only explain it but also predict it. God was removed from the immediate cause of events. The universe could now be seen as a finely tuned clock operating under its own power in a predictable manner. This does not mean that the universe was amoral or valueless. God had his place; after all, God created the clock and set the spring in action. To understand God, it was only necessary to understand God’s creation and the rules by which it operated. These rules were the natural laws, which are God-given and immutable. This thinking was the source of inspiration for most intellectual activity following Newton in both the physical and social sciences.

The Newtonian worldview had an especially great impact, directly or indirectly, on early economics. Scholars assumed that history, human behavior and economics would all be governed by natural laws. These laws would be harmonious and measurable. They would be good, right, and just since God was their author. Changing or tampering with these naturally ordained laws and their natural consequences would be sinful.

The founder of modern day economics was Adam Smith (1723-1790) with his publication of An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The shortened title of his famous book is the Wealth of Nations. Adam Smith was a disciple of Newton and sought the natural law and the harmony of nature in the economic sphere. What he found became the principle elements of modern economic theory. For instance, in economics the term equilibrium is used to describe a market driven price and quantity. This idea of equilibrium comes out of astronomy and the Newtonian worldview. For Newton, equilibrium referred to harmony and balance in the universe and to the forces keeping the planets in their proper places. For Adam Smith and his followers, it would come to represent the natural state of the market and the harmonious balance between demand and supply.

Because Adam Smith followed Newton so closely, economics was more influenced than other social sciences by the Newtonian worldview. If economics had been founded a hundred years later, after the work of Charles Darwin and his publication The Origin of Species, economic laws might not have seemed so immutable and unchanging. An evolving changing industrial world defying equilibrium might have become the norm for building economic models. The institutionalist paradigm demonstrates Charles Darwin's influence by adopting the model of an evolving non-equilibrium world.

If economics had been founded just seventy-five years later during the turmoil and conflicts cause by the new industrial age, the view of a harmonious balanced equilibrium world, may not have held much influence. Indeed, Karl Marx who lived in the industrial slums of Europe, developed his class conflict thesis during this time, and under these circumstances. His thesis replaced the underlying themes of harmony and equilibrium with conflict and change.

Economics no longer accepts the idea of natural law, and science has been completely divorced from religion and God. Nevertheless, it could be argued that much of the reluctance of economists towards government involvement, particularly any interference with pricing, stems from these early values and beliefs. Still inherent to the field, is a deeply seeded belief that markets operate most efficiently when they are "left to their own devices".

Adam Smith and the New Paradigm

Before the economics of Adam Smith, mercantilism was the prevailing economic system in Europe. It dominated the views of scholars, kings and their courts from the decline of feudalism to the Industrial Revolution (the time of Adam Smith). The basic ideas of mercantilism were the same throughout Europe; the government should manage the economy for the purpose of increasing national wealth and the power of the state. Power and wealth was equated with gold and silver. The aim was, therefore, to create a favorable balance of trade (where exports were greater than imports), so that other nations would be forced to pay out their gold and silver. One country's loss (gold and silver spent on imports) was another's gain (gold and silver received from exports). As gold and silver accumulated, so the power and wealth of the State increased.

Control of the power and wealth generated by mercantilism was concentrated within the aristocracy and, in particular, with the king and queen and their court. Mercantilism fostered a tight control on all economic activity, especially international trade. It was the first modern alliance between big government and business. The dominant partner of this alliance varied over time and country but tight control was universal.

The new paradigm of Adam Smith had goals completely contrary to that of mercantilism. The goal of economics changed from increasing power of the state and the king, to fostering increased production and consumption of goods for the general population. No longer would it be acceptable to force down wages and standards of living at home in order to export more goods abroad. The unit of analysis, or the idea of who should gain from the economy, changed from the king to the general public. These were radical and revolutionary ideas for this time. The important differences between mercantilism and the new paradigm steamed from the values imbedded in the methodological judgments made by the two dissimilar paradigms. There was no demonstrated proof of inadequacy in mercantilist thinking. Mercantilism was simply asking the wrong question, using the wrong approach, and making the wrong assumption.

Adam Smith was born in Kirkcaldy, Scotland in 1723. His life was orderly and harmonious like the economic world he imagined. He was, however, incredibly absentminded and a noted sleepwalker. He was also highly gifted and studied at Oxford University in England, until he returned to his native Scotland and the University of Glasgow, where he taught moral philosophy. Moral philosophy at that time included natural theology, ethics, jurisprudence and political economy. Economics, as Smith and others of his time conceived of it, was more broadly based than it is today. In fact, the first of Smith's two books, The Theory of Moral Sentiments (1759) was on ethics not economics. But the book that made him famous was the Wealth of Nations (1776). This was a timely book, with a receptive audience. During the time that it was published, market economy was becoming a reality, and the feudal world was breaking down. The rapidly expanding commercial world required a new theory of economics, which justified and tried to explain an economy in which money facilitated the exchange of goods and services. These were the economic practices that were then just becoming dominate. Smith and his Wealth of Nations provided just such a economic philosophy.

