I want to make clear what I think the point or value of an economic system or economic thinking is.⁽¹⁾ Defining an economic system is itself problematic, for it might include only those people involved with each other in a particular way, anywhere in the world --for example, ship builders in Japan, oil companies in Great Britain who buy those ships, bankers in New York who finance them, and the people who work the oil fields in Saudi Arabia to supply them. Or an economic system may include all the inhabitants of a specific geographical or political area, such as a country or region, even though many inhabitants do not actively participate in the economy -- e.g., are out of work and do not make a contribution to it, or in some cases are self-sufficient and do not take part in trading with others.⁽²⁾

First, a couple of examples and comments to make clear the reason behind an assumption I will soon state. Although many famous doctors and surgeons have invented instruments that have helped them make medical breakthroughs, they could not have done nearly as much good for patients if they had to manufacture all their own equipment and perform all aspects of medicine, surgery, and hospital care, construction, and maintenance themselves.

Second, as great a golfer as someone like Jack Nicklaus is, he could not have made nearly as much money as he has and he could not have entertained or thrilled as many people as he has if there had not been golf courses around, ways to travel to them, and televisions and television networks and crews to show the sport to millions of viewers. Nicklaus could not have played such great golf and also manufactured and manned the necessary television and travel equipment or constructed and maintained by his own hands the courses on which he plays. He probably could not have even played golf so well and also made his own set of golf clubs, golf balls, and shoes. 

Finally, if we lived in Paradise or Eden, where all that was desired or necessary was available to each of us, with little effort or need for cooperation and division of labor or specialization, we would not need money or trade. And oppositely, if we were ship-wrecked on a desert island where there was no food, water, or usable resources of any kind, specialization, division of labor, and trade or money would be of little value or benefit. If one person were marooned by himself anywhere, the idea of division of labor or trade would have no practical importance.

Therefore, assuming that few, if any, individuals can produce or provide themselves with as much as they want or need or, could reasonably have, the essence of an economic system or economic community is that people working at specialties or in combination (particularly in those endeavors that knowledge, technology or machinery enhance) can fairly reduce their burdens and yet produce or provide more than they could individually. In cases of division of labor and specialization, individuals or groups of individuals can produce more of a particular service or product than they want or need for themselves, and can thus reasonably and fairly share the excesses of their individual Goods or Services with each other. Economic improvement occurs when greater "shareable" and shared excesses occur of wanted or needed Goods and Services that are distributed so that a larger number of deserving people can have both fewer burdens and more of the things they want or need. Economics is the study of how people divide labor and resources and the attendant burdens and benefits; and it is the reflective study of how people can do it more beneficially, i.e., more productively (increasing the benefits and/or reducing the burdens) and/or more fairly.

One of the central tendencies in this book will be to examine economic policies and practices in terms of the benefits and burdens they (might) cause, instead of just in terms of how quantities and distributions of money are affected, for it is a central tenet of this book that how people are ultimately affected by economic policies and practices is important -- not how money is affected. Money is only important insofar as it affects quality of life. But economic discussions often lose sight of that, and it is imperative not to allow that to happen when thinking about money or when discussing it. Ultimately it is not how much or how little money anyone makes but how well or how poorly their needs are met; and the amount of money they have does not necessarily reflect how well their needs are met. If, just for example, one can travel anywhere in a country one wants to on public transportation purchased with tax money, and if one does not mind riding public transportation, or finds it more useful for one's lifestyle -- e.g., one reads while riding instead of having to attend to driving -- then a person in a country with good public transportation may be richer, in terms of having his needs met, than a person who earns more money but has to spend it, or even just a part of the difference, along with time and energy, on purchasing, using, and and maintaining an automobile. 

Or, as "60 Minutes" reported about one small town's experience with Wal-Mart, everyone's initially saving money when a store opened there eventually "killed the town twice". When the Wal-Mart opened, it drove out of business many of the small store owners. That eventually diminished the base from which Wal-Mart drew customers that the store itself eventually closed. So the initial benefit that Wal-Mart bestowed of saving everyone in the town money on merchandise they bought ended up causing irreparable burdens to the people in the town. Economic systems are like ecological, or any other complex, interdependent systems, in that changes tend to have multiple and rippling effects. To focus on any one factor, such as cost savings, is usually to ignore other likely important consequences. And if they do not explain how (proposed) economic policies actually affect human beings in ways other than just their finances, economic analyses can be narrow to the point of being not only harmful, but to the point of being ridiculous. 

