Origins

The economic history of the modern world can be broken down into two periods.

The Commercial Age from 1500 to 1750.

The Industrial Age from 1750 to present.

The Commercial Age was characterized by the advent of the philosophy of capitalism

 Capitalism: an economic system of large financial institutions- banks, stock exchanges,

investment companies that first developed in early modern Europe.

The primitive economic system it created was called Mercantilism.

 Mercantilism: European government policies of the 16 th-18th centuries designed to promote

overseas trade between a country and its colonies and accumulate precious metals by requiring
colonies to trade only with their mother country.
Mercantilists looked to the state to protect their businesses and allowed it to regulate
commercial activity. European governments enacted numerous trade laws strictly regulating
trade. The laws maintained high import tariffs to keep out foreign competition. Encouraged
exports to ensure balance of trade surpluses could be used to acquire gold and silver. Goods
traded between colonies and foreign countries went through the mother country (taxed both
ways). Shipping trade kept in the hands of the mother country’s merchant marine. Negative
balance of trade between colonies and mother country. Stockpiled money led to inflation.
Discouraged production and savings. Black market trade increased in light of heavy economic
regulation. Example: The Navigation Acts of Britain and her colonies.

Adam Smith

Adam Smith disagreed with mercantilists practices. Espoused his views in his book The Wealth of
Nations.

Smith believed that an economy had to be given free reign to regulate itself to be successful. He called
this Laissez-faire. Individual self-interest would be the “invisible hand” guiding trade. Trade was limited
only by the availability of raw materials.

Labor theory of value: Finished goods produced by an economy are intrinsically valuable because of the
labor and resources put into them. These intrinsically valuable goods became the reason for trade.
Stockpiled goods only valuable as a means of acquiring other goods.

Legal Foundations for modern corporations laid in Britain and France in 1850s and 1860s. Financed
through purchase of stocks. Investors got dividends if business profited. Limited liability of investors if
business failed.

Some big businesses in the late 19th century sought to eliminate competition. Wanted monopoly inn
their markets. Eventually governments intervened to prevent monopoly power.
Trade unions

Worked for change through large scale organization. Considered illegal through much of the 19 th
century. Seen as wanting to restrict trade. Strikes combated by police and troops. Gradually accepted as
gains reduced probability of worker revolt.

The socialist challenge

Socialism- the population collectively owns and controls the means of production and distributes the
end result proportionally.

Socialists worked to alleviate some of the problems of industrialization. Disparities of wealth deplored.
Condemned exploitation of women and children in the workforce. Sought to expand enlightenment
ideas of equality to the economic sphere.

Forms of socialism

 Evolutionary socialism
 Utopian socialism
 Marxist Communism

Evolutionary Socialism

Looked to government to legislate changes in working conditions. Hope for workers lay in change
through representative government.

Successful to a degree:

 Expanded suffrage to all men

 Reformed working conditions
 Medical insurance, unemployment compensation and pensions helped

Utopian Socialism

Led by Charles Fourier and Robert Owen beginning around 1830. Tried to establish equitable society.
Everyone worked in accordance to ability and inclination. Sought idealistically organized, separatist
communities of workers.

Model community at New Lanarck formed by Owen. Lowered working hours, paid fair wages, provided
fair prices in company store and educated children.

Social and Economic Reforms

 Child Labor Laws

 Women’s rights
 Unionization
 Abolition of Slavery
Marxism

Karl Marx and Friedrich Engels most prominent 19 th century socialists.

Marx saw utopians as unrealistic. Social problems were the inevitable result of the capitalist system. He
stressed class divisions. Workers had only their labor to sell. Employers took advantage of workers. So it
advocated class struggle and revolution.

The Communist Manifesto

Developed in the social and political turmoil of 1848. Stressed class struggle as the driving force in
human history. Marx believed the working class would ultimately win. Socialist revolution the only
alternative to continued exploitation.

Socialism and then Communism

Once capitalism collapses, a transitional socialist dictatorship of the proletariat would develop a fair and
just society. Workers would seize control of the means of production from the bourgeoisie, crush
opposition classes, and nationalize the economy.

Bourgeoisie: the class of well-off town dwellers whose wealth came from manufacturing, finance,
commerce, etc.

Proletariat: the working class who typically have only their labor to sell.

Once opposition ended, the dictatorship of the proletariat would eventually fade away leading to true
communism. In true communism there is only one class and no state.

Under true communism:

 All private property would cease to exist

 Economic exploitation, crime and social injustice would naturally end
 Thus, there would be no more need for police, courts, armies or governments.
How did capitalism change during the Industrial Revolution?

During the Industrial Revolution, capitalism transitioned from a feudal and agricultural system of
production to one dominated by machines and equipment. The Industrial Revolution saw the
sudden, sharp rise of the manufacturing, industrial and production sectors of the economy, which
facilitated a rise in economic revenue.
The capitalist system that began during the Industrial Revolution is one of the most effective and
efficient methods of production in human history. In the decades and centuries following the
Industrial Revolution, the effects of tools, machinery and the ability to increase output and
efficiency have spread worldwide.

Prior to the Industrial Revolution, agriculture was the primary form of capitalism. Small markets
and farms were economic drivers. These forms of commerce were ideal for supporting and
sustaining small families and communities, but it was the introduction of sophisticated tools and
equipment that enabled nations to create vibrant central economies. Among the key
technological developments during the Industrial Revolution was the ability to mass-manufacture
items, such as food, clothing and shelter, which were previously only produced on small scales,
and used to support individual families rather than provide a source of revenue. The expansion of
capitalism during the Industrial Revolution also planted the seeds for international trade and
commerce.