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Few societies can function if theft is widely used.
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1.4.2 Economic Activities
1.4.2.3 CONSUMPTION
The end purpose of economic activity is to provide goods and services
that can be consumed by individuals to satisfy needs and wants. Modern,
neoclassical economists generally do not like to use the word “needs.” The use
of the word “wants” is an attempt to take subjective judgment out of the
analysis.
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2 The Problem of Provisioning
2 THE PROBLEM OF PROVISIONING
2.1 INTRODUCTION
Society is confronted with a finite set of resources and a given state of
technology at any given point in time. As a result, there is a finite amount of
goods and services that can be produced in that time frame. Given human
desires and need for food, clothing and shelter, it is not always possible to
produce everything that every one would like to have. When individuals want
more than can be produced they have the economic problem of scarcity.
The problem of scarcity might be resolved by reducing individuals wants or
by increasing the output of goods and services. If the solution is to reduce
wants, which wants should be eliminated and which should be retained to be
satisfied? The individual would necessarily be required to make a choice. If the
solution was to produce more goods, which goods should be produced and
how are they to be produced? Again, the individual must make choices. In
modern, neoclassical, economic analysis (we will call this “orthodox”
economics), the problem is structured so the wants are taken as given and the
problem is to produce the goods that satisfy the greatest wants.
Scarcity requires that the individual or agent make choices. An individual in
isolation (Defoe’s Robinson Crusoe before Friday) would have to make choices
since time and resources are limited. It would be necessary to choose whether
time was to be spent catching fish, gathering coconuts, reading or building
shelter. If the choice were to catch fish, he/she would have to choose between
making a net, a fishing pole or trying to catch fish by hand. The choice to
spend an hour fishing implies that that hour cannot be used to gather
coconuts. The sacrifice of coconuts is called “opportunity cost.”
25
2.1 Introduction
Even Robinson Crusoe’s world of isolation did not last long. When Friday
came to the island, it became necessary to decide who did what and who got
what. It is necessary to coordinate the preferences and activities of Crusoe
and Friday. Since the story of Robinson Crusoe was written by an Englishman,
Daniel Defoe (1659-1731), Crusoe is dominant and he has a greater influence
on the decisions than Friday. In 1719, the perspective of an English writer was
that aboriginals of various lands were subordinate. Still, it is necessary to
coordinate their activities.
2.2 SOCIAL INTERACTION
In a society, the behavior of the individuals must be coordinated through
social interaction. This social interaction takes many forms ranging from
cooperation to competition. In the process of resolving the allocation problem
through social interaction, a set of institutions, organizations, beliefs,
principles, perspectives and commonly held values are created. Society,
guided by these values, perceptions and beliefs and constrained by
institutions, technology and resource endowment, must solve the problem of
provisioning. The specific uses of goods and resources must be determined.
These choices involve which resources to use, which goods to produce, who
will bear the costs and who will benefit.
The basic problem is the coordination of the choices and behavior of
individuals. Finding a way to protect the autonomy of the individual while
coordinating their behavior to provide for the commonweal has been an
important goal of most great writers on social topics.
2.3 SPECIALIZATION
Specialization and the division of labor are two important forms of social
26
2.3 Specialization
interaction that allow two or more individuals to do what an isolated individual
cannot do. Both are means to increase the production of goods and services.
Specialization is the case where an individual (firm, organization or
country) focuses on the production of a specific good (or group of goods). It
can increase the amount of goods that can be produced. It also requires some
form of social institution to coordinate the process. If one individual produces
food and the other clothing, the two individuals must interact if both are to
have food and clothing. This interaction may be facilitated through an
institution such as the market or a transfer based on kinship, marriage,
religion or government authority. Plato suggests that the city-state is a social
construct that is used to facilitate specialization and to improve the welfare of
the members of that state.
