ECO1010F/ECO1110F: INTRODUCTION TO ECONOMICS

Written by Corné van Walbeek: February 2020

Updated: February 2024

Dear Students

Welcome to ECO1010F/ECO1110F, your first course in Economics at UCT.

The first unit of the CORE text (The Economy 2.0) is called “Prosperity, inequality and planetary limits”.
It focuses on the fact that, after centuries of stagnation and practically no economic progress, there
has been rapid economic progress in most countries. The first country to progress economically was
England, followed by many countries in Europe, North America, Australia, South America, Asia and
Africa, roughly in that order. Countries have developed from traditional economic systems to (some
form of) capitalism. Capitalism has become the dominant economic system. Before we discuss the
development of capitalism, we first need to explain a few concepts. That is the focus of these notes.

These notes are very important. Please read them carefully. They are examinable in both the test and
the exam.

These notes are subdivided into three parts. In Part A I discuss some of the basic concepts in
Economics. Economics has been defined differently by different people, but there are common
themes in all the definitions. We will talk about scarcity and choice, wants and needs, inputs and
outputs, goods and services.

Part B covers economic systems. I will talk about traditional economic systems, the capitalist system,
and the command system. South Africa’s economic system is largely a capitalist system, but it has
some traditional and command elements as well. In practice, all countries have a mixed economic
system.

In part C I introduce you to, arguably, two of the most influential economic thinkers of all time: Adam
Smith, who lived in the 18th century and who is generally regarded as the father of the discipline, and
Karl Marx, who lived in the 19th century. Most people who have strong pro-market and capitalist ideas,
regard Adam Smith as their ideological father. Karl Marx took a very different view of the world. Karl
Marx’s thinking forms the basis of socialism (also called communism). Although socialism, as it was
practised in the Soviet Union and China till 30 or 40 years ago, has been abolished and discredited,
many people still cherish the ideals of socialism.

So, let’s dive in.

Part A: BASIC CONCEPTS

Defining the discipline

What do we study in Economics? You have probably heard the “economics news” on radio and
television, where they talk about the daily share movements on the Johannesburg Stock Exchange,
movements in the gold, platinum and oil price, the interest rate, and the exchange rate. When the
numbers are released by the South African Reserve bank or Statistics South Africa, commentators
would also talk about the inflation rate, the unemployment rate and the economic growth rate. When
companies release their financial reports, these are also discussed.

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Much time and attention is focused on economic forecasts. By what percentage is the economy going
to grow in this year? Will the Reserve Bank increase or decrease the interest rate? Is the rand likely to
weaken or strengthen against the US dollar? Is the stock exchange going to yield good returns this
year? Most of these forecasts and predictions are based on speculation. While some professional
economists can make a decent living off making them, because there is demand for this “service”, the
evidence suggests that these predictions are typically not very helpful or accurate.

Economics is about much more than commenting on some indicators that vary daily, and making
predictions. Economics is about life and how we live it. It is about our interactions with others. It is
about producing and consuming. It is about power dynamics between people. It is about wealth and
poverty. In short, it is about all aspects of our lives. In ECO1010/1110, we will focus less on the daily
“economic news”, and much more on the broader aspects of economics.

A formal, universally agreed-upon definition of economics does not exist. In the slides I give you a
number of definitions, each focusing on different aspects. That does not mean that they contradict
each other. They just focus on different things. Look at the picture of Rembrandt’s Night Watch below.
What attracts your attention? The two men walking in front? The highlighted lady? The drummer on
the right of the painting? The flag in the background? The play with dark and light colours? The fact
that everyone is looking in different directions?

In the same way as people look at the painting differently, people will look at the economics discipline
from different perspectives.

However, there are some themes that are common throughout. In economics the focus is on scarcity,
on the fact that resources (money and time) are in limited supply, and that we must make choices
between alternatives. With our resources we produce goods and services. How are these goods and
services produced? Who gets to consume them? At its very core, this is the essence of economics.

Of course, how we address the issue of scarcity is not so simple. Two critical concepts in economics
are production (i.e. what is to be produced and how will it be produced?) and distribution (i.e. who

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will consume these goods and services?). The techniques that we learn in economics allow us to
understand the scarcity problem better and to answer the questions.

Scarcity and choice

Let’s take a more in-depth look into scarcity. We all have needs and wants. Needs are those things
that we need to sustain life. We need food. Without food we starve. We need shelter. Without shelter
we will be exposed to the elements and possibly freeze to death in winter. These are basic needs.

We all have wants. If you sit down and think a bit, you are likely to come up with a long list of things
that you would like to buy if you had enough money. A really nice house, fancy car, regular overseas
trips, nice clothing, eating out at expensive restaurants, etc. You won’t die if you don’t have these
things, but you certainly would enjoy them if you could afford them.