Smith believed that the individual pursuit of self-interest in the market would lead automatically to social harmony. Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from the regard to their own interest.” Self-interest and economic self-reliance were regarded as perfectly natural and morally beneficial. Smith regarded self-interest, not as narrowly focused, but as tempered and enlightened by the “social passions” of generosity, humanity and mutual friendship. Many of his followers have ignored these conditions put on the interpretation of self-interest. Their contentions have led to controversy and debate over what Smith’s actual position would be on various different policy issues.

Smith's view held that self-interest and the market lead to social harmony; therefore government had little justification for interfering in economic affairs. A French term, laissez-faire-meaning let alone- came to represent this most enduring of Smith policy conclusions. If the government would provide for the physical safety of its people and enforce contracts and the right of private property, then the market being self-regulating would do the rest. Smith opposed all monopolization (one producer) whether from government or from a private firm.

Smith explained economic growth in the Wealth of Nations, by focusing on the division of labor. The division of the labor was the break down of a job into a number of separate tasks, each performed by a different worker. Skills of labor would increase as the worker concentrated on doing only one thing well, resulting in a growing firm and economy.

If the division of labor started the growth process in Smith's world, capital accumulation kept it going. Capital stock consisted of machines, tools, factories and circulating capital used to pay labor and buy materials. The economy would be able to grow by feeding on the capital accumulating in capital stock. Adam Smith used the concept of natural law as a set of conditions, necessary as he saw it, for the full operations of the market system (sometimes referred to as capitalism). Natural law was used to justify the concepts of profit, capital accumulation, economic growth and private property.

The System of Market Flows

The harmony of Adam Smith’s economic paradigm as it has evolved can be seen in Figure 1-1. The principle actors are the producers, or firms, and the consumers. These actors interact in both the product and factor markets.

Figure 1-1

The product market is where goods and services from the firm are exchanged for money from the consumer. The factor market is where labor, land, capital and risk taking are exchanged for money from the producers or the firm. These markets are the invisible hands that keep this flow of money in balance and thus in harmony. Figure 1-1 summarizes the essentials of the neoclassical paradigm as it has evolved from the time of Adam Smith. Textbooks on microeconomics typically include a couple of chapters on each of these actors, the consumer and the producer, as they interact within the two markets.

One commonly discussed question relating to consumers is how they decide what to buy. It is assumed that in the neoclassical paradigm, consumers have an innate set of desires that along with easily assessable information on good and services guide there buying behavior (demand). Also assumed is that consumers attempt to maximize their satisfaction with the goods and services they buy in the product market, while the firm as a producer for the product market is assumed to maximize their profits under different market conditions. When the factor market is discussed, the labor market is usually singled out for special attention. It should be argued here, however, that all markets are important since they are interrelated. For instance, if the demand for automobiles in the product market is weak, the demand for automobile assembly workers (the factor market) will also be weak. Markets operate as a system.

Smith's economic paradigm views power in the market system as concentrated among consumers. The term given to this concept is consumer sovereignty. This perspective holds that competition among producers leaves them with little power. They must produce what the consumer demands as cheaply as possible, or someone else will. Consumers decide what they want and producers simply respond.

Meanwhile, in the factor market, consumers work because they need the money that will allow them to buy the goods in the product market that will give them maximum possible satisfaction. Satisfaction is found in consuming goods and services only. These two elements of the neoclassical paradigm, consumer sovereignty and consumer satisfaction (for lack of a better term) are major points of contention with some alternative paradigms.

Institutionalists and Neo-Marxists, in particular, disagree with the contention that consumers are all powerful, and firms are powerless. At the present time, in contrast to the time of Adam Smith, many firms are very large and exist in oligopolistic markets (producers are limited to a few). With fewer producers, competition is limited and producers thus have more power to set prices and product quality. Firms also have power over consumers by use of persuasion and the control of information, particularly through marketing and public relations. Few will disagree that this is a factor, but there is a value judgment applied in determining to what extent it is an important element in explaining economic phenomena. The neoclassical paradigm gives it little importance.

Is work undertaken primarily for money? Are there other sources of satisfaction gained from work? Does self-esteem, a sense of belonging, and power motivate people to work? The humanistic paradigm argues strongly that yes, non-monetary incentives are important motivating factors. The neoclassical paradigm de-emphasizes their importance, being that they lie outside normal market values. Again this is a matter of degree, but the required judgment can results in very different theoretical approaches to economics.