In T
he R
epublic , Plato [427-347 B.C.] suggests specialization as an
explanation of the origins of the city-state. Plato describes a conversation
between Socrates and a group of students. They are pondering the nature of
justice. They conclude that justice is each person doing that which they are
best suited to do. The person best suited to be a baker should be a baker: the
person best suited to be a shepherd should be a shepherd. Once individuals
specialize, the city-state arises to facilitate the transfer of goods and the
necessary interactions among the individuals. [ T
he R
epublic , Book II]
Plato tries to identify the characteristics of the ideal society. One of the
focal points is justice that is achieved by “each person doing what they are
best suited to do.” Social interaction is required because each person depends
on the other members of the community. He devises a meritocracy that is lead
by philosopher kings. To prevent nepotism and greed from influencing these
philosopher kings, Plato does not allow the philosopher kings to hold private
property rights, all of their property is held in common.
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2.4 Division of Labor
2.4 DIVISION OF LABOR
The division of labor is another form of social interaction that allows
individuals to do what the isolated person cannot. In the division of labor, the
production of a good is broken down into individual steps. One person then
performs one step in the process. No single person produces the good alone.
The actions of each individual in the production process must be coordinated.
In modern industrial societies, production often takes place in a business firm.
“Management” is regarded as the process of coordinating the activities of the
individuals within the production process. A specific application of
microeconomics to the process of production within a firm is called
“managerial economics.”
Adam Smith [1723-1790] in the We
alth of Nations proposes that the
division of labor is one of the major elements that contribute to economic
growth (the increased ability to produce goods and services) [ T
he We
alth of
Nations, page 1]. The division of labor is the process of dividing a task (work)
into its component parts. Smith argues that the division of labor increases
production through improved dexterity, saving time in moving from one task
to another and improvements in tools.
Smith cautions about the effects of unrestrained use of the division of
labor,
“In the progress of the division of labor, the employment of the far
greater part of those who live by labor, that is, of the great body of the
people, comes to be confined to a few very simple operations, frequently
to one or two. But the understandings of the greater part of men are
necessarily formed by their ordinary employments. The man whose
whole life is spent in performing a few simple operations, of which the
effects too are, perhaps, always the same, or very nearly the same, has
no occasion to exert his understanding, or to exercise his invention in
finding out expedients for removing difficulties which never occur. He
naturally loses, therefore, the habit of such exertion, and generally
becomes as stupid and ignorant as it is possible for a human creature to
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2.4 Division of Labor
become….But in every improved and civilized society this is the state
into which the laboring poor, that is the great body of the people must
necessarily fall, unless government takes some pains to prevent it.
[Smith, We
alth of Nations , p 734-735]
Smith, a professor of moral philosophy, constructed a system to explain a
set of forces that would guide social and economic behavior. In The Theory of
Moral Sentiments [1759] he showed the need for justice and a system of
morality. In An
Inquiry into the Nature and Causes of the We
alth of Nations
[1776] he describes the role of self-interest and markets. In a third book that
was destroyed at his request at the time of his death, he describes the need
for a system of jurisprudence. Two sets of students’ notes have been used to
show these basic arguments in Lectures on Jurisprudence [1762-63 and 1766
published in 1978]. Smith describes a social system that requires morality,
markets and jurisprudence to guide and constrain individual action in a social
context.
2.5 COORDINATION OF EFFORTS
Once humans use the division of labor and specialization, it is necessary
for them to coordinate their efforts. They must interact on a variety of levels.
Society is a complex set of interactions among groups and individuals. These
interactions give rise to social institutions. The study of these interactions and
institutions is “social science.” Human interaction can be studied from a
variety of perspectives. Sociology, political science, law, history, psychology,
religion, anthropology and economics are examples of social sciences. These
are often studied as separate disciplines. However, we should remain aware
they are all interrelated perceptions of human behavior. While economics
specializes in the study of the processes that coordinate human behavior as it
allocates scarce resources to satisfy unlimited wants, its relationship to other
social sciences should not be overlooked.
