Introduction to Sociology/Economy
Economy refers to the ways people use their environment to meet their material needs. It is the realized economic system of a country or other area. It includes the production, exchange, distribution, and consumption of goods and services of that area. A given economy is the end result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, among other factors. These factors give context, content, and set the conditions and parameters in which an economy functions.
As long as someone has been making and distributing goods or services, there has been some sort of economy; economies grew larger as societies grew and became more complex. The ancient economy was mainly based on subsistence farming. According to Herodotus, and most modern scholars, the Lydians were the first people to introduce the use of gold and silver coin. It is thought that these first stamped coins were minted around 650-600 BC.
For most people the exchange of goods occurred through social relationships. There were also traders who bartered in the marketplaces. The Babylonians and their city state neighbors developed economic ideas comparable to those employed today. They developed the first known codified legal and administrative systems, complete with courts, jails, and government records.
Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, and astronomical records. Ways to divide private property, when it is contended, amounts of interest on debt, rules as to property and monetary compensation concerning property damage or physical damage to a person, fines for 'wrong doing', and compensation in money for various infractions of formalized law were standardized for the first time in history.
In Medieval times, what we now call economy was not far from the subsistence level. Most exchange occurred within social groups. On top of this, the great conquerors raised venture capital to finance their land captures. The capital investment would be returned to the investor when goods from the newly discovered or captured lands were returned by the conquerors. The endeavors of Marco Polo (1254-1324), Christopher Columbus (1451-1506) and Vasco de Gama (1469-1524) set the foundations for a global economy. Note that while these historical figures are often referred to as "discoverers" among dominant groups, there is ample archeological evidence suggesting that the places they "found" were visited by many other expeditions dating back to BC times and that many others attempted to conquer these same lands. Rather than a process of discovery, what separated them from earlier attempts was the devastating effects of massive plagues upon Native populations, which allowed them to conquer native lands that had fought off such assaults previously (see Lies my teacher told me for summaries of many of these findings). Following these events, the first enterprises were trading establishments. In 1513 the first stock exchange was founded in Antwerpen.
The European captures became branches of the European states, the so-called "colonies". The rising nation-states Spain, Portugal, France, Great Britain, and the Netherlands tried to control the trade through custom duties and taxes in order to protect their national economy. Mercantilism was a first approach to intermediate between private wealth and public interest.
The first economist in the true meaning of the word was the Scotsman Adam Smith (1723-1790). He defined the elements of a national economy: products are offered at a natural price generated by the use of competition - supply and demand - and the division of labour. He maintained that the basic motive for free trade is human self interest. In Europe, capitalism (see below) started to replace the system of mercantilism and led to economic growth. The period today is called the industrial revolution because the system of production and division of labour enabled the mass production of goods.
Capitalism is an economic and social system in which capital and the non-labor factors of production or the means of production are privately controlled; labor, goods and capital are traded in markets; profits are taken by owners or invested in technologies and industries; and wages are paid to labor.
Capitalism as a system developed incrementally from the 16th century on in Europe, although capitalist-like organizations existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages. Capitalism gradually spread throughout Europe and other parts of the world. In the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.
The origins of modern markets can be traced back to the Roman Empire and the Islamic Golden Age and Muslim Agricultural Revolution where the first market economy and earliest forms of merchant capitalism took root between the 8th–12th centuries.
A vigorous monetary economy was created by Muslims on the basis of the expanding levels of circulation of a stable high-value currency and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organisation were introduced by economists, merchants and traders during this time. Such innovations included the earliest trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnerships, and the earliest forms of credit, debt, profit, loss, capital, capital accumulation, circulating capital, capital expenditure, revenue, cheques, promissory notes, trusts, startup companies, savings accounts, pawning, loaning, exchange rates, bankers, money changers, deposits, the double-entry bookkeeping system], and lawsuits. Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
The economic system employed between the 16th and 18th centuries is commonly described as mercantilism. This period was associated with geographic "discoveries" by merchant overseas traders, especially from England, and the rapid growth in overseas trade. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods. While some scholars see mercantilism as the earliest stage of modern capitalism, others argue that modern capitalism did not emerge until later. For example, Karl Polanyi, noted that "mercantilism, with all its tendency toward commercialization, never attacked the safeguards which protected [the] two basic elements of production - labor and land - from becoming the elements of commerce"; thus mercantilist attitudes towards economic regulation were closer to feudalist attitudes, "they disagreed only on the methods of regulation." Moreover Polanyi argued that the hallmark of capitalism is the establishment of generalized markets for what he referred to as the "fictitious commodities": land, labor, and money. Accordingly, "not until 1834 was a competitive labor market established in England, hence industrial capitalism as a social system cannot be said to have existed before that date."
