Henslin James M. Sociology: A Down to Earth Approach

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Barter Coins Deposit Receipts Fiat Currency

Debit Cards E-Cash

Currency

The Transformation of the Medium of Exchange

As each type of economy evolved, so, too, did the medium of exchange, the means by

which people value and exchange goods and services. As we review the changes summa-

rized in the time-event line at the bottom of this page, you’ll see how the medium of ex-

change reflects a country’s economy.

Earliest Mediums of Exchange

Hunting and gathering and pastoral and horticultural societies produced little surplus, and

people bartered, directly exchanging one item for another. In later societies, surpluses

grew and trade expanded, making barter too cumbersome. People then developed new

ways of placing values on goods and services so they could trade them. Let’s look at how

the medium of exchange was transformed.

Medium of Exchange in Agricultural Societies

Although bartering continued in agricultural societies, people increasingly came to use money,

a medium of exchange that places a value on items. In most places, money consisted of gold

and silver coins. A coin’s weight and purity determined the amount of goods or services it

could purchase. In some places, people made purchases with deposit receipts. These receipts

transferred ownership to a specified number of ounces of gold or silver, or bushels of grain,

or to a specified amount of other goods that were on deposit in a warehouse or bank. Toward

the end of the agricultural period, deposit receipts became formalized into currency (paper

money). Each piece of paper represented a specific amount of gold or silver stored in a ware-

house. Currency and deposit receipts represented stored value. No more currency or deposit

receipts could be issued than the total amount of gold or silver in the warehouse. Gold and

silver coins continued to circulate alongside the deposit receipts and currency.

Medium of Exchange in Industrial Societies

With few exceptions, bartering became a thing of the past in industrial societies. Gold was

replaced by paper currency, which, in the United States, could be exchanged for gold stored

at Fort Knox. This policy was called the gold standard. As long as each dollar represented a

specified amount of gold, the number of dollars that could be issued was limited. Toward the

end of this period, U.S. paper money could no longer be exchanged for gold or silver. Instead,

there was fiat money, currency issued by a government that is not backed by stored value.

When fiat money replaced stored value, coins made of precious metals disappeared from

circulation. People considered these coins more valuable, and they were unwilling to part

with them. In the United States, gold coins disappeared first, followed by the largest silver

coin, the dollar. Then, as inferior metals (copper, zinc, and nickel) replaced the smaller silver

coins, people began to hoard these silver coins, and they, too, disappeared from circulation.

Even without a gold standard that restricts the amount of currency issued to the

amount of stored value, governments have a practical limit on the amount of paper money

they can distribute. In general, prices increase if a government issues currency at a rate

higher than the growth of its gross domestic product (GDP), the total goods and serv-

ices that a country produces. This condition, inflation, means that each unit of currency

will purchase fewer goods and services. Governments try to control inflation, for high in-

flation is a destabilizing influence.

The Transformation of the Medium of Exchange 401

FIGURE 14.1 Changes in the Medium of Exchange

Note: This figure depicts a general course of development, not a hard sequence of events. Credit cards are not shown, as they are not a

medium of exchange but an IOU, a version of merchants’ charge accounts.

Source: By the author.

medium of exchange the

means by which people place a

value on goods and services in

order to make an exchange—

for example, currency, gold, and

silver

barter the direct exchange of

one item for another

money any item (from sea

shells to gold) that serves as a

medium of exchange; today,

currency is the most common

form

deposit receipt a receipt

stating that a certain amount

of goods is on deposit in a

warehouse or bank; the receipt

is used as a form of money

currency paper money

stored value the goods that

are stored and held in reserve

that back up (or provide the

value for) a currency

gold standard paper money

backed by gold

fiat money currency issued

by a government that is not

backed by stored value

gross domestic product

(GDP)

the amount of goods

and services produced by a

nation

inflation an increase in prices

Amount Needed to Purchase

the Same Basket of Goods

$1.00

.50

.35

.25

.20

.17

.14

.13

.11

Purchasing Power of the Current

Dollar in Terms of the 1941 Dollar

1800

Year

1820

1840

1860

880

1900

1920

1940

1960

1980

$12

$13

$14

$18

.10$10

.08

.07

.06

$15 .05

$16 .04

$17 .03

2000

When the U.S. went

off the gold standard

.09$11

2020

.02

As you can see from Figure 14.2 as long as the gold standard limited the amount of cur-

rency, the purchasing power of the dollar remained relatively stable. When the United

States left the gold standard in 1937, the dollar no longer represented stored value,

and it plunged in value. Today, the dollar is but a skinny shadow of its former self,

retaining only about 5 percent of its earlier purchasing power—and shrinking rapidly.

