Summary and Analysis Chapter 2



From the beginning of civilization, human beings have faced the challenge of survival, which depends upon two factors — work and cooperation with others. Since individuals are notably self-centered, the possibility that humans will not remain faithful to work has threatened society's existence. If there are not enough miners to work the mines or if most miners should decide to follow another line of work; if farmers should decide to fish instead of plow and reap; or if an insufficient number of students studied medicine or engineering, the economy would break down. In summary, if the interdependence of human workers should fail at any vital point in the economy, the world would suffer. During the early portion of civilized life, only two methods safeguarded against such an outcome — tradition and command.


The passage of tasks, or jobs, from generation to generation through custom — a carpenter's child becomes a carpenter or a farmer's offspring take charge of the family farm. This reliance on tradition for the selection of a life's work was especially true of the Middle Ages and is still true in many underdeveloped areas of the world.

Command, or Central Authoritarian Rule

The enforcement of economic survival by absolute rule or dictatorship. An example of this principle is the building of the pyramids in ancient Egypt and the carrying out of the Soviet Union's Five-Year Plans in the post-World War II era.

Throughout most of history, one or the other of these two methods has solved the problem of survival. Because the methods are simple and need no economic explanation, there has been no need for economists. Since the Economic Revolution, however, the evolution of a third method — the market system — has presented a more challenging economic puzzle.

The Market System

A system where buyers and sellers, motivated by self-gain, freely conduct business with the goal of making profits. Another name for this arrangement is capitalism. Prompted by neither the "pull of tradition or the whip of authority," free markets are motivated by a single factor — the human urge to acquire goods.

The market system is not the simple exchange of goods which existed in primitive society, nor the commercial fairs of the Middle Ages. Nor is it a farm produce market or a stock exchange. The market system supports and maintains an entire society. Unplanned and slow to evolve, it was brought about through the most far-reaching revolution of the Western world — the Economic Revolution.

Many factors combined to cause the revolution, such as the breakup of the manorial system, the decline of guilds, the acceptance of the concepts of land, labor, and capital, the effects of the Renaissance, scientific advancement, European voyages of discovery and exploration, the emergence of modern nation-states, and the Protestant Reformation, which sanctioned the concept of profit.

The market system emerged only after bitter opposition to change by the people who tried to maintain their role in the status quo. Nevertheless, as the profit motive became respectable, the market system took shape, bringing with it the economists who satisfactorily explained the complexities of the system. In 1776, Adam Smith wrote his amazing masterpiece, Inquiry into the Nature and Causes of the Wealth of Nations, a work which helped society understand how changes in economics were leading toward a new plateau in human history.


Tradition, or the subsistence economy, bases itself on family, clan, or tribe. By this system, each unit produces all that it needs, and it consumes all that it produces. In many rural areas of Africa, Asia, and Latin America, the question of who will work and what work will be assigned to whom is settled by custom.

The planned economy under central authoritarian rule differs from tradition in that the means of production and the authority to make economic decisions belong to the state. Examples existed in ancient Egypt and Babylonia, where massive work projects were organized at the whim of the ruling class. In more recent times, the communist nations which were formed after the Russian Revolution in 1917 have attempted the same large-scale operations as an outgrowth of a centralized authority. In neither instance did individuals actualize their own ideas or goals.

In the market system, or market economy, economic decisions are decentralized: Each member of the labor force chooses which job to follow; each household selects what to buy with its income; and each business decides what to produce, what production methods to use, and where to sell the resulting product. Modern examples exist in the United States, Western Europe, Japan, and Great Britain. This capitalism, which is also called a free or private enterprise system, is named for its use of capital, or investment funds.

None of the three methods, or systems, exists in pure form. Systems practiced today in the United States, Great Britain, Japan, or the Soviet Union are better described as mixed economies, which contain elements of both the market economy and the planned economy. For example, within free enterprise there are obvious government-sanctioned monopolies, such as electric power companies, railroads, and communications systems.

In order to develop what is meant by the Economic Revolution and its roles in the remaining chapters of the book, a few definitions will prove helpful:

Economics: The study of the ways in which human beings make a living; the study of human wants and their satisfaction; the science of wealth.

Economic System: The rules, laws, customs, and principles which govern the operation of an economy. Each economic system has its own peculiar problems and therefore produces its own solutions.

Economic Activity: All action concerned with the creation and distribution of goods and services.

Consumption: The process by which goods and services are utilized in satisfying human needs and wants.

Production: The process of creating goods or services to be consumed.


a. Physical: The process of transporting these goods and services to the people who need or want to consume


b. Personal: The division of income among persons.

c. Functional: The categorization of income according to type — wages, rent, interest, and profit.

Basic Agents of Production of the Market System

Land: Natural resources.

Labor: Human effort.

Capital: The physical necessities for production — buildings, machinery, tools, equipment, and supplies.

Economists call these basic agents "factors of production." They include a fourth factor — management, which plans, coordinates, and directs production, although some economists label this factor a specialized high-level form of labor.

The market system involves a high degree of economic activity, revolving around the production of goods and services. It is significant that the basic agents of production — land, labor, and capital — did not exist as abstract ideas until the Economic Revolution. Of course, there was land used for agriculture, and labor in the form of human workers doing physical tasks, and capital that provided funds for buying tools and maintaining the land. However, society as a whole did not consider these terms as impersonal ideas in the modern sense of "Let's start a business — we need land for the location of the factory, we need a labor force to do the work, and we must have the capital to finance our efforts."

