L3 Capitalism the Market Driven Economy

8/7/2019 L3 Capitalism the Market Driven Economy

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Capitalism The Market Driven Economy

The economic problem

The economic revolution (evolution)

Key historical economic philosophers Questions for next time


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The Economic Problem

Survival

Almost from his beginnings, man has faced theproblem of survival

Not as an individual, but as a member of a social group Man seems to have survived his challenge

But want, misery, inequity evidences that mans solution isat best a partial one

Do not underestimate the staggering effort required to build

what you and I see around us today


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Advanced vs Primitive Societies

Man requires cooperation of a social group to survive

But man also is endowed with a self-centered nature

Conflict between his social partnerships and hisuntamed inner drives

In Primitive societies, the specter of starvation forcescooperation through work to survive

In more advanced societies, a larger percentage oreven a majority of the people never touch the land,enter the factories, build with their own hands


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Challenges of Modern Societies

If farmers fail to plant enough crops to feed thesociety

If too few people choose to work the factories If too few people choose to be involved in the

distribution of goods and services

If any of thousands of intertwined tasks fail to get

done, the supply of goods and services to a societywould become hopelessly disorganized

And the system would breakdown which meansstarvation, famine and pestilence


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Preventing Economic Meltdown

Organize Society around tradition Tasks handeddown according to custom and tradition Son follows

Father and a pattern is preserved The Whip of Authoritarian Rule What needs to be

done mandated by the will of the strong upon thebacks of the weak

For countless centuries, custom or command ruled

No need for an economist to explain how societyprovided for itself


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Development of the Market System

The third solution to how a society provides for itself

The game of the market system

Only Rule: Each person should do what is to his bestmonetary advantage The lure of gain; follow yourgreed

When each person pursues his self interest, he is led

as if by an invisible hand, to do that which is best forsociety as a whole (Adam Smith, Scotland, 1766)

Now the need for an economist to explain how ordercomes from chaos!


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The Economic Revolution

The emergence of the Market System

The Market System could not emerge until changebecame accepted and business practices developed

Bookkeeping practices receivables/payables Political security & policies favorable to business (Taxation)

Money and Measures had to become more common

The profit motive had to receive religious approval

Innovation had to be viewed as positive (Opposed to

Custom & Tradition) Private Property that could be bought and Sold

Labor free to move to best opportunity

Capital free to seek the best return


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Overcoming the obstacles

Books of business, open on the table. . . Calculationslargely in Roman numerals. . .sums are often wrong.

. .long division a mystery. . . And the use of the zerois not clearly understood.

The Worldly Philosophers,

Robert L. Heilbroner, p. 19

Describing a market in France, 1305


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Overcoming the Obstacles

Andreas Ryff, a merchant, writing to his wife istroubled because of the nuisances of the times. He

reports that as he travels he is stoppedapproximately once every six miles to pay a customstoll. All totaled, between two locations he pays thirtyone separate levies.

The Worldly Philosophers

Robert L. Heilbroner, page 20

Describing a typical business trip, 1550


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Robert Keayne is charged with a heinous crime: hehas made over sixpence profit on a shilling, an

outrageous gain. The court weighs excommunicationbut finally determines to fine him two hundredpounds. Mr. Keayne acknowledges with tears hiscovetous and corrupt heart.


Heilbroner, page 20.

Describing a trial in Boston, 1644


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In France the importation of printed calicoes isthreatening to undermine the clothing industry. It ismet with measures that cost the lives of sixteenthousand people. In Valence alone on one occasion77 persons are sentenced to be hanged, 58 brokenon the wheel, 631 sent to the galleys, and one loneand lucky individual set free for the crime of dealingin illegal calicoes.


Heilbroner, page 28

Describing French regulation of business, 1623


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Key Historical Economic Philosophers

Adam Smith (1723-1790)

An Inquiry into the Nature and Cause of the Wealthof Nations (1766)

When buyers and sellers meet in the marketplace, a patternof production develops that results in social harmony

Self interest leads to the betterment of society

Technology will improve the productivity of labor, therebycreating more total wealth which will trickle down to all

Specialization of labor multiplies mans productive energy


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Thomas Malthus (1766-1834)

Essay on the Principle of Population as it Affects theFuture Improvement of Society (1798)

Population tends to increase more rapidly than food supplies Society is caught in a hopeless trap in which the human

reproductive urge would inevitably shove humanity to thesheer brink of existence

Has given the discipline of Economics the name The Dismal

Science


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Key Historical Economic PhilosophersJohn Stuart Mill (1806-1873)

Principles of Political Economy (1849)

The true province of economics is production, notdistribution

Once wealth has been produced, society can distribute it asit pleases

Brought into focus the issues of fairness and equity,particularly in the division of wealth between businessowners (capitalists) and labor

Mill was not the extremist like Karl Marx. Perhaps a socialistbut not the communist


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Karl Marx (1818-1883)

Manifesto of the Communist Party (1848)

Das Kapital (1867)

History of mankind is a history of the conflict of the socialclasses

Capitalism is efficient but suffers from flaws of fluctuations,and the concentration of wealth into the hands of a few

Labor creates value, but is deprived of its rightful share by

the owners of capital (business owners) Government, tradition, religion all supports a corrupt, unfair

system

Revolution is the only solution


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Key Historic Economic Philosophers

Thorstein Veblen (1857-1929)

Theory of the Leisure Class (1899)

Society admires that class of individuals who seek to gainwealth and power (The Rich and Famous)

Conspicuous consumption is the trademark of this class

False values and social waste He who has the gold getsthe goods, so society produces for this group

Capitalism cannot survive it will evolve or drift toward

either socialism or fascism Scientist and engineers will become more important in

building a better, more planned society in the future


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John Maynard Keynes (1883-1946)

The General Theory of Employment, Interest, andMoney (1936)

It is not production that drives an economy; it is demand

That is, it is not the producer, but the buyer that determinesthe economic welfare of a society

If spending is slowed for whatever reason, recession andunemployment are likely to result

The economy may not always move toward full employment

Government has a role in managing an economy throughthe use of both fiscal and monetary policy tools

A revolution in economic thinking necessitated by theDepression of the 1930s


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Summary

Important to recognize that economics as a disciplineemerged with the development of the market system

Important to recognize that the old masters wroteabout society as they saw it in their times.

As the economy grew, became more complex, moreintertwined, more specialized, economic patternschanged.

New circumstances required an advance in thinking The story doesnt end with Keynes Many new

challenges throughout the twentieth and twenty firstcenturies


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For Next Time

By the end of WWI, the United States had the largestindustrial economy in the world. What defining

events and circumstances from the 1600s to 1920helped to make this possible?

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L3 Capitalism the Market Driven Economy