On a recent radio program, a financial expert dispensing advice to callers, pointed out that it would be catastrophic if medical researchers discovered how to prevent and reverse physical aging. The context of her comments was in regard to the Social Security system in the United States, and what she should have meant was that if researchers find a way to prevent or reverse the physical aging process, then we would obviously have to reconsider the notion of retirement and pensions because the current systems are all based practically and philosophically on the ability and social need to work and on actuarial sorts of data that would no longer be applicable. But she may actually have meant exactly what she said -- and may have been more concerned about the "economic" aspects of the matter than the human aspects. (And even when economic matters themselves are what is at issue, they tend to disguise what is involved at the level with what those numbers mean in terms of benefits and burdens. For example, monetary figures about damage to property occurring from natural disasters are usually reported as "losses", even though the rebuilding effort will bring a substantial amount of work and profit to those in the building industry. Or, recently the "costs" of fixing the Y2K problem are considered most expensive, even though other computer industry sales for products and services are considered "gains" in the economy. So if you buy a computer for $2000, that is considered to be good for the economy, but if you then have to spend an extra $50 making sure it works in a certain way, that additional $50 is bad for the economy. And if computer manufacturers redesign their products so that they aren't susceptible to the Y2K problem, that effort and the ensuing sales once again contribute to the economy, rather than "costing the economy" the amount of money involved. There is more involved in this sort of thing than just the financial numbers involved.)

I believe it is absolutely crucial, therefore, for any economic discussion or debate to be, not just about money, but about how people are actually affected, in terms relating to human activities, needs, desires, values, etc. And it is crucial to consider all the effects, not just those one prefers or on which one is inclined to focus.

Now, the reason I say above, in explaining the point or merit of an economic system, sharing the "excess" of what one produces rather than sharing what one produces, is because it is the excesses over and above one's own needs and wants that is, with one exception, the essential feature of (economic) progress through cooperation. Suppose you and I each make a sandwich and dessert for lunch that costs us the same amount and takes us each 15 minutes to prepare. If I trade you a peanut butter sandwich I have made for lunch for the bologna sandwich you have made for your lunch, and we both like either one, neither of us has really gained anything. But if I can make two sandwiches in 8 minutes and you can pack two desserts in 8 minutes and if the cost comes out the same, then I can trade my extra sandwich for your extra dessert and we have both gained (seven minutes in the morning -- plus less work at the supermarket and less work in the kitchen). We gain even more if I am a better sandwich maker than you and you are a better dessert maker than I. 

The exception mentioned above where progress occurs without the trading of excesses, is the trading of my sandwich for yours simply in order for each of us to get variety. Trades of this sort (my house in New Mexico for your house in New York, or my farm for your farm machinery business, the present I get for Christmas that I don't want for the present of equal cost that you get for Christmas that you don't want), bring about a sort of qualitative progress rather than a quantitative one. Such trades are important when they occur; they are not as typical as trading of excesses of specialized production.

With modern industry, the trading of excesses is carried to the extreme that virtually all one makes is excess to be traded to others. (That is, with the exception of people who are working for others for a mere fraction of return from their labor -- such people are producing excesses for the business owners or managers, not for themselves, since they may not be able to afford the amount they need or want of the product they are producing. Still, on say a Mercedes assembly line, each worker is producing an excess of what is needed for one car, and they are pooling the excesses in order to make more cars in a given time frame than what any of them could make if they had to each build a whole car by themselves. more cars than they need for themselves.) 

Or consider a baseball trade. It is generally not particularly helpful to trade your only good second baseman for someone else's only good third baseman (assuming they have equivalent offensive skills and get along with teammates equally, or make equal "leadership" contributions to their teams). It is more advantageous for your team to trade an extra third baseman who is better than another team's third baseman for their extra second baseman who is better than your second baseman, in order to fill a void each team has at the position they are trading for without creating a similar void at a different position. Of course there are some unfair economic exchanges where someone takes advantage of someone else and gains more than the other party, but the idea in any fair (which is what I am interested in for now) economic exchange is to give up things which are of less value to each party than the things they are each getting. That way both increase their lots in life and are not just breaking even.

