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Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc.

Chapters 9, 10, and 11

Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Oser Summary Main Page

Chapter 9: The Rise of Socialist Ideologies

Although socialist disagree among themselves, there are three strands of thought that characterize the socialist ideology:

1. They all repudiate laissez faire and the idea of a harmony of interest among classes,

2. They advocate collective action and public ownership of enterprise by the central government, local governments, or cooperative enterprises, and

3. They all believe in the perfectibility of man given the proper environment.

Overview of Socialism

The Social Background of Socialism

The industrial revolution destroyed the old agricultural-village-handicraft economy and replaced it with large factories where workers lived in slums with vice, crime, disease, and hunger. Wage-earners had no political rights and their families received little if any compensation when they were maimed or killed in industrial accidents. The poverty of the masses increased as the fortunes of the capitalist manufacturers multiplied.

The Essence of Socialism (Various Forms of Socialism and Capitalism Defined)

The essential characteristics of capitalism include private ownership of capital and land, and the profit motive as the guiding force in the market. In free-enterprise capitalism, competition prevails, rather than monopoly or oligopoly, there is a minimum of government regulation, and freely formed prices guide production and distribution. Where capitalism is controlled or regulated by government, monopolistic organization, or unions, it is more apply called a private-enterprise economy rather than a free-enterprise economy.

State capitalism is where a government owns and operates industries for maximum profit or minimum loss, as a private entrepreneur would. Examples of state capitalism include Bismarck's take over of the railway system in Germany, and the New York City government's take over of the bankrupt private subway system.

State socialism is where a government existing in a capitalist framework owns and operates sectors of the economy for over-all social objectives rather than for profit. Examples include the U.S. federal social security system, the Tennessee Valley Authority, and publicly owned canals.

Utopian socialism was founded by Compte de Saint-Simon, Charles Fourier, and Robert Owen in the early 1800s. They wrote that the capitalist market was unjust and irrational, and that universal brotherly love based on cooperative communities was preferable to class struggle.

Christian socialism developed in England and Germany after 1848, and advocated mutual love and fellowship, sanitary reform, education, factory legislation, and cooperatives. Charles Kingsley was a leading advocate in England.

Anarchism holds that all forms of government are coercive and should be abolished. "The state is the root of the evil" according to Mikhail Bakunin (1814-1876). Order should arise out of self-governing groups. Private property should be eliminated and replaced by collective ownership of capital by cooperating groups based on mutual understanding, cooperation, and complete liberty. Their ideal community is similar to that of the other socialists. Pierre-Joseph Proudhon was another early proponent.

Marxian socialism is based on the materialist conception of history where as each social system develops, its productive forces eventually become a barrier to further progress. Then, through a class struggle the old society is overthrown.The idea is that slavery was replaced by feudalism which was replaced by capitalism, which in turn will be overthrown by the proletariat who will establish socialism, that will (according to Marxism) be replaced by communism as the state withers away. Under socialism, private property in consumer goods is allowed, but capital and land are publicly owned and regulated by the state. Production and the rate of investment are planned, and the profit motive and the free market are eliminated.

Communism replaces the socialist slogan "From each according to his ability, to each according to his work" with "From each according to his ability, to each according to his need." Money payments based on work are eliminated, antagonistic classes will disappear, and the government over men will be replaced by the administration of things such as the railway system, and coal, iron, and machinery complexes. Communism does not exist anywhere except as small cooperative communities, usually motivated by a common religious group where people work, pool their earnings, and draw from a common fund to obtain the things they need.

Revisionism was advocated by Edward Bernstein and other Fabian socialists. They based their doctrine on education, electioneering, and gaining control of the government through the ballot. The government should regulate monopolies, control factory working conditions, operate public utilities, and gradually obtain ownership of capital. Revisionism has been referred to as "gas and water socialism."

Syndicalism was promoted in the Latin countries of Europe by George Sorel (1847-1922). Syndicalist were antiparliamentarian, antimilitarist, and advocated one big union that would strike to stir up revolutionary consciousness of the workers. One general strike of the big union would overthrow capitalism, and the coercive government would disappear. Private property would be abolished. The Industrial Workers of the World, organized in the U.S. in 1905 provides an example of a syndicalist union.