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2.6 Economic Activities
2.6 ECONOMIC ACTIVITIES
John Stuart Mill [1806-1873] divided economic activities into three
categories: production, distribution and exchange. It may be helpful to think of
an economic system as a process that begins with a set of inputs (or
resources) that are used for production that must be distributed for ultimate
consumption. (Mill, Principles of Political Economy, The Colonial Press, 1900)
In Figure I.1, the economy is shown as a process of altering a set of inputs
to satisfy individual wants. In this example, the steps in the economic process
are production, distribution and consumption.
Input or
Consumption
Resources
The ability of goods
[Land, labour,
capital and
Distribution
and services to satisfy
Production
entrepreneurial
or Allocation
wants is called
ability or energy,
“utility.”
matter, time and
tech]
Figure I.1
2.6.1 PRODUCTION
Production is the process of altering inputs to increase their ability to
satisfy human wants. Inputs are sometime called “factors of production” or
resources. Typically, economists will categorize inputs as land, labor and
capital. Superficially, labor is defined as human effort used to produce goods
that satisfy human wants. An input that is a “gift of nature” is referred to as
“land.” Capital is usually considered as an input that is produced by labor but
is used for the further production of goods and services. Entrepreneurial ability
was the last category of inputs to be added as a factor of production in market
30
2.6.1 Production
oriented economies. It is usually associated with the process of creating and
innovating of new processes. The taxonomy of inputs, its relation social
structure and the nature of economics will be considered more carefully later
in the text.
2.6.2 DISTRIBUTION
Distribution usually describes the process of allocating the goods and
services that have been produced. Societies have used market exchange,
reciprocity, eminent domain, inheritance, theft and philanthropy to distribute
goods and services. The primary means of distribution or allocative
mechanisms that are used in most societies are market exchange, reciprocity
and eminent domain.
MARKET EXCHANGE
Market exchange involves a quid pro quo, i.e. an exchange of private
property rights between individual agents. The terms of the exchange are
clearly specified: “I will give you this if you will give me that.” The goods to be
exchanged are clearly specified, as are the terms of the exchange.
The participants in the exchange do not need to know each other: they
only need to know the terms of the exchange. The information requirements
are quite low. In many cases, the exchange may be made easier by social
institutions. Laws that protect buyers and sellers may facilitate the exchange.
Trust may be an important element as well.
RECIPROCITY
Reciprocity is a system of obligatory gift giving: I will do you a favor or give
you a gift, but you are then obligated to do an unspecified favor or give me a
gift at some (possibly unspecified) point in the future.
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2.6.2 Distribution
Reciprocity requires a sense of community. Kinship ties or membership in
the community is needed so that the obligation of returning a favor is enforced
by social forces. If a friend helped you move apartments one weekend and
then helped you fix your car the next weekend, your refusal to help that
person would have social repercussions. Your common friends might come to
regard you as a freeloader. Social pressure may induce you to return the
favor.
2.6.2.1 EMINENT DOMAIN
Eminent domain is a redistribution of private property rights through the
authority of some organization. The individual is required to give up their
claims to private property by an authority. Usually the process of eminent
domain is legitimized by government, religion or some other authority.
PHILANTHROPY
The act of giving a gift with nothing expected in return is called
philanthropy. This is an important method of distribution in blood drives and
the donation of organs for transplantation.
INHERITANCE AND THEFT
Inheritance is the process transferring private property rights from a dead
person to an agent. The form that the inheritance laws take may greatly
influence the accumulation of wealth in a society.
Theft is the process of transferring property rights by illegitimate force.
Few societies can function if theft is widely used.
2.6.3 CONSUMPTION
The end purpose of economic activity is to provide goods and services
that can be consumed by individuals to satisfy needs and wants. Modern,
neoclassical economists generally do not like to use the word “needs.” The use
32
2.6.3 Consumption
of the word “wants” is an attempt to take subjective judgment out of the
analysis.
