RG5 Evolution of Economic Systems

As discussed in previous post (RG4: History, Methodology, & Economic Theory), economic systems have changed and evolved through history. The purpose of this post is to go over, very briefly, how the economic system has changed over time, to arrive at the capitalist economic system that we all live in today.

Evolution of Economic Systems

Economic systems evolve, sometimes under external dynamic and sometimes under internal dynamics. As they evolve, economic theories co-evolve, however their can be (often are) lags in understanding – so theories relevant to one system are applied to another, with disastrous results.

Human beings started out with tribal societies, and spent the longest period of history in this form. They societes were egalitarian and communal. They were not market oriented. Production and  distribution was done by consensus of the community. Communities were self-sufficient, producing or acquiring basic needs for all members, without any markets or trade. For more details, see “Hunter-Gatherer Societies”.  An essential point to understand is that the economic system shaped the nature of the society – the need for cooperation to survive in a harsh environment shaped social norms. This is again in contrast with the story told by economists that evolution has shaped us to be greedy and competitive, as this is necessary for survival. For the opposite point of view, see “Does Altruism Exist?” by D. S. Wilson, which uses latest findings of evolutionary biology to show that the opposite is true. Evolution has shaped human beings to be cooperative and generous.

In light of these understandings, it is very important for us to study the great transformation in European societies during which traditional societies based on cooperation, social responsibility, and community, were replaced by market societies with competition, individualism, and hedonism. This is because our own identities have been shaped by living in market societies.

Industrial Revolution Allows Production of Massive Surplus: New patterns of crop rotation and livestock utilization paved the way for better crop yields, a greater diversity of wheat and vegetables and the ability to support more livestock. These changes impacted society as the population became better nourished and healthier. The Enclosure Acts, passed in Great Britain, allowed wealthy lords to purchase public fields and push out small-scale farmers, causing a migration of men looking for wage labor in cities. The availability of surplus food, surplus labor, and technological innovations, combined to create the Industrial Revolution, which permitted production of massive amounts of surplus.

The ability to produce massive amounts of surplus led to dramatic changes in economics, politics, and social systems. Some of these changes are listed below:

  1. Surplus needs to be marketed to consumers. This led to creation of a consumer economy. When domestic demand proved insufficient, colonization of the globe was done to provide more consumers for the surplus.
  2. Massive productive capacity provided the material wealth, power, and weapons to enable colonization. This process had to destroy self-sufficient societies throughout the globe, in order to create consumers. This led to the emergence of the theory of “comparative advantage”, which argued that colonized lands should only produce raw materials, while the colonizers produced manufactured goods to sell back to the colonized lands.
  3. Creation of a large labor force was required to support industrial production processes. This led to the gradual normalization of the idea the hours of our lives could be brought and sold for wages on the market. This cheapened human lives by reducing them to resources and valuing lives by what they were worth on the marketplace.
  4. Money acquired central importance as a much more efficient way to store the surplus value created by goods. Money allowed trading of goods across time, and became the means to purchase all things – human lives, entire nations and colonies, political power, and educational systems to indoctrinate masses to capitalist ways of thinking. As Karl Marx noted, capitalism exploits workers not by force, but by their willing agreement. A similar statement holds for colonization.
  5. Thinking shifted from the C-M-C’ mode, where commodities are valued and traded by using money, to the M-C-M’ mode, where money is used to produce commodities and to sell them for even more money. This shift changed social goals and markers of social status from land and property to monetary wealth. This shift was of monumental importance in changing society.
  6. One of important impacts was the change in the nature of the relationship between man and our habitat – The Mother Earth. Instead of the natural symbiotic relationship, our planet provides all resources we need for our comforts, and we protect and preserve it, land became a commodity for sale on the market.

For a large number of reasons – repeated crises, increasing inequality, environmental collapse, even the ongoing COVID crisis – the current mode of capitalism seems to be self-destructing.  Continuing rape of the planet and massive destruction of plants and animals has led to loss of habitat and increased unusual interactions between humans and animals. The process continues, making further crises like this eminently likely.  If our planet and humanity survive the death-throes, we may expect a new system to emerge out of the ashes. There are large numbers of successful alternative models which have been used to organize societies in the past, and perhaps some of these may be useful as templates for the future.

To connect this with our current study of Central Banking, it is worth noting that we are studying the evolution of the monetary system associated with Central Banks. But all realms of our lives – social, political, and environmental – are connected and changes in one sphere affect all others.

LINKS to related Materials:

  • Introduction to Reading Course: bit.ly/iw2gh
  • Readers Guide (RG1) to Goodhart on Central Banking: bit.ly/gh2rg
  • RG2: Free Market objections to Central Banks bit.ly/we0rg1
  • RG3: Macro & Micro Monetary Management by CBs bit.ly/we0rg3
  • RG4: History, Methodology, & Economic Theory bit.ly/wp0rg

Date posted: April 24, 2020
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