Guild socialism advocated by Oxford University economics professor G. D. H. Cole (1889-1959) accepted the state institution to develop economic policy for the benefit of the whole community, but employees (the producers) organized into industrial guilds would manage the industries. Workers would have the status of partner in the enterprise, and the nation would be divided into producers and consumers, rather than opposing camps of capital and labor. This industrial democracy would represent a partnership of equals.

What Groups of People did Socialism Serve or Seek to Serve?

The more moderate groups (Utopian and Christian socialism) represented everyone, but their emphasis was on the workers. The more extreme groups (Marxists, anarchists, and syndicalists) advocated class warfare against the rich in promoting the interest of the working class. Their trade union activity, pressure on parliament, and threats of revolt helped win concessions from the capitalist.

How Was Socialism Valid, Useful, or Correct in its Time?

Workers grievances against laissez faire capitalism were legitimate and utopian socialism expressed the troubled conscience of humanity. Marxian socialism and other socialist programs pointed out the problems of poverty and the recurring business depressions that were not faced by advocates of the status quo. Marx predicted the growth of monopoly, and provided an evolutionary approach to the study of society and social problems, including a theory of economic development. Socialism was useful in a number of ways including promoting factory acts, sanitary reforms, cooperative associations, unions, pensions, and workmen's compensation laws.

How Did Socialist Doctrines Outlinve Their Usefulness?

When this book was published in 1963, socialism had not outlived its usefulness since one-third of the people in the world lived under regimes guided by Marxian economics, and perhaps another third lived under governments with socialist aspirations or a large socialist minority (India, Indonesia, Sweden, Japan, Italy, France). But socialists who advocated minimum reforms have outlived their usefulness in that capitalism has been reformed to meet those demands because the system grew richer and could offer more, and because capitalist as a group could give up what an individual capitalist could not afford. However, Marx did not foresee that unions, political action, and governenment intervention would restrain the tendency for the working class standard of living to continue to fall, that a new middle class (self-employed professionals, salaried scientists, engineers, teachers, administrators etc.) would emerge, and that government intervention in the economy would reduce the severity of fluctuations that he thought would make capitalism unsustainable. Capitalism has not demonstrated the inflexibility assumed by Marx, and has shown a greater ability to adjust to new circumstances. Other points in this section include the question of how the state could ever wither away to transform a socialist system into a communist system, how "each according to his work" could be applied equitably, how central planners could identify which consumer goods should be produced and in what quantities, how much should be invested, and similar questions that have never been successfully resolved.

Saint-Simon

The Compte de Saint-Simon (1760-1825) was a utopian socialist who regarded idleness as a sin. He wrote that an industrial parliament should consist of three chambers: invention (composed of artist and engineers who plan public works), review (scientist who would examine the projects and control education), and execution (including leaders of industry who would carry out projects and control the budget). He rejected the classical economists assumption that individual interests would further the general interest. His followers opposed the laws of inheritance and urged the collective ownership of property. Saint-Simon wrote that "Society is a world which is upside down. The nation holds as a fundamental principle that the poor should be generous to the rich, and that therefore the poorer classes should daily deprive themselves of necessities in order to increase the superfluous luxury of the rich." He did not advocate appropriating private property as most socialist, but he compared society to a pyramid with workers at the base, leaders of industry, scientists, and artists above that, the idle rich above that, then the governing class, and finally the monarchy as a diamond at the top.

Fourier

Charles Fourier (1772-1837) was an eccentric utopian socialist who disliked large-scale production, mechanization, and centralization. Competition, according to Fourier multiplies waste in selling, and businessmen withhold commodities to raise their prices. His solution to social problems was to organize cooperative communities called phalanxes that would combine three hundred families, eighteen hundred people on nine square miles of land focused on agricultural and handicraft production. Collective work would improve climate conditions, and there would be no theft as people would live together in honor and comfort. The disagreeable work would be performed by the children who would learn a variety of trades. Everyone would receive a minimum of subsistence regardless of their contribution, and the surplus would be divided five-twelfths to labor, four-twelfths to capital, and three-twelfths to talent and skill. The movement was popularized in the United States by Albert Brisbane, Horace Greeley, George Ripley, and others. Forty Fourierist phalanxes were established in the U.S. including the North American Phalanx in New Jersey (1843-1856), and the Brook Farm Phalanx near Boston (1841). Members included Nathaniel Hawthorne and Ralph Waldo Emerson. All of the phalanxes failed, but they influenced the labor movement at the time, and inspired much thought about how to improve the economic system.