The flow diagram Figure 1-1, excludes two elements that are considered very important in alternative paradigms. The first is an environmental factor or any external limits to scale. Spaceship earth, and its resource constraints are not of concern, as they certainly were not during the time of Adam Smith. The problem of ozone destruction and the effects of greenhouse gases could not have been envisioned two hundred years ago. Since this early time, the evolving mainstream economic paradigm has considered such problems as exceptions and not critically important to the market system. The judgment being made here is over the importance given to economic environmental spillover effects (unintended occurrences that negatively effect the environment), not whether these effects, in fact, exist.

The second element that is absent from the economic flow diagram is government. To some extent this absence is a deliberate consequence of Adam Smith's strong belief in the self-regulating invisible hand of the market. Smith's belief was that government should only have a passive role in setting and legally enforcing institutions needed for the market to work. The market was dynamic and more open and democratic than the government at the time of Adam Smith. The argument Smith made was that if government would allow the market to work without interference it would produce social harmony.

In contrast, post-Keynesians and some macroeconomists do not view the market system as so self-contained and self-regulating. The great depression of 1929-1941 is an example of a time when the market system failed. There would be general agreement that the markets failed but unfortunately not for the cause of the failing. Post-Keynesians point to the depression as evidence that government may need to play an active role (spending and taxing) to save the not so self-regulating market. Neoclassical economists, on the other hand, attempt to develop models that make government unnecessary or at least not very important. For instance, the rational-expectation school of thought has been developing models attempting to demonstrate that government cannot affect the economy. In some of their models they hypothesize that the fully informed rational public with advanced knowledge of government policy will change their behavior in such away as to frustrate government policy. The difference between these views is a value judgment over the degree of importance of the government and how much power it has to influence the economy, and the degree by which the market is self-regulating. This value judgment has important consequences for policy makers and economic theorists.

The Traditional/Command/Market Economy

Economics was defined earlier with a series of questions: what will be produced, how will it be produced and who will reap the rewards from production? This definition is very broad. It covers all societies that both produce and consume goods and services no matter how they are organized. The economic organization of societies can be categorized into three types: customary, command and market economies. While they overlap in many societies, they retain certain distinct characteristics.

The Customary Economy

In the customary or traditional economy the answers to the questions of economics are found by reference to continual patterns from the past. Change over generations is very slow, if at all, and patterns in economic behavior are repeated. One’s role in such a society is determined by its customs. While not all-economic decisions can be prescribed by custom or tradition, customs certainly can limit possible economic answers. For instance, in the Middle Ages the institution of inheritance greatly determined one's economic prospects. If your parents were of the royalty, you might become a king or queen. If they were serfs, you would be a serf or the wife of a serf. Given the internal rules of inheritance, marriage was the only manner in which one could move up the hierarchy and improve one’s status in society. Early fairy tales, who date back to these times, attest to these circumstances.

Inheritance is still an institutional rule in our society. It is not as deterministic as it once was, but still significant. Being born into the Rockefeller or Dupont family, for instance, will have quite an influence on your role in society. In traditional societies economic activity is always integrated and embedded in the social, political and religious rituals of that culture. Economics is not a separate or distinct activity in these societies. In our modern society, by contrast, economic functions are usually separate and compartmentalized. This contributes flexibility but also fragility to our social and economic institutions.

Elements of the command and the market organizational structures have, over time, encroached on the purely customary or traditional economic system of organization. Within many early agriculturally based cultures, for example, a centralized political elite rose to implement aspects of a command economy. In ancient Egypt, for instance, pharaohs ordered others to build roads, temples and pyramids, while agriculture maintained traditional, customary structures. Thus, both the command and traditional economic system were employed by society at the same time.

Archaeologists have found evidence of the market system operating in the earliest human societies. Shells and metal instruments have been discovered far from their original sources, providing clues of an early, and at times extensive, trading network. These elements of a market (the exchange of goods) were probably limited to the exchange of surplus goods (what was not needed for subsistence). Thus, evidence suggests that both market and traditional systems operated simultaneously in these societies. However, the transformation to a fuller market system required a higher degree of specialization and trading than existed among early humans. The transformation to a market-based system takes place when the majority of the population specializes and produces for the market with the intent of trading or buying other goods and services. This will be discussed further in a later section.

The Command Economy

The primary feature of a command economy is a centralized form of decision-making. The questions of economics; what to produce, how to produce and for whom, are decided by a central political body. This political body could be a totalitarian dictatorship, an open democratic government, or anything in between. It can be argued that democracy is a matter of degree with the more accessible the information needed to make decisions, and the level of participation by the masses, the more democratic the structure.

Command economics is also a matter of degree. Some form of a market exists in all nations even in a totalitarian dictatorship. Attempts to completely eliminate markets have generally failed. All actual economies are thus a mixture of both command and market systems and are usually referred to as mixed economies. Nevertheless, some economies are guided more by the command of government than others. The Soviet Union before its breakup was the best example of a command economy led by a non-democratic political body. Some also consider democratic Sweden and Norway as having command economies in terms of production. Command economics can be authoritarian, but are not necessarily so. During World War I and II, democracies, including the United States, developed command structures (wage and price control, rationing, etc.) that were more typical of a command economy than a market system. Normally, however, the United States is considered the best example of a full market economy.