The commercial stage of capitalism began with the founding of the British East India Company and the Dutch East India Company. During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment, setting the stage for capitalism.
During the Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, the surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture. Industrial capitalism marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within the work process and the routinization of work tasks.
In the late 19th century, the control and direction of large areas of industry came into the hands of trusts, financiers and holding companies. This period was dominated by an increasing number of oligopolistic firms earning supernormal profits. Major characteristics of capitalism in this period included the establishment of large industrial monopolies; the ownership and management of industry by financiers divorced from the production process; and the development of a complex system of banking, an equity market, and corporate holdings of capital through stock ownership. Inside these corporations, a division of labor separates shareholders, owners, managers, and actual laborers.
By the last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the US to reduce the monopolistic tendencies of the period. Gradually, during this era, the US government played a larger and larger role in passing antitrust laws and regulation of industrial standards for key industries of special public concern. By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem. In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. During the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression.
In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Max Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern western capitalism. For Weber, the 'spirit of capitalism' was, in general, that of ascetic Protestantism; this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically, and thus also the propensity to reinvest capital: this was sufficient, then, to create "self-mediating capital" as conceived by Marx. This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic, Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…” And, "If God show you a way in which you may lawfully get more than in another way (without wrong to your soul or to any other), if you refuse this, and choose the less gainful way, you cross one of the ends of your calling, and you refuse to be God's steward, and to accept His gifts and use them for him when He requierth it: you may labour to be rich for God, though not for the flesh and sin" (p. 108).
How capitalism works
The economics of capitalism developed out of the interactions of the following five items:
1. Commodities: There are two types of commodities: capital goods and consumer goods. Capital goods are products not produced for immediate consumption (i.e. land, raw materials, tools machines and factories), but serve as the raw materials for consumer goods (i.e. televisions, cars, computers, houses) to be sold to others.
2. Money: Money is primarily a standardized means of exchange which serves to reduce all goods and commodities to a standard value. It eliminates the cumbersome system of barter by separating the transactions involved in the exchange of products, thus greatly facilitating specialization and trade through encouraging the exchange of commodities.
3. Labour power: Labour includes all mental and physical human resources, including entrepreneurial capacity and management skills, which are needed to transform one type of commodity into another.
4. Means of production: All manufacturing aids to production such as tools, machinery, and buildings.
Individuals engage in the economy as consumers, labourers, and investors, providing both money and labour power. For example, as consumers, individuals influence production patterns through their purchase decisions, as producers will change production to produce what consumers want to buy. As labourers, individuals may decide which jobs to prepare for and in which markets to look for work. As investors they decide how much of their income to save and how to invest their savings. These savings, which become investments, provide much of the money that businesses need to grow.
Business firms decide what to produce and where this production should occur. They also purchase capital goods to convert them into consumer goods. Businesses try to influence consumer purchase decisions through marketing as well as the creation of new and improved products. What drives the capitalist economy is the constant search for profits (revenues minus expenses). This need for profits, known as the profit motive, ensures that companies produce the goods and services that consumers desire and are able to buy. In order to be successful, firms must sell a certain quantity of their products at a price high enough to yield a profit. A business may consequently lose money if sales fall too low or costs are incurred that are too high. The profit motive also encourages firms to operate efficiently by using their resources in the most productive manner. By using less materials, labour or capital, a firm can cut its production costs which can lead to increased profits.
