INTRODUCTION: THE ECONOMICS OF CIVILIZATION
The rise of civilization among humankind is inseparable from advances in technology, industry, and commerce. The inventions of tools and fire enabled human beings to improve their nutrition and general physical well being. In time, some individuals were found to be better at working flints to produce spear heads and scrapers and were allowed to concentrate on this task. It was discovered that certain locations had greater concentrations of flints, and family groups would move to these locations and stay until they had collected all the flints that they needed for the time being.
Through such means, the productivity of family groups multiplied, and, they found that they could support older members who were no longer productive. These older members sat around the group fire and told stories about their experiences. In so doing, they became humankind’s first teachers and transmitted the hard-won experience of the group to succeeding generations.
After the introduction of agriculture, domestication of animals, and settlement into communities, there arose a need to account for how much of a community’s produce could be consumed, how much should be set aside as seed for next year’s planting, and how much could be used in barter with other communities to secure what the community could not produce itself. This need was met by the invention of a series of clay tokens of various distinctive shapes and sizes with pictographic symbols for wheat, barley, cattle, sheep, and so forth, and with a system of incisings and punch holes similar in concept to Roman numerals. In time, pictographs yielded to the ideographs of early writing systems. From this crude beginning of record keeping for accounting purposes flowed all writing and all mathematics.
As time went on, urban centers developed, and craft specialization and mass production began to appear. The invention of the potter’s wheel, for example, led to the development of the pottery industry. With the consequent increase in productivity, more time could be devoted to artistic decoration. Today, the evolution of pottery shapes and decoration that took place allow archaeologists to distinguish between ancient cultures.
While the amalgamation of economic activity often led to great wealth, the frequent by-product was poverty and conflict. For example, in England during the reigns of the Plantagenets, the production of wool began to emerge as a major source of national wealth and enabled England to enter international trade in a significant way for the first time. By the sixteenth century in the reign of Queen Elizabeth, England enjoyed a mini-Industrial Revolution based on the introduction of the printing press and other inventions that helped to produce additional wealth and promote the explosion of culture and spirit of adventure that so marked the Elizabethan era. At the end of the century, however, Queen Elizabeth made a tour of her kingdom only to return with the complaint: “Paupers are everywhere!” Just a hundred years earlier, rural England consisted largely of yeomanry tilling their own lands in almost idyllic fashion. Wool, however, had continued to grow as the primary source of wealth, and more and more land had been devoted to the grazing of sheep. Dispossessed yeomanry roamed the countryside. There were so many of them that the suggestion was made that they should be confined to institutions named: Houses of Terror.
This series of readings deals with the creation of wealth and the poverty and conflict that so often seem to accompany the wealth-creation process. In Part I, Evolution of Commerce and Industry, the series begins with an extract from Adam Smith’s Wealth of Nations, a breath-taking world view of political economy that was written over a period of ten years and published in 1776. His treatise is largely a view of pre-industrial capitalism; the Industrial Revolution which was to become the driving force for the creation of wealth did not begin to manifest itself until around 1780. Even so, he did perceive major elements of the Industrial Revolution: the division and specialization of labor, the substitution of machine power for human power, and the aggregation of workers and machinery in factories.
The Industrial Revolution took hold first in Great Britain in the latter half of the eighteenth century. Key elements of the revolution such as the use of interchangeable parts and the factory system appeared earlier on the Continent of Europe but were isolated events and not imitated. In Britain, in contrast to the Continent, conditions were ideal to permit operation of Adam Smith’s “hidden hand” of the market place to force the spread of innovations by imitation and to motivate constant improvements.
In the late eighteenth century, after centuries of nation building first under the Plantagenets and then the Tudors, Great Britain enjoyed a larger free-trade area operating under one rule of law than did any area on the Continent. Major advances in agriculture and in mechanization, especially in the textile industry, already had taken place. Perhaps crucially, out of centuries of conflict over their rights as citizens, the British had developed a fundamental sense of “fair play” in their relations with each other. As one consequence, by the middle of the eighteenth century, there already had developed a lively, pre-industrial capitalism and an embryonic middle class which promoted the rapid spread of new innovations throughout the economy. In time, free internal markets, a common rule of law enforced by a strong national government, and a sense of fair play were to become essential ingredients of modern democratic capitalism.