There is a second dimension to command or government involvement in the economy. Government can be directly involved in providing the structures to produce goods or services, or it can be only indirectly involved. For instance, the government may only provide financing (usually accompanied by suggestions). In the defense industry in United States, private firms produce and develop most weapon systems used in the arms services. The government’s role is limited to that of a consumer.

Some recent efforts at reform in the United States involve allowing private institutions to provide governmental goods or services, thus, making government involvement indirect. In various proposed reforms of the educational system, for instance, new institutions have been introduced to replace the government's direct role. Charter schools, choice schools and the use of private vouchers are examples of such an effort. In all cases, however government remains both the financial support and the final overseer of the total process of education.

In many countries over the last fifty years, governments have acquired the ownership of firms. Many such countries are now selling these firms to private investors, these reforms efforts are referred to as privatization. Although privatization reduces government’s direct involvement, the government is usually compelled to seek adequate remedies if it produces unforeseen negative consequences.

Figure 1-2

In Figure 1-2, the degree of dependency on the market, verses on command, is shown as a continuum with all real economies being in the middle and a mixture of both. However, all national governments see themselves as the final arbiter of the system and as responsible for the economic well being of its citizens.

One important hypothesis from the institutionalist paradigm is that nations placed at the continuum's end points (near the extremes of market or command dependency) are in untenable positions in the long term. Inevitably, these nations face problems in the real world and will move to the center to find a more effective balance between market and command control of their economies. This explains the rapid movement of Eastern Europe and Russia, and its former republics after the breakdown of the Soviet Union, to market based economies. In the early eighties, China also introduced market reform, but unlike other nations it hasn’t attempted to introduce democracy (at least as of the year 2001). Marxist Chinese ideologies at first tried to block the movement to market reform, but as the economy has failed (from the 1970’s and on through the 1980’s) ideology was blamed and was finally pushed aside. The United States lies on the other end of the scale, closer to market dependency, however, how far toward this extreme end of the spectrum is an open and controversial question).

The pressure of real world problems- such as the environment, health care, education and poverty - in general tend to require more generous governmental involvement in various forms. Government is particularly needed to take a leadership role if nothing else. The dominant conservative ideology of the United States tends to be both anti-government and pro-market. These conservative forces, which controlled the presidency throughout the 1980s and early 1990s, were and continue to be alarmed by the slow and steady drift toward increasing governmental power. Reagan, a very conservative president, was proud of his efforts to reduce governmental taxing and spending and of his attempt to roll back governmental regulations. However, in retrospect it appears, he only succeeded in rolling back taxes, while increasing spending, which resulted in a large structural government deficit (which lasted till the late 1990ies). Efforts to disrupt governmental regulatory efforts have not overall had much impact. The ideological view that government is actually the cause of the problems facing the nation continues to be held only by a small minority within the United States and worldwide.

The contention is made by the political left that the United States will be forced to move toward increasing government involvement in the economy in order to confront its problems, thus abandoning the undertakings of President Reagan in the 1980s as a futile historical effort. This outcome should not be considered inevitable in the United States given the power of the conservative right. This is a political decision that has direct economic consequences. Forecasting the future is a formidable task particularly in a constantly evolving political and economic system.

Conservatives have argued that government encroachment on the market is a threat to democracy and freedom in general. They make a direct linkage between the existence of free markets and the decentralization resulting from markets, as necessary to sustain democracy. However, Europeans, and in particular Scandinavian countries have maintained over an extended period of time, elements of both a healthy participatory democracy and a relatively intrusive governmental sector (compared to the United States). In Sweden, for instance, government is responsible for providing such things as free health care, and higher education, which are paid for with higher taxes. It appears from their experiences that greater governmental involvement is not necessarily a direct threat to democracy.

These differing perspectives on government represent one of the principal divides between what is considered conservative and liberal in the modern world. However, it has not always been that liberals support government intervention and conservatives oppose it. Definitions have changed and evolved over time and place. Liberals have been traditionally opposed to the status quo, whatever it may be. Liberals or radicals in the Soviet Union, before the changes of 1992, were pro-market and anti-government; while in the United States they tend to be anti-market and pro-government. At the time of Adam Smith, the classical liberal was pro-market and anti-government (relatively speaking) which made Smith a down right radical for his times!

Economics was thus founded on the profound and liberal (for the times) belief in the power and importance of the market. However, because classical liberalism has dominated institutions and economic thought over the last two hundred years, it, in fact, has become the status quo. So that now in the twenty-first century, liberals support greater government involvement, not less, and conservatives defend the market and attack government. Benjamin Franklin's motto, "the government that governs best is the one that governs least" was a liberal slogan, but has evolved into a deeply conservative one.