Inflation in the United States is usually mild, less than 5 percent a year. People

get used to gradual increases in prices. High inflation, in contrast, makes life diffi-

cult, and when inflation goes wild, it upsets everything. How would you like to pay

$800,000 for a little bread roll? Or $1,000,000 for a chicken? How about $417 for a

single piece of scratchy toilet paper? These are actual prices in Zimbabwe, where in-

flation has run wild (Wines 2006b; Bearak 2008). A Coke was really high,

$15,000,000,000 (Walker and Higgins 2008). That was at noon. By dinner, of

course, it cost a few million more (all prices in Zimbabwean money, not U.S. dollars).

After World War I, Germany was ravaged by high inflation, which helped to usher

Hitler into power. Look at the photos to the left. The large, beautiful bill—which I

bought in an antique shop—looks and feels as though it had been engraved. Al-

though it is only 100 marks, with this 1908 bill you could buy a car. The smaller

bills of 200,000 and 1 million marks, churned out by the German mint in 1923 at the

height of inflation after World War I, look and feel like Monopoly money. With them,

you could buy a loaf of bread—if you rushed to the store before the price rose.

In industrialized societies, checking accounts became common. A check is a type

of deposit receipt, for it is a promise that the check’s writer has deposited enough

currency in the warehouse (the bank or credit union) to cover the check. The lat-

ter part of the industrial period saw the invention of the credit card. This device

allows someone who has been approved for a specified amount of credit to purchase

goods without an immediate exchange of money—either metal, currency, or check. The

owner of the credit card is then billed for the purchase.

402 Chapter 14 THE ECONOMY

FIGURE 14.2 Declining Value of the U.S. Dollar

Source: Modified from “Alternative Investment Market Letter,” November 1991.

Medium of Exchange in Postindustrial Societies

During the first part of the postindustrial (or information) society, paper money cir-

culated freely. Paper money then became less common, gradually being replaced by

checks and credit cards. The next development was the debit card, a device that elec-

tronically withdraws the cost of an item from the cardholder’s bank account. Like the

check, the debit card is a type of deposit receipt, for it transfers ownership of currency

on deposit.

The latest evolution of money is e-cash, money stored on a company’s computer that

can be transferred over the Internet to anyone who has an account with that company.

E-cash can be used for making purchases and for paying bills. We can use the term

e-currency to refer to the most common form of e-cash. E-currency represents an amount

recorded in a government’s paper money, such as so many dollars or euros.

The second form of e-cash is electronic gold, which represents a balance in units of

gold. A transaction in e-gold is actually the transfer of ownership to a specified amount

of gold, which the owner has stored in a bank’s vault. E-gold takes us back to the time

when people made transactions in gold and silver—this time, in contrast, using an elec-

tronic form for the exchange. The value of an electronic gold account goes up or down

depending on the price of gold. Because electronic gold is not issued by any national gov-

ernment, it does not represent the transfer of euros or dollars or any other currency. This

makes electronic gold a non-national money that can be used by citizens of any govern-

ment. Governments dislike the development of e-cash, in general, as the transactions

bypass banks, making it difficult for governments to monitor the financial activities of

their citizens. E-gold poses a special threat, for it even bypasses government-issued cur-

rencies. Consequently, we can expect extensive legislation to help governments regain

control over money.

World Economic Systems

Now that we have sketched the main historical changes in the means of exchange, let’s

compare capitalism and socialism, the two main economic systems in force today. This will

help us to understand where the United States stands in the world economic order.

Capitalism

People who live in a capitalist society may not understand its basic tenets, even though they

see them reflected in their local shopping malls and fast-food chains. Table 14.1 distills the

many businesses of the United States down to their basic components. As you can see,

capitalism has three essential features: (1) private ownership of the means of production (indi-

viduals own the land, machines, and factories); (2) market competition (competing with one

another, the owners decide what to produce and set the prices for their products); and (3) the

pursuit of profit (the owners try to sell their products for more than what they cost).

