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10.3 The Economy

Learning Objectives

  1. Outline the economic development of societies.
  2. Distinguish the types of economic systems.
  3. Discuss the importance of corporations and the controversy they cause.

One of the most momentous events of the 20th century was the Great Depression, which engulfed the United States in 1929 and spread to the rest of the world, lasting almost a decade. Millions were thrown out of work and bread lines became common. In the United States, a socialist movement gained momentum for a time as many workers blamed U.S. industry and capitalism for their unemployment.

The Depression involved the failing of the economy. The economy also failed in the United States in 2008 and 2009, as unemployment soared to just under 10% in the spring of 2010, with more than 14 million Americans out of work. When we hear the term economy, it is usually in the context of how the economy “is doing”: Is inflation soaring or under control? Is the economy growing or shrinking? Is unemployment rising, declining, or remaining stable? Are new college graduates finding jobs easily or not? All of these questions concern the economy, but sociologists define economyThe social institution that organizes the production, distribution, and consumption of a society’s goods and services. more broadly as the social institution that organizes the production, distribution, and consumption of a society’s goods and services. Defined in this way, the economy touches us all.

The economy is composed of three sectors. The primary sectorThe part of the economy that takes and uses raw materials directly from the natural environment. is the part of the economy that takes and uses raw materials directly from the natural environment. Its activities include agriculture, fishing, forestry, and mining. The secondary sectorThe part of the economy that transforms raw materials into finished products and is essentially the manufacturing industry. of the economy transforms raw materials into finished products and is essentially the manufacturing industry. Finally, the tertiary sectorThe part of the economy that provides services rather than products. is the part of the economy that provides services rather than products; its activities include clerical work, health care, teaching, and information technology services.

Economic Development in Historical Perspective

Societies differ in many ways, but they all have to produce, distribute, and consume goods and services. How this happens depends heavily on the level of a society’s development. Generally speaking, the less developed a society’s economy, the more important its primary sector; the more developed a society’s economy, the more important its tertiary sector. As societies developed economically over the centuries, the primary sector became less important and the tertiary sector became more important. Let’s see how this happened.

Preindustrial Societies

When we reviewed the development of societies in Chapter 2 "Culture and Society", we saw that the earliest were hunting and gathering societies in which people eked out a meager existence by hunting animals and gathering plants to feed themselves. Most of their waking hours were devoted to these two tasks, and no separate economic institution for the production and distribution of goods and services existed. The horticultural and pastoral societies that next developed also lacked a separate economy. Although people in these societies raised animals and/or grew crops and were better off than their hunting and gathering counterparts, these tasks, too, were done within the family unit and monopolized most of their time. No separate institution for the production and distribution of these sources of food was involved.

This separate institution—the economy—finally did appear with the advent of agricultural societies about 5,000 years ago. These societies were able to produce food surpluses thanks to the invention of the plow and the wheel and other technological advances. These surpluses led to extensive trade within the societies themselves and also with other societies. The rise of trade was the first appearance of a separate economy. People also had to make the plows and wheels and repair them when they broke, and new crafts jobs arose to perform these functions. These jobs, too, marked the development of a separate economy. Despite this development, most people’s work still took place in or very near their homes. Craftspeople and merchants may have been part of the new economy, but most still worked out of their homes or very near them.

Industrialization and the Division of Labor

Work and home finally began to separate in the 1700s and 1800s as machines and factories became the primary means of production with the emergence of industrial societies. For the first time, massive numbers of people worked in locations separate from their families, and they worked not for themselves and their families but for an employer. Whole industries developed to make the machines and build the factories and to use the machines and factories to manufacture household goods, clothing, and many other products. As should be clear, the secondary sector of the economy quickly became dominant. Perhaps inevitably it led to a growth in the tertiary (service) sector to respond to the demands of an industrial economy. For example, enterprises such as banks emerged to handle the money that industrialization brought to people with names like Carnegie and Rockefeller but also to a growing middle class of factory managers and the businesspeople that bought and sold the products that factories were producing.

