Economics is well-named. It is the study of economies of things, the study of scarcity. If given the opportunity, humans would consume an infinite supply of things. The problem is that resources are scarce; there are not enough resources to enable everyone to have everything he wants.
Enter economics, which determines who gets how much of what. “Economics” comes from the Greek words “oikos,” house, and "nomos," management. In a broad sense, economics is the management of the house, if that house is all of society.
But first let’s delve into the history of economic systems in the West. There has been an historical progression of economies, and even though we can agree that our current system is not equitable, it is certainly more equitable than older economic systems.
Feudalism; or, “Because I Said So”
The foundation of Western nation-states has its origin in the various tribes which existed in Europe during the time of the Roman empire. The Visigoths occupied the Iberian peninsula, the Angles and Saxons occupied the island of Great Britain, and the Gauls lived in the area that is now France.
Between 476 A.D. (the date given by the nineteenth-century British historian Edward Gibbon as the end of the Roman empire) and 800 A.D. (when Charlemagne was crowned Holy Roman Emperor by the Pope), Western Europe was in a state of fragmentation. Individual tribes rallied around individual leaders. These tribes fought with other tribes, conquering land in the process. Over time, these leaders amassed a good deal of land.
But they couldn’t possibly manage it on their own. Once these tribes settled down into particular areas of Europe, leaders of tribes sub-let land to some of their lieutenants. This is the feudal system, where a king -- who technically owned all of the land in a given nation -- rented some of that land to his friends, who were granted titles of nobility, in exchange for a pledge to support him in times of war. The nobles, in turn, rented some of this land to others, and so on and so forth. The word “feudal” comes from the Latin feodum, meaning “fief,” a Germanic word meaning “cow.” The word “fief” referred to any kind of movable property, which is what a feudal lord owned on his land.
At the bottom of the feudal system existed peasants and serfs. Though there is a technical distinction between peasants and serfs (serfs were actually attached to the land; peasants were not), both kinds of people worked the land of a feudal lord and were allowed to stay there as long as they compensated the lord, usually by giving him some of their crop of food. The feudal lord, in turn, provided the peasants with military protection. Sometimes, entire towns grew around a single feudal lord. It was not uncommon in medieval England or France to see a town built around a single castle.
Property in the feudal system passed from father to the eldest son, a condition called primogeniture. Titles of nobility were also inherited. The effect of the system was to keep the people in charge in charge and to keep the people outside outside. Peasants could not become nobility. There was no such concept as “upward mobility.” You could not improve your station in life. If you were a noble, good for you. You had power and land. (Wealth was not so important as land.) If you were a peasant, life was difficult and it wouldn’t get any better. This section is subtitled “Because I said so” because that’s why the nobility had power. In the feudal system of economics, who got what was determined by birth, by circumstances outside of your own control. If you were born a noble, you had everything; a peasant, and you got nothing.
But then, enter the middle class. They were called the bourgeoisie in France, burghers in Germany, and burgesses in England. The middle class did not own land in the same way that the lords (collectively, the aristocracy) did. They did not work the land in the same way that the peasants did. Peasants had nothing. Lords had everything. The middle class had something. Not much, but something. They were merchants and craftsmen, people who made products, people who handled money and law, people who had to work for their livelihood (unlike the aristocracy), but also people who could, through work, improve that livelihood (unlike the peasantry). The beginning of the middle class is the beginning of capitalism.
Capitalism: Rise of the Middle Class
Whereas the aristocracy did not have to work to get by, the middle class did. By the seventeenth century, eight hundred years after Charlemagne was crowned Holy Roman Emperor, the nobility was declining in power and the middle class was rising. Plays of England’s Restoration (1660-1685) were rife with characters drawn from the middle class. These were people who worked and gained wealth. But they were not like the nobility, who didn’t have to work. The sentiments of most Restoration authors were that the nobility were lazy and drunk, sometimes demented. The middle class had “middle-class values”: an emphasis is placed, for example, on marriage for love in Restoration comedies. Under the feudal system, marriage occurred whenever and however it was politically or financially expedient for the parents. The middle class did not own tremendous amounts of property, so there was no need for strategic alliances to be made between families. “Love” became important: if you’re going to get married, and you can choose who you want to marry, why not marry someone you have feelings for?