No country has pure capitalism. Pure capitalism, known as laissez-faire capitalism

(literally “hands off” capitalism), means that the government doesn’t interfere in the market.

World Economic Systems 403

credit card a device that al-

lows its owner to purchase

goods and to be billed later

debit card a device that

allows its owner to charge pur-

chases against his or her bank

account

e– cash digital money that is

stored on computers; it is of

two types, e-currency and

e-gold

capitalism an economic sys-

tem characterized by the pri-

vate ownership of the means

of production, the pursuit of

profit, and market competition

laissez-faire capitalism

unrestrained manufacture and

trade (literally “hands off ”

capitalism)

TABLE 14.1 Comparing Capitalism and Socialism

Capitalism Socialism

1. Individuals own the means of

production.

2. Based on competition, the owners

determine production and set prices.

3. The pursuit of profit is the reason for

distributing goods and services.

1. The public owns the means of production.

2. Central committees plan production and set

prices; no competition.

3. No profit motive in the distribution of goods

and services.

welfare (or state) capital-

ism

an economic system in

which individuals own the

means of production but the

state regulates many economic

activities for the welfare of the

population

monopoly the control of an

entire industry by a single

company

The current form of U.S. capitalism is welfare or state capitalism. Private citizens own

the means of production and pursue profits, but they do so within a vast system of laws

designed to protect the welfare of the population.

Consider this example:

Suppose that you discover what you think is a miracle tonic: It will grow hair, erase wrinkles,

and dissolve excess fat. If your product works, you will become an overnight sensation—

not only a multimillionaire, but also the toast of television talk shows and the darling of

Hollywood.

But don’t count on your money or fame yet. You still have to reckon with market re-

straints, the laws and regulations of welfare capitalism that limit your capacity to pro-

duce and sell. First, you must comply with local and state laws. You must obtain a business

license and a state tax number that allows you to buy your ingredients without paying sales

taxes. Then come the federal regulations. You cannot simply take your product to local

stores and ask them to sell it; you first must seek approval from federal agencies that mon-

itor compliance with the Pure Food and Drug Act. This means that you must prove that

your product will not cause harm to the public. Your manufacturing process is also sub-

ject to federal, state, and local laws concerning fraud, hygiene, and the disposal of haz-

ardous wastes.

Suppose that you overcome these obstacles, and your business prospers. Other federal

agencies will monitor your compliance with laws concerning racial, sexual, and disability

discrimination; minimum wages; and Social Security taxes. State agencies will examine your

records to see whether you have paid unemployment taxes and sales taxes. Finally, as your

shadowy business partner, the Internal Revenue Service will look over your shoulder and de-

mand about 35 percent of your profits.

To see how welfare or state capitalism developed in the United States, let’s go back to

an earlier era. Back in the 1800s, when capitalism was in its infancy, you could have made

your “magic” potion at home and sold it at any store willing to handle it. You could have

advertised that it cured baldness, erased wrinkles, and dissolved fat, for no agency existed

to monitor your product or your claims. As you can see from the 1885 poster below, this

is precisely what thousands of individuals did at that time. They made “elixirs” in their

basements and gave them whimsical names such as “Granny’s Miracle Medicine” and

“Elixir of Health and Happiness.” They might claim that their product could restore sex-

ual potency, purge the intestines, and make people more intelligent. These tonics often

made people feel better, for many elixirs were braced with alcohol—and even cocaine

(Ashley 1975). (The Coca in Coca-Cola refers to cocaine, which this “pick-me-up” drink

contained until 1903.) To protect the public’s

health, in 1906 the federal government passed the

Pure Food and Drug Act and began to regulate

products.

John D. Rockefeller’s remarkable success in un-

regulated markets helps to explain why the gov-

ernment began to regulate capitalism. After a

ruthless drive to eliminate competition, Rocke-

feller managed to corner the U.S. oil and gasoline

market (Chernow 1998). He slashed prices and

then doubled them after driving out the competi-

tion. He even sabotaged competitors’ pipelines

and refineries (Josephson 1949). With his com-

petitors crippled or eliminated, his company, Stan-

dard Oil, was able to dictate prices to the entire

nation. Rockefeller had achieved the capitalist’s

dream, a monopoly, the control of an entire in-

dustry by a single company.