Government can be viewed as belonging in the category “us” or “them”. One can discern the bias and perspective of a speaker by which of the two words he/she chooses to use in his/her rhetoric. The choice of which word to use thus relates to this fundamental disagreement in economics. If government is viewed as “us,” it is seen as an integral part of our community. Its decisions and direction are our decisions as a community and society. We are both responsible for its decisions and are obliged to accept them as part of the wider community. Lincoln’s stirring words describing a government, “of the people, by the people and for the people,” captures the essence of this view. An open participatory democracy at the local, state and federal level gives meaning to those words and creates a community out of a collection of individuals. The greatest expression of this, unfortunately, takes place during periods of warfare. Individuals are asked to risk their lives by evoking the responsibilities they have to their country (government) and their community.

Government can also be viewed as “them”. In this imagery there is no identification with the larger unit. A nation is just a collection of individuals and households. Government is needed to keep peace and form some sort of order, but it is viewed mostly as an outside intruder. Government just imposes constraints on individuals and limits individual’s freedoms. At the time of Adam Smith, most country's governments were controlled by a small group of wealthy aristocrats who set state policy to protect and enhance their positions. The market for Adam Smith was a means of giving power to the people, bypassing the aristocracy and its government. This early hostility toward government still prevails in some of the more conservative views of mainstream economics, despite the fact that the power of the aristocracy has long since disappeared.

To some degree the neoclassical paradigm in economics has adopted this view, that a nation is just a collection of separate individuals or households. Government is simply a necessary evil, required to keep the peace, provide order, enforce private contracts and provide a few (public) goods not normally available in the markets. Alternative paradigms tend to see government through the lens of participatory democracy, as a form of a community and thus, with a life of its own. Government is “us.” Individuals are important; but the community as a community is also important. Individuals are social beings that operating as a community, and government is needed to express the values and provide direction for that community.

The Market Economy

Under a market economy the questions of economics-what to produce, how to produce it, and for whom- are answered by the market. This market is impersonal, it captures the interaction of all participants, therefore there is no one to blame or accept credit for it’s functioning. This is in sharp contrast to the command economy where there is an authority directly responsible. Since all real economies are mixed, government always has to accept some responsibility even in a largely market economy. Regardless of what happens, or who is controlling what, the government will take the blame or praise; this seems to be a universal characteristic in any mixed economy, which is seen often at the ballot box or in political violence on the streets.

The Neoclassical Market Paradigm

The neoclassical paradigm is primarily concerned with market exchange and market based answers to basic economic questions. Many economists, operating with this paradigm prefer a narrow definition of economics that relates only to interaction found in the marketplace. The primary question thus becomes, how does the market choose to answer the questions of economics under conditions of scarcity?

Under this paradigm economics is the study of how people and firms make choices within the market, under conditions of scarcity. Scarcity is made up of two elements. The first is the scarcity of the factors of production, or anything used to make goods and services. To make a radio, for instance, what is necessary? First, labor to put it together; second, the raw materials to put together (referred to as land, historically); third capital- the machines and tools necessary for its assembly; and fourth the entrepreneur that conceives it, organizes it and takes the risk to produce it. All four are necessary and are scarce, some more so than others.

The second element is the consumer’s insatiable appetite for goods and services. Needs and wants are considered virtually unlimited. As a part of human nature, humans have a limitless set of desires for the goods and services exchanged in the marketplace. The condition of scarcity results from the limits on the availability of factors of production to feed our insatiable wants. Within the paradigm scarcity is considered the basic economic problem facing all societies.

The Alternative Paradigm Perspective on the Market

Other paradigms have different perspectives and tend to disagree with the neoclassical market paradigm's basic definition of economics. Both the humanistic and the institutional school are strong critics. They argue that the consumer's appetite for goods and services are not insatiable or unlimited, but are, rather, subject to influence or management. The analogy of the collusion of an unstoppable force (unlimited wants) and a brick wall (limited factors of production) is false. The unstoppable force can be redirected and managed. Desires stimulated by imagery in advertising, for instance, demonstrate the malleability of consumer's demand for goods and suggest that demand is to some extend artificially created. Choice and the fulfillment of satisfying our wants can be broadened and redirected into a dimension outside the market. Traditional cultures based on a stable and static resource base and with primitive technology usually direct members into accepting limits on wants and possessions.

The Control of Information

Among many fields of study there is an agreement that individuals are striving for something. During each day individuals are confronting problems, dealing with issues and making decisions with limited and uncertain information. Everyone is seeking and striving for something, if nothing more than entertainment or amusement. The alternative paradigms emphasize that society’s institutions manage the availability of information. By controlling information, our insatiable needs and wants are changed. This manipulation maybe a planned effort such as that effort to reduce the public acceptance of smoking or as very commonly is the case, the result of numerous institutions making individual decisions. Institutions such as the mass media, educational institutions and governments, for instance, all attempt to manage and direct our needs and wants by controlling information. Information reflects the institutions' perspective on whether a product or service is good or bad, desirable or undesirable and thus influences the level of desire for this product or service. Advertising is certainly one of the most obvious efforts in this regard, but because it is so obvious it probably is one of the least effective means of influencing and controlling information.

