PKU5 ECONOMICS Economics Terms
Capitalism(s)
To keep in mind as you read: In ideological contexts, one often hears
capitalism referred to as if it were a monolithic entity not subject to changes
over time. Granted that some major changes are identified in this document,
what, if anything, remains a constant core meaning of capitalism that applies
in all these instances?
Capitalism is, as an economic formation, more complex and long-lived than is
commonly thought. One of its indispensable premises, private ownership of property,
we can trace as far back as the earliest recorded legal system [link: Hammurabi’s Code].
Commercial Capitalism
In the West, the initial stages of commercial capitalism appeared in Italian cities
during the late Middle Ages (roughly the 13th to 14th centuries). What made the new Italian
ventures distinctive was their base in powerful family-clans. The scale of their
operations was vast, and they were able to create their own institutions of banking to
finance their far-flung enterprises. Hungry for wealth, the major trading families were
willing to pour profits back into financing ever more ambitious projects. High profits were
assumed, even though the risk factors were often very high as well. Economic growth
was already a Western expectation, based on a desire to acquire more and more goods
rather than merely to maintain reliable trade connections.
Mercantile Capitalism
A second stage of Capitalism emerged in the 17th and 18th centuries with the
formation of merchant companies. These were chartered by European monarchs to
allow several individuals (or families) to pool their investment resources, thereby
spreading the risk in case a ship was lost or a trade caravan was sacked by bandits [link:
probability and insurance]. During this period, the kings licensed out trade monopolies to
various merchant companies in return for their promise to promote the national
economic interest. Mercantile capitalism defined the national interest to be the increase
of gold and silver in the national treasury. Such an economic policy turned out to be
short-sighted, because no one had foreseen the inflationary effect of a large influx of
precious metals entering Europe from its new colonies. Spain, in particular, found its
economy seriously undermined by taking in too much gold and silver without an
accompanying increase in productivity. More money simply chased the same amount of
goods with the effect of causing higher and higher prices.
Market Capitalism
Adam Smith (1723-1790) articulated the new market capitalism idea in 1776. Here the
goal was to leave individual entrepreneurs free from government interference. That way,
each one would feel an incentive to maximize profits by seeking out the most efficient
means of production. If there was no interference, their products could be sold at the
lowest possible prices in a competitive marketplace. Gold and other precious metals
Smith understood not as money or value-in-itself but as commodities to be bought and
sold whenever market conditions driven by supply and demand allowed profits to be
made. The key to economic success was not how much money you had, but how much
money you could make. Profits and the drive to maximize them were expected to
motivate a constant search for better and cheaper ways to make products, hence to sell
more and more compared to competitors. Adam Smith believed that the free market
operated by means of a secular “invisible hand,” which would automatically make
everyone richer [link: Milton Friedman].
Industrial Capitalism
The industrial capitalism stage of development starting in the 19th century is what
Karl Marx and others attacked so vigorously. The logic of Adam Smith’s system led to
larger and larger factories involving ever more efficient but increasingly expensive
machinery to produce key products of all kinds. The larger amounts of capital required
to finance such enterprises led to another innovation in finance: the limited-liability
corporation. Under this device individual stockholders bought shares in a corporation
which took on itself the risk of any eventual failure. If the enterprise went into bankruptcy,
the individual shareholders would at most lose their initial investment, whereas under
earlier partnership arrangements, their personal fortunes might be at risk. Because their
liability was now limited to what they invested, wealthy individuals were more willing to
invest in shares or to loan money to this kind of corporation, in hopes that the enterprise
would prosper, thereby generating dividends on investments or, at the very least,
interest on loans. As the 19th-century corporations became larger and more impersonal;
workers were often exploited cruelly on starvation wages. The factories gave rise to the
alienated urban industrial proletariat that Marx and Engels saw as open to an imminent
Communist Revolution [link: Communist Manifesto].
East German heroic bust of Karl Marx (1818-1883) by Will Lammert (1953)
Capitalist countries have evolved a great deal since Karl Marx’s time. Workers are
commonly represented by independent trade unions that defend their interests, if
necessary, by strikes or other work stoppages. Workers are employed year round with
contracts guaranteeing annual vacations and retirement benefits. In the 19 th century
only capitalist bosses had comparable privileges. Though there are still startling
differences in income between the rich and the poor, the vast majority of workers in the
West support the capitalist system as it has now evolved. In recent decades, many
workers have even become capitalists, in the sense that they own shares in
corporations either directly in their own name or indirectly through shares in mutual
funds or their pension funds. In the USA, about half the population now own at least
some such shares.
Multinational Capitalism
Multinational corporations as they have developed since World War Two have
extraordinary latitude to maneuver among various different national governments. On
the other hand, multinationals are obliged to conform to the laws of every country in
which they do business, not a simple undertaking.
These developments do not qualitatively change the nature of capitalism. Its goals
are still to maximize profits by maintaining growth in the face of competition. The
expectation – and the felt necessity – for growth is essential in capitalist ideology. A
fixation on growth drives not only economic decisions but now affects Western thinking
on all subjects.
Study questions:
1. Compare and contrast Adam Smith’s invisible hand with the Daoist wuwei concept
as it might apply to economic matters [link: wuwei].