Rockefeller had played the capitalist game too

well, however, for he had wiped out one of its

404 Chapter 14 THE ECONOMY

This advertisement from 1885 represents an early stage of capitalism when

individuals were free to manufacture and market products with little or no

interference from the government. Today, the production and marketing of

goods take place under detailed, complicated government laws and regulations.

essential components: competition. Consequently, to protect this cornerstone of capitalism,

the federal government passed antimonopoly legislation and broke up Standard Oil.

Today, the top firms in each industry—such as General Electric in household appliances—

must obtain federal approval before acquiring another company in the same industry. If

the government determines that one firm dominates a market, it can force that company

to divest (sell off ) some of the businesses it owns.

Another characteristic of welfare capitalism is that although the government encour-

ages competition, it establishes its own monopoly over what it calls “common good” items.

These are items and services presumed essential for the common good of the citizens,

such as armed forces, highways, and sewers.

Socialism

As shown in Table 14.1 on page 403, socialism also has three essential components: (1)

public ownership of the means of production, (2) central planning, and (3) the distribu-

tion of goods without a profit motive.

In socialist economies, the government owns the means of production—not only the

factories but also the land, railroads, oil wells, and gold mines. Unlike capitalism, in which

market forces—supply and demand—determine both what will be produced and the

prices that will be charged, a central committee decides that the country needs X num-

ber of toothbrushes, Y toilets, and Z shoes. The committee decides how many of each will

be produced, which factories will produce them, what price will be charged for the items,

and where they will be distributed.

Socialism is designed to eliminate competition, for goods are sold at predetermined

prices regardless of the demand for an item or the cost of producing it. The goal is not to

make a profit, nor is it to encourage the consumption of goods that are in low demand

(by lowering the price) or to limit the consumption of hard-to-get goods (by raising the

price). Rather, the goal is to produce goods for the general welfare and to distribute them

according to people’s needs, not their ability to pay.

In a socialist economy everyone in the economic chain works for the government. The

members of the central committee who set production goals are government employees,

as are the supervisors who implement their plans, the factory workers who produce the

merchandise, the truck drivers who move it, and the clerks who sell it. Those who buy the

items may work at different jobs—in offices, on farms, or in day care centers—but they,

too, are government employees.

Just as capitalism does not exist in a pure form, neither does socialism. Although the

ideology of socialism calls for resources to be distributed according to need and not the

ability to pay, socialist countries found it necessary to pay higher salaries for some jobs in

order to entice people to take on greater responsibilities. Factory managers, for example,

always earned more than factory workers. These differences in pay follow the functional-

ist argument of social stratification presented in Chapter 9 (pages 239–240). By nar-

rowing the huge pay gaps that characterize capitalist nations, however, socialist

nations established considerably greater equality of income.

Dissatisfied with the greed and exploitation of capitalism and the lack of

freedom and individuality of socialism, Sweden and Denmark developed

democratic socialism (also called welfare socialism). In this form of social-

ism, both the state and individuals produce and distribute goods and

services. The government owns and runs the steel, mining, forestry, and

energy concerns, as well as the country’s telephones, television stations,

and airlines. Remaining in private hands are the retail stores, farms,

factories, and most service industries.

Ideologies of Capitalism and Socialism

Not only do capitalism and socialism have different approaches to

producing and distributing goods but they also represent opposing

belief systems. Capitalists believe that market forces should determine

World Economic Systems 405

socialism an economic sys-

tem characterized by the pub-

lic ownership of the means of

production, central planning,

and the distribution of goods

without a profit motive

market forces the law of

supply and demand

democratic socialism a hy-

brid economic system in which

the individual ownership of

businesses is mixed with the

state ownership of industries

thought essential to the public

welfare, such as the postal

service and the delivery of

medicine and utilities

Successful capitalists can buy most

things in life, including trophy wives.

