The Economy Physical Productive Sphere

The state and the economy are grouped together as physical spheres. Religion and science are intellectual spheres. Within each grouping, physical and intellectual, the system for the non-productive sphere starts first. This is because the productive sphere must gain independence from the unproductive sphere before its development can begin in earnest. The Greeks gave the economy independence when they developed the world's first market economy. The steps that the economy went through to gain independence from the state are covered in the auxiliary system for the economy in chapter nine. Naturally the system for the development of the economy begins before the system for science which must wait for Civil Liberty and Empiricism to establish its independence from religion.

Steps in the development of the economy, steps in the theoretical system

  1. Craftsman -Specialist
  2. Medieval Craft Guild - Educational Institution
  3. Capitalist - Independent Competitive Specialist
  4. Property Rights - Individual Ownership Institution
  5. Management - Dependent Competitive Specialist
  6. Corporate Management, Universities -Educational Institution for Dependent Competitive Specialist
  7. Despecialization of Management - Despecialization
  8. Socialism - Egalitarian Ownership Institution

    1.Craftsman - Specialist

    The craftsmen of ancient Athens enjoyed the freedom of selling their goods in a market. They were therefore the first instance of this new institutional role. Craftsmen also sold their goods for money under the Roman Empire. During the dark ages the money economy was greatly reduced in much of Europe, but as Europe recovered, the institutional role of the craftsman selling his wares in a market reemerged. These craftsmen were not necessarily different from craftsmen at other places and times, what was different was the developments in other spheres and therefore the economic future of Europe.

    2. Medieval Craft Guild - Educational Institution

    Like the craftsmen, these craft guilds were important relative to similar guilds at other places and times only because they were at the right place and time. If the industrial revolution had been in some other part of he world, another set of craft guilds would have to be studied.

    The craft guild is an educational monopoly institution. It was an institution because it involved a common strategy among the specialists. It was a monopoly on a local level. The guilds set prices and quantities and thus had monopoly power. Apprentices were required to go through a period of training and pass tests in the form of a masterpiece. Therefore the guild is an excellent example of an educational monopoly institution.

    Just as the theocratic state laid the basis for empire and the temple religions that survived the end of the theocratic state laid the basis for the founders of the great international religions, the guild lays the basis for property rights. The monopoly profits, the organizational strength, and the institutional loyalty encouraged by education gave the guilds the political strength to win economic rights. The guilds were often central to the government of the town. The town commonly tried to win economic rights from the aristocracy and the crown. By cooperating and controlling economic competition the guild was able to compete in the political arena, thus winning economic rights important to the growth of the trade.

    3. Capitalist - Independent Competitive Specialist

    Like educational institutions, before them the guild succeeded only too well. Trade thrived and eventually became less local. Changes in transportation technology, for example better ships and better long distance banking, encouraged long distance trade. Growing political control by the crown helped make the countryside safe, making inter- city trade safer and allowing the countryside to compete with the town. The end of localism broke the monopoly of the guild.

    This follows the same pattern as the earlier systems discussed in the previous chapters. The military specialist became more important as the localism of the state was broken and violent competition between states, war, became important. The independent thinker and teacher became important as the temple religion was replaced by the proselytizing religion. Similarly inter-city trade served to make the competitive capitalist more important.

    One way in which the capitalist broke the monopoly of the guilds was the putting out system. The capitalist would put out the raw materials to workers working at home and sell the finished products. By using cheaper labor from the countryside, they were able to undersell the guild. Eventually the capitalist took over the market and destroyed the guild.

    The rise of the capitalists or bourgeoisie was important to the Protestant Reformation. This was the class from which the Protestants drew wealth and support. The wealth was important because during the Protestant Reformation mercenaries were very important in warfare.

    The Dutch capitalists were particularly important to the development of civil liberty. They provided the wealth necessary to make the civil libertarian government work. They also benefited greatly from the new system because along with civil liberty came property rights.