During the Middle Ages, land existed in the form of estates, manors, and principalities, but it was not "for sale" in the modern sense. Instead, the ownership of land provided the prestige and status around which social life revolved. There were serfs, apprentices, and journeymen who worked, but there was no labor market — that is, people who were looking for jobs. The serfs were bound to the land of their masters, the lords. The apprentices and journeymen served the master and were rigidly controlled by guild regulations. Capital funds in the sense of private wealth existed, but not with any idea of investing, expanding, or taking risks. The goal of medieval landholders was to stabilize and protect the nation by financing wars and conquests and by underwriting the household expenses of kings. A good example is the Fugger banking family of Bavaria, which failed to pursue the amassing of wealth begun by their patriarch, Anton Fugger. Under the medieval system, advertising was unheard of; the basis of price was the just price. People lived as their ancestors had lived — off the output of the family land.

Without land, labor, and capital there was no production in the modern economic sense and therefore no market system. Society in the Middle Ages was run by custom and tradition. This system changed after the Economic Revolution, which represented a radical departure in commercial practices and concepts. The following factors were responsible for the Economic Revolution, which ushered in the market system:

The Renaissance (1350-1600) — when the weakening of restrictive religion produced a more skeptical, inquiring attitude.

The Scientific Revolution (1500-1700) — the discovery of scientific principles which laid the foundations for the Industrial Revolution.

Emergence of Nation-States (15th-l7th centuries) — a process that gave rise to royal patronage for favored industries, maritime trade, and the standardization of laws, measurements, and currencies.

The Age of Exploration and Discovery (l5th-l7th centuries) — an era which saw the rise of wealth in gold, silver, and raw resources from colonies in the New World.

The Protestant Reformation (1500-1648) — an era which encouraged enterprise, the investment of capital, and the respectability of interest and profit.

The greatest single change necessary for the adoption of the market system, or capitalism, was a radical change in the attitude of society toward profit, or self-gain. Without the profit motive, there would be no capitalism, or market system.

Certainly, the concepts of money and profit are old, with the first coined money dating back to Lydia, around 600 B.C., and with such Greek philosophers as Xenophon, Plato, and Aristotle, who were well aware of wealth, money, and profit. However, rather than emphasize any economic considerations, the ancient philosophers denounced economics in favor of basic questions about truth, good, evil, God, and life.

Later, the Church and its philosophers, especially St. Augustine and St. Thomas Aquinas, were completely absorbed with the question of immortality. These religious thinkers emphasized salvation as the all-important concern of society and criticized the acquisition of earthly material goods or riches. And so it was that the New Testament phrase "For the love of money is the root of all evil" (I Timothy 6:10) blocked the development of the market system, which emphasized self-gain and profit rather than spirituality.

Gradually, however, the factors listed above helped shape the market system. The Renaissance encouraged a new individualism in economic affairs and contributed to the breakdown of the guild system and to the rise of enterprise. Protestantism became a strong force in the alteration of concepts. Calvinism especially encouraged enterprise. Some Calvinists saw prosperity as a sign of God's grace, and poverty as evidence of damnation. Thus the Protestant Reformation obliterated the old concept of the just price and the ban against charging interest on loans. Consequently, the loaning of money and the investment of capital became respectable, and Western society as a whole adopted the profit motive, an idea explained by Adam Smith, the father of modern economics.


Economics The study of the ways in which people make a living; the study of human wants and their satisfaction; the science of production, distribution, and consumption of goods and services.

Economic System The rules, laws, customs, and principles which govern the operation of an economy. Each economic system has its own peculiar problems and therefore produces its own solutions.

Economic Activity All action concerned with the creation of goods and services to be in some way consumed.

Consumption The process by which goods and services are utilized in satisfying human needs and wants.

Production The process of creating the goods or services to be consumed.

Physical Distribution The process of getting goods and services into the hands of consumers.

Personal Distribution The division of income among individuals.

Functional Distribution The division of income according to different types . . . wages rent, interest, profit.

Basic Agents (Factors) of Production Land, labor, capital, and management

Land Natural resources.

Labor Human effort.

Capital The physical necessities for production — buildings, machinery, tools, equipment, and supplies. This term commonly refers to the money used to purchase these necessities.

Management The planning, coordination, and direction of production.

The Economic Revolution The development of historical factors which culminated in the adoption of the market system (capitalism).

The Renaissance (1350-1600) — the era which saw the decay of a restrictive religious spirit in favor of a spirit of skepticism and inquiry.

The Scientific Revolution (1500-1700) — the period of scientific experimentation and discovery which laid the foundation for the Industrial Revolution.

The Emergence of Nation-States (l5th-l7th centuries) — a period giving rise to royal patronage for favored industries, maritime trade, common laws, standard measures, and common currencies.

The Age of Exploration and Discovery (l5th-l7th centuries) — an era which provided natural wealth from the colonies in the form of gold, silver, and other raw resources.

The Protestant Reformation (l500-1648) — a time period encouraging enterprise and the investment of capital; a philosophical outgrowth which made interest and profit respectable.