Adam Smith and the Development of Capitalism Smith argued the world would be an orderly, better place, with increased prosperity if people followed their own self interests.
Another way to say a free economy is laissez faire: The idea that government should not interfere with or regulate industries and businesses.
The opposite is government intervention Examples Sales tax Minimum wage Maximum work hours Safe Working conditions Sick and vacation pay Disability pay Product safety
Examples of government intervention with regards to international trade (trade barriers): 1. Tariffs - high taxes on imported goods 2. Quotas: limit the quantity of imported goods 3. Tough government regulations
Smith thought the only legitimate functions of the state were: National defense Establish property rights Establish legal system Promote free trade Invest in trade-promoting infrastructure
Capitalism: An economic system based on private ownership and on the investment of money in business ventures in order to make a profit. Also known as the free-enterprise system or market economy
The aims of a market economy are to produce the best goods at the lowest price
Capitalist often oppose government efforts to help poor workers because it lowers profits.
Capitalism has as its goal the production of wealth, not the betterment of society. Laissez-faire capitalism in 19th century Britain: helped those who were already doing well, to do better. It failed to help those who needed help the most: workers and their families. The system kept workers from being able to live decent lives. It encouraged child labor It failed to provide for the safety of workers and discouraged family life.
The process of inventing never ends One invention inevitably leads to improvements upon it and to more inventions As more steampowered machines were built, factories needed more coal to create this steam Mining methods improved to meet the demand for more coal
Creative destruction: the withdrawal of investments from activities (and regions) that yield low rates of profit, in order to reinvest in new activities (and new places).
To maintain profitability capitalists explore new product lines, and that means the creation of new wants and needs. The effect of continuous innovation is to devalue, if not destroy, past investments and labor skills.
Example: Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players
Downsides of Creative Destruction Creative destruction can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.
However, some believe that in the long-term society as a whole (including the descendants of those that experienced short-term hardship) enjoys a rise in overall quality of life due to the accumulation of innovation - for example, 90% of Americans were farmers in 1790, while 2.6% of Americans were farmers in 1990. Over those 200 years farm jobs were destroyed by exponential productivity gains in agricultural technology and replaced by jobs in new industries. Present day farmers and nonfarmers alike enjoy much more prosperous lifestyles than their counterparts in 1790.
During the Industrial Revolution the output of an individual laborer increased dramatically, with the effect that the new machines were seen as a threat to employment, and early innovators were attacked and their inventions destroyed.
Communism also known as Marxism
1. Founder Karl Marx. He argued historically societies have always been divided into warring Classes
2. There is an unequal distribution of wealth
Haves take advantage of Have nots
3. Labor of the workers creates profit for the employers.
4. Eliminate private property Government should control ALL business
The state will wither away as a classless society develops.