Some trade their entrepreneurial

success (money, property,

sometimes fame) for younger,

beautiful women. Fred Thompson,

age 66, a successful, wealthy actor

and trial lawyer who also

served as U.S. Senator

from Tennessee, is

married to Jeri

Kehn, age 42.

both products and prices. They also believe that profits are good for humanity. The poten-

tial to make money stimulates people to produce and distribute goods, as well as to develop

new products. Society benefits, as the result is a more abundant supply of goods at cheaper

prices.

Socialists take an opposite view of profits. They consider them to be immoral. An item’s

value is based on the work that goes into it, said Karl Marx. The only way there can be

profit, he stressed, is by paying workers less than the value of their labor. Profit, then, is

an excess value that has been withheld from workers. Socialists believe that the govern-

ment should protect workers from this exploitation. To do so, the government should

own the means of production, using them not to generate profit but to produce items that

match people’s needs, not their ability to pay.

Capitalists and socialists paint each other in such stark colors that each perceives the

other system as one of exploitation. Capitalists believe that socialists violate people’s basic

right to make their own decisions and to pursue opportunity. Socialists believe that

capitalists violate people’s basic right to be free from poverty. With each side claiming

moral superiority while viewing the other as a threat to its very existence, the last cen-

tury witnessed the world split into two main blocs. In what was known as the Cold

War, the West armed itself to defend and promote capitalism, the East to defend and

promote socialism.

Criticisms of Capitalism and Socialism

The primary criticism leveled against capitalism is that it leads to

social inequality. Capitalism, say its critics, produces a tiny top

layer of wealthy people who exploit an immense bottom layer of

poorly paid workers. Another criticism is that the tiny top layer

wields vast political power. Those few who own the means of pro-

duction reap huge profits, accrue power, and get legislation passed

that goes against the public good.

The primary criticism leveled against socialism is that it does not

respect individual rights. Others (in the form of some government

body) control people’s lives. They decide where people will live,

work, and go to school. In China, they even decide how many chil-

dren women may bear (Mosher 1983, 2006). Critics also argue that

central planning is grossly inefficient and that socialism is not capa-

ble of producing much wealth. They say that its greater equality re-

ally amounts to giving almost everyone an equal chance to be poor.

The Convergence of Capitalism

and Socialism

Regardless of the validity of these mutual criticisms, as nations in-

dustrialize they come to resemble one another. They urbanize, en-

courage higher education, and produce similar divisions of labor

(such as professionals and skilled technicians; factory workers and

factory managers). Similar values also emerge (Kerr 1983). By it-

self, this tendency would make capitalist and socialist nations grow

more alike, but another factor also brings them closer to one an-

other (Form 1979): Despite their incompatible ideologies, both

capitalist and socialist systems have adopted features from the

other.

That capitalism and socialism are growing similar is known as

convergence theory. Fundamental changes in socialist countries

give evidence for this coming hybrid, or mixed, economy. Rus-

sians suffered from the production of shoddy goods, they were

plagued by shortages, and their standard of living lagged severely

behind that of the West. To try to catch up, in the 1980s and

406 Chapter 14 THE ECONOMY

convergence theory the

view that as capitalist and so-

cialist economic systems each

adopt features of the other, a

hybrid (or mixed) economic

system will emerge

Throughout most of the twentieth century, capitalism and

communism were pitted against one another in a deadly

struggle. Each thought of itself as the correct economic

form, and each viewed the other as an evil to be

eradicated. In support of this view of essential goodness

and evil, proponents of each system launched global

propaganda campaigns.This poster from about 1920 says:

“Comrade Lenin cleanses the filth from the earth.” Those

being swept away are rich royalty at the top, the clergy

(lower left), and capitalists (lower right).

1990s the rulers of Russia made the private ownership of property legal and aban-

doned communism. Making a profit—which had been a crime—was encouraged.

China joined the change, but kept a communist government. In its converged form of

“capunism,” capitalists joined the Communist party. The convergence is so great that

when the Western governments began stimulus plans to counter the economic crisis,

China joined in with a huge stimulus plan of its own (Batson 2009). Even Western

banks have been welcomed in China, so they can provide specialized services to China’s

300,000 new millionaires (Reuters 2008). Perhaps the point that best summarizes this

remarkable change is this: Some textbooks in China now give more space to Bill Gates

than to Mao (Guthrie 2008). The Cultural Diversity box below provides a glimpse of

the new capitalism in China.