This is true for most individuals. (Some people might purposefully choose to live a life of poverty and
deprivation, possibly because of religious or other reasons, but we will exclude these people from the
discussion – they do not fit the typical profile of Homo Sapiens).

People have wants and needs, but societies have wants and needs as well. Societies consist of a large
number of individuals, each with their wants and needs, but society also has wants and needs that
derive from the fact that people live together. Societies desire clean air, recreational areas, security,
a functioning government, a feeling of belonging, and recognition by other societies, etc.

Opposed to these needs and wants is the reality that goods and services, and the resources to make
them, are scarce. At an individual level, we don’t have sufficient money to buy all the things that we
want and need. According to the 2024 Forbes list, Bill Gates has a fortune of more than $120 billion
that is $120 000 million, or expressed in rands, more than R2.2 trillion). He does not have a financial
problem, but still has a problem of scarcity of time. Super-rich people are subject to the forces of
mortality just like everyone else; they do not live to 250 years. They will die, like everyone else, when
their time comes. As such, time, more so than money, is their scarce resource.

Most people are not super-rich and as a result they cannot buy everything that they want. They have
to make choices. That is the essence of economics: making choices.

At the community level, the budgeting process illustrates the economic problem well. Towards the
end of February each year, the Minister of Finance presents the budget speech to Parliament. This is
the end of a long process of negotiations with various government departments. In the budget speech
the Minister explains how the Treasury will divide the revenue that the government has collected
between the various government departments: health, education, safety and security, social grants,
housing, defence, the justice system, etc. Even though he has a lot of money to distribute (about R2.5
trillion, or R2 500 000 000 000), it is not enough. Beneficiaries of the government’s already large social
grant system want larger social grants; the Minister of Education wants more money for education;
the Minister of Health wants more money for hospitals and medical staff; and government officials
want higher salaries. The Treasury and the Minister of Finance have to balance all the competing
demands, and have to make choices.

Had there not been scarcity, there would be no need to have the discipline of economics. We would
not have to make choices, because there would be more than enough of everything so that everyone,
even the greediest, would have everything in abundance. Of course, that world does not exist.

The three basic economic questions

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So how does economics help us to make choices in a world of scarcity? People and society want to
consume goods and services (we will discuss goods and services a bit later). These goods and services
must be produced and distributed among people who need/want them. How does economics help in
solving this problem? There are different ways of looking at this, but a rather useful way is to ask three
questions. These are

1. What to produce? This is also known as the output question.

2. How to produce? Also known as the input question.
3. For whom to produce? Also known as the distribution question.

The output question

As we will discuss later on, the output question is addressed differently in different economic systems.
In a capitalistic system, also known as a market economy, the output question is answered by the
forces of supply and demand. If the demand for a product increases, this tends to increase the price
of the product, which in turn creates an incentive for businesses to produce more of that product. On
the other hand, if people do not want a particular product anymore, i.e. the demand for that product
decreases, businesses will sit with unsold stock, and will eventually be forced to reduce the price.
Hopefully, the lower prices will encourage some buyers to buy the goods and get them off the
retailers’ shelves, or out of the storeroom. The manufacturer quickly gets the message that it is not
profitable to produce that product, and will switch to more profitable products.

In the market system, the demand for goods and services is determined by people, more specifically
people with money. Without money I can’t buy and I don’t have any influence on what will be
produced. With my money I “vote” for the things that I want to purchase. My “money votes” informs
the producers what to produce.

In a command economy (like in the Soviet Union before 1989 and still currently in North Korea and
Cuba) the output question is solved, not by the forces of demand and supply, but by the government.
Government officials decide what will be produced and in what quantities. Whether people actually
like and want the things that are produced, is immaterial. Of course, sensitive officials might try to
align the planned production with what he/she thinks consumers need or want, but there is no
guarantee that all officials are that way inclined.

The input question

The input question is about the production process. How should the goods and services be produced?
At the highly operational level, this entails working out the production lines, and the designs,
formulations and recipes for the things to be produced. In economics we typically don’t look at it in
such a level of detail, but focus on the combinations of labour and machinery (equipment, also known
as capital) that can be used to produce these things.

Consider the production of cars. South Africa produces many hundreds of thousands of cars each year.
The car manufacturers in the Eastern Cape employ thousands of people in their factories. These
factories also have sophisticated equipment, used in the production of cars, but this equipment is
nowhere as sophisticated as in the car factories in Japan. In Japan the factories are full of robots and
there are not very many labourers at all. The point is that one can produce cars in relatively more
labour-intensive way (like in South Africa) or in a more capital-intensive way (like in Japan).

I am sure that you can think of different examples. Roads in most African countries are made and
maintained using lots of labourers with rudimentary equipment, i.e. spades and shovels, whereas in
most European countries they employ fewer people, but with sophisticated equipment. There are

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good reasons for these differences in the production process. If labour is relatively cheap, as in many
African countries, it makes sense to adopt a more labour-intensive production approach. On the other
hand, if labour is relatively more expensive, while capital is relatively cheaper and more abundant, like
in Europe, North America and Japan, it makes sense to adopt a more capital-intensive production
approach.