    4. Property Rights - Individual Ownership Institution

    Each freedom in a package of Civil Liberties is dependent on all the rest. Freedom to communicate would mean little if the state had an arbitrary right to seize the property of the offending communicator. Conversely property rights are hard to defend in the absence of the freedom to communicate. This is not to say there is one magic set of civil liberties, any deviation from which will ultimately degenerate into tyranny. If this were so, civil liberties would never have existed and surely would not have survived and thrived as they have. Nevertheless each freedom is dependent on the others so it should not be surprising that property rights were successfully established where civil liberties were also established.

    Property rights are an individual ownership institution. They are an institution because there is a common strategy of respecting economic ownership rights. They are an ownership institution because the right is not earned through education but is given automatically. Finally it is an individual ownership institution because the individual has the right to make decisions or determine rules affecting his money. For example, the owner of a business had the right to make certain policy decisions for the firm.

    Like individual ownership institutions before it, property rights greatly reinforced the trend toward expansion. The "Commercial Revolution" began in Holland. International trade expanded quickly with the Dutch as the middlemen. As a result they were the first people to break the Malthusian trap and enjoy long term per-capita economic growth. The pattern of economic growth, civil liberties and Republican government spread to England, the United States, and eventually much of the world. Each element, civil liberties, property rights, and economic growth, feed the others producing a remarkably stable yet dynamic system.

    5. Management - Dependent Competitive Specialist

    Ownership rights secure and firm size rapidly growing, salaried management rapidly became more important as the economies of the west developed. A dependent competitive specialist carries on the same tasks as the independent competitive specialist except that they work for those with ownership rights. Salaried management is an excellent example of the dependent competitive specialist.

    6. Corporate Management, Universities - Educational Institution

    The economic educational institution for dependent competitive specialists is more complex (reflecting the complexity of modern society) than any other educational institution within the system. The most important complexity is that part of the educational training is completed before the applicant enters the organization. This is a break from many of the previous systems. Nevertheless the modern corporate management and the university together form an educational institution because management has a certain degree of monopoly power, and education is used as a screening device for applicants. Furthermore like other educational institutions, it lays the basis for the following ownership institution.

    Historically the corporation represents an increase in salaried management's power in relation to ownership. With ownership more widely held and usually more poorly informed, management gains considerably in its independence and power. It is difficult in a widely held company for ownership to fire management, thus giving management a monopoly position. Furthermore, the monopoly position of management is enhanced by its specific knowledge of the situation making them difficult to replace.

    Entrance into these favored positions must be rationed. Two educational systems are important, one internal and informal and the other formal and external. Policies of promoting from within produce an informal educational system. This system has many of the strengths associated with other educational institutions, (a) large investments in difficult to transfer human capital tie individual to the institution, (b) individuals loyal to the institution can be selected over others, (c) the corporation acts as a surrogate family attracting loyalty, (d) finally the young executives can be paid less and worked harder because of their expectation of future gains.

    The external formal educational function is carried on at universities. Here the formal elements of testing and certification are employed. This form of education has the advantages that extensive feedback systems, grading gives the student a relatively clear picture of his performance and how it can be improved. Furthermore, the student is tested on sheets of paper costing relatively little, rather than with company resources. This allows the tester to give demanding tests that challenge the students's abilities. While the on the job experience may be difficult, risks with company resources must be minimized, encouraging conservative strategies. This type of education is generally paid for by the student, his parents, and society. The skills are too easily transferred for it to be provided internally.

    Up to this point we have discussed University Education in general. Some professions such as law and accounting provide management skills in a way more typical of an educational institution. The education function is still filled in universities or other post secondary institutions, but it is more guild like in that the profession limits entrants through testing and thus keeps up wages.

    Another type of university program is of particular importance, the business administration department. This type of training is particularly important for two reasons. First, it directly trains applicants in business practice. This is important because in doing so they are forced to articulate business thinking and thus make it more of a science and less an art. To the extent that this is possible, the supply of scarce entrepreneurial talent can be increased. The present income distribution is justified in part by this scarcity, therefore if it could be taught, it would mark a major step toward socialism, the next ownership institution. Once again we are reminded that each educational institution starts traditions that lay the basis for the following ownership institution.

    The second reason business administration is important is actually a sub-theme of the first, but it deserves specific attention. Business administration programs, as well as economics and other programs, teach the use of sophisticated mathematical models of resource distribution. For some problems, for example routing delivery trucks, these models with the help of computers make significantly better decisions than human judgment. These models are crucial because the socialism described in this system is built around a social utility function developed from the same type of mathematical models. Thus the educational system paves the way for socialism.