World Economic Systems 407

Cultural Diversity around the World

The New Capitalism in China

ocialism has the virtue of making people more

equal. Socialism’s equality, however, translates into

distributing poverty throughout a society. Under

socialism, almost everyone becomes equally poor.

Capitalism, in contrast, has the virtue of producing

wealth. A lot of people remain poor, however, leaving a

sharp contrast in wealth and poverty,

one that produces envy and some-

times creates social unrest.

Chinese leaders realized the

wealth-producing capacity of capital-

ism and wanted that for their people.

In the Chinese version they pro-

duced—capitalism directed by com-

munists—wealth is being produced. In

all the world’s history, this new capital-

ism has lifted the largest number of

people out of poverty in the shortest

time. The poor who are left behind,

however, aren’t happy when their land

is taken from them to help make oth-

ers wealthy. The anger and resentment

have kept the Party busy, for its army

has had to squelch a lot of riots.

In Beijing, the capital of China, stands

a mansion built by Zhang Yuchen. This is

no ordinary mansion, like those built by

China’s other newly rich.This imposing

building is a twin of the Chateau de Maisons-Laffitte, an ar-

chitectural landmark on the Seine River outside Paris. At

a cost of $50 million, the Beijing replica matches the origi-

nal edifice detail for detail. The architects even used the

original blueprints of the French chateau, and the building

features the same Chantilly stone (Kahn 2004, 2007b).

The cost of this Chinese version of the chateau was

actually greater than $50 million. The acreage set aside

for the mansion and a housing development of luxury

homes made eight hundred farmers landless.

But not to worry. The spiked fence, the moat, and

the armed guards—looking sharp in their French-style

uniforms complete with capes and kepis—keep the

peasants out of the chateau.

In most places, you need connections to become

wealthy. In China, this means connections with the Com-

munist Party, for this group still

holds the power. Yuchen has those

connections. As a member of the

Party, it was his job to direct Bei-

jing’s construction projects. With

his deep connections,Yuchen was

able to get the wheat fields farmed

by the peasants rezoned from farm-

land to a “conservation area.” He

was even able to divert a river so

he could build the moat around the

chateau, one of the finishing touches

on his architectural wonder.

It isn’t as though the peasants

have been left with nothing. As

part of Yuchen’s deal to get the

land, he gives $45 a month to each

of the elderly. And the younger

peasants can work in the vineyards

that Yuchen is planting. French wine

will top off the project.

For Your Consideration

When China has completed its transition to capitalism,

what do you think the final version will look like (that

is, what characteristics do you think it will have)? Where

will the top Party leaders fit in the class system that is

emerging? Why? (To answer this, consider the connec-

tions and resources of the elite.)

Like a debutante being introduced to society, the

Chinese comcapitalists presented themselves on the

world stage at the Beijing Olympics. This photo is

from the games’ closing ceremonies.

China

Changes in capitalism also support this theory. The United States has adopted many

socialist practices. One of the most obvious is the government taking money from some

individuals to pay for the benefits it gives to others. Examples include unemployment

compensation (taxes paid by workers are distributed to those who no longer produce a

profit); subsidized housing (shelter, paid for by the many, is given to the poor and eld-

erly, with no motive of profit); welfare (taxes from the many are distributed to the needy);

a minimum wage (the government, not the employer, determines the minimum that

workers receive); and Social Security (the retired do not receive what they paid into the

system, but, rather, money that the government collects from current workers). Finally,

in 2008 when Wall Street and auto firms started to buckle, the government stepped in

to shore up these businesses, even buying ownership in some of these firms, firing CEOs,

and setting salary limits. Such an embrace of socialist principles indicates that the United

States has produced its own version of a mixed economy.

Convergence seems to be unfolding before our very eyes. On the one hand, capital-

ists have assumed, reluctantly, that their system should provide workers with at least

minimal support during unemployment, extended illness, and old age—and in some

instances that the government should buy company stock. On the other hand, socialist

leaders have admitted, also reluctantly, that profit and private ownership do motivate

people to work harder.