Following Adam Smith, Karl Marx distinguished the use value of commodities from their exchange value in the market. Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate. The extraction of surplus value from workers is called exploitation. In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers: all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities. Marx argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, in order to survive, to sell their labor for a living wage. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy. For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. This argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value, and thus of profit. How capitalists generate profit is illustrated in the figure below.
The market is a term used by economists to describe a central exchange through which people are able to buy and sell goods and services. In a capitalist economy, the prices of goods and services are controlled mainly through supply and demand and competition. Supply is the amount of a good or service produced by a firm and available for sale. Demand is the amount that people are willing to buy at a specific price. Prices tend to rise when demand exceeds supply and fall when supply exceeds demand, so that the market is able to coordinate itself through pricing until a new equilibrium price and quantity is reached. Competition arises when many producers are trying to sell the same or similar kinds of products to the same buyers. Competition is important in capitalist economies because it leads to innovation and more reasonable prices as firms that charge lower prices or improve the quality of their product can take buyers away from competitors (i.e., increase market share. Furthermore, without competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the total output in the market. When this occurs, the firm can limit output and raise prices because it has no fear of competition. A cartel is a group of firms that act together in a monopolistic manner to control output and raise prices. Many countries have competition laws and anti-trust laws that prohibit monopolies and cartels from forming. In many capitalist nations, public utilities (communications, gas, electricity, etc), are able to operate as a monopoly under government regulation due to high economies of scale.
Income in a capitalist economy depends primarily on what skills are in demand and what skills are currently being supplied. People who have skills that are in scarce supply are worth a lot more in the market and can attract higher incomes. Competition among employers for workers and among workers for jobs, helps determine wage rates. Firms need to pay high enough wages to attract the appropriate workers; however, when jobs are scarce workers may accept lower wages than when jobs are plentiful. Labour unions and the government also influence wages in capitalist nations. Unions act to represent labourers in negotiations with employers over such things as wage rates and acceptable working conditions. Most countries have an established minimum wage and other government agencies work to establish safety standards. Unemployment is a necessary component of a capitalist economy to insure an excessive pool of laborers. Without unemployed individuals in a capitalist economy, capitalists would be unable to exploit their workers because workers could demand to be paid what they are worth. What's more, when people leave the employed workforce and experience a period of unemployment, the longer they stay out of the workforce, the longer it takes to find work and the lower their returning salaries will be when they return to the workforce. Thus, not only do the unemployed help drive down the wages of those who are employed, they also suffer financially when they do return to the paid workforce.
In capitalist nations, the government allows for private property and individuals are allowed to work where they please. The government also generally permits firms to determine what wages they will pay and what prices they will charge for their products. The government also carries out a number of important economic functions. For instance, it issues money, supervises public utilities and enforces private contracts. Laws, such as policy competition, protect against competition and prohibit unfair business practices. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting, as well as financing a wide range of programs. In addition, the government regulates the flow of capital and uses things such as the interest rate to control factors such as inflation and unemployment.
Criticisms of Capitalism
Critics argue that capitalism is associated with the unfair distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism, counter-revolutionary wars and various forms of economic and cultural exploitation; repression of workers and trade unionists, and phenomena such as social alienation, economic inequality, unemployment, and economic instability. Critics have argued that there is an inherent tendency towards oligopolistic structures when laissez-faire laws are combined with capitalist private property. Capitalism is regarded by many socialists to be irrational in that production and the direction of the economy are unplanned, creating inconsistencies and internal contradictions and thus should be controlled through public policy.
In the early 20th century, Vladimir Lenin argued that state use of military power to defend capitalist interests abroad was an inevitable corollary of monopoly capitalism. Economist Branko Horvat states, "it is now well known that capitalist development leads to the concentration of capital, employment and power. It is somewhat less known that it leads to the almost complete destruction of economic freedom." Ravi Batra argues that excessive income and wealth inequalities are a fundamental cause of financial crisis and economic depression, which will lead to the collapse of capitalism and the emergence of a new social order.