The distribution question

The “for whom?” question is about how the goods and services are distributed among consumers.
This question is closely related to the production question, because, in a market economy, the people
who buy the products are also the ones who determine what will be produced through their “money
votes”. Whether we like it or not, the people with more money will be able to buy more goods and
services than the people with less money. Some people might think that this is unfair, but this is the
essence of the market/capitalist system.

There are ways that the government can influence the distribution question. It can take away
resources from the rich and distribute them among the poor. The most common method the
government uses is through taxation and government spending. The South African government, like
nearly all governments worldwide, imposes income tax on its citizens. People with greater incomes
pay a relatively larger tax percentage than people with lower incomes.

Consider the latest (2024 tax year) tax tables that are available here. For example, if someone earned
R1 million a year, they would pay about R292 284 (i.e. 29.23% of their income) to the government in
the form of personal income tax. 1 Someone who earned only R200 000 would pay about R36 000 –
R17 235 = R18 765 (i.e. 9.38% of their income) to the government as income tax.

The government provides health, education and other services to the population with the money they
collect. In principle, people who pay a greater amount of tax do not get more or better services from
the government, and similarly, people who pay less (or no) income tax do not get fewer or poorer
services from the government. Importantly, the South African government has an extended grants
programme, where more than 17 million people in South Africa receive a monthly grant from the
government. The combined effect of the tax system (which reduces people’s disposable income) and
the grants system (which increases people’s disposable income) is to change the distribution of
income, which in turn changes the way that people can vote with their “money votes”.

Goods and services

We talked about goods and services quite a bit in the sections above. In this section we investigate
this in more detail. Goods are things that we can touch. When we go shopping, we bring back bags
with groceries, or shoes, or clothing. Those are goods.

In economics we sometimes classify goods into three components: (1) durable goods, (2) semi-durable
goods, and (3) non-durable goods.

Durable goods are things that last for many years. These are things like cars, refrigerators, computers,
microwave ovens, and lounge suites. They provide us with a service (notice the word) for a very long
time. Sometimes durable goods are called investment goods. Here we don’t use the word
“investment” in the way that you might have used it before (e.g. an investment in the bank), but rather

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To calculate the taxable amount, the calculation is as follows: (1 000 000 – 857 901) x 0.41 + 251 285 =
309 519. The primary rebate is R17 235, which is the “discount” that SARS gives to taxpayers. The net amount
of tax is thus R292 284.

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in the sense that they yield a return in the form of a service (e.g. transport in the case of a car, hot
food in the case of a stove and a comfortable seat in the case of a lounge suite). A house is typically
regarded as an investment good, because it supplies us with accommodation (which is a service) for
many years.

Semi-durable goods are goods that last for a reasonably long time, but that do not last as long as
durable goods. The most common examples are clothing, shoes and tyres for cars.

Non-durable goods are goods that are gone once you consume them. The typical examples would be
food, cleaning liquids, personal hygiene products (like toothpaste, toiletries, etc – toothbrushes and
hairbrushes would be classified as semi-durable products). For most families, the biggest proportion
of their income is spent on non-durable goods. The poorer a family is, the greater the percentage that
is spent on non-durables (especially food).

Services are things that we experience. Your university training is an example of a service. At the end
of your studies you get a degree. You might say “that is a product” but that piece of paper does not
cost R300 000 to R400 000. It simply indicates that you have received three or four years of education
and that you have passed all your exams. The service that you have received at university is intangible,
but still very real. Other examples of services are medical advice from the doctor, or the haircut you
get at the hairdresser, or the legal, financial, accounting or tax advice you get from the relevant
professional. Even a supermarket is a provider of a service. Generally, they do not produce the
products that you purchase there. Their contribution is to use their purchasing network to buy all the
products from hundreds of different manufacturers, to get them to the same place, to present them
in an aesthetically pleasing way and to make the shopping experience as pleasing as possible. Thus,
even though they sell goods, in effect they provide a service.

Think about it: most of you are likely to work in a service industry, where your contribution will be
intangible, but still very real.

Of course, it can get very technical when one decides whether something is a good or a service, and if
it is a good, whether it should be classified as a durable, semi-durable or non-durable good. This course
is not going to go into this kind of detail, and I will certainly not ask you questions in the tests or exam
about highly controversial issues. I want you to be aware of the difference between goods and services
and that goods can be subdivided into three categories, based on durability.

