So far there is no reference at all in this story to the issue of labour supply: thatis, how many workers are willing to offer their services in return for a wage orsalary. We have only considered the demand side of the equation: that is, how manyworkers do employers need, given their investment and production plans. Indeed,there is no particular reason why employment (which depends on business output)should ever equal the number of people who wish to work. In other words, there isno reason to expect full employment (see box). If there is not enough investmentand production to usefully employ all willing workers, then unemployment willexist – and capitalism has no sure-fire internal mechanism to eliminate it.

Competition – ruthless, unforgiving, to-the-death competition – is a crucialfeature of capitalism. It opens up new opportunities for individual firms: they canexpand revenues and profits by winning a larger share of sales from competitors.But competition also poses new challenges, since other companies are trying todo exactly the same thing: namely, grow their own market share at the expense oftheir competitors. Therefore, it’s not just greed that motivates company efforts tominimize costs and maximize profits; with competition, it’s also fear. If a companycan’t stand up to the competition, it’s not just that they won’t make quite as muchprofit as other companies. Far worse, eventually they will be destroyed by thesecompeting firms producing better products at lower cost.

The previous chapters of Part Two introduced the major actors in the economyand their assigned tasks. This chapter now fits them all together in a circular loopthat reflects the repeating cycle of the economy: work, production (using tools),income distribution, consumption, and reproduction. These are the core functionsand relationships that make up capitalism. We’ll even draw a simple map of thiscircular system. We’ll call this map the “little circle.” In later chapters, this map willget bigger as we consider more of capitalism’s real-world complexity (includingthe roles of competition, the environment, banks, government, and globalization)

During [Sigmund] Freud’s university years (the late1870s and early 1880s), young enthusiasts in thefuzzier disciplines, such as psychology, liked to bor-row terminology from the more rigorous and estab-lished field of mechanical physics. The borrowedterms became, in fact, metaphor; and metaphor, likea shrewd servant, has a way of ruling its master. Thus,Freud wound up with the idea that libido or sexual“energy,” as he called it, is a pressure that builds upwithin a closed system to the point where it demandsrelease, as in a steam engine

“Filling in Frameworks” wrestles with the misconceptionthat economics is a science. This section looks at the difficul-ties that economists face in trying to adopt scientific methods. Isuggest that economics differs from the natural sciences in thatwe have to rely much less on verifiable hypotheses and muchmore on hard-to-verify interpretative frameworks. Economicanalysis is a challenge, because judging interpretive frame-works is actually harder than verifying scientific hypotheses.

A commodity is anything that is bought and sold for money. With the advent ofcapitalism and widespread wage labour, labour itself became a commodity. Andneoclassical economics analyzes labour essentially like any other commodity: thereare suppliers (workers), demanders (employers), and a price (the wage rate). Intheory, if governments and unions stay out of the way, fluctuations in the priceof labour will supposedly ensure that everyone finds a job, in which case laboursupply equals labour demand and there is no unemployment. If unemploymentexists, just let the wage fall; employers will hire more workers, eventually absorbingall the slack in the labour market

here is that they don’t have to work, since their business wealth is sufficient tosupport themselves very comfortably without working. Statistical surveys indicatethat less than 2 percent of individuals in Anglo-Saxon economies own businessand financial wealth on this scale; and there is considerable overlap between thiscategory and the top managers.Either way, these top managers and major owners have a substantial, directpersonal stake in the profits of business. Both groups identify closely with thebusiness community, and exert their (disproportionate) political, social, andpersonal influence on its behalf. Put together, this class of top managers and wealthyinvestors accounts for perhaps 2 percent of the population of developed capitalisteconomies. They are the modern capitalist class: less visible, more sophisticated,possibly even more compassionate than the capitalists of the 1700s. But they are

might derive intrinsic enjoyment from admiring their newly purchasedhardware – but they are hardly typical!) Instead, we use tools to produceother things (goods or services) that we can consume and that are inherentlyuseful. For this reason, economists call tools intermediate products:things that are needed to produce something else, not for their own sake.Final products, on the other hand, are the goods and services that weultimately use or consume

As we defined it earlier, the economy is no more and no less than the amalgamationof our collective work – all the work that is necessary to produce the goods andservices we need and want. And once we’ve produced those things, we need todecide how to distribute and use them.By “work,” we refer to any productive human activity. Most obviously, thisincludes work in a paid job. Indeed, in modern capitalism, wage labour is sowidespread that many people wrongly equate “work” with “employment.” Afrustrated parent is likely to tell their lazy teenager to “Get a job!” when what theyreally mean is “Get up and do some work!” Under capitalism, most work consists ofwage labour, but not all. There is other important work that we must also consider