Environmentalists have argued that capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resources. Murray Bookchin has argued that capitalist production externalizes environmental costs to all of society, and is unable to adequately mitigate its impact upon ecosystems and the biosphere at large. Labor historians and scholars, such as Immanuel Wallerstein have argued that unfree labor — by slaves, indentured servants, prisoners, and other coerced persons — is compatible with (and in many ways necessary for) capitalist relations.
A common response to the criticism that capitalism leads to inequality is the argument that capitalism also leads to economic growth and generally improved standards of living. Capitalism does promote economic growth, as measured by Gross Domestic Product or GDP), capacity utilization or standard of living. This argument was central, for example, to Adam Smith's advocacy of letting a free market control production and price, and allocate resources. Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system. While the measurements are not identical, proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better availability of food, housing, clothing, and health care. Despite these claims, however, capitalists systems to date - despite increasing GDP in many places and ways overall - have never spurred economic growth and / or improved standards of living for whole populations, but rather, have offered significant growth and improvement for some while others remain without basic necessities (e.g., food, running or clean water, shelter, indoor plumbing) in even the most successful capitalist countries (like the United States). The ability of capitalism to spur economic growth and improved standards of living thus appears (thus far) to actually represent another way capitalism creates and sustains social inequalities within and between societies.  
Socialism refers to various theories of economic organization advocating public or direct worker ownership and administration of the means of production and allocation of resources, and a society characterized by equal access to resources for all individuals with a method of compensation based on the amount of labor expended. Most socialists share the view that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital and derives its wealth through exploitation, creates an unequal society, does not provide equal opportunities for everyone to maximise their potentialities and does not utilise technology and resources to their maximum potential nor in the interests of the public.
In one example of socialism, the Soviet Union, state ownership was combined with central planning. In this scenario, the government determined which goods and services were produced, how they were to be produced, the quantities, and the sale prices. Centralized planning is an alternative to allowing the market (supply and demand) to determine prices and production. In the West, neoclassical liberal economists such as Friedrich Hayek and Milton Friedman said that socialist planned economies would fail because planners could not have the business information inherent to a market economy (cf. economic calculation problem), nor could managers in Soviet-style socialist economies match the motivation of profit. Consequent to Soviet economic stagnation in the 1970s and 1980s, socialists began to accept parts of these critiques. Polish economist Oskar Lange, an early proponent of market socialism, proposed a central planning board establishing prices and controls of investment. The prices of producer goods would be determined through trial and error. The prices of consumer goods would be determined by supply and demand, with the supply coming from state-owned firms that would set their prices equal to the marginal cost, as in perfectly competitive markets. The central planning board would distribute a "social dividend" to ensure reasonable income equality.
In western Europe, particularly in the period after World War II, many socialist parties in government implemented what became known as mixed economies. In the biography of the 1945 UK Labour Party Prime Minister Clement Attlee, Francis Beckett states: "the government... wanted what would become known as a mixed economy". Beckett also states that "Everyone called the 1945 government 'socialist'." These governments nationalised major and economically vital industries while permitting a free market to continue in the rest. These were most often monopolistic or infrastructural industries like mail, railways, power and other utilities. In some instances a number of small, competing and often relatively poorly financed companies in the same sector were nationalised to form one government monopoly for the purpose of competent management, of economic rescue (in the UK, British Leyland, Rolls Royce), or of competing on the world market.
Typically, this was achieved through compulsory purchase of the industry (i.e. with compensation). In the UK, the nationalisation of the coal mines in 1947 created a coal board charged with running the coal industry commercially so as to be able to meet the interest payable on the bonds which the former mine owners' shares had been converted into.
Marxist and non-Marxist social theorists agree that socialism developed in reaction to modern industrial capitalism, but disagree on the nature of their relationship. Émile Durkheim posits that socialism is rooted in the desire to bring the state closer to the realm of individual activity, in countering the anomie of a capitalist society. In socialism, Max Weber saw acceleration of the rationalisation started in capitalism. As a critic of socialism, he warned that placing the economy entirely in the state's bureaucratic control would result in an "iron cage of future bondage".