Sismondi

Simonde de Sismondi (1773-1842) was a Swiss economist and historian who published several works including a sixteen-volume History of the Italian Republics of the Middle Ages, and a twenty-nine volume History of the French. He was not a socialist, but an early critic of classical economics. In his New Principles of Political Economy (1819) he wrote that unrestricted capitalist enterprise would not yield the results expected by Adam Smith and J. B. Say, but instead would lead to widespread misery and unemployment. He was one of the early contributors to business-cycle theory by raising the possibility of overproduction and the resulting crises. Only state intervention would insure workers a living wage and minimum social security. The government should provide assistance to men, not industry, save its citizens, not business. The largest possible output would not provide the greatest happiness of the people. Instead a smaller output properly distributed would be more beneficial. He promoted laws regulating distribution in the general interest, small-scale farming, as opposed to tenant farming, inheritance taxes, discontinuing patent rights to curb inventions, compelling employers to provide security for workers in old age, cooperation between workers and employers, and profit sharing. Although he is not classified as a socialist, and did not attack the institution of private property, his criticism of classical theory inspired the socialists.

Owen

Robert Owen (1771-1858) was the most famous utopian socialist, a factory reformer, advocate of cooperatives, trade union leader, founder of utopian communities, and theorist in the field of education. Owen viewed human nature as molded by the environment. Owen's theories, like Fourier's were based on the idea that better conditions produce better people. Individual happiness would be achieved by serving the community, a reverse from the classical economics and Benthamite view that self-interest would serve society. Owen owned Lanark Mills in Scotland and converted it into a model community. He denounced all religions because they taught that men were responsible for their evil actions, instead of attributing evil to a bad environment. He appealed to government to enact factory legislation, and to other manufacturers to follow his example. In 1825 he established the New Harmony colony in Indiana, but the colony failed and he lost four-fifths of his $250,000 fortune. He founded the National Equitable Labour Exchange where products could be exchanged for notes representing labor time, eliminating the need for money and profit which were viewed as twin evils. He promoted the Grand National Consolidated Trades Union in 1833 which was later reorganized to become the nuclei of the modern British union movement. Owen had a significant influence on socialism and unionism. The word socialism was first used in the Owenite Co-operative Magazine in 1827 to designate Owen's followers and to emphasize the term "social" as opposed to "individual."  Owen's son Robert Dale Owen (1801-1877) drafted a bill in Congress founding the Smithsonian Institution, was a U.S. ambassador to Italy, and advocated birth control, emancipation for slaves, women's rights, and free public education.

Blanc

Louis Blanc (1811-1882) was a French social reformer, journalist, historian, and founder of state socialism. In Organisation du Travail (Organization of Work) published in 1839 he wrote that "A systematic lowering of wages resulting in the elimination of a certain number of laborers is the inevitable effect of free competition..." The government should erect social workshops to provide work for the unemployed. Under pressure from Blanc and his followers, the government organized National Workshops, a make-work scheme that consisted of public works for common labor, but the government gave the men employed in this system the alternative of entering the army or leaving Paris for the provinces. The workers revolted, sixteen thousand people were killed, and Blanc had to flee to England. He returned to France in 1870 and was elected to the National Assembly. He promoted universal suffrage as a way to transform the state into an instrument of progress. Blanc attacked capitalism and competition, but was opposed to class war and trade unionism. He favored solidarity of the entire community, and state planning for full employment, welfare services, national workshops, and workers cooperatives financed by the government. He advocated that publicly owned banks be established to provide credit to cooperatives. In Blanc's view, capitalism would fade away.