Now economics as a science is the study of how people actually operate in this regard -- particularly formally or legally. It is the study of how people in various societies divide their labor and resources and how they share with each other -- particularly the study of general principles or general mechanisms involved, and the consequences of those mechanisms. (Black market or underground secondary economies are usually distinguished as such from the country's legal or formal economy. And, further, economics seems not to pay too much attention to informal or unpaid labor and working arrangements, which I will argue later is a mistake that tends to incorrectly influence some economists' views of how people tend to work together and what systems are most stable or progressive.)

There are a number of ways that economic improvement occurs (assuming for now a fair distribution of burdens and benefits): (1) the discovery or creation of services, (2) greater efficiency in production (for example, discovering or making better fertilizers or chemicals to improve farming or pharmaceutical output; the invention and use of machinery that can do proportionally more work of the required sort than the number of people required to build, maintain, and operate the equipment; or better management of resources and labor, as in design of assembly lines, etc.); (3) greater efficiency in physical distribution (e.g, more and better highways, waterways, railways, air travel; more and better planes, trains, trucks, etc., faster loading and unloading methods, greater carrying capacities; more and better distribution networks of non-material goods or services: e.g., the way network and local television, cable and satellite television, video tapes, radio, audio tapes, records, compact discs, phone lines, computers and fax machines, etc. distribute information and entertainment; (4) greater economy of scale for manufacture, distribution of product, providing of service; (5) greater knowledge about what is wanted or needed by whom, and what can be supplied by whom; and (6) greater facilitation of trade and trade arrangements. Improved travel methods or conditions, improved machines, improved working conditions, improved communications about peoples needs (and wants) and capabilities, improved training and improved knowledge and wisdom in general, etc. can contribute to each of these areas of improvement. And, in the opposite direction, economic progress and stability are impeded by those things which make productivity and distribution less efficient, that impede trading transaction, that make less accessible accurate knowledge about potential supply and actual demand, and that diminish scales to less than optimum potentials. 

Trade or the market (whether free or regulated or totally state-controlled) are usually considered to be the mechanism for distribution of each person's (or group of people's) excess production of goods and services. AI gave involved trading. But there are other mechanisms: neighborliness; organized community volunteerism; good samaritanism; gift giving; charity (which is one kind of gift giving -- based primarily on the recipients' needs which he can not (afford to) supply for himself, instead of on other reasons such as wanting to share something or simply to give joy; social and/or historical convention and/or biological habit as in parents providing for their own young children, grown children providing for their own aged parents, or husbands and wives dividing labor between them without its being some sort of business or trading transaction [until divorce lawyers try to tally it up as such in retrospect so they can argue who produced more that needs to be paid back or that is theirs personally to keep -- i.e., reckoning what each person produced in excess of his or her own personal needs and how it was distributed to the other person and at what monetary or trade value, etc.]; death bequests-inheritances (which is a special case of gift giving, since when you die you will have no needs or wants and everything you have is excess and will end up of no use to you no matter what -- whether someone else gets to benefit from it or not; taxation; slavery and the psychological or economic equivalent of slavery where people "voluntarily" do more work for less than it is really worth (or should be worth) because otherwise they could not survive well at all -- not because there is not enough to distribute in the society of which they are a part, but only because of conventions concerning distribution in the society in which they live, conventions that may seem fair or natural, but which are actually ethically arbitrary and often wrong.

I would venture to guess that, contrary to what one might think, most of the work that is done in society is not of an "economic" trade or exchange basis, but is of a neighborly or gift sort. At least a substantial amount of work in society is of that sort. Friends, families, neighbors and co-workers do a great deal for each other that no one keeps a specific balance sheet about as long as there seems to be reasonable general reciprocity. Even professional relationships abound in helpful work and gestures which are not specifically "billed" or charged for and for which no direct exchange is expected. Contrary to some rhetoric, greed or pure self-interest is not the normal cause of labor; and that is easy to see in two kinds of cases: (1) people who are greedy and selfish and who do nothing without some payment or incentive stand out as being selfish and greedy and lazy and unhelpful. If everyone behaved that way all the time, we would not notice the few who actually do behave that way. (2) When relationships break down and people start to act in guarded, unfriendly, distrustful ways, seeking only what is best for themselves, and doing little out of simple kindness and generosity, that is a noticeable situation, and one in which relatively very little gets accomplished. Further, it is a very difficult and uncomfortable way for most of us to operate; and it is clearly not the way we normally interact with others. (I will discuss Adam Smith's view of enlightened self-interest later, since it is often misunderstood and mistakenly pointed to as the belief that pure self-interest alone can foster cooperation, and is somehow the underlying psychological mechanism that drives a market economy.) 