The Marxist conception of socialism is that of a specific historical phase that will displace capitalism and be a precursor to communism. The major characteristics of socialism are that the proletariat will control the means of production through a workers' state erected by the workers in their interests. Economic activity is still organised through the use of incentive systems and social classes would still exist but to a lesser and diminishing extent than under capitalism. For orthodox Marxists, socialism is the lower stage of communism based on the principle of "from each according to his ability, to each according to his contribution" while upper stage communism is based on the principle of "from each according to his ability, to each according to his need"; the upper stage becoming possible only after the socialist stage further develops economic efficiency and the automation of production has led to a superabundance of goods and services.
Socialism is not a concrete philosophy of fixed doctrine and program; its branches advocate a degree of social interventionism and economic rationalisation (usually in the form of economic planning), sometimes opposing each other. Some socialists advocate complete nationalisation of the means of production, distribution, and exchange; others advocate state control of capital within the framework of a market economy.
Socialists inspired by the Soviet model of economic development have advocated the creation of centrally planned economies directed by a state that owns all the means of production. Others, including Yugoslavian, Hungarian, German and Chinese Communists in the 1970s and 1980s, instituted various forms of market socialism, combining co-operative and state ownership models with the free market exchange and free price system (but not free prices for the means of production).
Social democrats propose selective nationalisation of key national industries in mixed economies, while maintaining private ownership of capital and private business enterprise. Social democrats also promote tax-funded welfare programs and regulation of markets. Many social democrats, particularly in European welfare states, refer to themselves as socialists, introducing a degree of ambiguity to the understanding of what the term means.
Modern socialism originated in the late 18th-century intellectual and working class political movement that criticised the effects of industrialisation and private ownership on society. The utopian socialists, including w:Robert Owen (1771–1858), tried to found self-sustaining communes by secession from a capitalist society. Henri de Saint Simon (1760–1825), the first individual to coin the term socialisme, was the original thinker who advocated technocracy and industrial planning. The first socialists predicted a world improved by harnessing technology and better social organisation; many contemporary socialists share this belief. Early socialist thinkers tended to favour an authentic meritocracy combined with rational social planning.
The Financial crisis of 2007–2009 led to mainstream discussions as to whether "Marx was right". Time magazine ran an article titled "Rethinking Marx" and put Karl Marx on the cover of its 28th of January 2009 European edition. While the mainstream media tended to conclude that Marx was wrong, this was not the view of socialists and left-leaning commentators.
Examples of Socialism
The People's Republic of China, North Korea, Laos and Vietnam are Asian states remaining from the first wave of socialism in the 20th century. States with socialist economies have largely moved away from centralised economic planning in the 21st century, placing a greater emphasis on markets, as in the case of the Chinese Socialist market economy and Vietnamese Socialist-oriented market economy. In China, the Chinese Communist Party has led a transition from the command economy of the Mao period to an economic program called the socialist market economy or "socialism with Chinese characteristics." Under Deng Xiaoping, the leadership of China embarked upon a program of market-based reform that was more sweeping than had been Soviet leader Mikhail Gorbachev's perestroika program of the late 1980s. Deng's program, however, maintained state ownership rights over land, state or cooperative ownership of much of the heavy industrial and manufacturing sectors and state influence in the banking and financial sectors.
Elsewhere in Asia, some elected socialist parties and communist parties remain prominent, particularly in India and Nepal. The Communist Party of Nepal in particular calls for multi-party democracy, social equality, and economic prosperity. In Singapore, a majority of the GDP is still generated from the state sector comprised of government-linked companies. In Japan, there has been a resurgent interest in the Japanese Communist Party among workers and youth.
In Europe, the Left Party in Germany has grown in popularity, becoming the fourth biggest party in parliament in the general election on 27 September 2009. Communist candidate Dimitris Christofias won a crucial presidential runoff in w:Cyprus, defeating his conservative rival with a majority of 53% of the vote. In Greece, in the general election on 4 October 2009, the Communist KKE got 7.5% of the votes and the new Socialist grouping, Syriza or "Coalition of the Radical Left", won 4.6% or 361,000 votes.
