2The Roots of Economic SystemsWHY AND HOW DO …



The Roots of Economic Systems

WHY AND HOW DO ECONOMIC INSTITUTIONS CHANGE?

Why do economic systems change?

How do they change

technological change

population growth.

EVOLUTIONARY AND REVOLUTIONARY CHANGE

evolutionary school stress the gradual nature of change.

Revolutionary school

laws of motion Marx

superstructure

Darwin.

ECONOMIC SYSTEMS IN HISTORICAL PERSPECTIVE[1]

HUNTER-GATHERER SOCIETIES

“ORIENTAL DESPOTISM”

Classical Slave Economies

latifundia

The Feudal System

[A] kind of dispersed biker gang: armor, horses, and their propensity to resort to violence elevated them above most of the rest of the population in the same way as leather and Harleys elevate movie bikers where State authority is absent.[2]

PEASANTRY -- 90 PERCENT OF THE RURAL POPULATION.

Serfs

Free peasants

Command economy

Mercantilism

Feudal was under attack from without and within.

Rise of trade, towns and markets.

Mercantilism Defined

creation of an integrated economic space

state involvement in the development of the national economy

positive balance of trade was desirable

Adam Smith’s derision in the Wealth of Nations,

“Bullionists”

“Cameralists”

balance of employment.

The Institutions of Commercial Capitalism

Industrial Capitalism

1. The replacement of muscle power (whether animal or human) by machine power, first water power and then steam

2. THE REPLACEMENT OF SKILL AND CRAFTSMANSHIP BY THE ARTIFICIAL AND REPETITIVE PRECISION OF THE MACHINE

3. THE REPLACEMENT OF ORGANIC SOURCES OF RAW MATERIALS BY INORGANIC ONES

4. THE REPLACEMENT OF NATURAL “TIME” BY THE CLOCK (THIS LAST DEVELOPMENT WAS ESPECIALLY IMPORTANT FOR THE CREATION OF WORKFORCE DISCIPLINE IN THE FACTORY SYSTEM.)

GAIN IN INFLUENCE OF THE MANUFACTURING CLASS.

Corn Laws

The Industrial System in Continental Europe

Finance Capitalism

Imperialism

CONTEMPORARY ECONOMIC SYSTEMS

Socialism and Communism

The Growth of the Welfare State

Corporatism and Fascism

Economics and Islam

The declared purpose of Islamic economics is to identify and establish an economic order that conforms to Islamic scripture and traditions. Its core positions took shape in the 1940s, and three decades later efforts to implement them were under way in dozens of countries. In Pakistan, Malaysia, and elsewhere, governments are now running centralized Islamic redistribution systems known as zakat. More than sixty countries have Islamic banks that claim to offer an interest-free alternative to conventional banking. Invoking religious principles, several countries, among them Pakistan and Iran, have gone so far as to outlaw every form of interest; they are forcing all banks, including foreign subsidiaries, to adopt, at least formally, ostensibly Islamic methods of deposit taking and loan making. Attempts are also under way to disseminate religious norms of price setting, bargaining, and wage determination. And for every such initiative, others are on the drawing board[3].

KEY TERMS AND CONCEPTS

balance of employment industrial capitalism

balance of trade Islamic economics

commercial capitalism laws of motion

communism mercantilism

the corn laws Oriental despotism

corporatism population growth

evolutionary school superstructure

fascism technological change

Feudal system socialism

finance capitalism welfare state

“hydraulic” societies

QUESTIONS FOR DISCUSSION

1. Why does technological change frequently cause changes in the economic system? Can different economic systems be compatible with a single technology?

2. Why did the system of irrigated agriculture practiced in much of South and East Asia allow the surplus to be appropriated by the state?

3. How did the revival of trade and the advent of the Black Death undermine the feudal system?

4. What economic rationale might there be for a merchant class to favor a balance of payments surplus?

5. In what ways did the repeal of the Corn Laws in Britain represent a victory for the manufacturing classes over the landowners?

6. In what ways did economic development on Continental Europe differ from development in Britain?

7. Distinguish between socialism and communism as economic systems.

What defines a corporatist state?

9. “Fascism should be more correctly called corporatism.” Should this be a criticism of contemporary corporate America?

9. In what ways have Islamic economies found alternatives to handle the restriction on the use of interest rates?

RESOURCES

WEB SITES

This chapter is largely concerned with economic history and the history of economic thought. A good starting point for any research into the history of economic thought is the “History of Economic Thought” Web site, which is currently at , although it is in the process of relocation. It provides links to Web information on all major economists (living and dead), providing access to biographies, critiques, and their work that is downloadable from the Web. Two particularly useful sites in the context of this course are the following:

1. A searchable and downloadable copy of Adam Smith’s An Inquiry into the Nature and Cause of the Wealth of Nations, which is at

2.

3. The Marx/Engels Internet Archive has links to all of the Web-accessible work of Karl Marx and Friedrich Engles, as well as a lot of commentary. It is at

3. There are a growing number of sites that provide information about Isalamic economics from the point of view of its proponents. One can be found at

BOOKS AND ARTICLES

Cameron, Rondo. A Concise Economic History of the World, 2d ed., 363. Oxford: Oxford University Press, 1993.

Coleman, D. C. Revisions in Mercantilism. London: Methuen, 1969.