    The corporation foreshadows socialism in another manner. Management's role is to maximize a utility function whose major component is the expected value of profits and assets. Ownership acting through the board of directors, acts as an oversight committee. Under socialism, the social utility function will be maximized with the elected officials acting as an oversight committee.

    In conclusion, in spite of the complexity of the corporate management-university system, it still fits into the general pattern of an educational institution. Furthermore, corporate management and some university programs lay the basis for socialism.

    7. Despecialization of Management - Despecialization

    At this point we leave history and begin speculating on the future. This is, of course, fraught with intellectual dangers, but hopefully the theoretical framework will be able to keep us on track.

    The first assumption for the future is that computers and long distance communication systems will continue to become cheaper and more sophisticated. Historically a calculation, a unit of computing power, has dropped in price fifty percent every two to three years. This trend has shown remarkable consistency for the last few decades. Of course that does not prove that the trend will continue to show such consistency, but it seems safe to speculate that computing prices will fall. Many of the changes in communications technologies are related to computers so it is relatively safe to expect lower prices in this sphere too. Recent experience supports this position. In conclusion, those key technologies, computers and electronic communications are becoming cheaper and more sophisticated and thus are likely to play a more and more important role in management.

    Long distance communications and computers will be helpful in widening the market for management services. Cheaper transportation and more sophisticated banking techniques were important in creating large markets for goods. Cheap long distance electronic communication and electronic funds transfer may broaden the market for management services. For example, when writing a report, an executive could dictate it over telephone lines to a typist who would then type it into a computer terminal. With the press of a button, the report would appear on the executive's terminal. If he asks for a correction, he could observe the correction immediately on his screen. The important difference between this and the present telephone system is that the letter can be observed by both parties instantly and simultaneously. Because work will be done principally on the computer terminals, it can be transferred anywhere instantly and at low cost. This will help break down local, face-to-face management.

    This trend will be augmented by electronic funds transfer which will make payment easier. The computer can easily record the amount of time the secretary spent on the executive's report, debiting the executive and crediting the secretary by the proper amount. Instead of hiring a secretary, the executive could simply push a button to call up a list of secretaries. Each secretarial listing could include the skill levels and hourly wages of the secretary. By pressing a few buttons, the executive could contact the secretary automatically setting up a contract with the secretary, payment of the contract could be handled in the computer by electronic funds transfer. Thus not only the work but the contracting and payment would be contained within the system.

    All this technology would allow many management tasks to be performed by specialists not in the long term employ of the company. Not only secretaries, but accountants, lawyers, management experts, engineers and many other specialists could be hired through this system. But even these specialists will not be the same as they are today. Because each one is serving a larger market, they can specialize. For example, the general CPA will be replaced by experts in various areas of accounting. The specialization will not only be by area of expertise, but level of skill. The expert will no doubt hire out less skilled work to others. Thus much of the management task will be conducted on a vast network of specialists. This will allow a routinization of the work much like the factory routinized crafts in the industrial revolution.

    To the extent that the network can take over many of the functions of the executive, the old corporate management will become less necessary. The routine tasks will be given to computers and the important decisions will be farmed out to consultants. The manager will be left with those tasks that are too uncommon to be done by computer and too unimportant to call in a specialist. What is left of the management function will be rationalized to the point that little talent or education will be required. Thus, the manager will no longer be highly skilled and highly paid specialists.

    The despecialization of management is slightly different than the despecializaton stage for the state and religion. Hoplite tactics allowed a larger portion of the population to act as effective soldiers. The Protestant Reformation allowed the congregation to perform the functions of the clergy, interpretation of the scriptures and seeking salvation directly, "by faith alone," rather than through the sacraments. The despecialization of management will not make everyone a manager, but will allow management to be drawn less exclusively, making a larger proportion of the population potential managers. Therefore, management talent will become less scarce and the managers will lose their privileged position.

