Capitalism – The Market Driven Economy The economic problem The economic revolution (evolution) Key historical economic philosophers Questions for next time The Economic Problem “Survival” Almost from his beginnings, man has faced the problem 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 man’s solution is at best a partial one • Do not underestimate the staggering effort required to build what you and I see around us today The Economic Problem “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 his untamed inner drives In Primitive societies, the specter of starvation forces cooperation through work to survive In more advanced societies, a larger percentage or even a majority of the people never touch the land, enter the factories, build with their own hands The Economic Problem “Challenges of Modern Societies” If farmers fail to plant enough crops to feed the society 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 society would become hopelessly disorganized And the system would breakdown which means starvation, famine and pestilence The Economic Problem “Preventing Economic Meltdown” Organize Society around tradition – Tasks handed down 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 the backs of the weak For countless centuries, custom or command ruled No need for an economist to explain how society provided for itself The Economic Problem “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 best monetary advantage – The lure of gain; follow your greed “When each person pursues his self interest, he is led as if by an invisible hand, to do that which is best for society as a whole” (Adam Smith, Scotland, 1766) Now the need for an economist to explain how order comes from chaos! The Economic Revolution “The emergence of the Market System” The Market System could not emerge until change became 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 The Economic Revolution “Overcoming the obstacles” “Books of business, open on the table. . . Calculations largely in Roman numerals. . .sums are often wrong. . .long division a mystery. . . And the use of the zero is not clearly understood.” The Worldly Philosophers, Robert L. Heilbroner, p. 19 Describing a market in France, 1305 The Economic Revolution “Overcoming the Obstacles” Andreas Ryff, a merchant, writing to his wife is troubled because of the nuisances of the times. He reports that as he travels he is stopped approximately once every six miles to pay a customs toll. All totaled, between two locations he pays thirty one separate levies. The Worldly Philosophers Robert L. Heilbroner, page 20 Describing a typical business trip, 1550 The Economic Revolution “Overcoming the Obstacles” Robert Keayne is charged with a heinous crime: he has made over sixpence profit on a shilling, an outrageous gain. The court weighs excommunication but finally determines to fine him two hundred pounds. Mr. Keayne acknowledges with tears his covetous and corrupt heart. The Worldly Philosophers Heilbroner, page 20. Describing a trial in Boston, 1644 The Economic Revolution “Overcoming the Obstacles” In France the importation of printed calicoes is threatening to undermine the clothing industry. It is met with measures that cost the lives of sixteen thousand people. In Valence alone on one occasion 77 persons are sentenced to be hanged, 58 broken on the wheel, 631 sent to the galleys, and one lone and lucky individual set free for the crime of dealing in illegal calicoes. The Worldly Philosophers Heilbroner, page 28 Describing French regulation of business, 1623 Key Historical Economic Philosophers “Adam Smith” (1723-1790) An Inquiry into the Nature and Cause of the Wealth of Nations (1766) • When buyers and sellers meet in the marketplace, a pattern of production develops that results in social harmony • Self interest leads to the betterment of society • Technology will improve the productivity of labor, thereby creating more total wealth which will trickle down to all • Specialization of labor multiplies man’s productive energy Key Historical Economic Philosophers “Thomas Malthus (1766-1834) Essay on the Principle of Population as it Affects the Future 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 the sheer brink of existence • Has given the discipline of Economics the name “The Dismal Science” Key Historical Economic Philosophers “John Stuart Mill” (1806-1873) Principles of Political Economy (1849) • The true province of economics is production, not distribution • Once wealth has been produced, society can distribute it as it pleases • Brought into focus the issues of fairness and equity, particularly in the division of wealth between business owners (capitalists) and labor • Mill was not the extremist like Karl Marx. Perhaps a socialist but not the communist Key Historical Economic Philosophers “Karl Marx” (1818-1883) Manifesto of the Communist Party (1848) Das Kapital (1867) • History of mankind is a history of the conflict of the social classes • 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 Key Historic Economic Philosophers “Thorstein Veblen” (1857-1929) Theory of the Leisure Class (1899) • Society admires that class of individuals who seek to gain wealth and power (“The Rich and Famous”) • Conspicuous consumption is the trademark of this class • False values and social waste – He who has the gold gets the 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 Key Historical Economic Philosophers “John Maynard Keynes” (1883-1946) The General Theory of Employment, Interest, and Money (1936) • It is not production that drives an economy; it is demand • That is, it is not the producer, but the buyer that determines the economic welfare of a society • If spending is slowed for whatever reason, recession and unemployment are likely to result • The economy may not always move toward full employment • Government has a role in managing an economy through the use of both fiscal and monetary policy tools • A revolution in economic thinking necessitated by the Depression of the 1930’s Summary Important to recognize that economics as a discipline emerged with the development of the market system Important to recognize that the old masters wrote about society as they saw it in their times. As the economy grew, became more complex, more intertwined, more specialized, economic patterns changed. New circumstances required an advance in thinking The story doesn’t end with Keynes – Many new challenges throughout the twentieth and twenty first centuries For Next Time By the end of WWI, the United States had the largest industrial economy in the world. What defining events and circumstances from the 1600’s to 1920 helped to make this possible?
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