The first identifiable school of economics was the Mercantilists, basedmostly in Britain in the 1600s. Their theories paralleled the growing economicpower of the British empire, so not surprisingly they emphasized the importanceof international trade to national economic development. In particular, theybelieved that a country’s national wealth would grow if it generated large tradesurpluses: that is, if it exported more than it imported. Mercantilists were alsoforceful advocates of strong central government, in part to strengthen colonialpower and hence boost the trade surplus. Even today, the mercantilist spirit liveson (in modified form) in modern-day theories of “export-led growth” – followedin recent years by countries like Germany, Korea, and China

Beginning in the late 1970s, this “Golden Age” drew to a close, and global capitalismentered a distinct and more aggressive phase. The previous willingness of businessowners and governments to tolerate taxes, social programs, unions, and regulationspetered out. Businesses and financial investors rebelled against shrinking profits,high inflation, lousy financial returns, militant workers, and international“instability” (represented most frighteningly by the success of left-wing revolutionsin several countries in Asia, Africa, and Latin America in the 1970s). They began toagitate for a new, harder-line approach – and eventually they got it

After World War II, a unique set of circumstances combined to create the mostvibrant and in many ways most optimistic chapter in the history of capitalism– what is now often called the “Golden Age.” This postwar boom lasted forabout three decades, during which wages and living standards in the developedcapitalist world more than doubled. Strong business investment (motivated inpart by postwar recovery and rebuilding) was reinforced by a rapid expansionof government spending in most capitalist economies. Unemployment was low,productivity grew rapidly, yet profits (initially at least) were strong. This was alsothe era of the “Cold War” between capitalism (led by the US) and communism(led by the former Soviet Union). In this context, business leaders and Westerngovernments felt all the more pressure to accept demands for greater equality andsecurity, since they were forced by global geopolitics to defend the virtues of thecapitalist system.Stanford EFE2 01 text.indd 46 08/04/2015 09:26Stanford, Jim. Economics for Everyone : A Short Guide to the Economics of Capitalism, Pluto Press, 2015. ProQuest EbookCentral, http://ebookcentral.proquest.com/lib/forsythtech-ebooks/detail.action?docID=3440440.Created from forsythtech-ebooks on 2025-08-12 18:08:29.Copyright © 2015. Pluto Press. All rights reserved.

Even under neoliberalism, and despite the pressures for conformity that arise fromglobalization, there are still clear differences between different capitalist economies– even those at similar levels of development. (There are even bigger differences,of course, between richer capitalist countries and poor ones.) So it would be adangerous mistake to imply that all capitalist economies must now follow exactlythe same set of policies. And those differences produce very different outcomes forthe people who live and work in those economies

Innovation Economic progress requires us to think continuously about howto make our work more effective and useful. This continuous improvement iscalled “innovation”; it includes imagining new goods and services (products),and better ways of producing them (processes). An economy should beorganized in a way that promotes and facilitates innovative behaviour, or else itwill eventually run out of creative energy and forward momentum

The economy is simultaneously mystifying and straightforward. Everyone hasexperience with the economy. Everyone participates in it. Everyone knowssomething about it – long before the pinstripe-wearing economist appears on TVto tell you about it.The forces and relationships you investigated on your walk are far moreimportant to economic life than the pointless ups and downs of the stock market.Yet our local economic lives are nevertheless affected (and disrupted) by the biggerand more complex developments reported in the business pages

Most economists are wedded to a particular, peculiar version of economics –called neoclassical economics. This kind of economics is as ideological as it isscientific. It was developed in the late nineteenth century to defend capitalism, notjust explain it. And it still goes to great lengths to try to “prove” a whole portfolioof bizarre, politically loaded, and obviously untrue propositions: like claimingthat merely owning financial wealth is itself productive, or that everyone is paidaccording to their productivity, or that unemployment doesn’t even actually exist

Observe the accommodation of the most commonartificer or day-labourer in a civilized and thrivingcountry, and you will perceive that the number ofpeople of whose industry a part, though but a smallpart, has been employed in procuring him thisaccommodation, exceeds all computation.—Adam Smith, The Wealth of NationsIn a primitive society, people are self-sufficient. Each familygathers its own food, makes its own clothing, and finds itsown shelter. The largest unit of social cooperation would bean extended family or tribe.In a modern economy, no one is self-sufficient. Instead,people are specialized.

On Twitter, Garett Jones posted something to theeffect that today’s workers are building organizational cap-ital rather than widgets, and that tweet influenced the waythat I characterize specialization and roundabout production.Donald Boudreaux has been relentless in emphasizing theremarkable difference between what we can consume rela-tive to what we produce, thanks to specialization and trade.Finally, Pete Boettke likes to draw a distinction between“mainstream economics” and “mainline economics,” withwhat I call MIT economics representing the former andthe economics you will find in these pages representing myattempt at the latter.