The Evolution of the Modern Capitalist System Adam Smith (1723-1790) • Studied at the University of Glosgow at the age of 14 and spent 6 years at Oxford University • Appointed to the chair of logic in 1751 at the University of Glasgow, Scotland. • In 1752 he transferred to the chair of philosophy. • On his travels to France, he was influenced by the writings of French Economists. • 1776 The Theory of Moral Sentiments and an Inquiry Into the Nature of Causes of the Wealth of Nations was published. – A vehement attack of the mercantilist system. The Wealth of Nations (1776) The Scottish Enlightenment philosophical and intellectual movement of 17th and 18th centuries, circa 1688-1789. Characterized by promotion of rationality, and rejection of old political, economic, and social order. Not revolutionary, however, but reformist. Scottish Enlightenment (1688-1789) 3 main features: 1) anti-clericist and anti-feudalist. Anti-clericist, not atheism, but rejection of authority of church and embracing of ‘new science’ (Ideas and Technology); 2) notion of progress, advancement, dynamic view of history, moving forward for the Nation; 3) individual self-definition, self-realization. • Also in Scotland, Enlightenment tied to reform of universities and education. PEOPLE WHO INFLUENCED HIM • Benjamin Franklin, one of the Founding Fathers of the United States. • Francis Huthcheson, one of the founding Fathers of the Scottish Enlightenment. • Jean D'Alembert, was a French mathematician, mechanician, inventor, writer, physicist, philosopher, and music theorist. • André Morellet, was a French Economist, diplomat and writer. • François Quesnay, the head of the Physiocratic school. Adam Smith’s Attack on Mercantilism • He was making a political argument, NOT an economic one. – Part of the argument was for new economic policy, but.. – An essential part of the argument was for new social and political arrangements. • He argued that the basic unit for social analysis should be the nation, not the state. • He was against the belief that trade was a zero-sum game – It was a positive-sum game. – Both nations gained. Mercantilism- The theory and system of political economy prevailing in Europe after the decline of feudalism, based on national policies of accumulating bullion, establishing colonies and a merchant marine, and developing industry and mining to attain a favorable balance of trade. CAPITALISM Capitalism is a free market economic system in which the means of production are privately owned and operated for profit. In which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts. It is the opposite of a controlled market, in which the state directly regulates how goods, services and labor may be used, priced, or distributed. Basic Capitalist Principles 1. Goods and services are produced for profitable exchange. 2. Human labor power is a commodity for sale LABOR IS THE SOURCE OF VALUE. Goods & Service Consumer Spending Businesses Households Wages Labor & Investments Basic Capitalist Principles 3. The “Invisible Hand” of the market – Problem How do we survive in a world where we must depend on many others, but where humans are by nature self-interested individuals?? – Solution the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called “invisible hand.” – Therefore, the basic market mechanism is self-regulating! Basic Capitalist Principles 4. Individuals seeking success are driven by self- interest Profit Motive 5. The Law of Supply and Demand – Individuals who are free to pursue their self-interest will produce goods and services that others want, at prices others will be willing to pay. Basic Capitalist Principles 6. Law of Competition – The competitive market system compels producers to be increasingly efficient, and to respond to the desires of consumers. 7. A social division of labor will maximize the satisfaction of individual wants and needs, given scarce resources. 8. Government should interfere minimally with the free and efficient workings of the market – Laissez faire *“Let’s go! Lets act for ourselves!.”+ There, there it is again—the invisible hand of the marketplace giving us the finger. END On the division of labour It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well- governed society, that universal opulence which extends itself to the lowest ranks of the people.-The Wealth Of Nations, Book I, Chapter I, p. 22, para. 10. On competition… In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.-The Wealth Of Nations, Book II, Chapter II, p.329, para. 106. On government… It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.-The Wealth Of Nations, Book II, Chapter III, p.346, para. 36. On import controls As a rich man is likely to be a better customer to the industrious people in his neighbourhood than a poor, so is likewise a rich nation. [Trade restrictions,] by aiming at the impoverishment of all our neighbours, tend to render that very commerce insignificant and contemptible.-The Wealth Of Nations, Book IV, Chapter III, Part II, p.495, para. c11. human empathy How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-The Theory Of Moral Sentiments, Part I, Section I, Chapter I, p. 9, para.1. invisible hand… [The rich] consume little more than the poor, and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.