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?