Inputs/factors of production

The goods and services that are produced are the outputs of the production process. To produce these
outputs, we require inputs. In economics we identify four inputs (also called factors of production).
The factors of production are (1) land (which includes natural resources, such as minerals, ores and
water), (2) labour, (3) capital and (4) entrepreneurship. I will not discuss this in much detail, because
it is fairly self-explanatory and because this has been covered in school. Of course, if you want to read
further you can simply google for “factors of production” (as you can do for any topic that you feel I
have not explained sufficiently in this note).

Just a comment though. The word “capital” sometimes causes confusion, because it means different
things in economics and accounting. In accounting, “capital” is the money that the shareholder puts
into the business. In economics, “capital” means the physical equipment used in the production
process. I use a laptop to write these notes and I sit on a chair at my desk. The laptop, chair and desk
are capital inputs in the production of this service (i.e. these notes and the lectures that you will be
attending).

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For many years the economics profession did not recognise entrepreneurship as a separate factor of
production. It was regarded as labour, albeit a special kind of labour. Over the past number of decades
this thinking has changed. An entrepreneur is not like any other worker. This is a person with ideas,
with initiative and who is willing to take risks. Many entrepreneurs fail, but most get up and try again.
The entrepreneur takes the other inputs and combines them to create a new product or service or to
improve on existing products or services. The entrepreneur is a special kind of person. We need these
people in South Africa to help grow the economy. Hopefully, many of you will become entrepreneurs
once you graduate.

In conclusion of this section:

It is impossible to do justice to a section on the definition of economics and some basic economic
concepts in five or six pages. Hopefully many of the things that I have raised you have learned before
and I am simply pulling it back to the surface. There are many other terms that you will come across
in this discipline. Often they have a very specific meaning. Please feel free to google for terms that I
have either not explained sufficiently well or that you are still uncomfortable about.

Now we are going to change tack and talk about economic systems. This will be a good entry point for
Unit 1 of the CORE text, which discusses, among other things, the “capitalist revolution”.

Part B: ECONOMIC SYSTEMS

Even through Economics as a discipline dates back about 250 years, the problem of scarcity has existed
since the beginning of human existence. Thus, the questions of “What to produce?”, “How to
produce?” and “For whom to produce?” have also been around since the beginning of civilisation. To
address these questions, communities have developed economic systems.

Many books have been written about economic systems. In fact, in my undergraduate studies in the
1980s, I did a whole semester course on economic systems. At that point in time the issue was possibly
more relevant than now, because communism was still a dominant system (the other system, of
course, being capitalism). The Soviet Union and China were both communist, as were many of the
Soviet Union’s satellite countries in Eastern Europe. In opposition to the communist countries (and
the Soviet Union in particular) were the capitalist countries in Western Europe, Australia, and North
America. South Africa was Una capitalist country then, as it is now.

In the past decades the study of modern economic systems has become less popular because of the
collapse of communism in the Soviet Union and China. In 1989 the Berlin Wall fell, resulting in major
changes in Eastern Europe and the Soviet Union. Many “republics” in the Soviet Union (formally known
as the Union of Soviet Socialist Republics, or USSR) broke away and became independent, and the
remaining parts of the Soviet Union became Russia. These ex-communist countries all adopted some
version of capitalism.

In 1979, with baby steps at first, but with much bolder steps subsequently, China switched to a
capitalist system, even though it is politically run by the Communist Party. The country is not
democratic in the Western sense of the word. In fact, capitalism should not be equated to democracy,
and communism or socialism should not be equated to authoritarianism. Capitalism and
socialism/communism are economic systems, while democracy, authoritarianism and dictatorship are
political systems.

As we will see later, the capitalist revolution in China has been hugely successful, and has pulled
hundreds of millions of people out of extreme poverty. Over the past two decades China has become

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the biggest economic and political competitor to the US, still the leader of the “capitalist West”. It will
probably become the world’s largest economy in the next two decades.

With minor exceptions (e.g. North Korea and Cuba), all countries have some form of capitalist (market)
system. Of course, there are very substantial differences between countries, but at the core, market
forces are important, and define economic relations between citizens.

The capitalist system has been criticised by many people, and has been battered by a number of
events, but it has survived well. For example, the Financial Crisis of 2008, when the world’s financial
system was standing on the edge of the precipice, was a major threat to the capitalist system. Much
earlier, in the 1930s, the Great Depression posed a similar risk to the capitalist system. But the system
has adapted and survived.

Let’s go back to the question: What is an economic system? Economic systems define the way in which
people relate to each other in an economic sense. The two most important characteristics of an
economic system are (1) how property rights are defined, and (2) how decisions (especially regarding
the three fundamental economic questions) are made.

Property rights concern ownership of things. Do you own the land that you farm, or does it “belong”
to society and you simply use the land? Is the produce that you produce on the land yours, or does it
belong to society? Do your children inherit your belongings when you die, or does it go to society/the
government? Can the government take your property without compensating you for it? If property
rights are secure, then ownership can be legally enforced by the courts. If they are not secure, then
people who may have thought that they had ownership, may find that their property has been taken
away from them.

