Lecture 7 Technological Change and the Industrial Revolution What we mean when we say Capitalism

Technological Breakthroughs in the Industrial Revolution Key Innovations 1.Power: water power and especially steam power 2.Textiles: spinning, carding, weaving 3.Metallurgy: iron and steel making Later stages 1.Telegraph (“Victorian internet”) 2.Chemicals (especially for fertilizers), dyes 3.Electrification 4.Transport: ocean steamers, rail 5.Agriculture: mechanization, fertilizers

Why Europe? And why not China? Some Factors which Contributed to the Industrial Revolution in Europe 1.Competing political jurisdictions in Europe 2.Scientific Revolution 3.Relative economic and political freedom 4.Economic institutions and incentives : market economy, early patent laws, growing international trade, market competition The Value of Economic Institutions James Watt (inventor of the steam engine): “an engineer’s life without patent was not worthwhile”

What is Capitalism? Capitalism is a “social system.” What does that mean? We will identify a social system along four dimensions. Economic institutions Political institutions Social norms Belief systems Economic institutions refer to the rules for the allocation of the “factors of production” (land, other primary commodities, labor, capital, technology) and the final outputs of the production process (consumption and investment goods). Political institutions refer to the methods for organizing power in the society, particularly the nature of the state as the monopoly of “legitimate violence.” Does the state govern based on a “rule of law,” or on the basis of traditional or religious claims? Social norms refer to the behavioral patterns enforced by concerns of social acceptability and status, and include behavioral patterns involving gender roles, pursuit of wealth, marriage and fertility patterns, trust and cooperation with members of the society and with members outside of the society, living patterns, hierarchical relations and occupational choice Belief systems refer to the prevailing social theories about the operations of the physical world, including the balance of science versus religion in the formulation and testing of hypotheses and in the design and use of technologies. Science in turn is associated with methods of rational inquiry: empirical analysis, testing and refutation of hypotheses, publication of competing ideas and empirical evidence.

Capitalism is a very special social system, with distinctive characteristics along all four dimensions. Capitalism economic institutions: Factors of production and final outputs are allocated mainly though not exclusively on the basis of private ownership and market exchange. Tradeable property rights are established for land, labor, capital, and technology (e.g. patents, trademarks, and copyright). Capitalist political institutions: The state holds the monopoly of legitimate violence in the society, though other groups may wield illegitimate violence (such as the mafia or terrorists). The state operates according to rational bureaucracy (predictable procedures established by publicly known rules) and is bound by the rule of law (that is, law governs the behavior of the state itself). The state provides critical services as a third-party judge and enforcer of private contracts through judicial and police processes. There is a formal equality of citizenship before the law. Social institutions: there is a norm of social equality (“liberty, equality, fraternite”), which historically has tended to broaden to include previously excluded social groups (“sororite”). There is a norm of social mobility based on merit. Individualism is favored relative to group conformity. Social relations are contractual. High expectation of social change. Belief systems: increasing secularization of belief. Preeminence of the scientific method. Rational inquiry and acceptance of “manipulation” of nature through technology. We also note: A close historical relationship between the period of modern economic growth and the development of capitalism as a social system. Capitalist institutions seem to foster the mechanisms of growth.

Examples of some alternative 19 th and 20 th century social systems that we will discuss Great Britain Lands under British Colonial Rule (e.g. Rhodesia) Tsarist Russia Ch’ing Dynasty in China Soviet Union