In the Soviet Union before Gorbachev, the government controlled the public through the use of propaganda. Pointedly, the government created a ministry of propaganda specifically for the purpose of controlling the mass media. Starting early in their regime, the Soviets had a monopoly on the dissemination of all information. However, increasing educational standards, and independent information from the West, weakened and broke down this system of control, particularly in important educated urban centers. This was certainly one important factor in the demise of the communist system in the Soviet Union. It is easy to see through this example that control is possible through the management of information. In the Soviet Union state control succeeded in suppressing and limiting public demands for some seven decades.

In the West, a state monopoly has never controlled the spread of information. Instead, there are many competing institutions supplying information, resulting, in some areas, in an information overload. Some of the information is conflicting, such as advertisement for different competing brands of products. In other cases, information from a variety of sources is self-reinforcing. If there is enough support among different sources, the information can become fact and part of the accepted view of society. In the United States, for example, the general public, only accepted the health dangers of cigarettes after a coalition of government, medical and educational institutions developed an effective mass educational campaign. The competing message of the tobacco industry was overwhelmed by the consensus created by the public health campaign of these institutions. Tobacco companies objected to this effort as a propaganda campaign.

In the west, there is no centralized planning, yet through the way in which information is made available, society is being managed. In some cases, the flow of information on a given topic is overwhelming (think of the amount of information provided about the Olympic games, the World Cup, or the Super bowl), but in other cases, information is harder to obtain.

Information provided through advertising usually conflicts with other information, and thus may not be effective for selling the products of an individual firm, but given the total of all advertising, the reinforcing message is that buying something is a way to solve problems. "If you cannot make friends, try using a mouthwash; if you want to be one of the guys, drink beer, if you want to impress your friends, buy a new sports car or SUV." The message to buy is universal, and the result is a consumerist society. In such a society, information that cannot be packaged to sell a product or service is not readily available. If it were, however, it would be overwhelmed by the commercial messages intent on selling goods and services.

Humanist Economic Paradigm

In the tradition of the humanistic paradigm, human needs are put into categories (such as in Maslow’s hierarchy of needs). The contention is made that not all needs are the same. The first and most basic needs are those concerned with physical survival, such as food, clothing, and shelter. One step higher, are the social needs, including the need to belong, and the need for a healthy self-esteem. Highest in the hierarchy is the need for self-achievement.

For the alternative economic paradigms, the most important assertion is that these need-levels are not interchangeable. Goods and services, which are effectively supplied in the market system, are essential for the fulfillment of basic survival needs. Society cannot substitute products, which satisfy higher-level needs, for goods and services that meet basic needs. The old Soviet Union attempted this substitution, but discovered that an excess supply of arms and weapons will not satisfy hunger.

Goods and services supplied by the market are likewise not effective in fulfilling social or achievement needs. Nevertheless, conspicuous consumption goods do supply some status to certain social groups. And status certainly fills a social need. But in general, in the United States in the modern period, status is a product of what we have accomplished and achieved.

Among the affluent middle and upper middle classes, basic survival is not an issue, social and achievement needs are dominant. This becomes a marketing problem for the firm. The question is how to entice affluent consumers to buy more goods and services to satisfy their social and higher level needs. The answer that marketing has given us, is to try and associate in the consumer’s mind, the product and the fulfillment of a need-- to associate drinking beer (a particular brand of beer) with being one of the guys, or to associate a new car with status and success. Unfortunately, such efforts will most likely have only short term and limited effects on the consumer. And its effectiveness will probably diminish as consumers accumulate an increasing number of goods and services.

The consequence of this logic is important. It calls into question the value of increasing the production of goods and services targeted at upper and middle-income groups. This viewpoint sees the market as a machine that is effectively producing goods and services, but actually satisfying the consumers less and less (diminishing returns). Ironically, the consumers that could most benefit from market activities, those still struggling to satisfy their basic human needs, are mostly left out because they are poor and have no means of payment.

The gross domestic product (GDP) is the value of all goods and services produced in a year in a given country. For humanists, GDP is not an effective measure of what really satisfies needs in the developed world. Economic growths have less and less meaning, because the most predominant needs (social needs and self-achievement needs) are not being satisfied through the growth in economic activity (buying and selling). The prevailing needs of the developed world can be met in numerous ways; for instance, by spending more time raising healthy children, working in the house or in a garden, and by volunteering outside the home. However, with our strong, culturally based work ethic, non-retired adults usually seek out a work environment. Belonging to a work environment and achieving in such an environment is what our society values.

