Understanding economics is critical to understanding the history of humanity, from hunter-gatherers to today. Economics is the study of decision-making and how humans make decisions. Without understanding economics we cannot understand the trajectory of history over the last 10,000 years. This chapter reviews basic economic principles, and how economies have evolved through time. It discusses the economic principles of Adam Smith and Karl Marx, the differences between a market economy and a command economy, and the political and historical implications of the clash between those two models.

The integrity and durability of the Chinese empire over two millennia rested on the strength of its fiscal capacity. From antiquity, sovereignty was linked to the ruler’s duty to provide for the economic as well as moral welfare of his subjects. Rulers of the Bronze Age manifested and reproduced their authority through distribution of wealth among their kinsmen and noble allies. The autocratic monarchs who rose to dominance after 500 bce amassed wealth to buttress their military prowess, but they also strove to protect the independence and livelihood of the smallholder family farmers who undergirded their economic prosperity. The institutional apparatus of the fiscal state – centralized planning of taxation and expenditure to satisfy the state’s commitments to good governance – became a defining feature of the first empires, beginning with the Qin dynasty (221–206 bce). Yet at the same time the rise of a market economy also shaped the relationship between the state and its subjects. Even the command economy instituted by the Qin Empire made accommodations to markets, merchants, and money.