Kingsley

Charles Kingsley (1819-1875) was a clergyman, poet, novelist, professor of modern history at Cambridge, chaplain to Queen Victoria, canon of Westminster, Christian socialist, and Chartists. The goal of the Christian socialists was to "socialize the Christian and Christianise the socialist." The Chartist were more demanding. They had six specific demands: equal electoral districts, universal suffrage (including women), voting by secret ballot, parliaments elected annually, no property qualifications for serving in the House of Commons, and payment to members of parliament. These were radical demands that shocked and angered the aristocrats in 1848 when large numbers of Chartists were involved in military training, and Chartists had threatened to elect a people's parliament. The Christian socialists published a weekly journal in 1848 (Politics for the People) where Kingsley wrote a series of Letters to Chartists defending the poor. Kingsley referred to the Bible as the true Radical Reformer's Guide and God's everlasting witness against oppression, cruelty, and idleness of both the rich and the poor. He opposed mass meetings, physical violence, union strikes, and hatred of the rich by the poor. He thought the rich were ignorant, but not hostile. His doctrines were based on love, religion, cooperative associations, sanitary reforms, and education.

Proudhon

Pierre-Joseph Proudhon (1809-1865) was a philosophical anarchist who promoted anarchism as a mass movement to achieve liberty of the individual and justice. In What is Property published in 1840 he wrote that government had placed itself on the side of the richest and most educated class against the more numerous and poorer class. "Governing the people will always be swindling the people." Proudhon wrote that situations where large property holdings allowed its owner to live without working by exacting rent, interest, and profit from the producers, was theft. He favored small-property ownership including dwellings, land, tools, and products produced by laborers, and equality of incomes even for those with different abilities, strengths, talents, and output. Large industries should be owned by associations of workers that would charge just prices as near as possible to cost. He proposed that the gold standard be abolished and that a Peoples Bank be established where interest would be abolished, and every worker and group of workers would receive free credit. This he thought would unite property and labor. Proudhon did organize a People's Bank in Paris, but he was arrested and his trial ended the bank.

Chapter 10: Marxism and Revisionism

Karl Heinrich Marx (1818-1883) and Friedrich Engels (1820-1895) were the founders of Marxian or scientific socialism. He published Volume I or his magnum opus, Capital in 1867. After Marx death, Engels edited and published Volumes II and III.  Later Karl Kautsky published another three volumes with the title Theories of Surplus Value. Marx and Engels became friends in 1844 and together wrote the Manifesto of the Communist Party in 1848.

The Labor Theory of Value

In Marx's analysis of commodities in a capitalist society, a commodity has use value, or utility, and exchange value based on the average labor time required in production. For Marx labor time determines absolute value, as opposed to Ricardo who believed the relative values of different goods were proportional to the labor time embodied in each. If in Marx's version of the labor theory, all value is created by labor, the owner of capital goods would have no claim to any of the product.

The Theory of Exploitation

If all products sell at their value based on average labor time as Marx assumed, how does the capitalist receive a profit? The answer according to Marx, is that his profit or surplus comes from the exploitation of labor in the production process. Although all labor appears as paid labor, it is an illusion since the capital invested in machinery and raw materials is constant capital and does not increase the value of the product. The capital that is used for wages is variable capital, and the extra value that it produces without compensating the workers is surplus value or exploitation. Marx makes a distinction between labor time and labor power. Labor power refers to man's ability to work. Marx noted that the surplus value could be increased by increasing the efficiency of production, which would decrease the value of labor power.

Value and Price of Production

According to Marx, the labor theory of value holds for the capitalist system as a whole, but individual commodities will sell for more or less than their value to equalize rates of profit for the entire economy. He developed three hypothetical tables showing five industries with different ratios of constant capital to variable capital to illustrate how capital flows cause prices to rise in some industries and fall in others ..."in a very complicated and approximate manner, as a never ascertainable average of ceaseless fluctuations."

The Falling Rate of Profit

As the capitalists attempt to increase profit through mechanization and invention, the increasing proportion of constant to variable capital would create a tendency for the rate of profit to fall in the long run. Marx listed five counteracting forces to the falling rate of profit, (lengthening the work day, lowering wages, using cheaper materials and machinery, developing new industries that are more labor intensive, and investing in the colonies), but concluded that the long run tendency for falling profits was one of capitalism's insoluble problems.

Capitalist Accumulation and Crises

The surplus value squeezed out of the productive workers causes an accumulation of capital which leads to overproduction since the workers cannot, and the capitalist will not buy the flood of consumer goods produced. The system recovers from each crisis when some capital values are destroyed, some factories close, prices of commodities fall, credit contracts, and wages fall.

