The Evolution Of Economic Systems

The Evolution Of Economic Systems

It is now time to begin a more orderly approach to the investigation of economic systems. We must erect boundary markers around the economic aspects of human existence that our three examples showed to be so firmly interwoven with the organization of noneconomic activities. This is what the economic theorist accomplishes by invoking the ceteris paribus assump­tion, holding all things constant except for the specific factors allowed to change. In practice this has meant ignoring the social setting in which economic activity occurs to a degree incompatible with an in-depth com­parison of economic systems. We turn to the concept of economic institu­tions for the building blocks from which economic systems are formed and linked with other institutions.

Economic Institutions

Institutions are ways in which the actions of social units occur through interaction with other units under repetitive, typical conditions. The units may be individuals, families, business firms, political parties, or other groups. The interaction must be repetitive so that we know what to expect of others. The "rules of the game" define the rights and obligations of participants as they play their roles in that situation. Dating is an institu­tion facilitating mate selection in our society; the funeral institutionalizes expressions of grief; the family provides, among other things, for rearing children.

Economic institutions are devoted primarily to gaining a livelihood, although they may also serve other functions in the society, such as po­litical action. Thus labor unions allow members to exert collective pres­sure in negotiating terms of employment. Business firms assemble factors of production and create the channels of communication needed for in­ternal decision making. Trade associations and lobby groups promote the economic interests of their members in dealing with governmental agencies and with the public.

The most important economic institution in Western economies is the self-regulating market, in which price signals attract or repel customers and producers. The market as a way of organizing production and dis­tributing the rewards of the production process has shown tremendous adaptability and resiliency in the face of the geographical and technological changes that have occurred since Adam Smith observed that "it is not from benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard of their own interest."

Market institutions so permeate the economic systems of the nations of North America and Western Europe that the participants are largely unaware of the uniqueness of their particular way of conducting economic activity. Capitalism, the economic system to be described in the following chapters, has evolved since the eighteenth century with the self-regulating market at the center of its set of economic institutions. Karl Polanyi, a famous economic historian and economic anthropologist, demonstrated in his book The Great Transformation the limited historical and geographical context in which unregulated markets for products, labor, and land have actually prevailed. Polanyi was interested in the trading activities of ancient societies, in the reciprocal gift exchanges of primitive people such as the Trobriand Islanders, and in peasant economic systems whose products (such as cocoa or rubber) were often destined for worldwide markets but who relied on nonmarket methods of bringing land and labor together. Thus he saw market economies as historical anomalies that tend to revert to various forms of nonmarket regulation, especially by the government, when the socially disruptive effects of the impersonal market system be­come as great as they did during the Great Depression of the 1930s.

One essential of an economic system is that its institutions "fit to­gether," both with one another and with noneconomic institutions, in a way that avoids operating at cross-purposes. This means that a change in some aspect of society seemingly remote from the economic system may set up shock waves that require an accommodation in economic institu­tions (as in Max Weber's account of the influence of religious beliefs on the economic motivations of Calvinists) or that changes in a part of the economic system may similarly cause upheavals in social institutions (as demonstrated by the impact of mechanized cotton harvesting in the Ameri­can South).