Another middle class value was the value placed upon work. And why not? It was through hard work that a middle-class person could improve his socioeconomic position. Value was placed on merit; which is to say, if a person works hard, then that person is deserving of the monetary rewards that come with working hard. The middle class was being paid money, where the peasants were not. The middle class bought things from one another using money or using barter.
In 1776, the Scottish economist Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations, which described division of labor and suggested that, in doing things which are in our own self interest, we will necessarily do things that are good for society. Of course, Smith was not in favor of giving over control of resources to private people. He understood that private businessmen might not always do what is in the best interest of society, and therefore accepted government regulation of workers and government actions that reduced poverty.
Whereas “feudalism” is named thus because of its emphasis on the feodum, or fief (land), “capitalism” is named because of its emphasis on capital; that is, money or a medium of exchange. Goods and services are exchanged in a free market. “Free market” means that 1) the market is free from intervention by outside sources, and 2) the buyer and the seller are both mutually agreeing, of their own free will, to engage in a transaction.
Capitalism was different from feudalism in that you did have control of your station in life. Under the feudal system, a person was born into a particular situation and had no hope of changing that situation. Under capitalism, a person could change his situation. Free will, that thing that the Enlightenment philosophes loved so much, was exercisable. A person had control of his own life for once.
Capitalism was also more equitable than feudalism. When asking the question, “Who gets what?” the answer is, “Whoever can afford it.” Work hard and you earn scarce resources. They are not doled out to you by someone else and they are not given to you by virtue of your birth.
Communism: Everyone Is Equal
Capitalism was good at allowing middle-class people to improve their station in life, but with the industrial revolution, a new class of people was created. These people were not craftsmen, tradesmen, or professionals (doctors and lawyers). They worked in factories, mass-producing things. They did not engage in any kind of skilled labor. They tended to machines that made things. And they were poorer than the middle class. Capitalism was not good at being egalitarian. The system gave more to some than to others.
The German philosopher Karl Marx was concerned at how labor was “alienated,” as he put it. A laborer became “alienated” when he became estranged from the end product of his labor. An artisan puts himself into his work, and when he is finished, he has a work that he can be proud of. A laborer in a factory is not the same. Though he puts himself into the thing he is producing, he will never benefit from that thing. He has lost a part of himself to the process of production.
Marx was hardly an economist, but more an historian and philosopher. History, he believed, could be viewed as a constant struggle between owners (the powerful) and laborers (the oppressed). Whereas the world at any given time had been in the shape of a pyramid -- with a few on top in positions of power and many on the bottom in positions of servitude -- Marx wanted to level the pyramid and create a rectangle. He envisioned an end of history, where the laborers would overthrow the owners and create a communist utopia. Who decides who gets what? The people themselves decide. They control the means of production (the resources: land, labor, capital [machinery], and entrepreneurial talent).
The process of the creation of this communist utopia would be in three stages: first, the overthrow of the owners. Second, something Marx called the dictatorship of the proletariat. Third, the communist utopia itself. Marx theorized that some people would be hostile to the overthrow of a system, and therefore concluded that in the interim, the people would have to be governed by someone who would begin the process of socialization. This is the period called the “dictatorship of the proletariat.”
Unfortunately, every country that has had a communist revolution has never left that stage. Russia was the first country to experience a communist revolution. This situation was ironic, since one of Marx’s requirements for a revolution was that there had to be industrialization and workers operating machinery. Russia had no industrialization; it was still an agricultural society. It is the last place that Marx would ever have predicted a communist revolution.
Communism in Russia fell victim to the failings of Russian society and to human error: people simply became power-hungry. Stalin killed thousands in party “purges” in order to maintain control, and killed millions more by socializing the land; that is, the central government took the harvest from the land and re-distributed it as it saw fit. Unfortunately, it wasn’t very good at this redistribution, resulting in the deaths of millions from starvation. The same thing happened in China’s “Great Leap Forward” (1957-60).
