Industrialization: Economic Principles and Theories

Why Industrialization in England Legal and Political Developed Banking Industry Restrictions on power of king Legal protection of private property Fewer civil wars than other nations Growth of Corporations Stocks Stockholders

Capitalism Definition: an economic system in which there is private ownership of natural resources and capital goods. Self-interest is good – it motivates people Competition keeps it in check

Adam Smith Adam Smith – Wealth of Nations, 1776 Scottish Philosopher Laissez faire – let it alone No government restrictions/direction Individual self interest Wealth created by entrepreneurs chasing after profit Competition Prevents any one company from monopolizing market

Capitalism Invisible Hand “It is not due to the generosity of the butcher or baker that we should expect our meat and bread. Instead, we should appeal to their selfishness. We should reward those suppliers who produce quality products with profit. Thus, our needs are met via their own pursuit of wealth.” Question - are there items that are needed, but not met through the “invisible hand”? Is anyone going to step up and make roads? Or vaccines? Some items are so high in cost that it may not meet the needs of society…gov’t steps in

Capitalism What to Produce How to Produce For whom to Produce Sellers choose to make whatever they think people will buy Supply and demand sets prices and wages How to Produce Method determined by profit motive For whom to Produce Only those who can pay Show a supply and a demand curve For whom to produce – problem of capitalism – it does not create desire for poor people to be served as well

Problems with Laissez fair Capitalism Monopoly replaces competition Profit Motive & Lack of government intervention Dangerous / shoddy products Child labor Unsafe working conditions Low hours – low pay for unskilled labor Company store STOP here and READ “The Hard Truth behind Asia’s boom.”

Socialism Definition: an economic system in which the government owns and controls capital and sets prices and production levels. Government ownership of some of the key factors of production Private firms may continue to produce goods and services side by side with government Goal is to own and operate the factors of production for the benefit of all, not just a select few. Gov’t should plan the economy rather than depend on free market capiatlists -- factories, mines, rr, industry -- end poverty and promote equality

The Rise of Socialism Utilitarianism Jeremy Bentham & John Stuart Mill (late 1700s) Government should create the greatest good for the greatest number Government should reduce gap between rich & poor Promoted greater equality for all people Individual should be free to pursue his/her own advantage without interference from the state. People should judge ideas, institutions, and actions on the basis of its usefulness,,,,gov’t shoud promote the greatest good for the greatest amount of people Mill believed in a greater share of the profit for the workers

Goal of socialism Government should help answer economic questions What: goods & services capitalism not providing – schools, bridges, public trans How: working conditions - wages For whom: equal or equitable distribution of goods & services. See chart pg 303 to compare/contrast the economic ideas of socialism and capitalism

Karl Marx and Communist Manifesto Karl Marx – Communist Manifesto (1848) Marxism – radical form of socialism Criticized capitalism Capitalism only the latest form of exploitation Capitalists / Bourgeoisie Workers / Proletariat Capitalism would result in increasingly large firms employing mostly poor people while owners keep the wealth

Radical Socialism (Communism) Revolution would then be needed to overthrow Capitalism “The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries, unite.” (Marx and Engels) Socialist Utopia - Governments would eventually disappear as people shared goods & services Communism – final phase, complete socialism in which the means of production would be owned by the people. No private property would exist – all goods and services shared equally.

Communism Definition: an economic system based on one-party rule, government ownership of the means of production, and decision making by centralized authorities.

Other Reactions to Industrialization/Capitalism: Reform Movements Unions – created to help workers negotiate with large corporation. Strikes – all union members refusing to work until improvements in wages & working conditions Tried to force government to intervene in economy & pass laws to improve product safety, working conditions & wages Child labor Working conditions Length of work day Unions opposed by governments & corporations – laissez faire

Other Reactions to Industrialization Malthus Essay on Population 1798 Number of people growing faster than our ability to feed ourselves Government should not help poor because that would just encourage them to have more children

Other Reactions to Industrialization David Ricardo Political economist, late 1700s-early 1800s There would always be a“permanent underclass” of poor Wages should be allowed to stay low to better allocate scare resources Comparative advantage: argued that there is mutual benefit from trade even if one party (e.g. resource-rich country, highly-skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage.

Other Reactions to Industrialization Herbert Spencer Social Darwinism Application of Charles Darwin’s ideas about evolution and “survival of the fittest” to human societies, particularly as a justification for imperialist expansion. People/cultures are poor because they are “unfit” People/cultures are rich because they are “superior” Government should not help poor – it was their own fault!