You would have probably heard the phrase “expropriation without compensation”, specifically in the
context of land. Until 2021, this was a highly controversial and emotive topic in the South African
political discourse. It was controversial and emotive, not only because some people stand to lose from
it (while some hope to gain), but because it undermines property rights in South Africa. If the
government can take someone’s land without compensation the owner, can we trust the government
to respect other property rights? The issue lost much of its political steam in December 2021 when
the motion to have the Constitution changed to allow expropriation without compensation, did not
get a two-thirds majority in the National Assembly.

Regarding the second question about who makes the decisions: Who decides what is produced? Who
decides how these things are produced? And who decides who gets to consume the things that are
produced?, if the answer is “the state” or “the government” or “the Party”, then you would be living
in a command system. On the other hand, if these questions are determined by the interaction of
demand and supply, then you would be living in a capitalist or market-oriented system.

The traditional economic system

For much of human history, the dominant economic system was the traditional economic system. The
most important characteristic of the traditional system is the fact that things do not change. There is
no social mobility. Typically, my father is a farmer, and his father was a farmer and his father was a
farmer, and so we go back for many generations. I will be a farmer and my son will be a farmer. I use
the example of a farmer, because in a traditional system most people were subsistence farmers.
Standards of living were extremely low. People may have had food to eat (unless the crop failed, in
which case people were faced with starvation), but there were no resources (money) for the luxuries
of life.

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People did not travel much. You died in the same village in which you were born. Technical advances
and scientific improvements were frowned upon. The religious and community leaders would argue:
“Why do you want things to change? This is how we have done things for many generations”. Religious
and cultural beliefs and superstition trumped economic change. People did not think that economic
progress was possible, or even desirable.

Very few people currently still live in a traditional system. Some remote tribes in the Amazon and
some parts of Africa still live like this, but this economic arrangement is scarce and becoming scarcer.
The advantage of the system is that it is predictable for the people who live in it. If you are not used
to anything different, it gives security. However, it is also a very inflexible system. It does not adapt to
change, because by its very nature it assumes that things do not change.

There were some differences in traditional systems, across geographical areas and over time. For
example, the economic arrangements of hunter/gatherer societies differed substantially from the
slave-based societies of the Greek and Roman empires and the feudal arrangement of medieval
Europe. Hunter/gatherer societies were egalitarian. There was no hierarchy of status. Everyone’s
“value” was roughly the same, and each person contributed to the group according to their skills and
the role expected from them. This was, according to Karl Marx, an example of “primitive communism”.

The slave-based societies of the Greek and Roman empires also had traditional economic systems, but
in contrast to hunter/gatherer societies, had a definite hierarchical structure. Citizens had a much
higher status than slaves, and even among citizens, there were large differences in status. These
differences in stature were mostly determined at birth. If you were born from slave parents, you
would, nearly inevitably, live your life as a slave. Similarly, if you were born into the privileged classes,
you could expect to live a life of privilege.

The Western half of the Roman empire came to an end in the fifth century and new political
arrangements developed. The Middle Ages in Europe (about 500 to 1500 AD) was characterised by
feudalism. Feudalism is an economic arrangement that was characterised by a very hierarchical form
of society, where serfs (nominally free workers, mostly subsistence and small-scale farmers) lived on
the feudal lord’s land and were indebted to him. The serfs were not officially slaves, but the
relationship with the feudal lord was very similar to the relationship between slaves and masters. If
you were born from serf parents, you were bound to become a serf yourself, whereas if you were
born from the feudal lord and lady, you would become a feudal lord or lady yourself. There was no
social mobility. You could not “move up” in life through hard work.

The capitalist system

For thousands of years of human existence, the traditional economic systems were the norm, even
though they varied between different geographic regions and over different time zones. In the 18th
century a new system started developing in England. Its development coincided with the Industrial
Revolution, a period of great change and upheaval. Factories, using steam power as energy, were
founded across England. Many people were pushed off their farmland and were forced to live in cities,
where they worked very long hours in the factories.

A new social class, the capitalists, emerged. These are what we would call entrepreneurs today. They
were people who, with either their own money, or money from other sources (e.g. co-owners or
shareholders in the business venture), built and operated factories. Even though the Industrial
Revolution was extremely disruptive, the factories produced goods, like textiles and clothing, that
were desired by the population and allowed them to enjoy a higher standard of living.

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The capitalist revolution started in England, but spread to other countries in Europe and to North
America in the 19th century. The word capitalism derives from “capital”, i.e. the resources and
machines used to manufacture products. A critical characteristic of the capitalist system is that of
private ownership. The capitalists owned the means of production, i.e. the factories and the
equipment in them. The capitalists decided what to produce and how to produce them. They were
guided by the profit motive to produce those things which would yield the highest profit.