Therefore, ironically, the work environment provides the individual, more opportunities to fulfill self-achievement and social needs, than the goods and services that are being produced. Work provides one with an identity, a sense of belonging and, if successful, a feeling of achievement. The need to succeed, to belong, and to achieve becomes much more important than the goods and services (above some level) that can be consumed from the wages received. The work alcoholic is an extreme example, but not a rare case, of this pattern of behavior. Although money income may not (above some level) be the primary motivating factor, it retains a profound importance as an indicator of success. It is assumed that those who are successful (and achieve) are compensated for it.

In the public view, the primary negative consequences of a recession are the job losses and not the losses of goods and services whose production has slowed. Losing one’s job is a shock to the ego, to the self-esteem and to a sense of achievement. This is true even if another job is readily available. The goods and services that are not produced, and the resulting waste of resources (labor) that are not utilized are not of public concern. They would be of concern, however, if the nation was at a low level of subsistence and needed basic goods and services to survive.

The views of this humanistic paradigm, thus, turn the neoclassical paradigm on its head. A healthy growing economy is seen as important in both paradigms, but for vastly different reasons. The neoclassical model views the market as a provider of goods and services that, in turn provide satisfaction. Work is seen, as a necessary evil, required to produce goods and services. The humanistic paradigm reverses this process by considering goods and services as irrelevant beyond a basic-needs level, and views work itself as the source of satisfaction. Scarcity for the neoclassical paradigm means the lack of adequate goods and services given unlimited wants. For humanists there is a scarcity of good jobs or opportunities that can satisfy higher level needs. Goods and services beyond some level become increasingly irrelevant.

Socialism/ Capitalism

Up to this point, we have avoided these two terms because they are often accompanied by strong emotional sentiment. These terms are linked to the polarizing effects of a history of global conflict between two world ideologies. In the United States, capitalism has been more or less considered good but socialism is definitely considered bad. In the old Soviet Union, their communist version of socialism was considered good, but capitalism was bad. In this simplistic world, capitalism has won over socialism with the collapse of the Soviet Union in 1992 (it certainly has won over communist’s centralized planning state of Lenin and Stalin.). However, the real world is not quite this simple, and is certainly opened to alternative interpretations.

The widely accepted definition of these two terms involves the ownership of the factors of production. The factor of production includes land and natural resources, labor, and capital. If ownership of the factors of production resides in the state, it is socialism; if otherwise, it is capitalism and there is no middle ground. Some Marxist, in particular, supports this definition. They emphasize the importance of the common market features that are a part of all market based capitalistic societies, such as the all-consuming drive for profit on the part of the capitalist (owners of capital).

Other paradigms emphasize how real operating economies have evolved over time and across place. Using the view of an evolving and changing economy, capitalistic societies of the eighteenth century when Karl Marx wrote, might be considered very different than more modern western capitalist economies. There can be a middle ground, and, in fact, real-life economies have elements of both socialism and capitalism.

There is some value in both of these views. In our earlier discussion of the command and market economy a continuum was used (Figure 1-2) to show the relative standing of various economies. This same continuum can be used if one avoids the either/or categories, and accepts that there are degrees of socialism/ capitalism. In a command or socialist economy, the government will have ownership of effective control over the factors of production. The government will thus be in a position to answer the basic economic questions- what to produce, how to produce it and for whom. In contrast, in market-run or capitalist economies, individuals (non-government units) who own the factors of productions make these decisions. Ownership and the right to own private property are key concepts. They entitle one to use property (the factors of production) as one chooses, and to trade these rights, as well as deny use of them to others. The right to own property is established and enforced through a complex system of laws. These laws can be and are changed.

There are two important features of capitalism that change and evolve over time. The first is the level of concentration of the ownership of factors of production. With the elimination of slavery, labor is truly the most democratic and evenly distributed of the factors. We all own our own labor. Property, natural resources, and capital goods are much less evenly distributed. The effects of capitalism on a society vary depending on what extent capital, property, and natural resources are owned and controlled by the few (as in most Central American Republics) or spread out among the middle class. In the United States, approximately 16% of the top wealth holders own the vast majority (90%) of its land, resources and capital. The distribution affects many features of a capitalist society such as the types of goods and services consumed (luxury goods or not), the potential for individual advancement, as well as the concentration of political power.

A second telling feature of the capitalist systems is the level of disparity between who owns the factors of production and who controls it. Property rights are never absolute and they often change over time. Control over the factors of production does not always follow ownership. The people of the old Soviet Union, legally as a whole, owned all the factors of production, but in reality control was restricted to an elite privileged class of communist who acted much like the old aristocracy (who they had replaced). Ownership rights of the large corporate firms fall legally to the firm's stockholders. Yet, due to dispersed ownership among stockholders (in most cases) and the difficulty and cost of getting independent information, real life control over firms is given to corporate officers, usually the chief executive. Other stockholders may exercise some control if family owned, or for a large public corporation when is it under stress. Trustees of large investment funds (such as pension funds) can exercise such control. The principle point here is that ownership is only a legal right and is not a synonym for real-life control. Control is where the actual exercise of power resides. The terms capitalism and socialism refer to both the fixed legal right of ownership and the true-life level of control.

