The Pre-market Economy: Early solutions to the economic problem

The big ideas we’ll be discussing tonight

1. The tasks of an economy

2. The “economic problem”

3. Three solutions to the economic problem

4. Economic structure in antiquity and in the middle ages

5. Conditions required for the emergence of a market economy

What are the primary tasks of an economy?

The Primary Tasks of an Economy

1. Production: to organize social institutions that will mobilize human energy for productive purposes.

2. Distribution: the economic institutions of society must ensure a viable allocation of the social effort

Therefore, a formal definition of economics is . . .

Economics is the study of how a society chooses to allocate resources (land, labor,

capital, knowledge) to produce and distribute goods and services for

consumption.

What is the economic problem?

Three approaches to solving the economic problem: What are their strengths and drawbacks?

1. Tradition- production and distribution are coordinated by what worked in

the past- the drawback of this approach is that it is static and doesn’t

result in dynamic gains

2. Command- production and distribution are determined by an economic

commander-in-chief- a powerful mechanism for bringing about economic change

- diverts economic resources toward the goals chosen by a higher authority

3. The market- production and distribution are coordinated by demand

- the most dynamic system for generating economic growth- economic resources, however, may not be fairly distributed

The premarket economy

As we trace the evolution of economic life from As we trace the evolution of economic life from the premarket economies that characterized the premarket economies that characterized antiquity to the global free market economic antiquity to the global free market economic system we must consider the influence of system we must consider the influence of

numerous forces including:numerous forces including:

Culture and geographyCulture and geography

Philosophy and religionPhilosophy and religion

Political systemsPolitical systems

LawLaw

Money and capital marketsMoney and capital markets

Economic life in Antiquity

What features characterized economic life in antiquity?

Economic life in Antiquity

1. Economics were overwhelmingly based on agriculture, done by a peasantry who did not own their land, did not get to keep all the fruits of their labor, did not enter the market, did not seek out new technologies for dynamic

gains.

2. The economic life of the cities, where trading in a market did take place, was composed of consumers—primarily of

luxury goods—and not of producers of goods.

3. Wealth did not accrue to those who played an economic role but to those with political, military, or religious

power—economic surplus did not accrue to the general population.

Economic life in Antiquity

4. Aristotle differentiated the economic process into two branches: use and gain (vs. production and distribution). He

approved of the first (careful management of household resources) but not of the second.

5. Markets existed, but they must not be confused with modern markets because they were not how societies solved their

basic economic problems.

6. Differences between modern farmers and peasant farmers

Economic life in antiquity

Despite the fact that trade in commodities and “manufactured” goods was widespread in

antiquity, the author argues that these were not market economies. Why not?

Economic life in the Middle Ages

The fall of the Western Roman Empire led to the fragmentation of European economic life and trade,

and to the rise of the manorial system. What implications does this have for the role of government

in an economic system?

Economic life in the Middle Ages

1. After the fall of Rome, there was a breakdown in large political organization (which made long distance trade hazardous)

leading to smaller political units and economic self-reliance (although there were city-states that had trading empires such

as Venice and Genoa)

1. Feudalism: the social, political and economic organization of society—the manor, although an economic entity, was

primarily a political and social entity, in which the lords had absolute power over their serfs—primarily a barter as opposed

to money economy, extreme self-reliance

2. Exceptions to the manor: town and fair

Economic life in the Middle Ages

4. The guilds: unions of craftsmen organized not so much to make money as to make production orderly, limit competition,

and prevent the growth of monopolistic power

4. Medieval economics sought to deal with economic organization (what to produce, etc.) by tightly controlling economic life in an order ordained by God such as the manor system and the guild

structure or production

Economic life in the Middle Ages

6. Economic thought was largely moral, or prescriptive:- the disrepute of gain

- determination of the just price- the worldliness of material things

7. In summary, there was no free play of price, no competition, no probing for advantage; no idea of an expanding economy, a growing

scale of production, an increasing productivity

“The idea of an expanding economy, a growing scale of production, and an increasing productivity was asforeign to the guildmaster or fair merchant as to theserf and lord. Medieval economic organization wasconceived as a means of reproducing, but not enhancing, the material well-being of the past.” (p.31)

Summary of Pre-Market Approaches to Solving the Economic Problem

In general, economic organization was highly structured and restricted by government, by religion, and by the worldview that human existence is

static and that economic resources are fixed.

The emergence of the market economy

What are the prerequisites for change from a political or religious society to a market society?

A new attitude toward economic activity will be needed

Economic life will have to be monetized

The forces of market demand will have to take over the regulation of economic activity

Factors contributing to the emergence of the market society

1. From the itinerant merchant to the merchant of Prato: Bringing “foreign” goods to a local market

2. Urbanization & the growth of a socio-economic sphere independent of the manor

3. The breakdown of the manorial system

– the manorial system depended on barter

– with the rise of a monetized economy the nobility had

insufficient access to money

4. The growth of national power

Factors contributing to the emergence of the market society

5. Exploration and the increase of precious metals in circulation

6. A change in the religious climate– the disrepute of gain in the Catholic Church

– Calvinism, the Protestant work ethic, and the use of wealth

7. The rise of a new interest in technology – the scientific and industrial revolutions

The emergence of the market economy

In summary, the appearance of the economic aspect of life as a sphere of activity separate from other aspects of social life was a prerequisite for the

emergence of the market economy as exemplified in the life of Francesco di Marco Datini.

The Merchant of PratoFrancesco di marco Datini – 1335-1410

Here most men are still ordering their lives according to the precepts of the Church and the statutes of the guilds, but a few are already merely using these rules as a screen behind which to form their own audacious schemes. The unquestioning orthodoxy of the Middle Ages is giving place to the skeptical, inquiring mind of the Renaissance, and among the pioneers of the new order are men who perforce have had to depend upon their own enterprise, adaptability, and shrewdness, to achieve their ends; the merchants. . .

In his new business dealings Francesco was already a man of the new world: he belonged to it by his spirit of enterprise, his commercial methods, his international connections—and his own intense individualism . . .

The medieval man was esteemed in so far as he formed part of an aristocratic clan, a guild, or a party; in the Renaissance, he was assessed by what he had made of himself.

In the extent and variety of his ventures, in his powers of organization, in his international outlook, in his swift adaptability to the changes of a society in turmoil, as in his own ambition, shrewdness, tenacity, anxiety, and greed, he is a forerunner of the business-man of today.

What are some approaches for solving the economic problem through human

organization; that is, what are the options available for producing and distributing

goods?

Three approaches to solving the economic problem: What are their strengths and drawbacks?