Economic Theory & Economic Theory & IndustrialismIndustrialism

NotesNotes

CAPITALISMCAPITALISM• Industrialization was fueled by capitalism Industrialization was fueled by capitalism

(a.k.a. the “free market” economy)(a.k.a. the “free market” economy)

• Capitalist economic thinkers promoted the Capitalist economic thinkers promoted the concept of concept of laissez fairelaissez faire (“leave it be”)(“leave it be”)

• Laissez faire capitalists advocated for Laissez faire capitalists advocated for NONO government regulation in the economy (…let government regulation in the economy (…let the “laws of nature” regulate the market)!the “laws of nature” regulate the market)!

• This mentality created an open climate for This mentality created an open climate for the growth of privately-owned businessesthe growth of privately-owned businesses

ADAM SMITHADAM SMITH““Father of Father of Capitalism”, Capitalism”, Economist & Economist & Philosopher Philosopher

1723 - 17901723 - 1790

CAPITALISMCAPITALISM• Adam Smith, early economic theorist & Adam Smith, early economic theorist &

Enlightenment thinker; “father of capitalism”Enlightenment thinker; “father of capitalism”

• 1776—Smith wrote 1776—Smith wrote The Wealth of NationsThe Wealth of Nations

• Discussed concepts likeDiscussed concepts like– the role of self-interestthe role of self-interest– the function of marketsthe function of markets– The laws of “Supply” and “Demand”The laws of “Supply” and “Demand”

• Concept of the Concept of the “invisible hand”—“invisible hand”—the market will the market will regulate itself, if producers and consumers are left regulate itself, if producers and consumers are left to act in their own self-interest to act in their own self-interest

CAPITALISMCAPITALISM• Producers are Producers are

motivated to motivated to make PROFIT!make PROFIT!

• Consumers Consumers want to get want to get fair prices on fair prices on goods that goods that they need & they need & want!want!

• Equilibrium Equilibrium price is where price is where they “meet in they “meet in the middle” the middle” (w/out gov’t. (w/out gov’t. intervention)!intervention)!

Happy Place!

CAPITALISMCAPITALISM

More Laissez Faire/CAPITALISM . . .More Laissez Faire/CAPITALISM . . .• Thomas MalthusThomas Malthus

– Predicted the population Predicted the population (demand for food) would (demand for food) would outgrow the food supply!outgrow the food supply!

– NaturalNatural & & socialsocial factors would factors would occur to regulate population occur to regulate population growth (Ex: war, famine, disease)growth (Ex: war, famine, disease)

• David RicardoDavid Ricardo– ““Iron law of wages”—wages gravitate towards the Iron law of wages”—wages gravitate towards the

minimalminimal amount required to sustain the needs amount required to sustain the needs (and habits) of workers. . . (and habits) of workers. . .

– Wages are based on Wages are based on supply & demand of laborsupply & demand of labor——therefore, therefore, low wageslow wages are natural in a large, are natural in a large, industrialized population (esp. amongst workers w/ industrialized population (esp. amongst workers w/ basic skills)basic skills)

• These thinkers opposed government help for the These thinkers opposed government help for the poor (welfare), believing individuals can improve poor (welfare), believing individuals can improve their own situations through thrift and hard work!their own situations through thrift and hard work!

NEWNEW ECONOMIC THEORIES in ECONOMIC THEORIES in the Industrial Agethe Industrial Age

• Industrialization changed the way people lived Industrialization changed the way people lived & worked.& worked.

• Urbanization, factory conditions, low wages, Urbanization, factory conditions, low wages, child labor—often led to a low standard of living child labor—often led to a low standard of living for for working classworking class families. families.

• Led to calls for Led to calls for changechange! (Ex: protest ! (Ex: protest movements, unions formed, etc.)movements, unions formed, etc.)

• Some economic thinkers came up with Some economic thinkers came up with new ideas for how economies new ideas for how economies should work, and presented new should work, and presented new “alternatives” to the free market system . . . “alternatives” to the free market system . . .

UtilitarianismUtilitarianism• UtilitarianismUtilitarianism- - idea that society should aim idea that society should aim

to produce the “greatest good” for the to produce the “greatest good” for the “greatest number” of people“greatest number” of people

• Government involvement Government involvement mightmight be needed to be needed to make sure this happens . . .make sure this happens . . .