In Ireland, in the 2009 European election, Joe Higgins of the Socialist Party took one of four seats in the capital Dublin European constituency. In Denmark, the Socialist People's Party more than doubled its parliamentary representation to 23 seats from 11, making it the fourth largest party.
In France, the Revolutionary Communist League candidate in the 2007 presidential election, Olivier Besancenot, received 1,498,581 votes, 4.08%, double that of the Communist candidate. The LCR abolished itself in 2009 to initiate a broad anti-capitalist party, the New Anticapitalist Party, whose stated aim is to "build a new socialist, democratic perspective for the twenty-first century".
In some Latin American countries, socialism has re-emerged in recent years, with an anti-imperialist stance, the rejection of the policies of neoliberalism, and the nationalisation or part nationalisation of oil production, land and other assets. Venezuelan President Hugo Chávez, Bolivian President Evo Morales, and Ecuadorian president Rafael Correa for instance, refer to their political programs as socialist.
An April 2009 Rasmussen Reports poll conducted during the Financial crisis of 2007–2009 suggested there had been a growth of support for socialism in the United States. The poll results stated that 53% of American adults thought capitalism was better than socialism, and that "Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided". The question posed by Rasmussen Reports did not define either capitalism or socialism.
Criticisms of Socialism
Criticisms of socialism range from claims that socialist economic and political models are inefficient or incompatible with civil liberties to condemnation of specific socialist states. In the economic calculation debate, classical liberal Friedrich Hayek argued that a socialist command economy could not adequately transmit information about prices and productive quotas due to the lack of a price mechanism, and as a result it could not make rational economic decisions. Ludwig von Mises argued that a socialist economy was not possible at all, because of the impossibility of rational pricing of capital goods in a socialist economy since the state is the only owner of the capital goods. Hayek further argued that the social control over distribution of wealth and private property advocated by socialists cannot be achieved without reduced prosperity for the general populace, and a loss of political and economic freedoms.
There are a number of ways to measure economic activity of a nation. These methods of measuring economic activity include:
- Consumer spending
- Exchange Rate
- Gross domestic product
- GDP per capita
- GNP or Gross National Product
- Stock Market
- Interest Rate
- National Debt
- Rate of Inflation
- Balance of Trade
The Gross Domestic Product or GDP of a country is a measure of the size of its economy. While often useful, it should be noted that GDP only includes economic activity for which money is exchanged. GDP and GDP per capita are widely used indicators of a country's wealth. The map below shows GDP per capita of countries around the world:
The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion intended to represent the income distribution of a nation's residents. The Gini coefficient measures the inequality among values of a frequency distribution. A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (for example where only one person has all the income). However, a value greater than one may occur if some persons represent negative contribution to the total (e.g., have negative income or wealth). For larger groups, values close to or above 1 are very unlikely in practice. The Gini coefficient was originally proposed as a measure of inequality of income or wealth. For OECD countries, in the late 2000s, considering the effect of taxes and transfer payments, the income Gini coefficient ranged between 0.24 to 0.49, with Slovenia the lowest and Chile the highest. The countries in Africa had the highest pre-tax Gini coefficients in 2008–2009, with South Africa the world's highest, variously estimated to be between 0.63 to 0.7. The global income inequality Gini coefficient in 2005, for all human beings taken together, has been estimated to be between 0.61 and 0.68.
An informal economy is economic activity that is neither taxed nor monitored by a government and is contrasted with the formal economy as described above. The informal economy is thus not included in a government's Gross National Product or GNP. Although the informal economy is often associated with developing countries, all economic systems contain an informal economy in some proportion. Informal economic activity is a dynamic process which includes many aspects of economic and social theory including exchange, regulation, and enforcement. By its nature, it is necessarily difficult to observe, study, define, and measure. The terms "under the table" and "off the books" typically refer to this type of economy. The term black market refers to a specific subset of the informal economy. Examples of informal economic activity include: the sale and distribution of illegal drugs and unreported payments for house cleaning or baby sitting.
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