Farouqui, Mahmood, ed. Islamic Banking and Investment: Challenge and Opportunity. New York: Kegan Paul, 1998.

Fei, John C. H., with Gustav Ranis (Contributor). Growth and Development from an Evolutionary Perspective. London: Blackwell, 1997.

Hansen, Ejvind Damsgard, European Economic History: From Mercantilism to Maastricht, Copenagen: Copenhagen Buisness School Press, 2001

Hodgson, Geoffrey M. Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics. White Plains: Edward Elgar, 1999.

Kuran, Timur. “Islamic Economics and the Islamic Sub-Economy,” Journal of Economic

Perspectives 9, no. 4 (Fall 1995): 155–173.

Kuran, Timur, "The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity,” Social Research, Vol. 64, no. 2 (Summer 1997)

Nelson, Richard , Evolutionary Theory of Economic Change, Cambridge: Harvard UP, 1985

Presley, John, and John Sessions. “Islamic Economics: The Emergence of a New Paradigm,” Economic Journal 104 (May 1994): 584–596.

Schwartz, Herman. States Versus Markets: History, Geography, and the Development of the

International Political Economy. New York: St. Martin’s Press, 1994.

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[1] This section is concerned with the evolution of societies in historical perspective and can be omitted without damaging the overall flow of the text. It is recommended that any reader rejoin the discussion with “Contemporary Economic Systems” on page 57.

[2]See Herman Schwartz, States Versus Markets: History, Geography, and the Development of International Political Economy (New York: St. Martin’s Press, 1994).

[3] Timur Kuran, "The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity, Social Research, Vol. 64, no. 2 (Summer 1997)

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Box 2

Pakistan and Interest Free Economics

While the use of interest is generally as being against fundamentalist Islamic it is generally tolerated in most countries. Recently Pakistan looked as if it was going to make a serious move towards eliminating the use of the payment of interest. The Federal Shariat Court (FSC) is a unusual institution charged under the Pakistani constitution with determining if “any law or provision of law is repugnant to the injunctions of Islam. . .” In 1999 the FSC determined that the laws and commercial code necessary to support the use of interest rates in banking were repugnant to the Islam and ordered all such laws to be removed from the statute books. The government appealed to the Supreme Court of Pakistan which upheld the decision of the FSC. The supreme court ordered that all such legislation supporting the use of interest should cease as of June 30th, 2001. Fearing that this would have a serious impact on the economy, the government questioned the competence of the FSC in this area and did little to facilitate removing the “obnoxious” legislation. In the aftermath of the invasion of Afghanistan the government has seemed more resolved to resist the Islamic fundamentalists and nothing further has happened and so we will have to wait to assess the practicality of a major economy operating without the use of interest.

Box 1 Economics and 9/11

It is tempting to see the events of 9th September 2001 as the result of ideological conflict between Islam and capitalism. However, this is not really a conflict of two exclusionary creeds, as was perhaps the case in the cold war rivalry between capitalism and Soviet-style Communism that preoccupied the world for over forty years. The resentment that led to September 11th has clear, deep historical and religious, as well as economic, roots. Some of it can be traced to the relative decline of Islam in the last five hundred years. Islamic civilization was dominant in much of the world in the sixteenth century. At that time Moslems held power from mid-Europe to Zanzibar and from Morocco to the East Indies. The European “voyages of discovery” were actually an incursion into a vast civilization that was learned, skilled, sophisticated and urban. The following five centuries have been ones of progressive decline in Islamic global influence, with the twentieth century particularly catastrophic. The defeat and division of the Ottoman Empire, the extension of western political interests to ensure the reliability of the oil supply and the establishment of the state of Israel have all been severe blows that have excited anti-Western feeling.

Today the countries of the world that are either have Islam as their official religion or are inhabited in the majority by Moslems are generally much worse off in terms of income per head than are the inhabitants of the developed western nations. According to the World Bank Development Report 2000/2001m average income per head in the United States is about $30,600. The average income in terms of purchasing power parity for the 28 richest countries is $23,430 per year. In contrast the average for the 291 million people living in North Africa and the Middle East is only $4,600 per year, about one fifth of the level. Some Moslem counties are even poorer. Indonesia, Pakistan and Bangla Desh, which are the most populous of the Islamic nations, have together a population of 370 people. Average have per head incomes is $2,439, $1,757 and $1,475 respectively. On this rough basis we can see that the average Moslem is likely to have an income of around $3,000 a year, 10% of the average in the United States.

Moreover, poverty is reflected in other measures. 15% of children in the Middle East and North Africa are affected by malnutrition, 136 children out of every thousand die before the age of five, against 15 in the high income nations, and life expectancy is 67 years against 78 years in the developed west. Such relative poverty might well be a cause of anger, and might be a contributory cause of anti-American terrorism but cannot be said to be the sole cause, since there are nations whose relative standing in terms of income and health are even lower.

While Americans, and other Westerners, tend to see their affluence as flowing from their own hard work and the productivity of their institutions. They tend to believe that the key to prosperity abroad lies in adopting similar ethics and structures. Non-westerners, especially Moslems today, are much more likely to see the affluence of the west and the poverty of their own societies in terms of a zero-sum game, considering the very prosperity of the West as the result of conquest, tribute or unequal exchange. This seam of argument is particularly rich with respect to the Moslem Middle East and East Indies, so well-endowed with natural resource wealth but lacking the living standards that should follow.

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