Fabian Revisionism: The Webbs

The British Fabian Society was organized shortly after Marx's death in 1884, and their thinking influenced Marxian groups everywhere, particularly in England and Germany. The Fabians promoted trade unionism, extension of the ballot, tax reform, consumer cooperatives, government regulation of industry, social legislation, and the nationalization of key industries. They repudiated the doctrines of class struggle and revolution in favor of a slow and peaceful socialization of the means of production. They explicitly indorsed imperialism and promoted the view that Great Britain should become the nucleus of a world empire, not lose its colonies to become a tiny pair of islands in the North Sea.

Sidney Webb (1859-1947) and his wife Beatrice (1858-1943) founded the London School of Economics and Political Science (that became the University of London), and published forty-five volumes in addition to a number of pamphlets, articles, and essays. They believed that consumers' cooperatives and unions would eventually replace capitalism with the "Cooperative Commonwealth." After World War I, the Webbs published The Decay of Capitalism (1923) which provided a sharp indictment of the capitalist system. In 1935 they published Soviet Communism: A New Civilization?, a two volume work providing a eulogy for the Soviet Russian system.

German Revisionism: Bernstein

The German Social Democratic Party was the largest Marxist party in the world before World War I, but their enthusiasm for Marx's doctrines turned toward revisionism. Edward Bernstein (1850-1932) was a leading advocate of this new and more moderate version of socialism. Bernstein recognized that the adverse effects of capitalism had become less severe as the privileges of the capitalists were yielding to democratic institutions. He denied the Marxian view that socialism was the necessary outcome of a class struggle. Instead he promoted the idea of socialism as the goal of a civilized society. Bernstein's ideas were voted down by the Party congress in 1899 and 1901, but in 1959 (27 years after his death), the party voted to renounce Marx's class struggle, endorsed private property of capital goods, favored parliamentary democracy, and free competition in a free economy. The concept of "effective public controls" to prevent "misuse of the economy by the powerful" replaced the demand for the socialization of industry.

Chapter 11: The German Historical School

The German historical school began in the 1840's with publications by Friedrich List and Wilhelm Roscher. It ended during World War I when Gustav Schmoller died in 1917.

Overview of the German Historical School

After the Napoleonic wars Germany was divided into thirty-nine separate states, and many Germans demanded unification and constitutional reforms. Mercantilistic regulations continued in Germany and competition and freedom of enterprise were severely restricted. The historical school defended and rationalized the German system by questioning the relevance of economic doctrines. Germany was far behind England in industrial development and required government assistance to catch up.

The Essence of the German Historical School

1. The historical school used evolution in its study of society to promote the idea that economic doctrines that are relevant for one country at a particular time may be inappropriate for another country at a different stage of economic development. This reasoning was used to attack classical economics as being applicable for England, but not for Germany.

2. The historical school was nationalistic and emphasized the role of the state and the need for its intervention in economic affairs. While classical economics was individualistic and cosmopolitan, the historical school felt that the community had interests that were distinct from those of the individual.

3. The school emphasized historical research that focused on all the forces of an economic phenomenon, and facets of economic behavior. Some denied that there were any valid economic laws except for patterns of development indicated by history that could be generalized into "laws of development."

4. The historical economists were conservative reformers believing that the state should be entrusted with improving the conditions of the common man, and this would divert the working man from the socialistic ideology. These moderate reformers were referred to as "Socialists of the Chair."

What Groups did the German Historical School Serve or Seek to Serve?

The historical economists served the business, financial, and landowning groups with moderate reforms that suppressed a more democratic transformation of society.

How was the German Historical School Valid, Useful, or Correct in its Time?

New situations require new ideas and new theories, but to understand the present world we need to understand the changing history and environments, as well as economic and social evolution. The historical school economists were leaders in attacking laissez faire, understood that unrestricted free enterprise would not necessarily provide the best results for society, and were right in believing that reforms would prevent worse upheavals if poor working conditions were allowed to continue.

How did the German Historical School Outlive its Usefulness?

The school was no longer needed when economists of all persuasions agreed that historical empirical studies were needed to develop, test, and explain economic theories. Their historical-inductive method became generally acceptable as complimentary to the abstract-deductive approach, but the school failed to show that the historical method could produce theory. The German nationalism advocated by the historical economists conflicted with the rising hope that the world could move toward peace, international cooperation, and universal harmony.