In 1790, the year in which Adam Smith died, Alexander Hamilton, the first Secretary of the Treasury of the United States of America, began to apply advances in the theory of political economy on a grand scale. In a series of reports to the new Congress of the United States, he proposed a number of actions designed to strengthen the power of the national government and promote a free internal market with a readily acceptable medium of financial exchange under one rule of law for a nation that eventually would achieve continental proportions. Two of these reports, the Report on the Bank, in which Hamilton deals with the problem of how to promote free internal trade throughout the new United States, and the Report on Manufactures, in which Hamilton argued for the industrialization of the United States to promote its well being and make it a better competitor in the international market place, are extracted in Part I.
Part I of these readings concludes with an extract from The National System of Political Economy by Friedrich List that was published in 1841 and based in large part on an unpublished work written in 1837. List was a native of Germany, a minor civil servant and politician in Germany, an advocate of academic reform, and a professional lobbyist for free trade among the several, independent states of pre-modern Germany. He spent most of the years from 1825 to 1832 in political exile in the United States where he absorbed and advanced Hamilton’s ideas for protecting and promoting the development of the industrial powers of underdeveloped countries such as the United States and Germany were at that time. Whereas Adam Smith, Karl Marx, Thomas Jefferson, and, indeed, most of the leading political and economic thinkers of the late eighteenth and early nineteenth centuries seemed to dread the development of an industrial-urban society, List believed that development of such a society would lead humankind to new heights of achievement in the arts and sciences and a better way of life. Therefore, his work focused on how best to achieve this end.
Part II focuses on the Emergence of Industrial Capitalism. The first reading is extracted from: Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, by Joseph A. Schumpeter. Schumpeter emphasized that capitalism depends on the availability of credit and negotiable instruments which is consistent with Alexander Hamilton’s views; clarified the importance and role of the entrepreneur which Adam Smith perceived only vaguely; argued that entrepreneur-driven innovation was the source of economic growth, that technological innovations such as the steam engine came irregularly in bunches, and that, consequently, the business cycle with its periodic recessions and depressions was a natural outgrowth of the capitalist process. The second reading is extracted from John Maynard Keynes’ General Theory of Employment, Interest, and Money. Keynes focused more fully on the operation of the business cycle than did Schumpeter and on how governments might utilize fiscal policy to control its excesses, especially depression. As acknowledged by Thomas Hood’s poem, “Song of the Shirt,” and documented by extracts from Upton Sinclair’s The Jungle and Jane Addams’ Twenty Years at Hull-House, which complete the basic readings in Part II, the emergence of industrial capitalism upset the balance of forces described by Adam Smith much to the detriment of the workers employed by the new industrial combines.
Part III provides extracts from two key documents produced by the Socialist Reaction to Industrial Capitalism and its impact of on workers and their families: Karl Marx’s and Frederick Engels’ Communist Manifesto, and V.I. Lenin’s The State and Revolution. The divisive impact produced by industrial capitalism, which is documented by Sinclair in The Jungle and Addams in Twenty Years at Hull-House, produced an enormous anger in people like Marx and Lenin, both of whom were born into enlightened, middle-class families; Marx’s anger leaps at the reader from the pages of the Communist Manifesto. Such people felt that they had to find a way to get back at a system that was producing so much harm.
New names had to be invented to describe such people. In the beginning, there was no clear definition of what it meant to be a communist, other than someone who was upset by the impact of industrial capitalism on the working class.
Marx felt that, because capitalists were so driven by the competitive logic of capitalism to succeed at all costs and class- ridden societies of Europe were so corrupt, industrial capitalism would collapse of its own weight. Lenin was not so sure and believed that professional revolutionaries should be prepared to push the tottering, capitalist edifice into collapse if necessary, especially in Russia.
Other people, such as Pope Leo XIII, Eduard Bernstein—a contemporary and compatriot of Marx and Engels,—and, much later, Friedrich August Hayek, whose writings are extracted in Part IV, Search for a Middle Way, believed that some middle ground must be found between the rapacious greed of unbridled capitalism on the one hand and the total destruction of society as it was then constructed that Marx and Engels advocated.
In 1891, Pope Leo XIII issued his famous encyclical: Rerum Novarum (Of New Things). In it, he directly challenged Marxist Socialists on their principal goal: the overthrow of current states to establish a state of the proletariate. Instead, he insisted that a way should be found to reconcile the differences between workers and capitalists brought on by industrial capitalism: the very thing that Marx, Engels, and Lenin did not want to see happen.
