The Economic Revolution

Adam Smith from Wikipedia

First published 10/6/2008

Heilbroner (1999) called the emergence of capitalism in the 17th century an “economic revolution”. This essay will examine what brought on this revolution and what it meant for individuals and society at the time. The author will examine capitalism today and suggest an alternative.

The market system is a system where buyers and sellers are motivated by financial gain rather than tradition or authoritarian rule. The market system grew gradually in the 18th century and was influenced by a number factors including European exploration (and expansion), the renaissance, scientific discoveries and the decline of the guilds.

Civilizations have long relied on human interdependence for survival. Today we would not survive long without our human compatriots providing (and maintaining) essential services like power, water and cable television.

Early civilizations maintained cohesion by restricting human independence with tradition (or customs) and authoritarian rule. For example, an individual iron monger were often iron mongers for life and would train heirs to be future iron mongers.  The selection of gymnasts during cold war Russia is an example of authoritative rule.

The introduction of the market economy had a significant effect on society. Individuals were no longer bound to a profession by virtue of his or her family association or class. Individuals began to seek work with the greatest gain. Similarly landowners used their lands to generate wealth by pursuing ventures that had the greatest promise of reward.

A planned economy is a system in which the government manages the economy through regulation and ownership of businesses. Countries with planned economies today include Cuba, Libya, Saudi Arabia, Iran, North Korea and Burma (Planned economy, 2008).

Most countries today have mixed economies, that is, an economy that contains elements of capitalism and socialism. People are encouraged to pursue their entrepreneurial ambitions but the government retains some control on the economy through regulation.

The economy of the United States and that of many other counties is currently undergoing a severe correction. Share markets are declining and credit markets failing as investors lose confidence. But the root of this problem is the US subprime mortgage crisis that was permitted to flourish with little oversight.

Lending institutions repackaged risky loans as Mortgages Backed Securities (MBS) and appended Credit Default Swaps (CDS) as a quasi-insurance policy (CBS News, 2008).

In a brief moment of clarify, Alan Greenspan admitted that the securitization of subprime loans was the cause of the financial problems that started in October of 2007.

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market, arguing that the securitization of home loans for people with poor credit — not the loans themselves — were to blame for the current global credit crisis.
(MSNBC, 2007)

It may be difficult to assign exclusive fault for the current financial woes to the government. But is it the government’s responsibility to prevent financial crises or clean up the mess following one? It would seem that the former is more logical.

Perhaps it is time to re-invent capitalism (Baldwin, 2008). One solution would be for the US to consider a more left-wing approach to government, that is, to permit greater government influence in the economy to ensure that excesses in business are tempered.

REFERENCES

• Baldwin Bob (2008, October 6). University of Redlands.
• Heilbroner Robert (1999), The Worldly Philosophers, 7th ed., Simon and Schuster.