As an economic system, it has produced material welfare unprecedented in human history. However,
it has also come at a significant cost. These costs include environmental degradation and social
disruption. In recent years there has been a marked increase in income inequality, both within
countries and between countries. This is an issue that is discussed in detail in the CORE textbook.

Command (planned) economic systems

In 1917 a new type of economic system came into being. The Czar of Russia was overthrown by the
Bolsheviks and Vladimir Lenin became the leader of what later became known as the Union of Soviet
Socialist Republics (USSR) (also called the Soviet Union), and introduced a new economic system – the
command system. Whereas the capitalist system operates on principle that market forces answer the
three fundamental economic questions, the command system works on the principle that the
government makes these decisions. The government owns the factors of production and decides how
to employ them in the production process. The government decides what to produce, how to produce
them and how the goods and services will be distributed. For example, the USSR adopted five-year
plans in which production targets were set. These five-year plans allowed the Soviet economy to
develop very quickly.

In a capitalist society consumers’ preferences and purchasing behaviours determine what is to be

produced. Businesses know that they will not be able to sell things that consumers do not want. Thus,
in capitalist societies the consumers are sovereign; they are not told by the government or by the
businesses what they should consume. Rather, the businesses supply what the consumers want.

In a command system the state is sovereign. The state decides what to produce and consumers have
no choice but to buy the things that are produced on government decree.

A significant problem in the USSR and China was the quality of goods that were produced. The targets
set for the cooperative farms and factories were set in terms of quantity, not quality. If a factory had
to produce 1000 cars a month, it is easy to determine whether the target has been met by simply
counting the output for the month. However, there was no incentive to produce high quality cars or
better designed cars, because this was not rewarded.

Another characteristic of the socialist system were shortages of consumer products. The central
planners wanted the economy (and the military) to develop, and thus made sure that a large
proportion of the resources were allocated to investment goods (e.g. the building of more factories,
and the exploitation of natural resources), the military and to space exploration. The production of
consumer goods and services was unimportant.

Also, prices did not reflect the relative scarcity of consumer goods. While bread may have been cheap,
not enough was being produced. As a result, people stood in queues for hours to get their ration of
bread. This is not efficient.

The command system that was thrust upon Russia in 1917 allowed it to develop much faster than had
there not been a Bolshevik revolution. However, as the country developed and the economy became
more complex, it became increasingly difficult to centrally control all economic activity. The system

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became increasingly inefficient. During the 1980s it became clear that the system had become too
complex and cumbersome and inefficient to continue as always. In the mid-1980s the then-president
Michal Gorbachev, tried to reform the socialist/communist system. By creating Western-style market
changes, he wanted to make the system more efficient. His attempts at reforming the system failed.
In the early 1990s communism was abolished, and the USSR disintegrated. A capitalist system was
introduced. This was a very difficult and painful process, as it meant that many agricultural and
manufacturing plants were closed down because they were inefficient and could not compete in an
environment where they had to face the competition of competitors.

In 1948 Mao Zedong introduced a command system in China. The process of developing a poor, highly
populous country was difficult. Policy errors by planning officials and misguided strategies by the
country’s leadership resulted in famines that cost the lives of tens of millions of people. Relative to
the Soviet experience, China’s experience with the planned economy was less successful. It also lasted
much shorter. China’s experiment with central planning lasted just over 30 years (1948 – 1979),
whereas the Soviet Union’s experiment lasted more than 70 years (1917 – 1989).

Mixed economic systems

Most countries currently have a market-oriented system. I use the phrase “market-oriented system”,
rather than “market system” quite deliberately, because a pure market system does not exist. Some
countries are more market-oriented than others. In practice, all real-world economic systems are
mixed systems, having market features and command features, and (in some, but not all) traditional
features.

Classifying countries according to their market or command features will always be difficult. Is South
Africa more market-oriented than the US, or Botswana, or Zambia? It depends what weights you
attach to the various characteristics that you regard as market-oriented or command-oriented. If you
regard freedom of the labour market as an important feature of a market/capitalist system, South
Africa is further away from a market system than most other capitalist countries, because our complex
and onerous labour legislation is often perceived as a disincentive to businesses to employ more
people. In that sense our labour legislation has strong command characteristics.

However, if one classifies countries according to the ease with which capital (in this context it is
money) can be moved into and out from the home country, South Africa does much better. Our
exchange controls (i.e. the controls on the movement of money into and out of the country) are
relatively light, which means that, on this criterion, South Africa is less of a command economy, than
on issues related to labour.

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Part C: TWO IMPORTANT THINKERS IN ECONOMICS

Adam Smith

The year 1776 is an important year in economics as this was the year when Adam Smith published the
book “An Inquiry into the Nature and Causes of the Wealth of Nations”. The book is usually
abbreviated to “The Wealth of Nations”. In the book Adam Smith describes many of the new
development that were taking place, and criticises many of the things that were regarded as the
“received wisdom”. The brilliance of Smith lies in the fact that he was able to put into words
developments that were still in its infancy at the time. The book was written just as the Industrial
Revolution was taking off.