Social life is sometimes stranger than fiction, and here is a fascinating possibility. Like

two cars heading toward each other, these two economic systems do not converge. Rather,

each passes the other, continuing in the direction it is headed. The capitalist nations end

up adopting so many features of socialism while the former socialistic nations adopt so

many features of capitalism that each is transformed into something close to what the

other was. Could this theory, which we can call transmergence, indicate something that is

even possible? Consider this. An article in Pravda, Russia’s main newspaper and the for-

mer propaganda organ of the Soviet Communist Party, warned the United States not to

travel farther on the road to socialism (Mishin 2009). These new capitalists said that by

bailing out private companies—such as becoming owners of banks and automobile man-

ufacturers—the United States is choosing a path that is “dangerously Marxist.”

The Functionalist Perspective on the

Globalization of Capitalism

Capitalism has integrated the world’s countries, making them all part of the same broader

economic unit. When the economic crisis hit the United States, it spread quickly around the

world. The leaders of the top 20 producers of consumer goods met in Washington to see

what steps they could take to head off the crisis. Chinese leaders said that no one should

worry about them not being a team player, that they realized that any action they took would

affect other nations. (Yardley and Brasher 2008)

The globalization of capitalism may be the most significant economic change in the past

100 years. Its impact on our lives may rival that of the Industrial Revolution. As Louis Gal-

lambos, a historian of business, says, “This new global business system will change the way

everyone lives and works” (Zachary 1995).

The New Global Division of Labor

To apply functionalism to the globalization of capitalism, let’s step back a moment and

look at the nature of work. You know that work is functional for society. Only because

people work can we have electricity, hospitals, schools, automobiles, and homes. Beyond

this obvious point, however, lies a basic sociological principle: Work binds us together. As

you may recall from Chapter 4, Emile Durkheim noted that because farmers do the same

type of work, they share a similar view of the world. Durkheim used the term mechanical

solidarity to refer to the sense of unity that comes from doing similar activities.

408 Chapter 14 THE ECONOMY

mechanical solidarity

Durkheim’s term for the unity (a

shared consciousness) that peo-

ple feel as a result of performing

the same or similar tasks

When an agricultural society industrializes, people work at many different types of

jobs. As the division of labor grows, people come to feel less solidarity with one an-

other. Grape pickers in California, for example, may feel that they have little in com-

mon with workers who make aircraft in Missouri. Yet, what each worker does

contributes to the economic system and, therefore, to the welfare of the others. Because

they are like the separate organs that make up the same body, Durkheim called this type

of unity organic solidarity.

Durkheim had observed the beginning of a global process. With our new global divi-

sion of labor, each of us now depends on workers around the globe. If we live in California

or New York—or even Michigan—we depend on workers in Tokyo to produce cars. Tokyo

workers, in turn, depend on Saudi Arabian workers to pump oil and South American work-

ers to operate ships that deliver that oil. We may not feel a sense of unity with one another,

but the same global economic web links all of us.

This process, now engulfing the world, is still in its early stage. As corporations

expand into new areas, they have hit some unexpected cultural hurdles, the topic of the

Cultural Diversity box on the next page.

Capitalism in a Global Economy

Corporate Capitalism. That capitalism could become the world’s dominant eco-

nomic force can be traced to a social invention called the corporation. A corporation

is a business that is treated legally as a person. A corporation can make contracts,

incur debts, sue and be sued. Its liabilities and obligations, however, are separate from

those of its owners. For example, each shareholder of Ford Motor Company—

whether he or she has 1 or 100,000 shares—owns a portion of the company. How-

ever, Ford, not its individual owners, is responsible for fulfilling its contracts and

paying its debts. The term corporate capitalism is used to indicate that corporations

dominate the economy.

Separation of Ownership and Management. One of the most surprising aspects of

corporations is their separation of ownership and management. Unlike most businesses,

it is not the owners—those who own the company’s stock—who run the day-to-day af-

fairs of the company (Sklair 2001). Instead, managers run the corporation, and they are

able to treat it as though it were their own. The result is the “ownership of wealth without

The Functionalist Perspective on the Globalization of Capitalism 409

In their march toward

globalization, multinational

companies locate their

corporate headquarters in one

country, manufacture their

components in another country,

assemble them in still another,

and sell the finished product

throughout the world. These are

some of the 14,000 workers in

Nike shoe factories in Indonesia.