2.6.4 COORDINATION, COMPETITION AND COOPERATION
Each society must develop a set of social institutions (behavioral
patterns) to coordinate the activities of production, distribution and
consumption. There is a wide range of forms these institutions may take
depending on the physical environment, state of technical knowledge, social
values and other factors. These institutions and behavioral patterns may rely
on competition, cooperation or some combination. Market systems tend to
focus on competition while other systems may have a larger role for
cooperation. A bicycle race is a useful metaphor. In a road race the riders
cooperate in the peleton (the large group of riders in a bicycle race) by
drafting (using the rider in front to reduce the wind drag). When a group
breaks away from the peleton, they typically form a pace line and each shares
the work of riding in front of the group. Eventually, the structure of the pace
line disintegrates and the riders compete in a sprint to the finish or they fall
back into the group. The race is a mixture of cooperation and competition.
Joan Robinson argues that an economic system “… r equires a set of rules,
an ideology to justify them, and a conscience in the individual which makes
him (sic) strive to carry them out. ” (Robinson, p 13)
Production, distribution and consumption are interrelated. What to produce
is influenced by what individuals want to consume. What people want to
consume is influenced by the distribution process and what can potentially can
be produced. This coordination may come in the form of cooperative activities,
such as the creation of a business firm. The firm usually organizes production
internally as a cooperative process but must compete externally. Alternatively,
33
2.6.4 Coordination, Competition and Cooperation
the coordination of activities may be accomplished by competition or some
combination of cooperation and competition.
2.7 TECHNOLOGY
Technology is knowledge about how resources, individuals and social
organization can be used to accomplish objectives. Technology is more than a
set of skills to do things. It is a perspective about the relationships between
humans and their world. Technology is the sum total of the ways in which
human societies interact with natural and built environments. Humans seek to
understand these interactions and develop technology by combining and
reorganizing existing technologies.
In economics, technology is the knowledge about the use of scarce
resources to produce goods and services that satisfy human wants. The
knowledge about how we do things, “technology,” is not limited to machines.
The discovery of a calendar or the realization that crops can be planted on a
three field rotation may be as important as the invention of the padded horse
collar, the steam engine or the PC. Knowledge about the use of organizational
structure to achieve an objective is, in a sense, a form of technology.
The values and structure of society are connected to the state of
technology. Society is shaped by technology and at the same time is an
important force in the determination of the course of technological change.
This relationship between technology, society and the individual can be driven
by curiosity and/or material gain.
Technological change is pervasive. During some periods of history,
technology changes at a slow pace. At other times, the rate of change is more
rapid and more dramatic. During the medieval period, technological change
was slow. With the development of mechanical clocks, the plague, moveable
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2.7 Technology
type, gunpowder, new techniques in art and other innovations, the
“Renaissance” (usually thought of as the 14th-17th centuries) was a period of
dramatic change. During the 17th and 18th centuries, the “age of
Enlightenment” was fueled by technological change. The “Industrial
Revolution” (which is often dated as about 1750) is another term used to
identify a period of rapid technological change. Each of these periods involves
changes in ideas, values, knowledge and social institutions. Each altered
economic and social processes.
There are opposing views as to the process of technological change. One
view is the Thomas A. Edison perspective. In this case, technological
development is driven by profits. If a technology is profitable, it will be
invented. The other view is that technology is a self-generating process. New
technology is the result of old technology(ies) being recombined in new ways
and used for new purposes. In the second view, profits cannot create the
development of technology but determine its uses.
What an individual perceives as a resource is influenced by the nature of
technology. In the 18th century, obsidian was an important resource among
the inhabitants of the western United States: uranium was not. In the 21st
century, obsidian is not normally regarded as a very important resource while
uranium has become a resource.
Factor endowment may influence the direction that technology develops. In
a society with an abundance or arable land and a shortage of labor may
produce (and consume) different goods and seek different technologies to
produce them.
In the Edison view, the light bulb was invented because there was a
demand for it and it could be developed and produced for a profit. In the
second view, it is not possible to invent high-pressure steam engines, even
35
2.7 Technology
though they may be profitable, until the technology of metallurgy develop