His book was revolutionary at the time because it upended so many thoughts. For example, most
people (and kings) at the time thought that, to be rich, a country must have a lot of gold and silver.
Many old children’s stories have the theme that gold is riches, e.g. Rumpelstiltskin and Robin Hood.
These stories were popular at the time because that was the way that people thought about it.

How do you get gold and silver? In several ways. You could plunder other countries (e.g. the Spanish
plundering Central and South America), or you could steal it from other countries’ ships (e.g. sponsor
your own pirate fleet to attack other countries’ ships transporting these precious metals), or through
more legitimate means by exporting more than you are importing. If you export to another country,
you (legitimately) receive their gold, whereas if you are importing you must pay the other country
with your gold. Exporting is “good” because it increases the stock of gold, but importing is “bad”
because it reduces your stock of gold. This way of thinking is known as Mercantilism.

Smith said: No, the wealth of the country is not the quantity of gold that it has in its vaults, but the
quantity of goods and services that it produces for its population. As such, he was strongly opposed
to Mercantilism.

Another revolutionary idea was the idea that the government does not have to be involved in the
economy. In Smith’s time the government gave licences to producers to produce candles, shoes, meat,
bread and a variety of other things. Without such a license you could not produce these things.

Also, producers organised themselves in guilds. These guilds were groups of people who had the
sole/monopoly right to be in that industry, and they tried to keep the group small to avoid competition
among themselves that would drive the prices down.

Smith argued that if everyone were allowed to operate as they saw fit (i.e. without government
intervention and without guilds) this would enhance the welfare of society. People do not need the
intervention of government, but would “as guided by an invisible hand”, in pursuance of their own
self-interest, act in such a way that everyone would be better off.

Please read more about Adam Smith’s contribution to our thinking about economics in the CORE text.

19th century England

Before I introduce you to Karl Marx it is important to understand the context in which he wrote. The
Industrial Revolution gathered pace in the late 18th and early 19th centuries. Many people were driven
off the land where they had been working the soil for generations and ended up living in squalid
conditions in cities like London and Birmingham. There they lived in hovels, without sanitation,
electricity, running water. Cities of this scale had never existed before, so city planners were
completely unprepared to deal with so many people congregating in one city so quickly. Living
conditions were particularly unpleasant. Infectious diseases were rife. Because of the terrible quality

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of the water, cholera killed many thousands of people prematurely. The life expectancy at birth in the
cities was not more than 30 years, and in many cases much lower. Women had many children, but a
majority of children died before the age of five.

In 1651 Thomas Hobbes wrote a poem which contained the words: “No arts; no letters; no society;
and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary,
poor, nasty, brutish, and short”. This description that life was “poor, nasty, brutish and short” was
equally true, and probably even truer, for most people in the first 100 years of the Industrial
Revolution (i.e. 1750—1850).

Workers in the factories worked incredibly long hours, often 12 hours or more each day, at least six
days a week. Child labour was common and accepted as normal. Wages were very low and were hardly
sufficient to keep soul and body together.

The economic thinking at the time was greatly influenced by Thomas Malthus and David Ricardo, who
argued that this level of exploitation was “the natural order of things”. They argued that, if wages
were to be above the subsistence level (i.e. that level where one can just survive), the population
would grow too quickly, as people would have more children and they would survive their childhood
years. In the long run there would not be sufficient food for all to eat and humanity would be faced
with mass starvation. To avoid such a catastrophe, it was rationalised that the working class should
work at such low wages, in order to keep the working population from increasing.

In unit 1 of the CORE textbook (version 2.0), this thinking, which is generally ascribed to Malthus, is
investigated in more detail. We will briefly consider this argument.

As cruel and heartless as it sounds today, Malthus’s analysis described the situation quite well. When
he wrote his thesis (1798) the production of food was done in old-fashioned and inefficient ways.
There were no fertilizers, insecticides, or labour-saving equipment that increased the productivity of
the farmers. The so-called “Green Revolution”, which saw major advances in agriculture and food
production, only came much later.

Adam Smith and David Ricardo saw no role for government to change the situation. In fact, they
argued that the role of government was to be very limited. It should provide for national security and
for a working legal system, but should not get involved in the production side of things. The thought
that the government should provide housing, education and health services was inconceivable. Smith
and Ricardo argued for laissez faire capitalism. Laissez faire means “the policy of leaving things to take
their own course, without interfering”.