Economists and business leaders need to be very careful to understand the actual mechanisms and motivations of human behavior if they are going to try to enhance business by means of them. It is very easy for a social scientist to notice and to study the behavior which proves his point and to ignore as irrelevant, and outside the scope of his area, the behavior which actually is contrary to it. If I am correct about exchange and greed not being our normal, necessary, or most important motivation or means of interaction, then economics that studies only those kinds of interactions which are based on self-interest and exchange will, of course, yield skewed (and false) results about how people behave and what kinds of incentives need to be employed to influence their behavior. Hence, in this book I will be talking about behavior which may not seem at first blush to be "economic" behavior, but which I think is important for us to see ought to be considered to be economic behavior, if economics is the study of how we do, in fact, interact to decrease our burdens and increase our benefits in fair and justifiable ways. We do not simply trade with each other, and economics therefore is not just about making trades. It is about how we "share" or divide resources and labor, and about how we ought to do so. 

1. I say "point or value" because the Nobel laureate economist Friedrich A. Hayek, argues that a market system has no central purpose, but instead consists of a vast number of reciprocal actions toward "the reconciliation of different purposes for the mutual benefit of the participants...." He believes that one of the chief characteristics of a market, and one that is necessary for a successful market system, is the "purposeless spontaneous order" of these varied reciprocal actions, brought about, not by directed compliance toward a "unitary scale of concrete ends" or a particular governing belief about what is important, but by "members of a free society hav[ing] a chance successfully to use their individual knowledge for the achievement of their individual purposes...." Even to the extent, however, that Hayek is right about "the market" having no specific originating purpose or overall design dictating a goal toward which all its individual spontaneous transactions tend, that does not mean there is not a particular merit to the overall enterprise, nor that there are no general principles (moral or otherwise) which apply to the enterprise as a whole or which ought to and could apply without disturbing the spontaneity or success of the individual transactions. Nor does it mean there are no unfair burdens placed on innocent third parties which need to be remedied. 

I will be more specific as I proceed, but it should be clear that something does not have to be designed in order to have value -- penicillin has merit without having been designed by those who use it; and there is a point to using it, without its necessarily having had some purpose to begin with. The free market has certain general benefits even though those benefits may not have been intended; and there are some threads common enough to most or all particular socially beneficial, as well as individually advantageous, transactions, that we can describe those threads even if we cannot generate a design or algorithm to mechanically or automatically generate the advantageous kinds of transactions that contain them. And just as there are certain causal and statistical factors at work in a market, though they were seen only upon scientific study, there are, I will try to show, certain moral and philosophical factors at work as well, though some of them are seen only upon reflection. In fact, many laws or rules in codes of professional conduct are attempts to prevent market transactions which are thought to be socially burdensome even if they are mutually beneficial to the parties of the transaction. Most people already recognize that not every transaction two parties might themselves agree to (e.g., bid fixing or embezzling with an auditing cover-up) is one that ought to be permitted.

2. There is a particularly troublesome and consequential complexity in trying to designate or define what an "economic system" is because not every trade relationship is between members of the same social, geographical, or governmental entity; and not every social, residential, or co-citizenship relationship involves trade or commerce. 

Further, there are ways of distributing burdens and benefits in society that don't involve trade or commerce, but that effect trade and commerce. And it is misleading to categorically lump them as part of the economic system or not to count them at all as part of the economic system.

Yet we often designate or define economic systems by social, geographical, or geopolitical membership; we tend to designate "economies" or economic entities in terms of those, usually governmental, social units - Detroit's economy, Japan's economy, Alabama's economy, etc. Sometimes the designation is geographic or a mixture of geography and similar sociological conditions, as in the economy "of the Northeast, " "of the rural South," or of "urban inner cities" or "large cities".

However, members, residents, or citizens of the same social or geopolitical group don't necessarily participate in "an economy" in the same way, in an important sense of "same", not just in the sense that they don't all do the same work or contribute the same amount or receive the same benefits for their labors. And it is misleading in some important ways to group them together, whether you include or exclude them from the economic system under consideration. What is misleading is to confuse social policies and practices with economic policies and practices, even though the two often are intertwined, and perhaps justifiably so. 

Take some simple examples. Children in a family or in a community that has sufficient resources not to need to put children to work at daily jobs, receive benefits from a community or from their parents without contributing to the economics of the family or society (while they are children). In a slave "economy" on the other hand, slaves contribute a great deal to the economy, but get back very little from it. 