organic solidarity

Durkheim’s term for the inter-

dependence that results from

the division of labor; people

depending on others to fulfill

their jobs

corporation a business en-

terprise, often jointly owned,

whose assets, liabilities, and ob-

ligations are separate from

those of its owners; as a legal

entity, it can enter into con-

tracts, assume debt, and sue

and be sued

corporate capitalism the

domination of an economic

system by giant corporations

410 Chapter 14 THE ECONOMY

Cultural Diversity around the World

Doing Business

in the Global Village

he globalization of capitalism means that busi-

nesspeople face cultural hurdles as they market

products in other countries. Some of the cultural

mistakes they make as they try to clear these hurdles

are downright humorous.

In trying to reach Spanish-speaking

Americans and Mexico’s growing mid-

dle class, some companies have stum-

bled over their Spanish. Parker Pen was

using a slogan “It won’t leak in your

pocket and embarrass you.” The trans-

lation, however, came out as “It won’t

leak in your pocket and make you

pregnant.” Frank Perdue’s cute chicken

slogan “It takes a strong man to make a

tender chicken” didn’t fare any better

in Spanish. It came out as “It takes an

aroused man to make a chicken affec-

tionate.” And when American Airlines

launched a “Fly in Leather” campaign

to promote its leather seats in first

class, the Mexican campaign stumbled

just a bit.“Fly in Leather” (vuela en

cuero), while literally correct, came out

as “Fly Naked.” I suppose that slogan

did appeal to some (Archbold and

Harmon 2001).

The Spanish market is so huge that it keeps enticing

companies to run marketing campaigns. The American

Dairy Association made a hit in the United States with

its humorous campaign,“Got Milk?” In Mexico, though,

the Spanish translation read “Are you lactating?” All

those mouths with white milk on them suddenly took

on new meaning. Coors didn’t fare any better. Their slo-

gan,“Turn It Loose,” was a hit in the United States, but

in Spanish it came out as “Get Diarrhea.”

Then there is Hershey’s new candy bar, Cajeta Ele-

gancita, marketed to Spanish-speaking customers. While

cajeta can mean nougat, its most common meaning is

“little box.” The literal translation of cajeta elegancita is

elegant or fancy little box. Some customers are snicker-

ing about this one, too, for cajeta is also slang for an inti-

mate part of the female anatomy (“Winner . . .” 2006).

It isn’t only Spanish that has given U.S. companies

problems. Vicks decided to sell its cough drops in

Germany. In German, the “v” is pronounced “f.” Unfor-

tunately, this made Vicks sound like the “f” word in Eng-

lish, which is just what ficks means in German.

Cultural mistakes are a two-way street, of course.

A Swedish company makes Electrolux, a vacuum cleaner.

Their cute slogan reads just fine in Swedish, but the

translation for their U.S. ads came out as “Nothing

sucks like an Electrolux.”

Some businesspeople have managed

to avoid such problems. They have

seized profit opportunities in cultural

differences. For example, Japanese

women are embarrassed by the sounds

they make in public toilets. To drown

out the offensive sounds, they flush the

toilet an average of 2.7 times a visit (Iori

1988). This wastes a lot of water, of

course. Seeing this cultural trait as an

opportunity, a U.S. entrepreneur devel-

oped a battery-powered device that is

mounted in the toilet stall.When a

woman activates the device, it emits a

25-second flushing sound. A toilet-

sound duplicator may be useless in our

culture, but the Japanese have bought

thousands of them.

To be accepted in another culture,

sometimes even the product has to be

changed. In a process called transcreation,

cartoons designed originally for one au-

dience are modified to match the tastes

of an audience in another culture. The illustration in

this box shows this process. At the top is the U.S.

version of the Powerpuff Girls; at the bottom is how

the Powerpuff Girls appear on Japanese television.

Portraying Blossom, Buttercup, and Bubbles as leggy and

dressed in skimpy outfits has broadened their appeal

considerably: Not only do little girls look forward to

this cartoon on Saturday mornings, but so do many

adult Japanese men (Fowler and Chozick 2007).

For Your Consideration

1. Why is it often difficult to do business across

cultures?

2. How can businesspeople avoid cross-cultural

mistakes?

3. If a company makes a cultural blunder, what should

it do?

Japan

United States