2. To what extent do the Learned Men in the Han debates on iron and salt [link: text]
affirm an Adam Smith vision of a marketplace free from government interference?
Market Economy
To keep in mind as you read: The idea of a market economy now receives lip
service nearly everywhere in the world, yet there remain major differences in
its applications. Is there a “right” way? What are some of the hidden costs of
this way of organizing life?
The concept of the market economy has by now become world-wide in its influence,
but its origins merit close and critical attention for that very reason. Capitalism is closely
associated with the market idea, but capitalism had already been part of several earlier
economic formations [link: capitalisms]. Hence a market economy is not necessarily linked
to capitalism.
In China during the Han Dynasty leaders were already debating the wisdom of
private enterprise as opposed to government monopolies [link: Iron and Salt Debates].
These are issues of market access: who decides when and where and at what price
goods are sold. The idea of a market economy in its modern sense involves something
more: a systemic conception that aspires to control all economic and social relations in
a given time and place. It extends economic ideas to affect all cultural domains.
The modern market system originated with the Scottish thinker Adam Smith (17231790) and his book entitled An Inquiry into the Nature and Causes of the Wealth of
Nations (1776) [link: Adam Smith].
Adam Smith (1723-1790)
Adam Smith presumed that, if there were no interference in the marketplace by
governments or other regulatory agencies, the most efficient producers or suppliers of
all products would be able to make a profit while selling at lower prices than their
competitors. Those competitors would then be obliged either to lower their prices or else,
in the long run, go out of business. This privileging of the more efficient producers or
suppliers would inevitably, he asserted, increase the total wealth available in the system.
Thus Smith’s famous “invisible hand” was supposed to work automatically to the benefit
of all. The incentive to greater profits would, he predicted, encourage new technological
advances and ever more efficient operations.
In fact, remarkable advances in efficiency emerged in the 19th and 20th centuries
beyond anything that Adam Smith could have foreseen. These were due to many
factors: to technological innovations, to unprecedented degrees of specialization (both in
the division of labor and in machines for specific purposes) , to progressively more efficient energy
sources (wood, then coal, then oil, then electricity, nuclear energy, solar energy) , and to more
efficient organizations making better informed decisions in modern limited-liability
corporations. Thus Adam Smith’s free market provided only part of the story of Western
industrial expansion, though his advocates, illustrated here by Milton Friedman [link: text],
would claim all the benefits follow from the “invisible hand.”
Modernization as an Economic Concept
To keep in mind as you read: If economic “modernization” is so
ethnocentrically Western, what is its appeal in other parts of the world?
Social scientists in the West often limit the concept of modernization to a certain time
period or to certain technological advances rather than to larger processes. Such
concepts are identified here as limited to socio-economic concerns as opposed to
larger-scale modernity [link: modernity] that is central to this course.
According to C. E. Black and other social-science theorists of the late 20th century,
modernization is characterized by:
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continuous and accelerating expansion of knowledge (science, education)
deliberately applied to technology and industry (factory system)
involving ever more efficient forms of energy (wood to coal to oil to nuclear)
to increase the production of goods and services (materialist “quality of life”)
with the goal of maximizing efficiency (and hence profits)
for distribution according to market principles (freely, by supply and demand)
in an atmosphere of secularization (decline of traditions, esp. religious beliefs)
supporting impersonal and utilitarian values (spreading worldly goods)
encouraging economically unconstrained policies (to motivate innovation)
with individuals free to pursue their rational self-interest (“individualism”)
Such an approach has the merit of generality. It can be applied anywhere in the
world, but only at the cost of making Western-style economic development the
touchstone criterion for distinguishing “advanced” from “developing” nations.
[Recommended reading C.E. Black, Dynamics of Modernization: a Study in Comparative History, New
York: Harper & Row, 1966.]
In broadly applicable terms, one can derive these characteristics from the history of
Western economic developments since the beginnings of industrialization in late 18thcentury England. As a model, it applies less than well to many other parts of the world;
but its ethnocentrically Western bias dismisses any deviations as due to
“underdevelopment,” i.e., a failure to be part of the Western world or to take the
Western world as the only legitimate model for economic development. This Western
bias may easily provoke controversy [link: Daniel A. Bell on “Asian Values”].
In addition to such ethnocentric flaws in the Western modernization model, its
materialist focus on homo economicus (Latin: humans as economic entities) oversimplifies
human nature. In all parts of the world people are apt to act in ways that contradict
simple-minded models of behavior such as “rational self-interest.” Humans often
respond on the basis of more complex motives than those of maximizing their incomes
or enhancing their competitive position.
Study questions:
1. This approach to “modernization” identifies ten tendencies that characterize it.
How many of them could be cited to characterize China in recent years?
2. Does thinking of a country as a “developing” nation commit it to following the West
in each of these different domains? Why or why not?
3. Which of the ten might be separable from the others in the case of China?
4. Are there any of these ten that seem to you no longer applicable in the West? Are
we perhaps entering a “post-modernization” period?
Excerpt from Western Civilization with Chinese Comparisons, 3rd ed.
(Shanghai: Fudan University Press, 2010), pp 322-28.