19th century England was characterised by a very hierarchical society, with three distinct social classes:
(1) landowners, (2) capitalists and (3) labourers. The landowners had owned the land for generations
and were the wealthy class in society. They received rents from their tenants. One was born into this
class. One could not work yourself into it. The capitalists, the “new rich” class in English society, owned
and operated the factories. Many came from wealthy backgrounds. The labourers comprised by far
the largest proportion of England’s population. They worked on the farms (often as tenants to the
landlords) or in the factories. The factory labourers bore the brunt of the disruption caused by the
Industrial Revolution.

The labourers in the factories were the focus of Karl Marx’s analysis. Let’s now look at him in more
detail.

Karl Marx

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Karl Marx was born in Germany, but fled to England after run-ins with the authorities. He was
financially supported by his wealthy friend Friedrich Engels and spent most of his days in the British
Museum in London, writing and philosophising.

Marx looked at the developments in England – at the extreme inequality, the exploitation and the
rationalising that this is the “natural order of things” and said, “This is not right”.

In 1867 he published his life’s work “Das Kapital” (in English “Capital”, but mostly known by its German
name). It is heavy reading. In the book he describes human history as one massive class struggle.
Different social classes emerge, but they conflict with one another. In 19th century England the three
classes are the landowners, the capitalists and the workers. Marx called the capitalist class the
Bourgeoisie and the working class the Proletariat. These are useful terms to remember and impress
your friends with.

In a process that he describes as “historical determinism” he explains that there is a predictability

about the development of the class struggle. He acknowledges that the economic growth that derives
from the Industrial Revolution has great potential to improve people’s standards of living, but that it
is associated with unacceptable levels of exploitation. He also explained that the inequalities in society
(which he called the contradictions in society) would become so large that it would eventually result
in the collapse of the capitalist system. The rich (i.e. the Bourgeoisie) would become increasingly
richer, while the poor (i.e. the Proletariat) would remain poor. He did not foresee that the capitalist
system was able to reform or transform itself.

At some point, when these inequalities (contradictions) became so large, there would be a Proletarian
revolution, where the workers would rise up against the capitalist masters and take over the means
of production (i.e. the factories and equipment). The Proletariat would then introduce a classless
society where everyone would contribute to society according to their skills and take from society
according to their needs. Marx, sadly, did not write much about this new society.

While das Kapital is a very dense and difficult book, he wrote a much easier-to-read book with his
friend and benefactor, Friedrich Engels, called the Communist Manifesto (1848). I strongly
recommend that you read this book. Find it here: https://activistmanifesto.org/assets/original-
communist-manifesto.pdf. Don’t worry: reading the Communist Manifesto does not make you a
communist, but it gives you an insight into some of Marx’s thinking. You will notice that the book was
written in anger. The first four paragraphs of the Manifesto read as follows:

“The history of all hitherto existing society is the history of class struggles.

Freeman and slave, patrician and plebeian, lord and serf, guild-master‡ and journeyman, in a word,
oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted,
now hidden, now open fight, a fight that each time ended, either in a revolutionary reconstitution of
society at large, or in the common ruin of the contending classes.

In the earlier epochs of history, we find almost everywhere a complicated arrangement of society into
various orders, a manifold gradation of social rank. In ancient Rome we have patricians, knights,
plebeians, slaves; in the Middle Ages, feudal lords, vassals, guild-masters, journeymen, apprentices,
serfs; in almost all of these classes, again, subordinate gradations.

The modern bourgeois society that has sprouted from the ruins of feudal society has not done away
with class antagonisms. It has but established new classes, new conditions of oppression, new forms
of struggle in place of the old ones.”

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If you read the Manifesto, you will notice the word “bourgeoisie” many times. He had a particular
dislike of this class, although he begrudgingly acknowledged that they had created a system that
greatly increased the level of production, and could substantially raise the standard of living of all,
provided the benefits were more equally distributed.

Much more can be said about Karl Marx, but for now this suffices. Many people regard him as evil. For
many, “Marxism” is a dirty word. However, I think that it is important that we read and understand
the man’s writings in context. He wrote in a particularly disruptive and nasty period in human history.
He wanted to see more justice in the world.

It turns out that his predictions proved incorrect. He expected the Proletarian revolution to happen in
England, because England was by far the most economically advanced country at the time. He thought
it inconceivable that the system could transform itself. However, in the last quarter of the 19th century
the government of England passed laws (e.g. minimum wage legislation, banning of child labour, and
allowing trade unions to form) that took the hard edges and the extreme exploitation off the capitalist
system. Were these laws passed because the capitalists and the rich feared the Proletarian revolution
that Marx predicted? Possibly, we don’t know.

What we do know is that Karl Marx has left an indelible mark on world history. In 1917 the October
Revolution took place in backward Russia, and in 1948 Mao Zedong led the communists to power in
desperately poor China. The socialist experiences in these countries did not work out as predicted. But
Marxist ideals did not collapse with the fall of the Berlin Wall in 1989. In many people’s mind, including
many in South Africa, these ideals are alive and well.

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