As mentioned earlier, ownership is a legal right but it is not absolute. Ownership gives the right to use property as one chooses, only given that one does not harm others. This last condition is constantly being revisited and reinterpreted. Government, through the power of regulatory oversight at the federal, state and local levels, is constantly making adjustments.

As our population becomes increasingly concentrated in smaller areas, particularly in cities, spillover or externalities are more common. Spillover or externalities are unintended and unexpected consequences of market activities. Externalities produce negative effects that, in many cases, result in restricted property rights. This has proven to be particularly true as our ability to understand the negative consequences of our actions has increased.

Examples are easy to find. Smoker’s rights are restricted because of an increased understanding of the effects of smoking on passive smokers. The rights of farmers to drain wetlands to make room for crops are being restricted to protect the habitat of plant and animal species, some of which are threatened with extinction. The rights of timber companies to cut down old growth trees in the northwest US is being restricted to protect another threatened species, the northern spotted owl. These are just some of the better-known environmental regulations.

For the firm, non-environmental restrictions are just as numerous. Large governmental agencies at the federal and state level have been created to enforce and regulate the activity of firms. Their right to advertise (and mislead the public) has been restricted. Firms cannot hire and advertise for white male employees only, nor can they fire an employee without cause, without the risk of being forced into court. The regulatory decisions issued by federal executive agencies are very detailed and numerous.

These federal and state regulatory efforts, along with governmental spending and taxing decisions are constantly modifying the control and rights of ownership. Thus, capitalism as actually practiced is not static but changing. Given this, many primarily capitalist economies can be considered a fluid mixture of both capitalism and socialism. Democratic socialism, where the government owns all factors of production, does not exist in the real world today, but if democratic socialism is used to refer only to a dominant governmental sector in a fluid mixed economy, it describes most well established modern economic nations.

With the demise of most totalitarian socialist governments, ideology will hopefully play less of a role in determining the balance between markets and government. There is hope that as totalitarian socialism is no longer a threatening ideology to the West, the criteria governments use to decide if they should intervene in the economy, will change from being based on ideology to being based on pragmatism. If this becomes the case, the terms socialism or capitalism will have lost their ideological power.

GLOSSARY OF TERMS:

Adam Smith (1723-1790) - The founder of modern day economics was Adam Smith with his publication of An Inquiry into the Nature and Causes of the Wealth of Nations in 1776

The Newtonian worldview- A worldview emanating from the natural sciences that assumed that history, human behavior and economics would all be governed by natural laws. These laws would be harmonious and measurable. This view had an especially great impact, directly or indirectly, on early economics.

Mercantilism- An early economic system before Adam Smith, where government managed the economy for the purpose of increasing national wealth and the power of the state.

Laissez-faire- Meaning let alone in French, this term came to represent the idea that the government would provide only for the physical safety of its people and enforce contracts and the right of private property, and the market, being self-regulating, would do the rest.

Division of the labor- The break down of a job into a number of separate tasks, each performed by a different worker. Skills of labor would increase as the worker concentrated on doing only one thing well, resulting in a growing firm and economy.

The product market- Where goods and services from the firm are exchanged for money from the consumer

The factor market- Where labor, land, capital and risk taking are exchanged for money from the producers or the firm

Consumer sovereignty- The view that competition among producers leaves them with little power. They must produce what the consumer demands as cheaply as possible, or someone else will.

The customary or traditional economy- Where the answers to the questions of economics, what to produce, how to produce and for whom, are found by reference to continual patterns from the past.

The command economy- Where there is a centralized form of decision-making and the questions of economics: what to produce, how to produce and for whom, are decided by a central political body.

Privatization- Reforms under which countries sell firms that the governments has acquired to private investors

Factors of production- Anything used to make goods and services, land and natural resources, labor, and capital

The market economy- Where the questions of economics-what to produce, how to produce it, and for whom- are answered by the market

The condition of scarcity- Results from the limits on the availability of factors of production to feed our insatiable wants. Considered the basic economic problem facing all societies by the neoclassical market paradigm.

The gross domestic product (GDP)- The value of all goods and services produced in a year in a given country

Socialism- Using a strict definition it refers to economies where the ownership of the factors of production resides in the state. It can also refer to countries that have a high level of government control over the economy - where the government answers the basic economic questions of what to produce, how to produce it, and for whom

Capitalism- An economic system where capitalists own the factors of production and the basic economic questions of what to produce, how to produce it, and for whom, are answered by the market

Spillover or externalities- Unintended and unexpected consequences of market activities