• Based on the Based on the ““Principle of UtilityPrinciple of Utility”: ”: – an action is "an action is "rightright if it produces more of an increase if it produces more of an increase

in happiness for all affected by it than any in happiness for all affected by it than any alternative action, and alternative action, and wrongwrong if it does not". if it does not".

• In other words . . . In other words . . . PleasurePleasure and and happinesshappiness are are intrinsically valuable, while intrinsically valuable, while painpain and and sufferingsuffering are not . . . are not . . .

• Things have value to society only if they cause Things have value to society only if they cause more happiness than suffering. more happiness than suffering.

Utilitarian PHILOSOPHERSUtilitarian PHILOSOPHERS• Jeremy BenthamJeremy Bentham

– Believed individual freedom & democracy created Believed individual freedom & democracy created happinesshappiness

– With improved education, statesmen & the rich With improved education, statesmen & the rich would make decisions in their own interests that would make decisions in their own interests that would also ultimately promote the greater happiness would also ultimately promote the greater happiness (to keep their constituents & workers happy)(to keep their constituents & workers happy)

– Developed a way to calculate “happiness” and Developed a way to calculate “happiness” and “pain”, based on intensity, duration, likelihood, and “pain”, based on intensity, duration, likelihood, and extent.extent.

• John Stuart MillJohn Stuart Mill– Society should promote happiness and prevent painSociety should promote happiness and prevent pain– Believed in the rights of capitalists, so long as they Believed in the rights of capitalists, so long as they

do not do not harmharm the working class . . . the working class . . .– But called for voting rights for workers and women But called for voting rights for workers and women

(as a way for them to voice their unhappiness(as a way for them to voice their unhappiness

Utilitarianism Explained??Utilitarianism Explained??

Utopian SOCIALISMUtopian SOCIALISM• UtopiaUtopia = “ideal world” = “ideal world”

• SocialismSocialism = = system in which system in which the societythe society as a whole as a whole (rather than individuals) owns the means of production (rather than individuals) owns the means of production (i.e.—factories, farm equipment, land, etc.)(i.e.—factories, farm equipment, land, etc.)

• Early socialists include: Robert Owen, Saint-Simon, Early socialists include: Robert Owen, Saint-Simon, Charles FourierCharles Fourier

• Aims to combat poverty & equalize the gap between Aims to combat poverty & equalize the gap between rich and poor, by providing basic needs for all members rich and poor, by providing basic needs for all members of society (welfare)of society (welfare)

• If all members of society are provided for, If all members of society are provided for, there should be less conflict.there should be less conflict.

• Utopian socialists advocated Utopian socialists advocated cooperationcooperation in place of competitionin place of competition

KARL KARL MARXMARX

Economic & Economic & Political Political

Philosopher Philosopher 1818 - 18831818 - 1883

“History is economics in action “ --Karl Marx

MARXISM (a.k.a. MARXISM (a.k.a. Communism)Communism)

• Marx rejected utopian views and created a new theory Marx rejected utopian views and created a new theory of of “scientific socialism”“scientific socialism”

• Viewed history as a series of Viewed history as a series of class strugglesclass struggles• Believed struggle between employers and employees Believed struggle between employers and employees

was inevitable!was inevitable!

• With fellow socialist With fellow socialist Friedrich Engels, Marx Friedrich Engels, Marx wrote wrote The Communist The Communist ManifestoManifesto

MARXISM (aka Communism)MARXISM (aka Communism)• Bourgeoisie vs. Bourgeoisie vs. ProletariatProletariat (“Haves” vs. “Have-nots”) (“Haves” vs. “Have-nots”)

• Marx calls for a revolution of the proletariatMarx calls for a revolution of the proletariat– ““Workers of the world, unite. You have nothing to lose but Workers of the world, unite. You have nothing to lose but

your chains!”your chains!”

• Capitalism socialism then Capitalism socialism then communismcommunism is final is final stage, where community shares benefits of industry; stage, where community shares benefits of industry; no no class struggle (and there is no need for gov’t. at all)!class struggle (and there is no need for gov’t. at all)!

SYNTHESISSYNTHESIS• How did industrialization change the How did industrialization change the

way people lived and worked?way people lived and worked?

• What changes resulting from the What changes resulting from the Industrial Revolution led to the rise of Industrial Revolution led to the rise of socialism and communism?socialism and communism?

• What type of economic system most What type of economic system most benefits the working class? The benefits the working class? The upper class? Society as a whole?upper class? Society as a whole?