    A natural criticism of this is that the technology has been available for some time. Why hasn't it already happened? This is a typical criticism of projections on communication technology. The problem with communications technology is that it involves huge externalities and economies of scale. No one wants to pay for a telephone unless there are lots of other telephones that can be called. Similarly, no one wants to pay for a television set if no one is broadcasting and no one wants to broadcast when no one has a television set. Because of this problem communications technologies are not implemented on a wide scale until long after they are practical. But eventually enough televisions and enough broadcasters accumulated and there was a period of rapid growth as more broadcasters encouraged more people to buy televisions, and more households with televisions encouraged more businessmen to broadcast. In like manner many of our new communications technologies may see rapid growth when they reach a critical mass.

    8. Socialism - Egalitarian Ownership Institution

    With management conducted by the network, the transfer of ownership from the individual to the group will be relatively easy. Thus the communications network lays the basis for the economic egalitarian ownership institution, socialism. The network's control of management will be useful in implementing socialist policies for several reasons. First, the network will supply the necessary managerial talent without requiring economic rents to entrepreneurial talent. Secondly, the network will make work on the social utility function much easier. With most economic transactions carried on within the computer and communications system it will be easier to collect the necessary information. Finally, the computers and human expertise needed to analyze the data will also be available through the network. Because of the massive improvement in managerial and clerical technique associated with the network the objective of economic institutions can change from profit maximization to social utility maximization.

    At this point it will be useful to explain social utility functions in more detail. The social utility function discussed in this paper is an aggregation of the individual utility functions. So we begin by discussing the individual's utility function. The well being of a person is assumed to be a function of various factors, food, warmth, entertainment, social esteem, etc. This well being is summed up in a measure called utility. Utility is not directly measurable with today's technology and indeed it may never be directly measurable. So instead of the unmeasurable utility, we resort to things we can measure: for example, some of the factors that enter the function: food, opera tickets, television sets, and other economic goods. The quantity of economic goods available is summed up as income which may serve as a first approximation of utility.

    Other factors not traded in the market also enter the function. For example, pollution. A factory may raise income, but also produce pollution. The effects of the pollution should be subtracted from the positive income effects. There are a myriad of other factors involved that would also have to be added and subtracted. The result is an individual utility function. The individual utility functions are in turn aggregated to form a social utility function.

    The aggregation will probably not consist of incomes minus and plus other factors added together. This would give too much weight to the incomes of the rich. An extra dollar to a millionaire probably does not mean as much as an extra dollar to a poor man. Of course this is only the author's judgment. What really counts is not the author's judgement, but the judgement of the electorate or the judgement of whoever the electorate delegates the decision to. The point is that a function representing the total utility of the community is developed.

    The proper specification of the social utility function will no doubt be a subject of constant argument. But under socialism, it will be the responsibility of the policy maker to set policy to maximize the currently accepted social utility function. Ultimate veto power rests with the voter and policy must be set within civil libertarian limits, but the basis of socialism is the acceptance of the social utility function and policies within constitutional limits that maximize that function.

    In conclusion, socialism will be an egalitarian ownership institution. It will be an institution because it consists of the establishment of a common strategy on the part of the electorate to respect the economic interests of others as expressed in the social utility function. Socialism is an ownership institution in that the individual does not earn the right to have his interests considered in the social utility function but receives it as a right. Finally, socialism is egalitarian because the well being of each individual is considered as an objective in the social utility function, unlike the profit function where only the owners interests is considered as an objective and all other objectives are treated as constraints.

    With socialism, the economic system of institutional development is completed. In summation, the 1. craftsman is the economic specialist. The craftsmen form the 2. Medieval craft guild, an educational institution. The 3. capitalist, the independent competitive specialist in economics uses the broadening of the market to take control of trade from the guilds. 4. Property rights an individual ownership institution strengthens the hand of the capitalist, encourages trade and allows man to break the Malthusian trap. The task of business administration is turned over to salaried 5. management the dependent competitive specialist. Control was further removed from ownership by the corporation. 6. Corporate Management and Universities assumed the role of educational institutions for the dependent competitive specialists, management. 7. Despecialization of Management will be carried out with the help of computers and communications networks. 8. Socialism will build on the despecialization of management to establish an egalitarian ownership system built around a social utility function.

    Chapter 7 Science: Scientist to Artificial Intelligence

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