To help achieve this goal, which he felt was urgent, Leo set forth certain principles that he felt should be followed, including most especially the right of every person to own private property. He outlined the roles that he expected workers, capitalists, and the state to play, with guidelines for their individual behavior. To help redress the balance of power between workers and capitalists, he specifically urged the formation of labor unions.
In 1895, Eduard Bernstein, who had been a compatriot and collaborator with Marx and Engels, repudiated Marxism. In Evolutionary Socialism, which was published in 1898, he offered his views of why Marx’s vision of how capitalism would collapse of its own weight would not come true and why socialism as a political movement should work within the system to make it more democratic: indeed, his goal could be characterized as democratic socialism as contrasted to democratic capitalism.
Personally, Bernstein did not feel that he could forecast the final form that socialism would take and concluded instead that he should concentrate on ensuring that socialism was moving in the right “direction.” His instinct was that socialism should work toward securing nationalization of key industries: the path that socialism took in France and Great Britain. However, to him, the key goal was for labor to secure a working partnership with capitalists, and the modern German practice of granting membership on the boards of directors of German companies to labor representatives would seem partly at least to satisfy Bernstein’s goal in this regard.
In any event, after Bernstein’s repudiation of Marxism, socialism appears to have taken a distinct and separate path from Marxism. On the whole, it did seem to work within the system to secure its interests in society.
In The Road to Serfdom, which was published in 1944, Friedrich A. Hayek argued that socialism required “the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of ‘planned economy’ in which the entrepreneur working for a profit is replaced by a central planning body,” whereas capitalism assumes “that, where competition can be created, it is a better way of guiding individual efforts than any other,” which was Adam Smith’s belief. He believed that capitalism—or liberalism as he called it—had not had an opportunity to complete its development and prove itself, and that the states of Europe were moving rapidly toward centralization of direction of economic activity, “largely because most people . . . believe[d] that it must be possible to find some middle way between ‘atomistic’ competition and central direction.” In reaching this conclusion, he anticipated the nationalization of key industries and development of welfare states after World War II in Great Britain, France, and other continental nations, which would bring into reality Eduard Bernstein’s vision of democratic socialism.
Hayek, however, did not believe that such hybrid mixtures of socialism and capitalism would be viable, and events would seem to bear him out: by the latter part of the twentieth century one country after another in Europe began to privatize nationalized industries and make retrenchments in their welfare programs. Even so, there remained considerable resistance to the idea of pure, raw competition.
To Hayek, the solution to this dilemma lay in establishing what he called “the Rule of Law” in which individuals would be free to pursue their own desires as long as the they stayed “within the known rules of the game.” These rules could include without harm to the potential benefits of competition such things as environmental standards, rules of commerce, even welfare support for individuals in difficulty as long as it did not become too extensive.
Even with the trend away from democratic socialism in the latter part of the twentieth century toward what might be described as democratic capitalism, a number of questions remained: was it still possible for Karl Marx’s view of the evolution of capitalism to come to pass?; could Friedrich A. Hayek’s concept of capitalism bounded by a Rule of Law offer a reconciliation of the interests of capital and labor?; How could labor’s interests be protected in a capitalistic system?
Complicating the task of answering these questions are the age-old problems of Poverty and Wealth which have taken on new dimensions in modern, industrial societies. Part V offers three readings that explore Issues of Poverty in a Modern, Industrial Society in which the production of goods and services is a vast amalgamation of many specialized elements, and in which people must have cash to procure their food, clothing, and shelter because individuals in general no longer have the capacity to produce such needed items on their own. The first reading is extracted from: The Other America: Poverty in the United States by Michael Harrington who was the first writer to bring the plight of people who do not have enough cash to purchase their daily needs to the attention of the public at large in a meaningful way. The second reading is extracted from: By Little and By Little: the Selected Writings by Dorothy Day who in a long career as a writer for The Catholic Worker among other activities anticipated the themes of Michael Harrington and documented what only can be described as Third-World conditions in the in supposedly advanced economy of the United States. The last reading is a short story, I Stand Here Ironing, by Tillie Olsen that captures poignantly the plight of a single mother who could not help her daughter at critical moments in her development because of the necessity to work and bring in money to feed and chlothe them. When the mother turned to the social welfare system for help, the system did more harm than good.
Part V explores Issues of Wealth in a Modern, Industrial Society in two readings. The first reading is extracted from Thorstein Veblen’s The Theory of the Leisure Class. Veblen re-examined the fundamental assumption that economic man is a rational being who constantly seeks to better his own self-interest. He concluded that, because the accumulation of wealth is so important as a sign of success in an industrialized society, an industrial society cannot be satisfied short of achieving industrial efficiency: a very different understanding of why societies achieve industrial efficiency than the one advanced by Adam Smith.
