An excerpt from Chapter 1 of Capitalism: A Treatise on Economics, Volume I.
Economics has been defined in a variety of ways. In the nineteenth century it was typically defined as the science of wealth or of exchangeable wealth. In the twentieth century, it has typically been defined as the science that studies the allocation of scarce means among competing ends. [1]
I define economics as the science that studies the production of wealth under a system of division of labor, that is, under a system in which the individual lives by producing, or helping to produce, just one thing or at most a very few things, and is supplied by the labor of others for the far greater part of his needs. The justification of this definition will become increasingly clear as the contents of this book unfold. [2]
The importance of economics derives from the specific importance of wealth—of material goods—to human life and well-being. The role of wealth in human life is a subject that will be examined in Chapter 2 of this book, but provisionally its importance can be accepted on a common-sense basis. Obviously, human life depends on food, clothing, and shelter. Moreover, experience shows that there is no limit to the amount of wealth that practically all civilized men and women desire, and that the greatest part of their waking hours is actually spent in efforts to acquire it—namely, in efforts to earn a living.
Yet the importance of wealth, by itself, is not sufficient to establish the importance of economics. Robinson Crusoe on a desert island would need wealth, and his ability to produce it would be helped if he somehow managed to salvage from his ship books on various techniques of production. But it would not be helped by books on economics. All that books on economics could do for Crusoe would be to describe abstractly the essential nature of the activities he carries on without any knowledge of economics, and, beyond that, merely to provide the possible intellectual stimulation he might feel as the result of increasing his knowledge of the society from which he was cut off. Something more than the importance of wealth is required to establish the importance of economics.
As Chapter 4 of this book will show, the production of wealth vitally depends on the division of labor. The division of labor is an essential characteristic of every advanced economic system. It underlies practically all of the gains we ascribe to technological progress and the use of improved tools and machinery; its existence is indispensable for a high and rising productivity of labor, that is, output per unit of labor. By the same token, its absence is a leading characteristic of every backward economic system. It is the division of labor which introduces a degree of complexity into economic life that makes necessary the existence of a special science of economics. For the division of labor entails economic phenomena existing on a scale in space and time that makes it impossible to comprehend them by means of personal observation and experience alone. Economic life under a system of division of labor can be comprehended only by means of an organized body of knowledge that proceeds by deductive reasoning from elementary principles. This, of course, is the work of the science of economics. The division of labor is thus the essential fact that necessitates the existence of the subject of economics. [3]
Despite its vital importance, the division of labor, as a country’s dominant form of productive organization—that is, a division-of-labor society—is a relatively recent phenomenon in history. It goes back no further than eighteenth-century Britain. Even today it is limited to little more than the United States, the former British dominions, the countries of Western Europe, and Japan. The dominant form of productive organization in most of the world—in the vast interiors of Asia, Africa, and most of Latin America—and everywhere for most of history, has been the largely self-sufficient production of farm families and, before that, of tribes of nomads or hunters.
What makes the science of economics necessary and important is the fact that while human life and well-being depend on the production of wealth, and the production of wealth depends on the division of labor, the division of labor does not exist or function automatically. Its functioning crucially depends on the laws and institutions countries adopt. A country can adopt laws and institutions that make it possible for the division of labor to grow and flourish, as the United States did in the late eighteenth century. Or it can adopt laws and institutions that prevent the division of labor from growing and flourishing, as is the case in most of the world today, and as was the case everywhere for most of history. Indeed, a country can adopt laws and institutions that cause the division of labor to decline and practically cease to exist. The leading historical example of this occurred under the Roman Empire in the third and fourth centuries of the Christian era. The result was that the relatively advanced economic system of the ancient world, which had achieved a significant degree of division of labor, was replaced by feudalism, an economic system characterized by the self-sufficiency of small territories. [4]
In order for a country to act intelligently in adopting laws and institutions that bear upon economic life, it is clearly necessary that its citizens understand the principles that govern the development and functioning of the division of labor, that is, understand the principles of economics. If they do not, then it is only a question of time before that country will adopt more and more destructive laws and institutions, ultimately stopping all further economic progress and causing actual economic decline, with all that that implies about the conditions of human life.
In the absence of a widespread, serious understanding of the principles of economics, the citizens of an advanced, division-of-labor society, such as our own, are in a position analogous to that of a crowd wandering among banks of computers or other highly complex machinery, with no understanding of the functioning or maintenance or safety requirements of the equipment, and randomly pushing buttons and pulling levers. This is no exaggeration. In the absence of a knowledge of economics, our contemporaries feel perfectly free to enact measures such as currency depreciation and price controls. They feel free casually to experiment with the destruction of such fundamental economic institutions as the freedom of contract, inheritance, and private ownership of the means of production itself. In the absence of a knowledge of economics, our civilization is perfectly capable of destroying itself, and, in the view of some observers, is actually in the process of doing so.
Thus, the importance of economics consists in the fact that ultimately our entire modern material civilization depends on its being understood. What rests on modern material civilization is not only the well-being but also the very lives of the great majority of people now living. In the absence of the extensive division of labor we now possess, the production of modern medicines and vaccines, the provision of modern sanitation and hygiene, and the production even of adequate food supplies for our present numbers, would simply be impossible. The territory of the continental United States, for example, counting the deserts, mountains, rivers, and lakes, amounts to less than nine acres per person with its present population—not enough to enable that population to survive as primitive farmers. In Western Europe and Japan, the problem of overpopulation would, of course, be far more severe. Needless to say, the present vast populations of Asia, Africa, and Latin America would be unable to survive in the absence of Western food and medical supplies.
Excerpted from Chapter 1 of Capitalism: A Treatise on Economics, Volume I. Copyright 2020 George Reisman. All rights reserved.
The encyclopedic Capitalism: A Treatise on Economics is a required reference for every Capitalist’s library. Reisman’s treatise is now available in two volumes: Volume I (focuses on microeconomic issues) and Volume II (focuses on macroeconomic issues).
References
1. For an account of the change that has taken place in the definition of economics, see Israel M. Kirzner, The Economic Point of View (New York: D. Van Nostrand, 1960).
2. I could also say that economics is the science which studies the production of wealth under a system of division of labor and monetary exchange, or under a system of division of labor and capitalism. (See below, p. 19, the first two paragraphs of Part B of this chapter.) Both of these statements would be correct, but they would also be redundant, because, as later discussion will show, a system of division of labor presupposes both monetary exchange and all the other essential institutions of a capitalist society. Finally, the expression goods and services could be substituted for the word wealth. This too would yield a true statement about what economics studies. But, as will be shown, a certain priority and emphasis must be given to wealth as opposed to services.
3. Secondarily and peripherally to its study of the production of wealth under a system of division of labor, economics also studies the production of wealth under the absence of division of labor. It does so insofar as by so doing it can develop its theorems under simplifying assumptions that will enable it to shed light on the operations of a division-of-labor society, and insofar as by so doing it can place the value of a division-of-labor society in its proper light, by contrasting it with non-division-of-labor societies.
4. In the second century A.D., the Roman Empire extended from Syria in the southeast to the northern border of present-day England in the northwest. It circled the Mediterranean Sea, embracing Egypt and all of North Africa, and included all of Europe west of the Rhine, as well as present-day Romania and Turkey and all of Eastern Europe south of the Danube. Goods produced in the various regions of the Empire were consumed throughout the Empire. For example, pottery made in Syria was consumed as far away as England, and tin mined in England was consumed as far away as Syria.