One important consequence of industrialization was the specialization of work, more commonly called the division of laborThe specialization of work, such that individuals perform only specific aspects of a task or project.. In agricultural societies, the craftspeople who made plows, wheels, and other objects would make the whole object, not just a part of it, and then sell it themselves to a buyer. With the advent of the division of labor under industrialization, this process became more specialized: some factory workers would make only one part of an object, other factory workers would make a second part, and so on; other workers would package and ship the item; and still other workers would sell it. This division of labor meant that workers became separated from the fruits of their labor, to paraphrase Karl Marx, who also worried that the type of work just described was much more repetitive and boring for workers than the craft work that characterized earlier societies. Because of these problems, Marx said, workers in industrial societies were alienated both from their work and by their work.

Postindustrial Societies

As Chapter 2 "Culture and Society" pointed out, today much of the world has moved from an industrial economy to a postindustrial economy. This is the information age, in which smartphones, netbooks, tablets, and other high-tech equipment have begun to replace machines and factories as the major means of production and in which the tertiary sector has supplanted the secondary sector. With the information age has also come an increasing globalization of the economy. The Internet connects workers and industries across the world, and multinational corporations have plants in many countries that make products for consumers in other countries. What happens economically in one part of the world can greatly affect what happens economically in other parts of the world. If the economies of Asia sour, their demand for U.S. products may decline, forcing a souring of the U.S. economy. A financial crisis in Greece and other parts of Europe during the spring of 2010 caused the stock markets in the United States to plunge. The world is indeed getting smaller all the time. We will return later to the implications of the postindustrial economy for U.S. workers.

Types of Economic Systems

The two major economic systems in modern societies are capitalism and socialism. In practice, no one society is purely capitalist or socialist, so it is helpful to think of capitalism and socialism as lying on opposite ends of a continuum. Societies’ economies mix elements of both capitalism and socialism but do so in varying degrees, so that some societies lean toward the capitalist end of the continuum, while other societies lean toward the socialist end. For example, the United States is a capitalist nation, but the government still regulates many industries to varying degrees. The industries usually would prefer less regulation, while their critics usually prefer more regulation. The degree of such regulation was the point of controversy after the failure of banks and other financial institutions in 2008 and 2009 and after the BP oil spill in 2010. Let’s see how capitalism and socialism differ.


CapitalismAn economic system in which the means of production are privately owned. is an economic system in which the means of production are privately owned. By “means of production,” we mean everything—land, tools, technology, and so forth—that is needed to produce goods and services. As outlined by famed Scottish philosopher Adam Smith (1723–1790), widely considered the founder of modern economics, the most important goal of capitalism is the individual pursuit of personal profit (A. Smith, 1776/1910).Smith, A. (1910). The wealth of nations. London, England: J. M. Dent & Sons; New York, NY: E. P. Dutton. (Original work published 1776) As individuals seek to maximize their own wealth, society as a whole is said to benefit. Goods get produced, services get rendered, people pay for the goods and services they need and desire, and the economy and society as a whole prosper.

Figure 10.13

One important hallmark of capitalism is competition for profit. This competition is thought to help ensure the best products at the lowest prices, as companies will ordinarily try to keep their prices as low as possible in order to attract buyers and maximize their sales.

As people pursue personal profit under capitalism, they compete with each other for the greatest profits. Businesses try to attract more demand for their products in many ways, including lowering prices, creating better products, and advertising how wonderful their products are. In capitalist theory, such competition helps ensure the best products at the lowest prices, again benefitting society as a whole. Such competition also helps ensure that no single party controls an entire market. According to Smith, the competition that characterizes capitalism should be left to operate on its own, free of government intervention or control. For this reason, capitalism is often referred to as laissez-faire (French for “leave alone”) capitalism, and terms to describe capitalism include the free-enterprise system and the free market.

The hallmarks of capitalism, then, are private ownership of the means of production, the pursuit of profit, competition for profit, and the lack of government intervention in this competition.