Socialism: “Practical Communism”
And so, instead of the people being in control of the means of production, as was Marx’s intention, the state is in control of the means of production. This is what we would call “socialism.” Who decides who gets what? The government does. Under socialism, the government knows best, although historically, this hasn’t necessarily proven to be the case. Countries that operate with pure socialism do not allocate resources well and there are always administrative, logistical problems. It is very difficult to operate an entire country’s economy from a central office. Bureaucracy (literally, “rule by the desk,” although actually rule by appointed officials working in different offices) is required, and bureaucracy always creates problems of efficiency and timeliness. It usually ends up that in a socialistic state, favors, bribes, and corruption are the way that things get done expediently.
In our world, a state which is somewhat socialist has some good things going for it. Take modern Sweden, which has several economic safety-nets in place for its citizens. A Swede can not work at all and still make about 75% of what he would make just through government entitlement programs. The issue, though, is who pays for these programs. The government pays for them through taxes, and these taxes come from people. And people get the money to pay taxes by working. This is called the fallacy of composition: what is good for one person is not necessarily good for everyone. While it may be good for one person not to work and get government benefits, if no one works, then no one is earning money and no one is paying for the government benefits. Currently, Sweden has problems supporting its economy, more so in the past, since the population is growing older, there are fewer people working, and it spends more than it takes in.
Under a capitalist system, people would be forced to fend for themselves. The government’s job is to stay out and let the market handle things, since it handles things most efficiently. In a socialist system, the government’s job is to ensure equality -- or as much equality as it can. To do this, however, requires taxation, and usually socialism taxes the rich more than the poor. This creates a disincentive to be wealthy (“why make money if I’m just going to give it to the government?”) as demonstrated by the tremendous amount of Britons who live in the United States. Paul McCartney makes a good deal of money, and if he lived in the United Kingdom, he would have to give a good deal of his good deal of money to the government for taxes. In the United States, the current highest marginal income tax rate is 37.6%, a rate paid only by people who make more than $288,350 per year. In the United Kingdom, the highest marginal tax rate is 40%, paid by people who make more than £31,400 (about $58,639). People move away or they don’t make money. This is a problem.
So What Do We Do?
Certainly capitalism is more “fair” than feudalism in the sense that the more people work, the more they are rewarded, and communism is more “fair” than capitalism, since everyone receives the same rewards regardless of his level of work, but communism is, practically speaking, a pipe-dream. Realistically speaking, the best economic system would combine the efficiency of the capitalist system with the stability of the socialist system. We see this in the United States in the form of entitlement programs like welfare (which is a blanket term for several federal and state programs), social security, Medicare, and Medicaid. Our educational system is publicly funded, unlike the system of private schools in Great Britain. (Although most higher education in Europe is publicly funded.) Our health care system, though, is privatized: people who can pay the most will get the best health care. There is a minimum standard of health care in the United States, but the issue is that people in the U.S. die of diseases that they could have treated if only they had the money to afford that treatment.
The correct movement, if economics is a progression through history, is a combination of the efficiency of capitalism with the social justice of socialism. Capitalism made social mobility possible for the middle classes; socialism makes social mobility possible for the lower classes. To combine the two in perfect balance with each other would produce a system which is efficient but at the same time ensures that no one will do without the basic necessities of life. The people who earn what they get will still get what they earn, but for the people incapable of earning anything, a state -- a well-regulated, well-monitored state -- will look out for them, allowing them to survive and get health (to maintain their lives) and education (to improve their lives). Even Adam Smith believed in a little government regulation. To those who maintain that the government is corrupt, I say that private enterprise can be equally corrupt. Only by balancing the two and ensuring that there is freedom for capitalism to work (that’s what democracy is for) can we achieve a synthesis which brings things closer to an ideal living condition that is a little more equitable and takes into account that things happen -- the condition into which we are born, for example -- which are outside of our control.