The second reading is an extract from The Gospel of Wealth by Andrew Carnegie. As a consequence of his sale of Carnegie Steel in 1901 to J.P. Morgan for 480 million dollars, Carnegie probably had more liquid, personal, financial wealth than any other person in his day which made him very conscious of the role that wealth played in people’s lives in a modern, industrial society. He argued that the lever of individual wealth was important in achieving social progress and as a motivation for personal endeavor. He believed, however, that the creators of great personal wealth should give away most of it in their lifetimes and work just as hard at ensuring that it went to worthy causes as they did in creating it. He especially felt that wealthy parents should provide for a proper upbringing of their children, including a college education, but otherwise not give them much in the way of inherited wealth. He wanted the children of wealthy people to feel many of the same motivations that their parents felt. Friedrich List certainly would have understood Carnegie’s concern over preserving the personal productive powers of future generations and not allowing wealth to become sterile as it so often does in later generations of wealthy families.
In Part VI, extracts from Barbara Ward’s The Rich Nations and the Poor Nations; Mahatma Gandhi’s Sutras, and Thomas Malthus’ Essay on the Principle of Population, problems of the developing nations are brought into focus. Ward proposes major efforts to stimulate economic growth in those countries most susceptible to effective assistance. Gandhi proposes the creation of spinning as a cottage industry in villages throughout India. Malthus warns of the tendency of population to outgrow the means of subsistence.
The final part of these readings, the Ascendancy of Democratic Capitalism over Marxist Socialism, contains two readings. The first is extracted from a set of remarks to the students and faculty of Moscow State University on May 31, 1988, by Ronald Wilson Reagan, President of the United States, on his last summit visit to the Soviet Union. His policies as president had done much to hasten the collapse of Marxist socialism, which by the time of his trip was foreseeable. In his remarks, Reagan speaks of the on-going technological revolution that is a constant hallmark of capitalism, the new freedom of the mind that this revolution has made possible and demands if progress is to continue, the importance of entrepreneurship to continued growth, the need to minimize the interference of government bureaucracies in the affairs of entrepreneurs, the importance of individual freedom in the “continuing revolution of the marketplace,” the importance of people rising above their simple self-interest, “the irresistible power of unarmed truth” in all the affairs of humankind.
In his encyclical Centesimus Annus, which is extracted here and which was issued on May 1, 1991, near the height of the euphoria over the collapse of Marxist socialism, Pope John Paul II reviews the history of capitalism and the divisive impact that it has had on society, especially in its early developmental stage; recalls the importance of the role that the papal encyclical, Rerum Novarum, issued by his predecessor, Leo XIII, played in confronting in a positive way the initial divisive impact of capitalism; focuses very quickly on the continuing need to be concerned about the rights of the poor and other people who seemingly have been left behind by the constant destruction-and-reconstruction process of capitalism and all the wealth and progress that it brings to so many, but not to everyone; acknowledges and clarifies the fundamental error of socialism—its basic misunderstanding of human nature—that led to its collapse; notes carefully the trend away from totalitarian regimes, the rise of new forms of democracy, and the difficulties that the new democracies face because of the injustices of the past; makes the important points that the collapse of Marxist socialism “does not rid the world of situations of injustice and oppression” on which Marxist socialism fed, that there is a real danger that, if these concerns are not addressed, the hatred and ill will of the past will “re-explode,” and that, in their own self-interest, the major industrialized nations must find a way of addressing the needs of people in the former states of the Soviet empire in particular and in the lesser developed nations of the world in general; brings out the positive aspects of democratic capitalism, especially its basis in freedom in the economic field; concludes by bringing out forcefully the need of democratic capitalism to deal effectively with all the environmental and social problems involved in making it possible for all of humankind to enjoy its benefits. The issuance of this encyclical seemed almost prescient for many of the dangers that it forecasted erupted almost immediately, and an economic and political malaise of stultifying proportions fell upon the major industrialized nations of the democratic west in the very moment of their apparent triumph over Marxist socialism. The hope of the encyclical was that, as its predecessor encyclical Rerum Novarum had done, its description of the economic, political, and social problems faced by democratic capitalism and guidelines offered for their solution would challenge humankind to confront its problems and opportunities in a positive way to the benefit of all humankind.
Robert Kendall North
April 3, 1996