The features of socialism are the opposite of those just listed for capitalism and were spelled out most famously by Karl Marx. SocialismAn economic system in which the means of production are collectively owned, usually by the government. is an economic system in which the means of production are collectively owned, usually by the government. Whereas the United States has several airlines that are owned by airline corporations, a socialist society might have one government-owned airline.

The most important goal of socialism is not the individual pursuit of profit but rather work for the collective good: the needs of society are considered more important than the needs of the individual. Because of this view, individuals do not compete with each other for profit; instead they work together for the good of everyone. If under capitalism the government is supposed to let the economy alone, under socialism the government controls the economy.

The ideal outcome of socialism, said Marx, would be a truly classless or communist society. In such a society all members are equal, and stratification does not exist. Obviously Marx’s vision of a communist society was never fulfilled, and nations that called themselves communist departed drastically from his vision of communism.

Recall that societies can be ranked on a continuum ranging from mostly capitalist to mostly socialist. At one end of the continuum, we have societies characterized by a relatively free market, and at the other end we have those characterized by strict government regulation of the economy. Capitalist nations are found primarily in North America and Western Europe but also exist in other parts of the world.

Comparing Capitalism and Socialism

People have debated the relative merits of capitalism and socialism at least since the time of Marx (Bowles, 2007; Cohen, 2009).Bowles, P. (2007). Capitalism. New York, NY: Pearson/Longman; Cohen, G. A. (2009). Why not socialism? Princeton, NJ: Princeton University Press. Compared to socialism, capitalism seems to have several advantages. It produces greater economic growth and productivity, at least in part because it provides more incentives (i.e., profit) for economic innovation. It also is often characterized by greater political freedom in the form of civil rights and liberties. As an economic system, capitalism seems to lend itself to personal freedom: because its hallmarks include the private ownership of the means of production and the individual pursuit of profit, there is much more emphasis in capitalist societies on the needs and desires of the individual and less emphasis on the need for government intervention in economic and social affairs.

Yet capitalism also has its drawbacks. There is much more economic inequality in capitalism than in socialism. Although capitalism produces economic growth, not all segments of capitalism share this growth equally, and there is a much greater difference between the rich and poor than under socialism. People can become very rich in capitalist nations, but they can also remain quite poor. As we saw in Chapter 6 "Social Stratification", several Western European nations that are more socialist than the United States have fewer extremes of wealth and poverty and take better care of their poor.

Another possible drawback depends on whether you prefer competition or cooperation. As we saw in Chapter 2 "Culture and Society" and Chapter 3 "Socialization and Social Interaction", important values in the United States include competition and individualism, both of which arguably reflect this nation’s capitalist system. Children in the United States are raised with more of an individual orientation than children in socialist societies, who learn that the needs of their society are more important than the needs of the individual. Whereas U.S. children learn to compete with each other for good grades, success in sports, and other goals, children in socialist societies learn to cooperate to achieve tasks.

More generally, capitalism is said by its critics to encourage selfish and even greedy behavior: if individuals try to maximize their profit, they do so at the expense of others. In competition, someone has to lose. A company’s ultimate aim, and one that is generally lauded, is to maximize its profits by driving another company out of the market altogether. If so, that company succeeds even if some other party is hurting. The small Mom-and-Pop grocery stores, drugstores, and hardware stores are almost a thing of the past, as big-box stores open their doors and drive their competition out of business. To its critics, then, capitalism encourages harmful behavior. Yet it is precisely this type of behavior that is taught in business schools.

Some nations combine elements of both capitalism and socialism and are called social democracies, while their combination of capitalism and socialism is called democratic socialismAn economic and political system in which the government owns several industries and provides many social benefits but also in which private ownership remains common.. In these nations, which include Denmark, Sweden, and several other Western European nations, the government owns several important industries, but much property remains in private hands, and political freedom is widespread. The government in these nations has extensive programs to help the poor and other people in need. Although these nations have high tax rates to help finance their social programs, their experience indicates it is very possible to combine the best features of capitalism and socialism while avoiding their faults (see the “Learning From Other Societies” box).

