World Economics: A Historical Perspective

FROM A LECTURE SERIES BY PROFESSOR DONALD J. HARRELD, PH.D.

What happens when you study world economics from the perspective not of the businessperson or the economist – but the historian?

The study of economic history is truly the study of human survival. In a general sense, economic history concerns itself with the ways that mankind has structured the environment in order to provide food, shelter, and clothing. In other words, economic historians are interested in examining the process through which society provides for its material well-being.

Economic history illustration

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Three Pointed Questions

To understand the main streams of economic history, you have to consider several key questions.

  • What was produced? Even the most primitive societies had to grapple with this question. Primitive societies might think of it in terms of what they could hunt or plant. But this is also a question entrepreneurs have been asking for thousands of years.
  • How was it produced? This question forces us to look at resources, such as labor and machines, to understand how goods were made in the past. Looking at changes that were made to how things were produced helps us understand how we got to where we are today.
  • How did what was produced get distributed? This question can be asked at the familial, communal, regional, national, and international levels. Asking this question helps us to understand commerce, the allocation of resources, and social welfare practices.

These three questions might seem fairly simple, but they lead to discussions of prices, resource allocation, production methods, technological development, labor, supply and demand, and more.

They also point to issues that both economists and economic historians address, while doing so in very different ways.

Economists versus Historians

Image of sign warning of economic uncertainty
Economists tend to try to isolate independent variables in order to identify regularities that might predict human behavior.

Economists, for instance, practice something that few historians are comfortable doing: They look to the future and try to predict what will happen and what could influence decision making. Historians, including economic historians, are oriented toward the past; we don’t try to predict the future.

Historians and economists also approach questions from different methodological perspectives.

Economists tend to try to isolate independent variables in order to identify regularities that might predict human behavior. But to historians, this notion of isolating variables is not attainable. Instead, historians suggest that in attempting to explain what happened in the past, we need to consider as many variables as possible.

Actually, most historians consider all variables to be interdependent. Removing any one of them alters the situation, and thus, the explanation suffers.

Landmarks in Economic History

A list of some of the highlights of the economic history of the past 500 or more years might include the following events:

  • The development of productive agricultural. Mankind moved from hunter-gatherer to cultivator millennia ago. But only recently has agriculture been productive enough to allow people to focus efforts on other activities.
  • The development of business contracts and agreements. Business contracts have existed for thousands of years, but the form these took changed over time and—hundreds of years ago—gave rise to a variety of partnerships and corporative relationships.
  • The expansion of trade. In addition to the great European voyages of discovery, trade has expanded in a multitude of ways over the centuries.
  • The development of economic nationalism. This development is what Adam Smith would have called the mercantile system.
  • The development of science and technology. New ideas and technology have radically affected how we produce things, and have also led to the routinization of knowledge.
  • image of car being built in factory
    The Industrial Revolution changed how we produce, what we produce, and how we distribute our products in significant ways.

    The shift to industrial production. As probably the greatest process in modern economic history, the transition that we refer to as the Industrial Revolution changed how we produce, what we produce, and how we distribute our products in significant ways.

  • Population growth. Global population growth brought with it a demographic revolution, changes in our methods of production, and increases in agricultural productivity.
  • Free trade and mass consumption. These concepts became increasingly important in the newly industrial world.
  • Imperialism, colonization, and warfare. These historical forces touched much of the world’s population and set up an enduring divide between the global haves and the have nots.

Defining Capitalism

One recurring theme of economic history is the concept of capitalism.

The word itself is rather new. Capital—basically meaning assets—dates as far back as the Middle Ages. But the word capitalism originated only in the middle of the 19th century, in the context of referring to an economic system. And then it was usually used by socialists.

Today, most people think of capitalism as a method of organizing economies and markets through flows of capital, or cash and its equivalents. Some characteristics of capitalism include:

  • clearly defined private property rights,
  • enforceable contracts,
  • markets that set prices, and
  • institutions favorable to the above elements.

Thus, capitalism can be defined as an economic system in which rational private property rights and enforceable contracts provide for the efficient functioning of markets that generate price signals, and for which favorable institutions exist to create incentives for participation in the system. (In this general statement, “private property rights” refers to the ownership, control, and exchange of a resource or a good.)

Unfortunately, this conceptualization represents more of an ideal way of thinking about the economy than a description of reality at any point in the past. Aspects of it can be found in most historical periods, but rarely does the entire system seem to have functioned this way.

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Evolving Institutions

Another concept to consider: the role of institutions in economic history. This is even more difficult to describe than capitalism.

At its core, the study of institutions is the examination of the interaction between (and among) individuals, firms, states, social and legal norms, cultural cues, and so on.

Obviously, institutions change over time. The rules that govern much of human behavior, such as social and legal norms, tend not to be fixed and constant. Rather, they can change dramatically.

In turn, such changes can produce great confusion among historical actors, when they are thrust into situations that put them into contact with new and unfamiliar institutional arrangements. For example, when parties from different cultures come together to engage in trade, certain misunderstandings and miscues are likely to occur, until each party adjusts to the new institutional arrangements.

Three Perspectives on Economic History

Finally, three ideological perspectives offer a sense of the differences you find when examining economic history.

  1. Neoclassical economics. In general, neoclassical economic historians apply economic theory to historical processes in the interest of understanding the past. This approach follows in the tradition of Adam Smith and holds in high regard the study of price theory, utility, profit maximization, and the presence of rational economic actors. One drawback of neoclassical economics, as it applies to the distant past, is that it often struggles with the so-called free-rider problem (which refers to those who benefit from something without paying for it). It also has difficulty accounting for ideology in human action.
  2. Image of Karl Marx
    Karl Marx (1818-1883) was a German-born scientist, philosopher, economist, sociologist, journalist, and revolutionary socialist.

    Marxian economic history. Marxist thought has had a significant impact on economic history and continues to do so, to some degree, even today. The basic focus of Marxian economic thought is the mode of production. The Marxist historian views every historical period as having its own identity, shaped by the ways in which the means of production are owned, by how people relate to one another in the process of production, and by the material forces of production. In this view, all modes of production have built-in contradictions that must be resolved through some kind of struggle. Thus, to the Marxist, the driving force of human history is the struggle of one class with another.

  3. World systems theory. Although not a theory of economics per se, world systems analysis has had an important role to play in economic history. Rather than viewing the nation-state as the most important focus of historical analysis, world systems theory seeks to substitute a regional or inter-regional, approach. World systems theory also rejects the notion that Marxists and most neoclassicists commonly hold: that there is only a single path to economic development for most countries and regions.
From the lecture series An Economic History of the World since 1400
Taught by Professor Donald J. Harreld, Ph.D.

3 Comments

  1. Marxism is a fraud. Wherever it’s been forced on a population, they end up dying by the millions. The only economic system for a free people is the free market.

  2. Absolute Capitalism divides the people into haves and have nots,and results in revolution because it creates disparities.The basic premise of Capitalism is to each according to his advantage.Absolute socialism can work but only in a culture of mercy and selflessness.Capitalism can work if combined with socialism.The basic premise of socialism is to each according to his need,That is biblical.

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