In communities, there may be (1) people who are unemployed, (2) people who work together and trade among themselves, (3) people who work and/or trade primarily with people outside the community (e.g., who deal primarily in foreign trade or in interstate commerce), (4) people who have a disproportionate amount of burdens (e.g., have to do most of the work for the minority of the reward), and (5) people who have a disproportionate amount of benefit (e.g., have most of the "economic" rewards for a minor or negligible contribution of the work). In some very important sense that is difficult to spell out precisely in general terms, slaves and their masters, children and their parents, industrialist leaders and the unemployed are not part of the same economies or the same economic systems just because they simply happen to live together in some city, state, country, or family. Yet economies and economic systems typically refer to such social or geopolitical entities.

If this were just a matter of degree of participation, it would be unnecessary to state this. To say that the combined assets of Bill Gates and some penniless homeless person is over 50 billion dollars would just be a statistically misleading representation in the form of an unkind joke. But everyone would understand its meaning; and everyone would understand that their average incomes were billions of dollars only in a "mathematical average" sense, not in an equal partnership sense. That is not the problem in talking "economics".

The problem is it is often extremely difficult to separate or to distinguish economic relationships from other kinds of relationships, because, particularly under interdependent social conditions, those who work and trade with each other often have important impact on those who do not. Take a really simple case first. Suppose that school students bring their own lunches to school. And suppose that three or four students decide to work together to make their lunches because one is able to make really good desserts, one can make great sandwiches, one has a way with soup, etc. and that it is easier and more cost effective for each of them to divide their labor and trade among their specialties. Each of the three or four students participating in this effort is part of an economic system of commerce. The other students are not. However, suppose that some additional students want to participate with the initial group because the food looks so good. They may pay for their food or they may have something to offer in trade that the initial group members want. The economic system has expanded, but the non-participating students are still not a part of it. No problem so far; the trading/catering kids have one system for getting their lunches; the other kids have a different system (or no system). But now suppose one or both of the following things happen:

(1) the catering students start to corner the best food in the neighborhood market, thus making it difficult for the other students to get even as good of lunches as they were bringing on their own before,

(2) some of the other students want to participate, but they cannot because either they have nothing the catering group wants, or the catering group wants to exclude them, or doesn't want to work any harder even if it means getting greater benefits.

At this point, it seems less clear that there are two separate systems or that there is a system some of the students have, while others do their lunches differently. It starts to seem appropriate to think of it as one system that harms or excludes some people. At issue is not so much how we describe the situation as is how we think about it. For example, in the initial stages, no one would feel sorry for the kids who are not part of the original three; but in the latter stages, one does start to feel sorry for them perhaps. In the case of (2)'s occurring by itself, this may even seem odd because the students under (2) have not lost anything materially from what they had originally; they have simply not gained as much as the kids who are able to trade. Yet how we describe it will eventually influence how we (or perhaps more, how others) will think about it. Should we call the initial stages one economic system, two systems, or no system? Should we call the later stages one system or two systems, or still no system? While clearly the non-participants in the early stages of the enterprise cannot have any legitimate complaints about the three initial students working together, can they have any legitimate complaints once the enterprise starts to affect them in the ways described?

Or suppose, we have two different countries whose policies and practices in relationship to business and commerce are identical. They have the same customs, laws and principles applying to contracts, to fraud, to pollution, to manufacturing, etc. Anyone doing business in one country could easily open a business in the other. However, suppose that in one of the countries, the people feel that it is important to take care of the people who do not or cannot participate in the commerce of the country - say, the unemployed, or the starving artists who cannot sell their work. So they institute some sort of program or plan to share the benefits of their commerce with them. And suppose in the other country, the people involved in the commerce don't want to share with the unemployed or the starving artists. So they don't. The question I wish to ask then is: While it is clear that these two countries have different social systems, and perhaps different ethical values, do these two countries have the same economic system or different economic systems? 

I don't think there is a simple objective answer to these questions. And I certainly don't think we can legitimately build our answer into the "definition" of what an economic system is or ought to be, for that would end up determining ethical and philosophical issues by what seems to be definition, rather than by more proper and complex analysis of, and reflections on, the issues.

I raise this (these) issue(s) here, not in order to answer them, but in order to point out some things we need to keep in mind in some of the ensuing discussions. It will make those discussions more amenable to dissection and analysis.  (Return to text.)