Learning From Other Societies

Social Democracy in Scandinavia

The five Scandinavian nations, also called the Nordic nations, are Denmark, Finland, Iceland, Norway, and Sweden. These nations differ in many ways, but they also share many similarities. In particular, they are all social democracies, as their governments own important industries while their citizens enjoy much political freedom. Each nation has the three branches of government with which most people are familiar—executive, judicial, and legislative—and each nation has a national parliament to which people are elected by proportional representation.

Social democracies like the Scandinavian nations are often called controlled capitalist market economies. The word controlled here conveys the idea that their governments either own industries or heavily regulate industries they do not own. According to social scientist Tapio Lappi-Seppälä of Finland, a “defining characteristic” of these social democracies’ economy is that “inequalities in income and distribution of wealth and power are not tolerated as much as in most other countries.” Employers, employees, and political officials are accustomed to working closely to ensure that poverty and its related problems are addressed as much as possible and in as cooperative a manner as possible.

Underlying this so-called social welfare model is a commitment to universalism. All citizens receive various services, regardless of their socioeconomic status or family situation, that are free or heavily subsidized, such as child care and universal health care. To support this massive provision of benefits, the Scandinavian nations have very high taxes that, according to Lappi-Seppälä, are “accepted with little or no resistance.”

This model leads political scientist Torben Iversen to observe, “Scandinavian social democracy represents one of the most systematic attempts to shape economic institutions and policies in pursuit of equality and full employment.” This attempt has not been entirely free of difficulties but overall has been very successful, as the Scandinavian nations rank at or near the top in international comparisons of health, education, economic well-being, and other measures of quality of life. The Scandinavian experience of social democracy teaches us that it is very possible to have a political and economic model that combines the best features of capitalism and socialism while retaining the political freedom that citizens expect in a democracy (Berman, 2006; Iversen, 1998; Lappi-Seppälä, 2007).Berman, S. (2006). The primacy of politics: Social democracy and the making of Europe’s twentieth century. New York, NY: Cambridge University Press; Iversen, T. (1998). The choices for Scandinavian social democracy in comparative perspective. Oxford Review of Economic Policy, 14, 59–75; Lappi-Seppälä, T. (2007). Penal policy in Scandinavia. Crime and Justice, 36, 217–296.


One of the most important but controversial features of modern capitalism is the corporationAn organization that has a legal existence apart from that of its members., a formal organization that has a legal existence, including the right to sign contracts, that is separate from that of its members. We have referred to corporations several times already and now discuss them in a bit more detail.

Adam Smith, the founder of capitalism, envisioned that individuals would own the means of production and compete for profit, and this is the model the United States followed in its early stage of industrialization. After the Civil War, however, the corporation quickly replaced individuals and their families as the owners of the means of production and as the competitors for profit. As corporations grew following the Civil War, they quickly tried to control their markets by, for example, buying up competitors and driving others out of business. To do so, they engaged in bribery, kickbacks, and complex financial schemes of dubious ethics. They also established factories and other workplaces with squalid conditions. Their shady financial practices won their chief executives the name “robber barons” and led the federal government to pass the Sherman Antitrust Act of 1890 to prohibit restraint of trade that raised prices (Hillstrom & Hillstrom, 2005).Hillstrom, K., & Hillstrom, L. C. (Eds.). (2005). The Industrial Revolution in America. Santa Barbara, CA: ABC-CLIO.

Figure 10.14

Corporations such as Exxon dominate the U.S. economy. They employ thousands of workers, and their assets total many trillions of dollars.

More than a century later, corporations have increased in both number and size. Although several million U.S. corporations exist, most are fairly small, but the largest 500 each have annual revenue exceeding $4.6 billion (2008 data) and employ thousands of workers. Their total assets run into the trillions of dollars (Wiley, 2009).Wiley, H. (2009). Welcome to the 2009 Fortune 500. Fortune, 159(9), 14. It is no exaggeration to say they control the nation’s economy, as together they produce most of the U.S. private sector output, employ millions of people, and have revenues equal to most of the U.S. gross domestic product. In many ways, the size and influence of corporations stifle the competition that is one of the hallmarks of capitalism. For example, several markets, including that for breakfast cereals, are controlled by four or fewer corporations. This control reduces competition because it reduces the number of products and competitors, and it thus raises prices to the public (Parenti, 2007).Parenti, M. (2007). Democracy for the few (6th ed.). Belmont, CA: Wadsworth.

