The Roots of Economic Systems
WHY AND HOW DO ECONOMIC INSTITUTIONS CHANGE?
Why do economic systems change?
How do they change
technological change
population growth.
EVOLUTIONARY AND REVOLUTIONARY CHANGE
evolutionary school stress the gradual nature of change.
Revolutionary school
laws of motion Marx
superstructure
Darwin.
ECONOMIC SYSTEMS IN HISTORICAL PERSPECTIVE1
HUNTER-GATHERER SOCIETIES
“ORIENTAL DESPOTISM”
CLASSICAL SLAVE ECONOMIES
latifundia
THE FEUDAL SYSTEM
1
This section is concerned with the evolution of societies in historical perspective and can be omitted without damaging the
overall flow of the text. It is recommended that any reader rejoin the discussion with “Contemporary Economic Systems” on
page 57.
[A] kind of dispersed biker gang: armor, horses, and their propensity to resort to violence elevated them above
most of the rest of the population in the same way as leather and Harleys elevate movie bikers where State
authority is absent.2
Peasantry -- 90 percent of the rural population.
Serfs
Free peasants
Command economy
MERCANTILISM
Feudal was under attack from without and within.
Rise of trade, towns and markets.
Mercantilism Defined
creation of an integrated economic space
state involvement in the development of the national economy
positive balance of trade was desirable
Adam Smith’s derision in the Wealth of Nations,
“Bullionists”
“Cameralists”
balance of employment.
THE INSTITUTIONS OF COMMERCIAL CAPITALISM
INDUSTRIAL CAPITALISM
1. The replacement of muscle power (whether animal or human) by machine power, first water power and then
steam
2. The replacement of skill and craftsmanship by the artificial and repetitive precision of the machine
3. The replacement of organic sources of raw materials by inorganic ones
4. The replacement of natural “time” by the clock (This last development was especially important for the
creation of workforce discipline in the factory system.)
2See
Herman Schwartz, States Versus Markets: History, Geography, and the Development of International Political Economy
(New York: St. Martin’s Press, 1994).
Gain in influence of the manufacturing class.
Corn Laws
THE INDUSTRIAL SYSTEM IN CONTINENTAL EUROPE
FINANCE CAPITALISM
IMPERIALISM
CONTEMPORARY ECONOMIC SYSTEMS
SOCIALISM AND COMMUNISM
THE GROWTH OF THE WELFARE STATE
CORPORATISM AND FASCISM
ECONOMICS AND ISLAM
The declared purpose of Islamic economics is to identify and establish an economic order
that conforms to Islamic scripture and traditions. Its core positions took shape in the
1940s, and three decades later efforts to implement them were under way in dozens of
countries. In Pakistan, Malaysia, and elsewhere, governments are now running centralized
Islamic redistribution systems known as zakat. More than sixty countries have Islamic
banks that claim to offer an interest-free alternative to conventional banking. Invoking
religious principles, several countries, among them Pakistan and Iran, have gone so far as
to outlaw every form of interest; they are forcing all banks, including foreign subsidiaries,
to adopt, at least formally, ostensibly Islamic methods of deposit taking and loan making.
Attempts are also under way to disseminate religious norms of price setting, bargaining,
and wage determination. And for every such initiative, others are on the drawing board3.
3
Timur Kuran, "The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity, Social Research, Vol. 64,
no. 2 (Summer 1997)
Box 1 Economics and 9/11
It is tempting to see the events of 9th September 2001 as the result of ideological conflict between Islam and
capitalism. However, this is not really a conflict of two exclusionary creeds, as was perhaps the case in the
cold war rivalry between capitalism and Soviet-style Communism that preoccupied the world for over forty
years. The resentment that led to September 11th has clear, deep historical and religious, as well as
economic, roots. Some of it can be traced to the relative decline of Islam in the last five hundred years.
Islamic civilization was dominant in much of the world in the sixteenth century. At that time Moslems held
power from mid-Europe to Zanzibar and from Morocco to the East Indies. The European “voyages of
discovery” were actually an incursion into a vast civilization that was learned, skilled, sophisticated and
urban. The following five centuries have been ones of progressive decline in Islamic global influence, with
the twentieth century particularly catastrophic. The defeat and division of the Ottoman Empire, the
extension of western political interests to ensure the reliability of the oil supply and the establishment of the
state of Israel have all been severe blows that have excited anti-Western feeling.
Today the countries of the world that are either have Islam as their official religion or are inhabited in the
majority by Moslems are generally much worse off in terms of income per head than are the inhabitants of
the developed western nations. According to the World Bank Development Report 2000/2001m average
income per head in the United States is about $30,600. The average income in terms of purchasing power
parity for the 28 richest countries is $23,430 per year. In contrast the average for the 291 million people
living in North Africa and the Middle East is only $4,600 per year, about one fifth of the level. Some
Moslem counties are even poorer. Indonesia, Pakistan and Bangla Desh, which are the most populous of
the Islamic nations, have together a population of 370 people. Average have per head incomes is $2,439,
$1,757 and $1,475 respectively. On this rough basis we can see that the average Moslem is likely to have
an income of around $3,000 a year, 10% of the average in the United States.
Moreover, poverty is reflected in other measures. 15% of children in the Middle East and North Africa are
affected by malnutrition, 136 children out of every thousand die before the age of five, against 15 in the
high income nations, and life expectancy is 67 years against 78 years in the developed west. Such relative
poverty might well be a cause of anger, and might be a contributory cause of anti-American terrorism but
cannot be said to be the sole cause, since there are nations whose relative standing in terms of income and
health are even lower.