List

Friedrich List (1780-1846) was a forerunner of the historical school. He was active in promoting a strong political and commercial union of German states, advocated a railway network for Germany, and was a driving force in establishing the German customs union (the Zollverein) in 1834. List advocated free trade within Germany, but high tariffs on imports of manufactured goods to protect infant industries. He condemned Adam Smith and classical economists for claiming that doctrines applicable for England were applicable for all countries. In his view, free trade was inappropriate for underdeveloped countries. He popularized the idea of stages of economic growth. In National System of Political Economy published in 1841, List wrote that nations go through stages in economic development including the savage state, the pastoral state, the agricultural state, the agricultural and manufacturing state, and finally, the agricultural, manufacturing, and commercial state. A country could revert to free trade only after it reached industrial maturity. List also denied Smith's idea of a harmony of interest between the individual and society. The private interest of members of a community would not necessarily lead to the highest good of the whole. List thought the foundation for international trade should be based on manufacturing in the temperate zone, and free-trade in the tropics where tropical products would be exchanged for manufactured goods.

Roscher

Wilhelm Roscher (1817-1894) was a founder of the "older historical school" who wanted to supplement classical theory rather than replace it with historical research and policy considerations. In his Principles of Political Economy published in 1854, he included a simplified version of classical theory and attempted to discover its historical basis.

Schmoller

Gustav Schmoller (1838-1917) was a professor of political science, and a leading figure in the "younger historical school". He considered the accumulation and description of historical factual materials as far more important than deductive theorizing, and was antagonist to deductive economists, particularly Carl Menger who founded the Austrian marginalist school. He called for much more historical study to establish an empirical basis for national economic theory, but the massive historical studies that were conducted failed to produce economic theory. Schmoller and his disciples major contribution was to economic history.

Weber

Max Weber (1846-1920) was a professor of political economy and sociology, and introduced a controversy over the relationship between Protestantism and capitalism. He rejected the Marxian view that religious doctrines were manifestations of economic conditions, and viewed capitalism as a result of the Protestant Reformation. Weber believed that Calvinist theology in particular contained ideas conducive to individualistic economic activity undertaken for profit. In The Protestant Ethic and the Spirit of Capitalism published in 1905 he wrote that the religious valuation of restless, continuous, systematic work in a worldly calling must have been the most powerful lever for the expansion of the spirit of capitalism. At that time, the Catholic Church condemned usury, was suspect of economic motives, had an unfavorable view of private fortunes, and was the largest feudal landowner. R. H. Tawney and others disputed Weber's analysis stating that economic changes (geographic discoveries, expansion of commerce etc.) were responsible for the transformation of the Christian ethic, and that both Calvinism and capitalism were produced by changes in economic organization and social structure. The complex relationships between Protestantism and capitalism make it difficult to determine cause and effect. As a result, questions remain as to whether Protestantism produced capitalism, as Weber believed, or whether capitalism simply accepted Protestantism as a more suitable religion for business activities, as Tawney and others believed?

Sombart

Werner Sombart (1863-1941) was a German economic historian who accepted Schmoller's nationalistic outlook, and hostility toward classical economics and liberal individualism. In attempting to explain the rise and growth of capitalism he noted the role of historical accidents such as the discovery of gold. He questioned Weber's views and wrote that the Jews and the Jewish religion gave capitalism its impersonal, rational, and materialistic qualities. According to Sombart, Jews also had a decisive role in the development of socialism. He divided capitalism into stages: early capitalism, 1400-1760, high capitalism 1760-1914, and late capitalism from 1914 on. The period of high capitalism marked the decline of capitalism where business leaders had become fat, rich, and complacent. Risk-taking became subordinate to caution and routine business, and economic activity was increasingly stabilized and regulated by the state. By 1914 the decadent tendencies had become pronounced. Sombart predicted that capitalism would endure indefinitely, but that public control and planning for satisfying needs rather than making money would become more important. In 1933, Sombart became a full supporter of the Nazi philosophy and believed that Germany under Hitler was the new dynamic system that would overcome capitalism. Like other members of the historical school, Sombart neglected value and distribution theory in favor of history, and viewed the laws of capitalism as applicable only to capitalism.

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