The last few decades have further seen the rise of the multinational corporation, a corporation with headquarters in one nation but with factories and other operations in many other nations (Wettstein, 2009).Wettstein, F. (2009). Multinational corporations and global justice: Human rights obligations of a quasi-governmental institution. Stanford, CA: Stanford Business Books. Multinational corporations centered in the United States and their foreign affiliates have more than $16 trillion in assets and employ more than 30 million people (U.S. Census Bureau, 2009).U.S. Census Bureau. (2009). Statistical abstract of the United States: 2009. Washington, DC: U.S. Government Printing Office. Retrieved from The assets of the largest multinational corporations exceed those of many of the world’s nations. Often their foreign operations are in poor nations, whose low wages make them attractive sites for multinational corporation expansion. Many multinational employees in these nations work in sweatshops at very low pay and amid substandard living conditions. Dependency theorists, discussed in Chapter 6 "Social Stratification", say that multinationals not only mistreat workers in poor nations but also exploit these nations’ natural resources. In contrast, modernization theorists, also discussed in Chapter 6 "Social Stratification", say that multinationals are bringing jobs to developing nations and helping them achieve economic growth. As this debate illustrates, the dominance of multinational corporations will certainly continue to spark controversy.

Another controversial aspect of corporations is the white-collar crime in which they engage (Rosoff, Pontell, & Tillman, 2010).Rosoff, S. M., Pontell, H. N., & Tillman, R. (2010). Profit without honor: White collar crime and the looting of America (5th ed.). Upper Saddle River, NJ: Prentice Hall. As we saw in Chapter 5 "Deviance, Crime, and Social Control", price fixing by corporations costs the U.S. public some $60 billion annually (Simon, 2008).Simon, D. R. (2008). Elite deviance (9th ed.). Boston, MA: Allyn & Bacon. Workplace-related illnesses and injuries that could have been prevented if companies obeyed federal regulations kill about 50,000 workers each year (AFL-CIO, 2007).AFL-CIO. (2007). Death on the job: The toll of neglect. Washington, DC: AFL-CIO. An estimated 10,000 U.S. residents die annually from dangerous products. All in all, corporate lawbreaking and neglect probably result in more than 100,000 deaths annually and cost the public more than $400 billion (Barkan, 2012).Barkan, S. E. (2012). Criminology: A sociological understanding (5th ed.). Upper Saddle River, NJ: Prentice Hall.

In sum, corporations are the dominant actors in today’s economy. They provide most of our products and many of our services and employ millions of people. It is impossible to imagine a modern industrial system without corporations. Yet they often stifle competition, break the law, and, according to their critics, exploit people and natural resources in developing nations. The BP oil spill in 2010 reminds us of the damage corporations can cause. BP’s disaster was the possible result, according to news reports, of many violations of federal safety standards for oil drilling (Uhlmann, 2010).Uhlmann, D. M. (2010, June 4). Prosecuting crimes against the Earth. The New York Times, p. A27.

Key Takeaways

  • As a separate institution, the economy appeared with the advent of agricultural societies about 5,000 years ago. Work and family separated during the 1700s and 1800s with the advent of industrialization.
  • The two major economic systems in modern societies are capitalism and socialism. In practice most societies have economies that mix elements of both systems but that lean toward one end of the capitalism-socialism continuum.
  • Social democracies combine elements of both capitalism and socialism.

For Your Review

  1. Write a brief essay in which you discuss the benefits and costs of industrialization during the 19th century.
  2. In what ways might capitalism be a better economic system than socialism? In what ways might socialism be a better economic system than capitalism?