While Americans, and other Westerners, tend to see their affluence as flowing from their own hard work
and the productivity of their institutions. They tend to believe that the key to prosperity abroad lies in
adopting similar ethics and structures. Non-westerners, especially Moslems today, are much more likely to
see the affluence of the west and the poverty of their own societies in terms of a zero-sum game, considering
the very prosperity of the West as the result of conquest, tribute or unequal exchange. This seam of
argument is particularly rich with respect to the Moslem Middle East and East Indies, so well-endowed with
natural resource wealth but lacking the living standards that should follow.
Box 2
Pakistan and Interest Free Economics
While the use of interest is generally as being against fundamentalist Islamic it is
generally tolerated in most countries. Recently Pakistan looked as if it was going to
make a serious move towards eliminating the use of the payment of interest. The
Federal Shariat Court (FSC) is a unusual institution charged under the Pakistani
constitution with determining if “any law or provision of law is repugnant to the
injunctions of Islam. . .” In 1999 the FSC determined that the laws and commercial
code necessary to support the use of interest rates in banking were repugnant to the
Islam and ordered all such laws to be removed from the statute books. The government
appealed to the Supreme Court of Pakistan which upheld the decision of the FSC. The
supreme court ordered that all such legislation supporting the use of interest should
cease as of June 30th, 2001. Fearing that this would have a serious impact on the
economy, the government questioned the competence of the FSC in this area and did
little to facilitate removing the “obnoxious” legislation. In the aftermath of the
invasion of Afghanistan the government has seemed more resolved to resist the Islamic
fundamentalists and nothing further has happened and so we will have to wait to assess
the practicality of a major economy operating without the use of interest.
KEY TERMS AND CONCEPTS
balance of employment
balance of trade
commercial capitalism
communism
the corn laws
corporatism
evolutionary school
fascism
Feudal system
finance capitalism
“hydraulic” societies
industrial capitalism
Islamic economics
laws of motion
mercantilism
Oriental despotism
population growth
superstructure
technological change
socialism
welfare state
QUESTIONS FOR DISCUSSION
1. Why does technological change frequently cause changes in the economic system? Can different economic systems be
compatible with a single technology?
2. Why did the system of irrigated agriculture practiced in much of South and East Asia allow the surplus to be
appropriated by the state?
3. How did the revival of trade and the advent of the Black Death undermine the feudal system?
4. What economic rationale might there be for a merchant class to favor a balance of payments surplus?
5. In what ways did the repeal of the Corn Laws in Britain represent a victory for the manufacturing classes over the
landowners?
6. In what ways did economic development on Continental Europe differ from development in Britain?
7. Distinguish between socialism and communism as economic systems.
What defines a corporatist state?
9. “Fascism should be more correctly called corporatism.” Should this be a criticism of contemporary corporate
America?
9. In what ways have Islamic economies found alternatives to handle the restriction on the use of interest rates?
RESOURCES
WEB SITES
This chapter is largely concerned with economic history and the history of economic thought. A good starting
point for any research into the history of economic thought is the “History of Economic Thought” Web site,
which is currently at http://www.econ.jhu.edu/people/fonseca/het/hethome.htm, although it is in the process of
relocation. It provides links to Web information on all major economists (living and dead), providing access to
biographies, critiques, and their work that is downloadable from the Web. Two particularly useful sites in the
context of this course are the following:
1. A searchable and downloadable copy of Adam Smith’s An Inquiry into the Nature and Cause of the Wealth
of Nations, which is at http://www.duke.edu/,atm2/SMITH/
2.
3. The Marx/Engels Internet Archive has links to all of the Web-accessible work of Karl Marx and Friedrich
Engles, as well as a lot of commentary. It is at http://csf.colorado.edu/psn/marx/
3. There are a growing number of sites that provide information about Isalamic economics from the point of view of its
proponents. One can be found at http://www.islamic-economics.com/
BOOKS AND ARTICLES
Cameron, Rondo. A Concise Economic History of the World, 2d ed., 363. Oxford: Oxford University Press, 1993.
Coleman, D. C. Revisions in Mercantilism. London: Methuen, 1969.
Farouqui, Mahmood, ed. Islamic Banking and Investment: Challenge and Opportunity. New York: Kegan Paul,
1998.
Fei, John C. H., with Gustav Ranis (Contributor). Growth and Development from an Evolutionary Perspective.
London: Blackwell, 1997.
Hansen, Ejvind Damsgard, European Economic History: From Mercantilism to Maastricht, Copenagen:
Copenhagen Buisness School Press, 2001
Hodgson, Geoffrey M. Evolution and Institutions: On Evolutionary Economics and the Evolution of
Economics. White Plains: Edward Elgar, 1999.
Kuran, Timur. “Islamic Economics and the Islamic Sub-Economy,” Journal of Economic
Perspectives 9, no. 4 (Fall 1995): 155–173.
Kuran, Timur, "The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity,” Social
Research, Vol. 64, no. 2 (Summer 1997)
Nelson, Richard , Evolutionary Theory of Economic Change, Cambridge: Harvard UP, 1985
Presley, John, and John Sessions. “Islamic Economics: The Emergence of a New Paradigm,” Economic Journal
104 (May 1994): 584–596.
Schwartz, Herman. States Versus Markets: History, Geography, and the Development of the
International Political Economy. New York: St. Martin’s Press, 1994.